Hybrid Annuity Model for Infrastructure Projects in India

The Cabinet Committee on Economic Affairs in 2016 gave approval for the Hybrid Annuity Model as one of the modes of delivery for implementing the Highway Projects.

Adopting such a model for projects not found viable on BOT (Toll) mode shall be more effective in terms of maximizing the quantum of kilometers implemented within the available financial resources of the Government.

The main object of the approval is to revive highway projects in the country by making one more mode of delivery of highway projects.

By adopting the Model as the mode of delivery, all major stakeholders in the PPP arrangement – the Authority, lender and the developer, concessionaire would have an increased comfort level resulting in revival of the sector through renewed interest of private developers/investors in highway projects and this will bring relief thereby to citizens / travelers in the area of a respective project.

It will facilitate uplifting the socio-economic condition of the entire nation due to increased connectivity across the length and breadth of the country leading to enhanced economic activity.

An important feature of the Hybrid Annuity Model for highways development is the rational approach adopted for allocation of risks between the PPP partners – the Government and the private partner i.e. the developer/investor.

While the private partner continues to bear the construction and maintenance risks as in BOT (Toll) projects, it is required only to partly bear financing risk. Further, the developer is insulated from revenue/traffic risk and the inflation risk, which are not within its control.

The Hybrid Annuity Model (HAM)

As per the design, the government will contribute to 40% of the project cost in the first five years through annual payments (annuity). The remaining payment will be made on the basis of the assets created and the performance of the developer. Here, hybrid annuity means the first 40% payment is made as fixed amount in five equal installments whereas the remaining 60% is paid as variable annuity amount after the completion of the project depending upon the value of assets created.

As the government pays only 40%, during the construction stage, the developer should find money for the remaining amount. Here, he has to raise the remaining 60% in the form of equity or loans.

There is no toll right for the developer. Under HAM, Revenue collection would be the responsibility of the National Highways Authority of India (NHAI).

Advantage of HAM is that it gives enough liquidity to the developer and the financial risk is shared by the government. While the private partner continues to bear the construction and maintenance risks as in the case of BOT (toll) model, he is required only to partly bear the financing risk.

Government’s policy is that the HAM will be used in stalled projects where other models are not applicable.

Latest Developments:

The National Highway Authority of India has so far awarded 30 highways projects of total length 1821.54 kms and total cost Rs. 28162.13 crores.

The Ministry of Water Resources, River Development & Ganga Rejuvenation has also adopted Hybrid Annuity Model for Namami Gange program.

Tenders for three Sewage Treatment Plants under this program have been invited. As far as Railways is concerned, one contract for 3rd railway line has been planned under Public Participative Policy – normal Annuity Model in which response is good and finalization of contract is under process.