PPP model has been a limited success in attracting investments from private sector. In this scenario government is moving to adopt Hybrid Annuity Model (HAM) to reinvigorate private investment in infrastructure sector. Highlight the key features of HAM and compare how HAM is better than EPC?
Hint/Model Answer –
Conventional PPP models like The Build Operate and Transfer (BOT) Annuity Model, BOT Toll Model, Engineering, Procurement and Construction (EPC) Model etc are mired under several constraints like viability of projects, delay in government’s approvals, cost overruns and no dispute resolution mechanism. Thus they fail to attract much needed private investment in the infrastructure sector. Thus government decided to adopt the Hybrid Annuity Model (HAM) to reinvigorate private investment in infrastructure sector.
The key features of HAM include:
The new HAM is a mix of BOT Annuity and EPC models. 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 instalments 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.
Necessary land acquisition and environmental clearances would be handed over to private contractors prior to the commencement of project.
The model would prevent instances of Viability gap funding given to contractors under BOT and hence increase their accountability.
Advantage of HAM over EPC:
Under EPC government has to fund the project completely, however, under HAM only partial funding from government is required thus reduces burden over government exchequer
As 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. Thus HAM is a win- win situation for both private players and government.
All regulatory clearances risk, compensation risk, commercial risk and traffic risk is borne by government, so risk for private sector is also minimal. Thus it would attract the efficient private players and cost overrun would be reduced.
Traffic related risk would be eliminated due to annuity based model. It will also enable easier financial closure and refinancing ability post project completion.
As the private sector balance sheets are already overleveraged and public exchequer is under stress, the HAM’s initial assistance of 40% will significantly lower the upfront cost and certainty of cash flow under annuity model would enable the developers to get more finance from the banks thus HAM could be proved a sustainable way out to build infrastructure under PPP.