The Hybrid Annuity Model (HAM) is a public-private partnership (PPP) model utilized in the road construction sector. Under this model, the government contributes 40% of the construction cost, while the remaining portion is funded by the private developer. The developer receives fixed payments (annuities) with a profit margin. HAM combines elements of the engineering, procurement, and construction (EPC) and build-operate-transfer (BOT) formats.
Advantages of the Hybrid Annuity Model:
Reduced risks for concessionaires:
- Compared to the traditional BOT model, the government funding alleviates the upfront financial burden on concessionaires.
- The government retains revenue risk and tolling rights, while the private player assumes risks related to construction, operation, and maintenance.
- The authority is responsible for expediting land handover and providing necessary approvals, minimizing project delays.
- Annuity payments ensure a steady cash flow during the operational phase.
- Provisions for inflation-adjusted project costs address cost overruns.
Easing pressure on the NHAI:
- HAM reduces cash flow pressure on the National Highways Authority of India (NHAI) as it only needs to provide 40% funding during the 30-36 months of construction, with the remaining 60% paid over 15-20 years in semi-annual installments.
- The NHAI can collect tolls during the operational period, generating revenue against annuity payments made to concessionaires.
However, despite the advantages mentioned above, the interest in HAM has moderated due to various reasons. These include:
- Challenges in lending to infrastructure groups by banks, prompted by rising non-performing loans, leading to stricter lending norms under Prompt Corrective Action.
- A skewed bidding trend under HAM, with larger players aggressively bidding for road projects, while smaller developers who bid aggressively struggle to secure funds later.
- Many companies have taken on more projects than they can feasibly complete, resulting in banks being unable to lend due to exposure limits already reached by the group.
- Delays in NHAI providing the appointed date or the effective starting date of a project to the developer or concessionaire, with an average delay of around 5-6 months.
- Over-reliance on HAM negatively impacting the financial health of the NHAI, with its total debt projected to increase from Rs 1.8 lakh crore in March 2019 to Rs 3.31 lakh crore by FY23.
- Difficulties faced by companies in achieving financial closure due to factors such as aggressive bidding, stressed balance sheets, low equity commitment, and selective lending by banks.
To address these concerns, the government has implemented measures such as introducing eligibility criteria for bidders based on minimum net worth, awarding bids based on Net Present Value (NPV) and bid operation and maintenance (O&M) costs, and rejecting
negative O&M bids. These measures aim to stimulate investment in the road sector and positively impact the country’s GDP growth.