Road Development, Highway, NHAI, HAM, DBFOT, Risk

Build Operate and Transfer (BOT) Annuity Model:

• Under BOT annuity, a developer builds a highway, operates it for a specified duration and transfers it back to the government.
• The government starts payment to the developer after the launch of commercial operation of the project.
• Payment will be made on a six-month basis.

Engineering, Procurement and Construction (EPC) Model:

• Under this model, the cost is completely borne by the government.
• Government invites bids for engineering knowledge from the private players.
• Procurement of raw material and construction costs are met by the government.
• The private sector’s participation is minimum and is limited to the provision of engineering expertise.
• A difficulty of the model is the high financial burden for the government.

Hybrid Annuity Model (HAM):

• In financial terminology hybrid annuity means that the government makes payment in a fixed amount for a considerable period and then in a variable amount in the remaining period.
• This hybrid type of payment method is called HAM in the technical parlance.
• Hybrid Annuity Model (HAM) has been introduced by the Government to revive PPP (Public Private Partnership) in highway construction in India.
• Launch of the new model is due to many problems encountered as associated with the existing ones.
• Large number of stalled projects are blocking infrastructure projects and at the same time adding to Non-Performing Assets (NPAs) of the banking system.

The Hybrid Annuity Model (HAM):

• In India, 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 installments whereas the remaining 60% is paid as variable annuity amount after the completion of the project depending upon the value of assets created.
• The balance 60 per cent is arranged by the developer. Here, the developer usually invests not more than 20-25 per cent of the project cost (as against 40 percent or more before), while the remaining is raised as debt.
• As the government pays only 40%, during the construction stage, the developer should find money for the remaining amount.
• 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

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.