What is Hybrid Annuity Model (in PPP)?

tojo jose
January 28, 2016

The government has decided to introduce Hybrid Annuity Model (HAM) to revive PPP (Public
Private Partnership) in highway construction. At present, three different models –PPP Annuity,
PPP Toll and EPC (Engineering, Procurement and Construction) were followed by the
government while adopting private sector participation.

Launch of the new model is due to the many problems with the existing ones. Large number of
stalled projects are blocking infrastructure projects and at the same time adding to NPAs of the
banking system.

In this context, the government has introduced Hybrid Annuity Model (HAM) to rejuvenate PPP.

By features the HAM is a mix between the existing two models – BOT Annuity and EPC. Hence
to understand the HAM, we should know the basic features of the existing PPP models.

1. The Build Operate and Transfer (BOT) Annuity Model

Under BOT annuity, a developer builds the 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.

2. BOT Toll Model

In this toll based BOT model, a road developer constructs the road and he is allowed to recover
his investment through toll collection. This toll collection will be over a period of nearly 30 years
in most cases. There is no government payment to the developer as he earns his money invested
from tolls.

3. 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 that financial is the high
financial burden for the government
What is hybrid annuity?

In financial terminology hybrid annuity means that payment is made 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 attached under the HAM.

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.

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.