What is Hybrid Annuity Model (in

PPP)?

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.