Background:

The Hybrid-Annuity Model or HAM was introduced in January 2016 to revive investments in road infrastructure projects.

What is Hybrid Annuity Model (HAM)?

HAM is a mix of the EPC (engineering, procurement and construction) and BOT (build, operate, transfer) models. 

What is EPC? – Under the EPC model, National Highway Authority of India (NHAI) pays private players to lay roads. The private player has no role in the road’s ownership, toll collection or maintenance (it is taken care of by the government).

What is BOT? – Under the BOT model, private players have an active role — they build, operate and maintain the road for a specified number of years — say 10-15 years — before transferring the asset back to the government. Under BOT, the private player arranged all the finances for the project, while collecting toll revenue or annuity fee from the Government, as agreed. The annuity fee arrangement is known as BOT-Annuity.

HAM combines EPC (40 per cent) and BOT-Annuity (60 per cent). On behalf of the government, NHAI releases 40 per cent of the total project cost. It is given in five tranches linked to milestones. 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.

Problems faced by the earlier models:

• Reluctance on part of private players – The BOT model ran into roadblocks with private players not quite forthcoming to invest. The private player had to fully arrange for its finances — be it through equity contribution or debt.
• Reluctance on part of banks – Banks were reluctant to finance such projects on the apprehensions of such projects turning to Non-performing assets.
• Traffic volume risk – the developer had to take on the entire risk of low passenger traffic which is not within the control of the developer.

Advantages of HAM:

• Risk sharing – HAM spreads the risks between the developer and the government.  The government pitches in to finance 40 per cent of the project cost — a sort of viability-gap funding.
• Better credit availability – HAM helps the developer cut the overall debt and improves project returns.
• Less dependence on traffic volume – The annuity payment structure means that the developers aren’t taking ‘traffic risk’.  

Source: The Hindu Business Line.