Hybrid Annuity Model [HAM]

The Hybrid Annuity Model (HAM) was implemented by Nitin Gadkari, the Union Transport Minister. It was designed to revive investments in road infrastructure projects in India. As of the first half of FY22, about 51% of the 1900 km road projects have been awarded under HAM by NHAI.

Here’s what you need to know about the Hybrid Annuity Model and its significance.

What Is the Hybrid Annuity Model?

The Hybrid Annuity Model combines two infrastructure construction models, namely the BOT-Annuity and the EPC. The EPC model comprises 40% of this combination, while the rest, 60%, is BOT-Annuity.

The EPC Model

• The EPC (Engineering, Procurement, and Construction) model denotes a process of infrastructure construction in which the government pays private parties to build roads.
• The responsibility of the private players ends with road construction.
• They are not involved in road maintenance, toll collection, or road ownership. The government remains responsible for these things.

The BOT-Annuity Model

• In the BOT (Build, Operate, Transfer) model of infrastructure construction, the private players are involved for an extended period.
• They deal with constructing, operating, and maintaining the roads for a specific period, suppose 10 to 15 years.
• The roads are then handed back to the government.
• Under the BOT model, the private players have to arrange funds for the project.
• The private players are paid a pre-fixed amount as an annuity for building and maintaining the roads. This annuity fee is known as BOT-Annuity.
• The government bears the risk of toll revenue.

The Hybrid Annuity Model [HAM]

• Under the Hybrid Annuity Model, the National Highways Authority of India (NHAI) pays 40% of the total project expenditure.
• This payment is released in ten equal instalments based on the completion of targeted project milestones.
• The remaining 60% amount has to be arranged by the road developer.
• The developer finances around 20 to 25% of the total project cost. The remaining amount of money is raised as debt.

When Did the Government Launch the Hybrid Annuity Model?

The Government of India launched the Hybrid Annuity Model in January 2016.

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Major Features of the Hybrid Annuity Model

• The government selects the concessionaire of the project. This is done through a transparent, open, and competitive bid procedure.
• The Life Cycle Cost is the parameter for bidding.
• It is the responsibility of the concessionaire to maintain the project till the concession period comes to an end.
• The concession period includes the construction period and 15 years of fixed operations.
• The government remains responsible for toll collection.

Significance of the Hybrid Annuity Model

• HAM assumes significance as it brought in better results than the BOT model.
• Since private players had to arrange finances for the whole project under the BOT model, they were reluctant to take up this responsibility. HAM reduced this financial stress on the private players.
• Under the BOT model, private players had to depend on passenger traffic as they were offered no guaranteed compensation. Under HAM, the annuity payment assurance reduced the dependence of private players on passenger traffic.
• From the government’s standpoint, HAM enables them to flag-off road projects.
• Launching and completing road projects can mean better roads, smoother rides, and fewer traffic jams.

The Hybrid Annuity Model can help improve infrastructure investment in the country. It can lead to better and faster commuting.

FAQs on Hybrid Annuity Model

Q.1. Is Hybrid Annuity Model a type of PPP infrastructure construction model?

The Hybrid Annuity Model is a variant of the PPP (Public-Private Partnership) model.

Q.2. Are projects under the Hybrid Annuity Model inflation indexed?

Yes, the cost of projects under the Hybrid Annuity Model is inflation-indexed.

Q.3. When is a change of ownership allowed under the Hybrid Annuity Model?

The change of ownership under the Hybrid Annuity Model is allowed after six months from the date of commercial operations.

Q.4. How will be the interest on Hybrid Annuity Model projects payable?

The interest on the Hybrid Annuity Model projects will be payable on the reducing balance of project completion cost.

Q.5. What is the interest rate for Hybrid Annuity Model highway projects?

The interest rate for the highway projects under the Hybrid Annuity Model will be equal to the one-year MCLR average of the top 5 commercial banks + 1.25%.