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CCEA Approves Hybrid Annuity Model

The Cabinet Committee on Economic Affairs, chaired by the Prime Minister Shri Narendra Modi, has given its approval for the Hybrid Annuity Model as one of the modes of delivery for implementing the Highway Projects. The main object of the approval is to revive highway projects in the country by making one more mode of delivery of Highway projects

What is Hybrid annuity model?

• HAM is a Combination of EPC model and BOT- (Build Operate Transfer) Annuity model. Under this model. The government will provide 40% of the project cost to the developer to start work while the remaining investment has to be made by the developer.

Why do we require HAM?

• Most of the earliest highway projects allocated through PPP mode were implemented through BOT -TOLL  MODE. under this model the private party is selected to build, maintain and operate the road based on the fact that which private bidder offered maximum sharing of toll revenue to the government. Here, all the risks- land acquisition and compensation risk, construction risk (i.e risk associated with cost of project), traffic risk and commercial risk lies with the private party.  The private party is dependent on toll for its revenues. The government is only responsible for regulatory clearances.

• To reduce the risk for private player, and to attract private players, The 2nd model of PPP i.e. BOT-ANNUITY model was introduced under which the private player would built, maintain and operate the Project and government would pay the private player annually fixed amount of annuity. Though it was a better model than BOT-TOLL because it reduced traffic and commercial risk however cost risk remained as private player was solely responsible for the cost incurred in the project.

• In last few years many of the highway projects were stuck due to various reasons like Loss of promoters interest ,Land acquisition issue, environmental reasons, excessive and unrealistic bidding by the private players and Lack of fund availability for private players due to high NPA,s of the banks and lack of long term financing options in India.

• To counter this and to remove the deficiencies of  government brought in EPC model . EPC stands for engineering, procurement and construction. It is a model of contract between the government and private contracter. The EPC entails the contractor build the project by designing, installing and procuring necessary labour and land to construct the infrastructure, either directly or by subcontracting. Under this system the entire project is funded by the government rather than the PPP model where there is cost sharing.The project is awarded via bidding. Thus it shifts all the risk from the private players to the government  and is the other  extreme of BOT model where all risk was borne by the private player.

• However EPC model could be used only as a short term emergency measure as there is an inherent limitation in implementing projects on EPC mode as such implementation is restricted by the financial resources available with the Government and also therefore it is unsustainable to use this model  in the long run. In that context, MoRTH decided to introduce a mixed model in order to sustain the pace of implementation of highway projects where risk are divided rationally between both the private players and the government.

Key features Of HAM MODEL (Figure No. 1.1)

• Under this the government will pay 40% of the project cost to the concessionaire during the construction phase in five equal installments of 8% each.

• Revenue collection would be the responsibility of the National Highways Authority of India (NHAI); developers will be paid in annual instilments over a specified period of time.

• An important feature of the hybrid annuity model is allocation of risks between the partners-the government and the developer/investor. While the private partner continues to bear the construction and maintenance risks as in BOT (toll) projects, it is required only to partly bear the financing risk. The developer is insulated from revenue/traffic risk and inflation risk, which are not within its control. 

• In the hybrid annuity model, one need not bring 100% of finance upfront and since 40% is available during the construction period, only 60%t is required to be arranged for the long term. This makes it attractive and viable for the private player to invest in Highway projects. It also reduces burden on the Government as unlike EPC, the government has to provide only 40% of the project cost.

Conclusion

By adopting the Model as the mode of delivery, all major stakeholders in the PPP arrangement - the Authority, lender and the developer, concessionaire would have an increased comfort level resulting in revival of the sector through renewed interest of private developers/investors in highway projects and this will bring relief thereby to citizens / travelers in the area of a respective project. It will facilitate uplifting the socio-economic condition of the entire nation due to increased connectivity across the length and breadth of the country leading to enhanced economic activity.

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