Abstract
This article focuses on the concept of the Hybrid Annuity Model which comprises of two existing models. It gives light on how this model can be a tool for economic growth and development of the Indian Economy. It highlights the advancements and needs for implementing such a model for the benefits of the government, developers and investors. It also speaks about the reasons behind implementing such a model.
Keyword(s): Hybrid Annuity Model, economic growth, Indian Economy;
Introduction
Transport minister Nitin Gadkari actively promoted his brain-child — the Hybrid-Annuity Model or HAM. Introduced in January 2016 to revive investments in road infrastructure projects, HAM has seen good initial success. About 30 highways projects have been awarded under HAM by the National Highway Authority of India (NHAI) at a total cost of about ₹28,000 crore. Half the projects awarded in 2016-17 were under HAM
Literature Review
The concept of Hybrid Annuity Model (HAM) was brought in to rejuvenate the Public Private Partnerships in highway construction. HAM is a model that is consisting of two more existing models, that is, BOT Annuity and EPC. To understand the concept of HAM, we need to understand these two models.
1. BOT or The Build Operate and Transfer Annuity Model
Under such kind of model, the developer builds and operates the highway for a certain period of time and returns it to the government. When this asset is used for commercial purpose, the government pays the developer a considerable amount.
2. BOT Toll Model
Under this model, the developer is allowed to recover his investment through the tolls collected from the highway.
3. Engineering, Procurement and Construction Model
Under this model, all the costs relating to engineering, procurement of raw materials and the construction is borne by the government itself. A huge financial burden is imposed on the government.
In financial terminology, hybrid annuity refers to those payments that are made in fixed instalment up to a certain time period and becomes variable henceforth for the remaining period. Such a payment method is followed under HAM. As per the model, the government contributes about 40% of the project costs in the first five years of the project. The rest 60% will be paid in variable amounts as per the value of the asset after construction. The developers, in return, invest about 25 percent as equity and raise the balance as debt. Under HAM, the revenue collection is done by National Highway Authority of India (NHAI).
This model is expected to lower the initial capital outflow for the government, as bulk of the payment will be done through annuity payments. Further, the private entity will be insulated from traffic and inflation risks, as these will be looked after by the government.
Reasons for implementation of HAM
1. It would help in improving the financial mechanism in the road development sector.
2. Return of the old contractors
Leading developers, including Larsen and Toubro Ltd, IL&FS Transportation Networks Ltd (ITNL), GVK Power and Infrastructure Ltd, GMR Infrastructure Ltd, IVRCL Ltd, Gammon Infrastructure Projects Ltd and Hindustan Construction Co. (HCC) Ltd, were no longer actively participating in road construction bids as their balance sheets are stressed. To bring back such developers back into the market the model was implemented as the cost is shared between the developer and the government.
3. No aggressive bidding
In spite of the lower equity investment requirement and the minimal revenue risks in this model, many existing companies with hugely stressed balance sheets may still struggle to participate in these bids because any incremental equity outlay and project finance may be beyond their present means. It will also see new and small companies bidding for highway projects instead of focusing on EPC opportunities.
4. Stress-free lending
Lending for hybrid annuity-modelled projects would be comparatively easier as there is no traffic risk associated. Lenders would be comfortable as the execution risk is less for contractors as the bidding rolls out only after 90% land is available
Development of HAM
The visibility of high visibility of projects are to be implemented over five years, worth around Rs5.35 lakh crore for 35000km. The bid project cost remains at around Rs23-35 crores. Further, the L1 (lowest) bids are on average 15 per cent higher than NHAI’s estimated EPC costs, though the difference between L1 and L2 bidders has doubled to 8 per cent last fiscal from 4 per cent in FY17.
HAM has become the preferred contract for the NHAI, rising from less than 10 per cent of awards in FY16 to nearly 50 per cent in FY18. The represents an order award value growth from ₹7,000 crore to ₹76,500 crore in just three years. the Ministry of Road and Transport (MoRTH) awarded projects of around 17,000 km, of which 7,397 km was awarded by NHAI.
How it is an effective tool for the growth of Indian Economy?
HAM facilitates capital inflows. This means that the economy would increase in its productive capacity without having much inflation from this sector. It also helps to give more liquidity in the market. Liquidity in such an illiquid market is very important for the economy. This gives the developers confidence on the market and they are eager to contribute to such projects. As the cost burden is divided between the government and the developer, the entire burden does not fall on the government which helps them to save revenue and they can use it in productive purposes which would be beneficial for the general public. The government has to bear the financial risk partly which does not become a burden on the economy as a whole. It propagates foreign or international contractors to contribute to such projects which eventually is beneficial for the economy. HAM was introduced to help the well-placed construction companies with lower debit and better financials to secure their order books. The idea was to bring in responsible and seasoned players that would be accountable enough to secure and execute projects. This also helps investors to invest in such projects in the long run. This induces FDI which is quite beneficial for the economy as well. 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.
- NANDINI SIL
FOR ECOBUZZ
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