Hybrid Annuity Model (HAM) – A project by Indian Government

Introduction:

The Hybrid Annuity Model (HAM) is a Public-Private Partnership (PPP) model introduced by the Government of India in 2016. It aims to address the funding challenges in infrastructure development, particularly in the road sector. HAM combines elements of two existing models:

  • Engineering, Procurement, and Construction (EPC): Under EPC, the government bears the entire project cost and awards contracts to private players for design, construction, and procurement.
  • Build, Operate, and Transfer (BOT-Annuity): In BOT-Annuity, the private developer finances, builds, and operates the project for a concession period. After that, the ownership is transferred back to the government.

Key Features of HAM:

  • Cost Sharing: HAM adopts a 40:60 ratio for project cost sharing.
    • Government: Contributes 40% of the project cost in five installments linked to achievement of specific milestones.
    • Private Developer: Responsible for the remaining 60% of the cost. This typically involves a combination of equity investment (20-25%) and debt financing.
  • Revenue Model: Unlike BOT-Annuity, there is no toll collection by the private developer in HAM. Instead, the government pays a fixed annuity payment to the developer throughout the concession period to recover its investment and operation & maintenance (O&M) costs.
  • Selection Process: Private companies bid for HAM projects based on the lowest annuity amount they require from the government.

Advantages of HAM:

  • Reduced Government Burden: Shares the financial risk with private players, lowering the immediate financial burden on the government.
  • Faster Project Completion: Private sector involvement often leads to faster project execution due to their expertise and experience.
  • Improved Quality: Competitive bidding process incentivizes developers to offer better quality construction and ensure timely completion.
  • Transparency: Milestone-based payments ensure transparency and accountability in project execution.

Disadvantages of HAM:

  • Limited Private Sector Participation: Private companies might be hesitant due to the upfront capital investment and potential delays in receiving government payments.
  • Government Debt Burden: Though the initial financial burden is lower, the government has to bear debt for annuity payments throughout the concession period.
  • Termination Challenges: Exiting the contract mid-way can be complex and expensive for both parties.

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