• UGI USER
  • Feb 13, 2023
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Evaluate the Hybrid Annuity Model (HAM) in addressing the challenges of Public Private Partnership (PPP) in the country.

Approach:

  • Introduce the answer by defining HAM. In the body of the answer, discuss the benefits of HAM in improving the PPPs.
  • In the next part of the body, discuss limitations associated with HAM.
  • Conclude the answer emphasizing upon ways to reduce bottlenecks in PPPs.

HAM is a hybrid/mix of Engineering, Procurement and Construction (EPC) and Build, Operate, Transfer (BOT) models. Under this model, the Government and private company share the project cost in the ratio 40:60 respectively. The investment of the private sector is recovered as periodic annuity payments from the government over a period of time. The Hybrid Annuity Model has addressed the challenges of the PPP in the country as:

  • Funding: Government provides partial funding of the project. By adopting a middle path approach, it builds over BOT model (financial burden on private sector) and EPC model (financial burden on government).
  • Inflation indexing: Inflation is incorporated in the project cost. Therefore, it provides a policy cushion for the private players against market vagaries.
  • Toll collection: Toll collection is the responsibility of the government, reducing the traffic risk for the private player.
  • Timely completion: Under the HAM model, there is a specified bonus amount for timely completion of the projects.
  • Easy clearances: Under the HAM the government will bear the regulatory clearances risk, compensation risk etc., therefore, timely land acquisition, environmental clearances etc., are possible.
  • Increased efficiency: Under the HAM model, the private players will be able to focus on activities like capital cost, quality, and expedient completion of the project, thus enhancing efficiency.

Model BOT (Build Operate Transfer) EPC HAM Financing risk By private By government By government and private Revenue collection risk Operational and maintenance risk

Even as the HAM adds to the effectiveness of PPPs, it is besotted with several shortcomings such as:

  • Model doesn’t take care of the cost and time overruns due to issues of administrative inefficiency.
  • As a result of COVID19 pandemic, high debt/NPAs, weak traffic and slow pace of execution, infrastructure funding has become a challenge.
  • Unsustainable: In the process of insulating the private players from commercial risk, HAM has unduly strained the government bodies. E.g., it is estimated that the debt of NHAI may reach more than 3 lakh crores in FY 23.
  • It does not address the issue of inefficient dispute redressal mechanisms plaguing the PPP.
  • Reducing popularity: Logjams in project, incomplete closures, lack of funding etc., have considerably reduced the popularity of HAM. E.g, 55% of highway projects were awarded through HAM in 2016-17, which reduced to just 28% in 2019-20.

Even though the HAM model provides for a robust model of infrastructure creation, the associated bottlenecks have to be ironed out. Sustainable financing, efficient regulatory clearances and timely/productive land acquisition models should be envisaged.