In the ever evolving world of contract management, HAM, or Hybrid Annuity Model projects are gaining traction in India. HAM is a blend of the EPC (Engineering-Procurement-Construction) and BOT (Build-Operate-Transfer) model contracts. Here we will look in to HAM Contracts in detail and see what are the pros and cons of it.
The HAM model is a variation of PPP, or Public-Private Partnership. In India, Govt. introduced it in 2016 to expedite the construction of the National Highways for further expansion in a rapid pace.
Understanding the Hybrid Annuity Model
The Hybrid Annuity Model (HAM) represents a shift from the traditional Build-Operate-Transfer (BOT) model that was prevalent earlier in infrastructure projects in India. Under conditions of HAM, the Government bears 40% of the project cost in its initial stage, and the private developer undertakes the remaining 60% of the cost. The Government pays the developer a predetermined annuity amount over the concession period, which is typically 15 to 20 years.
The HAM contract model significantly reduces the financial burden on the private developers and makes the infrastructure projects more attractive and financially viable. Further it ensures better risk allocation by allowing the Government to retain ownership of the project, and transferring the operational risks to the private builders.
Salient Features of Government Contracts of HAM type
Salient features of this models are: (Ref. Circular no. NH-24028/14/2014-H (Vol-II) Ministry of Road Transport and Highways, Govt. of India)
- Open, transparent and competitive bid mechanism
- Net Present Value (NPV) of construction and NPV of the operation and maintenance for the entire operation period will be the bid parameter. This is termed as ‘Life Cycle Cost’.
- Govt. authority will pay Cash construction support of 40% of the bid project cost to concessionaire in 5 equal instalments linked to project milestones.
- Concessionaire shall have to initially bear the balance 60% of the project cost through debt+equity combination and construct the project.
- Authority will pay the remaining 60% of the project cost to the concessionaire in semi-annual annuity payments. Along with the annuity payments, Govt. authority will also pay interest on the reducing balance of the cost @bank rate + 3.00%.
- Project cost shall be inflation indexed (through a Price Index multiple, which is a weighted average of the WPI and CPI in 70:30 ratio.
- Concessionaire will be responsible for the maintenance of the project till the end of the concession period.
- Toll collection shall be the responsibility of the authority.
- O&M payments will be made by authority in accordance with the amount quoted which will be inflation indexed.
- Concession period will be construction period + 15 years of fixed operation period. Construction period will be project specific.
- Appraisal and approval system for HAM contracts will be same as the procedure of PPP mode.
A Detailed Example of Hybrid Annuity Model (HAM)
The Hybrid Annuity Model has primarily been used for highway projects in India. Let’s take an example: Imagine a company wins the bid to construct a 100 km highway stretch under HAM. For example, if the project cost is INR 2000 crores (HAM type contract), the following will be the basic parameters:
- Project Cost = INR 2000 Crores
- Construction support by Govt. authority = INR 800 Crores
- Contractor (concessionaire) to fund the balance project cost = INR 1200 Crores
- Debt and Equity requirement:
- Equity required = 30% of INR 1200 Crores = INR 360 Crores
- Debt required = 70% of INR 1200 Crores = INR 840 Crores
Upon completion, the responsibility for maintenance would lie with the developer for a set period (usually 30 years). However, unlike BOT models, toll collection wouldn’t be their responsibility. The government would manage that, and the developer would receive periodic payments (annuities) based on the project cost.
Benefits of Hybrid Annuity Model (HAM)
HAM offers a bouquet of advantages for various stakeholders:
- Faster Project Completion: With a significant portion of funds coming from the government upfront, projects get a head start. This translates to quicker completion timelines, which benefits the economy and citizens alike.
- Reduced Risk for Developers: The government’s financial backing mitigates the risk for developers, especially during the initial construction phase. This encourages wider participation from the private sector.
- Sustainable Funding: HAM provides a predictable and stable source of funding for infrastructure projects, ensuring their long-term viability.
- Transparency and Accountability: The tendering process for HAM projects is open and competitive, promoting transparency and ensuring value for money.
HAM in Action: Building Highways for the Future
The Hybrid Annuity Model has emerged as a viable alternative to traditional infrastructure financing mechanisms, revolutionizing the landscape of highway projects in India. By leveraging the strengths of both the public and private sectors, HAM has accelerated project implementation, improved asset quality, and fostered sustainable development.
As India continues to embark on its journey towards economic growth and modernization, the Hybrid Annuity Model stands as a testament to the power of innovation and collaboration in driving infrastructure development forward.
With the Hybrid Annuity Model paving the way for transformative change, the future of infrastructure development in India looks promising and poised for growth.
Digging Deeper into Hybrid Annuity Model (HAM)
For those interested in exploring further, here are some additional resources:
- Ministry of Road Transport and Highways (MoRTH) – Guidelines for Hybrid Annuity Model: https://morth.nic.in/sites/default/files/implementing.pdf
- Press Information Bureau (PIB) – Hybrid Annuity Model for National Highways: https://morth.nic.in/sites/default/files/implementing.pdf