India’s first Hybrid Annuity Project and various PPP models

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Context: India’s first Hybrid Annuity (HAM) project in the sewerage sector, the 14MLD Sewage Treatment Plant (STP) at Sarai in Haridwar, was inaugurated by the Chief Minister of Uttarakhand.

Relevance:
Prelims: Current events of national and international importance
Mains: GS III-Infrastructure: Energy, Ports, Roads, Airports, Railways, etc.

Introduction:

  • According to the World Bank, India is one of the leading countries in terms of readiness for Public-private partnership (PPP).
  • Rapid Urbanisation, increase in per capita income and high industrial growth led to demand for basic infrastructure such as water supply and sanitation, seamless transportation, and energy.
  • To fulfill these demands India has systematically rolled out a PPP program with increasing budgetary allocation in 12th FYP for the delivery of high-priority public utilities and infrastructure.

Different PPP Models:

In India, road projects are awarded via one of the three models: Build-Operate-Transfer (BOT)-Annuity, BOT-Toll, and EPC (engineering, procurement, and construction) contract.  An advanced version of  (MCA) Model Concession Agreement HAM model is a mix of BOT (Built Operate Transfer) and EPC (Engineering, Procurement, and Construction) model.

1. The Build Operate and Transfer (BOT) Annuity Model:

  • Under BOT annuity, a developer builds the highway, operates it for a specified duration and transfers it back to the government.
  • The government starts payment to the developer after the launch of the commercial operation of the project.
  • Payment will be made on a six-month basis.

2. BOT Toll Model:

  • In this toll-based BOT model, a road developer constructs the road and he is allowed to recover his investment through toll collection.
  • This toll collection will be over a period of nearly 30 years in most cases.
  • There is no government payment to the developer as he earns his money invested from tolls.

3. Engineering, Procurement, and Construction (EPC) Model:

  • Under this model, the cost is completely borne by the government. Government invites bids for engineering knowledge from the private players.
  • Procurement of raw material and construction costs are met by the government.
  • The private sector’s participation is minimum and is limited to the provision of engineering expertise.
  • A difficulty of the model is the high financial burden for the government.

4.The Hybrid Annuity Model (HAM):

  • In India, the new HAM is a mix of BOT Annuity and EPC models.
  • As per the design, the government will contribute to 40% of the project cost in the first five years through annual payments (annuity).
  • The remaining payment will be made on the basis of the assets created and the performance of the developer.
  • Here, hybrid annuity means the first 40% payment is made as a fixed amount in five equal installments whereas the remaining 60% is paid as variable annuity amount after the completion of the project depending upon the value of assets created.
  • As the government pays only 40%, during the construction stage, the developer should find money for the remaining amount. Here, he has to raise the remaining 60% in the form of equity or loans.
  • The private developer will recover his investment from the government by receiving annuity payments over a period of 15 years.
  • The government also offers 80 percent of prior land acquisition and forest clearance in such projects to the developers.
  • There is no toll right for the developer.
  • Under HAM, Revenue collection would be the responsibility of the National Highways Authority of India (NHAI).

 

Advantages:

The brief picture of Risk Allocation can be tabulated as in Table:

 

Type of Risks/Models Financing Risk Revenue collection Risk O&M Risk
BOT Model By Private By Private By Private
Annuity Model By Private By Private By Private
VGF By Govt and Private By Private By Private
EPC Model By Govt By Govt By Govt
HAM By Govt and Private By Govt By Private

 

  • The financial burden of private players and even the government will reduce.
  • Will reduce dependency on Banks for loans, a private player can raise money for equity.
  • Thus NPAs of banks for long gestation project will also decrease. It helps cut the overall debt and improves project returns.
  • Developers will take ‘traffic risk’ help in expediting project completion. From the government side, it does take the traffic risk, it also earns better social returns by way of access and convenience to daily commuters.
  • Will speed up stalled projects.
  • The advantage of HAM is that it gives enough liquidity to the developer and the financial risk is shared by the government.
  • While the private partner continues to bear the construction and maintenance risks as in the case of BOT (toll) model, he is required only to partly bear the financing risk.
  • Government’s policy is that the HAM will be used installed projects where other models are not applicable.

Why in news?

  • India’s first Hybrid Annuity (HAM) project in the sewerage sector, the 14MLD Sewage Treatment Plant (STP) at Sarai in Haridwar, was inaugurated by the Chief Minister of Uttarakhand.

Key highlights:

  • The Sarai 14 MLD Sewage Treatment Plant is the first STP to be completed under the Hybrid Annuity (HAM) Based Public-Private Partnership Model, involving a cost of Rs. 41.40 crores
  • This Plant is based on advanced aerobic biological process, Sequential Batch Reactor (SBR) process, capable of removing the nutrients during treatment and is a 100% eco-friendly project.
  • The vision of the National Mission for Clean Ganga (NMCG) is long term and hence the capability being created would fully take care of the requirements up to 2035.



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