India’s Cabinet Committee on Economic Affairs, chaired by Prime Minister Narendra Modi, recently gave its approval for the hybrid annuity model as one of the modes of delivery for implementing highway projects. The introduction of this model is expected to provide impetus for the next wave of public-private partnership highway projects and attract more investments in this sector. It’s a welcome move towards the right direction and will benefit all stakeholders involved in highway projects in India, primarily private sector developers which were required to assume risks that they couldn’t efficiently manage and banks and financial institutions which were unable to finance such projects due to bankability issues. However, the scope of such a model could be expanded to infrastructure projects other than highway projects.
Premises of the model
The government has opted for a hybrid annuity model, based on the assumptions that: (a) in many highway projects, tolling may not be feasible and hence such projects are not found to be viable on a build-operate-transfer toll (BOT-toll) model; (b) the cost of funds for the government is lower than that at which the private sector can borrow; and (c) the private sector is better equipped to ensure efficient construction, maintenance and operation of infrastructure projects. The main object of the hybrid annuity model is to realign risk allocation based on ground level realities of the market thereby bringing about a revival in investor confidence.
Government contracts in the infrastructure sector in India are generally awarded through one of the following three models: (a) engineering, procurement and construction (EPC) and operation, maintenance and transfer (OMT) model, where the project is undertaken at the cost of and on behalf of the government by a contractor, which is required to construct the project for a fixed price by a fixed date and after construction the government operates the project on its own or awards an OMT contact to an operator to operate and maintain the project over the period of the OMT contract; (b) build-operate-transfer annuity (BOT-annuity) model, where the project is developed on a build, operate and transfer basis, and the developer is entitled to annuity payments from the government over the period of the contract; and (c) BOT-toll model, where the project is developed on a build, operate and transfer basis, and the developer is entitled to generate revenues from tolls levied on the vehicles using the road.
The hybrid annuity model is a mix of the BOT models and the EPC model. The project is developed on a built, operate and transfer basis but, unlike BOT contracts, 40% of the project cost is payable by the government to the developer in five equal instalments linked to project completion milestones.
You must be a subscribersubscribersubscribersubscriber to read this content, please subscribesubscribesubscribesubscribe today.
For group subscribers, please click here to access.
Interested in group subscription? Please contact us.
Anjan Dasgupta is a partner at HSA Advocates. HSA is a full-service ﬁrm with ofﬁces in New Delhi, Mumbai and Kolkata, and with a correspondent relationship in Bangalore.
81/1, Adchini, Sri Aurobindo Marg
New Delhi – 110 017
Tel: +91 11 6638 7000
Fax: +91 11 6638 7099
Construction House, 5th Floor
Walchand Hirachand Marg Ballard Estate
Mumbai – 400 001
Tel: +91 22 4340 0400
Fax +91 22 4340 0444