Hybrid Annuity Model

Context

The pace of national highway construction is expected to slow down from 34 km per day in FY24 to 31 km per day, with an estimated decline of 7-10% year-on-year, from 12,350 km in FY24 to about 11,500 km in FY25 . This decline can be attributed to several factors, including the influx of mid-level developers with moderate credit profiles, especially after March 2020. The drastically expanded pool of bidders led to lower bids, but heightened the execution risks, including funding hurdles and other delays .

Projects Under the Hybrid Annuity Model (HAM)

• Projects under HAM, a public-private partnership (PPP) model that combines engineering, procurement, and construction (EPC) and build, operate, transfer (BOT) models, haven’t taken off as anticipated . 
• Of the ₹1.5-lakh-crore HAM projects awarded after March 2020, nearly one-third are delayed by 4-6 months beyond the three-month grace period . 
• Their aggregate ‘bid project cost’ (BPC) — the lowest lifecycle cost of the project, which includes construction, operation and maintenance — is ₹50,000 crore . 
• The developers have applied for or received an extension for a similar or longer period .

Regulatory Clarity

• InCoBAN, an infra-construction industry improvement ecosystem, observes that since March 2020 competition intensified in the roads sector with the inclusion of mid-sized sponsors of moderate credit standing, leading to execution risks, delays and funding scarcity . 
• To remedy this, InCoBAN co-founder Abhilasha Panwar suggests stepping up project supervision, alongside exploring alternative funding sources such as multilateral organisations . 
• Simplifying approval processes, addressing regulatory hurdles, and nurturing collaboration among stakeholders can enable seamless implementation .

Project Finance Worries

• The Reserve Bank of India’s recent draft guidelines on project financing have added another layer of worry for embattled construction companies, which are anxious about the implications for under-construction infrastructure projects .
• A mandatory tail-period accounting for 15% of a project’s economic life will restrict the ability of infrastructure projects to secure additional top-up loans . 
• CareEdge Ratings estimates that this will necessitate an 8-10% increase in equity requirements for HAM-based road projects to align the loan tenure with 85% of the economic life for concessions lasting 15 years .

Challenges Faced by the Roads Sector

Other key challenges facing the roads sector include :

• Land acquisition hurdles
• Delays in the ‘appointed date’, namely the handover of the contract letter to the successful bidder, enabling commencement of work

Conclusion

In conclusion, the national highway works are facing a slippery road ahead, with a decline in the pace of construction and challenges in the roads sector, including land acquisition hurdles and delays in the ‘appointed date’ . Projects under HAM are also facing delays and funding scarcity, and the recent draft guidelines on project financing by the Reserve Bank of India have added to the worries of construction companies . To address these challenges, regulatory clarity, simplification of approval processes, and exploration of alternative funding sources are necessary.

Source: Business Line

UPSC Mains Practice Question

Q. Discuss the concept and significance of the Hybrid Annuity Model (HAM) in the context of infrastructure development in India. Examine its merits and demerits, and suggest measures to enhance its effectiveness in attracting private investment while ensuring public interest and fiscal prudence. (250 words)

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