Daily Answer Writing And Mentorship Program
Q: The Hybrid Annuity Model (HAM), previously hailed as a transformative approach in Public Private Partnerships (PPP), has not received lukewarm response from private developers. What are the alternative PPP models that could be pursued to foster increased private investments. (15 Marks, 250 Words)
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HAM is a type of PPP based on risk sharing where government contributes 40% of the project cost and 60% of cost is borne by the developer. Government agencies collect the revenue from the project and pay annuity to the developer of the project. It is a mix of EPC and BOT model. Despite its novelty, the HAM as a PPP model has not taken off as per expectations.
Reasons for lukewarm success of HAM:
- Structural Shocks: Several structural economic shocks like demonetization, hasty implementation of GST and consequent lockdown in the wake of Covid-19 further reduced the appetite of private players.
- Bank issues and cash flows: Annuity payment to developers is linked to bank rates. The bank rate has come down but interest rates on loans have not (due to poor monetary policy transmission), resulting in reduced pro fit margins for private players. Banks are also skeptical about HAM due to low equity contribution from developers.
- NBFC Crisis: Crisis in NBFC sector resulted in impaired ability of developer to raise finance for some HAM projects.
- Issues related to Land acquisition: In FY19, the projects awarded through HAM slowed down to around 834 km of the overall 2,222 kms of projects awarded by NHAI. This was a result of a problem related to land acquisition.
Alternative Models of PPP
- EPC: Under the EPC model, the project cost is completely borne by the government. The private sector’s participation in this model is minimal as far as the cost is concerned and is limited to the technical and engineering expertise such as design and construction.
- Build-Own-Operate (BOO) is a type of old BOT but ownership of the newly built facility remains with the private party. The Government largely agrees to ‘purchase’ the goods and services produced by the project on mutually agreed terms.
- Lease-Develop-Operate (LDO): Here, the government or the public sector entity retains ownership of the newly created infrastructure facility and receives payments in terms of a lease agreement with the private promoter. This approach is mostly followed in the development of airport facilities.
- Management contract: Here, the private promoter has the responsibility for a full range of investment, operation, and maintenance functions. It has the authority to make daily management decisions under a profit-sharing or fixed-fee arrangement.
- Service contract: The private promoter performs a particular operational or maintenance function for a fee over a specified period. There is always a need to improve and improvise according to the needs of the present. No model would work indefinitely, and we need to adopt and evolve them constantly.
By exploring alternative PPP models, and implementing necessary reforms, we can create a conducive environment for larger socio-economic development. Collaboration between the public and private sectors can unlock new avenues for growth and bring positive change to infrastructure development in India.