The highway projects in India are commonly awarded via one of the following three widely accepted PPP models:
1. Build-Operate-Transfer (BOT)-Annuity – The private developer builds and thereafter operates the highways for an indicated duration known as concession period and on the completion of the said time period and transfers the same back to the government. Once the project is launched for commercial purpose, the government make payment to the developer on a six-month basis.
2. BOT-Toll – Under this the private developer builds the road. The investment so made by the developer is then recovered by collecting toll over a concession period of 30 years.
3. Operation, maintenance, and transfer (OMT) – the government outsources the overall management and operations of the public infrastructure to a private company is out-sourced to a private company. Suitable for projects with a significant operating content. The contract period varies from 2-5 years. Once the contract period is over the said public infrastructure is transferred back to the government.
The most common models adopted by the government were BOT- Toll and BOT-Annuity through which the projects were awarded successfully. Through these projects, many important cities were connected.
It was observed that some segments of BOT- Toll projects lacked the adequate toll-paying traffic, which led to the requirement of government support. The government support was achieved through the Viability Gap Funding (VGF) wherein 20%- 40% of the project cost was covered by the government.
However, it was soon realized by the government that some road had good prospects for toll collection where the collection was more than the required recovery of investment and even exceeded the profit margins. Thus, every other contractor wanted to take such project by paying to the government thereby raising a negative grant. When the project did not turn out to be as rewarding the contractors started backing up from the project and the projects were left in the middle of nowhere.
Although the government provided 100% support via annuity payment over the concession period to many projects which were commercially not viable soon it was realized that this led to increasing burdens of annuity payouts on the government and severally impacted the budget. As a result, this model was discontinued unless required in very rare cases.
Given the scenarios, it was very clear that all the payment combinations needed a fresh look as many projects were not faring well. Moreover, the contractors were showing lack of interest towards BOT –Toll projects given the risks faced in similar projects in past.
Introduction of Hybrid Annuity Model:
In order to keep the financial burden in check, the government has opted for the more advanced version of the Model Concession Agreement (MCA) which is also known as Hybrid Annuity Model (HAM) in the highway projects. This hybrid model is safeguarding the interests of both the parties i.e., government and the developers as 40% of project cost is granted by the government and the rest 60% is funded by the private developer.
The main salient features of hybrid annuity projects:
1. Bid parameter: The project life cycle is measured by the costing and value Project life cycle cost most commonly known as Net Present Value (NPV). It takes into consideration the entire projected cost as different stages of the project including the costs for entire O&M. the bidder who quotes the lowest NPV for the project life cycle ends up getting awarded the bid.
2. Cash Construction Support: During the construction period the developer is provided the grant of 40% of the bid project cost by the government. The payments are made by the government in five equal installments subject to the physical progress of the project. The remaining 60% of the project cost is to be borne by the concessionaire through loan and equities.
3. Escalation clause in the project cost: the MCA entails an escalation clause wherein the project cost is indexed through inflation rates i.e., Price Index Multiple (PIM). PIM is calculated as an average of the ratio of 70:30 of the Wholesale Price Index (WPI) and Consumer Price Index (CPI) (IW). The variation between the price index occurring between the reference index preceding the bid date and reference index date preceding the appointed date leads to the adjustment of the project cost. This variation calculated shall be deemed to be the project cost at the time of commencement of the construction of the project. It must be mentioned here that the bid project cost shall be changed on monthly basis to variation in PIM till the project achieves commercial operation date (COD).
4. Stable cash flow of annuity payments: the government makes the semi-annual (six monthly) payments to the developers on the completion of the project through which the 60% cost of the project as funded by the concessionaire is recovered. The annuity payments are made on the basis of the revenue of the highway project. An interest is also paid along with the annuity payments in the form of annuity on reducing the balance of final construction cost.
5. Assured O&M payouts: The authority is responsible for making the operation and maintenance payments along with the annuity to the concessionaire. This shall be based on the price quoted in the inflation index. The timely payments ensure that the concessionaire remains responsible towards the maintenance of the project till the end of the concession period.
6. Revenue for authority: the government is responsible for the collection of toll and the revenue so generated shall belong to the government.
7. Concession Period: The concession period in this model project construction specifications and the operations period is for fixed 15 years.