How Hybrid Annuity Model will revive private participation in large infrastructure projects:

♤ National Highways Authority of India (NHAI) had recently laid down the guidelines for the hybrid annuity model (HAM) in which the government funding to the extent of 40 per cent of the project cost will come in five equal instalments during the construction period, thus reducing the financial burden on concessionaire during the project implementation phase.

♤ When compared with EPC projects, shift to HAM would ease the cash flow pressure on NHAI. Moreover, spends can be recovered to an extent through tolling of these stretches by NHAI itself. Therefore, NHAI´s own upfront funding requirement will be lower in case of hybrid annuity compared with EPC model.

♤ Also, in the BOT annuity model, the government bears the commercial risk of toll collection. The government pays the private operator the project cost along with interest in the form of a half- yearly annuity.

♤ However, the hybrid annuity will involve the government paying a part of the capital cost at the commencement of the construction work, thus giving the private company a revenue stream even before the actual commercial operations begin.

♤ Thus, a Hybrid annuity contract gives flexibility to allocate funds to both fixed and variable (which are risky, but can give higher returns) annuity components.

Thus, the HAM model may succeed as government has mitigated lot of risks for private sector. More vigorous private sector involvement in PPP models can happen when the Government addresses some other issues related with PPP MODEL like- timely regulatory clearances, timely land acquisition and compensation, dispute resolution mechanism which is non - existent; The more sustainable and long term solution to funding of infra projects with long gestation period lies in developing insurance and pension markets in India as only their business is long enough to fund projects of long duration whereas banking sector finds it difficult to fund projects beyond 5-7 years.