Topic – Investment model
4) Explain the difference toll and annuity model in PPP projects? Critically analyze whether adopting the hybrid annuity model for road construction would resolve issues associated with PPP projects?(250 words)
Why this question
The article very lucidly explains the difference between toll and annuity model of PPP projects and examines whether resorting to hybrid annuity model would resolve the issues faced by road construction sector. It also remains to be seen whether this move attracts private investment which had decreased post the problems with the previous concessionaire agreements became apparent. Hence this question would help you in examining all these issues in detail.
Key demand of the question
In the first part of the question, we need to discuss the differences between toll model and annuity model of PPP projects. Thereafter, we need to explain hybrid annuity model which has now found favour with the policy makers. Next, we need to critically analyze whether this would resolve the issue. We need to provide a fair and balanced conclusion and discuss way forward.
Critically analyze – When asked to analyze, you have to examine methodically the structure or nature of the topic by separating it into component parts and present them as a whole in a summary. When ‘critically’ is suffixed or prefixed to a directive, all you need to do is look at the good and bad of something and give a fair judgement.
Structure of the answer
Introduction – Highlight that India has awarded the highest number of road projects among all countries through PPP. Explain that this is to leverage advantages and name the three popular models of PPP ie toll, annuity and hybrid annuity.
- Explain the difference between toll and annuity model. Use points from the article and based on your own reading.
- Thereafter, explain what happens under hybrid annuity model and what advantages it provides over the model discussed previously.Government would provide upfront around 40% of the project cost to developer to start the work and remaining 60% would be borne by the private player. Once the project is completed, the NHAI will collect toll and refund the private players in instalments for 15-20 years. This implies that the toll collection job will be done by NHAI.
- Explain that this model is being cited beneficial because of the following: Compared to the BOT Annuity / EPC projects, it would ease the cash flow pressure on the government. Compared to BOT Toll model, the traffic risk is not associated with the concessionaire, it gives him some comfort level to lend from the banks.
- Point out the counter argument provided in the article
Conclusion – Give a fair and balanced view and discuss the way forward.