Topic – Part of static series under the heading – “Investment models”
4) Critically analyze the hybrid annuity model which has recently found favour with the government for road construction?(250 words)
Key demand of the question
Here, we first need to explain hybrid annuity model, explain how it differs from the earlier toll model or annuity model. Thereafter, we need to bring out its pros and cons and give a fair and balanced opinion on whether the use of this model would start attracting private capital for road construction purposes.
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 the government has recently awarded the construction of several road projects on hybrid annuity model.
- Explain the model – is a mix of the EPC (engineering, procurement and construction) and BOT (build, operate, transfer) models. Hybrid Annuity Model (HAM) combines EPC (40 per cent) and BOT-Annuity (60 per cent).
NHAI releases 40 per cent of the total project cost. It is given in five tranches linked to milestones. The balance 60 per cent is arranged by the developer. Here, the developer usually invests not more than 20-25 per cent of the project cost (as against 40 percent or more before), while the remaining is raised as debt.
- Discuss the advantages that it offers such as
- NPA-riddled banks were becoming wary of lending to these projects.
- spreads the risk between developers and the Government
- helps cut the overall debt and improves project returns etc
- Discuss the issues such as it doesn’t take care of the cost and time overruns due to issues of administrative efficiency etc
- Highlight how the model can be made better with steps such as efficient dispute redressal mechanism, faster environmental clearances etc
Conclusion – Give a fair and balanced opinion on hybrid annuity model and discuss way forward for this model.