Hybrid Annuity Models In PPP – Would It Attract Investments?

In many parts of the world since Public Private Partnerships have increased the rate at which infrastructural development occurs has doubled. There are many models on which Public Private Partnerships or PPPs work one of the models is the Hybrid Annuity Model.

The hybrid Annuity Model is also known as HAM, HAM takes a balanced approach toward financial risk sharing in the private sector. The HAM model takes an approach where demand risks are not allocated to the private sector. It is a contractual safeguard that gives more emphasis to project readiness, this model also gives incentives to the private sector with the early completion of the project.

There are many successful examples of Hybrid Annuity Models from developing nations such as India. Many leading financial institutions such as the Asian Development Bank finance projects based on Hybrid Annuity Model. In this article by Green Urbane which is one of the leading PPP consulting firms in Dubai we shall see various aspects of the Hybrid Annuity Model and whether it can help in attracting investments for the public as well as private entities.

Hybrid Annuity Model Is a Hybrid of EPC and BOT Models

EPC Model (Engineering, Procurement, and Construction)

When a public infrastructure project is allocated based on EPC (Engineering, Procurement, and Construction) then it is pure contractual work where the private player holds no decisions or powers as to operations and revenue of the project. Everything is tightly controlled by the government of the public sector. The major discrepancy of this format is that to award projects a lot of corruption can take place under this model and most corrupt politicians through proxy companies award such projects to themselves.

While the assigning of the project is a difficult thing at the same time completion of the project is also a difficult thing as funds are tightly controlled by the public sector and it takes quite a task to get this work finished in time. As the funds are tightly controlled by the public sector the end quality of EPC projects is quite questionable in many cases. Although reports show that EPC is a good model for projects which are small-scale and which do not have high stakes involved.

BOT Model

BOT model stands for the build, operate, and maintain. In this model, private players have quite considerable decision-making powers as for a considerable period complete operations remain under the control of the private player. Several studies conducted by PPP Advisory Services in UAE suggest that BOT models in the Public Private Partnership projects in developed and high-income nations prove to be very successful and can also attract investments. But when it comes to low-income nations this model isn’t that successful in attracting investments from the private sector enthusiastically, as the private sector has to go through a lot of troubles with this model.

For example, in the case of road development projects under the BOT models, the private sector had to fully arrange for the funds. There were many challenges that the private sector had to face to arrange funds for building the project in the first place and then for recovering the invested money part by part slowly from the operations. This model increased the number of NPA loans in some developing economies and it made it further difficult for the private sector to raise funds for such projects.

HAM (Hybrid annuity Models)

As a solution for this HAM (Hybrid annuity Models) was developed especially for the developing economies. Leading public-private partnership consulting firms in Dubai such as Green Urbane suggest that this model has been quite successful in improving the quality of public infrastructure in developed as well as developing nations.

HAM is a perfectly homogenous mix of EPC and BOT models where 40% of the project funding is done by the public sector that is government agencies and the remaining 60% is done by a private company. Since both public and private sectors invest funds in such projects both entities work enthusiastically and recover money and finish projects before the deadline. Countries such as India have hugely utilized HAM models for the development of national highways since the year 2016. As far as 2022 PPP consulting firms in Dubai suggest that the HAM model has been successful in countries such as India and other developed high-income economies.

Benefits of the HAM Model

HAM (Hybrid annuity Models) has several benefits over the traditional models in many cases. While some projects work best on EPC (Engineering, Procurement, and Construction) and others on BOT (build, operate, and manage) many stalled projects are preferred to be managed on the HAM model.

The major benefit of a HAM model is that the developer gets a lot of liquidity in this model and 40% of the project money is funded by the public sector and the remaining is to be managed by him. For such projects, it becomes quite easier for the private sector to raise funds via equity as well as debt. At the same time, financial risk is shared both by the government as well as the private sector. The stakes and risk for private entities become quite less with this model so it attracts many investors and even projects get completed on time. PPP consulting firms in Dubai suggest that this is a golden period for investing in HAM-based projects in developing countries such as India.

Concluding Lines

Several studies conducted show that the HAM (Hybrid Annuity Model) is very beneficial for attracting investments from the private sector. Even for private companies engaged in HAM-based projects, it is easier for them to get financed through debt or equity or via any other feasible and reasonable way.