NHAI Adopts Hybrid Annuity Model for National Highways

Business activities thrive when social, political, and economic conditions are stable and following a positive trend. The stability of an economy is, according to the Government of India, measured by the ease of doing business there. The ease-of-doing-business (EODB) index in India has been improving lately owing to legislative reforms.

The highways sector in India is one of the largest beneficiaries of these reforms. Many of the stalled construction/developmental activities initiated by the National Highways Authority of India (NHAI) are being revived as a direct result of the reform.

The National Highways Authority of India (NHAI), an autonomous agency of the Ministry of Road Transport & Highways, was tasked with the development and maintenance of national highways. The NHAI has executed several highway-related projects, but many of them have faced challenges due to obsolete financial models used to execute them.

The NHAI had faced pre - and post - completion challenges. One of the reforms initiated by the NHAI in the recent times is ‘Hybrid Annuity Model’.

Background of Hybrid Annuity Model

In the present world, from sourcing of raw materials to the induction of technologies, many of the activities are influenced by globalisation and privatisation. India, which started privatising and globalising its economy in the early 90’s, has started reaping benefits of various reforms. Due to globalisation, many of the business activities are some or other way linked with different countries. The privatisation paved ways for efficiency and cost-effective services in the Indian economy. Many sectors in India embraced the fruits of reforms.

Indian Highways also witnessed rapid changes in their pace of development due to the aforementioned happenings. Many of its developmental works have been awarded to global and private players through BOT (Build, Operate, and Transfer) and EPC (Engineering, Procurement, and construction) models. By adopting these models, the NHAI has encountered many problems such as land acquisition, pressure from contract awardees, and delay-infused inflation, thus stalling many projects. So, the NHAI is contemplating to adopt the Hybrid Annuity Model.

Hybrid Annuity Model

It is a hybrid of BOT and EPC model. Under this model, the government itself would provide upfront around 40 % of the project cost to developers to start the work and the rest 60% of the project cost should be borne by the developing company, which would be refunded by the NHAI over a mentioned period by collecting Toll. This project model helps NHAI bypass the pressure mounted by the developers to pay money for the commissioned projects and also invite international players to bid for highway developmental works. This model comes as a big relief for the construction companies as well as the government of India as it is restoring the faith in the developmental works pertaining to highways.

Government is mulling to adopt this model for the stalled projects to increase the speed of developmental works, which experts feel as a wise move.

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