In News: After funding highway projects through public money for a better part of the last decade the National Highways Authority of India (NHAI) is set to return to funding through private investments using the build-operate-transfer (BOT) model during the current quarter.
Over the last few years, the NHAI resorted to offering projects under the Hybrid Annuity Model (HAM) that ensures funds to the company building the road, thereby insulating it from financial risk to a certain extent.
The BOT (toll) model was the preferred model for road projects, accounting for 96% of all projects awarded in 2011-12. But this progressively reduced to nil. HAM was designed and adopted.
Investment Models
In simpler terms investment means exchange of money for a profit yielding asset.
The same profit earned is used to invest in other assets as well.
As far as the economic well being of the country is concerned, investment is important as it contributes to growth and development.
Types of Investment Models
Public Investment Model:
In this model Government requires revenue for investment that mainly comes through taxes.
Properly targeted public investment can do much to boost economic performance, generating aggregate demand quickly, fueling productivity growth by improving human capital, and spurring private-sector investment by increasing returns.
Private Investment Model:
Private investment can be source from domestic or international market.
From abroad private investment comes in the form of FDI or FPI.
Public-Private Partnership Model:
PPP is an arrangement between government and Private sector for the provision of public assets and/or public services.
PPP allow large-scale government projects, such as roads, bridges, or hospitals, to be completed with private funding.
Commonly adopted model of PPPs include engineering, procurement and construction (EPC) model, Build-Operate-Transfer (BOT), Build-Operate-Lease-Transfer (BOLT), Hybrid Annuity Model
PPP Models
Engineering, Procurement and Construction Model (EPC)
The EPC Model partnership requires the government to undertake the total funding of the project while the Private sector partner will provide the engineering and construction requirements.
The cost is completely borne by the government.
Government invites bids for engineering expertise from the contractors. Procurement of raw material and construction costs are met by the government.
From design to commissioning, the EPC Contractor is responsible for all activities and handover of the project to the Government.
Build-Operate-Transfer (BOT)
It is conventional PPP model in which private partner is responsible to design, build, operate (during the contracted period) and transfer back the facility to the public sector.
Private sector partner has to bring the finance for the project and take the responsibility to construct and maintain it.
Public sector will allow private sector partner to collect revenue from the users.
The national highway projects contracted out by NHAI under PPP mode is a major example for the BOT model.
Build-Operate-Lease-Transfer (BOLT)
In this approach, the government gives a concession to a private entity to build a facility, own the facility, lease the facility to the public sector and then at the end of the lease period transfer the ownership of the facility to the government.
Hybrid Annuity Model (HAM)
Hybrid annuity stands for a combination in which the government makes payment in a fixed amount in the beginning and then in a variable amount at a later stage.
The HAM is a combination of BOT and EPC Models.
The government will give 40% of the Project Cost as Construction Support during the construction period, and the remaining 60% as annuity payments to the concessionaire throughout the operations period, plus interest.
The payment made in the later stage will be based on the assets created and the performance of the developer.
In HAM, the company has no right to collect tolls.
Revenue is collected by the National Highways Authority of India (NHAI) and refunded to the private players in installments for 15-20 years.
National Highways Authority of India (NHAI)
It is a nodal agency of the Union Ministry of Road Transport and Highways.
NHAI is an autonomous agency of the Union Government, responsible for management of a network of over 70,000 km of national highways in India.
It was established through National Highways Authority of India Act, 1988.
In 1995, it was formally made an autonomous body.
It is responsible for the development, management, operation and maintenance of National Highways.
