HYBRID ANNUITY MODEL CONTRACTS

The Hybrid Annuity Model (HAM) requires that part of the private sector financing by the concessionaire during the construction phase be paid by the authority during the operation and maintenance (O&M)?phase. The stakeholder ecosystem in HAM contracts does not deviate from the conventional public?private partnership (PPP) structure .

HAM project cost is determined from open competitive bidding and is discovered on its life- cycle cost—in other words, on net present value (NPV)—for the construction as well as the O&M period. The term “cost” in this context is deemed to include both base cost and its associated overhead, and profit.

A bidder is required—in its bid—to quote the bid project cost (BPC) and the first year O&M cost. The bidding parameter for HAM projects is referred to as life-cycle costs which consider the NPV of the quoted BPC along with the NPV of O&M costs to be incurred for the entire operations period.

Project cost during construction is shared between the government and the private sector. The costsharing proportion is not fixed but varies depending on requirements and project feasibility. The approach initially endorsed required that the government invest 40% of the BPC during the project construction period (as construction assistance), in five equal installments, linked to the achievement of predefined construction milestones. The private investor was required to invest the remaining 60%, which typically comprises equity and debt..

Upon completion of the project construction—during the O&M period—the government pays semiannual annuity amounts to the private investor for the 60% of the project cost that was financed by the private party during construction, along with interest on the reducing balance.

The interest calculation period starts only after the commencement of operations. The project cost is adjustable to account for inflation, change in work scope, changes in law, and force majeure.

Additionally, payments for O&M are made during the operation period based on the quoted bid price for O&M, adjusted for inflation. These payments are subject to the fulfillment of performance standards by the concessionaire as required by the relevant schedules of the concession agreement.

Overview of the Hybrid Annuity Model Process:

From Project Procurement to Implementation Procurement: HAM-based contracts in India follow the single-stage-two-envelope bidding procedure. The envelopes containing technical bids are evaluated first to ensure that bidders meet required qualifications—including technical and financial capacity requirements—before evaluation of the financial bids. In evaluating bidder qualifications—such as relevant experience in construction and maintenance—bidders are examined against the prespecified minimum net worth and financial resources requirements to partially fund the construction phase of the project.

Contract Agreement:

Within 45 days after the letter of award is issued, the bidder is required to promote and incorporate the concessionaire as a limited liability company, establish a special purpose vehicle (SPV), and—under the concessionaire SPV name—sign the concession agreement with the authority. This will enable the concessionaire to undertake and perform the obligations and exercise the rights of the winning bidder. Under this agreement, the authority awards the concessionaire the concession, including its exclusive right, license, and authority to construct, operate, and maintain the “project” during the concession period.

1.?Concession Period

The concession agreement period comprises three distinct phases: (i) development period; (ii) construction period; and (iii) operation period. Summation of construction and operation periods is called the concession period, which starts from the appointed date and ends on the transfer date, the date on which the rights and obligations of the concessionaire under the agreement expires either through the performance or termination, and all its rights and interests in the project passes to and vests in the authority.

2.?Development Period

During phase 1 of the agreement (development period), both parties are required to satisfy their respective conditions precedent. The date on which all the conditions precedent—including financial close—are satisfied is called the “appointed date.”14 The development period spans from the concession agreement date to the appointed date. The specified period for this phase is usually 150 days from the concession agreement date. Authority obligations within this period include securing (i) more than 80% of the site; (ii)?100% of environmental permits; (iii) 100% of forest clearance; and (iv) approval of general arrangement drawings for the road over- or under-bridges at level crossings, if any. The authority is also required to appoint an independent engineer to administer the concession agreement.

3.?Construction Period

The construction period does not commence unless both parties to the concession agreement fully satisfy their respective conditions precedent. The concessionaire is entitled to commence the work under the agreement on the “appointed date,” which is broadly similar to the “commencement date” under FIDIC contract?forms. During this period—other than undertaking the (design and) construction work—the concessionaire is required to partly finance the works as stipulated in the agreement. The construction period commences on the appointed date and ends on the issuance of the ?completion certificate” or “provisional certificate” by the contract administrating consulting f irm—independent engineer—marking the completion of the construction period, which is typically specified as 2 to 2.5 years.

4.?Operation Period Phase of the agreement starts on the date on which the completion certificate—or the provisional certificate—is issued to the concessionaire. This date—on which the commercial service under the contract commences—is called the commercial operation date (COD). During the operation period, the concessionaire is obliged to operate and maintain the asset under the agreement and is entitled to receive (i) O&M costs and (ii) annuity payments from the authority, following the agreement terms.

Salient Features of the Hybrid Annuity Model Contract

(i) Mobilization advance.

The HAM contract provides for interest bearing advance payment to the concessionaire for a sum equal to 10% of the bid project cost (BPC). The mobilization advance is paid to the concessionaire in two equal installments. The mobilization advance and interest is recovered from the concessionaire during the milestone payments.

(ii) Partial funding by the authority during construction.

Unlike under other PPP models such as BOT-Toll and BOT-Annuity, a pre-specified proportion of construction payments based on achievement of physical progress is made to the concessionaire in 10 equal installments, which are indexed to inflation.

(iii) Descoping of works.

The authority can descope part of the project in the case of non-acquisition of a portion of right-of-way. The BPC would be adjusted to reflect the changes.

(iv) Termination payments.

Unlike earlier PPP models, the HAM contract mandates termination payments if the project is terminated during the construction period due to concessionaire default. Other PPP models do not provide provisions for termination payments if the project is terminated during the construction period through concessionaire default.

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• courtesy Asian Development Bank (ADB)