[Answered] The shift from a hybrid annuity scheme for infra projects to a low-debt, performance-linked model is encouraging govt and private majors to pivot to the business in a bigger way. Comment.

Introduction: Contextual introduction.

Body: Explain some issues with hybrid annuity scheme. Also write some measures.

Conclusion: Write a way forward.

Infrastructure development involves huge investments, procedural delays and returns spread over a long period of time. HAM is a mix of the Engineering, Procurement and Construction (EPC) and Build, Operate, Transfer (BOT) models. HAM combines 40% EPC and 60% BOT-Annuity. Hybrid annuity means that payment is made in a fixed amount for a considerable period and then in a variable amount in the remaining period.

Issues with hybrid annuity scheme:

  • It does not take care of the cost and time overruns due to issues of administrative efficiency etc.
  • The major risk for HAM is the prevailing low bank rates adversely affecting the overall project viability and returns. Such interest receipts account for around 45% of total inflows.
  • The other problem is related to delayed and inadequate interest rate transmission—there is a transmission lag for the project loan (linked to MCLR of banks).
  • With the increasing number of HAM projects, funding can be an important issue because in long term it could be challenging for the government to allot funds to all the projects in short span of time.

The following measures are required to pivot to the business in a bigger way:

  • Due to rising NPAs and owing to Covid-19, banks have developed cold feet with regard to financing various projects. Therefore, the government needs to either come up with a bond guarantee or enhance credit funds for the projects so that the bond market is rejuvenated to fulfil the financing requirements of the sector.
  • Technologies such as augmented reality (AR), UAV and drones, 3D printing, Internet of Things (IoT) and Building Information Modelling (BIM) come in handy when fast-tracking construction projects.
  • There is a need for a better regulatory environment and consistency in the tendering process. Lack of consistency and policy coherence across different government departments should be addressed as a priority.
  • User charges are crucial because in many areas, partly because of zero or very low user charges, there is over-use and wastage of the precious resources (for instance, groundwater).
  • The model can be made better with steps such as efficient dispute redressal mechanism, faster environmental clearances etc.

The development of India’s infrastructure presents a huge task as well as a huge opportunity.  The newly established Infrastructure Finance Secretariat is a step in the right direction.

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