Annuity Mode of contract is a mechanism to lessen the budgetary burden on government in Infrastructure projects which traditionally were used to be executed on EPC (Engineering, Procurement & Construction) Contract funded by budgetary grant. It comes under umbrella term of PPP mode of contracts. In fact, the annuity mode of contract is one of the many faces of PPP (Public Private Partnership). Essentially, the PPP enables private sector participation in creation of public asset through money, technology and management.
In the context of Wadala Project, exploring the annuity mode of contract refers to adopting a mode of deferred payment to the project developer that usually spreads across a long period of time instead of lump sum payment in short span. Prominently there are two models of Annuity: BOT annuity model and Hybrid Annuity Model (HAM). The latter one is the brain child of Sh. N.J. Gdakari with remarkable achievement in transport domain. Annuity models have been quite successful in executing many of the govt projects in recent years. These models at one hand come in handy to meet large investment requirements of govt. for infrastructure while at other hand, they also come incentivised for developers basis their performance.
The world Bank also broadly recognizes three types of public-private partnerships that are output focused viz. Concessions, Build-Operate-Transfer (BOT) Projects, and Design-Build-Operate (DBO) Projects. [Source: WorldBank.Org ]
The PPP projects and Hence Annuity Mode Contract in India are Post Liberalization Evolution
Project implementation through PPP is although a long accepted model in other countries but in India its root goes back to liberalization era after 1991. However, it was year of 2000 when the first PPPs were signed and implemented. [ Source: Wikipedia]. India’s experience with PPP in a serious manner could however was started 2006 onward.
There are several popular forms of PPP models for example: Build-Operate-Transfer (BOT), Build-Own-Operate (BOO), Build-Operate-Lease-Transfer (BOLT), Design-Build-Operate-Transfer (DBFOT), Lease-Develop-Operate (LDO), Operate-Maintain-Transfer (OMT), etc. [Source: indianeconomy.net ] Most famed one is BOT which was largely used for developing roadways followed by ports and bridges.
Broadly speaking, three different models: PPP Annuity, PPP Toll and EPC (Engineering, Procurement and Construction) were followed by the government while adopting private sector participation. Further, a hybrid of BOT and EPC was also brought in by government in 2015. It is called HAM (Hybrid annuity model) whose idea was to to rejuvenate PPP by providing liquidity to to the private player and sharing financial risk during construction.
Under HAM in India, usually 40% of the project cost is paid to developer by Govt during first five years through annual payments (annuity). The remaining payment is made on the basis of the assets created and the performance of the developer. [Source: arthapedia.in]
BOT (Build- Operate- Transfer) Again to Become Mainstream Replacing HAM
Considering the liquidity crunches with govt. and large NPAs of lending institutions, the Union government is in process of re-adopting the Build-Operate-Transfer(BOT) model over the Hybrid Annuity Model (HAM) for executing projects. The very original BOT does not require govt. to provide initial lump sum capital expenditure [Source: Drishtiias.com]. HAM requires usually 40% of lump sum payments to private player /developer. The EPC contract in contrast to BOT and HAM, burdens the exchequer most as it requires paying entire cost of project within a fixed time.
The HAM was able to have some good successes after the model was given effect under public policy. However, after NPA of lending institutions having been grown out of proportion, the supply of funds from Govt to the private players turned inconsistent. The situation led many projects stuck up midway. Consequently, the govt went on a rethink over the model. This article on thehindubusinessline.com explains the HAM in a very candid manner. Currently, the most govt projects are either being undertaken on EPC mode or on pure annuity model (BOT annuity). But again, when the economy is riding a rough weather, release of funds from govt. are not timely. This is resulting into many of the govt projects getting stalled under EPC contract mode. Considering all this, govt. now is becoming more and more reliant on pure annuity model in the instances when it is felt that allocation of fund would not be possible for a project under consideration.
Personally, I am of the belief that the govt. in our case too, might fail providing allocations in timely manner even after A/A & E/S. Reasons are many including fiscal deficit and slowdown of economy. In fact, the present condition of economy is not only instantaneous, rather a perpetuation of situations, Post demonetization and roll out of GST. So FSI Auction/Sale model still looks very much suitable for the project [I have already expressed desire to explore the model in this report para 10 -15, Aug 2018 ]. The best part of the model is that we can have full control over the extent of construction as the proceeds from FSI Auction will be received in lumpsum. In contrast, the IFU compelled the department to drop the social infrastructure part citing the economy of expenditure. Without the social infrastructure part any residential project no longer remains habitable. I fear if this happens to our case also.
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[Exploring annuity mode of contract is the latest suggestion of NITI Ayog received on 23.08.2019 ]
[A comprehensive chronology on Wadala Project (Ask for Password)]
Glossary
Concessionaire: Person or firm that operates a business within the premises belonging to another (the grantor) under a concession, usually as the only seller of certain goods or services.
Example: CBIC has granted concessionaire rights to M/s L&T and they plan to make a shopping complex within the premises of residential colony of CBIC employees.
Concession: Synonymous with Contract/terms of business.
“A Concession gives a concessionaire the long term right to use all utility assets conferred on the concessionaire, including responsibility for operations and some investment. Asset ownership remains with the authority and the authority is typically responsible for replacement of larger assets. Assets revert to the authority at the end of the concession period, including assets purchased by the concessionaire. In a concession the concessionaire typically obtains most of its revenues directly from the consumer and so it has a direct relationship with the consumer.
A concession covers an entire infrastructure system (so may include the concessionaire taking over existing assets as well as building and operating new assets). The concessionaire will pay a concession fee to the authority which will usually be ring-fenced and put towards asset replacement and expansion. A concession is a specific term in civil law countries. To make it confusing, in common law countries, projects that are more closely described as BOT projects are called concessions.” … World bank