Hybrid annuity model: Hamming risk allocations in Indian highway public–private partnerships

• DOI: http://doi.org/10.1002/pa.1890
• Published date: 01 February 2019
• Date: 01 February 2019

ACADEMIC PAPER

Hybrid annuity model: Hamming risk allocations in Indian

highway public–private partnerships

Swapnil Garg

1

|Diptiranjan Mahapatra

2

1

Strategic Management, Indian Institute of

Management Indore, Indore, India

2

Strategic Management and Public Policy,

Indian Institute of Management, Sambalpur,

India

Correspondence

Swapnil Garg, Strategic Managements, Indian

Institute of Management Indore, Prabandh

Shikhar, Rau‐Pitampur Road, Rau, Indore 453

556 (M.P.), India.

Email: swapnilgarg@iimidr.ac.in

A new public–private partnership (PPP) model, that is, hybrid annuity model (HAM)

was introduced in 2016, to revive investments in the Indian highway infrastructure

and to remedy the troubled relationship between the public and private sectors. This

model marked a significant policy departure in the management of long‐and short‐

term public interest, which is inherent to public utilities and service delivery.

Through a dispassionate lens, this paper critically examines the extent to which HAM

has fulfilled its stated objectives. The analysis of project award data provides mixed

empirical evidence of HAM's early success. As a positive policy imperative, HAM

has been able to attract private participation in highway infrastructure by readjust-

ment of risk allocations, and hence, it is a welcome step forward in improving public

affairs. Worryingly though, HAM also brought about extensive de‐risking of the pri-

vate sector, with evidence of rendering risk retention, that is, “skin‐in‐the‐game”by

the less significant private infrastructure investors, and thereby adversely impacting

development priorities. We find that HAM has taken the reengagement of private

sector two steps back in management of PPP affairs.

Recognizing that a true performance assessment is unlikely at this early stage of HAM

introduction, the paper adopts a more analytical stance in identifying possible pitfalls

based upon the telltale signs presented by project bidding and award data. This study

offers fresh insight and course correction on the role of government and other stake-

holders in this newly introduced PPP template.

1|INTRODUCTION

Forging and managing stakeholder's relationship in public–private

partnership (PPP) has been elusive (Leitch & Motion, 2003). Further,

our understanding of this relationship is severely hampered due to

the ever increasing emergence of multitude variants of PPP over

time and also because of involvement of a large number of stake-

holders and influencers (De Schepper, Dooms, & Haezendonck,

2014; Kwak, Chih, & Ibbs, 2009; OECD, 2008; Tang, Shen, & Cheng,

2010). The understanding of this relationship is deeply investigated

and is rooted in the risk allocations among the different PPP stake-

holders. However, this strand of literature recognizes two key stake-

holders, public and private, sub assuming all others in their fold. This

has resulted in a gap in the literature. The short‐term and long‐term

impact of the risk allocations in PPPs on the different PPP stake-

holders has remained largely underresearched.

The impact of this under recognition on PPP context is evident in

the different disciplines that study PPPs. The public finance and

accounting literature has been vocal about how PPPs compromise

by being off‐balance sheet financing, or long‐term government credit

card (subject to misuse), or compromising with transparency standards

regarding in public accounts. Similarly, the public administration litera-

ture has raised concerns about democratic accountability getting com-

promised in PPPs (Higgins & Huque, 2014). The multiple concerns

imply lack of a clear recognition of the impact of risk allocations on

public welfare in PPPs. This study proposes to address this gap by

studying the risk allocations in a new variant of PPP that has emerged

in India. We analyze how the modified set of risk allocations have

Received: 12 October 2018 Accepted: 13 October 2018

DOI: 10.1002/pa.1890

J Public Affairs. 2019;19:e1890.

https://doi.org/10.1002/pa.1890

© 2019 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/pa 1of16

delivered to the larger public welfare in the long and short term, and

how they have fallen short.

The Indian Highway sector has been experimenting and maneu-

vering the innate challenges of PPP for over two decades. After an

enthusiastic private response to standard long‐term infrastructure

concession for almost a decade, the PPP project awards fell during

the period 2012–2015. This made policy intervention by the govern-

ment inevitable. With private sector funding drying up, the govern-

ment resorted to engineering, procurement, and construction (EPC)

contracts that required significant upfront financing by the govern-

ment leading to stress on public finances (Press Information Bureau,

2016). As a middle path, the government introduced the hybrid annu-

ity model (HAM) in 2015 with an attempt to revitalize private sector

investments in the highway sector (Press Information Bureau, 2016).

The HAM model conceived of different risk allocations that were a

combination of the traditional EPCs and the multiple variants of

long‐term infrastructure concession.

An initial assessment of HAM from a public interest perspective is

necessary as it has received varied response from the different stake-

holders. The government bid out a large number of HAM projects fol-

lowing up on its development priorities and simultaneously opening a

large private opportunity. However, the profile of private firms bidding

for highway projects underwent a major change, and the lenders

expressed serious reservations in lending to them. This resulted in

delayed financial closures for some projects, and termination of

others.

1

The underlying factors behind these setbacks need to be ana-

lyzed from a short‐and long‐term public perspective. To address this,

this paper aims to investigate the reasons behind the mixed senti-

ments of different project stakeholders and to develop a sound under-

standing of management of risk allocations in HAM model, a new kind

of PPPs. More specifically, the paper studies the management of

public affairs in the context of PPP projects, which are complex

in nature and involve numerous public and private stakeholders

(De Schepper et al., 2014).

We structure the remainder of the paper as follows.

In the following section, we introduce the Indian highway PPP

journey to motivate the reasons for the introduction of HAM and sub-

sequently provide a theoretical description of the HAM model and the

risk allocations therein. We then explain our empirical strategy and

report the results based on the detailed bidding information collected

for 48 HAM projects. Finally, we put forward our reflections from the

analysis and conclude with a discussion summarizing our contribu-

tions, future research directions, and implications for policymakers.

2|INDIAN HIGWHWAY SECTORS PPP

JOURNEY

The Indian Highway sector had formally adopted the PPP model of

build–operate–transfer model in the year 2006, after experimenting

with them for over a decade. The project's commercial viability based

upon forecasted toll collections determined the project funding mostly

from private concessionaires, whereas viability gap funding and annu-

ity grants were made available in case commercial viability of the pro-

ject remained infeasible. Although the above arrangements were able

to free up public finances to a significant level, there also emerged

numerous instances of aggressive bidding and herding by concession-

aires, finally tipping the balance in 2012. Post 2012, private invest-

ments dried up, with unviable bids received for over 40 projects,

necessitating policy intervention by the government. In parallel, over

a hundred projects were stuck in various stages of construction, due

to negotiation deadlocks between the government and private firms.

The government while outsourcing the projects' construction also

stayed away from many of its fiduciary roles. This has resulted in pro-

jects getting stuck at various construction stages and under legal,

financial, or bureaucratic deliberations.

As an immediate response, the government shifted to traditional

EPC contracting. However, this required high commitments from the

already stressed public finances (Press Information Bureau, 2016).

Simultaneously, aggressive bidding had left the concessionaires in

deep financial crisis, and financial institutions had become apprehen-

sive and cautious in extending debt to the sector. Policy intervention

was also important politically, as the new government had won on

promises of boosting infrastructure growth. Highway construction, in

terms of kilometers upgraded and commissioned per day, had once again

become a part of new government's report card (NDTV Correspon-

dent, 2010). The targets for road construction were doubled from

20 km per day to 40 km per day (Dey, 2017). The newly conceived

HAM model was proposed to remedy the situation and address the

challenges.

The HAM model sought to alter the risk allocations in the conces-

sions. It assigned the fundamental responsibility for public infrastruc-

ture provisioning and management to the government, recognizing

the private sector as an enabler and an agent in the process. This

was in contrast to earlier PPP models where the government was seen

as an enabler to private participation in infrastructure development.

Consequently, HAM introduced public provisioning of 40% of project

cost during the construction phase, isolated private sector from

demand and toll collection risks, and increased public sector account-

ability to its roles and responsibilities in the project. Simultaneously, it

retained construction and maintenance risks with the private sector,

to ensure that the benefits of efficiency and innovations of private

sector could be accrued. From the public affairs perspective, these

changes made HAM projects significantly different from the conven-

tional Build–operate–transfer (BOT) concessions.

2.1 |Overview of HAM

At a conceptual level, construction and operation of infrastructure

awarded through BOT route are bundled and transferred to the pri-

vate sector for fixed period, with the private concessionaire receive

either a stream of payments from the government or user charges lev-

ied directly on the end users, or both. In contrast, HAM recognizes

that the government ultimately has to pay for building the public infra-

structure from its own sources or if feasible through accruals of user

charges from the public to be collected by the government. The gov-

ernment also contributes part of the construction cost, with the rest

reimbursed to the private sector over the life of the project. The fun-

damental difference lies in the government taking over the

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