STPs to be constructed under Hybrid Annuity Model

In the first-of-its-kind success, the creation and maintenance of sewage treatment infrastructure under Hybrid Annuity based PPP model has taken off, with NMCG awarding work to private sector for construction and maintenance of Sewage Treatment Plants (STPs) in two major cities in Ganga river basin – Varanasi and Haridwar.

The awarded projects would ensure that no untreated sewage waste water goes into river Ganga.

Hybrid Annuity based PPP model has been adopted for the first time in the country in sewage management sector. Such a model has earlier been adopted successfully in highway sector only.

What you need to know about the Hybrid Annuity Model?

 The Government of India had accorded Cabinet approval to Hybrid Annuity-PPP model in January 2016 with 100% central sector funding.

Under this model, the development, operation and maintenance of the sewage treatment STPs will be undertaken by a Special Purpose Vehicle (SPV) to be created by the winning bidder at the local level. As per this model, 40% of the Capital cost quoted would be paid on completion of construction while the remaining 60% of the cost will be paid over the life of the project as annuities along with operation and maintenance cost (O&M) expenses.

One of the most important features of this model is that both the Annuity and O&M payments are linked to the performance of the STP. This will ensure continued performance of the assets created due to better accountability, ownership and optimal performance. 

Other models:
The hybrid model will be the fourth to be introduced in India for the execution of road projects and is intended to kickstart stalled projects and accelerate highway construction. The three formats for road projects in India followed so far are:

 Build-operate-transfer (BOT) annuity, in which a developer builds a highway, operates it for a specified duration and transfers it back to the government, which then pays the developer annuity over the period of concession.

BOT toll, under this private party is selected to build, maintain and operate the road based on the fact that which private bidder offered maximum sharing of toll revenue to the government. Here, all the risks- land acquisition and compensation risk, construction risk (i.e risk associated with cost of project), traffic risk and commercial risk lies with the private party. The private party is dependent on toll for its revenues. The government is only responsible for regulatory clearances.

EPC(Engineering Procurement Construction), wherein the developer executes the project on behalf of the government. EPC model was brought in, where all (100%) money or cost to build the road is provided by the government including that for land acquisition and rehabilitation of people affected by project. Private developers will only design and build fixed length of stretches and leave after completing their part of work handing the road to the government, which then maintains and operates the road by collecting toll or otherwise. The contract for building road is given to that private player who offers to build it at lowest price while simultaneously guaranteeing the quality desired. Quite clearly, the risk to private player in this model is minimum or evil nil as it doesn’t need to even bother about the finances for the project.

The hybrid annuity model is a mix of BOT toll and EPC models.In the next two fiscal years, the government will build more than 5,000 km of national highways based on the hybrid annuity model. In the present fiscal year, 1,000 km national highway projects were awarded through the BOT model and 3,000 km through the engineering, procurement and construction (EPC) model. 

By: Vishal