Day 34 – Q 3.Which category of investment model suits the highway sector the most in India? Analyse.
3. Which category of investment model suits the highway sector the most in India? Analyse.
किस श्रेणी का निवेश मॉडल भारत के राजमार्ग क्षेत्र के लिए सबसे ज्यादाअनुकूल है? विश्लेषण करें।
INTRODUCTION
Highway sector in India is pivotal for transportation of goods; it carries about 40% of Indian traffic. As veins and arteries keep the blood flowing in our body, similarly roads-especially highways keep the life moving in a country. According to World Bank, India needs to invest $4.5 trillion in infrastructure by 2040; therefore, effective investment models are pivotal to keep the growth engine moving fast and strong.
BODY
Highway sector in India has expanded rapidly in the recent past due to shift from traditional investment models to newer ones. Also, Public Private partnership has been accepted as most viable option and the new way forward, various models of PPP that have been tried so far are-
- EPC model – NHAI pays private players to lay roads. The private player has no role in the road’s ownership, toll collection or maintenance (it is taken care of by the government). Only the engineering and technical dimensions are provided by the private players. However, it would add to the fiscal pressure n the long run.
- BOT model – though, private players have an active role — they build, operate and maintain the road for a specified number of years — say 10-15 years — before transferring the asset back to the government.
- BOOT model – It is almost similar to BOT, used generally for short projects with residual profits resting with private players.
However, there was always a need for a model, that could take care of the maximum number of negatives arising out of the rest of the models and effectively finding a solution for smooth way of investment- “Hybrid Annuity Model” is been seen as a panacea due to the following features-
- It is a mix of the EPC (engineering, procurement and construction) and BOT (build, operate, transfer) models.
- Hybrid Annuity Model (HAM) combines EPC (40 per cent) and BOT-Annuity (60 per cent).
- NHAI releases 40 per cent of the total project cost. It is given in five tranches linked to milestones. The balance 60 per cent is arranged by the developer. Here, the developer usually invests not more than 20-25 per cent of the project cost (as against 40 percent or more before), while the remaining is raised as debt.
Advantages of using HAM over BOT & other models.
- HAM arose out of the need for better financial mechanism for road development.
- The BOT model ran into roadblocks with private players not quite forthcoming to invest.
- In BOT, the private player had to fully arrange for its finances — be it through equity contribution or debt.
- NPA-riddled banks were becoming wary of lending to these projects.
- If the compensation structure didn’t involve a fixed compensation (such as annuity), developers had to take on the entire risk of low passenger traffic.
- HAM is a good trade-off, spreading the risk between developers and the Government
- In HAM the government pitches in to finance 40 per cent of the project cost — a sort of viability-gap funding
- It helps cut the overall debt and improves project returns.
- HAM is a method for slow easing of funds; this prevents the crowding out of funds by the government.
- Life cycle of the project would be a binding parameter in this model.
However, in addition to the types of methods- following steps should be taken to ensure efficient, affordable, speedy construction of quality roads-
- Efficient dispute redressal mechanism.
- Reducing the gestation period.
- Superior Engineering expertise and skills.
- Faster and easy environmental clearances.
- Easy government approval for projects.
- Effective rehabilitation of distressed people affected due to the project.
- Controlling levels of corruption and project escalation.
CONCLUSION
Thus, for fast and sustainable economic growth, it is necessary for a country to have good roads. Hence, an effective instrumental model becomes pivotal for development. Hybrid annuity model (HAM) , thus has emerged to be the panacea for issues related to investment, successful examples of its implementation for big infrastructural projects , will definitely make it sustainable in the long run.
Best answer: gargantuan
