PPP Investment Models: HAM, Swiss Challenge, Kelkar Committee

Hybrid Annuity Model(HAM) for the benefit of the road sector


From UPSC perspective, the following things are important :

Prelims level : Working of HAM

Mains level : Paper 3- Hybrid Annuity Model and risks involved

The article explains the working of Hybrid Annuity Model in the road construction and the risks involved in the model.

Investment in road sector

  • The central government has set a target of increasing the investment in infrastructure to over Rs 111 lakh crore over the period FY20-FY25.
  • Within the transportation segment, projects worth Rs 36.7 lakh crore, constituting 55% of transportation infra, are for the road sector.
  • The large investments planned in the road sector signifies its importance—it has a multiplier effect on the economy and provides large employment opportunities.

Models for the road sector

  • Out of HAM (Hybrid Annuity Model) and BOT (Build, Operate and Transfer)—toll developers prefer the relatively lower risk HAM model.
  • This is due to its various positives like lower equity requirements, provision for mobilisation advances, better right of way availability, inflation-linked adjustments for bid project cost, termination payments during the construction period and de-linking construction and operations.
  • These HAM features have garnered a favourable response and mix of HAM awards has increased from 10% in FY16 to 48% in H1FY2021.

How HAM works and risks involved

  • During the operations period for a HAM project, the recovery from authority is in the form of fixed annuity payments along with interest on balance accumulated annuity payments (calculated @300 bps over prevailing bank rate)
  • The only 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.
  • Low bank rate would thus reduce the overall inflows for a HAM project, thereby adversely affecting its debt coverage metrics and returns to the investors.
  • The second problem is related to delayed and inadequate interest rate transmission—there is a transmission lag for the project loan (linked to MCLR of banks).

Changes in model concession agreement

  • As per revised concession agreement dated November 10, 2020, interest rate on annuities will be equal to the average MCLR of top 5 scheduled commercial banks plus 1.25% instead of bank rate.
  • With the average MCLR replacing the bank rate, there will be a natural hedge between the annuity inflows and interest costs,
  • This will reduce the interest rate risks to a large extent, and that too without any delay.
  • The other major revision is the grant payment from the authority which will now be paid in 10 instalments instead of five.
  • The other major revision is the grant payment from the authority which will now be paid in 10 instalments instead of five.
  • Thus, the spacing between the payment milestones is reduced.
  • This will improve the cash conversion cycle for the contractors executing the HAM projects as their payments are back to back in nature.
  • However, these changes will be applicable for new awards, and the fate of the existing HAM projects is hanging in the balance.


With improved attractiveness, HAM is expected to remain the mainstay for public-private partnership projects in the road sector.



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