The Hybrid Annuity Model

How India's hybrid annuity model for highways splits funding and risks between the government and private developers, and why it revived road building.

After many highway PPPs struggled in the early 2010s, India’s highway authority, NHAI, introduced a new approach in 2016: the Hybrid Annuity Model, or HAM.

How HAM works

The government pays 40 percent of the project cost during construction, in instalments linked to progress.
The private developer finances the remaining 60 percent, through equity and loans.
After completion, the government pays the developer annuities (fixed payments) over about 15 years, plus interest on the outstanding amount and payments for maintenance.
Tolls, where charged, are collected by the government, not the developer.

Why it helps

Traffic risk stays with the government: developers don’t lose if traffic is lower than forecast.
Lower financing needs: developers only fund 60 percent, easing debt burdens.
Construction incentive: payments depend on completing milestones.
Maintenance: the developer maintains the road over the concession, linking construction quality to long-term costs.

Comparison with other models

BOT (toll): the developer bears traffic risk and collects tolls.
EPC (engineering, procurement and construction): the government pays the full cost; the contractor just builds.
HAM sits in between.

Results

HAM helped revive highway construction, and India’s pace of highway building rose significantly in the late 2010s and early 2020s. Many projects were awarded under HAM alongside EPC.

Concerns

Fiscal commitments: annuities are future government liabilities, and a large pipeline of HAM projects adds to long-term obligations.
Interest rate risk: payments linked to interest rates can change the cost.
Developer capacity: smaller developers sometimes struggled to raise their 60 percent share.

The highway under HAM

A developer wins a HAM contract for a 100-kilometre highway. The government pays 40 percent as construction progresses, and the developer borrows the rest. Once the road opens, the developer receives regular annuity payments and maintains the road, regardless of how many vehicles use it.

Thinking HAM means the private sector pays for highways

The government pays 40 percent upfront and annuities later. Taxpayers or toll users ultimately fund the road.

Key takeaways

HAM was introduced by NHAI in 2016.
The government pays 40 percent during construction and annuities afterwards.
Traffic risk stays with the government, reducing developer risk.
HAM revived highway building but creates future fiscal commitments.