India’s highway development programme has increasingly relied on the Hybrid Annuity Model (HAM) since its introduction by the Ministry of Road Transport and Highways in 2016. The model was designed to revive private investment in road infrastructure after the stress experienced under earlier build–operate–transfer frameworks. By dividing project costs between the government and the private developer, HAM sought to balance risk and restore investor confidence. Nearly a decade later, the model has indeed accelerated highway construction, but practical experience has also revealed several gaps in the allocation of risks under the standard concession agreement. These gaps have resulted in disputes, arbitration claims, and renegotiations among government authorities, concessionaires, and lenders.

Structure of Risk Allocation under HAM

Under the standard HAM framework, the concessionaire bears most construction-related risks. These typically include execution risks, contractor performance issues, cost overruns, and procurement of materials. The agreement also includes force majeure provisions that distinguish between political and non-political events, with different consequences for compensation and termination.

Land acquisition has emerged as one of the most significant implementation challenges. The concession framework requires the government authority to provide at least 80 percent of the required right of way before the appointed date and the balance within a prescribed period thereafter. Delays in land acquisition frequently disrupt construction schedules and escalate project costs. When project timelines are extended due to incomplete land availability, concessionaires often face increased financing costs and contractor claims, which in turn trigger disputes regarding responsibility for the delay.

Another frequently overlooked exposure relates to interest rate risk. The annuity payable under HAM projects is generally determined at the bidding stage and remains fixed during the project term. If interest rates increase after financial close, the concessionaire bears the impact through higher debt servicing costs. Recent increases in benchmark lending rates demonstrated how sensitive HAM projects can be to changes in financing conditions, with several projects reporting pressure on their debt service coverage ratios.

Emerging Trends in Risk Allocation

Over the past few years, the interpretation of HAM concession agreements has evolved through arbitral awards and judicial scrutiny. These decisions have influenced how risks are actually distributed between public authorities and private developers.

Three developments are particularly noticeable.

Judicial interpretation of right-of-way obligations

Courts have increasingly recognised that delays in land acquisition may remain the responsibility of the government authority. In several disputes relating to HAM projects, arbitral tribunals have granted compensation or time extensions to concessionaires where project execution was hindered by incomplete land handover or delayed utility relocation.

Cash support payment delays

HAM projects rely on government cash support payments during the construction phase. These payments are linked to project milestones certified by independent engineers. In practice, delays in certification or internal administrative processes can postpone disbursements. Such delays create liquidity stress for developers because they must continue financing ongoing construction while waiting for payment. The resulting working capital burden also increases interest during construction for lenders.

Change-in-law claims

The change-in-law clause allows concessionaires to seek compensation when legislative or regulatory changes significantly affect project economics. Disputes relating to tax reforms, including the transition to the goods and services tax regime, led to numerous claims by concessionaires seeking adjustments to project costs. While authorities initially treated the reform as revenue neutral, arbitral tribunals in some cases recognised that specific cost increases could justify partial compensation.

Perspective of Lenders

Financial institutions have also adapted their approach to HAM financing as the model has matured. Lenders generally enter into tripartite arrangements with the project authority and the concessionaire through a lenders’ agreement. This arrangement allows lenders to monitor project performance and intervene if the concessionaire defaults.

Two areas have received particular attention from lenders.

Control over annuity receivables

Lenders typically secure repayment through an escrow mechanism that channels annuity payments from the authority into designated accounts. Over time, financing structures have incorporated tighter escrow controls and contractual safeguards to ensure that lenders maintain priority over project cash flows.

Substitution rights

The lenders’ agreement also allows lenders to replace a defaulting concessionaire with another entity capable of completing and operating the project. While substitution provisions have existed in concession agreements for years, practical use of these rights has been limited. Recent instances where lenders exercised substitution rights in distressed highway projects have highlighted procedural uncertainties, particularly regarding pending claims and liabilities during the transition period.

New Categories of Risk

As the highway sector evolves, several new risk categories have begun to emerge that were not fully anticipated when the HAM template was drafted.

Climate-related disruptions

Increasing frequency of extreme weather events has affected several infrastructure projects. Although force majeure provisions cover natural disasters, determining whether an event qualifies for relief may become more complex as climate-related risks become more predictable.

Fiscal exposure of the project authority

Government authorities responsible for highway development have accumulated significant financial obligations in the form of annuity payments across multiple projects. While these payments are generally regarded as secure, lenders and developers are paying closer attention to the long-term fiscal capacity of the authority responsible for making such payments.

Technology transitions in tolling systems

The transition toward satellite-based tolling technologies and evolving digital toll collection systems may introduce operational obligations that were not originally contemplated in early HAM concession agreements. Future projects may require clearer contractual provisions addressing technology upgrades and system integration responsibilities.

Policy Implications

The Hybrid Annuity Model has played a major role in sustaining highway construction and attracting private sector participation in infrastructure development. However, the experience of nearly a decade indicates that the contractual framework requires refinement to reflect operational realities.

Several lessons can be drawn from the evolution of HAM projects:

Risk allocation must reflect the practical ability of each party to manage that risk.
Payment mechanisms should minimise liquidity pressures on concessionaires.
Lender protections must remain robust to maintain investor confidence.
Concession agreements should anticipate emerging challenges such as climate resilience and technological change.

Incorporating these lessons into future revisions of the concession template could reduce disputes and create a more balanced risk framework. For project developers, financiers, and legal practitioners, careful analysis of risk allocation in HAM agreements remains essential for evaluating project viability and long-term infrastructure sustainability.

HAM Highways: Changing Risk Allocation in India