Blended Finance Model for Funding Infrastructure Projects in India

Blended Finance Model for Funding Infrastructure Projects in India

A preliminary study on requirement and applicability of blended finance model in India

Srinath Reddy Vanipenta

 Consultant – Industries, Andhra Pradesh

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Abstract - This research is mostly focused to identify the sectors where private investment is lacking and how blended finance can help to attract the private investors into those sectors. So, to identify the sector where private investors are worried to invest, we have to analyse the infrastructure investment in India over the years.

In this project we have analysed the data from 1991 to 2020. From this analysis we can observe that private investors are mainly interested in energy sector and transportation. The total cost of projects in water and sanitation was not even 1% of the total cost of all infrastructure projects in PPP and Private infrastructure projects. Only government has funded for the water and sanitation projects in India which accounted for 21% of total infrastructure investment by government. Projects related to these sector posses’ high risk. The top three will be disputes between states, clearance from various bodies and land acquisition. Government alone cannot fund those projects they need private investor to pitch in for the projects. So, the risk allocation is crucial between the parties to make the transaction.

We have analysed all the key business models which are currently being used in India and understood the risk allocation. We have observed that in all the model’s private players are taking the construction risks and, in some cases, risks during O&M stage also. If government is agreeing for annuity, then private investor is safe. By giving more support and confidence to private investor we can attract him into investing in water and sanitation sector.

This is where blended finance concept will be useful. In this concept we can address the problems for private investment. In this project we have suggested two ways. In the first way government will use concessional funds to attract private investment. Concessional funds can be from aided agencies or DFI. Use these funds to start the project and mitigate the early risks of the project so that private investor can be protected from them. Also, by using concessional funds the cost of capital will be reduced which will act as added layer of protection to private investor. In the second suggestion we will try to setup a risk guarantee or insurance funds for the project. Not necessarily government has to setup by using their funds. They can take assistance from MIGA which is actively working in these field. This can also give confidence to private investor to invest in these high-risk projects. From this study we have understood how to apply blended finance and which sector actually requires this concept. Further study is required on developing risk reward policies. This will be the most crucial and challenging part.

Key Words:  Blended Finance, Infrastructure investment, Concessional funds, Water and sanitation, Private infrastructure investment