Addressing Legal and Regulatory Barriers to Quality Infrastructure Investment in India, Indonesia and the Philippines

4. India

Abstract

India’s infrastructure agenda shows promise for addressing key bottlenecks in land acquisition, regulatory coordination, and investor confidence. The NHAI model in particular shows the promise of innovative financing models in achieving efficient and sustainable infrastructure development. Long-term success will depend on aligning new initiatives with internationally recognised ESG standards and predictable governance frameworks. By embedding QII principles in practice, India can convert its ambitious pipeline into an attractive and sustainable investment environment.

Good practices and recommendations

Good Practices in India

• The central government provides regulations that foster a favourable business climate, with opportunities to engage in regulatory dialogue. India's ambitious infrastructure strategy and supportive policies have created strong incentives for private investors.

• Initiatives like the Indian Private Investment Unit (PIU) (manages viability gap funding (VGF) schemes for public-private partnerships and supports economically beneficial but financially unviable projects) and the Infrastructure Project Development Fund (IIPDF) (provides guidelines and funding to support transaction advisors) has supported the development of PPPs by more parties.

• A robust private and debt market, competitive currency, and reliable policy frameworks have improved the investment environment more broadly but cater to have more diverse financing channels into infrastructure. In particular, Infrastructure Investment Trusts (InvITs) are investment vehicles that catalyse infrastructure development into infrastructure sectors by attracting domestic and international investors supported by local banking institutions.

• For major infrastructure projects, such as highways and solar parks, the government has streamlined the process by acquiring and developing land before transferring it to developers. The government's decision to quadruple compensation for private land acquisitions has largely resolved fair pricing issues.

• The National Highway Authority of India (NHAI) has deployed a "develop, commission, monetise, invest" cycle which leverages toll revenue and other models to fund new infrastructure development, and has been instrumental in unlocking value of roads. In particular, the NHAI developed the Hybrid Annuity Model (HAM), which is a PPP variant, provides a more predictable revenue stream with fixed and wholesale price index (WPI)-linked toll rates, plus traffic-based income, as well as granting NHAI special dispensation to manage HAM and directly hire market talent, bypassing typical government bureaucracy.

• India established the National Bank for Financing Infrastructure and Development (NaBFID) and the National Investment and Infrastructure Fund (NIIF) to support private investment into PPPs.

Recommendations for India

• The infrastructure sector faces challenges due to non-standardised reporting and would benefit from a unified reporting system, in line with the QII Principle 6 on strengthening infrastructure governance, which highlights the importance of transparency and consistency in reporting.

• The credit enhancement tools that NaBFID is developing could boost bond markets for infrastructure financing through capital markets, in line with QII Principle 2 on raising economic efficiency, which highlights the importance of cost-effective financing structures over the project life cycle.

• Land use planning under the jurisdiction of local authorities may have their own zoning and land use plans that could differ from national guidelines. These limitations may make investors shy away from urban, water, and waste management sectors which involve complex dealings with state authorities. Addressing such misalignments would be consistent with the QII Principle 6 on strengthening infrastructure governance, which calls for coherent and predictable frameworks to enable private investment.

• India lacks a unified ESG framework or specific legislation, relying instead on diverse ministerial requirements – such as the Business Responsibility and Sustainability Report. India should consider developing an ESG framework can be recognised internationally. Developing such a framework would align with the QII Principle 3 on integrating environmental considerations, which emphasises embedding sustainability into infrastructure investment frameworks.

4.1. Institutional landscape and regulatory framework for infrastructure development

India's democratic system and common law system offer a competitive edge for private infrastructure investment compared to regional peers. Well-structured central government regulations foster a favourable business climate. Investors value the opportunity to engage in regulatory dialogue, potentially influencing policies that impact business development. While time-intensive, this engagement is key for capitalising on India's market opportunities.

The Indian market offers significant opportunities but poses challenges due to its complexity. Infrastructure financing has shifted towards equity, with private investors establishing local offices and partnering with Indian public funds and commercial banks for improved market access and insight.

Partnerships between domestic and international private and public stakeholders can boost investment and create more viable transactions, particularly in sectors like energy and digital. Investors analyse each sector to assess opportunities, potential, and risks based on the ease of forming partnerships. Alignment in investment strategies is crucial, and investors may prefer non-Indian entities that align better with their goals. Difficulties in aligning with local partners often lead investors to seek co-control or full control in transactions.

4.1.1. Infrastructure institutional landscape

Successful investing in India requires expert local guidance from the outset. Key factors include choosing the right sector, partnering with strong management, and implementing robust controls. Investors must navigate complex business practices carefully, as scaling up can be challenging. There are reported local-level challenges include regulatory uncertainty, operational inefficiencies, bureaucratic hurdles, and payment issues (Integrity Risk International, 2023[1]) although most investors report positive experiences in the Indian market.

The Indian government, through the Ministry of Finance’s Department of Economic Affairs, is promoting infrastructure development using various financing instruments. With nearly 2,000 projects in different stages, India's Public-Private Partnership (PPP) program is among the world's largest, offering systematic planning, preparation, and implementation support to ministries (Invest India, 2023[2]).

The Indian National Bank for Financing Infrastructure Development (NaBFID established in 2021 with USD 2.4 billion in government-backed capital and USD 600 million in grants (Nayak, 2023[3]), operates as a financial intermediary for infrastructure projects. Governed by a Parliamentary Act rather than SEBI regulations, it has greater flexibility to engage with government agencies and line ministries. NaBFID can arrange syndicated financing and establish SPVs for asset ownership.

NaBFID can assess the financial viability of infrastructure assets and use risk mitigation tools like risk-sharing or project structuring. It can also structure financial arrangements with optimal debt-to-equity ratios, set suitable repayment terms, and align financial models with projected cash flows and revenues. NaBFID, as a local DFI, can access both domestic and international capital. It can collaborate with other DFIs to create strategic partnerships, co-financing arrangements, and leverage diverse expertise for infrastructure development. An MoU with IFC provides support to PPP project developers through financing, advisory services, and credit enhancements.

NaBFID, a specialised infrastructure finance institution, lends to government bodies, private entities, PPPs, and InvITs in sectors designated by the Ministry of Finance’s Department of Economic Affairs, such as roads and telecommunications. It also pursues development initiatives like an environmental and social management system and a green capital framework. The institution is exploring investment funds at GIFT City for smaller projects and creating a National Data Repository with impact monitoring (KPMG, 2022[4]). Collaborations with the World Bank aim to improve bond ratings, and NaBFID is considering blended finance with MDBs (IFC, 2023[5]).

The Indian Private Investment Unit (PIU) manages viability gap funding (VGF) schemes for public-private partnerships. VGF supports economically beneficial but financially unviable projects, initially focusing on roads but expanding to social infrastructure like housing, education, and hospitals in underdeveloped areas. This aims to attract private investment to sectors that may otherwise struggle to secure funding (Government of India, 2023[6]).

So far, 67 projects, primarily from state governments, have been approved. States decide which areas need PPPs and how to access VGF. The PIU assesses these proposals for funding, mainly provided by the central government. Social infrastructure projects can receive up to 30% of capital costs in VGF, while economic infrastructure projects receive 20%, due to their lower financial viability.

The PIU conducts a structured tender process with comprehensive stakeholder consultations to evaluate project requirements. Services are procured through established panels or open market tenders, based on project needs. All procedures adhere to state and central government financial rules, ensuring transparency and consistency in procurement.

The PIU funds transaction advisors to enhance state governments' PPP project preparation capabilities. This support has led to improved state capacity, evidenced by increased PPP resource utilisation, participation in online training, and growing demand for these programs. Consequently, states have developed in-house expertise for future projects and improved their ability to secure central government grants.

Most projects submitted to the PIU for appraisal include stakeholder consultations. While most participating companies are Indian, international companies can also join these PPPs, fostering a diverse range of investors in infrastructure development across the country.

The India Infrastructure Project Development Fund (IIPDF) is a revolving fund created by the Ministry of Finance’s Department of Economic Affairs to facilitate the development of PPP projects. It aims to enhance private sector involvement by covering transaction costs and reducing procurement expenses, thereby improving the quality and quantity of PPPs (Government of India, 2022[7]).

The IIPDF provides guidelines and funding to support transaction advisors, mainly assisting state governments. These authorities often lack resources for feasibility analyses and essential documentation for PPP projects. The IIPDF offers grants up to USD 500,000, released upon project milestones like initial report submissions. If a project is feasible, a PPP player is engaged for implementation. If not, funding stops without reimbursement (Government of India, 2022[7]).

Since its launch in 2022, the IIPDF has supported approximately 30 new projects. Enhanced transactional knowledge in state governments, aided by empanelled advisors from top firms, has facilitated successful project tendering and construction. State governments can choose advisors from this panel or opt for competitive bidding, though the latter can be more time-consuming.

The IIPDF is experiencing increasing interest from Indian state governments, though some projects fall outside the NaBFID priority list, complicating approval. Efforts are being made to streamline procedures and manage the project pipeline more effectively, but clearance within the IIPDF system can still be time-consuming.

To build state government capacity, regular PPP workshops are held. While established sectors have model concession agreements (MCAs), new sectors require developing tailored MCAs. These standardised agreements allow customisation for specific needs. The ministry mediates arbitration cases annually, particularly in sectors like ports, addressing monetisation and competing facility issues. States generally follow established agreements with minor project-specific adjustments.

4.1.2. Laws and regulations impacting infrastructure development

Investors agree that regulatory inconsistency across jurisdictions in India's federal system, particularly between national and local authorities, is a concern. Although regulations have become more open to foreign investment, local enforcement often fails to align with federal plans. For private investors, this misalignment and the local authorities' inability to enforce regulations or adapt to legal changes pose a risk of value loss rather than an investment opportunity.

Inconsistencies in issuing permits and licenses for investment, construction, and development at both local and national levels can challenge investors navigating bureaucratic processes. Infrastructure project approvals often require clearances from both authorities, and delays or inconsistencies at either level can hinder project progress.

Policy discrepancies between national and local levels can impede infrastructure projects, particularly in real estate and transportation. Investors struggle with project initiation, as key assets like railways and highways remain under government ownership.

4.1.3 Compliance and reporting procedures, guarantees, and credit risk mitigation

The relationship between data, reporting, and credit risk for infrastructure investment in India is complex and multifaceted. Current efforts focus on improving data collection and management, particularly for post-commercial operations, to better assess project performance and payment commitment fulfilment.

However, the sector faces challenges due to non-standardised reporting. To address this, a proposal for a unified reporting system supported by organisations like the World Bank will jointly identify and develop PPP projects (IFC, 2023[5]). This aims to consolidate fragmented information across different entities while accommodating sector-specific needs.

Recommendation: The infrastructure sector faces challenges due to non-standardised reporting and would benefit from a unified reporting system, in line with the QII Principle 6 on strengthening infrastructure governance, which highlights the importance of transparency and consistency in reporting (G20, 2022[8]).

NaBFID is developing credit enhancement tools to boost bond markets for infrastructure financing. While progress has been made on demand risk, stronger mechanisms are needed to attract private investors, especially in energy. The bank aims to encourage infrastructure companies to tap capital markets, targeting domestic investors to increase turnover and create a new infrastructure financing asset class. NaBFID is experimenting with tools like municipal bonds, though these efforts are nascent and lack formal regulation. The goal is to establish a framework supporting blended finance and green financing to meet infrastructure sector needs (Srivastava and Rana, 2024[9]).

Credit rating agencies should consolidate their separate databases to create an anonymised, sector-level credit loss index. This would provide valuable risk insights while balancing competition between public and private banks. Tracking financial flows into infrastructure sectors is key for understanding overall risks and investment patterns. A centralised data repository, potentially housed at NaBFID or a relevant ministry, would aggregate data from various regulators, sectors, and agencies. Inspired by projects like GEMS from MDBs, this initiative could improve credit risk assessment accuracy and efficiency in India's infrastructure sector, potentially leading to better investment decisions and increased private sector participation.

Recommendation: The credit enhancement tools that NaBFID is developing could boost bond markets for infrastructure financing through capital markets, in line with QII Principle 2 on raising economic efficiency, which highlights the importance of cost-effective financing structures over the project life cycle (G20, 2022[8]).

4.1.4 Key infrastructure development sectors

The PM Gati Shakti National Master Plan, introduced in the 2022-2023 Indian Union Budget, aligns with the National Infrastructure Pipeline to develop seven key sectors: roads, railways, airports, ports, mass transportation, waterways, and logistics infrastructure (Government of India, 2022[10]). While international investors recognise the importance of these sectors for India's development, they also see potential in renewable energy investments.

Infrastructure projects like renewable energy transmission and national highways are attracting private and foreign investment in India. These large, multi-state projects fall under federal jurisdiction, simplifying management and reducing risks. Since 2014, 90% of such projects have been federally managed, leading to increased investment due to lower risk.

India prioritises government funding for high-risk projects while encouraging private investment in lower-risk ventures. The country's infrastructure focus is on energy and transportation, particularly renewable energy, to meet its rapidly growing power demand. India added approximately 20 GW of solar power last year, and highway project execution times have significantly improved from 4-5 years to 18 months, enhancing investor confidence in these sectors.

Transport sector

The highways sector has streamlined project execution, reducing timelines from 4-5 years to 18 months and boosting completion rates. The government prioritizes energy and transportation, strategically allocating funds to high-risk projects while directing lower-risk opportunities to private investors. This balanced approach enhances the sectors' appeal to both domestic and international investors.

India's transport sector comprises 5.7 million km of roads1, including nearly 141,000 km of national highways as of 2022, 68,103 km of railways2, and 34,261 km of waterways, with 45% navigable3 (Government of India, 2022[11]). It also includes 13 major ports and 110 airports (Reserve Bank of India, 2022[12]). The Union Budget 2022-2023, under the Gati Shakti Master Plan, allocated USD 2.4 billion to extend the National Highway Network by 25,000 km, integrate 2,000 km of railway into the Indian Kavach system, and construct 400 new trains (Government of India, 2022[10]).

India's extensive transport sector and large population present significant opportunities for infrastructure monetisation. The National Highway Authority of India (NHAI) aims to unlock value from over 26,000 km of existing roads by 2025 through a "develop, commission, monetise, invest" cycle. This approach leverages toll revenue and other models to fund new infrastructure development. (Singh, 2023[13]). Some key elements about the different models to finance and monetise roads’ assets are:

• The Hybrid Annuity Model (HAM) has successfully attracted 30% private investment in road projects, and further improvements in the Build-Operate-Transfer (BOT) model are expected as land acquisition challenges are addressed.

  The Hybrid Annuity Model (HAM) place demand risk on the government, while the Build-Operate-Transfer (BOT) model shifts it to the private sector, with provisions to extend concession periods if actual traffic falls below projected threshold.

Box ‎4.1.  Hybrid Annuity Model in India

India’s HAM model has been widely adopted across the national highway system since the 1990s, towards approximately 8000 km of road construction. The HAM model aims to balance risk sharing between public and private parties and has more recently been extended to water sector projects. Under a HAM setup, the government authority would finance 40% of the construction costs, and the private sector 60% via a mix of debt and equity into a special purpose vehicle. Once the operational period begins, the private actor is repaid through annuity payments.

In recent years, through Multilateral Agencies, such as with the ADB, have also started to participate in lending to the private sector for HAM projects, indicating further investment appetite for the future. A series of interviews conducted with the implementing agencies, banks, financiers and concessionaires indicated that there remain areas for improvement, notably in projects acquiring land on a timely basis, adding incentives for early completion, and strengthened escrow mechanisms among others.

The HAM model has unlocked value in India by enabling private funds to go further through the attraction of private capital and expertise. The best practices and structuring developed in India represent a powerful opportunity for developing countries to leverage in order to achieve sustainable development while balancing fiscal prudence and private participation.

Source: (Shiwakoti and Dey, 2022[14]) , (Peri, Chen and Dey, 2019[15])

Renewable energies

India's energy landscape is defined by two key themes: it generates about 1750 TwH of power annually, and at twice the US’ growth rate. To address this demand, India is prioritising renewable energy, adding around 20 GW of solar power in the past year. However, renewable sources alone cannot satisfy the country's total energy needs.

India, the third-largest CO2 emitter globally, has a low per capita emission rate. The country plans to install 500 GW of renewable energy by 2030 to meet 50% of its energy needs and aims for net zero by 2070. Since COP21, India has achieved its goal of generating 40% of its power from non-fossil fuels, nine years ahead of schedule (Birol and Kant, 2022[16]).

India has emerged as a leader in energy transition, rapidly expanding renewable energy deployment. Over the past decade, it has electrified 50 million citizens annually, shifted car subsidies from petrol to electric, and made solar power cheaper than fossil fuels through policy support and private sector engagement (Birol and Kant, 2022[16]).

India's ambitious infrastructure strategy and supportive policies have created strong incentives for private investors. A robust private and debt market, competitive currency, and reliable policy frameworks have improved the investment environment. This has streamlined due diligence, eased administrative processes for foreign investors, and reduced capital costs, particularly benefiting the solar power sector which has achieved cost parity with other electricity sources.

India's energy sector presents a lucrative opportunity for foreign banks, with an estimated USD 240 billion investment potential in renewable energy markets (Ernst & Young, 2023[17]). Solar photovoltaic and advanced battery manufacturing alone could attract USD 18.2 billion in investments (Ernst & Young, 2023[17]). The transition from fossil fuels opens innovative opportunities in electric metering and mobility, especially in India's expanding urban areas.

Private solar investment in India follows two main paths: independent plant bidding or government-owned solar parks. Major players prefer the lower-risk solar park option for easier implementation. Private land development faces challenges due to government pricing and potential compensation claims. Investment models typically factor in a 3-year risk period, but ongoing land title digitisation efforts are gradually reducing these risks, enhancing the appeal of private solar investments (Invest India, 2023[18]).

4.2. Addressing challenges for private infrastructure investment in India

Private infrastructure investment in India faces multifaceted challenges. Market risks, bureaucratic hurdles, and legal uncertainties impede project performance. A fragmented regulatory environment, coupled with policy instability and lengthy land acquisition processes, further complicates matters.

Investors highlight inconsistent regulatory implementation across jurisdictions and land acquisition challenges as key issues. Financiers struggle to assess revenue realisation risks during project appraisal, with financial institutions lagging in developing risk-adjusted products for infrastructure financing, particularly for institutional investors (Kearney, 2020[19]). Limited visibility into long-term project pipelines and performance hinders effective risk assessment. Foreign institutional investors face additional challenges engaging with the Indian market due to currency constraints.

4.2.1. Land acquisition, asset ownership, right of way, and project implementation

Private funds in India face varied experiences with land acquisition, influenced by project type and location. Urban infrastructure projects, like metros, are challenging due to high land costs and rigid design needs, causing funds to shy away from urban, water, and waste management sectors. These projects involve complex dealings with state authorities, who often lack expertise and clear procedures, particularly for new infrastructure like airports and metros. Conversely, large-scale projects such as interstate highways and renewable energy transmission, which are under federal jurisdiction, are generally easier to manage (Kaur, 2022[20]).

The Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013 regulates land acquisition for infrastructure projects, addressing expropriation, resettlement, and compensation (Ministry of Law and Justice, 2013[21]). However, inconsistencies in regulation and uniform land ownership rules can deter private investment. While the Act is central to land acquisition for public purposes, state-level variations in implementation create regulatory misalignment between national and local jurisdictions, potentially impeding infrastructure development:

• Land use planning: local authorities may have their own zoning and land use plans that could differ from national guidelines. This can lead to conflicts when businesses or investors want to acquire land for specific purposes.

Recommendation: Land use planning under the jurisdiction of local authorities may have their own zoning and land use plans that could differ from national guidelines. These limitations may make investors shy away from urban, water, and waste management sectors which involve complex dealings with state authorities. Addressing such misalignments would be consistent with the QII Principle 6 on strengthening infrastructure governance, which calls for coherent and predictable frameworks to enable private investment (G20, 2022[8]).

• Land conversion: converting agricultural land for non-agricultural purposes is subject to regulations at both national and local levels. Local authorities may have their own policies and procedures for land conversion, and these might not always align with national guidelines.

Large infrastructure projects encounter complex issues beyond basic regulatory mismatches, including disparities in land acquisition processes, varying compensation mechanisms, and inconsistent rehabilitation policies. A notable example is the relocation of slum dwellers, which presents multiple challenges such as regulatory and administrative hurdles, delays in permit issuance, and questions about the sustainability of the projects, not to mention political sensitivities. Additionally, there are concerns regarding the adequacy of utility supply for relocated populations and the necessity for upgraded social infrastructure and urban development (Kaur, 2022[20]). These factors collectively impact the development and implementation of such projects.

The government's decision to quadruple compensation for private land acquisitions has largely resolved fair pricing issues. For major infrastructure projects, such as highways and solar parks, the government streamlines the process by acquiring and developing land before transferring it to developers (Kaur, 2022[20]). Sector-specific approaches and phased execution in highway projects enhance efficiency, enabling developers to start work once 80% of the land is transferred, with the option to exclude the remaining 20% if needed. This approach, outlined in the National Infrastructure Pipeline (NIP), has streamlined the process, and increased public acceptance of compensation.

Land acquisition for private investors is typically easier in rural areas than in urban zones, where costs and political issues are more complex. Government authorities usually acquire land for major infrastructure projects (airports, railways, ports, roads, large solar farms). However, private developers may need to acquire land independently for specific projects like transmission lines (Shira and Associates, 2019[22]). To assist private developers, India's PPP scheme offers viability gap funding, providing land at minimal or no cost to incentivise participation. This approach ensures pre-acquisition of land, reducing implementation delays. PPP teams stress that project developers should have custody of the land before construction begins, streamlining development (Delplanque and Torhonen, 2024[23]).

The Indian Ministry of Finance acknowledges the importance of private sector participation and the challenges of land acquisition. While sectors like renewable energy, ports, airports, and roads already have significant private involvement, airports and ports may become fully privatised. However, the fragmentation of land holdings complicates stakeholder management, necessitating greater public sector involvement (Delplanque and Torhonen, 2024[23]). For large parcels required for industrial and renewable energy projects (about 1,000 hectares), initial government acquisition is expected given potential issues. Two primary models are emerging: government acquisition followed by transfer to private developers and long-term lease arrangements ranging from 10 to 40 years.

Since 2014, India has federalised about 90% of its infrastructure projects, reducing risks and attracting foreign and private investors to sectors like national highways and interstate transmission lines. However, high-risk areas remain dominated by local developers. This shift illustrates how government risk mitigation efforts have influenced private investment in Indian infrastructure, with foreign and private funds favouring federally managed projects due to their more predictable land acquisition processes.

The National Bank for Financing Infrastructure and Development (NaBFID) is playing a pivotal role in streamlining land acquisition for infrastructure projects in India. Operating within the Gati Shakti framework, it has a clear mandate across government levels. The bank implements an aggregate model that distributes project risks through well-structured concession agreements, reducing developer burden. This approach, along with other government initiatives, has significantly improved the efficiency of land acquisition and project development for infrastructure SPV syndicates. Despite ongoing time requirements, the process benefits from stronger central agency agreements. This model includes:

• A Single Window clearance model, allowing all project participants to obtain necessary clearances for their respective roles simultaneously.

• A model for concession agreements that has been developed to allocate and distribute risks among participants effectively. These agreements now address various project types, including brownfield projects, ensuring financial viability even for inherited projects.

The NIIF can streamline land acquisition by acting as a transparent intermediary between investors and the government's fair compensation legislation. It collaborates with initiatives like the Ministry of Logistics' infrastructure planning platform, which centralises data from seven major ministries. This platform geotags critical areas, enabling efficient project planning and land acquisition strategies that minimise population disruption and environmental impact (IFSWF, 2024[24]).

4.2.2. Innovative vehicles, strategies, and mechanisms to enhance infrastructure investment

India's capital markets face challenges in offering diverse fixed-income instruments that meet expected returns. Despite a stable BBB-/Baa3 credit rating (Jain, 2023[25]), institutional investors often avoid markets rated below A-, perceiving them as underdeveloped and bank-driven. To address this, India has introduced innovative alternatives akin to private equity and venture capital investments, providing depth and returns for large institutional investors seeking infrastructure assets in their portfolios.

Monetisation of infrastructure assets

The National Monetisation Pipeline (NMP), a key initiative in India's 2021-2022 Union Budget, aims to monetise operational infrastructure assets worth USD 72 billion (Government of India, 2021[26]) by attracting private investment through lease, sales, or concessions. This approach offers predictable returns without construction risks. This plan focuses on five major sectors: roads, railways, power, oil and gas pipelines, and telecommunications. Roads benefit from toll indexation, while renewable energy operates competitively. However, metro rail tariffs remain government-controlled, and water infrastructure faces collection challenges. Some projects use PPP models with public subsidies to mitigate tariff risks. Metro rail projects showcase various approaches, ranging from fully privatised systems to hybrid models, exemplifying the diverse strategies in infrastructure development.

The NMP's implementation is based on specific characteristics designed to optimise asset utilisation and attract private investment (Deloitte, 2023[27]):

• The monetisation will affect the “rights” and not the “ownership” of the asset. Assets will be returned to the government after the transaction life.

• The monetisation will affect brownfield de-risked assets to guarantee stable revenue streams.

• Partnerships will be structured under defined contractual frameworks with strict KPIs and performance standards.

The monetisation models will include concession-based contracts, such as Operate-Maintain-Transfer (OMT) or Operate-Maintain-Develop (OMD), REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts), and asset back securitisation (Deloitte, 2023[27]).

NaBFID’s pivotal role as a development finance institution (DFI) India's economic and infrastructure growth supports the implementation of the NMP. It focuses on financing large-scale projects aligned with the National Master Plan, Infrastructure Pipeline, and Union Budget. NaBFID aims to catalyse investments, increase transparency, and enhance creditworthiness to mobilise capital through grants and commercial lending, particularly at local and municipal levels.

The National Investment and Infrastructure Fund (NIIF)

Established in 2015, the National Investment and Infrastructure Fund (NIIF) was created to address India's infrastructure challenges following rapid growth and an economic slowdown. It aims to attract global investment and develop infrastructure in key areas. Despite an initial government investment of USD 3 million, the government holds only a 49% stake, positioning NIIF as a public-private partnership rather than a sovereign wealth fund. As of October 2023, the NIIF had raised USD 4.9 billion out of the USD 6 billion it aims to provide in infrastructure funding. (Jain and Mawkin, 2024[28]).

The NIIF's governance structure aligns with a typical Asset Management Company, as only 2 of the eight Board of Directors members represent the government. The NIIF management team, comprising 8-10 experienced individuals from large infrastructure companies and institutions, independently handles investment strategy, decisions, and business operations without Board oversight.

The NIIF serves as a vital intermediary between the government, domestic and international private sectors, and financial institutions. It facilitates contract drafting, ensures transparency in tender processes, and collaborates with the Ministry of Finance to refine policies affecting foreign investment in India. This unique position allows NIIF to foster dialogue and understanding among all stakeholders, streamlining infrastructure development processes (NIIF, 2022[29]). In addition, the NIIF functions as both a policy advisor and investment consultant through the Special Investment Promotion Authority (SIPA), maintaining independence while leveraging strong government links. The NIIF's approach capitalises on India's mature PPP market and extensive infrastructure experience, while the government works to standardise regulations and digitalise processes to reduce investment barriers.

The NIIF plays a crucial role in facilitating partnerships between the Indian government and both domestic and foreign institutional investors by aligning government practices with the efficiency of private enterprises. It serves as an attractive vehicle for North American and Australian pension funds to enter the Indian market. As a result of these collaborations, sectors like roads, renewable energy, airports, and ports have become more bankable and aligned with international standards, enhancing their appeal to global investors.

The NIIF manages four funds with distinct objectives and nearly USD 5 billion in AuM. The flagship Master Fund, established in 2017, holds USD 2.4 billion AuM and focuses on core infrastructure sectors (Jain and Mawkin, 2024[28]). It is 49% government-owned, with the remaining 51% held by global investors from North America, Australia, and regional private equity funds. This diversified portfolio reflects NIIF's strategy to channel investments into critical infrastructure sectors for India's economic growth. Some examples include:

• Ports and logistics: NIIF is working with Hindustan Infralog and Dubai ports to manage India container traffic. The new company holds a mix of new assets, old assets, and assets under construction.

• Renewable energies: NIIF invests in an existing company with capacity of 500-600 MW and will partner with BII UK and other operators to participate in auctions for assets under construction in the solar and wind sectors.

• Roads: Atang Infrastructure is a company created and fully owned by NIIF focused on building toll and national roads.

• Smart meters: NIIF is the majority owner in a venture with Intelismart and Energy Efficiency Services to develop greenfield power distribution projects for smart meter space.

• Data centres: in collaboration with Digitaledge to build telecommunications and internet distribution infrastructure through a scalable model across India.

• Airports: partnership with GMR Group for co-ownership of the Goha airport.

The NIIF USD 1 billion Fund of Funds (Jain and Mawkin, 2024[28]), also known as NIIF Private Markets Fund, invests in other funds focused on infrastructure-related sectors. The fund targets economically significant areas such as affordable housing, green mobility, consumer domains, healthcare, buyouts, and deep tech ventures. While potentially overlapping with equity sectors and presenting higher risks, it offers attractive returns of 10% to 15% (IFSWF, 2024[24]).

The NIIF's strategic partnership with the Japan Bank for International Cooperation (JBIC) has culminated in the launch of the USD 600 million India-Japan Fund in October 2023 (NIIF, 2023[30]). This bilateral fund, NIIF's first, focuses on environmental sustainability and low-carbon emission strategies, with investments targeting sectors such as renewable energy, e-mobility, and circular economy. The Government of India holds 49% of the fund, while JBIC holds 51% (NIIF, 2023[30]). Operating as a private equity fund, it aims to make minority investments and enhance Japanese investments in India while addressing climate-related issues.

The NIIF Strategic Opportunities Fund (SOF) is USD 2.1 billion with a major direct growth equity fund in India that focuses on high-potential ventures in sectors benefiting from India's evolving business landscape, such as energy, green mobility, transportation, and healthcare (Jain and Mawkin, 2024[28]). Unlike NIIF's other funds, SOF excludes core infrastructure investments. It provides long-term capital through minority stakes and partnerships with high-growth businesses, emphasising value creation and strong corporate governance (NIIF, 2023[31]).

NIIF's multi-perspective approach addresses India's diverse needs, working within established regulatory frameworks across sectors and government levels in a way comparable to the European Union's complexity. As a government-anchored fund of funds, it operates across various financial sectors, including InvITs. This structure directs capital into operating assets, advances along the risk curve, and channels investments into critical infrastructure projects (NIIF, 2022[29]). By attracting domestic and international investment, NIIF supports Indian infrastructure while balancing risk and return for diverse investors.

The Hybrid Annuity Model (HAM) in India’s roads sector

The Hybrid Annuity Model (HAM), introduced in India in 2016 for highway projects, offers a successful alternative to the preferred BOT (toll) mode. HAM, a PPP variant, provides a more predictable revenue stream with fixed and wholesale price index (WPI)-linked toll rates, plus traffic-based income. To streamline implementation, the National Highway Authority of India (NHAI) received special dispensation to manage HAM and directly hire market talent, bypassing typical government bureaucracy (Government of India, 2016[32]).

The National Highways Infrastructure Trust (HIT) enhances the HAM by monetising infrastructure projects through India's robust InvIT ecosystem. This strategy, along with the financing and monetisation models of the National Highways Authority of India (NHAI), offers stable and attractive opportunities for private investors. The government's fixed pricing and established toll road regulations provide a clear valuation framework, making these projects appealing for investors seeking reliable, long-term returns in India's expanding infrastructure sector.

Through innovative and advantageous features, the HAM has provided better incentives for early completion and contributed to higher project readiness, thus enhancing project bankability, and attracting more private participation:

• Balances financial risk sharing between government and the private sector by injecting a portion of project costs during construction:

  i. 40% of the bid project cost shall be payable by the government as support for construction cost in instalments linked to completion milestones.

  ii. 60% of construction cost shall be borne initially by the concessionaire through a combination of equity and debt.

  iii. Upon completion, this balance shall be repaid in annuities aligned with the asset’s revenue profile during the operation phase.

• It allows to hedge inflation through indexation of construction costs and O&M payments.

• The government is responsible for collecting toll revenues and the concessionaire for the project’s maintenance until the end of the fifteen-year concession.

The HAM has revolutionised India's infrastructure sector by diversifying monetisation and operation models, improving traffic flow, and maximising sector potential. While HAM offers significant benefits, it faces challenges common to Indian infrastructure, including land acquisition issues, bidding process transparency, and dispute resolution efficiency (Shiwakoti and Dey, 2022[33]). Despite these areas for improvement, HAM projects are considered stable and reliable investments, often compared to bonds with added advantages, though they may offer lower returns than some alternatives.

Due to the success of the HAM in the roads sector, the Indian government is considering applying this model to finance other infrastructure assets. For instance, in the water, sanitation, and hygiene (WASH) sector, strong central counterparts like the NHAI could help reduce lender risk.

The Indian success of Infrastructure Investment Trusts (InvITs)

Infrastructure Investment Trusts (InvITs) are investment vehicles that catalyse infrastructure development into infrastructure sectors (Shah, 2021[34]) by attracting domestic and international investors supported by local banking institutions (Fernand, 2021[35]). They typically invest in income-producing assets like roads, renewable energy, and communication towers. InvITs complement traditional bank financing and offer investors access to high-quality real assets with stable returns. Currently, 43 countries recognise the value of these investment vehicles for infrastructure development (PwC, 2022[36]).

InvITs were introduced in India as alternative investment funds in 2014 through the InvIT Regulation issued by SEBI (Bhasin, 2022[37]). They are required to distribute 90% of their cash flows, providing regular income to investors and mitigating currency impact for foreign participants. The structure involves a Sponsor, Trustee, Investment Manager, and Project Manager, with assets typically held in an SPV under the India Trusts Act. Conservative leverage caps and improved bankruptcy laws have enhanced InvITs' appeal as a low-risk infrastructure investment product in India. The resolution process for infrastructure debt now typically takes about two years, further improving the investment climate (Infometrics Ratings, 2024[38]).

InvITs have become a key infrastructure financing tool in India, simplifying ownership and improving asset liquidity. As of March 2024, 26 SEBI-registered InvITs have mobilised about USD 4 billion (SEBI, 2024[39]) across five subsectors: energy, transport and logistics, communications, social and commercial infrastructure, and water and sanitation. These trusts, which can be public or private (Bhasin, 2022[37]), invest in assets listed in the 2017 Harmonised Master List of Infrastructure Sub-sectors, covering transport, energy, telecommunications, and social infrastructure.

InvITs have emerged as a tax-efficient solution for highly leveraged infrastructure projects, particularly for brownfield investments. Their rigorous oversight enhances investor confidence, making them more reliable than traditional corporate models in the sector. SEBI's ongoing regulatory updates keep InvITs responsive to market changes, attracting widespread participation from domestic and international investors, including significant global institutional players.

NHAI launched the National Highways Infrastructure Trust (HIT), an InvIT designed to monetise operational highway projects through capital markets (Government of India, 2020[40]). This InvIT features NHAI's Project Management Company (PMC) as the Project Manager and the Government of India as the Investment Manager. With approximately USD 680,000 in assets under management, HIT monetises 452 km of roads, generating revenues of USD 70,300 (Highway Infrastructure Trust, 2023[41]) and provides an interesting reinvestment model for foreign sovereign and pension funds with upcoming expiring concessions. While domestic pension and insurance funds remain cautious, regulatory support for the model has led to optimism in the potential.

4.3. ESG Considerations

India is developing a comprehensive ESG framework and taxonomy for the infrastructure sector, acknowledging the need for standardised sustainable finance and reporting approaches (Kumar, Ambast and Chaturvedi, 2022[42]). Currently, the country lacks a unified ESG framework or specific legislation, relying instead on diverse ministerial requirements – such as the Business Responsibility and Sustainability Report – and indicators for key areas like forestry, pollution, and energy, applicable only to a limited and incomplete pool of listed and large companies (Kher, 2023[43]).

Recommendation: India lacks a unified ESG framework or specific legislation, relying instead on diverse ministerial requirements – such as the Business Responsibility and Sustainability Report. India should consider developing an ESG framework can be recognised internationally. Developing such a framework would align with the QII Principle 3 on integrating environmental considerations, which emphasises embedding sustainability into infrastructure investment frameworks (G20, 2022[8]).

Both government and private sectors recognise that existing standards may fall short of international reporting requirements (Kumar, Ambast and Chaturvedi, 2022[42]). Instead, domestic companies, multinational developers, and foreign investors are shaping the Indian ESG landscape by voluntarily complying global ESG standards and requirements (Kumar, Ambast and Chaturvedi, 2022[42]). Concessional agreements now often include ESG-linked statutory clearances as part of project viability assessments. Private investors and developers are adopting green portfolios that extend beyond structural certifications to include operational and commercial aspects. The recent introduction of green bonds and a green taxonomy in the latest budget marks a significant step towards a structured ESG approach, potentially facilitating blended finance instruments and green financing in infrastructure.

Although implementation is currently managed by individual investors and developers, there is a clear movement towards stronger governance, particularly through new rules for board compositions and acquisitions for REITs and infrastructure funds. The upcoming green taxonomy is expected to guide the market and regulators in adopting sustainable finance methods, potentially aligning current practices with international standards. This evolving framework aims to provide a comprehensive and standardised approach to ESG considerations in India's rapidly developing infrastructure sector.

Climate adaptation efforts are advancing through partnerships with organisations like IFC, emphasising social and governance aspects alongside environmental concerns. In infrastructure, this leads to more comprehensive due diligence during acquisitions. However, these ESG initiatives are primarily driven by international investors, as domestic markets are not yet fully prepared to implement them independently.

Like other ESG-focused financing schemes, InvITs can assess the environmental impact of assets by examining carbon footprint, energy efficiency, and regulatory compliance. For social aspects, InvITs may evaluate the effects on local communities, adherence to labour practices, and community engagement initiatives.

Governance practices are crucial for InvITs, requiring scrutiny of management structure, transparency, and regulatory compliance. While a framework for ESG governance best practices exists, it's not yet integrated into due diligence processes. ESG and HSE managers at the corporate level are key to promoting sustainability efforts, focusing on GHG emissions, diversity, inclusion, and community engagement. For InvITs, pre-acquisition due diligence should consider these factors, develop methods to identify red flags, and implement mitigation measures.

The NIIF has aligned its investment strategy with national development priorities and global SDGs, emphasising sustainable investment. In 2019, it partnered with the US Department of Treasury's Office of Technical Assistance to enhance its ESG practices, particularly in reporting, due diligence, and impact measurement (NIIF, 2022[29]). Beyond ESG considerations directly related to investment, NIIF has also established "Values Beyond Business" linked to ESG objectives (NIIF, 2022[29]):

• Promoting the adoption of best-in-class ESG standards in all investments, made possible through 48 ESG professionals implementing these frameworks across the portfolio.

• Increasing awareness about diversity and inclusion by encouraging call to action and reducing biases with 40% of the funds overall team formed by women.

• Giving back through Corporate Social Responsibility (CSR) initiatives in the field of healthcare and improving livelihoods that benefit over 7,000 beneficiaries in local communities.

NIIF's strong ESG focus has attracted multilateral investors, with over 50% of investments targeting sustainability. The portfolio includes significant investments in electric vehicles and advanced renewable energy solutions. NIIF is also exploring waste-to-energy projects, supported by new regulations. The organisation's commitment is reflected in its structure, with a dedicated ESG team and widespread integration of ESG principles. All investments undergo mandatory ESG screening, with non-negotiable policy commitments based on established standards like EHS guidelines and IFC Performance Standards.

The NHIT, managing about 15 projects with USD 3.2 billion in assets, plans to issue a AAA-rated Sustainability Bond in partnership with IFC. This USD 2.5 billion bond, offering 7.9-8% interest rates, will fund maintenance of PPP-operated road assets held by NHIT and monetised by NHAI. Despite higher costs, NHIT pursues this initiative to demonstrate sector leadership and responsibility (Hussain and Dill, 2023[44]).

NHIT is focusing on Scope 1 and Scope 2 emissions to meet sustainability KPIs without adopting stricter international standards. DNV has been engaged for verification, and the assets are being released in rounds, with 8 assets in rounds 1 and 2, and 7 assets in round 3. NHIT recognises the challenges in addressing Scope 3 emissions due to the nature of road infrastructure. This initiative positions NHIT as a leader in sustainable infrastructure financing in India, with competitors like iSquared Capital's "Cube" project pursuing similar strategies.

India's energy sector is transitioning from traditional to renewable sources, challenging the existing power grid. This shift requires significant upgrades to transmission capabilities, especially near urban areas. While following global trends, India faces unique difficulties in implementing international standards, particularly regarding social issues affecting blue-collar workers in the industry.

The impact of sustainable finance tools on integrating ESG into India's infrastructure project preparation has been limited, especially in the domestic market. Despite public funding and IFC assistance, there's a significant need for education and stronger domestic ESG investing regulations. The absence of specific benefits for green issuances in India highlights the considerable room for growth in ESG integration, particularly in domestic market participation and regulatory frameworks.

The primary challenge is developing a unified ESG framework that engages the broader industry while accommodating each country's unique factors and developmental stages. While stringent ESG requirements may deter some minority shareholders, many investors view ESG as an effective risk management tool, especially for long-term infrastructure investments with 20–30-year cashflow horizons.

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Annex 4.A. India: Regulation of Infrastructure Investment

Annex Table ‎4.A.1. .Regulation of Indian Infrastructure Investment

Regulation name	General purpose	Impact on infrastructure
India
Securities and Exchange Board of India (Infrastructure Investment Trusts) Regulations, 2014 [last amended on October 23, 2023]	-Defines the legal form and key definitions, rights and responsibilities, and governance for the establishment of REITs and InvITs. -Define the eligibility of the sponsor (the person who sets up the REIT or InvIT), the manager of the trust and the trustee. -Outline both common investment conditions and asset conditions for investment, such as the ratio of the value of income-generating assets as well as other assets. -Establish policies and requirements with respect to distribution of dividends, minimum capital required for an initial public offer (IPO), listing requirements, key responsibilities of the parties to the trust, etc.	-Alleviate the burden on the banking system by making available fresh and patient capital for the infrastructure sector. -Create a regulatory and investment landscape that facilitate access to capital – domestic or foreign – required by the growing infrastructure sector.
Indian PPP Policy	-Setting out the broad principles for pursuing a project on PPP basis. -Providing a framework for identifying, structuring, awarding, and managing PPP projects. -Delineating the cross-sectoral institutional architecture and mechanisms for facilitating and implementing PPPs.	-Establish a broad policy framework that sets out the principles for implementing a larger number of projects across diverse infrastructure sectors to complement India’s growth aspirations. -Facilitate this expansion in the use of PPP approach, where appropriate, in a consistent and effective manner.
The National Bank for Financing Infrastructure and Development Act, 2021	-Coordinate with the Central and State Governments, regulators, financial institutions, institutional investors, and such other relevant stakeholders, in India or outside India, to facilitate building of infrastructure. -Lend or invest in India-based infrastructure projects, directly or indirectly, and seek to attract investment from private sector investors and institutional investors.	-Improve the relevant institutions to support the development of long-term non-recourse infrastructure financing in India including the domestic bonds and derivatives markets. -Foster infrastructure investment and sustainable economic development in India.
The Right of Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013	-Establishes provisions for fair compensation to landowners, brings transparency to land acquisitions directed to set up factories, buildings, or infrastructure projects. -Makes adequate provisions for the rehabilitation and resettlement of persons affected by effective or proposed land acquisitions processes.	-Applies to infrastructure projects and assets as defined by the Indian Department of Economic Affairs (excluding private hospitals, education institutions, and private hotels). -Applies to infrastructure assets in agriculture, industrial corridors and mining, water networks and treatment, government administered infrastructure, sports and healthcare facilities, tourism, transportation, and space programmes.

Source: (2020[45]), PwC Indian real estate and infrastructure market analysis (PwC, 2022[36]), the Philippines BOT Law (Public-Private Partnership Center, 2022[46]).

Notes

← 1.  As of 2019.

← 2.  As of 2021.

← 3.  As of 2022.