Infrastructure investment models

The first principle

An infrastructure project is a large cost paid now for small benefits spread over decades, and it carries risks of land, construction, cost overrun, traffic, inflation and interest rates. Every investment model answers two questions: who pays up front, and who carries which risk. The rule that runs through this note is that a risk should sit with the party best able to control it, and a model fails when it hands a risk to someone who cannot.

The core

The models, from all public to all private

• Engineering, procurement and construction (EPC). The government designs the project, pays a contractor in stages to build it, and then owns and maintains it. The contractor carries only construction risk, and EPC uses the most public money.
• Build operate transfer (BOT), toll. A private concessionaire raises the money, builds the road, collects toll for a fixed period, often 20 to 30 years, and then hands it back. It carries construction, finance and traffic risk, so the state spends nothing but the traffic must repay the investment.
• BOT annuity. The concessionaire builds and maintains the road with its own money, but the government collects the toll and pays the concessionaire a fixed annuity every six months. Traffic risk moves back to the state.
• Variants. In build own operate transfer (BOOT) the private party owns the asset during the concession, which helps it borrow, and in build own operate (BOO), common in private power plants, there is no transfer at all. In build own lease transfer (BOLT) the private party builds the asset and leases it to the government, which pays rent and takes ownership at the end. Design build finance operate transfer (DBFOT) is the full form of BOT in Indian model concession agreements.
• Hybrid annuity model (HAM). Introduced by the National Highways Authority of India (NHAI) in 2016, it splits the cost: the authority pays 40 per cent of the bid project cost during construction, and the concessionaire raises the other 60 per cent and recovers it in semi annual annuities over 15 years after the road opens, with interest on the unpaid balance and separate payments for operation and maintenance. NHAI collects the toll. The bid cost is indexed to inflation through a price index multiple that weighs wholesale and consumer prices 70 to 30, so the builder does not carry inflation risk. Agreements revised from 2020 set the interest at the average one year marginal cost of funds based lending rate (MCLR) of the top five banks plus 1.25 percentage points, in place of the bank rate plus 3 points.
• Toll operate transfer (TOT). The government auctions the right to collect toll on a finished, operating road for a long period in exchange for an upfront payment. The first bundle in 2018 went for Rs 9,681 crore, and TOT is the model on which asset monetisation is built.

Dimensions

• Fiscal. Private finance spreads the state's cost over time, but an annuity is a firm promise to pay for 15 years, so annuities and guarantees are deferred or contingent liabilities to count when judging fiscal health.
• Financial. Banks lend from deposits of one to three years, while a road repays over 15 to 30 years, so bank lending to infrastructure creates an asset liability mismatch; stalled power and road projects were a large part of bank bad debt in the 2010s.
• Risk sharing. BOT toll failed in the early 2010s when land acquisition stalled and traffic fell short of aggressive bids, leaving firms with risks they could not control; HAM moved traffic and inflation risk back to the state.
• Governance. Long contracts need renegotiation, but officials fear any change will look like favouring a firm.
• Equity. User charges are fair to those who benefit but can exclude the poor, so social sectors need grants such as viability gap funding.

In practice

The worked example, in words

Take a bid project cost of Rs 1,000 crore, ignore indexation, and assume interest of 9 per cent a year, or 4.5 per cent a half year. NHAI pays Rs 400 crore (40 per cent) during construction, and the concessionaire raises Rs 600 crore from equity and loans. After opening, NHAI repays the Rs 600 crore in 30 half yearly instalments of 600 ÷ 30 = Rs 20 crore, plus interest on the unpaid balance. The first payment is 20 + 0.045 × 600 = Rs 47 crore and the last is 20 + 0.045 × 20 = Rs 20.9 crore. Total interest is 0.045 × 20 × (30 + 29 + … + 1) = 0.9 × 465 = Rs 418.5 crore, so NHAI pays Rs 400 + 600 + 418.5 = Rs 1,418.5 crore for the capital, plus maintenance payments, and keeps all the toll.

The pipelines and the institutions

• The Kelkar Committee, chaired by Vijay Kelkar, reported on revisiting and revitalising public private partnerships (PPP) in November 2015. It said that PPPs should deliver better services to citizens rather than revenue for the state, should not be used for very small projects, and must allocate each risk to the party best able to manage it. It asked for an amendment of the Prevention of Corruption Act 1988 to separate honest errors from corruption, a renegotiation framework, an Infrastructure PPP Adjudication Tribunal, independent sector regulators and a national institution to build PPP capacity.
• The National Infrastructure Pipeline (NIP) listed projects worth Rs 111 lakh crore for 2019-20 to 2024-25 (Task Force report, 2020), with the Centre and the States expected to fund about 39 and 40 per cent and the private sector about 21 per cent; energy, roads, urban infrastructure and railways made up about seven tenths of it.
• The National Monetisation Pipeline (NMP), released by NITI Aayog in August 2021, aimed to raise Rs 6 lakh crore over 2021-22 to 2024-25 by leasing operating Central assets such as roads, railway stations, transmission lines and pipelines; the government reports that about 90 per cent of the target was achieved. NMP 2.0, launched in February 2026 for 2025-26 to 2029-30, estimates a potential of Rs 16.72 lakh crore, including Rs 5.8 lakh crore of private investment.
• Infrastructure investment trusts (InvITs) and real estate investment trusts (REITs), both governed by regulations of 2014 of the Securities and Exchange Board of India (SEBI), are trusts that pool operating assets and sell units to investors. They hold mostly completed, income earning assets and must distribute at least 90 per cent of net distributable cash flows, much like a bond with a share in the upside. NHAI's National Highways Infra Trust and the POWERGRID Infrastructure Investment Trust, both of 2021, are public sector examples; Budget 2026-27 proposed dedicated REITs to recycle the real estate of Central public sector enterprises.
• The National Bank for Financing Infrastructure and Development (NaBFID), set up under an Act of 2021 with Rs 20,000 crore of capital and a Rs 5,000 crore grant, is a development finance institution regulated by the Reserve Bank. It lends for long tenors and is meant to deepen the infrastructure bond market.
• Viability gap funding (VGF), under a scheme of 2006 run by the Department of Economic Affairs, is a capital grant to PPP projects that are economically justified but not commercially viable. The Centre gives up to 20 per cent of total project cost and the sponsoring authority up to another 20 per cent; the scheme revamped in November 2020 raised this to 30 plus 30 per cent for social sectors such as water, waste, health and education, and allowed up to 80 per cent of capital cost for pilot projects in health and education.
• Public money still leads. The Union Budget 2026-27 provides Rs 12.2 lakh crore for Central capital expenditure, against Rs 11.2 lakh crore budgeted for 2025-26, and proposes an Infrastructure Risk Guarantee Fund to give lenders partial credit guarantees during construction.

Issues and way forward

• Weak private appetite. After the losses of the 2010s firms prefer EPC and HAM, and BOT almost disappeared from highway awards by the end of the decade; revised BOT agreements, including proposals to link the concession period to actual traffic seen in FASTag data, aim to bring private risk capital back.
• Land and clearances. Delays in land and forest clearance cause overruns no contract can price; awarding only after most land is in hand reduces this risk.
• Disputes and renegotiation. Large claims sit in arbitration for years and the Kelkar Committee's tribunal was not set up, though the Prevention of Corruption Act was amended in 2018; time bound conciliation and a renegotiation framework are still needed.
• Annuity burden. HAM commits NHAI to 15 years of payments, which should be published with the budget.
• Monetisation that does not recycle. Leasing a road helps only if the money builds new assets and users are protected, which independent sector regulators can guard.
• A thin bond market. Pension and insurance funds, the natural long term lenders, hold little infrastructure debt; credit enhancement and listed InvITs can draw them in.

Common confusions

• BOT annuity and HAM. In a BOT annuity the private party finances the whole cost and is repaid by annuities, while in HAM the state pays 40 per cent during construction and the annuity covers only the remaining 60 per cent with interest.
• Monetisation and disinvestment. Monetisation leases the right to run an asset for a period and the asset comes back, while disinvestment sells shares in a public company and the ownership changes.
• NIP and NMP. The NIP is a list of new projects to be built, while the NMP lists existing, operating assets whose cash flows can be leased to raise money for the new ones.
• VGF and an annuity. Viability gap funding is a one time capital grant during construction to make a project bankable, while an annuity is a stream of payments for a service delivered over years.

For the exam

• Keyword bank: risk allocation, engineering procurement and construction, build operate transfer, hybrid annuity model, toll operate transfer, price index multiple, Kelkar Committee, contingent liability, asset liability mismatch, viability gap funding, National Infrastructure Pipeline, asset recycling, infrastructure investment trust, NaBFID.
• Previous year questions: Practise the previous year questions on this topic →
• Use in an answer:
  • Introduction with data: NMP 2.0 of February 2026 aims to unlock Rs 16.72 lakh crore from operating public assets over 2025-26 to 2029-30, after the first pipeline achieved about 90 per cent of its Rs 6 lakh crore target (NITI Aayog).
  • Introduction with a report: The Kelkar Committee of 2015 held that the purpose of a public private partnership is better service to citizens, not fiscal relief for the state, and that each risk must lie with the party best able to bear it.
  • Conclusion: The shift from BOT to HAM shows that private capital returns when risk is shared fairly; traffic linked contracts, deeper bond markets and quick dispute resolution can bring back risk capital.
  • Conclusion: Asset recycling through TOT, InvITs and monetisation can fund new infrastructure without new debt, if the money is reinvested.