Shaping the infra risk guarantee fund

Announced in this year's Budget, the initiative requires intervention on six fronts to become even more impactful

Fiscal grants lower project cost upfront, viability gap funding offers zero-cost funding of up to 40 per cent of project cost (largely used as a bidding criterion for hybrid annuity projects), while Section 80-IA (10-year tax break for infrastructure) and tax-free bonds make servicing invested capital easier. 

There are several other forms of government support. Interest subvention reimburses part of the interest cost. Concessional loans help financial closure. Credit-rating makes debt saleable to institutional investors, and partial credit enhancement lifts a bond’s rating, making capital cheaper. Take-out financing allows refinancing of a bank’s higher-cost construction-phase loan with cheaper options once projects are operationally stable. Risk-sharing guarantees address specific risks, not the entire loan.

This column examines the Infrastructure Risk Guarantee Fund (IRGF), proposed in the Union Budget 2026-27. 

IRGF’s objectives, as enunciated in the Budget Speech was “to strengthen the confidence of private developers regarding risks during infrastructure development and construction phase, and to provide prudently calibrated partial credit guarantees to lenders”. The IRGF has now been conceptualised as a ₹1,000 crore sovereign-backed corpus managed as a trust under the National Credit Guarantee Trustee Company. 

The eligibility criteria for “under-construction” projects to avail of this facility consists of the following: 

1. It must be a public-private partnership (PPP) or a privately-funded infrastructure project having concession agreements with sovereign or sub-sovereign counterparties. 

2. The guarantee applies only to delays that occur outside the developer’s control. These are popularly termed as “sovereign risks”, such as land acquisition, environmental clearances, right-of-way permissions and the like. Force majeure conditions are also included. 

3. Project cost must be between ₹200 crore and ₹5,000 crore 

For calculation purposes, debt-to-equity is capped at 75:25, and eligible cost overrun is capped at 30 per cent of the original project cost, while the payout is computed only on the debt portion of that eligible overrun, funded at the same debt-to-equity ratio. 

For illustration, a ₹5,000 crore project that has a cost overrun of 10 per cent — that is, ₹500 crore — would trigger a maximum payout of ₹375 crore. 

A comprehensive evaluation of the IRGF scheme throws up six dimensions that need to be addressed. They are: 

Allow discretion in applicability: The IRGF guarantee absorbs cost overruns caused by sovereign-related delays as well as force majeure conditions. Since preparing an exhaustive laundry list of “covered perils” is near-impossible, an unambiguous enabling clause allowing the sanctioning committee to decide applicability at its discretion would help. 

Expand eligibility to above ₹5,000 crore: A 400 km six-lane well-designed highway will cost around ₹6,000 crore (without land acquisition). Similarly, a 1,200 Mw solar farm will also cost around ₹8,000 crore. Thus, the limit of ₹5,000 crore project cost significantly reduces the scope of IRGF. 

Ramp up size of the fund: India’s annual infrastructure spend is currently around ₹25 trillion and private capital participation is at roughly 20 per cent, accounting for about ₹5 trillion a year. Across a five-year pipeline of projects, that is ₹25 trillion of private investment. Even if 10 per cent of projects face time or cost overruns, the cumulative project cost overrun (at a maximum of 30 per cent) would be ₹75,000 crore, and the debt exposure of the overrun cost (at a maximum of 75 per cent) would be ₹56,250 crore. Against this, a ₹1,000 crore corpus may be a welcome but underwhelming start. It is best that the IRGF ramp up to around a ₹50,000 crore corpus at the earliest to remain meaningfully relevant. 

Protect the SPV, not just lenders: A key concern is the equitableness of risk-sharing. The current design protects lenders but offers no direct relief to developers, despite both parties bearing the consequences of sovereign-related delays. The guarantee could instead be routed as a one-time grant to the project special purpose vehicle (SPV) — keeping the asset financially alive and healthy, and sharing relief with both parties that bear the risk, rather than making lenders the sole beneficiary. Such an approach would better align with the stated objective of strengthening private-sector confidence. 

Have credible institution for finalising claims: The procedural credibility would benefit from having an independent and reputable party providing assurance on the true extent of claims. Such a firm (as distinct from lender’s engineers) should be acceptable to both the lender and the borrower at the outset, and would prevent disputes at the payout stage. This would materially speed up settlement. 

Define the geographical scope: The scheme is silent on geography. Indian developers are increasingly investing in and executing projects in neighbouring countries — Bhutan’s hydropower sector being a prominent example. It would be prudent to clarify whether such cross-border projects, backed by sovereign or sub-sovereign agreements, fall within the fund’s ambit. None of this detracts from the fund’s fundamental aim. 

A credibly capitalised, correctly administered risk-sharing instrument reflects a welcome recognition that project perils emanating from sovereign road blocks and force-majeure events deserve a helping hand.

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The writer is an infrastructure expert. He is also the founder & managing trustee of The Infravision Foundation. With research inputs from Aakash Bhavsar