Project Finance and Infrastructure Models
A project finance model is a different shape from a corporate model. The debt schedule is not a consequence of the plan; it is the centre of it, and everything else is arranged around servicing it. The question is not whether the project is profitable but whether it is bankable, which is a stricter and more specific test.
- Why bankability is a different test from profitability
- The Reserve Bank's project finance regime as it stands since October 2025
- Debt sizing, cover ratios and the construction period
- Public private partnership structures and viability gap funding
- Cost benefit analysis and what it is actually for
Why a project model is built the other way round
In a corporate model, you forecast the business and the financing follows. In a project model, you establish the cash the project can generate, decide what portion of it lenders will let you commit to debt service, and the debt quantum falls out of that. Equity takes what is left. The model is therefore built from the cash flow available for debt service upward, and the sizing is an output of the cover ratio rather than an input to it.
Three features follow. There is a construction period during which the project consumes cash and earns nothing, and interest during construction is capitalised rather than expensed. There is a defined operating life, often set by a concession or a power purchase agreement, after which the model stops rather than growing into perpetuity. And there is usually a single purpose vehicle whose only assets are the project, which is what makes the cash flow ring fenced and the lending non-recourse or limited recourse.
The Reserve Bank of India (Project Finance) Directions, 2025
The framework a lender will apply changed recently, and the change is often misdated. The Reserve Bank of India (Project Finance) Directions, 2025 were issued on 19 June 2025 under reference RBI/2025-26/59, and took effect on 1 October 2025. They are worth reading before a model is built, because they determine several structural inputs.
| What the Directions do | The provision |
|---|---|
| Define what counts as project finance | Two cumulative tests: at least 51 per cent of the repayment envisaged at financial closure must come from cash flows arising from the project, and all lenders must have a common agreement with the debtor |
| Require a techno-economic viability study | Mandatory for all projects where the aggregate exposure of all lenders is 100 crore rupees or more, at paragraph 20 |
| Require independent certification of progress | The lender's independent engineer or architect certifies the stages of completion, at paragraph 21 |
| Require financial closure before disbursement | Financial closure achieved and the original date of commencement of commercial operations clearly spelt out and documented prior to disbursement, at paragraph 13(a) |
| Cap the repayment tenor against economic life | The original or revised repayment tenor, including any moratorium, may not exceed 85 per cent of the economic life of the project, at paragraph 13(c) |
| Set standard asset provisioning | Construction phase: 1.25 per cent for commercial real estate, 1.00 per cent for commercial real estate residential housing, 1.00 per cent for all others. Operational phase, once repayment has commenced: 1.00 per cent, 0.75 per cent and 0.40 per cent respectively |
| Limit deferment of the operations date | Up to 3 years for infrastructure projects and up to 2 years for non-infrastructure projects, including commercial real estate |
| Set a minimum share per lender in large syndicates | Where the aggregate exposure of all lenders exceeds 1,500 crore rupees, an individual lender's exposure floor is 5 per cent or 150 crore rupees, at paragraph 15 |
Source: Reserve Bank of India (Project Finance) Directions, 2025, RBI/2025-26/59, DOR.STR.REC.34/21.04.048/2025-26, issued 19 June 2025, effective 1 October 2025. Read 1 September 2026.
Two things the Directions do not do, which matters because both are commonly asserted. They do not prescribe a minimum debt service coverage ratio: the ratio appears in Annex 3 as a parameter to be reported in the project profile and again where the operations date changes, with no threshold attached. And they contain no requirement of sensitivity or scenario analysis. Those requirements come from individual lenders' credit policies, which are usually stricter, and it is the lender's floor that your model will actually be measured against.
The 2025 Directions are the operative framework and nothing displaces them. There is a similarly titled draft prudential framework in circulation, and it is worth knowing what it is: the consultation document of 3 May 2024, which is what the 2025 Directions grew out of, not a later proposal to replace them. The final Directions were issued on 19 June 2025 and took effect on 1 October 2025, and they moderated the draft materially, including on provisioning. Entity-specific credit facilities amendments issued during 2026 operate alongside them and do not supersede them. No instrument displacing the 2025 Directions had been identified as at 18 September 2026.
Cover ratios, and how debt quantum is actually set
The debt service coverage ratio is cash available for debt service divided by debt service in the same period, and the two measures a lender will look at are the minimum in any single period and the average across the loan life. The minimum is usually the binding constraint, because a covenant is tested period by period and not on average.
Sizing runs backwards from there. Take the projected cash available for debt service, divide by the target cover ratio to get affordable debt service, then solve for the principal that produces that service at the assumed rate and tenor. That is the debt quantum. The sponsor's equity is the balance of project cost, and if that balance is larger than the sponsor can fund, the project is not undersized on debt; it is over-costed or its revenue assumption is too thin.
Two ratios sit alongside it. The loan life coverage ratio is the present value of cash available for debt service over the remaining loan term, divided by debt outstanding, and it is the forward looking test a lender applies when a covenant is under pressure. The project life coverage ratio does the same over the full project life and shows the tail beyond the debt, which is what supports a restructuring argument if one is ever needed.
Public private partnership structures and viability gap funding
Where the counterparty is a public authority, the model's revenue side is defined by the concession rather than by a market. A build, operate and transfer toll structure puts traffic risk on the concessionaire. An annuity structure puts it on the authority and turns the model into a receivables model with counterparty risk. A hybrid annuity structure splits construction funding between the authority and the concessionaire, and the model has to follow the split precisely, because the authority's share arrives on milestones and the balance is financed.
Model concession agreements for several sectors are published by NITI Aayog, covering areas including non-communicable diseases, automated vehicle inspection and certification centres, eco-tourism resorts, electric bus operations and maintenance, medical education, integrated solid and liquid waste management, and passenger ropeways. For national highways under the hybrid annuity model the current base document is the revised Model Concession Agreement of 11 November 2020. It is not on NITI Aayog's list, which is why it is easy to conclude it does not exist; it sits in the Department of Economic Affairs' public private partnership model agreement register. No later generally applicable consolidated replacement had been identified as at 18 September 2026. The 2020 revision reached sponsor exit and change in ownership, utility shifting, maintenance during construction, financial close, construction period payments, the applicable bank rate, mobilisation advances, termination payments and dispute resolution. The change with the most effect on a sponsor's model shortened the lead member's post-construction minimum shareholding period from two years to six months, while keeping the 26 per cent minimum during construction. Read the project's own request for proposals, executed agreement and addenda in any case, because project-specific terms modify the model.
Viability gap funding: the caps are not a single number
Support is available under the Scheme for Financial Support to Public Private Partnerships in Infrastructure, administered by the Department of Economic Affairs and revamped by an office memorandum of 7 December 2020. Under the scheme guidelines, general sector projects can receive up to 20 per cent of total project cost, with the sponsoring authority able to provide a further 20 per cent. A social sector sub-scheme covering water, waste management, health and education goes to 30 per cent plus a further 30 per cent. A second sub-scheme for demonstration and pilot projects in health and education goes to 40 per cent as a capital grant plus 25 per cent of the net present value of the first five years of operating cost after commercial operations, again with matching sponsoring authority support. Proposals are appraised by a committee chaired by the Secretary, Economic Affairs.
The two published figures are not in conflict; they are the same structure described at different levels. The 20, 30 and 40 per cent figures are the maximum Central Government contribution. The higher figures include the matching contribution the State Government, sponsoring Central Ministry or statutory entity may add.
| Project category | Central Government | Sponsoring authority | Combined maximum |
|---|---|---|---|
| Ordinary economic or infrastructure project | 20 per cent of project cost | A further 20 per cent | 40 per cent of project cost |
| Sub-scheme 1: social infrastructure recovering at least 100 per cent of operating cost | 30 per cent | A further 30 per cent | 60 per cent of project cost |
| Sub-scheme 2: demonstration or pilot health and education project recovering at least 50 per cent of operating cost | 40 per cent | A further 40 per cent | 80 per cent of capital expenditure |
Sub-scheme 2 may also carry support of up to 50 per cent of operating and maintenance costs for the first five years.
The 80 per cent figure is the one most often quoted out of place. It is the outer limit for a qualifying Sub-scheme 2 demonstration or pilot project, not a rate generally available to social-sector projects.
On whether the scheme is running: the original Cabinet approval and its ₹8,100 crore outlay expressly ran to FY 2024-25, and no later instrument formally extending that period has been located. The scheme is nonetheless being administered. The official register records in-principle approvals dated 28 October 2025 and further approvals for two waste-to-energy projects dated 13 June 2026, and the application route remains open. So proposals continue to be processed in FY 2026-27, on the evidence of the register rather than of a located extension instrument.
On the threshold question underneath all of these benefits: the current instrument is the Updated Harmonized Master List of Infrastructure Sub-sectors, notified by the Department of Economic Affairs on 19 September 2025 under F. No. 13/1/2025-IPP. It supersedes the list of 11 October 2022 and its only substantive change was to add qualifying large ships under transport and logistics. Its currency is confirmed independently by CBDT Notification 70/2026 of 1 June 2026, which adopts it for Schedule V to the Income-tax Act 2025.
The list has five categories: transport and logistics; energy; water and sanitation; communication; and social and commercial infrastructure. Eligibility turns on the definitions and the quantitative conditions inside the list, not on the sector heading, and the conditions are where projects fail. A data centre needs a minimum information technology load of 5 MW. A grid-scale energy storage system needs at least 200 MWh and must not be on a merchant basis. Affordable housing needs at least half the floor area ratio used for units of no more than 60 square metres. An exhibition-cum-convention centre needs at least 100,000 square metres of qualifying built-up floor area. A large ship means a commercial vessel of at least 10,000 gross tonnage under Indian ownership and flag, or one of at least 1,500 gross tonnage built in India and under Indian ownership and flag.
What a cost benefit analysis is actually for
A cost benefit analysis is not a financial model with extra rows. It answers a different question: whether the project is worth doing from the point of view of the economy or the public authority, rather than whether it returns capital to a sponsor. It brings in effects that never touch the project's cash flows, such as time saved by users, emissions avoided or displaced activity elsewhere, and it discounts them at a social discount rate rather than at a cost of capital.
The two analyses answer different questions and can point in opposite directions. A project can be strongly positive on a cost benefit basis and unfinanceable, which is precisely the gap that viability gap funding exists to bridge. Presenting one as if it were the other is a common and avoidable error in project documentation.
Questions about project models
Monthly or quarterly periods during construction?
Monthly through construction, because interest during construction is calculated on drawn balances and the drawdown profile is the whole point. Semi-annual or quarterly through operations, aligned to the debt service dates in the facility agreement rather than to accounting periods.
How do we handle the circularity between interest during construction and the debt quantum?
It is a genuine circularity, since interest during construction is part of project cost and project cost determines the debt that generates the interest. Resolve it with a controlled iterative calculation and a convergence check, not by leaving iterative calculation running silently across the whole workbook.
Does the model need to run the full concession period?
It needs to run at least the full debt tenor, and for a concession structure it should run the concession, because the tail beyond debt maturity is what supports the project life coverage ratio and any refinancing case.
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Position as at 18 September 2026. Reviewed every six months.
This page is general information, not professional advice. A financial model is only as good as the rules it assumes will still be there when the forecast period arrives, and most of those rules moved recently. The Income-tax Act 2025 replaced the 1961 Act on 1 April 2026 and renumbered every section. The Reserve Bank's project finance regime was rewritten with effect from 1 October 2025. The external commercial borrowing framework was rewritten in February 2026. The treatment of a share buyback changed twice inside eighteen months. Take professional advice before acting on anything on this page. We are happy to be that adviser, but we do not act on a web page, ours or anyone else's, without one.