Enabling Bond Market Finance for Infrastructure Projects in India: The Problem of Credit Ratings

Abstract

In India, public–private partnership (PPP) infrastructure projects are mainly financed by commercial bank debt, and bond markets have had only limited participation in financing infrastructure. One of the factors that has constrained infrastructure projects from accessing bond markets has been their low-investment-grade credit ratings. Infrastructure projects are considered risky by rating agencies, and their low-investment-grade (BBB) rating levels do not attract bond market investments. However, the rationale for higher risk grades for infrastructure PPP projects is not clear. This article reviews research on financing infrastructure in India, analyzes rating transition studies over five years, and summarizes findings from an analysis of actual defaults for 134 infrastructure PPP projects in India. The findings indicate that infrastructure PPP projects exhibit lower rates of default than those expected from the credit ratings given to the infrastructure project debt. The use of external credit ratings by investors and financial sector regulators is constraining debt investments in infrastructure specifically from bond markets and long-term sources.