Empowering India's Electric Bus Revolution: The Role of Blended Finance


Majority of bus operators in India are small players, with 90% owning less than five buses.
India's public transport electrification drive faces several formidable challenges. With approximately 93% of buses under private ownership, the imperative for scaling up operators to facilitate this electric shift is evident. One way to bridge the existing financing gap and enable this is designating electric buses for priority sector lending. There is, however, another viable solution – blended finance. Blended finance refers to the strategic use of philanthropic and commercial capital to finance projects, leveraging the strengths of both sectors to address development challenges and maximize impact while mitigating risks.

In the case of electric buses, the upfront capital cost, and the looming specter of battery replacements, constituting nearly 50% of the Total Cost of Ownership (TCO), cast a daunting shadow. The absence of viable financing models exacerbates this challenge, identified by operators as a primary obstacle hindering widespread adoption. From the financier's standpoint, the reluctance stems from the novelty of the technology and its limited uptake thus far. Uncertainties regarding battery life and replacement costs further compound the perceived risks, creating a formidable barrier.

Blended finance offers a compelling avenue by harnessing catalytic funding from public and philanthropic sources to galvanize additional private sector investment. This approach effectively mitigates risks, enticing private capital into areas where venturing alone would be deemed too hazardous. Blended finance channels concessional capital, enabling operators to access funding at below-market rates.

This significantly reduces the cost of capital, easing the financial burden and enhancing affordability for operators, especially small and medium-sized enterprises (SMEs) with limited resources.

Within this framework, bilateral and multilateral agencies, philanthropic organizations, and Corporate Social Responsibility (CSR) foundations can channel their resources through loans, equity or guarantees to support bus operators in deploying electric buses.

By offering funds at below-market rates, the cost of capital can be significantly reduced, thereby facilitating access to financing for small and medium-sized operators, who constitute the majority of India's bus sector.

Majority of bus operators in India are small players, with 90% owning less than five buses. The credit profiles of these smaller players often fall short, rendering them ineligible for conventional financing avenues. Lacking sufficient collateral, they are reluctant to stake personal assets as mortgage guarantees. Blended finance can not only provide capital but also facilitate capacity-building measures to strengthen operators' credit profiles.

Through financial literacy programs, technical assistance and mentorship initiatives, operators can improve their financial management skills, enhance operational efficiency, and build credibility with lenders and investors.

While initiatives like Faster Adoption & Manufacturing of Electric Vehicles (FAME) and state-level incentives provide a crucial starting point, their sporadic nature and lack of standardization limit their efficacy in driving widespread adoption. Subsidies, while essential for kickstarting the electrification journey, prove insufficient for achieving scale and do little to bolster operators' creditworthiness. Unlike one-time subsidies, blended finance fosters a long-term self-sustaining ecosystem of investment.

By incentivizing private capital to enter the market, blended finance stimulates innovation, drives down costs and fosters competition, ultimately reducing reliance on government subsidies and ensuring the continued growth of the electric bus industry.

In previous rounds of Convergence Energy Services Limited (CESL) tenders for electric buses, participation primarily stemmed from original equipment manufacturers (OEMs). However, this model, albeit common, has drawn criticism for its inherent inefficiencies. While OEMs excel in manufacturing, their forte doesn't necessarily extend to operations management. A testament to this mismatch surfaced during the fourth tender held in November 2023, where 3,825 buses were put up for procurement, yet failed to attract any bids. The crux of the problem lies in the burden of risks and costs being disproportionately borne by OEMs under this framework.

With their involvement in these tenders, OEMs find themselves shouldering the entire gamut of challenges and financial implications, without commensurate incentives to ramp up production capacity. This disincentivizes expansion, stalling the potential growth of the electric bus sector.

To electrify India's 2 million buses, a paradigm shift is imperative. Beyond subsidies, capital infusion is vital. Blended finance emerges as a potent mechanism to propel operators toward scalability, enabling business expansion and eventual integration into the commercial capital ecosystem. By infusing concessional capital, acceptable risk-return profiles can be tailored to accommodate various financing partners, including private investors, thus fostering a collaborative investment landscape. As this model gains traction, it has the potential to crowd-in independent investment from other commercial entities, further amplifying its impact.



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