Viability Gap Funding constitutes a grant allocated to infrastructure projects that possess economic feasibility but encounter a shortfall in financing. Structured as a Plan Scheme, it will be overseen by the Ministry of Finance, with budget allocations subject to annual adjustments.
What is Viability Gap Funding?
- Viability Gap Finance offers grants to bolster projects with economic merit but financial vulnerabilities.
- Structured as a Plan Scheme, it is executed by the Ministry of Finance, with budgetary allocations adjusted annually.
- This subsidy serves as a capital injection, enticing private sector involvement in PPP projects deemed financially unfeasible due to prolonged gestation periods and limited future revenue streams.
Financing of Viability Gap Funding Scheme
- The scheme’s funds originate from the government’s budget allocation.
- Alternatively, funding may be sourced from the statutory authority owning the project asset.
- Should the sponsoring Ministry/State Government opt to offer additional assistance beyond the prescribed VGF amount, it will be limited to an additional 20% of the total project cost.
- Grants are exclusively earmarked for infrastructure projects where private sector sponsors are chosen through competitive bidding.
- These grants are disbursed during the construction stage, subsequent to the private sector developer’s equity contribution meeting the project’s requirements.
Components of Viability Gap Funding Scheme
Subscheme 1
- This initiative targets sectors including Waste Water Treatment, Water Supply, Solid Waste Management, Health, and Education.
- Projects in these areas often encounter challenges such as issues with bankability and insufficient revenue streams to cover capital costs entirely.
- To qualify for financing under this category, projects must demonstrate a minimum of 100% Operational Cost recovery.
- The Central Government is poised to contribute up to 30% of the Total Project Cost (TPC), with the State Government/Sponsoring Central Ministry/Statutory Entity offering additional support of up to 30% of the TPC.
Subscheme 2
- This scheme provides backing for demonstration/pilot social sector projects, spanning domains like health and education, where a minimum of 50% Operational Cost recovery is anticipated.
- In such ventures, the Central Government and State Governments collectively fund up to 80% of capital expenditure and up to 50% of Operation & Maintenance (O&M) costs for the initial five years.
- During the first five years of commercial operations, the Central Government is committed to contributing a maximum of 40% of the TPC of the Project and also a maximum of 25% of the Operational Costs of the project.
Benefits of Viability Gap Funding
- The initiative aims to foster Public-Private Partnerships (PPPs) in both social and economic infrastructure, fostering more efficient asset creation, enhanced operation and maintenance, and the commercial viability of economically and socially crucial ventures.
- Economic infrastructure encompasses energy, transportation, communication, banking, financial institutions, and other components vital for production and distribution processes.
- Social infrastructure comprises all facilities and institutions enhancing human capital quality, such as educational institutions, hospitals, nursing homes, and housing facilities.
- The VGF Scheme will undergo a revitalization process to attract more PPP projects and encourage private investment in social sectors.
- The establishment of new hospitals and schools is poised to generate numerous job opportunities.
- In accordance with the recommendations of the Kelkar Committee, the Scheme will serve as an incentive for private infrastructure investment.
Conclusion
Viability Gap Funding serves to finance projects of commercial or social significance that encounter hurdles due to financial constraints. These infrastructure projects typically have extended gestation periods and thus necessitate a consistent and secure source of funding. The funding under this scheme is allocated annually by the government.
FAQs
Q: What is Viability Gap Funding (VGF)?
Viability Gap Funding (VGF) is a financial instrument used by governments to bridge the gap between infrastructure project costs and revenue generated from them. It is provided to make projects financially viable, especially in sectors where private investment alone may not suffice.
Q: How is Viability Gap Funding different from traditional financing?
Traditional financing involves loans or equity investments where the returns are expected to cover the project costs. VGF, however, is a subsidy provided by the government to support projects that are economically feasible but not financially viable due to market conditions or inherent risks.
Q: Which sectors commonly utilize Viability Gap Funding?
VGF is often used in infrastructure sectors such as transportation (roads, airports, ports), energy (power generation, transmission), water supply, and social sectors (healthcare, education). These sectors typically require large upfront investments and may have long gestation periods before generating sufficient revenue.
Q: Who provides Viability Gap Funding?
Viability Gap Funding is primarily provided by governments, either at the national or sub-national level. Governments allocate funds for VGF in their budgets or set up dedicated funds or agencies to administer it. Additionally, multilateral development banks and international agencies may also contribute to VGF for specific projects.
Q: What are the benefits of Viability Gap Funding?
VGF encourages private sector participation in infrastructure development by reducing financial risks and improving project feasibility. It helps attract investments in sectors crucial for economic growth and social development. Additionally, VGF can enhance infrastructure quality, efficiency, and accessibility, ultimately benefiting communities and promoting sustainable development.
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