Viability Gap Funding

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Lack of finance is the main limitation in the infrastructural sector in India. The Government recognises that infrastructure requires a significant investment that the public cannot finance alone. Therefore , in other words, it cannot be financially viable because of long capital investment requirements, long gestation period, and small revenue flows in the future. Most importantly, the Government decided to implement a new scheme named-“Viability Gap Funding” (VGF), formed in 2004, administered by the Ministry of Finance (Nirmala Seetharaman). In other words, It aims to complete the infrastructure projects successfully that are economically justified but fall short of financial unviable. On a year-to-year basis Plan Scheme had designed for this fund, and the budget is allocated.

However, earlier projects were limited to economic infrastructure. Later, In 2006, The Cabinet Committee on Economic Affairs, chaired by Prime Minister Shri Narendra Modi has approved for revamping or updating the VGF scheme as “the Scheme for Financial Support to Public-Private Participation (PPP),” extended over five years (till Financial Year 2024-2025). PPP refers to a project based on a contract between Government and a Statutory entity or private sector company for supporting infrastructure services. The new scheme encouraged both social and economic infrastructure projects. It aims to support projects that come under PPP and facilitate private sector investment in social infrastructure.

Further, the revamped scheme becomes operative within one month of Cabinet Approval,  financed from budgetary support of the Ministry of Finance. A total outlay of 8,100 crores for investment was predicted, out of which 6,000 crores was set apart for PPP projects in the economic infrastructure division and the remaining 2,100 crores for social infrastructure projects. In short, the VGF scheme is a one-time or deferred grant to support infrastructure projects that comes under Public-Private Partnerships (PPP).

List of sectors under VGF Scheme:

  • Health and education development.
  • Roads, railways, seaports, airports, bridges etc
  • Oil and gas pipelines
  • Electricity
  • Irrigation
  • Soil testing laboratories
  • Terminal markets
  • Water supply, sewerage, and solid waste management
  • Telecommunication (Fixed Network)
  • Telecommunication towers
  • Infrastructure projects in Special Economic Zones(SEZ).
  • Capital investment in the creation of modern storage capacity(including cold chains and post-harvest storage)
  • Common infrastructure in agriculture markets

 Objectives:

  • To attract and promote more PPP’s in social and economic infrastructure, thereby making essential projects viable.
  • To facilitate investment in social sectors such as education, health, water supply, wastewater, solid waste management.
  • Building new hospitals and schools generate more job opportunities, especially in remote areas.
  • The new scheme will be beneficial to the public as it helps develop the country’s infrastructure.
  • It focuses on integrating private participation of social sectors.

Applicability and Eligibility:

  • Within 30 days of receipt of the project proposal, Empowered Committee shall inform the Government/Statutory Entity about the eligibility of projects for VGF.
  • It can be only applicable to PPP projects proposed by Central Government/Central ministries/Statutory Entities as the case may be.
  • The project shall be implemented (developed, financed, constructed, maintained for the project term) by a Private Sector Company for funding.
  • The project should provide service against payment of a pre-determined tariff or user charges.
  • A private sector company shall be eligible only if selected through open and transparent competitive bidding.
  • The proposal will be applicable only if the contract/concession is awarded in favor of a private sector company.

Funding:

  • Funds shall be invited by concerned State government/Central Ministries/Statutory Entities in the form of the capital grant within four months of the approval of the Empowered Committee. The period may be extended by the Department of Economic Affairs, if necessary.
  • State Government/statutory entity/Ministry will restrict funding to 20% of the Total Project Cost if the sponsoring State Government/Statutory Entity/Ministry aims to provide assistance over and above the stipulated amount under VGF.

Disbursement of Grants:

  • The VGF grant will be disbursed at the construction stage only if the private sector company has subscribed and expended the equity contribution required for the project.
  • After the recommendation of the sponsoring authority, the Empowered Authority can release the grant to an escrow account.
  • The Empowered Committee, lead financial institution, and Private Sector Company shall enter into a tripartite agreement as prescribed by Empowered Committee from time to time.

Monitoring:

A lead financial institution (refers to the financial institution funding the PPP projects)  shall send regular monitoring and evaluation of projects for the disbursal of VGF and quarterly progress reports to the Empowered Committee.

The revamped VGF has two components:

1. Sub scheme 1:

  • 30% of the Total Project Cost (TPC) of the project is treated as VGF by the Central Government. Statutory entity/Central Ministry/State Government also provides additional support for funding (up to 30% of TPC).
  • Eligibility:

It mainly focuses on catering social sector projects such as Health, education, water supply, wastewater treatment, solid waste management.  These projects may face poor revenue streams and bankability issues to serve fully capital costs, and also projects should have at least 100% operational cost recovery.

 2. Sub scheme 2:

  • This scheme supports demonstration/pilot social sector projects. Central and State Government provides up to 80% of capital expenditure and 50% of Operation and Maintenance(O&M) for VGF over the first five years.
  • Eligibility:

The projects should come from the Health and Education sectors with a minimum of 50% Operational cost recovery.

64 projects have been accorded ‘final approval’ with a Total Project Cost of INR 34,288 crore and VGF of INR 5,639 crore since the inception of the scheme. VGF of INR 4,375 has been disbursed till the end of the financial year 2019-2020.

VGF Scheme is used to finance infrastructure projects. Not only infrastructure projects but almost all sectors of our economy also require funds to operate successfully. That’s why they seek the help of investment banks to raise funds effectively before launching their business. Are you considering a new business? Do you need funding? Drop a mail or fill-up the form below to get assistance right from the start.

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