Viability Gap Funding is the grant provided to infrastructure projects that are economically feasible but fall short of financing. The system is designed as a Plan Scheme that will be administered by the Ministry of Finance, and the budget amounts will be adjusted year to year. This article will discuss the viability gap funding model which is important for aspirants preparing for the UPSC examination.

What is Viability Gap Funding?

• Viability Gap Finance provides grants to support projects that are economically justified but are also financially weak.
• It is designed as a Plan Scheme that is implemented by the Ministry of Finance and the amount for which is made in the budget on a year-to-year basis.
• It is provided as a capital subsidy to attract the private sector players to participate in PPP projects that are otherwise financially unviable due to long gestation periods and small revenue flows in the future.

Financing of Viability Gap Funding Scheme

• The funds for the scheme are provided by the government’s budgetary allocation.
• Funding can also be provided by the statutory authority that owns the project asset.
• If the sponsoring Ministry/State Government intends to provide assistance over and above the stipulated amount under VGF, it will be restricted to a further 20% of the total project cost.
• Grants will only be available for infrastructure projects where private sector sponsors are selected through a process of competitive bidding.
• Grants would be given at the construction stage itself after the private sector developer makes the equity contribution required for the project.

Components of Viability Gap Funding Scheme

Sub scheme -1

• It will focus on sectors such as Waste Water Treatment, Water Supply, Solid Waste Management, Health, and Education sectors, etc.
• The projects in these sectors face various constraints such as bankability issues and poor revenue streams to cater fully to capital costs.
• The projects eligible to be financed under this category should have at least 100% Operational Cost recovery.
• The Central Government would provide a maximum of 30% of the Total Project Cost (TPC) of the project as VGF and State Government/Sponsoring Central Ministry/Statutory Entity may provide additional support up to 30% of TPC.

Sub scheme -2

• It supports demonstration/pilot social sector projects.
• The projects can be from various domains such as health and education sectors where there is at least 50% Operational Cost recovery.
• In such projects, the Central Government and the State Governments together provide up to 80% of capital expenditure and up to 50% of Operation & Maintenance (O&M) costs for the first five years.
• The Central Government would provide a maximum of 40% of the TPC of the Project and also a maximum of 25% of the Operational Costs of the project in the first five years of commercial operations.

Benefits of Viability Gap Funding

• The initiative will encourage PPPs in social and economic infrastructure, resulting in more efficient asset creation, proper operation and maintenance, and commercial viability of economically/socially critical enterprises.
• Energy, transportation, communication, banking, and financial institutions, and other elements of economic development that aid in the process of production and distribution are referred to as economic infrastructure.
• All infrastructures and institutions that improve the quality of human capital, such as educational institutions, hospitals, nursing homes, and housing facilities, are referred to as social infrastructure.
• The VGF Scheme will be revamped in order to attract more PPP projects and to facilitate private investment in the social sectors.
• The construction of new hospitals and schools will provide several prospects for job creation.
• According to the Kelkar Committee's recommendations, the Scheme will incentivize private infrastructure investment.

Conclusion

Viability gap funding provides financing to projects that are of commercial /social importance but gets stuck due to financing issues. Such infrastructure projects have long gestation periods and therefore require a sustained and stable source of financing. Funding under this scheme is provided on a yearly basis by the government.