Viability Gap Funding

What is viability gap funding?

There are many projects with high economic returns, but the financial returns may not be adequate for a profit-seeking investor. For instance, a rural road connecting several villages to the nearby town. This would yield huge economic benefits by integrating these villages with the market economy, but because of low incomes it may not be possible to charge user fee. In such a situation, the project is unlikely to get private investment. In such cases, the government can pitch in and meet a portion of the cost, making the project viable. This method is known as viability gap fund.

How does the scheme Work?

VGF is typically provided incompetitively bid projects. Under VGF, the central government meets up to 20% of capital cost of a project being implemented in public private partnership (PPP) mode by a central ministry, state government, statutory entity or a local body. The state government, sponsoring ministry or the project authority can pitch in with another 20% of the project cost to make the projects even more attractive for the investors. Potential investors bid for these projects on the basis of VGF needed. Those needing the least VGF sup-port will be awarded the project. The scheme is administered by the ministry of finance.

Which are the eligible sectors?

Projects in a number of sectors such as roads, ports, airports, railways, inland waterways, urban transport, power, water supply, other physi-cal infrastructure in urban areas, infrastructure projects in special eco-nomic zones, tourism infrastructure projects are generally eligible for viability gap funding. The government now proposes to add social sectors such as education and health to the list.

How does the government benefit?

The government has limited resources. It can use those funds to build everything on its own, but such public funding will take years to cre-ate the infrastructure that is needed to achieve higher growth. Through viability gap funding, the same amount of funds can be used to execute many more projects through private participation. VGF is in that sense a force multiplier, enabling government to leverage its re-sources more effectively.

What has been the success rate?

The government has so far approved 199 VGF-supported projects in-volving investment of Rs 170,651 crore by the end of December 2009.