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GK SPECIAL TOPIC : WHAT IS VIABILITY GAP FUNDING?
Saturday, 17 May 2014 07:20

 


WHAT IS VIABILITY GAP FUNDING?

 

Infrastructure shortages are proving a key constraint in sustaining and expanding India's economic growth and ensuring that all Indians are able to share in its benefits. To meet this challenge, the Government of India is committed to raising investment in infrastructure from its existing level of below 5% of GDP to almost 9%. This suggests that more than $450bn will be required to fund infrastructural development in India over the next five years. However, the scope for making improvements on this scale is fundamentally constrained by the state of public finances. The combined deficit of the central and state governments is roughly 10% of GDP and government borrowing is capped through the Fiscal Responsibility and Budgetary Management Act. This necessarily limits the capacity of the State to finance as much infrastructural development as it required.

Thus responding to this challenge, the Government of India is actively promoting the expansion of Public Private Partnership (PPP) activities across all key infrastructure sectors including highways, ports, power and telecoms.

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. Thus Government of India has established a Viability Gap Fund to aid the PPP infrastructure projects which face the viability gap due to inherent nature of the project.

The government under the Viability Gap Funding Scheme is providing financial support in the form of grants to infrastructure projects undertaken through public private partnerships with a view to make them commercially viable. The Scheme is administered by the Ministry of Finance.

VGF is typically provided in competitively 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 support will be awarded the project.

The project should meet the following criteria:

The PPP project should be implemented, i.e. developed, financed, constructed, maintained and operated for the Project term by a Private Sector Company to be selected by the Government or a statutory entity through a transparent and open competitive bidding process. The criterion for bidding shall be the amount of viability gap funding required by the Private Sector company for implementing the project where all other parameters are comparable.

The PPP project should be from one of the following sectors:

• Roads and bridges, railways, seaports, airports, inland waterways

• Power

• Urban transport, water supply, sewerage, solid waste management and other physical infrastructure

• Infrastructure projects in Special Economic Zones

• International convention centers and other tourism infrastructure project.