The Cabinet Committee on Economic Affairs recently greenlit the continuation and restructuring of the Viability Gap Funding (VGF) Scheme. Under the Public Private Partnership (PPP) model, this project will run until 2024-25 with a total budget of Rs. 8,100 crore. The purpose of VGF is to provide one-off or deferred grants to underpin infrastructure developments that are financially unviable but economically sound. PPPs are collaborative efforts between government organizations and private-sector companies, employed to finance, establish, and maintain projects like public transportation networks, parks, and convention centers. The VGF currently available for economic infrastructure will be extended to include social infrastructure as well.
A Look at the Viability Gap Funding (VGF) Scheme’s Background
In 2006, the Department of Economic Affairs under the Ministry of Finance launched the Scheme for Financial Support to PPPs in Infrastructure (Viability Gap Funding Scheme). This initiative aimed to bolster infrastructure projects carried out through the PPP mode. These projects, while economically justified, are commercially untenable due to high capital investment needs, lengthy gestation periods, and the inability to raise user charges to commercial levels. Thus, the Government of India (GoI) and the sponsoring authority offer VGF up to 40% of the Total Project Cost (TPC) as a capital grant during the construction phase (20%+20%).
Expansion of the Scheme to Social Infrastructure
Sub Scheme -1 targets social sectors such as Waste Water Treatment, Water Supply, Solid Waste Management, Health, and Education, etc. These projects grapple with bankability issues and insufficient revenue streams to meet entire capital costs.
Eligibility parameters dictate that the projects under this category should achieve at least 100% Operational Cost recovery. The Central Government will contribute a maximum of 30% of Total Project Cost (TPC) as VGF while the State Government/Sponsoring Central Ministry/Statutory Entity may provide additional support up to 30% of TPC. The outstanding project cost will be gathered through private participation.
Pilot Projects in Social Sectors
Sub Scheme -2 aims to support pilot projects within social sectors. Eligible projects include those from Health and Education sectors, which manage at least 50% Operational Cost recovery. In such cases, the Central Government and State Governments will jointly 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 will provide a maximum of 40% of the Total Project Cost (TPC), and potentially up to 25% of a project’s Operational Costs for the first five years of commercial operations.
Implications of the VGF Scheme
This revamped scheme is anticipated to encourage PPPs in social and economic infrastructure, leading to effective asset creation and proper upkeep. Both economic and social infrastructures are crucial tools in aiding production and distribution processes. Economic infrastructure includes facets like energy, transportation, communication, banking and financial institutions, whereas social infrastructure encompasses facilities and institutions that boost human capital, such as education institutions, hospitals, housing facilities, etc.
Revitalizing the VGF Scheme is poised to attract more PPP projects and stimulate private investment in social sectors. The establishment of new hospitals and schools will present myriad opportunities for employment generation. Consistent with the Kelkar Committee’s recommendations, this Scheme will incite private investment in infrastructure.
Last Modified: February 9, 2024