VGF - Viability Gap Funding
v VGF is in the limelight after Central Government gave in approval of viability gap funding of Rs. 1,458 crore (12.35 per cent of total project cost of Rs. 11,814 crore) under the VFG scheme to the project from government of Andhra Pradesh for development of Hyderabad Metro Rail on DBFOT (toll) basis.
v DBFOT - Design, Build, Finance, Operate and Transfer
What is viability gap funding?
v There are many projects with high economic returns, but the financial returns may not be adequate for a profit-seeking investor.
v The lack of financial viability usually arises from long gestation periods and the inability to increase user charges to commercial levels.
v Example, 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.
v 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 funding.
v Under VGF, the central government meets up to 20% of capital cost of a project.
v 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.
v Potential investors(like L&T corporation in Hyderabad Metro bidding) bid for these projects on the basis of VGF needed.
v Those needing the least VGF support will be awarded the project. (in case of Hyderabad Metro, L&T Corporation is the lowest bidder with Rs.1458 Crores i.e., 12.35 per cent of total project cost of Rs. 11,814 crore )
v VGF is disbursed only after the private sector company has subscribed and expended the equity contribution required for the project.
v Example is the viability gap funding i.e., Rs.1458 Crores will start flowing after the concessionaire L&T Metro Rail Hyderabad (L&TMRH) will spend its equity share of Rs.2,768 crore of the total project cost of Rs.12,132 crore in Hyderabad Metro project.
v The scheme is administered by the ministry of finance.
Which are the eligible sectors?
v Roads, ports, airports, railways, inland waterways, urban transport (Hyderabad Metro), power, water supply, other physical 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.
v Ministry of New and Renewable Energy has proposed to fund solar energy projects under phase-II of the Jawaharlal Nehru National Solar Mission (JNNSM) through viability gap funding (VGF).
How does the government benefit?
v The government has limited resources. It can use those funds to build everything on its own, but such public funding will take years to create the infrastructure that is needed to achieve higher growth.
v To make infrastructure projects attractive for the private sector, government introduced viability gap funding (VGF) in 2004 by subsidising the capital cost through public-private partnership (PPP) framework.
v Through viability gap funding, the same amount of funds can be used to execute many more projects through private participation.
v VGF is in that sense a force multiplier, enabling government to leverage its re-sources more effectively.
What has been the success rate?
v During 2005 to 2020 year:
A. Approved VGF – Rs. 5600 Crores
B. No. of Projects – 63
C. Total investment involved Rs. 35000