What is Viability Gap Funding (VGF)?

The main constraint in Indias infrastructure sector is the lack of source for finance.
More than the overall difficulty of securing funds, some projects may not be financially
viable though they are economically justified and necessary. This is the nature of
several infrastructural projects which are long term and development oriented.

For the successful completion of such projects, the government has designed Viability
Gap Funding (VGF). Viability Gap Finance means a grant to support projects that are
economically justified but not financially viable.

The scheme is designed as a Plan Scheme to be administered by the Ministry of

Finance and amount in the budget are made on a year-to- year basis.

Such a grant under VGF is provided as a capital subsidy to attract the private sector
players to participate in PPP projects that are otherwise financially unviable. Projects
may not be commercially viable because of long gestation period and small revenue
flows in future.

The VGF scheme was launched in 2004 to support projects that comes under Public
Private Partnerships.

VGF grants will be available only for infrastructure projects where private sector
sponsors are selected through a process of competitive bidding. The VGF grant will be
disbursed at the construction stage itself but only after the private sector developer
makes the equity contribution required for the project.

The usual grant amount is upto 20% of the total capital cost of the project. Funds for
VGF will be provided from the governments budgetary allocation. Sometimes it is also
provided by the statutory authority who owns the project asset. If the sponsoring
Ministry/State Government/ statutory entity aims to provide assistance over and above
the stipulated amount under VGF, it will be restricted to a further 20% of the total project
cost.

The project agreements must also follow the best practices that would secure value for
public money. Regular monitoring and evaluation should be done by the lead financial
institutions for the disbursal of the grants.

The lead financial institution for the project is responsible for regular monitoring and
periodic evaluation of project compliance with agreed milestones and performance
levels, particularly for the purpose of grant disbursement.

- See more at: http://www.indianeconomy.net/splclassroom/272/what-is-viability-gap-

funding-vgf/#sthash.S0HNWKRd.dpuf
Viability Gap Funding (VGF) Means a grant one-time or deferred, provided to support
infrastructure projects that are economically justified but fall short of financial viability.
The lack of financial viability usually arises from long gestation periods and the inability
to increase user charges to commercial levels. Infrastructure projects also involve
externalities that are not adequately captured in direct financial returns to the project
sponsor. Through the provision of a catalytic grant assistance of the capital costs,
several projects may become bankable and help mobilise private investment in
infrastructure.

Government of India has notified a scheme for Viability Gap Funding to infrastructure
projects that are to be undertaken through Public Private Partnerships. It will be a Plan
Scheme to be administered by the Ministry of Finance with suitable budgetary
provisions to be made in the Annual Plans on a year-to- year basis.

The quantum of VGF provided under this scheme is in the form of a capital grant at the
stage of project construction. The amount of VGF will be equivalent to the lowest bid for
capital subsidy, but subject to a maximum of 20% of the total project cost. In case the
sponsoring Ministry/State Government/ statutory entity propose to provide any
assistance over and above the said VGF, it will be restricted to a further 20% of the total
project cost.

Support under this scheme is available only for infrastructure projects where private
sector sponsors are selected through a process of competitive bidding. The project
agreements must also adhere to best practices that would secure value for public
money and safeguard user interests. The lead financial institution for the project is
responsible for regular monitoring and periodic evaluation of project compliance with
agreed milestones and performance levels, particularly for the purpose of grant
disbursement. VGF is disbursed only after the private sector company has subscribed
and expended the equity contribution required for the project.
PPP Experiences in Indian Cities: Barriers, Enablers, and the Way Forward

Recent studies indicate that India must invest more than $150 billion over the next 5
years in the development of urban infrastructure. Urban local bodies lack the financial
resources and the capacity to develop these projects on their own, pointing to a large
role that public-private partnerships (PPPs) need to play in the development of urban
infrastructure. This paper uses a combination of archival sources, case studies, and
insights from a recently concluded roundtable discussion on PPPs to highlight five key
barriers that PPP projects face in the urban Indian context. These barriers are a distrust
between the public and private sector, a lack of political willingness to develop PPPs,
the absence of an enabling institutional environment for PPPs, a lack of project
preparation capacity on the part of the public sector, and poorly designed and structured
PPP projects. A series of measures that the Government of India has undertaken to
enable PPPs are evaluated and it is observed that these programs address only three
of the five barriers identified. A set of nine additional strategies emanating from the
roundtable are then proposed, that, in addition to the existing measures outlined by the
Government of India, can help comprehensively address the challenges that PPPs in
urban infrastructure that India is facing. This could help improve the quantity and quality
of infrastructure services in Indian cities.

- See more at: http://ascelibrary.org/doi/abs/10.1061/(ASCE)CO.1943-

7862.0000130#sthash.WFCX4dT3.dpuf

Abstract

Recent studies indicate that India must invest more than $150 billion over the next 5
years in the development of urban infrastructure. Urban local bodies lack the financial
resources and the capacity to develop these projects on their own, pointing to a large
role that public-private partnerships (PPPs) need to play in the development of urban
infrastructure. This paper uses a combination of archival sources, case studies, and
insights from a recently concluded roundtable discussion on PPPs to highlight five key
barriers that PPP projects face in the urban Indian context. These barriers are a distrust
between the public and private sector, a lack of political willingness to develop PPPs,
the absence of an enabling institutional environment for PPPs, a lack of project
preparation capacity on the part of the public sector, and poorly designed and structured
PPP projects. A series of measures that the Government of India has undertaken to
enable PPPs are evaluated and it is observed that these programs address only three
of the five barriers identified. A set of nine additional strategies emanating from the
roundtable are then proposed, that, in addition to the existing measures outlined by the
Government of India, can help comprehensively address the challenges that PPPs in
urban infrastructure that India is facing. This could help improve the quantity and quality
of infrastructure services in Indian cities.

- See more at: http://ascelibrary.org/doi/abs/10.1061/(ASCE)CO.1943-

7862.0000130#sthash.pjGT4RCO.dpuf

Abstract

Infrastructure is a key area since it provides the main thrust and impetus area in the
growth of a developing nation like India. A major area of concern for sustaining the real
gross domestic product (GDP) growth in India has been the lack of adequate
infrastructure, which can support the growth process. The deplorably low levels of public
investment have rendered Indias physical infrastructure incompatible with large
increases in the national product. Clearly, without improving the rate of infrastructure
investment, the expected growth rate of 9 per cent and above at best would remain
modest. The Planning Commission of India has estimated that investment in
infrastructure sector defined broadly to include road, rail, air and water transport, electric
power, telecommunications, water supply and irrigation will need to be of the order of
about 45 lakh crores or US$1.4 trillion during the 12th Five-year Plan period. India has
one of the largest road networks in the world, aggregating around 33 lakh km;
historically, the budgetary resources from the governments have been the major source
of financing for infrastructure such as road projects in India. This article focuses on
Viability Gap Funding (VGF) that has been used for financing of infrastructure projects
and specially for road projects in India. The purpose of this article is to examine and
analyse viability of the VGF scheme for Indian road projects by studying projects being
covered under the VGF option.