From UPSC perspective, the following things are important :
Prelims level : Viability Gap Funding
Mains level : Not Much
The government has expanded the provision of financial support by means of viability gap funding for public-private partnerships (PPPs) in infrastructure projects to include critical social sector investments in sectors such as health, education, water and waste treatment.
Note the minutes of VGF, its meaning, funding mechanism, various sectors included and its nodal ministry etc. UPSC can ask static statements based question.
What is the move?
- Now, under this scheme, private sector projects in areas like wastewater treatment, solid waste management, health, water supply and education, could get 30% of the total project cost from the Centre.
- Separately, pilot projects in health and education, with at least 50% operational cost recovery, can get as much as 40% of the total project cost from the central government.
- The Centre and States would together bear 80% of the capital cost of the project and 50% of operation and maintenance costs of such projects for the first five years.
Viability Gap Funding (VGF) Scheme
- 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 the long gestation period and small revenue flows in future.
- The VGF scheme was launched in 2004 to support projects that come under Public-Private Partnerships.
- Funds for VGF will be provided from the government’s 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.
- 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.