Fact Box: Viability Gap Funding (VGF)

India’s first transmission project viability-gap funding unveiled

India’s first viability-gap funded, 99-km power transmission line project, in Haryana, was unveiled. The 400 KV double circuit Jharli-Kabulpur-Rohtak line was established by a joint venture of Kalpataru Power Transmission and Techno Electric and Engineering Company.

The Rs 444-crore public-private-partnership project with the Haryana Government has received Rs 92 crore of viability gap funding from Government of India.

What is Viability Gap Funding (VGF)?

VGF is a government’s initiative to assist private investors or entities to set up projects of high economic worth. It is usually seen that many projects, like a road connecting a rural area, generates high economic returns, but the financial returns may not be sufficient for a profit-seeking investor. Although such a project would yield huge economic benefits by linking these villages with the market economy, but because of low incomes it may not be possible to charge user fee. In such condition, the project would not attract private investment. In such cases, the government extends its support to the investors by sharing a fraction of the cost, making the project viable. This method is known as viability gap funding.

How does it work?

Typically, VGF is provided in competitively bid projects. 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 provide 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 assistance will be awarded the project. The Ministry of Finance administers the scheme.

Eligible sectors:

Projects in a number of sectors such as roads, ports, airports, railways, inland waterways, urban transport, power, water supply, other physical infrastructure in urban areas, infrastructure projects in special eco-nomic zones, tourism infrastructure projects are generally eligible for VGF. The government intends to add social sectors such as education and health to the list.

What are the benefits of VGF for the government?

If the government builds all the infrastructure on its own then it would require huge expenses as well as time to create it on such a vast scale. But, with VGF, the limited resources of the government can be distributed more widely through private participation implementing more number of projects as well as saving money for other schemes and activities. Thus VGF works as a force multiplier, enabling government to invest its resources more effectively.

Month: Current Affairs - March, 2013