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
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