What is VGF?
- The main constraint in India’s 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). It means a grant one-time or deferred, provided to support infrastructure projects that are economically justified but fall short of financial viability.
- Through the provision of a catalytic grant assistance of the capital costs, several projects may become bankable and help mobilise private investment in infrastructure.
- The Department of Economic Affairs, Ministry of Finance introduced “the Scheme for Financial Support to PPPs in Infrastructure” (Viability Gap Funding Scheme) in 2006 with a view to support infrastructure projects undertaken through Public Private Partnership (PPP) mode.
- VGF up to 40 per cent of the total project cost is provided by the central government and the sponsoring authority in the form of capital grant at the stage of project construction.
- 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 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.
Why in News?
- 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.
- The government also approved the continuation of the scheme for financial support to PPPs in infrastructure till 2024-25.
- A total of ₹8,100 crore has been allocated under this programme between 2020-21 and 2024-25, of which ₹2,100 crore will be devoted to social sector projects.