Explained: Visibility Gap Funding Model

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In India the main problem for the large scale and long-term projects is infrastructure. In India there is a lack of proper resources of finance to build a proper infrastructure. In long term projects, a vast number of financial resources are required, but how to arrange those resources is difficult. Some projects may not be financially viable but they are economically justified and necessary. For the successful completion of these type of projects, government has designed Viability Gap Funding.

Viability Gap Funding means a grant to support projects which are Economically Justified but not financially viable. This scheme was administered by the Ministry of Finance and its amount is decided in Budget on year to year basis. It was launched in 2004 to support the projects which come under the Public Private Partnership i.e. PPP projects.

Finance minister Nirmala Sitharaman proposed VGF of Hospitals under the Ayushman Bharat Scheme in districts to ensure proper healthcare facilities in the Hospitals. This will attract the Hospitals chains in small cities. There is a lack of proper infrastructure and facilities in the Health care sector which is notified by the government. Hospitals PPP projects should be given assistance by the government and by providing VGF to the Hospital PPP projects the health care sector will be improved and will develop more.

Significance of this development

This scheme has a great importance from the economical perspective. This will attract the private entrepreneurs to engage in the PPP projects. There are lot of financial crisis are faced by the entrepreneurs in the projects where a lot of investment has to be made and the gestation period of the profit is too long. There are a lot of commercial cost occurs in between, a huge capital is required; these all discourage the entrepreneurs to indulge into these projects.

The Viability Gap Funding Model was aimed to provide aid these entrepreneurs, this will not only provide them financial assistance but will also encourage more private sector sponsors to start working on PPP projects.

There are various benefits of VGF schemes which are as follows:

  • It will reduce the project cost which is to be borne by the owners
  • It will increase the financial feasibility of the PPP projects
  • The incentives under VGF scheme will attract the investors and will encourage them to participate in PPP projects and invest in private sector
  • It delivers public service at an affordable tariff to the community
  • It increases the certainty of the procurement of the project in the planned time and ensured quality.

What is this Model?

Viability Gap Funding Model is designed by government to provide financial help to those projects which are economically viable but are financially unviable. Under this scheme grants will be provided to the private sector entrepreneurs. These entrepreneurs will be selected by government by bidding. The usual grant of 20% is provided on the total capital cost of the project. If the government thinks it is suitable to raise more fund then a grant of further 20% can only be given.

The grants which are provided by government can be one time or deferred depending upon the infrastructural requirement of the projects. An empowered committee or an empowered institution will be set up to check the projects which fulfill the eligibility criteria of the PPP projects and on the approval of this committee or institution the financial grants will be provided. The ‘In-principle’ approval of the committee is required before bidding and after bidding before disbursement of grant. The UDAN Regional Connectivity Scheme and Metro Rail Projects are some of the examples which are funded by central government under VGF Scheme.

Salient features

The quantum of assistance provided under VGF scheme is as follows:

  • Viability Gap Funding will be in the form of a Capital Grant at the stage of project Construction.
  • If any other form of assistance is required then they can be proposed to the empowered committee and after its approval sanction will be made on case to case basis.
  •  The amount sanctioned by the Empowered committee will subject to Budgetary ceiling
  • The Funding will subject to the nature of projects and the priority of state including regional and sectoral balance.
  • In the first two years, the projects will be funded on first come first serve basis; in the later years, if need arises funding will be made on an appropriate formula determined by the Empowered Committee.
  • The owner whose projects are funded under this scheme, will not be eligible to take the benefit of any other scheme of the state government.

The eligibility criteria are as follows;

  • To be eligible for financing under the scheme, the PPP projects should be implemented i.e. they should be developed, financed, constructed, maintained and operated for the projects term by the Private Sector Company to be selected by the government or a statutory authority through transparent and open competitive bidding process.
  • The criteria for bidding should be amount of VGF required by the Private Sector Company for implementing the project where all other parameters are comparable.
  • The project should provide a service against payment of pre-determined tariff or user charge
  • This scheme will apply only if the contract/concession is awarded in favor of a private sector company which is not a government company
  • The approval of the projects is given prior to invitation of bids and actual disbursements takes place once the private entity has expanded his portion of the equity
  • The final VGF is determined through the bidding.

Critical Analysis

Infrastructure is a crucial sector notified by the government in the five-year plan. The aim is to build strong infrastructure in various sector by providing aid in funds to the projects which come under the ambit of PPP projects. By developing the infrastructural facilities, the economical development will take place in all the sectors. As the investors will be encouraged by the incentives of the VGF scheme and will be motivated to invest in the projects which are not financially viable.

The infrastructural development in these projects involves huge investments and it can not be raised by Public Funding of their own. These projects are not financially viable and also has long gestation period with limited financial return, thus are unattractive to the investors. By raising fund in these projects with the help of VGF scheme will encourage the spirit of the investors to start these projects. This will also increase the Economical Development of the country.

Conclusion

By the help of VGF Scheme, the infrastructure in India will build to a great extent and the PPP model will be promoted and the Private Entrepreneurs will be encouraged to invest in theses projects which are economically justified but are not financially viable.

But the current VGF limit is not sufficient to meet the requirement of the PPP projects. The government has raised the quantum of viability gap funding up to 30% in the Social Infrastructure Projects as they suffer from poor viability. The limit should also be increased for the other infrastructural projects also as the current limit is insufficient to meet their requirements.

Author: Riya Kaushik from Geeta Institute of Law.

Editor: Silky Mittal, Junior Editor, Lexlife India.

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