VIABILITY GAP FUNDING (VGF) (Syllabus: GS Paper 3 – Economy)

News-CRUX-10     22nd May 2024        

Context: Recently, the coal ministry invited proposals from public and private sector entities, among others, for coal gasification projects, as part of an ₹8,500-crore viability gap funding initiative.

Viability Gap Funding (VGF)

  • About: VGF stands for Viability Gap Funding, which aims at supporting infrastructure projects that are economically justified but fall marginally short of financial viability.
  • Initiated: In 2004, supports projects falling under Public-Private Partnerships (PPP).

oThis scheme operates as a Plan Scheme, with budget allocations made on an annual basis by the Ministry of Finance.

  • Aim: VGF grants are given as capital subsidies to encourage private sector involvement in financially unviable PPP projects.
  • These projects often lack commercial viability due to extended gestation periods and limited future revenue prospects.

Components of Viability Gap Funding Scheme

  • Sub-scheme 1: This includes Water Supply, Solid Waste Management, Waste Water Treatment, Health and Education etc. 

oThe amount of VGF under this scheme shall be equivalent to the lowest bid for capital grant, subject to maximum of 30% (Thirty percent) of the Total Project Cost.

  • Subscheme 2: This scheme supports demonstration or pilot social sector projects in areas such as health and education. It expects a minimum of 50% operational cost recovery.

oUnder this scheme, the Central Government and State Governments jointly fund up to 80% of capital expenditure and up to 50% of operation and maintenance costs for the first five years.

oThe Central Government contributes a maximum of 40% of the total project cost (TPC) and may additionally cover up to 25% of operational costs during the project's initial five years of commercial operations.

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