VIABILITY GAP FUNDING SCHEME FOR ...GOI) has made provision to financially support the viability gap to the tune of 20% of the cost of the project in the form of capital grant from

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Int. J. Struct. & Civil Engg. Res. 2013 W N Deulkar and A F Shaikh, 2013

VIABILITY GAP FUNDING SCHEME FORINFRASTRUCTURAL DEVELOPMENT

W N Deulkar1* and A F Shaikh2

India has one of the largest road networks in the world, aggregating around 3.3 million km.historically, the budgetary resources from the governments have been the major source offinance for infrastructure such as road projects. The reduction in the budgetary allocation towardsroadway and increasing demands from other sectors, such as social and economic infrastructureand the limitations in the traditional public procurement system, have resulted in deficiencies inthe road network leading to capacity constraints, delay, congestion, fuel wastages. In order toremove the deficiencies and to upgrade the road network to world-class standards, Ministry ofFinance Department (MFD) and Department of Economic Affairs (DEA) have introduced ascheme to support the Public Private Partnership (PPP) in infrastructure. Government of India(GOI) has made provision to financially support the viability gap to the tune of 20% of the cost ofthe project in the form of capital grant from its viability gap fund. The scheme is confined to PPPprojects taken by the GOI or its agencies, where the private sector is selected through opencompetitive public bidding. Infrastructure development is a crucial sector recognized in the currentFive Year Plan. Even State Government’s vision 2020 envisages huge requirement of Rs.169,918cr considering five years’ shelf of projects in various sectors. Similarly such projects are notfinancially viable on stand alone basis as they have long gestation period and having limitedfinancial return. Hence, they are not attractive to the private sector. State government has thereforeintroduced a new scheme for extending financial support to such PPP Projects in the sectors ofinfrastructure called as Viability Gap Funding Scheme (VGF).

1 Associate Professor, D.Y.Patil College Of Engineering , Akurdi, Pune- 411044, India.

*Corresponding author:W N Deulkar, [email protected]

ISSN 2319 – 6009 www.ijscer.comVol. 2, No. 4, November 2013

© 2013 IJSCER. All Rights Reserved

Int. J. Struct. & Civil Engg. Res. 2013

Research Paper

Keywords: VGF, Road network, Infrastructure, PPP, Investment

INTRODUCTIONIn a view to support the infrastructure projectsfinancially, Viability Gap Funding Scheme wasannounced in year 2004 and the modalities tooperationalise it in year 2005. The schemeaims to ensure wide spread access to

infrastructure provided through the PPPframework by subsidizing the capital cost oftheir access (A report by GOI, 2008). To makeessential projects economically commerciallyviable gap funding scheme from GOI wouldobviate the need for such projects and allow

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private sector participation in the projects,facilitating private sector efficiencies ininfrastructure development.

Such scheme provides financial support inthe form of grants (one time or deferred) toinfrastructure projects undertaken throughPPPs with a view to make them commerciallyviable. Such scheme provides total VGF upto20% of the total cost of project. Scheme isnormally in the form of a capital grant at thestage of project construction. The guidelinesfor financial support to PPPs in infrastructurewere issued by Ministry of Finance in January2006 (National Solar Mission Phase 2, 2012).

The guidelines essentially flow from theprovisions of the scheme, approved byCabinet Committee on Economic Affairs(CCEA) in 2005, and prescribe the procedureto be followed for posing the proposals forseeking VGF for PPP projects (A report byGOI, 2008).

The guidelines essentially flow from theprovisions of the scheme, approved by CCEAin 2005, and prescribe the procedure to befollowed for posing the proposals for seekingVGF for PPP projects (A report by GOI, 2008).

WHAT IS VIABILITY GAPFUNDING (VGF) SCHEMEInfrastructure projects have long gestationperiods and in most cases, are not financiallyviable on their own. It may not be possible tofund the very large investment requirementsof these projects fully from the budgetaryresources of the GOI alone. In order to removethis shortcoming and to bring in the privatesector resources and techno-managerialefficiencies in flow, the GOI is promoting PPP

in infrastructure development through aspecial facility envisaging support to any PPPprojects through VGF. Primarily, this facility ismeant to reduce capital cost of the projects bycredit enhancement, and to make them viableand attractive for private investments throughsupplementary grant funding. Provisions for thisfacility are made on year to year basis5.

CRITERIA FOR FUNDINGTHE VGF SCHEMEFollowing is the eligibility criteria for fundingVGF scheme:

i. The project must be implemented (i.e.,constructed, maintained and operatedduring the project term, by an entity with atleast 40% private equity.

ii. The project must belong to one of thefollowing sectors:

a. Roads, railways, seaports, airports;

b. Power;

c. Water supply, sewerage and solid wastedisposal in urban areas; and

d. International convention centers.

iii. The projects should have been vetted/endorsed by the concerned line ministriesin the GOI.

iv. All central projects should have receivedrequisite government’s approval at theappropriate level.

v. The total government support required forthe project, including support from the GOIunder this facility, or any other sources ofGOI and its agencies, must not exceed 20%of the total project cost ( lesser of estimatedpreliminary project cost or the actual project

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cost).

vi. The implementing agency must be selectedthrough a transparent and open competitiveprocess.

The main criterion for selection will be theextent of VGF required by the private partnerto successfully implement the project. Theextent of VGF shall be determined on the basisof the net present value of the actual VGFrequired. For this purpose and for allcalculations under these guidelines, the rateof discount shall be the rate of interest on 10-year gilts on the date of submission of the bid4.

FUNDINGSVGF can be in different forms, including butnot limited to capital grant, subordinated loans,O&M support grants or interest subsidy. A mixof capital and revenue support may also beconsidered. Different forms of VGF’s are asfollows:

i. The funding is to be disbursed contingenton agreed milestones, preferably physical,and performance levels being achieved, asdetailed in funding agreements.

ii. The funding is to be provided ininstallments, preferably in the form ofannuities, and with at least 15 % of thefunding to be disbursed only after project isfully functional.

iii. In the first year of the facility, funding is tobe allocated to projects on a first come, firstserved basis subject to meeting theeligibility criteria.

APPRAISAL AND APPROVALPROCEDURESAn Empowered Committee has been set up

in the DEA under the Additional Secretary (EA)

to consider and authorize the sanction of fundsup to Rs. 50 cr beyond which approval of theFinance Minister will be required. The projectsmay be posed by any (a) public agency at thecentre, state or urban local body which ownsthe underlying assets; (b) private agency with

sponsorship from the relevant central or stategovernment agency. Project proposals mustbe accompanied by a preliminary projectappraisal (covering (a) techno-economicviability of the project, (b) financial appraisaland project financing arrangements, and (c)

extent and nature of viability gap fundingproposed) and a commitment letter on behalfof the lending institutions. After approval of theproject by the Committee within 30 days ofsubmission the project will be put to bid by thepublic agency concerned through transparent

and open competitive bidding indicating theextent of VGF that is actually required. The leadfinancial institution will present its detailedappraisal of the technical and economicviability of the project as proposed by the

successful bidder, for the consideration of theCommittee. The transfer of VGF and theschedule of such transfers will be approvedby the Committee. The leading financialinstitution will undertake regular monitoring andevaluation of project compliance with agreed

milestones and performance levels.

FINAL APPROVAL BY THEEMPOWERED INSTITUTIONWithin three months from the date of approval,or such extended period as may be permitted,the Lead Financial Institution shall present itsappraisal of the project in six copies (both in

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hard and soft form) for consideration andapproval of the Empowered Institution. Theappraisal shall be accompanied by an updatedapplication in the format specified along withthe project report and project agreements. TheLeading Financial Institution shall verify thecontents of the application and convey itsrecommendation to the Empowered Institution.Prior to final approval by the EmpoweredInstitution, the Ministry, State Government orstatutory authority.

The procedure specified in above shall befollowed mutatis mutandis for examination andapproval of the appraisal report of the LeadFinancial Institution2.

DISBURSEMENT OF VGF1. A grant under VGF Scheme shall be

disbursed only after the Private SectorCompany has subscribed and expendedthe equity contribution required for theproject and will be released in proportionto debt disbursements remaining to bedisbursed thereafter.

2. The Empowered Institution will release theGrant to the Leading Financial Institution asand when due, and obtain reimbursementthereof from the Finance Ministry.

3. The Empowered Institution, the LeadingFinancial Institution and the Private SectorCompany shall enter into a TripartiteAgreement for the purposes of thisScheme. The format of such TripartiteAgreement shall be prescribed by theEmpowered Committee from time to time2.

MONITORINGThe Leading Financial Institution shall be

responsible for regular monitoring and periodicevaluation of project compliance with agreedmilestones and performance levels,particularly for the purposes of disbursing theVGF. It shall also send a quarterly progressreport to the Empowered Institution6.

CONCLUSION1. VGF can be one of the resource for any

infrastructural development.

2. VGF implement the project without causing

stress to the financials.

3. VGF results in transparency and

standardization in the manner how grants

are released.

4. This facility reduces capital cost of the

projects by credit enhancement, and make

them viable and attractive for private

investments through supplementary grant

funding.

5. VGF provide a broad framework and a

conducive environment so that the strength

of private sector in terms of their

efficiencies, flexibility and innovativeness

are utilized to provide better infrastructure

and services at an optimal cost and for

better ‘Value for Money’ to the users.

BIBLIOGRAPHY1. A report by ‘Government of India, Ministry

of finance, Department of economicaffairs’, in 2008.

2. A report on ‘Financial Support to PublicPrivate Partnerships in Infrastructure’Published by The Secretariat for theCommittee on Infrastructure Planning

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Commission, Government of India, Jan2006.

3. A report on ‘Viability Gap Funding andProject Development experience forKolhapur STP Project’ by RahulBedmutha in April 2012.

4. Jawaharlal Nehru National Solar MissionPhase II – Policy Document, in Dec 2012.

5. A report on ‘Viability gap funding forinfrastructure’, website: http:/indiabudget.nic.in

6. A report on ‘Role of Ministry Of Financeto promote PPP InfrastructureDevelopment by Freddy R. Saragih,Head of Center for Fiscal RiskManagement Fiscal Policy Office Ministry

of Finance the Republic of Indonesia, inJanuary 2013.

7. Article on ‘Viability gap funding neededto make PPP attractive’, in newspaperThe Indian Express, Tue, Sep 18, 2012.

8. Article on ‘Bridge to India: Viability gapfunding for solar projects to be providedunder National Solar Mission Phase 2’,in May 2010.

9. Article on ‘Viability gap funding neededto make PPP attractive’ in The IndianExpress, Tue, Sep. 18, 2012

10. Bridge to India: Viability gap funding forsolar projects to be provided underNational Solar Mission Phase 2, May 10,2012.

VIABILITY GAP FUNDING SCHEME FOR ...GOI) has made provision to financially support the viability gap to the tune of 20% of the cost of the project in the form of capital grant from

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