The main bottleneck in India’s infrastructure sector is the lack of source for finance. Some projects may not be financially viable though they are economically justified and necessary. For example, a road connecting a rural area, generates high economic returns, but the financial returns may not be attractive for a profit-seeking investor.The lack of financial viability usually arises from long gestation periods, unattractive future cash flows and the inability to increase commercial charges from the users.
To encourage the implementation of more such economically justifiable but financially unviable infrastructure projects, the government has designed Viability Gap Funding (VGF). Viability Gap Finance, administered by the Ministry of Finance, means a grant or financial aid to support such projects under Public Private Partnership model (PPP).
A grant under VGF is provided as a capital subsidy by the Central Government under the Viability Gap Funding Scheme, usually up to 20% of the total capital cost of the infrastructure projects. The scheme is confined to Public Private Partnership projects taken by the Government or its agencies, where the private sector is selected through open competitive public bidding. The state government, sponsoring ministry or the project authority can provide another 20% of the project cost to make the projects even more attractive. The VGF grant will be disbursed at the construction stage itself but only after the private sector developer makes the equity contribution required for the project.