Decoder: What is Viability Gap Funding?

What is Viability Gap?

Not all projects to be implemented under the Public-Private Partnership (PPP) mode are economically viable and financially viable. Some, despite being financially strong, will fall short on financial viability, meaning that the private sector will not be able to finance and execute such projects on its own. To solve this problem, governments usually step in to fund the gap – the amount that is needed to make the project financially viable. This difference is called viability gap.

Why are projects executed in PPP mode?

In emerging economies, governments rarely have the funds to implement all projects. They generally look to the private sector to share the load and help execute projects, especially in the infrastructure sector. Private sector participation improves the efficiency and effectiveness of the project. This frees up money for the government to invest in more socially relevant projects.

Which projects have had a viability gap in the recent past?

UDAN – Regional Air Connectivity Scheme – is a perfect example of this. The objective of the scheme is to promote regional air connectivity and make air travel affordable for the masses. Under this, the government has operated many small airports across the country. It has also put a moratorium on rent. But airlines do not find it profitable to fly to these airports. The government has pushed them into their service by promising to fund the viability gap. By January 1, 2023, the government has released the funds 2,355 crore to select airlines for flight routes. There are also feasibility gaps in metro projects being built across the country which are funded by the government.

How does the government fund the viability gap?

Governments provide one-time payments or deferred payments to fund the viability gap in PPP projects. In November 2020, it approved the continuation of Viability Gap Funding Scheme under PPP model till FY25. it is allocated 8,100 crore for this purpose.

To what extent does the government finance the viability gap?

The extent of funding varies from project to project and depends on operating-cost recoveries. For example, social sector projects such as wastewater treatment, solid waste management, health and education, which have 100% recovery of operating cost, will receive viability gap funding from the central government up to 30% of the project cost. Some projects get more. In some cases, state governments also take help from VGF.

Updated: June 04, 2023, 11:09 AM IST