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. The lack of financial viability usually arises from long gestation periods, unattractive future cash flows and the inability to increase commercial charges.
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, usually up to 20% of the total capital cost of the projects to attract the private sector players selected through a process of competitive bidding to participate in PPP projects.
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.