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Financial Support to Public Private Partnerships in Infrastructure

  • 12 Nov 2020
  • 4 min read

Why in News

Recently, the Cabinet Committee on Economic Affairs has approved continuation and revamping of the Viability Gap Funding (VGF) Scheme under the Public Private Partnership (PPP) model till 2024-25 with a total outlay of Rs. 8,100 crore.

  • Viability Gap Funding (VGF) means a grant one-time or deferred, provided to support infrastructure projects that are economically justified but fall short of financial viability.
  • Public-Private Partnerships (PPPs) involve collaboration between a government agency and a private-sector company that can be used to finance, build, and operate projects, such as public transportation networks, parks, and convention centers.
  • The Viability Gap Funding (VGF) provided for economic infrastructure will be extended to social infrastructure.

Key Points

  • Background:
    • The Department of Economic Affairs, Ministry of Finance introduced the Scheme for Financial Support to PPPs in Infrastructure (Viability Gap Funding Scheme) in 2006 with a view to support infrastructure projects undertaken through PPP mode.
      • Projects that are economically justified but commercially unviable due to large capital investment requirements, long gestation periods and the inability to increase user charges to commercial levels.
    • VGF up to 40% of the Total Project Cost (TPC) is provided by the Government of India (Gol) and the sponsoring authority in the form of capital grant at the stage of project construction (20%+20%).
  • Extension of the Scheme to Social Infrastructure:
    • Sub Scheme -1:
      • Objective: To cater Social Sectors such as Waste Water Treatment, Water Supply, Solid Waste Management, Health and Education sectors etc.
        • These projects face bankability issues and poor revenue streams to cater fully to capital costs.
      • Eligibility: The projects eligible under this category should have at least 100% Operational Cost recovery.
      • Contribution: The Central Government will provide a maximum of 30% of Total Project Cost (TPC) as VGF and State Government/Sponsoring Central Ministry/Statutory Entity may provide additional support up to 30% of TPC and the remaining project cost will come through private participation.
    • Sub Scheme -2:
      • Objective: To support pilot social sectors projects.
        • The projects may be from Health and Education sectors where there is at least 50% Operational Cost recovery.
      • Contribution: In such projects, the Central Government and the State Governments together will provide up to 80% of capital expenditure and upto 50% of Operation & Maintenance (O&M) costs for the first five years.
        • The Central Government will provide a maximum of 40% of the TPC. In addition, it may provide a maximum of 25% of Operational Costs of the project in the first five years of commercial operations.
  • Benefits:
    • The scheme will promote PPPs in social and economic infrastructure leading to efficient creation of assets and ensuring their proper operation and maintenance and make the economically/socially essential projects commercially viable.
      • Economic Infrastructure refers to the elements of economic change that aid in the process of production and distribution such as energy, transportation, communication, banking and financial institutions etc.
      • Social Infrastructure refers to all those facilities and institutions that enhance the quality of human capital such as educational institutions, hospitals, nursing homes, housing facilities etc.
    • Revamping of the VGF Scheme will attract more PPP projects and facilitate private investment in the social sectors.
      • Creation of new hospitals, schools will create many opportunities to boost employment generation.
    • The Scheme will encourage private investment in infrastructure on the lines suggested by the Kelkar Committee.

Source:PIB

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