VGF works by providing a one-time or deferred capital grant at the construction stage after the private developer has invested their equity.

Viability Gap Funding, Meaning, Scheme, Components, Benefits

Q: What is the viability gap funding?

Viability Gap Funding is a government grant that helps make economically important but financially unviable infrastructure projects possible, especially in public-private partnerships.

Q: What is the limit of viability gap funding?

VGF is usually capped at 20% of the total project cost for most sectors, but it can go up depending upon the project.

Q: How to calculate viability gap funding?

VGF is calculated based on the net present value of the funding required to make a project viable, or the actual project cost, whichever is lower.

Q: What is the viability gap analysis?

Viability gap analysis assesses how much funding is needed to bridge the gap between a project’s costs and its expected revenues to make it financially viable for private investors.

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Viability Gap Funding (VGF) is a financial grant provided by the government to make economically essential infrastructure projects commercially viable. It bridges the gap between a project’s costs and its potential revenues, enabling private sector participation in Public-Private Partnerships (PPPs).

Viability Gap Funding is intended for projects that benefit the public at large, such as transport, renewable energy, healthcare, and education, but are not financially attractive enough to secure private investment on their own. By offering upfront or deferred grants, the scheme ensures critical infrastructure reaches completion, fostering socio-economic development.

Viability Gap Funding Meaning

Viability Gap Funding (VGF) is a government-backed financial assistance mechanism aimed at supporting infrastructure projects that offer significant economic value but are not financially feasible on their own. These projects often face challenges such as high initial investment or extended payback periods. VGF helps close the gap between the project's costs and expected returns, encouraging private sector participation.

VGF Full Form

VGF full form stands for Viability Gap Funding. It is a funding mechanism where the government provides financial assistance to bridge the viability gap in infrastructure projects, facilitating their implementation through PPP models.

Viability Gap Funding Scheme

Viability Gap Funding Scheme in India was introduced to support Public Private Partnership (PPP) projects in the infrastructure sector. It was approved by the Cabinet Committee on Economic Affairs. The Viability Gap Funding (VGF) scheme offers enhanced financial support for social sector projects, including water supply, wastewater treatment, solid waste management, the healthcare sector, and the education sector in India.

Viability Gap Funding Objectives

Viability Gap Funding scheme aims to encourage Public-Private Partnerships (PPPs) in developing social and economic infrastructure, ensuring efficient asset creation, proper operation, and maintenance, while making economically or socially vital projects financially sustainable.

Viability Gap Funding Financing

Viability Gap Funding financing involves a combination of government grants and private investment. The private sector is responsible for project execution and operation, while the government provides financial support to bridge the viability gap.

The revised Viability Gap Funding (VGF) scheme offers enhanced financial support for social sector projects, including water supply, wastewater treatment, solid waste management, health, and education.
These projects can receive VGF of up to 60% of the total project cost, with the central and state governments contributing up to 30% each.
For pilot or demonstration projects in health and education, the VGF can be as high as 80%, with the central and state governments each covering up to 40%.
Additionally, these pilot projects can also receive operational and maintenance (O&M) support for the first five years, covering up to 50% of O&M expenses (25% each from the central and state governments).
In other sectors, VGF assistance is capped at 40% of the total project cost, with a maximum of 20% contribution each from the central and state governments.

Viability Gap Funding Components

Viability Gap Funding was revamped by the Cabinet Committee on Economic Affairs, headed by the Prime Minister of India, with a total budget of ₹8,100 crore, operational until FY 2024–25. It introduces two distinct sub-schemes aimed at encouraging greater private sector involvement in social infrastructure development.

Sub-Scheme 1

This component targets sectors such as healthcare, education, water supply, solid waste management, and wastewater treatment, which typically struggle with limited financial returns and bankability.

To qualify, projects must demonstrate 100% recovery of operational costs. Under this scheme, the Central Government will contribute up to 30% of the total project cost (TPC).
Additionally, State Governments or relevant Central Ministries/Authorities may offer another 30% support, taking the maximum total public funding to 60% of the TPC.

Sub-Scheme 2

The second sub-scheme focuses on pilot or demonstration projects, especially in health and education, where operational cost recovery is at least 50%. Here, a combined contribution from the Centre and State can reach up to 80% of the capital costs.

Furthermore, Operational & Maintenance (O&M) costs for the first five years may receive support up to 50%, with the Centre alone providing up to 40% of the project cost and covering up to 25% of operational costs during the initial five years of operation.

Viability Gap Funding scheme for Offshore Wind Energy Projects

Viability Gap Funding scheme for offshore wind energy projects, approved by the Indian government with a total outlay of ₹7,453 crore, aims to support the installation of 1 GW capacity (500 MW each off Gujarat and Tamil Nadu). This VGF support will reduce power costs, attract private investment, and kickstart India’s offshore wind sector, contributing to clean energy targets and job creation.

Viability Gap Funding For Battery Energy Storage Systems

Viability Gap Funding for Battery Energy Storage Systems was approved by the Union Cabinet in 2023 to promote the development of large-scale energy storage infrastructure. Under this scheme, financial support will be extended to BESS projects approved during the period 2023–2026.

The scheme’s target capacity has been increased from 4,000 MWh to 13,200 MWh, while staying within the allocated budget of ₹3,760 crore.
The Ministry of Power is responsible for administering the scheme, and the Central Electricity Authority (CEA) is entrusted with monitoring its implementation and ensuring timely completion and effective fund utilisation.
This scheme is expected to play a key role in integrating renewable energy sources into the grid and reducing electricity costs during peak demand periods, especially in non-solar hours.

Viability Gap Funding Benefits

Viability Gap Funding boosts infrastructure by attracting private investment in financially unviable yet socially essential projects. It bridges funding gaps, accelerates development, supports clean energy integration, and enhances public service delivery across key sectors.

Encourages Private Investment: VGF helps attract private sector participation in infrastructure projects that may otherwise be financially unattractive due to low returns in the early years.
Bridges Financial Gaps: By covering part of the capital cost, Viability Gap Funding makes commercially unviable but socially and economically necessary projects viable and sustainable over the long term.
Accelerates Infrastructure Growth: The Viability Gap Funding scheme promotes faster development of essential public infrastructure like roads, renewable energy, urban transport, and more, contributing to overall economic growth.
Supports Renewable Energy Integration: In sectors like Battery Energy Storage Systems, Viability Gap Funding ensures smoother integration of clean energy, like solar energy and wind energy, into the national grid by funding critical storage infrastructure.

Enhances Public Services Access: VGF-backed projects improve the availability and quality of public utilities such as electricity, water, and transport, especially in underserved regions.