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Filling in the gaps?

Not quite. Extending viability gap funding to areas like irrigation and telecom towers sounds like a great move but that’s far from the truth

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Published 9 years ago on Apr 14, 2012 6 minutes Read

Journalists and analysts typically spend the days after the Union Budget is presented picking over specifics in the Budget document and reading the fine print to understand various policy decisions. But what do you do when a perplexing decision is announced and there’s nothing in the documents — in fine print or otherwise — to explain the logic behind it? Finance Minister Pranab Mukherjee’s intent to extend viability gap funding (VGF) to a host of new sectors is a case in point.

On the face of it, it sounds like a huge positive for driving investment in the country; after all, VGF is supposed to act like a force multiplier, helping government leverage its limited resources to create the maximum benefit in sectors where it matters most. But in the six years since its introduction, such funding hasn’t proved an unqualified success. Does it make sense to extend it further, in that case? 

Spreading the light

When the government first announced the VGF scheme in 2006, the idea was to encourage private participation in resource-heavy infrastructure projects. By providing a capital subsidy for part of projects that are considered essential but commercially unviable, it essentially makes it worth the while for private investors to take them on. For instance, if a project was worth ₹100 crore and projections showed companies could make only ₹80 crore by building and operating it, the government would chip in with the remaining ₹20 crore.

Since the government can give up to 40% of the project cost as grant to get it executed, the monies involved in VGF are huge. Since 2006, over ₹20,000 crore has been either disbursed or considered for projects under the VGF scheme. In FY12 alone, the Centre has committed ₹11,996.87 crore as VGF for 111 proposals in the form of in principle/ final approvals. 

VGF is by definition reserved for public-private partnership (PPP) projects, which until this year’s Budget, were limited to specific infrastructure sectors like roads, railways, seaports, airports, power, urban transport and tourism infrastructure. Last fortnight, though, the ambit was extended to include irrigation,

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