SOURCE – NOT THE HINDU
QUESTION : Discuss various advantages and issues related to public-private partnership (PPP) in viability gap funding scheme in India.
WHAT ?
Viability Gap Funding (VGF) Scheme
WHY IN NEWS ?
The Cabinet Committee on Economic Affairs has approved continuation and revamping of the Scheme for Financial Support to Public Private Partnerships (PPPs) in Infrastructure Viability Gap Funding (VGF) Scheme Till 2024-25.
MORE ABOUT THE SCHEME :
- The Department of Economic Affairs, Ministry of Finance introduced the Scheme in 2006 with a view to support infrastructure projects undertaken through PPP mode that are economically justified but commercially viable due to large capital investment requirements.
- VGF up to 40% of the Total Project Cost (TPC) is provided by the Government of India and the sponsoring authority in the form of capital grant at the stage of project construction (20%+20%)
- The revamped Scheme is mainly for mainstreaming private participation in social infrastructure.
- The aim of the scheme is to 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.
COMPONENTS OF SCHEME :
Sub scheme -1
o The Central Government will provide a maximum of 30% of Total Project Cost (TPC) of the project as VGF and State Government/Sponsoring Central Ministry/Statutory Entity may provide additional support up to 30% of TPC.
o Eligibility:
This is for Social Sectors projects such as Waste Water Treatment, Water Supply, Solid Waste Management, Health and Education sectors etc.
These projects face bankability issues and poor revenue streams.
The projects should have at least 100% Operational Cost recovery.
Sub scheme -2
- This Sub scheme will support demonstration/pilot social sectors projects.
- 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.
- Eligibility: The projects may be from Health and Education sectors where there is at least 50% Operational Cost recovery.
SIGNIFICANCE :
- PPP projects: It will attract more PPP projects and facilitate private investment in the social sectors.
- Employment and infrastructure: Creation of new hospitals, schools will create many opportunities to boost employment generation.
VGF ?
- It means a grant one-time or deferred, provided to support infrastructure projects that are economically justified but fall short of financial viability.
- The lack of financial viability usually arises from long gestation periods and the inability to increase user charges to commercial levels.
- Through the provision of a catalytic grant assistance of the capital costs, several projects may become bankable and help mobilise private investment in infrastructure
PUBLIC PRIVATE PARTNERSHIPs ?
- Public-private partnerships involve collaboration between a government agency and a private-sector company.
- It can be used to finance, build, and operate projects, such as public transportation networks, parks, and convention centres .
- Financing a project through a public-private partnership can allow a project to be completed sooner or make it a possibility in the first place.
- Public-private partnerships often involve concessions of tax or other operating revenue, protection from liability, or partial ownership rights over nominally public services and property to private sector, for-profit entities.
WAY FORWARD :
- Checking Viability: PPPs should not be used to evade responsibility for service delivery to citizens
- Risk allocation and management: Public-Private Partnership PPP contracts should ensure optimal risk allocation across all stakeholders by ensuring that it is allocated to the entity that is best suited to manage the risk.
- Strengthening governance
- Strengthening institutional capacity
- Strengthening contracts: The private sector must be protected against such loss of bargaining power. This could be ensured by amending the terms of the Public-Private Partnership PPP contracts to allow for renegotiations.
CONCLUSION :
To foster the successful implementation of a PPP project, a robust PPP enabling ecosystem and sound regulatory framework is essential.
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