Govt needs to reinterpret viability gap funding for building social infra

In the Union Budget for 2025-26, Finance Minister Nirmala Sitharaman earmarked ₹11.21 trillion for infrastructure capital expenditure — just slightly above last year’s ₹11.11 trillion. The messaging was clear: In the last 25 years, core infrastructure (especially transport and energy) had matured, and other sectors now required attention.

 

Key among them is clearly the social infrastructure sector — health care, education, tourism, housing, sanitation, water, skilling, and digital. These sectors also have a direct impact and visibility among the voting public, in contrast to core infrastructure. The Budget Speech mentioned that central ministries are required to come up with a three-year pipeline of projects that can be implemented in public private partnership (PPP) mode. States are also encouraged to do so, and can seek support from the India Infrastructure Project Development Fund scheme to prepare PPP proposals. So, this is clearly the time to focus on social infrastructure.

 

Public spending on social infrastructure is constrained by the government’s commitment to fiscal consolidation. Since most of these sectors cannot generate market returns on capital deployed, enabling private capital to step in becomes crucial. The government’s role should focus on providing partnering and de-risking mechanisms, such as viability gap funding (VGF) for de-risking the otherwise non-remunerative PPP projects.

 

VGF is typically a capital grant for projects that does not need to be returned to the government. It is neither equity nor debt, but a grant that goes to reduce the extent of capital to be serviced. Since 2005, VGF has been the primary tool for supporting PPPs. Revamped in 2020, it now includes three targeted sub-schemes:

 

1. Sub-scheme 1 provides 60 per cent VGF (30 per cent each from the Centre and the state) for water, waste management, health, and education projects.

 

2.Sub-scheme 2 supports pilot projects in health and education, with up to 80 per cent VGF and 50 per cent operational cost support for five years.

 

3. Other sectors receive 40 per cent VGF.

 

VGF does indeed offer a strong “bang for the buck” on government expenditure. For instance, if five large hospitals were to be built entirely with public funds at ₹1,000 crore each, the total outlay would be ₹5,000 crore. However, under a 20 per cent VGF scheme, if the private sector steps in, the government’s share would drop to just ₹1,000 crore. The ₹4,000 crore saved could then be used to support the construction of 20 more such hospitals.

 

VGF is often paired with the hybrid annuity model. It has been used in the Clean Ganga Mission for constructing and operating sewage treatment plants. Structured as a PPP, the government pays 40 per cent of the capital cost upfront, and the operations & maintenance (O&M) costs over the life of the project through annuity payments. This aspect of life-cycle O&M responsibility by the private sector is important, as it is a major weakness in the management of public projects by the state.

 

District hospitals present another major opportunity. The NITI Aayog has advocated PPP schemes to link functional district hospitals with new or existing private medical colleges. A model concession agreement (MCA) is available on its website. Successful examples of such PPPs include projects in Chittoor (Andhra Pradesh) and Bhuj (Gujarat).

 

On tourism infrastructure, the 3.65 km Varanasi Ropeway project is funded by VGF — 20 per cent by the Centre and 20 per cent by the state. VGF is being encouraged for other ropeway projects too.

 

Under the “Scheme of Upgradation of Government ITIs through PPP”, 1,227 government-run ITIs have been covered, each with an associated industry partner. Such schemes need much higher outlays — and a scaling up in both ambition and reach.

 

One of the largest VGF allocations in recent times has been extended to the Tata Group for its semiconductor manufacturing project in Dholera, Gujarat. The VGF, termed a “fiscal support agreement” in reports, covers 50 per cent of the estimated project cost of ₹91,000 crore.

 

PPPs in social infrastructure sectors in India still remain relatively limited, partly due to the lack of sector-specific MCAs. Projects with MCAs see faster approvals — as was seen in the oft-quoted and oft-discussed MCAs for the roads sector crafted by the late Gajendra Haldea. Since 2005, 67 VGF projects worth $5.45 billion have been approved, with 86 per cent in transport and logistics, 6 per cent in energy, water & sanitation, but only 8 per cent in social infrastructure.

 

VGF need not be purely monetary. Land and external development of utility linkages provided by a government body can itself be a form of VGF. Such “in-kind” contributions constitute a valid mechanism of public support.

 

A broader interpretation of VGF is crucial at this stage of our economic development for social infrastructure projects. Only then can India strive forward with both core and social infrastructure acting as twin engines — powered by private capital and operational involvement — to deliver much higher levels of quality-of-life services. 

 

 

The author is an infrastructure expert. He is also the founder & managing trustee of The Infravision Foundation. Research inputs from Vrinda Singh