Viability Gap Funding (VGF) is a financial assistance scheme of the Government of India designed to support infrastructure projects that are economically justified but not commercially viable on their own. The concept is a grant, provided one-time or deferred, to bridge the financial gap between a project's cost and its expected revenue, thereby encouraging private sector participation. The VGF scheme was initially approved by the Cabinet Committee on Economic Affairs (CCEA) on July 25, 2005, to attract private capital into Public-Private Partnerships (PPPs), which often face long gestation periods and limited financial returns.
The scheme is administered by the Department of Economic Affairs (DEA), Ministry of Finance. Under the mechanism, the grant is provided as a capital subsidy to the private entity selected through a competitive bidding process. For general infrastructure projects, the total VGF is capped at 40% of the Total Project Cost (TPC), with the Central Government and the State Government/Sponsoring Authority each contributing a maximum of 20%.
The scheme was significantly revamped and approved by the CCEA on November 11, 2020, with guidelines notified on December 7, 2020. This revamp introduced higher support for critical social sectors like Water Supply, Health, and Education. Under the revised Sub-scheme 1 for social sectors, the total VGF can be up to 60% of the TPC (maximum 30% each from the Central and State Governments). Furthermore, Sub-scheme 2 for pilot/demonstration projects in Health and Education allows for a combined Central and State contribution of up to 80% of the capital expenditure and up to 50% of Operation & Maintenance costs for the first five years. The scheme is fundamentally connected to the promotion of PPPs in infrastructure development.