1. Government of India recognizes that there are significant shortcomings in the availability of critical infrastructure in the country at central as well as state and local level and that this is hindering rapid economic development. In addition, the development of infrastructure requires very large investment that may not be possible out of the budgetary resources of government of India alone. In order to remove these shortcomings and to bring in private sector resource as well as techno-managerial efficiencies, the government is committed to promoting public private partnerships (PPPs) in infrastructure development.
    
2. It is also recognized that infrastructure projects have a long gestation period and may not all be fully financially viable on their own. On the other hand, financial viability can often be fully financially viable on mechanism that provides government support t reduce project costs. The government of India there fore proposes to set up a special facility to provide such support to PPP projects. This support is generically termed as ‘viability gap funding’ throughout this document. This facility will be housed in the department of economic affairs (DEA). Suitable budgetary provisions will be made on a year basis.
3. In order to operationalise this facility to the following are now issued.

4. In order to be eligible for funding under this facility PPP project shall meet the following criteria:
   1. The project must be implemented, i.e., constructed, maintained and operated during the project term, by an entity with at least 40% private equity.
       
   2. The project must belong to one of the following sector:
      1. Roads, railways, seaport, airport:
      2. Power :
      3. Water supply, sewerage and solid waste disposal in urban areas and
      4. International convention centres

3. The project should have been vetted/endorsed by the concerned line ministries in the government of India.
4. All central projects should have received requisite government approval at the appropriate level.
5. The total government support required by the project, including support from the Government of India under this facility, or any other sources of the Government of India and its agencies, must not exceed twenty percent of the total project a cost as estimated in the preliminary project appraisal or the actual project cost, whichever is lower.
    
6. The implementing agency must be selected through a transparent and open competitive process. The main criterion for selection will be the extent of viability gap funding required by the private partner to successfully implement the project. The extent of viability gap funding shall be determined on the basis of the net present value of the actual viability gap funding required. For this purpose and for all calculations under these guidelines, the rate of discount shall be the rate of interested on10-year gilts on the date of submission of the bid.

5. Viability gap funding can take various forms, including but not limited to, capital grant, subordinated loans, Operation & Management (O&M) support grant or interested subsidy. A mix of capital and revenue support may also be considered.
    
6. The funding will be disbursed contingent on agreed milestones, preferably physical, and performance levels being achieved, as detailed in funding agreements.
    
7. The funding will be provided in installments, preferably in the form of annuities, and with at least 15% of the funding to be disbursed only after the project is fully functioning.
    
8. In he first year of the facility, funding will be allocated to project on a first –come, first served basis subject to meeting the eligibility criteria. In later years funding will be provided based on an appropriate formula that balance needs across sector.

APPRAISAL AND APPROVAL PROCEDURES

9. An empowered committee chaired the additional secretary (EA) and including financial adviser, minister of finance, joint secretary (PF-II), js (banking) and joint secretary of the concerned ministry, with joint secretary (FT), DEA as member –secretary, will consider project proposal for viability gap funding. This committee will be authorized to sanction viability gap funding up to Rs. 50 crores. Viability gap funding proposals beyond Rs. 50 crores will be approved at the level of the finance minister.
    
10. Project proposals may be posed by either of the following :
    • The concerned public agency, either a central minister or a government of India agency, or the concerned state government, or urban local body, which owns the underlying assets.
    • A private party, with sponsorship from the central or state government agency.
       
11. Project proposal must be accompanied by a preliminary project appraisal, carried out by a public financial institution, as well as a commitment letter on behalf of the lending institutions that they agree to fund the project. The appraisal will cover the following:
    9. Techno-economic viability of the project;
    10. Financial appraisal and project financing arrangements and
    11. Extent and nature of viability gap funding that is proposed.
         
12. Within 30 days of any project being submitted to the Government, the committee will inform the sponsor whether the project is qualified for funding under this scheme.

13. he project will then be put to bid by the concerned public agency through a transparent and open competitive process. The result of biding will indicate the extent of viability gap funding that is actually required.
     
14. The lead financial institution shall present its detailed appraisal of the technical and economic viability of the project as proposed by the successful bidder, for the consideration and approval of the Committee / Finance Ministry.
15. The transfer of the viability gap funds and the schedule of such transfers will be approved by the committee.
     
16. The lead financial institution will be responsible for regular monitoring and periodic evaluation of project compliance with agreed milestones and performance levels.

17. The lead financial institution will release the viability gap funding support to the project authorities when due and obtain reimbursement from DEA.
18. These guidelines will be reviewed in the light of experience gained after the first year of operation of the facility.