Finance Minister Pranab Mukherjee, who took additional charge of the finance ministry recently, has rejected a Planning Commission proposal to increase the upper limit for Viability Gap Funding (VGF) for infrastructure projects coming up under the public-private partnership model.
The rejection of the proposal to increase the limit on VGF, under which the government provides capital to make unviable commercial projects viable, from the current 40 per cent comes against the backdrop of low private sector participation in many road projects that came up for bidding.
Around 15 road projects worth between Rs 20,000 crore and Rs 30,000 crore that came up for bidding did not attract a single bidder.
Among other things, private infrastructure companies were citing lack of commercial viability in many of the projects.
A higher VGF limit would have meant a large number of such projects becoming viable as financial returns to private developers would have increased.
India's apex planning body had proposed increased public investment through PPP projects to ramp up economic activity at a time when private investment, which was driving the growth rate of the Indian economy until the last fiscal, is expected to fall drastically.
The finance ministry, however, feels this is unnecessary because the government-owned India Infrastructure Finance Company Ltd (IIFCL) has already raised Rs 10,000 crore by way of tax-free bonds to finance infrastructure projects. It has also been allowed to raise an additional Rs 30,000 crore if needed for funding purposes.
IIFCL has been designated as refinancier of bank loans provided to infrastructure sectors. This is expected to increase credit availability since banks, which were earlier unwilling to lend for longer tenures fearing asset-liability mismatch, would now be incentivised to lend. The cost of funding is also expected to fall since IIFCL has raised resources at 6.85 per cent and plans to finance banks at 7.5 per cent.
A top finance ministry official told said: "We have conveyed to the Planning Commission that any change in VGF pattern is not required at this point of time. If needed, it can be looked at later."
Sources also suggest that Finance Minister Pranab Mukherjee questioned why the government should provide "all the money to the private sector so that it can make huge profits".
After the reply from the Finance Ministry, Planning Commission Deputy Chairperson Montek Singh Ahluwalia issued specific instructions not to follow the matter any further.
Parvesh Minocha, managing director of the engineering and project management division of Feedback Ventures, an infrastructure consulting company, said: "VGF need not be changed. There are far more scientific ways to increase confidence among bidders and investors."
He said many road projects would become viable without raising VGF if the project costs were revised from earlier levels.