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What is Viability Gap Funding? Viability Gap Funding (VGF) reduces the upfront capital costs of pro-poor private infrastructure investments by providing grant funding at the time of financial close, which can be used during construction. The VGF ‘gap’ is between the revenues needed to make a project commercially viable and the revenues likely to be generated by user fees paid mostly by poor customers. Although the economic benefits of a private investment project may be high, in situations where the incomes of end users are low it may not be possible to collect sufficient user fees to cover costs. VGF is designed to make projects that are economically viable over the long term, commercially viable for investors. It helps mobilise private sector investment for development projects, while ensuring that the private sector still shares in the risks of infrastructure delivery and operation. Substantial risks are associated with this kind of funding, but TAF procedures include a number of overlapping mitigation measures. VGF grants are only disbursed after investors have committed equity to the project, thereby putting their money at risk for a project they believe to be viable. VGF disbursements also track debt drawdowns, to benefit from lender due diligence and performance monitoring. TAF places limits on the size of VGF grants to ensure that private capital is genuinely at risk to performance. TAF also uses an independent panel of experts to evaluate all VGF applications before they go to TAF’s donors for final approval. 2013 saw the take-off of TAF’s VGF programme. Three grants were approved totalling US$12.1m. Projects included a solid waste management project in Kampala, Uganda, a run-of-river hydroelectricity project in a poor region of Vietnam and a series of renewable energy projects in Cambodia, Lao PDR and Myanmar. In each case, TAF funded a prefeasibility study to confirm that projects have the potential to generate substantial social and economic benefits for low-income populations without unduly subsidising private investors or distorting local markets. The VGF prefeasibility grants supplement the financial and management skills of the PIDG Facilities with specialist expertise in social and economic cost-benefit analysis.
17 April 2014
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