Viability gap funding model for gas pipelines in offing

Written by Siddhartha P Saikia | New Delhi | Updated: Aug 19 2014, 06:16am hrs
PetrolThe petroleum ministry has proposed viability gap funding (VGF) for cross-country gas pipelines.
The petroleum ministry has proposed viability gap funding (VGF), similar to such support given to roads and airport projects, for cross-country gas pipelines. This is in sync with finance minister Arun Jaitley's announcement in the Budget to lay 15,000 km of gas pipelines through PPPs.

The bidder quoting the least transporting tariff and seeking minimum viability gas funding would win the project. The ministry is working out the modalities in discussion with Petroleum and Natural Gas Regulatory Board, a government official working on the proposal told FE.

The ministry is first putting together a bidding mechanism before deciding which pipe-lines are to be auctioned based on demand and availability of natural gas, the official added.

There has been lukewarm response to laying of gas pipelines in India, as there is no certainty on availability and the domestic market is not conducive to absorbing expensive imported gas. There is a need for setting up a gas grid because, unless infrastructure is laid, the economies for a gas market would not evolve, say industry experts. The success of a gas pipeline depends on modelling it with availability, demand and pricing of the gas. Viability gap funding would hedge the risk associated with these things. So it is a welcome move, Kalpana Jain, senior director at Deloitte Touche Tohmatsu India.

Jaitley had said in his Budget speech that India has about 15,000 km of gas pipeline systems. In order to complete the gas grid across the country, an additional 15,000 km of pipelines are required. It is proposed to develop these pipelines using appropriate PPP models. This will help increase usage of gas, domestic as well as imported which, in the long-term, will be beneficial in reducing dependence on any one energy source.

In the VGF model, a one-time grant is provided to projects that are economically justified but fall short of financial viability. Infrastructure projects have long gestation periods and, in most cases, are not financially viable on their own. It may not be possible to fund the large investment requirements of these projects fully from the budgetary resources of the government alone.

In order to remove this shortcoming and to bring in private sector efficiencies, the government is promoting envisaging projects through viability gap funding. Primarily, this facility is meant to reduce capital cost of projects by credit enhancement and to make them viable and attractive for private investment through supplementary grant funding.

India's largest gas transmission and marketing company GAIL is getting hit over scarcity of domestic natural gas leading to underutilisation of its 11,500 km of pipeline network. Its network is operating at an average of 47% capacity.