Ukraine Develops VGF Mechanism as a Catalyst for PPP-Led Reconstruction

Ukraine’s recovery needs are estimated at USD 588 billion, a scale that cannot be covered by the government  budget and international assistance alone.

According to IFC estimates, the private sector could potentially cover up to 40% of Ukraine’s recovery needs, including through Public Private Partnerships (PPPs).

Private investors are ready to engage in Ukraine’s reconstruction through PPPs, yet in many cases they face a real obstacle in the form of a viability gap: many priority infrastructure PPP projects are economically essential and socially critical, yet not commercially feasible on a standalone basis.

One financial instrument that could support such projects is the Viability Gap Facility, or VGF — a mechanism designed to partially cover the financial viability gap in public-private partnership projects — just enough to make it commercially viable, no more.

Possible approaches to launching the VGF in Ukraine were presented and discussed in Gdańsk, during a roundtable organized with the support of the PPP Agency, the Ministry of Economy, and the World Bank Group as part of the Ukraine Recovery Conference. 

Ukraine currently has a portfolio of 110 potential PPP projects, with around EUR 7 billion in potential private investment. At the same time, hospitals, water supply systems, waste management facilities, affordable housing, and municipal energy projects may be critical for communities, yet insufficiently attractive to investors without additional support.

This is the gap the VGF is designed to address. The mechanism may provide targeted support — in the form of a grant or guarantee — to make a PPP project financially viable for a private partner. At the same time, the VGF does not replace private investment; it acts as a catalyst, helping attract capital, expertise, and long-term private-sector participation in project delivery.

The PPP Agency emphasizes that when a community needs a hospital, water, or stable energy, such a project should not remain just a good idea because it lacks commercial viability on its own. Instruments such as the VGF can help move socially important projects from planning to implementation — by combining private and donor funding, risk mitigation measures, and bankability enhancements, while ensuring public accountability and oversight. .

The proposed VGF could operate through two complementary instruments:

• Grant Support – providing targeted grants to bridge the viability gap of PPP projects, improve bankability, and attract private investment. Grant allocations would be determined before tendering and disbursed against verified project milestones.
• Guarantee Support – providing guarantees to private partners to mitigate public payment risk, strengthen investor confidence, and facilitate access to commercial financing.

The proposed VGF model includes clear eligibility criteria: a project must be included in Ukraine’s Single Project Pipeline, show a real  confirmed viability gap, meaning user fees and budgets genuinely aren’t enough. It must go through open, competitive tender to select a private partner. In terms of sectors –  healthcare, solid waste management, water supply and sanitation, affordable housing, and energy at the municipal and regional levels.

Another principle of the mechanism is transparent and capped support. Under the presented parameters, the grant component should not exceed 50% of the project’s capital expenditure or EUR 50 million, whichever is lower. Funds may be disbursed in stages, after specific milestones are reached: financial close, completion of construction works, or operational readiness of the asset.

The VGF targets EUR 500 million in total, with EUR 150 million as a starting point for the first 12 months.  It is expected that every EUR 1 of donor support could mobilize nearly EUR 2 in additional private and public resources.

The potential overall investment effect could reach approximately EUR 1.5 billion.

For Ukraine, the VGF could become one of the practical solutions to help launch infrastructure projects that communities need now — without waiting for full budget financing, but by creating the conditions for partnership between the public sector, donors, and private investors.

The experiences and perspectives of the roundtable participants made a valuable insights to the dialogue, which was attended by senior representatives of the Government of Ukraine, international financial institutions, donor organizations.