Print Friendly, PDF & Email

Insights into Editorial: Asset monetisation — execution is the key

 

 

Context:

The government has announced an ambitious programme of asset monetisation. It hopes to earn ₹6 trillion in revenues over a four-year period. At a time when the government’s finances are in bad shape, that is money the government can certainly use. Getting asset monetisation right is quite a challenge, though.

Creation of National Monetisation Pipeline (NMP) is Government of India’s pioneering initiative to establish a medium-term pipeline along with a roadmap for “monetisation ready” assets.

Developed in the backdrop of the unprecedented Covid-induced economic and fiscal shocks, NMP lists out assets and asset classes, under various infrastructure ministries, which will be monetised over a period of time.

 

Meaning of Asset Monetisation:

  1. In asset monetisation, the government parts with its assets — such as roads, coal mines — for a specified period of time in exchange for a lump sum payment.
  2. At the end of the period, the assets return to the government. Unlike in privatisation, no sale of government assets is involved.
  3. By monetising assets it has already built, the government can earn revenues to build more infrastructure.
  4. Asset monetisation will happen mainly in three sectors: roads, railways and power.
  5. Other assets to be monetised include: airports, ports, telecom, stadiums and power transmission.

 

About National Monetisation Pipeline (NMP):

  1. It is an ambitious 4 year period ₹6 lakh-crore National Monetisation Pipeline (NMP) that included unlocking value in brownfield projects by involving private firms across infrastructure sectors from passenger trains and railway stations to airports.
  2. As per the plan, private firms can invest in projects for a fixed return using the Infrastructure Investment Trusts (InvIT) route as well as operate and develop the assets for a certain period before transferring them back to the government agency.
  3. Union Budget 2021-22 has identified monetisation of operating public infrastructure assets as a key means for sustainable infrastructure financing.
  4. Land will not be monetised under National Monetisation Plan only brownfield assets to be monetised.
  5. The government has stressed that these are brownfield assets, which have been “de-risked” from execution risks, and therefore should encourage private investment.
  6. The funds will then be used to build new infrastructure assets, helping boost economic growth in the country.
  7. The top five sectors by value under the government’s asset monetization programme are roads (27%), railways (25%), power (15%), oil and gas pipelines (8%) and telecom (6%).
  8. The plan is in line with Prime Minister’s strategic divestment policy, under which the government will retain presence in only a few identified areas with the rest tapping the private sector.

 

First, under-utilised assets:

Two important statements have been made about the asset monetisation programme.

One, the focus will be on under-utilised assets.

Two, monetisation will happen through public-private partnerships (PPP) and Investment Trusts.

  1. Let us examine each of these in turn. Suppose a port or airport or stadium or even an empty piece of land is not being used adequately because it has not been properly developed or marketed well enough.
  2. A private party may judge that it can put the assets to better use. It will pay the government a price equal to the present value of cash flows at the current level of utilisation.
  3. By making the necessary investment, the private player can reap the benefits of a higher level of cash flows.
  4. The difference in cash flows under government and those under private management is a measure of the improvement in efficiency of the assets. This is a win-win situation for the government and the private player.
  5. The government gets a ‘fair’ value for its assets. The private player gets its return on investment. The economy benefits from an increase in efficiency. Monetising under-utilised assets thus has much to commend it.

 

Choice between well-utilised and under-utilised assets:

  1. Matters could be very different in monetisation of an asset that is being properly utilised, say, a highway that has good traffic.
  2. In this case, the private player has little incentive to invest and improve efficiency. It simply needs to operate the assets as they are.
  3. The private player may value the cash flows assuming a normal rate of growth of traffic. It will pay the government a price that is the present value of cash flows minus its own return.
  4. The government earns badly needed revenues but these could be less than what it might earn if it continued to operate the assets itself. There is no improvement in efficiency.
    1. Suppose the private player does plan to improve efficiency in a well-utilised asset by making the necessary investment and reducing operating costs.
  5. The reduction in operating costs need not translate into a higher price for the asset than under government ownership.
  6. The cost of capital for a private player is higher than for a public authority. A public authority needs less equity capital and can access debt more cheaply than a private player.
  7. The higher cost of capital for the private player could offset the benefit of any reduction in operating costs.
  8. As we have seen, the benefits to the economy are likely to be greater where under-utilised assets are monetised.
  9. However, private players will prefer well-utilised assets to assets that are under-utilised.
    1. That is because, in the former, cash flows and returns are more certain. Private incentives in asset monetisation may not accord with the public interest.
  10. The life of the asset, when it is returned to the government, may not be long. In that event, asset monetisation virtually amounts to sale. Monetisation through the PPP route is thus fraught with problems.

 

What are the challenges?

Among the key challenges that may affect the NMP roadmap are:

  1. Lack of identifiable revenues streams in various assets,
  2. Level of capacity utilisation in gas and petroleum pipeline networks,
  3. Dispute resolution mechanism,
  4. Regulated tariffs in power sector assets, and
  5. Low interest among investors in national highways below four lanes.

 

While the government has tried to address these challenges in the NMP framework, execution of the plan remains key to its success.

Structuring of monetisation transactions is being seen as key.

The slow pace of privatisation in government companies including Air India and BPCL, and less-than-encouraging bids in the recently launched PPP initiative in trains, indicate that attracting private investors interest is not that easy.

Monetisation potential of toll road assets, though being a market-tested asset class with established monetisation models, is limited by the percentage of stretches having four lane and above configuration.

The total length of national highway (NH) stretches with four-lane and above is estimated to be about 23% of the total NH network.

The government has tried to address this with a plan to monetise assets that are four-lane and above.

The MNP framework notes that other key impediments to the monetisation process are asset-specific challenges such as presence of an identifiable revenue stream.

This is specifically relevant to the railway sector, which has seen limited PPP success as a mode of project delivery.

Konkan Railway, for instance, has multiple stakeholders, including state governments, which own stake in the entity.

Creating an effective monetisation transaction structure could be a bit challenging in this case.

 

Infrastructure Investment Trusts (InvIT): Another way of going about it:

  1. The other form of monetisation the government has indicated is creating Infrastructure Investment Trusts (InvIT) to which monetisable assets will be transferred.
  2. InvITs are mutual fund-like vehicles in which investors can subscribe to units that give dividends. The sponsor of the Trust is required to hold a minimum prescribed proportion of the total units issued.
  3. InvITs offer a portfolio of assets, so investors get the benefit of diversification.
  4. Assets can be transferred at the construction stage or after they have started earning revenues.
  5. In the InvIT route to monetisation, the public authority continues to own the rights to a significant portion of the cash flows and to operate the assets.
  6. So, the issues that arise with transfer of assets to a private party — such as incorrect valuation or an increase in price to the consumer — are less of a problem.

 

The pathway for proper execution is the key:

First, a public authority has inherent advantages on the funding side. In general, the economy is best served when public authorities develop infrastructure and monetise these.

Second, monetisation through InvITs is likely to prove less of a problem than the PPP route.

Third, we are better off monetising under-utilised assets than assets that are well utilised.

Fourth, to ensure proper execution, there is a case for independent monitoring of the process.

 

Conclusion:

The end objective of this initiative is to enable “infrastructure creation through monetisation” wherein the public and private sector collaborate, each excelling in their core areas of competence, so as to deliver socio-economic growth and quality of life to the country’s citizens.

The government can set up an Asset Monetisation Monitoring Authority staffed by competent professionals.

The authority must put all aspects of monetisation under the scanner and valuation, the impact on price charged to the consumer, monetisation of under-utilised versus well-utilised assets, the experience across different sectors, etc. — and document the lessons learnt.