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[Burning Issue] Asset Monetization & Value Creation

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Sustained economic growth is the key to India’s power. Infrastructure without a doubt lies at the heart of this growth story. Infrastructure is inextricably linked to growth by its inherent ability to supports livelihoods, drive businesses, generate employment, and in effect determine the quality of life. Top-quality well managed Infrastructure holds the key to growth and job creation.

Recently, the government has announced an ambitious program of asset monetization. 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 monetization right is quite a challenge, though.

The creation of the National Monetization Pipeline (NMP) is the government’s pioneering initiative and a step in the right direction to establish a medium-term pipeline along with a roadmap for “monetization ready” assets.

Covid pandemic and its effect on economic activity in the country

  • Need of infrastructure investment: With the COVID taking an unprecedented toll on the economic activity in the country, significantly enhanced level of infrastructure investment is required for reviving growth.
  • Sustainable infrastructure systems: Covid has also bought to fore, the need for resilient, sustainable and advanced infrastructure systems.
  • Need for Long-term capital: Investing huge sums into creating world class infrastructure will lead to a high trajectory of growth, but this essentially hinges on availability of long-term capital at scale.
    • Financing of infrastructure thus requires a diversified set of alternatives, especially so in economies at the cusp of transformation such as India.
    • Meeting the required scale of infrastructure spending can only be made possible through a re-imagined approach.

In this context, Asset Monetization merits a seat on the table.

What is Asset Monetization?

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

What is the objective of Asset recycling and monetization?

Asset recycling and monetization serves two critical objectives

1) Firstly, it unlocks value from public investment in infrastructure, and;

2) Secondly, it taps private sector efficiencies in operations and management of infrastructure.

How it is different from privatization?

  • In privatization, there involves sale of public assets to private sector like land, Public Sector Enterprises, etc. But this is not the case with asset monetization.
  • Government doesn’t transfer ownership of assets to private entities in asset monetization.
  • Asset Monetization at its core, is a distinct shift from ‘privatization’ and ‘slump sale’ of assets to ‘structured partnerships’ with private sector within defined contractual frameworks.
  • The driver for Asset Monetization is beyond its fiscal impact.
  • It is not just a funding mechanism, but an overall paradigm shift in infrastructure operations, augmentation and maintenance.

Why private sector is important in infrastructure development?

  • India has made massive strides in creating a mesh of infrastructure through flagship build-out programmes in recent years.
  • For most sectors, this has been driven by the public sector or public funding. Today, India holds one of the largest brownfield stocks of fixed assets in the world.
  • However, while public sector can build infrastructure, it is rarely able to run it efficiently. It is a widely accepted fact the private sector has much greater resource efficiencies, when it comes to developing and managing infrastructure.
  • Increasingly, therefore, government looks to partner with the private sector as a partner. However, for effective co-working between the public and private sector, PPP models are now demanding a reboot.

India and PPP ecosystem

  • India has a robust PPP ecosystem involving institutional mechanisms, model contractual frameworks, regime of standards and financing institutions.
  • Concepts such as preservation of ownership with government, transfer back of asset at the end of concession and key Performance Indicators are well engrained in our PPP eco-system.
  • However, over the last few years there has been reduced appetite of private sector and debt financiers for Greenfield infrastructure.
  • This necessitates innovative mechanisms, structured around mature brownfield assets, for tapping private investment.
  • Asset Monetization, therefore strives to tilt the axis from greenfield to brownfield models.
  • Increased appetite for brownfield assets is evidenced by the flow of private and institutional capital into sectors such as roads, power and telecom.
  • Private sector has very effectively utilized risk managed structures to monetize assets such as toll roads, transmission towers, pipelines and telecom towers thus bringing in a new investor class into India’s Infrastructure.

Recent successful examples of asset monetization:

  • From the public sector, NHAI has monetized close to 1,400 km of toll roads through TOT concessions and has raised Rs. 17,000 crore.
  • Powergid successfully launched the first ever public sector InvIT monetizing its first batch of transmission assets and raising Rs. 7,700 crore.
  • Airports Authority of India successfully monetized 6 brownfield AAI airports through OMDA model raising upfront proceed and private investment towards augmentation of the airports.
  • Indian Railways also launched the strategic foray into PPP in station redevelopment and running of passenger trains.

Role of Infrastructure Investment Trusts (InvITs) & Real Estate Investment Trusts (REITs)

  • Innovative structured vehicles such as Infrastructure Investment Trusts (InvITs) & Real Estate Investment Trusts (REITs) are a capital market play.
  • They are created and operated under the regulatory framework of SEBI and targets pooled long term capital.
  • Since the launch of regulations for these vehicles by SEBI in year 2014, India’s private sector has very effectively unlocked its invested equity by employing these vehicles and bringing in capital from global pension and sovereign funds.
  • Assets Under Management (AUM) of Rs. 1 lakh crore from the private sector alone, is held by these vehicles.
  • Through the Asset Monetization programme, public sector entities will also tap into long term institutional capital and build on the recent success of PowerGrid’s InvIT.
  • More importantly, India’s common public can also invest in InvITs and REITs as retail investors.
  • These models interest a different investor class comprising of global pension and sovereign wealth funds and also retail investors.
  • The SEBI Regulations bring transparency for investors and also efficiency in asset management.

What is National Monetization Pipeline (NMP)?

  • The NMP comprises a four-year pipeline of the Central Government’s brownfield infrastructure assets.
  • It will serve as a medium-term roadmap for the Asset Monetization initiative of the government, apart from providing visibility for the investors.
  • Incidentally, the 2021-22 Union Budget, laid a lot of emphasis on Asset Monetization as a means to raise innovative and alternative financing for infrastructure.
  • It has to be noted that the government views asset monetization as a strategy for the augmentation and maintenance of infrastructure, and not just a funding mechanism.

Framework

The framework for core asset monetization has three key imperatives:

  • The pipeline has been prepared based on inputs and consultations from respective line ministries and departments, along with the assessment of total asset base available therein.
  • Monetization through disinvestment and monetization of non-core assets have not been included in the NMP.
  • Further, currently, only assets of central government line ministries and CPSEs in infrastructure sectors have been included.
  • Process of coordination and collation of asset pipeline from states is currently ongoing and the same is envisaged to be included in due course.

Estimated Potential

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  • The aggregate asset pipeline under NMP over the four-year period, FY 2022-2025, is indicatively valued at Rs 6.0 lakh crore.
  • The estimated value corresponds to ~14% of the proposed outlay for Centre under NIP (Rs 43 lakh crore). This includes more than 12-line ministries and more than 20 asset classes.
  • The sectors included are roads, ports, airports, railways, warehousing, gas & product pipeline, power generation and transmission, mining, telecom, stadium, hospitality and housing.
  • The top 5 sectors (by estimated value) capture ~83% of the aggregate pipeline value. These top 5 sectors include: Roads (27%) followed by Railways (25%), Power (15%), oil & gas pipelines (8%) and Telecom (6%).

Implementation & Monitoring Mechanism

  • As an overall strategy, significant share of the asset base will remain with the government.
  • The programme is envisaged to be supported through necessary policy and regulatory interventions by the Government in order to ensure an efficient and effective process of asset monetisation.
  • These will include streamlining operational modalities, encouraging investor participation and facilitating commercial efficiency, among others.
  • Real time monitoring will be undertaken through a separate dashboard.

What are the challenges involved?

  • Realizing adequate value: The First and foremost criticism is whether adequate value from the assets will be realized or not.
    • This depends on the quality of the bidding process and whether enough private players are attracted to bid.
  • Ensuring sufficient participation from bidders: The only way of ensuring that asset monetization doesn’t lead to cronyism is to make the bidding conditions such that the people eligible to bid are not a small, predetermined set.
    • However, because of the capital intensity of the project, not everybody is going to be able to bid. Even so, you can ensure that there is sufficient participation.
  • Execution Risk: There will be execution risk in such a large programme. However, this is exactly why NMP is not adopting a one-size-fits-all approach.
  • Issue of Taxpayers’ Money: The taxpayers have already paid for these public assets — and, so, why should they pay again to a private party to use them.
  • Suboptimal Contractual Enforcement: A criticism is born out of scepticism about a sub-optimal contractual and judicial framework to make such a plan a success.
  • Monopolistic Outlook: A few business houses will corner the bulk of the assets offered under NMP.
  • Right and targeted policy planning and implementation: There is a need to systematically adopt these initiatives across varied asset classes and streamline the frameworks and modalities of such alternatives in a programmatic manner which can be readily absorbed, evaluated and replicated.
  • Involvement of states: Any of the center’s objectives can’t go in full throttle without apt cooperation from the states. The growth of the states is a precondition for the overall growth of India.

Conclusion

  • A well laid out pipeline gives a comprehensive view to investors & developers of brown-field investment avenues in Infrastructure and helps them plan their fund raising and due-diligence activities.
  • A diverse and sustained National Monetisation Pipeline (NMP) not only provides visibility to the investors on potential financing opportunities but also driving preparedness of public authorities to structure and launch transactions in a systematic and transparent manner.
  • Contribution of States is essential: States are an equal partner in India’s Infrastructure story. India cannot grow faster unless states grow at higher rates and hence there is a need to work closely with states.
    • States, too present a significant potential for leveraging assets such as tolled State Highways, Transmission towers, discoms, bus terminals, sports stadiums and state warehouses to mobilize capital for Infrastructure investment which can have multiplier effects on the state economies.
    • Recognizing the criticality of enhanced capital expenditure, the “Scheme for Special Assistance to States for Capital Expenditure” to boost capital expenditure by state governments reeling under the financial impact of COVID-19 pandemic, is a path breaking measure.
    • Under the Scheme, incentive is provided to the States in the form of 50-year interest free loan.
  • In order to give the needed fillip to the monetization initiative, following three aspects need concerted efforts and interventions.
    1. Firstly, a relentless focus on implementation is the key.
    2. Secondly developing brownfield models and frameworks will provide the needed pace.
    3. Lastly, driving states and partnering with them in undertaking monetization in a structured manner.

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