National Monetisation Pipeline –Unlocking the latent value in Public Assets

-Penned by Apoorva Grewal and Rajdeep Sil

Union budget 2021-22 reinforced Government of India’s commitment towards creation and development of institutional infrastructure. Asset monetization is seen as an important source of finance for this commitment. In the light of this, National Monetization Pipeline is the policy roadmap to list out core assets under various infrastructure ministries to be monetized. Brownfield Public assets will be leased out to private parties to generate up to INR 6 lakh crore under this scheme in the next four years (FY22-25), INR 88,000 Crore, this year.

What makes NMP unique is that it is not disinvestment or privatization. Unlike selling the family silver, here the ownership of the assets remains with the government while private parties operate and manage them to generate revenue for themselves as well as the government. These assets will be mandatorily returned to the government once the lease period is over. Also, the finance minister has emphasized that no publicly owned land will be sold. Languishing and under-utilized assets are expected to be modernized in this way for the public good, unlocking idle capital and reinvesting the funds raised in greenfield projects for infrastructure development.

The Government has identified strategic and significant assets which include 26,700 kilometers of highways, 400 railway stations, 90 passenger trains, 4 hill railways, telecoms, power transmission and distribution and petroleum, petroleum products and natural gas pipelines to be included in the NMP and monetized through long-term leases with periodic or upfront payments.

WHY IT MATTERS

When the government creates an asset like a road, a huge investment goes into it. It takes years for the government to recover this struck capital through toll revenues alone. By building infrastructure and leasing it out to the private sector to operate it, the government can recover a major part of its investment right away and utilize it to further finance fresh infrastructure, as proposed under National Infrastructure Pipeline (NIP). This spending could give a huge boost to economic activity and employment. It could also share the risks and rewards in infrastructure development equitably.

Therefore, NMP is seen as a win-win situation where the government gets the fair value for its assets and the private entity gets a return on its investment. It can lead to infrastructure augmentation, and better service delivery. Efficient management of resources would lead to immense value creation. In the long-term, it would result in an environment enabling participation of long-term institutional investors in infrastructure asset management.

However, asset monetization is not just a deal between public and private entities. The assets on offer are not for the government to keep or sell on its own. They have been created through taxpayers’ contribution over the years who are directly affected with their operation and management. Moreover, management of an asset by the government differs significantly from its management by an entity that has profit-making objectives. For example, the public could be affected by higher usage charges for utilities such as power, telecom or gas when operated by private firms, while social benefit takes a backseat and the poorer sections are priced out of the market. If the government steps in here to subsidize these charges, it could erode public funds, defeating the very purpose of this scheme. This brings in the necessity to have regulatory bodies in place to protect consumer interests

STEPS TO BE TAKEN BY THE GOVERNMENT TO IMPLEMENT NMP

The concept of Asset Monetisation has been instituted as a sustainable long-term strategy for creating a virtuous cycle of continuous infrastructure development and delivery contributing to the growth of the nation. However, very often the relevant assets are not directly owned by the government but rather through a subsidiary of government i.e., a public sector entity. Thus, it is primarily the responsibility of these public sector entities to institutionalise an efficient and effective framework for creating a sustainable and marketable asset monetisation plan.

To achieve the objectives of a systematic and effective plan, a structured process along the following lines needs to be followed:

Step 1 – Preparation of an asset monetisation and financing plan

Step 2 – Asset screening and packaging

Step 3 – Transaction preparation and structuring

Step 4 – Approval process

SECTOR-WIDE ANALYSIS

Asset monetisation is critical to attract the required quantum of capital into infrastructure sector. However, monetisation needs to be viewed not just as a funding mechanism, but as an overall strategy for bringing about a paradigm shift in infrastructure augmentation, service delivery and maintenance. Resource and capital efficiencies of private sector along with the ability to dynamically adapt to the evolving global and economic reality, necessitates looking at Asset Monetization as the key to value creation in Infrastructure.

It presents an immense opportunity for public asset owners to deleverage the balance sheets and easing of fiscal space to take up more greenfield infrastructure creation. In terms of other longer-term benefits, it creates an enabling environment for participation of long-term institutional investors in infrastructure asset management.

Thus, we can observe that Roads and the Railways are two of the sectors which have the greatest potential for achieving large scale monetisation. A brief analysis is presented for both of these sectors.

1. ROADWAYS:

The Ministry of Road Transport and Highways is the central line ministry responsible for development of National Highways. The Potential Asset Base for roads sector includes aggregate National Highway (NH) road length estimated at about 1,36,155 km as on December 20, 2020. However, the aggregate length of assets considered for monetisation over FY 2022 to 2025 aggregate to 26,700 km. This is based on the length of already/to-be operational, four lane highways and above in the country, entailing potential for revenue generation and thereby monetisation.

Marquee Project in Roadways: NHAI’s Infrastructure Investment Trust (InvIT)

In order to enhance NHAI’s resource mobilization, the Cabinet accorded the approval and authorized NHAI to set up Infrastructure Investment Trust, as per InvIT Guidelines issued by SEBI, to monetize completed National Highways that have a toll collection track record of at least one year. Alternative sources such as capital markets and diversification of its investor base also to be considered for monetisation.

Key feature:

The first tranche of InvIT are expected to consist of ~586 km of NH assets in Rajasthan, Gujarat, West Bengal, and Bihar.

2. RAILWAYS:

Indian Railways (IR) is the fourth-largest railway network in the world by size, with 121,407 km (75,439 mi) of total track over a 67,368 km route. With IR’s focus on augmenting railway infrastructure to facilitate freight and passenger movement, significant investments will be needed to address capacity constraints.

The following approaches are being considered for monetisation:

1. Railway station redevelopment	4. Private Freight Terminals (PFTs)
2. Passenger train operations	5. Monetisation of track and allied infrastructure of Dedicated Freight Corridor
3. Track, signalling, and Overhead Equipment (Track OHE)	6. Other assets: Konkan Railway, Hill Railways, Railway Stadiums and colonies

Marquee project: Private participation in Passenger Train Operations

Indian Railway (IR) has launched the project to invite private participation in running of passenger trains over its network. The cluster of projects identified envisages private train operations on ~109 pair of routes structured as 12 clusters with a targeted private investment of Rs. ~30,000 crore. The project will incrementally add over 150 modern trains to the IR system. The clusters in the current set of packages being bid out are dense demand routes and include Delhi-Mumbai, Delhi-Chennai, Mumbai-Chennai among others

CHALLENGES:
Realising Adequate Value: The First and foremost issue is whether adequate value from the assets will be realised or not. Further, the angle of in-appropriation in the valuation can’t be ruled out.
Ensuring Sufficient Participation from Bidders: To attract the private players, government needs to structure the assets properly which ensures that any sort of liabilities associated with the asset are kept to the minimum, so that this does not drive away the bidders.
Execution Risk: With many of the marquee projects taking place simultaneously, this can pose a risk to the execution of the projects.
Monopolistic Outlook: Even though the asset relocation will be done through bidding, still the risk of all the assets being leased to a single organisation can’t be ignored.

CONCLUSION:

The government is facing criticism from the opposition with the narrative that this act will lead to selling of the nation’s assets. One thing that needs to be understood is that this plan of the government is for leasing the under-utilised assets so as to generate revenue from these loss-making, under-utilised assets which will be further used to fund other infrastructure development projects.

Thus, on paper this activity seems a picture-perfect plan to ease pressure on the government by simply increasing the utility of the assets.

Also, it is completely logical to say that “Government has no business to be in business”, thus leasing out the assets to players who would understand the worth and with their technical knowhow would be able to extract useful value from these assets, and in the process the government also benefits.

However, with the history of scams that the nation has faced in such big amount transactions also cannot be ignored.

If an agile bureaucracy can carry out the necessary activities without any ill-motives, then without any doubt this plan will be another breakthrough in the India growth story.