Asset Monetization

The Union government announced the Asset Monetization plan under National
Monetisation Pipeline (NMP). The plan aims to identify and monetize the
brownfield and under-utilized assets through private sector biddings. Centre
plans to monetize about Rs.6 trillion ($81 billion) worth of public infrastructure
assets for further new infrastructure developments, without selling off any
assets and ownership to the private sectors. The NMP is set for a four-year
(FY22-25) plan, and after the allotted period it will be mandatory to hand back
the assets.

The asset monetization is majorly in sectors like roads (27%), Railways (25%),
Power (15%), Oil & Gas pipelines (8%), and Telecom (6%). 52% of the total
NMP value comprises just Railways and Roads. 15 railway stations, 25 airports,
and 160 coal mining projects will be monetized under the scheme. “We are
fully committed to delivering success to the National Monetisation Pipeline.
We feel that it is very important to bring in the private sector for better
operation and maintenance. Therefore, we are committed to very strong
delivery on the ground” stated CEO of NITI Aayog, Amitabh Kant.

The government has failed in terms of economic and GDP growth and the
ongoing privatization plans don’t seem to work as well. Economic disasters like
demonetization, GST, Corporate Tax-Cuts led to revenue disruption, and to
cope with the deficits, the common man has to suffer through the inflated
petroleum product rates and direct taxes. With general government debt at
90% of GDP and fiscal deficit reaching 9.4% of GDP this year, this scheme
seems to be the last option for the government to recover some of the
economic state’s debt.

The government is looking forward to an idea of “asset recycling”, as current

Finance Minister Nirmala Sitharaman stated that by bringing in private
participation, the monetization can be controlled better, and with whatever
resource the government receives, can be used into further infrastructure
development. The Centre emphasized the ownership of the underlying assets
to be kept by them.

A senior Director at CRISIL, Sudip Sural stated, “For government entities sitting
on piles of operating assets (such as roads, power lines and plants, ports, and
railway tracks), recycling unlocks capital for both, fresh investments and
deleveraging.” He added, “Operating infrastructure assets with stable cash
flows for long tenures attract long-term investors such as pension and
insurance funds. And for the economy and the public at large, more
infrastructure is built, more jobs are created.”

This might sound great. But what if, the private players raise prices, and
counter competition to maximize their profits. Well, If the Operator of a
certain asset will not get the ownership and find low profit for them, they will
not invest much in the asset to operate it, which will not bring much profit to
the government also. This raises the question that will these kinds of pacts
even attract private players. And if they stand with profit-seeking motives, will
the government negotiate with their pact? And if there are leakages in the
operation, it will be impossible to monitor these schemes.
The plan could turn into a transfer mechanism of taxpayer-funded assets to a
handful of business giants without proper regulation and bureaucracy. India is
already witnessing a concentration of economic power in major sectors like
telecom and transport. The Cabinet Committee on Economic Affairs, chaired by
Prime Minister Shri Narendra Modi, in a path breaking reform, has
approved monetisation of assets of POWERGRID, a Public Sector Undertaking
(PSU) under Ministry of Power, through Infrastructure Investment Trust (InvIT)
model. This is the first time any PSU in Power Sector will undertake asset
recycling by monetising its assets through the InvIT model and using the
proceeds to fund the new and under-construction capital projects.
This approval would help POWERGRID to monetise in the first lot, assets with
gross block value of more than 7000 crore. These assets, which are mainly
High Voltage Transmission lines and substations, are held by POWERGRID in
form of Special Purpose Vehicles (SPVs). The proceeds from the asset
monetization would be deployed by POWERGRID in their new and under-
construction projects.
POWERGRID, a public limited company under the administrative control of the
Ministry of Power, Government of India, started its commercial operation in
the year 1992-93 and is today, a Maharatna company, engaged in the business
of power transmission. The Company, along with its wholly owned subsidiaries
acquired through the Tariff Based Competitive Bidding (TBCB) process, owns
and operates a pan India transmission network. The Company meets its fund
requirement for its Capital Expenditure (CAPEX) through its internal accruals
and debt.
The Budget 2019-20 emphasized investment led growth and indicated that
new and innovative financial instruments including Infrastructure Investment
Trusts (lnvITs), have been launched as part of the brown field asset
monetization strategy for augmenting infrastructure investment.
The Cabinet Committee on Economic Affairs has accorded approval to the
POWERGRID to monetise transmission assets held in SPVs through InvIT
model. The asset monetisation through InvIT by POWERGRID is a first for the
Power Sector PSU. The proceeds from the asset monetization would be utilized
by POWERGRID for its CAPEX and the premium generated would augment the
net worth of POWERGRID.
In the first block, POWERGRID would monetize assets with gross block of more
than Rs7000 crore. Based on the experience gained, further monetization shall
be carried out in future.
Asset recycling is a key strategy of the Government of India to release the
capital invested in operational assets and the proposed InvIT of POWERGRID
would attract both domestic as well as global investors including Sovereign
Wealth Funds. Sale of assets to InvITs is a way of accessing long term, relatively
cheap finance required to fund infrastructure projects in Transmission Sector.
The CAPEX plan of POWERGRID for next two years (2020-21 and 2021-22) is Rs.
20,500 cr. The Government of India has enacted an enabling regulatory and
taxation framework for InvITs and the proposed InvIT by POWERGRID would
deepen this market.
The InvIT would provide an opportunity to the general public and institutional
investors such as Pension Funds, Mutual Funds, to benefit from this
investment opportunity and participate in the growth of Indian Infrastructure
Sector.
While the Niti Aayog has listed assets worth ₹6 trillion for the NMP, by its own
estimate, it can only raise about ₹3.4 trillion in long-term asset leases.
i). The remaining assets on the list are to be developed via public-private
partnerships, where the private partner only invests in the asset. No payment
accrues to the government.
ii). In the power transmission sector, the regulated tariff projects, part of the
balance sheet of Power Grid Corporation of India Ltd, will have to be de-
merged first before being privatized, and may pose associated transaction
overheads such as the continuation of the tax holiday on assets.
iii). The clean energy assets on sale are 3.5 gigawatts of plants owned by
public sector units. The challenge here will be to sell assets at book value at a
time when newer plants are being built at ever-falling tariffs.
iv). Banks are not enthusiastic about NMP and understandably so. At the
height of the bad loan crisis in 2017 that brought banks to their knees, the
infrastructure sector accounted for a quarter of all non-performing assets.
v). As per reports, the NMP is “aggressive” and “over-ambitious” compared to
the pace of privatization that India has so far been able to forge. For instance:
In the past three years, a total of 1,408km of roads have been monetized.
Against this, the NMP wants to monetize 26,700km of roads by FY22-25—a 20x
jump over four years.