By Seela Subba Rao
The Union Budget 2021-22 laid out the importance of “monetising operating public infrastructure assets for new infrastructure” apart from setting up a new outfit called National Bank for Financing Infrastructure and Development (NBFID). Consequent to this, the government of India recently announced its ambitious programme on asset monetisation to garner Rs 6 lakh crore in revenues over a span of four years, ie, 2021-22 to 2024-25.
Under asset monetisation, the government parts with its assets such as roads, railways, power and coal mines for a specific period of time in exchange for a lump-sum payment from private parties. At the end of the period, the assets return to the government. Unlike in privatisation, no sale of government assets is involved. The monetisation will happen on under-utilised assets to begin with. Further, the potential models will happen through public-private partnership and investment trusts.
The prime objective is that instead of the government providing money through budgetary resources for infrastructure creation, existing infrastructure is better managed through the private sector and it will be utilised for more and more infrastructure creation. In this regard, the government has formed an empowered ‘Core Group of Secretaries on Asset Monetisation’ under the chairmanship of Cabinet Secretary that will review the pipeline on a monthly basis. Further, the Finance Minister will review the same on a quarterly basis.
The bulk of the asset base will remain with the government. Under the framework for core asset monetisation, the assets monetised will be handed back at the end of the transaction life.
One of the potential models is public-private partnership route. When an asset like an airport or stadium has not been properly developed or marketed well enough, it will remain used inadequately. 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.
By making the necessary investment, the private player can reap the benefits of higher-level cash flows. The difference in cash flows under government and those under private management is a measure of improvement in the efficiency of assets. This is a win-win for the government and the private sector. 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 underutilised assets thus has much to commend it.
Matters could be very different in the monetisation of an asset, say, a highway that has good traffic. In this case, the private player has little to invest in and improve efficiency. It simply needs to operate the assets as they are.
Infra Investment Trust Route
The other model envisaged by the Niti Aayog is Infrastructure Investment Trust. The government has indicated creating Infrastructure Investment Trusts to which the monetisation assets will be transferred. These trusts are mutual funds-like vehicles in which investors can subscribe to units that give dividends. The sponsor of the trust is required to hold a minimum proportion of the total units issued.
These trusts offer a portfolio of assets, so investors get the benefit of diversification. Assets can be transferred at the construction stage or after they have started earning revenues. Here, the public authority continues to own the rights to a significant part of cash flows and operate the assets. So the issues that arise with the transfer of assets to a private party such as incorrect valuation or increase in price to the consumer etc are less of a problem.
Successful implementation of the National Monetisation Pipeline (NMP) hinges on effective governance framework with escalation matrix for real-time monitoring of progress. There is a need for putting in place a fool-proof mechanism for monitoring the implementation of projects by comparing actual progress vis-a-vis planned pipeline for NMP assets.
The basic components of the framework for proper implementation of NMP assets include consistent policy and regulatory support; handholding and capacity building; finalisation of pipeline and yearly targets; real-time monitoring through dashboard by appropriate authorities; and periodic reviews by an empowered committee.
To ensure proper execution, the government may set up an Asset Monetisation Authority comprising competent experts. The authority must focus on all aspects of monetisation such as valuation, the impact on the price charged to the consumer, monetisation of underutilised versus well-utilised assets and the experience across different sectors.
In the case of the PPP route, there is no incentive for the private player to invest in the asset towards the end of the tenure of monetisation. 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 appears to be fraught with a few problems. Thus, monetisation through investment trusts is likely to prove less of a problem than the PPP route.
This innovative model of infrastructure creation through monetisation as envisaged by the Niti Aayog appears to be alright provided it is executed right. It is pertinent to mention here the experience from what happened after the economic boom of 2003-08 and PPP in infrastructure has been a financial disaster in India. Hence in public and private sector collaboration, utmost precaution and due diligence are needed for execution.
(The author is former Assistant General Manager of Nabard)
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