Why monetising infra assets is fraught with risks

Far from an exercise in encouraging private investment, it could prove to be an attempt to boost the government’s revenue collection

One of the many ways to spur infrastructure activity is to monetise an operational project by hiving it off or roping in equity partners and reinvesting the proceeds back into creating new roads, highways and power plants. However, as the government paves the way for monetisation of infrastructure assets, there are fears it could prove to be an exercise in divestment— by another name.

A Cabinet approval was taken last year for a list of assets — with three plants of the Steel Authority of India and one each of the National Minerals Development Corporation and Ferro Scrap Nigam Ltd — that the government intended to monetise. Besides assets owned by public sector units, the Centre also wants to monetise highway projects.

Highway projects are easier to monetise than PSU-owned ones because the control of road projects rests with the government or the National Highways Authority of India. In the case of PSUs, on the other hand, for assets that do not operate as companies, the parent company needs to host them as a fully-owned subsidiary before they can be sold.

Such monetisation runs the risk of disturbing the businesses of PSUs. “The assets that are hived off will in themselves be profitable. By doing so, PSUs may be left with only those assets that are not making enough profits or are running at a loss. This would hurt their balance sheets, impairing their capacity to raise funds from the market,” says Arvind Mayaram, former Union finance secretary.

A reverse situation could also be true. An operational plant could be unprofitable even though the company might be making a profit overall.

There are other complications too. The financials of certain types of infrastructure assets, such as power plants, depend on the capacity of the state distribution companies to pay. “As long as these (projects) remain in the public sector, they have the backing of the Centre to recover their dues. However, in the hands of the private sector, they may be severely constrained on that account,” says Mayaram.

The government is banking on institutional investors to infuse fresh capital. The ministry of road transport last year short-listed 75 national highway projects, with annual toll revenue collection of ~2,700 crore, for monetisation. Of these, 11 projects are being offered in the first phase for bidding, to be leased out on a toll-operate-transfer basis.

However, institutional investors picking up infrastructure assets will need managers to run them. In the case of highways, this could be easy since there are plenty of road management companies in existence to assist them through it. In the case of other assets though, such as power plants, the going may not be smooth for investors.

The catch, however, is to find buyers. Mayaram says it would be difficult to find private infrastructure companies that aren’t overleveraged and stressed already. Vishwas Udgirkar, partner and leader (government utilities and infrastructure development), Deloitte, on the other hand, disagrees. “Selling government stake in completed assets at a right price and with adequate transparency could bring investment by attracting specific type of investors. This would help in investment revival,” he says.

How the proceeds from monetisation are used will be a reflection of the government’s intentions. If the assets are hived off as separate companies, the proceeds will go the holding company. In such a case, the government can get the money only if the parent PSU buys back the government’s shares for an amount equivalent to the value realised from disinvestment in its subsidiary. Such an approach will, however, mean that the money will be in the hands of the government and not the PSU; only if the government spends the amount on infrastructure creation, could it spur private sector activity.

Since the National Investment Fund, where disinvestment proceeds were parked, has been discontinued, the asset sale could prove to be a divestment exercise for realising more revenue instead of an attempt at monetisation. If that happens, it would amount to stripping PSUs of their assets for funding the government’s expenses.

However, experts say, if the PSUs retain the money with themselves, it won’t spur private sector investment either. Currently, only public sector companies have been making capital investments, given the stretched balance sheets of private companies.

Sale of PSU assets has been tried earlier, too. The Atal Bihari Vajpayee government divested stakes in 18 ITDC hotels between 1999 and 2004. ITDC created shell companies in which the control of hotels were vested. After the sale of assets, the proceeds flowed back to the government.