Pushing the pedal on asset recycling

Incentivise states to deliver on the infrastructure agenda

Asset recycling, or monetisation, has emerged as a viable option for raising muchneeded monies to fund India’s infrastructure build-out. The concept has gained currency in the last few years, with models such as tolloperate-transfer (TOT), and infrastructure investment trust (INVIT) helping unlock capital in operating infrastructure assets.

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. 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.

In the last five years, states have accounted for about 40 per cent of the infrastructure spend. They will need to do the heavy-lifting going forward too. This is easier said than done considering their combined fiscal deficit stands at 2.9 per cent of GDP for 2018-19 (RE). Thus, asset recycling assumes great significance.

So which assets? Toll roads and power transmission lines are the most amenable to this, for two reasons.

One, these sectors have investors’ attention already. This is because a relatively well-developed regulatory ecosystem and an established user charge regime are in place. Two, both have high monetisation potential. India has nearly 2.3 lakh circuit km (ckm) of power transmission lines owned by states and about 1.7 lakh km of state highways. Even if 10 per cent of this is monetised, it can rake in about ~2 trillion. That’s half of the yearly infrastructure spend by states of ~4 trillion.

And how to do it? The incentive structure for states should comprise the following prescriptions:

The Finance Commission can propose performance-based incentives as part of grants-in-aid to states to support creation of greenfield infrastructure;

Appropriate incentives can be designed for asset recycling proceeds re-invested in creation of new infrastructure assets and for accelerating construction of such assets. Such incentives will compensate for revenue foregone by state governments on revenue-earning assets such as toll roads;

Eligibility conditions can be laid down for deploying the proceeds of asset recycling in new infrastructure assets. Such criteria should aim at boosting economic growth and employment generation. For this, the definition of infrastructure, as laid down in the harmonised list of the Ministry of Finance, may be followed. It can also include social infrastructure such as hospitals and educational institutions, apart from economic infrastructure such as roads, power plants and industrial corridors. Projects developed or conceptualised by states in the National Infrastructure Pipeline (NIP), which fit these eligibility conditions, may be earmarked for such investments;

A long-term lease model concession agreement can be drafted for toll road assets, with specific clauses on contract sanctity, service levels, force majeure events, and dispute resolution;

State governments can be made to understand that asset recycling is not privatisation, especially when the lease model is followed, and that unlocking capital can help usher in long-term benefits for the state economy. What are the risks? Investors will look for contract sanctity. Recent instances of state governments renegotiating or cancelling contracts tend to put off global long-term capital market investors such as pension and insurance funds.

Investors will also look for transparency from governments on available assets, and the likely terms to be associated with transactions. The better the availability of this data, the higher the likelihood of attracting the right kind of investors.

Private investors will need to mitigate the risk of adverse political or regulatory intervention over the longer term, a key characteristic of any infrastructure asset.

Last but not the least, there may be concerns around asset monetisation and potential escalation in costs for consumers. Governments will have to ensure that private investors are chosen after an appropriate duediligence process and through a competitive bidding route as infrastructure assets are public goods. Efficiency and service improvements on the ground will be the key to gaining acceptance.

State governments can be made to understand that asset recycling is not privatisation, especially when the lease model is followed, and that unlocking capital can help usher in long-term benefits for the state economy