Assets on the money

The government is eyeing different monetisation models to raise resources for its infrastructure investments

Monetisation and privatisation are the two planks on which the Union government is resting its blueprint for the public sector. Privatisation is a tried and tested option; monetisation is a relatively new experiment. Unlike privatisation, monetisation of assets does not require transfer of ownership to private hands; instead, projects are vested with a trust or a private operator.

There are various models that figure in the monetisation programme (see box). Power Grid Corporation Ltd (PGCIL) and National Highways Authority of India (NHAI), for instance, are taking the infrastructure investment trust (INVIT) route for monetisation. PGCIL plans to place some of its projects that it won through the bidding process under the INVIT. It has already engaged merchant bankers and other agencies, and applied to the Securities Exchange Board of India to register the trust. The target is to raise ~10,000 crore.

Similarly, NHAI has registered an INVIT and plans to place completed national highway projects in it. “Monetisation is an alternative fundraising mode and goes hand-in-glove with traditional funding sources since the requirement of financing is huge. In infrastructure projects, monetisation of projects will bring better value for the concessioning authority and proceeds can be used for new projects,” said P R Jaishankar, managing director, India Infrastructure Finance Company Ltd (IIFCL).

Before INVIT, NHAI has already tried the toll-operate-transfer (TOT) mode of monetisation. TOT, however, has not been much of a success for NHAI except for the first round when in 2018 it garnered ~9,681 crore — 1.5 times higher than the base price. With none of the bidders matching the floor price of ~5,632 for 586.55 km length in the second bundle, NHAI dropped the round, while the third bundle went at a slightly higher price, though Cube Highways, a Singaporebased company with the largest portfolio of toll roads, took time to make the payment. The fourth bundle was annulled and now the fifth one is on offer.

Somesh Kumar, partner and leader, power and utilities, EY India, says while monetisation is an approach to earn additional income by existing assets, privatisation is exiting a business fully or partly. “Both approaches are applied in different contexts. The monetisation approach is usually applied where a PSU has a large asset base (such as land/right of way or any other tangible asset) that can be put to use which otherwise is passive under routine business operations.”

Monetisation can also take place through outright sale of assets. But this runs the risk of asset stripping and reducing the value for the owner, especially if it is a profit-making asset. If that company is sold in the future, this could mean lower valuation,

The key for monetisation lies in a careful choice of projects as much as in determining whether monetisation or continued operation is more cost effective

though the books of the company would have higher cash from the sale. Kumar, however, does not agree with this view and says both privatisation and monetisation can go hand-inhand. “Monetisation can be an ongoing process as one of the enterpriselevel initiatives to unlock value. Ongoing monetisation initiatives with a potential value extraction can only help increase the valuation of the PSU. They can supplement each other,” he says.

Privatisation, on the other hand, could involve taking a conscious call on exiting the business either because it is not performing or the government’s intent is to focus on policy and governance. “Depending on the goals, the government may decide to sell partly or fully shares of the Psu/utility. The current theme of privatisation under Budget 2021 has largely been driven to meet the disinvestment targets, which may also include performing PSUS,” says Kumar.

According to Kumar, while both privatisation and monetisation models will continue to be seen as options for revenue and will coexist, it is expected that at least in the power sector, realisations for the government will be higher under the monetisation model, which is doable with relative ease.

There are, however, challenges. Most of the assets with tangible value such as land, right of way often face regulatory challenges and approvals with regard to end-use change. “The realisations can also be lower than expected. Therefore, multiple initiatives may be required instead of just trying one or two options,” he says.

For instance, if a PSU power generator explores setting up a mini industrial park to offer plug-and-play access for, say, manufacturing within the power plant, it would require diligence to map the industrial activity being proposed with all approvals from land, water, environment and so on.

“Monetisation requires detailed planning and rigour in implementation to extract value from your assets. Also, for regulated utilities, this comes in as non-tariff income, which may be subject to sharing with existing consumers — as a pass-through. While not a challenge but the revenue may be partly shared,” he adds.

Though the success of PSU asset monetisation is yet to be tested, Union Finance Minister Nirmala Sitharaman has even put the dedicated rail freight corridors under this basket though the full project itself is yet not completed. The freight arms of the Railways have met numerous delays in execution and any operational fault line appearing could make revenue realisation trickier for these costly projects that carry with them multilateral loans given to a sovereign. The key for monetisation, therefore, lies in a careful choice of projects as much as in determining whether monetisation or continued operation is more cost effective and revenue generating.