As per the Economic Survey 2018-19, India needs to spend 7-8 per cent of its GDP on infrastructure annually that translates into an annual infrastructure investment of $200 billion. However, the country’s annual infrastructure spend has been only $100 billion-$110 billion, leaving a deficit of around $90 billion per annum. Given the fiscal constraints, the government has shifted its focus towards mobilising private capital to meet the infrastructure financing needs. Amidst a slowing economy, Union Budget 2019-20 has laid emphasis on investment-led growth. To this end, asset monetisation and recycling is an important mechanism for raising funds. Two successful asset monetisation models implemented in the country are infrastructure investment trusts (InvITs) and toll-operate-transfer (TOT).
The centre has set an ambitious disinvestment target of Rs 1.05 trillion for 2019-20, up from Rs 900 billion projected in the interim budget. The government overachieved its disinvestment target of Rs 800 billion for 2018-19, raising Rs 850 billion. Today, disinvestment holds much more relevance as the government needs to keep the fiscal deficit from widening.
With the government realising that “it has no business being in business”, it recently indicated its willingness to give up management control along with a majority stake in three public sector undertakings (PSUs) – Bharat Petroleum Corporation Limited (BPCL), the Shipping Corporation of India (SCI), and Container Corporation of India Limited (CONCOR). While government ownership is necessary in strategic sectors such as defence and oil exploration, its presence in non-strategic areas (fuel retail stations, shipbuilding, container freight operations, etc.) not only distorts competitive dynamics for the private sector but also results in taxpayers bearing the brunt of inefficient PSU operations. Besides BPCL, SCI and CONCOR, the government has proposed the selling of majority stakes in THDC India Limited and North Eastern Electric Power Corporation (NEEPCO) to NTPC Limited. Other key planned disinvestments include the strategic sale of Air India and initial public offerings (IPOs) of RailTel Corporation of India and the Indian Railway Finance Corporation.
The Union cabinet, in fact, recently approved a new process for strategic disinvestment to expedite privatisation of select PSUs. The Department of Investment and Public Asset Man-agement (DIPAM) has been made the nodal agency for strategic stake sales. The move is aimed at streamlining and speeding up the process and reducing the role of the concerned ministries. DIPAM and NITI Aayog will now jointly identify PSUs for disinvestment. The change comes after the announcement of the sale of the government’s entire 53.29 per cent stake in BPCL, 63.75 per cent stake in SCI, 30 per cent in CONCOR, 100 per cent in NEEPCO, and 75 per cent in THDC.
During 2018-19 and 2019-20, the government floated IPOs of railway PSUs RITES Limited, Ircon International, Rail Vikas Nigam Limited (RVNL), and the Indian Railway Catering and Tourism Corporation (IRCTC). Some of these were well received while others failed to attract investors.
Railway consultancy firm RITES made a strong debut on the bourses. The shares were listed at Rs 190 each on the Bombay Stock Exchange (BSE), a 2.7 per cent premium over its issue price of Rs 185. The company’s Rs 4.66 billion IPO, which was open between June 20, 2018 and June 22, 2018, was oversubscribed by 67 times.
Ircon International made a weak debut, as the scrip got listed at Rs 410.30 on the BSE, a 13.62 per cent discount on its issue price of Rs 475, owing to weak market sentiment. The Rs 4.67 billion issue, from September 17, 2018 to September 19, 2018, was oversubscribed by 9.77 times.
RVNL failed to garner much interest on the stock exchanges with shares listing at Rs 19.05, marginally higher against its issue price of Rs 19 per share. The Rs 4.81 billion IPO, which was sold between March 29, 2019 and April 3, 2019, was oversubscribed by only 1.83 times.
IRCTC made a stellar market debut with its shares surging by nearly 128 per cent on the BSE from the issue price, the biggest stock market debut for any company in nearly two years. The public offering of IRCTC was subscribed by 112 times at a price band of Rs 315-Rs 320, emerging as one of the most sought-after IPOs among PSU IPOs ever. The Rs 6.45 billion issue was open for subscription between September 30, 2019 and October 3, 2019. The company received a very strong response due to the asset-light business model, monopolistic nature of the business, unique brand value, and strong parentage. The company reinstated a convenience fee of Rs 10-Rs 30 per booking on its web and mobile platforms that will further shore up its revenues.
Recycling of public assets
The government has now recognised that infrastructure assets, once created, need to be bid out to private entities for efficient operations and maintenance (O&M). In this context, asset monetisation not only allows investors/private players to bid for yield-generating assets, but also allows the government to recycle capital which can then be used for investment in new infrastructure projects. Besides, this financing option allows the value of underutilised public assets to be unlocked and helps pare debt of central public sector enterprises (CPSEs).
Public asset management has become a key focus area for the government. The process of monetisation of existing public assets through sale or lease to the private sector offers the opportunity of providing the required infrastructure without adding to public debt. Meanwhile, the private sector can manage the asset better, and that results in higher returns for the government.
With rising institutional investor interest in operational assets generating stable cash flows, asset monetisation is the next logical step. The proceeds generated from this process will flow back to the concerned CPSE. At present, the country offers a lucrative pipeline of operational assets in various segments such as roads, highways, railway tracks, airports and transmission lines.
The government’s intent is clear – to hive off stable yield-generating assets of CPSEs, for which there is investor appetite and interest in undertaking O&M. A dedicated committee under the chief executive officer of NITI Aayog has been constituted to identify and monitor the progress of asset monetisation. CPSEs have the option to either transfer assets to a special purpose vehicle or transfer the sale proceeds to an escrow account to ring-fence the realised amount from the rest of the business. Other assets such as warehouses, sports complexes and land parcels can be considered for sale to investors/private parties. Asset monetisation and recycling models could vary from a contractual agreement between the CPSE/ concerned ministry and the private entity (in the case of TOT) to structured finance models (such as InvITs) depending on investor appetite and the other strategic reasons.
InvITs and TOT
TOT is a good mechanism for professionalising assets and freeing up government capital. The first bundle of nine highways spanning a length of about 680 km was successfully monetised at an investment of Rs 98 billion. However, the second bundle received a lukewarm response from investors and bidding was therefore cancelled. Meanwhile, Cube Highways and Infrastructure emerged as the highest bidder for the third bundle, spanning a length of about 566 km, and the fourth bundle has been put on the block.
InvIT is the other model adopted for monetising operational assets such as roads and transmission lines. InvITs are slowly gaining acceptance in the country. Investors who had earlier adopted a wait-and-watch approach are more optimistic today with growing knowledge about the product as well as various encouraging regulatory changes. Till date, six InvITs have been launched and a few others are in the pipeline. Assets such as roads, gas pipelines, transmission grids, telecom towers, renewable projects, etc. are being identified for monetisation through the creation of such unit trusts. While private players have started tapping this route for deleveraging their balance sheets, the time is ripe for the government to consider doing the same for raising funds.
During 2019-20 so far, a meagre Rs 174 billion has been raised through disinvestment transactions. With only four months left for the financial year to end, achieving the Rs 1.05 trillion disinvestment target appears to be a tall task. In order to meet the daunting target by March 2020, the government has invited requests for proposal, including those for BPCL and CONCOR. However, the inclusion of proceeds from the strategic sale in BPCL in the current year’s receipts seems next to impossible as the process is complex – Numaligarh Refinery will first be carved out of BPCL before the latter’s strategic sale. Moreover, the government is treading with utmost caution with respect to the privatisation of Air India, after the failure of its first attempt. All said and done, with lower-than-expected collections from the goods and services tax and the recent cut in the corporate tax, disinvestment proceeds and asset monetisation will be key to bridging the government’s revenue shortfall.