The Government of India is strongly focused on increasing investment in infrastructure development in the country. Towards this end, the National Infrastructure Pipeline (NIP) envisages an infrastructure investment of Rs 111 trillion over a five-year period from financial year 2020 to 2025. The power sector is expected to account for about 12.6 per cent of this investment with the central, state and private sectors, lining up a capex of about Rs 14 trillion from 2020 to 2025.
For funding the NIP, the government is fundamentally considering three main sources – budgetary, private and extrabudgetary – besides innovative and alternative financing sources. As per the NIP’s task force report, about 18-20 per cent financing needs are expected to be met through the centre’s budgetary resources and 24-26 per cent through states’ budgetary resources. Another 40 per cent is proposed to be raised through extrabudgetary resources/private sector investment and about 15-17 per cent of the outlay is to be met through innovative and alternative initiatives, wherein asset monetisation has been suggested as a tool to monetise operational assets at both the central and state levels.
In this way, the government has decided to monetise core infrastructure assets in sectors such as roads, power, telecom, ports, warehousing, mining, aviation and railways from financial year 2021-22 to 2024-25 under the National Monetisation Pipeline (NMP), which was announced in the Union Budget 2021-22. In August 2021, NITI Aayog, which was tasked with the creation of the NMP for brownfield core infrastructure assets, came out with a report on the subject, detailing the procedure as well as the asset pipeline for various sectors. As per the report, asset monetisation would essentially entail a limited period licence/ lease of an asset, owned by the government or a public authority, to a private sector entity for an upfront or periodic consideration. As per the report, the aggregate asset pipeline over financial years 2022-25 under the NMP is indicatively valued at Rs 6 trillion. The top five sectors (by estimated value) account for nearly 83 per cent of the aggregate pipeline value. These are roads (27 per cent), railways (25 per cent), power (15 per cent) (with power transmission having a share of 8 per cent and generation of 7 per cent), oil and gas pipelines (8 per cent), and telecom (6 per cent).
Key findings for the generation and transmission segments from the report…
As of March 31, 2021, the transmission asset base in terms of the network length in India, was 441,821 ckt. km, growing at a healthy compound annual growth rate of 5-7 per cent since 2015. The shares of the centre, states and private sector in the overall length of the transmission lines were 38 per cent, 54 per cent and 8 per cent respectively.
The government intends to monetise transmission lines belonging to the central government-owned Power Grid Corporation of India Limited (Powergrid), which owns and operates 168,140 ckt. km of transmission lines as well as 252 substations, with an aggregate transformation capacity of 419,815 MVA, of which 90 per cent is over 400 kV. The report recommends monetisation of Powergrid’s transmission assets worth Rs 452 billion by selling 28,608 ckt. km of transmission lines on a staggered basis. The assets are expected to be monetised using two approaches – the infrastructure investment trust (InvIT) and the toll-operate-transfer (ToT) model.
During financial year 2021-22, transmission assets with an indicative value of Rs 77 billion will be monetised. The assets selected for monetisation include Powergrid’s InvIT issue transaction, which was concluded in the first quarter of the year. An aggregate length of 23,734 ckt. km has been considered for monetisation in financial years 2023, 2024 and 2025.
For Powergrid’s cost-plus assets under the regulated tariff mechanism (RTM), the ToT model is likely to be adopted. These assets are tariff contracts, where tariffs are set on the basis of regulated return on equity invested, which is re-examined every five years. Typically, such assets are housed in the parent entity’s balance sheet and not under separate special purpose vehicles and therefore, transferring them to another entity will necessitate a scheme of arrangement/demerger process. A scheme of demerger process will entail expenditure on many transaction overheads such as continuation of tax holiday on assets, capital gains tax, stamp duty, etc., due to asset transfer. Therefore, it is probable that these assets will be monetised using the ToT model, where assets are split from the parent entity and demerged into an individual entity. These entities are then responsible for their own operation, revenue, profit and expansion, without any external intervention. The government can also choose to lease these demerged entities to concessionaires for a specified period of time, wherein the concessionaire will pay upfront to acquire tariff rights from these transmission assets, while also assuming the operational and maintenance cost.
Cost-plus RTM assets account for 95 per cent of the assets by value and, therefore, will account for Rs 429 billion of the total assets that are in contention for monetisation. Monetising these RTM assets will liberate the government and Powergrid from concerns relating to their maintenance and repair, providing access to a lot of cash.
The government plans to monetise 6 GW of power generation assets for Rs 398.32 billion. Hydroelectric power plants (HEPs) will comprise 3.5 GW of assets to be monetised and renewable energy will comprise the rest of the assets. The value of generation assets will account for 7 per cent of the total assets expected to be monetised under this programme. The generation asset base considered for monetisation constitutes a share of about 6 per cent of the total generation capacity under central public sector undertakings (PSUs). Key entities whose assets have been considered are NHPC Limited, NTPC Limited and SJVN Limited, which own the bulk of the hydel assets as well as certain renewable assets of NTPC and the Neyveli Lignite Corporation.
The monetisation of the power generation assets is expected to garner investor attention because of various steps taken by the government to reform the weakest link in the power sector – distribution. Some initiatives include liquidity support worth Rs 1.3 trillion for discoms through the Power Finance Cor-poration and the Rural Electrification Corporation, directive to all regulatory bodies to ensure cost-reflective tariffs and measures to ensure sanctity of contracts. Additionally, all assets that are targeted for monetisation are renewable and therefore eligible for environmental, social and governance (ESG) investment. Monetisation of coal and gas assets has not been considered during the NMP period as the interest of global investors in these assets is limited by the strict ESG guidelines under which they operate and the uncertain long-term potential of the assets.
Hydro assets have been chosen for monetisation as they are more amenable to it, as the offered flexibility in operations and their renewable nature renders them eligible for meeting renewable purchase obligations for states. Further, hydro assets operating under a regulated tariff regime provide a degree of predictability to investors on the return on their invested capital.
The government plans to monetise around 25 per cent of the targeted generation assets, that is, 1,488 MW of assets in 2021-22 and 2022-23. The rest of the assets will be phased out in 2023-24 and 2024-25. The book value approach has been adopted to determine an indicative value of the above-mentioned assets, varying based on the vintage value of the asset. The average realisation value for HEPs has been tentatively considered as Rs 75 million per MW and the average realisation value for solar assets has been tentatively considered as Rs 55 million per MW. The product of assets considered for monetisation (in MW) and the above-mentioned book value of assets are used to compute the annual indicative monetisation value for assets in each subsector, such as solar, HEPs and wind power plants
The policy of monetising generation and transmission assets will provide the government much-needed access to capital over the medium term, which, in turn, will be reinvested to develop and widen its asset base in the power and other infrastructure sectors. The NMP, pioneered by the government, is a pragmatic strategy to amass capital and provides an opportunity to PSUs to avail of the benefits of new financial instruments for tapping capital from private sector investors. The process will help PSUs in easing fiscal constraints and freeing up balance sheets for more greenfield infrastructure creation and deployment of financial resources towards the social sector and other competing public priorities.