Asset Monetisation

Progress, potential and pitfalls

While last year’s budget announced the asset monetisation programme, identified assets and established institutional structures, the budget for 2022-23 has reiterated a continued commitment to public investment in order to attract private in­vestment, and has provided the states with more fiscal space. In the process, it has mobi­lised resources through innovative models for infrastructure investment at the scale that is envisaged under the National Monetisation

Pi­pe­line (NMP).

NITI Aayog believes that for the private debt market in India to be more robust, a variety of innovative private participation models, including capital market-based structures and brownfield public-private partnership (PPP) models, should be employed. This helps tap not only long-term capital for infrastructure, but also revives the overall credit flow, which is essential for accelerating infrastructure developme­nt. As part of this, new models such as infrastructure investment trusts (InvITs) have been successfully channelising long-term capital (pension and insurance) into infrastructure.

Experience thus far

Under the NMP, the 2021-22 target was approximately Rs 880 billion, and NITI Aayog has completed transactions of an amount slightly in excess of the target (Rs 881.9 billion) under the asset monetisation programme. In terms of value, the basic tenet has been that monetising value for an entity that owns the asset is captured in the form of accruals (upfront or periodic), receipts or private investment occurring over the augmentation of brownfield assets.

Marquee investors have also participated in infrastructure through models such as InvITs, brownfield PPP concessions (toll-operate-transfer/operations-maintenance-development), aggregation of green assets under the new investment vehicles, and securitisation of cash flow-based structures.

As per NITI Aayog’s perspective and experience with the NMP, the availability of market-tested structures, and established methods of cost estimation, project preparation and performance monitoring for sectors such as roads and power have been very effective. Moreover, it is beneficial for autonomous institutions with clear delegation of authority, such as the National Highways Authority of India (NHAI) and the Airports Authority of India, to act as counterparties for monetisation projects. Moreover, sectors with clearly established tariff regimes, such as the toll policy for roads, transmission tariffs and regulatory asset base-based tariff determination in airports, have aided in providing structure to the transactions.

However, substantial effort is required in the creation of an institutional framework for monetisation through capital structures by central public sector enterprises. The evolution of the market in terms of intermediaries such as legal consultants becomes more crucial as asset monetisation advances. For states to profit from monetisation, structured engagement between them and the centre is also needed.

Potential routes

There are several assets in the oil and gas sector that can be easily monetised, such as gas pipelines of mature CGD entities and product pipelines owned by various oil public sector undertakings. Exploration of privatisation or a partnership model between the state, the centre and private entities for the sector is re­quir­ed. For this to succeed in India and be implemented by other ministries in a systema­tic ma­nner, an acceptable and uniquely Indian framework for monetisation is required.

The Canada Pension Plan Investment Bo­ard has been at the vanguard of taking ad­vantage of the NMP by investing in NHAI and the PowergridInvITs, both of which have been favourably received from a market reception perspective. One of the primary reaso­ns that these two institutions were able to clo­se this deal was that they had the internal capability to execute a transaction of this size.

Moving on to other sectors, such as railways, there is a need to build the sector’s capabilities, as historically they have not raised public funds or sold any of their assets. Therefore, capacity development is necessary. Rail infrastructure as a whole, and routes that can be monetised, has considerable promise.

As India moves toward the COP26 targets of carbon neutrality, a few of the sunrise sectors not listed in the NMP such as water, desalination, and waste management will be crucial, and will require significant development in terms of working with states. Private capital finds it extremely challenging to accept urban local government counterparties as risk; therefore, there is a need to improve their risk profile, and these sectors could experience growth similar to sectors such as roads and renewables.

Addressing challenges

The crucial issue of private sector exits needs to be addressed. It must be acknowledged that there are various types of private sector players who wish to enter and undertake risk at different times. Investors who acquire a concession or participate in a PPP model are willing to as­su­me this risk, and after stabilising and mo­­der­nising the assets, they should be allowed to bring in long-term players to take over the operations and maintenance of assets. Financing, long-term financing and refinancing must also be streamlined.

Large investors avoid taking the early risk of developing a project due to unsteady re­turns. After the initial few years, when the cash flow has stabilised, large fund houses such as Brookfield step in. Firms such as these strive for very predictable cash flows and decent utilisation of assets.

Investors in several sectors in India are discouraged due to a lack of balance between risk and reward and believe they should not bear the brunt of the risk while consumers only reap the rewards.

After an asset is monetised, the quality of its operations is one of the often overlooked yet important factors to take into account, and is also not the responsibility of only the inv­e­stors. As seen in the airport sector, once the infrastructure is monetised, the quality of the end-experience for users with those assets is also enhanced, and this aspect becomes everyone’s duty, as the infrastructure is being constructed for the larger public.

Going forward

For NMP 2022-23, the anticipated target is close to Rs 1.6 trillion, and there are proposals in various stages of processing with several mi­nistries. Even though rolling out assets sustainably is a top priority for implementation, enga­ge­ment with investors and learning from their viewpoints is even more critical. A proactive, systematic approach to engaging with the sta­tes is a significant focus area for NITI Aayog, with a particular emphasis on those with a pot­ential asset base. The NMP has already identified some of the potentially explorable asset classes at the state level.

Airports are on the anvil for the current year. The six airports, bundled with seven smaller airports, are a significant component of the pipe­line. This component is awaiting approval from the relevant authority, the Airports Authority of India. Additionally, the NMP is actively examining warehousing. A group of 200 locations in India has been identified, but the challenge lies in clustering them such that they can be tra­c­k­ed by institutional investors. Consequently, this is a sector that benefits greatly from aggregation and consolidation, which is why developing a structure is beneficial. w

Based on a panel discussion among JatinAneja, Partner, National Practice Head, ShardulAmarchandMangaldas& Co.; Deep Gupta, Managing Director, Macquarie Infrastructure and Real Assets; Alpna Jain, Senior Specialist (PPP), NITI Aayog; Pushkar Kulkarni, Managing Director Infrastructure & Sustainable Energies, CPP Investments; and Akhil Mehrotra, Managing Director and CEO, Pipeline Infrastructure Limited, at the India Infrastructure Forum 2022

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