Even though the widely validated concept of asset monetisation has piqued interest, it has not been all smooth sailing in terms of real progress. In the first two years, the overall experience has been moderately positive, with room for further growth. The policy think tank NITI Aayog, along with various ministries, has made some progress across different sectors.
The road sector, in particular, has exhibited encouraging performance. Interestingly, the coal and mining industry has also performed well. The railway sector holds great potential; however, its progress under the monetisation programme has been sluggish. For over a year, a bundle of airports has been slated for monetisation. However, there has been no advancement in these plans. Regardless of the impact of Covid-19 on the sector, it is imperative for the government to proceed with this monetisation plan. The oil and gas sector holds promise for the future monetisation of a wide range of assets, including oil and gas pipelines, government owned-city gas distribution companies, and terminals.
Defining roles
Government entities in India are more adept than the private sector at managing the risks associated with infrastructure creation. Additionally, they possess the ability to procure funds at more favourable interest rates. However, once a project is completed, it is ideal to monetise it so that government resources can be replenished and fresh infrastructure can be built. The field of power generation stands as the sole exception, where private companies have demonstrated notable success in terms of creating infrastructure.
Pension funds and private companies exhibit superior capabilities to hold and maintain infrastructure assets in the long run. The Delhi and Mumbai airports, which now generate a minimum of Rs 30 billion annually for the Airports Authority of India (AAI), are significant examples. These assets did not yield as much revenue under AAI management. Under the revenue share model, the money generated now is allocated towards the construction of new airports.
As per industry experts, it is crucial to establish a core team within NITI Aayog, or separately, that can effectively communicate with various ministries for asset management. With the exception of road assets, it is more practical for private entities to oversee and manage public-facing infrastructure.
In addition to this, as infrastructure is a capital-intensive business, private sector capital also requires replenishing. The attraction of monetisation, for the private sector, is the promise of a steady cash flow from prized assets. Hence, in addition to domestic and international pension funds, and insurance companies, holding these assets, it will be advantageous for retail investors and high net worth individuals (HNIs) to increase their presence in this area.
InvIT success
Given the overarching monetisation targets, it is essential for the government to explore multiple modes of monetisation. Typically, the infrastructure sector utilises financing vehicles such as infrastructure investment trusts (InvITs), real estate investment trusts, and public-private partnership (PPP) concession agreements. InvITs are still at a nascent stage, considering that numerous domestic pension funds, provident funds and insurance companies are still in the process of grasping this concept. Regardless, these pooled investment vehicles have been identified as a viable choice that effectively aligns across sectors. Additionally, InvITs have already seen success in sectors such as roads, ports and transmission.
Set up by the National Highways Authority of India (NHAI), the NHAI InvIT was privately placed in 2020 and currently has an overall investor base of around 150 investors. The road sector InvIT has seen the successful closure of two rounds of asset acquisition from NHAI. In November 2021, under the first round, the InvIT mobilised around Rs 80 billion. It subsequently mobilised around Rs 40 billion almost a year later, in the second round.
Being the parent body, NHAI holds approximately 15 per cent stake in the InvIT. As per regulations, the remaining is apportioned between domestic and international investors, comprising pension funds, insurance companies, provident funds, banks, mutual funds and HNIs from the secondary market.
Investors primarily prioritise the underlying governance mechanism and its potential impact on asset management. For instance, the involvement of a credible organisation such as the NHAI in its InvIT provides a sense of security for investors. Furthermore, the authority has established a governance framework, comprising a designated board of directors and documented policies, to oversee asset management. Additionally, the project management company for the operations and maintenance of these assets is a wholly owned subsidiary of the authority itself.
Recommended reforms
India presents numerous opportunities owing to its reputation as the fastest growing economy. Due to this, more investments are likely to come in. But there is a need for greater stability with regard to infrastructure policy. For instance, more clarity regarding the taxation of income from business trusts is required. Additionally, the task of attracting non-institutional investors poses a significant challenge. Besides, numerous insurance companies and mutual funds have two distinct arms – debt and equity. Due to this, there is ambiguity surrounding the classification of InvITs, which needs to be addressed.
Being a regulated model, InvITs can be implemented faster. PPP concession agreements, on the other hand, are inherently arduous, considering every sector has its own nuances. Yet, there is consistent and considerable interest among investors in acquiring assets through this route. Sectors such as railways and airports are also more likely to rely on concession agreements. In order to accommodate this preference, the government must expedite contract-based monetisation of assets.
The underlying concession framework for the road sector has proven to be effective in generating considerable interest. As a result of frequent modifications, investors, concessionaires, regulators, rating agencies and lenders possess a comprehensive understanding of the constraints, enabling them to make informed decisions. Replicating this model across other sectors will expedite the move towards asset monetisation.
The oil and gas sector has great potential for growth and improvement. In order to ensure sector success, NITI Aayog should fast-track the monetisation of the already proposed pipelines under the National Monetisation Pipeline (NMP), while also recommending additional assets. Additionally, the think tank should identify potential assets for disinvestment.
While the NHAI InvIT and the Powergrid InvIT have successfully raised funds domestically, there exists potential for greater foreign capital influx from countries such as the US and Canada, provided the timing is opportune. This would be suitable for India, as a diverse category of investors can coexist within the infrastructure realm.
Railway stations and passenger trains offer significant opportunities. Many stations are strategically situated and hold the potential for monetisation. As the largest land bank holder in India, the sector comes with exceptional potential for land monetisation. However, the regulator, the concessioning authority and the operator for this sector is the same entity. As a result of this centralised regulatory supervision, monetisation is challenging. To remedy this sector-specific issue, passenger trains could either be made subject to rigorous service standards, or a distinct regulatory body could be established.
The process of land monetisation is currently being implemented in railway colonies, wherein real estate or infrastructure companies engage in the construction of multi-storey buildings and improved amenities for railway employees. The airport sector presents a similar but comparatively less compelling opportunity, where approximately 5 to 10 per cent of land can be monetised, given that the remaining land is reserved for airports.
Based on a panel discussion among Jatin Aneja, Partner, National Practice Head, Projects and Infrastructure, Shardul Amarchand and Mangaldas; Anurag Jain, Chief Investment Officer, National Highways Infra Investment Managers; and Akhil Mehrotra, MD and CEO, Pipeline Infrastructure Limited, at India Infrastructure Forum 2023
