Asset monetisation — execution is the key

Relevance: Mobilization of resources

Synopsis: Challenges in implementing the National Monetisation Pipeline Project and suggestions for better implementation.

Background

• Read more: National Monetisation pipeline (NMP) project – Explained

Privatisation vs Monetisation

• Privatisation takes the government out of a business, whereas Monetisation keeps the government in there as an active player.
• In asset monetisation, the Government parts with its assets such as roads, coal mines for a specified period of time in exchange for a lump sum payment. At the end of the period, the assets return to the Government. Unlike in privatisation, no sale of government assets is involved.

Rationale behind Asset Monetization

While the Government gets a ‘fair’ value for its assets. The private player gets its return on investment. The economy benefits from an increase in efficiency.

Issues and Challenges

• Cronyism: Given the record of past blunders and under-achievements and the vulnerabilities of India’s eroded institutions, the infrastructure asset monetization programme might end up as another scandal. Similar to the infamous auction of telecom licences and coal mines
• Correct valuation of assets is very difficult: It is very difficult to get the valuation right over a long-term horizon, such as 30 years. For instance, for a road or highway, growth in traffic would also depend on factors other than the growth of the economy such as the level of economic activity in the area, the prices of fuel and vehicles, alternative modes of transport and their relative prices, etc.
  • If the rate of growth of traffic turns out to be higher than assessed by the Government in valuing the asset, the private operator will reap windfall gains.
  • Alternatively, if the winning bidder pays what turns out to be a steep price for the asset, it will raise the toll price steeply. The consumer ends up bearing the cost.
• Monetisation will eventually end up as Privatisation: There is no incentive for the private player to invest in the asset towards the end of the tenure of monetisation. The life of the asset, when it is returned to the Government, may not be long. In that event, asset monetisation virtually amounts to sale. Monetisation through the PPP route is thus riddled with problems.
• Cost of Capital: The cost of capital for a private player is higher than for a public authority. A public authority needs less equity capital and can access debt more cheaply than a private player. The higher cost of capital for the private player could neutralize the benefit of any reduction in operating costs.

Suggestions

• Co-ordination among financial sector regulators (RBI, SEBI, IRDA and PFRDA) is important as the assets that are to be monetised are listed across sectors.
• There is a need to expand the investor base and scale of monetisation instruments like InvITs and Real Estate Investment Trusts (REITs).
• Existing investment guidelines for insurance and pension funds have varying restrictions on investing in InvIT/ REIT and these needs to be streamlined.
• Restrictions pertaining to investments in the overall corporate bond market also needs to streamlined. Such norms limit the investor class participation thereby constraining the pool of liquidity available.
• Monetisation through InvITs: Utilising InvITs is likely to prove less of a problem than the PPP route. Because, In the InvIT route to monetisation, the public authority continues to own the rights to a significant portion of the cash flows and to operate the assets. So, the issues that arise with transfer of assets to a private party such as incorrect valuation or an increase in price to the consumer are less of a problem.
• The Government should set up an Asset Monetisation Monitoring Authority staffed by competent professionals. The authority must evaluate all aspects of monetisation such as valuation, the impact on price charged to the consumer, monetisation of under-utilized versus well-utilised assets, the experience across different sectors, etc.