Asset Monetisation — Execution Is The Key

Context: The success of Government’s asset monetisation programme depends on how efficiently it is executed.

About National Monetisation Pipeline

• Targeting to earn Rs 6 trillion in revenues over a four-year period.
• Government to part 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, assets will return to the Government.
• Revenue utilisation: To build more infrastructure, mainly in three sectors, roads, railways and power.
• Two important statements have been made about the asset monetisation programme - 
  • One, the focus will be on under-utilised assets. 
  • Two, monetisation will happen through public-private partnerships (PPP) and Investment Trusts.

Potential benefits of the programme

• Optimising utilisation of under-utilised assets: Private players can pay Government a lumpsum amount corresponding to the current low level of cash flow and further invest and develop assets to earn higher returns.
• Economic benefits: Higher rates of investment and improvements in the efficiency of the assets can generate higher growth prospects.
• Fair share of government’s revenue Government gets a ‘fair’ value for its assets, at the same time, can get much-needed capital for infrastructure upgradation.
• Benefits from the private player point of view: 
  • In the case of under-utilised assets, there is a significant opportunity to earn higher returns as new avenues of investment are opening up.
  • In the case of properly utilised assets, the private player simply needs to operate the assets as they are, and they can be assured of normal returns with minimum risk.

Challenges

• Limited Economic benefits: Scope for higher returns is limited, and there is no efficiency improvement.
• It is very difficult to get the valuation right over a long-term horizon, say, 30 years
• Risks and uncertainties: E.g. For a road or highway, growth in traffic would also depend on factors such as level of economic activity in the area, prices of fuel and vehicles, alternative modes of transport and their relative prices, etc., which cannot be predicted beforehand.
• Issues associated with the PPP model of monetisation: Public authority’s advantage of cheap access to capital is lost as the asset development and investment will be made by private players.
• Consumer bearing the cost: If the winning bidder pays what turns out to be a steep price for the asset, it will raise the toll price steeply.
• There is also the possibility that roads whose usage is currently free are put up for monetisation.
• Risks of imperfect competition: The scheme is based on the assumption that there will be a large number of bidders for the many assets that will be monetised. 
• Asset monetisation virtually amounts to privatisation: As by the end of life of the asset, when it is returned to the Government, its further value will be very limited.

Way forward: To ensure proper execution, there is a case for independent monitoring of the process. 

• Creating Infrastructure Investment Trusts (InvIT) to which monetisable assets be transferred –
  • InvITs are mutual fund-like vehicles in which investors can subscribe to units that give dividends.
  • InvITs offer a portfolio of assets, so investors get the benefit of diversification.
  • In the InvIT route to monetisation, the public authority continues to own rights to a significant portion of the cash flows and to operate the assets.
    • So, the issues that arise with the transfer of assets to a private party, such as incorrect valuation or an increase in price to the consumer, are less of a problem.
• Independent monitoring: Set up an Asset Monetisation Monitoring Authority to competently settle all aspects of monetisation such as valuation, impact on the price charged to the consumer, monetisation of under-utilised versus well-utilised assets, the experience across different sectors, etc.