In its Union budget in February this year, the Modi government made high-decibel pronouncements in two areas involving the private sector—disinvestment and asset monetisation. The initial results of its disinvestment push have been mixed. The sale of Air India has received interest from a few private suitors, with the bidding process slated to be completed within this fiscal year, while LIC (Life Insurance Corporation) is gearing up for a public listing of shares this year. However, the sale of PSUs (public sector units) such as BPCL (Bharat Petroleum Corporation Limited), Container Corporation of India and IDBI Bank remain in limbo. It is at this juncture that the government decided to embark on its next big drive—asset monetisation. Under this, public assets are to be leased to private firms for an upfront fee. This, the government believes, is likely an easier target to hit. It also sidesteps the opposition to privatisation that has scuppered previous attempts to generate revenue from public assets.
On August 23, Union finance minister Nirmala Sitharaman announced the launch of the Centre’s National Monetisation Pipeline (NMP). Under this, it intends to lease major infrastructure projects to private firms over the next four year for periods ranging from 15 to 30 years, and hopes to raise about Rs 6 lakh crore in the process—that’s India’s education and health budgets combined. This will allow it to fund its ambitious infrastructure plans, bridge the budget deficit and hopefully revive the private sector’s ‘animal spirits’. The Centre also hopes this will allow it to brush off criticism that it has failed to achieve its reform agenda, aimed at reviving public sector assets that have been performing far below their potential due to inefficient state management. This will also give it an opportunity to address the gaps in the earlier UPA government’s PPP (public private partnership) models, as laid out in the recommendations of the 2015 Vijay Kelkar committee.
Montek Singh Ahluwalia, former deputy chairman of the erstwhile Planning Commission, says the government should attempt both monetisation and privatisation “because we don’t know what’s best”. Privatisation is a tougher sell, because it involves giving up ownership of state assets like land; it is far easier to justify a 30-year lease. The NITI Aayog, which was tasked with the creation of the NMP, also highlights that there is a history of institutional investors and funds investing in existing infrastructure projects, such as toll roads, ports and airports, in North America, Europe and Australia. More recently, similar investments have taken place in the Asia-Pacific region as well.
Under the Centre’s asset monetisation plan, 13 sectors—including roads, railways, power transmission, aviation and ports—have been identified (see What’s on the Menu) in which assets will be leased out to the private sector. These will be given out via a competitive bidding process, with the government remaining the owner. The NMP aims to monetise about Rs 1.6 lakh crore worth of projects in roads, Rs 1.5 lakh crore in railways, Rs 45,000 crore in power transmission, Rs 40,000 crore in power generation and so on. It includes 27,000 km of roads, 25 airports and 21 million tonnes of warehousing assets, among other assets.
The government is offering only brownfield projects—those that are already up and running. “The NMP [relates only to] projects where investments have already been made, where there is a completed asset which is either languishing, is not fully monetised or is under-utilised,” Sitharaman said. “By bringing in private participation, we will be able to monetise [these] better and ensure further investment in infrastructure.” Nilesh Shah, MD of Kotak Mahindra Asset Management Company, says the NMP is a “game changer”, although he stresses that execution is crucial, saying, “one has to learn from the failures in disinvestment.”
Asset monetisation is not a new concept, having already been implemented by previous governments, and by the current one as well, in a limited way. In 2018, global financial conglomerate Macquarie won the right to operate nine stretches of roads under the NHAI (National Highways Authority of India) under a toll-operate-transfer (TOT) model, with a bid of Rs 9,681.5 crore. Last year, IRB Infrastructure Developers, which operated the Mumbai-Pune expressway for 15 years after winning toll rights in 2004, bagged the rights to collect toll for 30 years under the TOT model, paying the Maharashtra State Road Development Corporation Rs 6,500 crore. In March, the Union road transport and highways minister Nitin Gadkari said the NHAI plans to raise Rs 1 lakh crore under the TOT model over the next five years. Similarly, many airports have found success in monetising existing assets.
“The NMP is a gamechanger, but one has to learn from the failures in disinvestment”
– Nilesh Shah, MD, Kotak Mahindra Asset Management Company
Where the Modi government’s plan breaks new ground is in its scale. The identified sectors span 12 ministries and departments and include assets from 20 categories. “The monetisation plan seems to be rather ambitious, and will have to be pushed hard to be successful,” says D.K. Joshi, chief economist with Crisil. It nonetheless appears an attractive option. First, investors get to sidestep many of the financial risks of infrastructure projects, such as construction delays, while the government avoids the charge that it is selling off India’s assets. “This seems to be a more palatable solution [compared to privatisation],” says Joshi. Second, since these assets already exist, the private sector only has to manage them efficiently, while the government gets money to build more infrastructure. The government has already announced several ambitious goals, from the National Infrastructure Pipeline (NIP)—Rs 111 lakh crore of expenditure by 2024-25—to the PM Gati Shakti project, an infrastructure plan announced by PM Modi on August 15 that reportedly involves Rs 100 lakh crore of spending. “We need to see how the government [plans to] pull this off. The past experience doesn’t seem very encouraging,” says Joshi. The Centre expects to raise 14 per cent of the outlay for the NIP through asset monetisation. It is also creating a development finance institution to fund long-term infrastructure projects, with Rs 20,000 crore of initial capital.
The Centre has also earmarked Rs 5,000 crore to incentivise states to divest their stakes in PSUs. If a state fully divests its stake, the Centre will match the divestment value; if a state lists a PSU on the stock markets, the Centre will give it 50 per cent of the amount raised; if a state monetises an asset, it will receive 33 per cent of the amount raised.
There are several different models in the works for the monetisation of assets. These include the TOT model, OMT (operate-maintain-transfer) concessions and infrastructure/ real estate investment trusts. The NITI Aayog says the model used will depend on the asset, the target investors, the scope of the project and the extent of risk-sharing. The plan will be implemented with structured partnerships under defined contractual frameworks, with clear performance standards. The implementation roadmap laid out by the NITI Aayog includes yearly targets for ministries, the on-boarding of advisors and the streamlining of approvals through ‘alternative/ empowered’ mechanisms.
A senior executive with an investment firm keenly interested in the NMP programme says there is a lot of interest in roads and railways projects. Roads, railways and power together make up about 65 per cent of the total NMP; how the programme progresses in these three sectors is likely to set the trend for other sectors as well. While there is some understanding of how things are likely to work out when it comes to airports and roads, railways is a fairly new animal. There are also questions on how profit-seeking will be balanced against the public good.
“A major question is how much appetite there is for such assets,” says Madan Sabnavis, chief economist with Care Ratings. “Moreover, in cases where the asset is owned by a PSU, the revenue goes to the PSU, not the government.” Nonetheless, some say the move is conceptually exciting. They point to the massive funding available in the IPO (initial public offering) market, and say investors like insurance companies and pension funds are looking for long-term investments that give them steady annual returns. Another reason for hope is the massive funding currently available in global financing markets. Former minister of state for finance Jayant Sinha points out that there is currently an $18 trillion glut in global financing markets. In this scenario, Indian corporates have the option of taking this funding onto their books as debt and deploying it into low-risk NMP projects. “There is no dearth of liquidity in the market,” says a top official at the RBI (Reserve Bank of India). “All financial institutions want viable projects; the NMP will provide these.”
To the ruling BJP’s relief, its asset monetisation plans have found support from its ideological parent, the RSS (Rashtriya Swayamsevak Sangh). Many in the RSS-affiliated Swadeshi Jagran Manch (SJM) say the government must ensure that the asset monetisation process is transparent, fair, and the correct valuation is achieved. The SJM had opposed privatisation bids during both the Atal Bihari Vajpayee regime and Modi 1.0. Top RSS leaders explain they are not opposed to private capital in the public sector—their opposition is to the strategic sale of public sector enterprises. “That stand continues,” says a leader. Ashwani Mahajan, national co-convenor of the SJM, says private sector firms should be welcomed if they are looking to invest in public assets but that strategic sales are “a bad proposition both politically and business-wise”.
“By bringing in private participation, we will be able to monetise assets better and ensure further investment in infrastructure building”
– Nirmala Sitharaman, Union finance minister
India’s infrastructure deficit—from congested roads and ports and slow train services to inadequate hospitals—heavily constrains economic growth and job creation. Low productivity, poor competitiveness, high costs and the slow pace of urbanisation are some of the consequences, says the Kelkar committee report. This is where teaming up with the private sector becomes crucial. However, India’s record when it comes to the public and private sectors working together is mixed at best.
The PPP model emerged as a favoured model for development in the first decade of the 21st century. In India, there was a surge in the number of infrastructure projects implemented through PPPs during its 11th Five Year Plan. However, many were plagued by delays in land acquisition and clearances, as well as inadequate due diligence that led to several loans becoming non-performing assets. Projects approved by one government were cancelled by the next. Basic infrastructure was not provided. In ports, for instance, the Adani Group built its own railway line to service its ports, but other developers didn’t have the capacity to do so. Infrastructure companies like GMR and GVK have gone bankrupt for reasons including not being able to hike airport fees, acquire land and so on. But analysts say that this time, the risks are considerably reduced. “In infrastructure monetisation, which is largely what the NMP is all about, there are three types of risks—development risks, construction risks and operating risks,” explains Vinayak Chatterjee, chairman of Feedback Infra. “A favourite among investors now is acquiring the operations of brownfield assets, because it eliminates the first two links in the risk chain.”
Along with the disaster stories of the PPP era are the successes, like that of Taj Mansingh Hotel in New Delhi, which the Tata Group built into a hospitality icon over the decades, winning its lease back in 2018 in a competitive bidding round after its original lease ended. (Critics, however, cite this as a case in which a once-public asset has become near-private.) Another is of Wall Street major Blackstone, which says India is its most profitable market in terms of returns—its seed investments of $25 billion are now worth over $50 billion. These include two real estate investment trusts that own, operate or finance income-generating real estate, making it the largest owner of office real estate and a leading player in the retail and logistics space.
However, as the success of the NMP lies in its implementation, there are significant challenges to be overcome.
This is a critical issue. How does one arrive at the actual worth of a project? Should it be valued at its current worth, or its potential future worth? Moreover, since infrastructure projects take several years to become profitable, there needs to be flexibility in the longevity of asset monetisation contracts to make such projects attractive to investors. The NITI Aayog has proposed a number of ways to value projects (see Pricing the Assets). The manner in which these contracts are structured will also determine the value—for instance, the government could make investment in stadiums more attractive by allowing them to be used for congregations other than sporting events. There also needs to be clarity on whether there will be an independent regulator—the last thing an investor needs is a ‘command and control’ environment or an overnight change in the policy environment. The entire mechanism has to be transparent and visibly remunerative.
The government has repeatedly failed to hit its targets in a related effort—disinvestment. Between 2014-15 and 2020-21, the Modi government aimed at raising Rs 6.57 lakh crore through this process, but managed Rs 4.04 lakh crore, about 60 per cent of that. In 2020-21, while the Centre hoped to raise Rs 2.1 lakh crore, it managed only Rs 21,000 crore, despite the stock markets being buoyant for much of the latter part of the fiscal. For 2021-22, the Centre has targeted raising Rs 1.75 lakh crore from PSU disinvestment and asset monetisation, but hardly any assets have been privatised yet. The divestment of firms such as BPCL, Air India, Shipping Corporation of India and Container Corporation of India are yet to fructify. The government also proposed privatising two public sector banks and one general insurance company in 2021-22, but progress has been slow so far. Given this history, there are concerns that asset monetisation could end up the same way.
Many worry that asset monetisation could create monopolies, leading to cronyism. The fact that most recent airport auctions were won by a single operator—the Adani Group—has only strengthened this argument. (The Adani Group is the single largest operator of airports in India, managing seven.) However, Amitabh Kant, CEO of the NITI Aayog, says the NMP process will be transparent. “All this is subject to a transparent competitive bidding process,” he says. Chatterjee is of the view that if there are worries about transparency and fair play, they should be examined by regulators such as the Competition Commission of India. Clauses can be built into contracts to prevent monopolies. For instance, if six projects in a given sector are to be monetised, a clause could be inserted to ban a single bidder from winning the rights to more than one or two projects.
Predictability and due diligence
“Broadly, I am in support of the philosophy of releasing government assets to the private sector,” says Prof. N.R. Bhanumurthy, vice chancellor of the Dr B.R. Ambedkar School of Economics University in Bengaluru. “The NMP will address the efficiency issue which the public sector failed vis-a-vis the private sector.” Lessons need to be learned from the recent effort to privatise train routes on the Indian railway network. Although there were at first a dozen contenders, only two submitted bids—the absence of a regulator, the payment of haulage (transportation) charges in addition to revenue-sharing and curbs on route flexibility were some reasons that kept bidders away.
Cutting red tape
Asset values can be eroded if investors are forced to spend years getting necessary clearances. Assets might also need to be broken up to attract interest—an investment banker says the divestment of BPCL has been slow because investors who might only be interested in the firm’s refinery business could be unwilling to take on the company’s massive real estate assets. Dispute resolution mechanisms could be another challenge—India has a lot of work to do in contract enforcement. Similarly, tariffs are regulated in the power sector, which could dampen investor interest. Shah suggests setting up a company like the Singapore-headquartered Temasek Holdings to manage the NMP. Others say India will require huge intellectual capital for the NMP to succeed, due to the scale of the effort. Former finance minister Arun Jaitley, in his July 2014 budget, had announced the setting up of a PPP think-tank—3P India—with a corpus of Rs 500 crore. This has yet to happen.
“Asset monetisation will have a multiplier effect on growth and employment”
– Amitabh Kant, CEO, Niti Aayog
Another concern relates to ensuring that the assets that are returned to the government are as valuable as when they are leased out. “When the finance minister says we are owners and the assets will be returned to us, what asset is she talking about and in what form? It will be completely depreciated,” former Union minister and Congress leader P. Chidambaram said in an interview. He has proposed that depreciation of assets go into depreciation reserves, used to keep the asset in good shape.
Narrow view of public assets
Vikram Singh Mehta, former chairman of Shell India, says he is concerned that the NMP model looks at public utility assets through a narrow lens—finance—which underrates their potential contribution to public welfare. According to the NITI Aayog, what determines whether a public asset is a candidate for monetisation is whether it is active and revenue-generating with potential for improved utilisation—if so, it can be considered for monetisation. ‘My concern is that the model seemingly absolves the government of the responsibility of unlocking the intrinsic social value of these assets,’ Mehta wrote in a media article on September 6. However, Kant says the Centre has set up a PPP cell with advisors from the private sector who are working with the government to execute the NMP. Projects will be closely monitored, with yearly targets, he adds. This is also expected to balance the government’s monetisation goals with its welfare targets.
Overall, the asset monetisation plan is a giant call by the Centre to reach out to the private sector. If well executed, this could have a multiplier effect on the Indian economy. Given the circumstances that the government is in today, it has few other options left, making success in this effort crucial.
—with Anilesh S. Mahajan