The announcement to synergise projects under a single masterplan to lower logistics cost, and promote last-mile connectivity under the PM Gati Shakti Plan has garnered support from all quarters. On October 25, Finance Minister Nirmala Sitharaman asked the civil aviation ministry to ‘substantially’ enhance its capital expenditure for FY23. A larger plan to transform the face of Indian infrastructure is underway, and asset monetisation is a re-imagined approach to attain the same.
Let’s look at the need for asset monetisation, the potential risks involved, and some lessons from other countries.
Need For Asset Monetisation
A well thought-out plan for asset monetisation is imperative to ramp up India’s infrastructure, which requires long-term capital that banks are normally not keen to finance. Mere monetisation, however, entails the fear of unwise allocation of funds.
A clear strategy for asset recycling under the National Monetisation Pipeline (NMP) will ally these fears. Given that long-term concession schemes, with regard to core assets that mobilise quick funds, have seen success in the past (National Highways Authority of India), the need to systematically adopt this across varied asset classes in a streamlined fashion has been felt.
Finally, the sales from fixed assets of the Central Public Sector Enterprises (CPSEs) have been on the decline. However, given that the CPSEs have gross fixed assets valued at Rs 14.4 trillion in toto, there is a lot of unmet potential.
Concerns, And Likely Solutions
Projects of such colossal proportions, and wide-ranging impact, are seldom bereft of complexities and trepidations. Take the case of Air India, or Bharat Petroleum Corporation Limited. Attracting private investors here has not been easy. But if the pricing of assets and terms of sale are made attractive for private investors, their reluctance can be dissipated.
In fact, the very design of the NMP counterweighs the risk of low-key response by including projects that do not have land acquisition, financing, and other compliances pending. The strategy outlined by the Niti Aayog identifies assets that currently generate revenue, or can be augmented for future operations as core assets for monetisation. Internal capabilities under the Niti Aayog’s private partnership vertical to execute model concession agreements for risk sharing and transaction advisers for a case-to-case assessment are additional buffers in the plan.
Asset-specific challenges such as inefficiencies in the existing infrastructure, and undetermined revenue stream have continued to haunt the prospects of effective private partnership. The NMP circumvents this by leasing out only operational assets.
If there exist inefficiencies in the asset, a low private interest would be a good enough indicator for appropriate State response. Further, institutional mechanisms for contract re-negotiations in case of changing ground realities or inaccuracies in usage predictions will help the private sector offset losses, if incurred.
The presence of multiple stakeholders such as public sector, line ministries, funders, private players, users, etc. makes an effective monetisation transaction structure a herculean task. But a well-defined transaction mechanism can avert disputes at a later stage.
There is also the fear of an increased pressure on users if charges are imposed by private players. Conversely, prior written understanding, and a well-functioning regulatory mechanism can help mitigate this risk. Furthermore, government efforts towards fostering greater competition will ensure cost efficiency.
Lessons From Other Countries
The increasing share of private participation in infrastructure projects in India over the years point towards an increasing maturity, and readiness among the private sector to take up complex, large, and socially-impactful projects. Provided the limited budgetary bandwidth of the State, the role of private players is slated to increase as the user demand for public assets surge in the growing economy.
The rationale behind the plans for the NMP is well-founded, but implementation would be key here.
The Asset Recycling Initiative in Australia, for instance, performed well because of a strong interface between the State and the private sector, and sufficient public acceptance of privatised service provision. A value-for-money test that includes social feasibility assessment, private party fit, and alternative plan assessment, undertaken by (say) South Korea could be adopted by India too. Another strategy followed by Seoul entails bundling of projects to appropriate size so as to provide prospects for scalable returns.
Under Indonesia’s Limited Concession Scheme, the infrastructure to be qualified is mandated to have been in operation for at least two years with a remaining life of 10 years. Categorical definitions, stipulated project requirements, and adherence to robust financial planning are thus some lessons for efficient planning, and effective implementation of this grand project.
Source : Money Control
