Asset Monetization: 8 key myths debunked
Vineeta Hariharan, a renowned Public Policy expert, demystifies the National Monetization Pipeline which unlocks the value of investments in public sector assets by tapping private sector capital and efficiencies.
The Government of India has embarked on a bold, decisive and much-needed initiative of monetization of assets and to create a National Monetization Pipeline. This essentially entails unlocking the value of investments in public sector assets by tapping private sector capital and efficiencies.
The government estimates generation of nearly Rs 6 lakh crore of revenue to be through this innovative public finance route, thus contributing substantively to the economy, which is reeling under the aftershocks of the pandemic.
However, undue scepticism from naysayers has given rise to several myths around this. This article attempts to allay some of the fears and debunk some of these myths.
Myth 1: The government is selling all its assets to the private sector.
The NMP clearly envisages the transfer of revenue rights for a fixed term and does not include the transfer of full ownership. The modes of transfer would be clearly delineated through well-structured contractual agreements.
Myth 2: There is no distinction between core and non-core assets and there are no clear identified sectors that are out of the purview of NMP.
Infrastructure assets such as transport (roads, rail, ports, airports), power generation, transmission networks, pipelines, warehouses etc. are considered as core assets that would be included in the monetization pipeline.
The other assets, which generally include land parcels and buildings, are categorized as non-core assets and will not be included in the NMP.
Myth 3: There is no clarity on the models of monetization
There are two models being adopted (i) the Direct contractual approach and (ii) Structured financing models. In the first model, the asset is transferred to a single or a consortium of developers through defined contractual agreements with payments made either upfront or periodically. The investors would primarily be infrastructure developers selected through a transparent bidding process.
There would be clearly defined KPIs and performance contracts designed to ensure implementation and monitoring. This model is for brownfield assets and the types of engagement include Public-Private partnership models such as Operate Maintain Transfer (OMT) and Operate Maintain Develop (OMD).
In the second model, rights over assets are given to a pool of investors such as sovereign wealth funds, domestic insurance funds, retail investors etc with upfront considerations given to the government.
Myth 4: NMP sole objective is to raise revenue over a four year period.
The aim of asset monetization leading to the creation of the NMP is to unlock "idle" capital to be reinvested in other assets or projects that deliver improved or additional benefits. Through well-structured asset monetization routes, public assets can be leveraged for tapping private capital, thus helping the public sector authorities to de-burden their balance sheets towards greenfield
The revenue generated through this route would contribute towards the government’s welfare spending on the social sector and other competing public priorities.
Further, asset monetization comprises only about 5% of the funding towards India's National Infrastructure Pipeline (NIP) of Rs 111 lakh crore to be created over the five-year period (FY 2020-25). The remaining is to be generated through traditional sources of capital, such as budgetary resources, bond markets, banks, NBFCs, private developers, external aid, multilateral and bilateral agencies.
Myth 5: The criteria for the selection of the assets for monetization have not been clearly defined
Niti Ayog, mandated to develop the National Monetization Pipeline is undertaking this through a scientific and studied process and has released a monetization guidebook, comprising two volumes viz. Volume (i) Guidance book for Asset Monetization and Volume (ii) Medium-term road map with the pipeline of assets included.
The selection of assets has been carried out based on the assessment of various factors such as visible revenue streams, commercial potential, utilization levels, investor appetite, ability to tap private sector efficiencies in operations and maintenance, policy focus to tap institutional investment in the sector etc.
The guidebook gives the detailed methodology and rationale for the selection of these assets.
Myth 6: The value of the asset that would be handed over back to the government would be highly depreciated.
The indicative monetization value of the assets is estimated based on various methods. Of this, an important method is the CAPEX approach, which is based on the principle that in the absence of the asset monetization transaction, the Public Asset Owner would have to incur the outlay towards augmentation and Operation and Maintenance (O&M) of the brownfield asset. Hence, in addition to the savings on O&M and augmentation to the public asset owner by undertaking the asset monetization transaction, revenue streams would also accrue to the Government based on the sharing agreement with the private entity.
The other approaches for estimating the monetization value are (i) market approach, based on market price discovery of the assets (ii) book value approach, based on the average CAPEX cost incurred to construct a similar asset adjusted for the life of the asset (iii) enterprise value approach, where the Net Present Value (NPV) of discounted cash-flows is worked out to determine indicative monetization value.
Different approaches are applied for different assets based on the sectors covered.
All of these approaches, however, ensure fair monetization value to the government, taking into account the life of the asset. In all these approaches, the onus of operation and maintenance of the asset would be with the private entity which would maintain the quality of the asset and invest in the augmentation of the asset, in a much more efficient manner deploying state of the art technologies, under the supervision of the public entity. Hence, the asset being handed over back would be well maintained and in better quality than it would have been if left to the public entity.
Myth 7: The monetization would be done to favour a few monopolies.
The bidding process followed for the monetization route would be open and transparent bidding following the government's General Financial Rules for procurement. In general, the government has also made its stand clear on competition laws and curbing of monopolistic practices, which is clearly reflected in the latest e-commerce rules brought out by the Ministry of Consumer Affairs.
Myth 8: There were no stakeholder consultations done on the NMP
The NMP is a result of cumulative efforts of the Government over the last six months to elicit insights, feedback and experiences, through consultations with the concerned line ministries and departments, multi-stakeholder consultations and a series of one-to-one consultations with prominent global investors.
The author is a principal policy architect and leading the Government of India's missions in the rural, urban and MSME space.