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ASSET MONETISATION: WILL IT TAKE OFF?

YB WEB DESK. Dated: 9/22/2021 7:24:34 AM

UTTAM GUPTA In her maiden budget presented to Parliament on in 2019, Finance Minister Nirmala Sitharaman laid a roadmap for catapulting the Indian economy to $5 trillion by 2024-25, its most crucial component being investment in infrastructure to the tune of a mammoth Rs 100,00,000 crore ($1.4 trillion) over a period of five years. Thirty-nine per cent each of this amount was to come from the Centre and States and the balance from the private sector. The Centre’s contribution works out to around Rs 40,00,000 crore over five years or Rs 800,000 crore per annum. Against this, the revised estimate (RE) for capital expenditure during 2020-21 was Rs 439,000 crore. Even assuming that all of this was on building infrastructure, it is just about half of what was required. For 2021-22, the Budget allocation is Rs 5,54,000 crore or 70 per cent of what is required. This is when the Modi Government kept a generous fiscal deficit (FD) target for these years. From 2022-23 onward, it is committed to return to fiscal discipline aiming to reach 4.5 per cent in 2024-25.That means it will not be able to sustain even the capital spending of 2020-21 or 2021-22. The mandarin in finance ministry are well aware of this. So, they are looking for alternative ways. One of these is monetization of public assets — both greenfield projects as well as brownfield in areas such as roads, highways, railways, ports, power transmission lines, gas pipelines and so on. It involves ‘transfer of revenue rights to a private player for a specified period of time say up to 20 years or more in lieu of an upfront (or periodic) payment defined by a ‘concession/contractual framework’. This way, the Government intends to unlock value and leverage the proceeds from sale of ‘revenue rights’ for investing in new projects. It intends to garner over Rs 600,000 crore from this exercise. Prima facie, this looks great as with this much money in hand and assuming debt-equity ratio of 4:1 (a jargon for borrowing Rs 4 for every one rupee of a person’s own money), it can arrange for funding worth Rs 24,00,000 crore. If the Government can rope in a private partner contributing an equal amount under a joint venture (JV), projects worth Rs 4800,000 crore can be executed. Since the arrangement only involves selling of the ‘revenue rights’ and ownership of the asset continues to be with Government, it cannot be dubbed as privatization per se. So, it also escapes any criticism that invariably goes with the mere whisper of any move to sell public assets lock, stock and barrel. But, chartering the course - as delineated above-is easier said than done.Let us face some harsh realities. A private firm interested to take an asset say,a road under the proposed model would like to ensure that it gets a reasonable return on the capital he gives to the Government upfront. To get there, it will conduct due diligence to fully satisfy itself about the quality of the asset and its capability to generate a good income (revenue minus expenses) stream during the contract term; enjoy full flexibility in operating the asset that would include inter alia fixing charges for the services rendered by it — free from any outside interference. The second point can be a bone of contention. When the Government or its agency runs a public utility, it is prone to offering the services at subsidized rates; for instance, fixing passenger fare in case of railways or toll tax (expressway) or power tariff at below the cost of making these available. It also involves offering services on routes which are not lucrative. The underrecovery arising there from is normally paid from the budget. The unpaid amount if any, remains on the balance sheet of the agency to be eventually cleared as and when funds are released from the exchequer. When the asset is transferred to a private operator, he would like to take it free from any of these encumbrances. He would also seek full immunity from any untoward incident (for instance, protestors laying siege on toll plazas at national highways during farmers’ agitation).In fact, the bidder will insist on inclusion in the concession/contractual framework, all safeguards necessary to protect his interest during the pendency of the lease period. If the Government is unable to give these assurances, the deal will come unstuck. In case the bidder decides to go ahead sans these safeguards, he will build in a very high rate of return in his financial calculations to compensate for all the associated risks leading to a very low bid amount for the asset. In either case, the asset monetization program will turn out to be a damp squib. The proof of the pudding is in the eating. In August 2021, the Government had put up for auction 109 railway passenger routes offering rights to run passenger services for 35 years hoping to garner Rs 30,000 crore. The exercise ended up in a fiasco as the bidders backed out ‘citing rules favoring the national transporter, lack of a truly independent regulator, curbs on route flexibility and other unresolved issues’.