Context

The government has announced an ambitious programme of asset monetisation. It hopes to earn ₹6 trillion in revenues over a four-year period.

About Asset monetisation

• Unlike in privatisation, no sale of government assets is involved.
• The government parts with its assets — such as roads, coal mines — for a specified period of time in exchange for a lump sum payment.
• Asset monetisation will happen mainly in three sectors: roads, railways and power.
• Other assets to be monetised include: airports, ports, telecom, stadiums and power transmission.
• Two important statements have been made about the asset monetisation programme.
• The focus will be on under-utilised assets.
• Monetisation will happen through public-private partnerships (PPP) and Investment Trusts.

Challenges

1) Investors would prefer property utilised assets over underutilised assets

• Suppose an asset is not being used adequately because it has not been properly developed or marketed well enough.
• A private party may judge that it can put the assets to better use.
• It will pay the government a price equal to the present value of cash flows at the current level of utilisation.
• This is a win-win situation for the government and the private player.
• The government gets a ‘fair’ value for its assets.
• The private player gets its return on investment.
• Increase in efficiency: The economy benefits from an increase in efficiency.
• Monetising under-utilised assets thus has much to commend it.
• However, in case of an asset that is being properly utilised, the private player has little incentive to invest and improve efficiency.
• It simply needs to operate the assets as they are.
• The private player may value the cash flows assuming a normal rate of growth.
•  The cost of capital for a private player is higher than for a public authority.
• The higher cost of capital for the private player could offset the benefit of any reduction in operating costs.
• The government earns badly needed revenues but these could be less than what it might earn if it continued to operate the assets itself.
• There is no improvement in efficiency.
• The benefits to the economy are likely to be greater where under-utilised assets are monetised.
• However, private players will prefer well-utilised assets to assets that are under-utilised.
• That is because, in the former, cash flows and returns are more certain.

2) Valuation challenges

• It is very difficult to get the valuation right over a long-term horizon, say, 30 years.
•  For a road or highway, growth in traffic would also depend on factors other than the growth of the economy.
• . If the rate of growth of traffic turns out to be higher than assessed by the government in valuing the asset, the private operator will reap windfall gains.
• Alternatively, if the winning bidder pays what turns out to be a steep price for the asset, it will raise the toll price steeply.
• The consumer ends up bearing the cost.
• It could be argued that a competitive auction process will address these issues and fetch the government the right price while yielding efficiency gains.
• But that assumes, among other things, that there will be a large number of bidders for the many assets that will be monetised.

3) Life of the returned asset may not be long

• There is no incentive for the private player to invest in the asset towards the end of the tenure of monetisation.
• The life of the asset, when it is returned to the government, may not be long.
• In that event, asset monetisation virtually amounts to sale.
• Monetisation through the PPP route is thus fraught with problems.

Way forward: InvIT route

• Infrastructure Investment Trusts (InvIT) are mutual fund-like vehicles in which investors can subscribe to units that give dividends.
•  Monetisable assets will be transferred to InvITs.
• The sponsor of the Trust is required to hold a minimum prescribed proportion of the total units issued.
• 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 the rights to a significant portion of the cash flows and to operate the assets.
• So, the issues that arise with transfer of assets to a private party — such as incorrect valuation or an increase in price to the consumer — are less of a problem.

Key takeaways

• Low cost of capital for public authority: In general, due to the low cost of capital for public authority, the economy is best served when public authorities develop infrastructure and monetise these.
• InvIT route: Monetisation through InvITs is likely to prove less of a problem than the PPP route.
• Monetise under utilised assets: We are better off monetising under-utilised assets than assets that are well utilised.
• Monitoring authority should be set up: To ensure proper execution, there is a case for independent monitoring of the process.
• The government may set up an Asset Monetisation Monitoring Authority staffed by competent professionals.

Consider the question “How asset monetisation is different from privatisation? What are the challenges in asset monetisation? Suggest the ways forward.”

Conclusion

Government must pay attention to the challenges in asset monetisation and use it in the proper way to increase the efficiency in the economy.

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