Here is is what should help monetise infrastructure assets at state level

Specialist expertise would be required to do a detailed assessment of potential assets/projects from the viewpoint of financial sustainability, risk-return analysis, risk mitigation mechanisms etc.

Written by Arindam Guha

Monetisation of operating infrastructure assets or asset monetisation refers to an arrangement wherein the original developer (in most cases the Government) transfers the right of usage of assets to a new investor for a pre-defined period against an upfront payment. The returns for the new investor/operator come from the cashflows from the asset which in most cases is in the form of toll or user charges. As per the National Monetisation Pipeline (National Monetisation Piepline, Niti Aayog, July 2021), asset monetisation of around Rs. 6 lakh crores has been envisaged during 2022-25, accounting for around 5% of aggregate infrastructure investments under the 2020-25 National Infrastructure Pipeline (NIP). The initiative has made a modest beginning with around Rs. 96,000 Crores of infrastructure assets owned by the Government being monetised during 2021-22 and another Rs. 33,422 Crores till November 2022 (The Times of India, November 21, 2022). However, significant ground still needs to be covered.

While innovative structures such as toll-operate-transfer (ToT), infrastructure investment trusts (InvITs) have been used as part of asset monetisation, investor interest has largely depended on viability of the underlying project or asset, certainty of cash flows, envisaged risks and their mitigation mechanisms. As a result, asset monetisation has largely focused on relatively mature sectors such as roads, renewable energy and power transmission with Government of India agencies such as National Highways Authority of India, Power Grid Corporation of India being the primary beneficiaries. However, going forward, with around 50% of the NIP being accounted for by sectors such as urban & rural development, irrigation, health & education which fall under the jurisdiction of State (and even city) Governments, it is essential for asset monetisation to succeed at the State or regional level for it to make a reasonable contribution to infrastructure financing.

The good news is that a number of State Governments seem to be keen on monetising their existing operating infrastructure assets. However, for the initiative to take off, some key issues need to be addressed. First and foremost is the need to identify operating infrastructure assets suitable for monetisation. These are likely to be spread across multiple departments. Potential state-level assets for monetisation include toll-based State highways (usually under Public Works Department), hydro or renewable power generation facilities, power transmission assets (Department of Power or Renewable energy), urban infrastructure such as housing & market complexes, community centers, parking lots, etc. (Department of Urban Development). Additional asset categories such as water treatment plants, solid waste to energy plants etc. may also be of interest to investors provided they are backed by suitable credit enhancement measures.

Specialist expertise would be required to do a detailed assessment of potential assets/projects from the viewpoint of financial sustainability, risk-return analysis, risk mitigation mechanisms etc. Since it may not be feasible to duplicate this expertise in multiple departments, it may be optimum to centralise it in a single nodal agency. The designated nodal agency can also be tasked with other key activities such as bundling of assets, deciding on the optimum transaction structure (ToT, InvIT etc.), finalizing standard concession/transfer agreements and running the bid management process for selection of the investor/operator.

In states with a functioning PPP cell, this cell itself can possibly play the role of nodal agency. The other option would be to set up a separate special purpose vehicle under the Companies Act as the nodal agency so that it is able to benefit from additional flexibility in areas of procurement etc. while having required corporate governance safeguards in place. Given its mandate, it may be advisable for the nodal agency to be under the primary oversight of the Finance Department, with Board level representation from relevant Departments owning the assets to ensure holistic coordination and oversight.

To enable mobilisation of blended finance and ensure redeployment of proceeds in infrastructure investments, setting up a separate asset monetisation fund may also be considered. While the seed capital for the fund may be contributed by both State and Central Governments, continued financial sustainability can largely be out of the asset monetisation proceeds. Having such a structure would create a dedicated corpus which can then be leveraged/ deployed for (a) temporary warehousing of projects/assets for future monetisation, (b) credit enhancement of select projects / assets to make them attractive for private investment, (c) using the seed capital for mobilizing debt which can add to the corpus and (d) attracting extra-Government / budgetary resources from private as well as not-for-profit sector based on suitable tax & regulatory concessions. For optimum management of the corpus, the fund may be best managed through reputed investment managers with similar expertise and experience selected through transparent public procurement.

The above measures are likely to go a long way in helping States join the asset monetisation bandwagon, thereby enabling India to achieve its aspirations of inclusive growth on the back of quality infrastructure across the country.

Arindam Guha, Partner and Leader – Government & Public Services, Deloitte India.

Written by Arindam Guha

Monetisation of operating infrastructure assets or asset monetisation refers to an arrangement wherein the original developer (in most cases the Government) transfers the right of usage of assets to a new investor for a pre-defined period against an upfront payment. The returns for the new investor/operator come from the cashflows from the asset which in most cases is in the form of toll or user charges. As per the National Monetisation Pipeline (National Monetisation Piepline, Niti Aayog, July 2021), asset monetisation of around Rs. 6 lakh crores has been envisaged during 2022-25, accounting for around 5% of aggregate infrastructure investments under the 2020-25 National Infrastructure Pipeline (NIP). The initiative has made a modest beginning with around Rs. 96,000 Crores of infrastructure assets owned by the Government being monetised during 2021-22 and another Rs. 33,422 Crores till November 2022 (The Times of India, November 21, 2022). However, significant ground still needs to be covered.

While innovative structures such as toll-operate-transfer (ToT), infrastructure investment trusts (InvITs) have been used as part of asset monetisation, investor interest has largely depended on viability of the underlying project or asset, certainty of cash flows, envisaged risks and their mitigation mechanisms. As a result, asset monetisation has largely focused on relatively mature sectors such as roads, renewable energy and power transmission with Government of India agencies such as National Highways Authority of India, Power Grid Corporation of India being the primary beneficiaries. However, going forward, with around 50% of the NIP being accounted for by sectors such as urban & rural development, irrigation, health & education which fall under the jurisdiction of State (and even city) Governments, it is essential for asset monetisation to succeed at the State or regional level for it to make a reasonable contribution to infrastructure financing.

The good news is that a number of State Governments seem to be keen on monetising their existing operating infrastructure assets. However, for the initiative to take off, some key issues need to be addressed. First and foremost is the need to identify operating infrastructure assets suitable for monetisation. These are likely to be spread across multiple departments. Potential state-level assets for monetisation include toll-based State highways (usually under Public Works Department), hydro or renewable power generation facilities, power transmission assets (Department of Power or Renewable energy), urban infrastructure such as housing & market complexes, community centers, parking lots, etc. (Department of Urban Development). Additional asset categories such as water treatment plants, solid waste to energy plants etc. may also be of interest to investors provided they are backed by suitable credit enhancement measures.

Specialist expertise would be required to do a detailed assessment of potential assets/projects from the viewpoint of financial sustainability, risk-return analysis, risk mitigation mechanisms etc. Since it may not be feasible to duplicate this expertise in multiple departments, it may be optimum to centralise it in a single nodal agency. The designated nodal agency can also be tasked with other key activities such as bundling of assets, deciding on the optimum transaction structure (ToT, InvIT etc.), finalizing standard concession/transfer agreements and running the bid management process for selection of the investor/operator.

In states with a functioning PPP cell, this cell itself can possibly play the role of nodal agency. The other option would be to set up a separate special purpose vehicle under the Companies Act as the nodal agency so that it is able to benefit from additional flexibility in areas of procurement etc. while having required corporate governance safeguards in place. Given its mandate, it may be advisable for the nodal agency to be under the primary oversight of the Finance Department, with Board level representation from relevant Departments owning the assets to ensure holistic coordination and oversight.

To enable mobilisation of blended finance and ensure redeployment of proceeds in infrastructure investments, setting up a separate asset monetisation fund may also be considered. While the seed capital for the fund may be contributed by both State and Central Governments, continued financial sustainability can largely be out of the asset monetisation proceeds. Having such a structure would create a dedicated corpus which can then be leveraged/ deployed for (a) temporary warehousing of projects/assets for future monetisation, (b) credit enhancement of select projects / assets to make them attractive for private investment, (c) using the seed capital for mobilizing debt which can add to the corpus and (d) attracting extra-Government / budgetary resources from private as well as not-for-profit sector based on suitable tax & regulatory concessions. For optimum management of the corpus, the fund may be best managed through reputed investment managers with similar expertise and experience selected through transparent public procurement.

The above measures are likely to go a long way in helping States join the asset monetisation bandwagon, thereby enabling India to achieve its aspirations of inclusive growth on the back of quality infrastructure across the country.

Arindam Guha, Partner and Leader – Government & Public Services, Deloitte India.