The Indian central government has recently announced an ambitious Asset Monetization Plan. The objective of this plan is to offer existing government owned infrastructure assets(“Brownfield” assets) to private investors, thereby generating fresh capital. The newly generated capital can then be used for further infrastructure investments, without adding to public debt. The infrastructure assets will be offered in various sectors – Roads, Railways, Warehousing, Ports, Airports, Telecom, Power Generation, Power Transmission, Natural Gas pipelines, Real Estate as well as other assets like Sports Stadia. Over 6 Trillion INR(81 Bill USD) will be offered over the next 4 years under this Plan.
Unlike privatization, the government will not be giving up ownership control of the assets. Instead, the assets will be returned to full control of the government after a pre-determined number of years.
Let us examine the impact on the stakeholders involved – Government, Private Investors and Indian Citizens.
- Government : This allows the government to raise money from existing assets without increasing debt. This also side-steps the politically unpopular discourse around privatization. For this to work, the amount that can be generated upfront has to be more than the NPV of the current predicted earning streams of that asset. For example, if the asset is a road, the upfront money has to be more than the discounted cash flows of profits(from toll charges) that are currently being generated/projected over the next few years. The key assumption is that the asset is underutilized from an earnings perspective. It is assumed that a private operator can either generate more revenues or reduce cost of operations or do both. However, the government will need to handle any blowback that may occur if the private operators provide inadequate service to the citizens.
- Private Investors : Strategic investors(companies like Reliance, Adanis etc) would be interested if they believe a) they can operate these assets better than the government and/or b) the asset will provide synergetic value to their other businesses. Institutional investors who are typically long term investors like pension funds & sovereign funds, would be interested if they believe that the risk adjusted returns are higher than government bonds. India’s experience in BOTs & PPPs for greenfield projects has been mixed and investor interest will be based on past experiences, legal issues & contractual obligations that the government will lay out for that asset.
- Indian Citizens : Private operators are very likely to offer better customer experience to Citizens than what the government is currently offering. However, citizens who do not pay full prices for the services(either through avoidance or special political considerations) will get impacted. Citizens also benefit indirectly as the government will be able to raise vast sums of money without increasing debt or taxes. Citizens could also benefit from the innovative uses of the asset by the private players – for example new retail stores & office space in assets like railway stations.
I believe that this is a good move by the central government and opens up interesting opportunities for infrastructure players in India. The government could also look at other sectors in the next phase – for example in healthcare, there are medical diagnostic assets (CTS/MRIs) that can be potentially monetized by offering it to diagnostic chains.
gopaldevanahalli 