Monetisation of assets has been identified as one of the pillars for enhanced and sustainable infrastructure financing. The Finance Minister of India (“FM”) had, in December 2019, announced a National Infrastructure Pipeline (“NIP”) that envisages an investment of INR 111 lakh crore in the infrastructure sector in the period between 2019 and 2025 and brings in various opportunities for private sector to invest in infrastructure projects including the development and operation of the same. The FM in the annual budget 2021-2022 announced the launch of a new national monetisation pipeline to bridge the gaps in infrastructure funding projects under the NIP and to unlock value from the current public investment in infrastructure through private sector efficiencies in operations and management of infrastructure. The NITI Aayog has now created the National Monetisation Pipeline (NMP Volumes I & II) (“NMP”) in respect of the brownfield core infrastructure assets. The NMP is in furtherance of the Government of India’s (“Government”) strategic divestment policy, which aims to limit Government’s presence to only a select identified sectors with the rest to be handed to private players.
Asset monetisation means “a limited period license/ lease of an asset, owned by the government or a public authority, to a private sector entity for an upfront or periodic consideration”. Asset monetisation is not a new concept and was introduced in India via the Toll-Operate-Transfer transaction (“TOT”) of National Highways Authority of India (“NHAI”). However, NMP is a big and bold initiative as it clearly lays down, for the first time, a ‘roadmap’ for monetisation of assets in several specified sectors with defined targets. For the purposes of NMP, the assets have been classified as core (roads, railways, ports, warehouses, power, oil & gas pipelines, etc.) and non-core (land and building). The NMP is currently limited to only core assets of central government line ministries and central public sector enterprises in infrastructure sectors.
The framework for core asset monetisation under the NMP has three key imperatives.
- The focus is on the brownfield de-risked assets with stable revenue streams. Brownfield assets are those assets which are already in existence and can be upgraded and modified. The idea is to unlock the value of investments in existing public sector assets that are either languishing or are underutilised by inviting private sector capital and efficiencies. The proceeds would thereafter be used to develop greenfield assets.
- The monetisation happens through the monetisation of rights and not ownership. Hence, the primary ownership of the assets under these structures continues to be with the public authority with the framework envisaging hand back of assets to the public authority at the end of transaction life.
- Structured partnerships under transparent competitive bidding and defined contractual frameworks. Partners will have to abide with strict key performance indicators and performance standards.
NMP estimates potential aggregate monetisation of INR 6 lakh crore through core assets of the Government over a four-year period from FY 2022 to FY 2025. The breakup of the overall pipeline and sector share is depicted in the figure below.
MODELS OF ASSET MONETISATION UNDER NMP
The NMP Volume I provides for the following two models of asset monetisation:
- Direct Contractual Approach: In this model, the asset is transferred to a single or a consortium of developers (selected after a transparent bidding process) through defined contractual agreements with payments made either upfront or periodically. This includes: (a) Operate Maintain Transfer (OMT) agreements such as TOT agreements in roads; (b) Operation Maintain Develop (OMD) agreements such as Operation Management Development Agreements (OMDA) in airports; and (c) other arrangements like the Design Build Finance Operate Transfer agreements entered into by the Railway Department for railway station redevelopment projects that enjoy existing brownfield infrastructure like tracks and signals.
In India, there are already a number of infrastructure projects implemented through PPPs in sectors like ports, airports, roads, railways, etc. Most of the PPP projects have issues like delay in land acquisitions, obtaining approvals or inadequate due diligence due to inaccurate / lack of information, resulting in these projects becoming non-performing assets in the future. For example, Reliance Infrastructure-led concessionaire pulling out from the Delhi Airport Express Line project due to an inflated traffic projection made in the beginning and it being expected to continue to meet the commitments originally made in the concession agreement without asking for contract renegotiation. Also, the concession agreements for ports are generally more favorable to the Government without much negotiating power to the investors resulting in larger development and operational risks on them. It is important that for NMP projects, the public sector have a mindset of a ‘partner’ and assist the private sector partner in ensuring that capital invested sees a fair rate of return. The contracts must include proper risk mitigation measures for the investors.
The Government’s experience of monetising brownfield assets in few sectors has also not been very encouraging. For instance, the privatisation of Indian Railways did not generate interest from the private players and there were no serious bidders for these projects. This may be because private players are expected to invest large capital in the existing public assets to eventually realise revenues and the revenue structure may not be satisfactory to them making the project non-feasible. Another example is where the traffic risks were not adequately addressed in the TOT contracts of the third and fourth round of NHAI bidding, making such rounds relatively unattractive for the investors.
- Structured Financing Models: In this model, rights over assets are given to a pool of investors such as institutional investors, sovereign wealth funds, domestic insurance funds, retail investors, etc. with upfront considerations given to the Government. This includes Infrastructure Investment Trusts (“InvIT”) and Real Estate Investment Trusts (“REIT”).
For example, PowerGrid InvIT is floated by PGCIL for its operating transmission assets. InvIT model has also been a preferred route for road, however, challenges such as lack of traffic data for roads and liquidity issues may need to be overcome. Also, global private equity firm, Blackstone has two REITs that own, operate or finance income generating real estate.
- Long term leases: Another model discussed in the NMP guidebook is long-term leases, which align with PPP model. This model can be adopted in case of sectors such as telecom where the licence to provide an infrastructure service is already available with a private party and the unused/sub-optimally utilised asset of public sector entity is leased out to such private sector party for providing service under its own licence.
A successful example of this model is Taj Mansingh Hotel in New Delhi, which was leased to the Tata Group after a competitive bidding in 2018.
CURRENT OPPORTUNITIES UNDER NMP
As per the NMP Pipeline, the following broad assets are being currently considered by the Government for monetisation. The above provides massive opportunities for the private investors (both strategic and institutional investors) to consolidate their presence in the said sectors. Also, the asset monetisation sets the stage for new age infrastructure entrepreneurs.
26,700 km of four lane highways and above during the FY 2022 to 2025
New national highway roads which are constructed and operationalised over the next four years.
Railway station redevelopment
Private train operations on 109 pairs of routes structured as 12 clusters
Hill railways and dedicated freight corridor
28,608 circuit km of transmission assets
Transmission assets of PGCIL through InvIT
Bharatnet fibre assets over 86 lakh route km
BSNL/ MTNL tower assets
6 GW for the FY22 to FY25; 3.5GW for hydel assets and 2.5GW for solar and wind assets
Natural Gas Pipelines
7928 km operational pipelines and 200 km new pipeline assets
Petroleum and Petroleum Products
3,196 km of product pipeline assets and 733 km of LPG pipeline assets during FY22 to FY25;
HPCL’s Mangalore Hassan pipeline
2 hydrogen generation plants in Gujarat, IOCL.
17 projects on developer and operator model with a capacity of 178 MTY;
Coal gasification plant
Operationalization of 4 abondoned projects
For FY22, Bhubaneswar, Varanasi, Amritsar, Trichy, Indore and Raipur airports
Other airports to also be monetised between FY23 to FY25
31 projects in major ports
2 national stadiums (JLN and one more national stadium to be identified)
2 SAI regional centres (at Bangalore & Zirakpur)
Urban Real Estate Assets
Redevelopment of 7 general pool resedential accomodation (GPRA) Colonies in Delhi
Development of residential/ commercial units on 240- acre land in Ghitorni (Delhi).
Storage infra of FCI and CWC
NMP initiative is kick-starting now with IOCL inviting expression of interest on September 30, 2021 for monetisation of its two hydrogen generation units from Indian or a foreign bidder. The Government is also planning to set up a National Land Monetisation Corporation for fast track monetisation of land and non-core assets of Central Public Sector Enterprises.
SUGGESTIONS to make NMP successful
- Structuring of the transactions: There is a need for ‘differentiated market structures’ for different asset classes at different levels of maturity. The Government should move away from the one-size-fits-all approach. It is also advisable that the Government learns from its previous experiences of divestment and PPP in railways and roads (as discussed above) and resolve such issues while structuring or preparing the asset specific monetisation plan.
- Bankability of the contracts: The Government should ensure that the contracts are bankable and have appropriate risk mitigation measures for investors. The Government must appreciate that the private investors aim to make profits out of the partnership and the contracts should have clear revenue structures for private parties. Also, adequate mechanism for cost and time overruns due to Government actions or omissions will need to be provided. Since infrastructure projects span over longer terms, the contracts should have inbuilt flexibility for fair amendments/ changes to safeguard against changes in the economic or policy environment. There must also be robust mechanisms for the enforcement of contracts and resolution of disputes.
- Government implementation agencies: The Government, as part of a multi-layer institutional mechanism for overall implementation and monitoring of the asset monetisation programme, has constituted an empowered Core Group of Secretaries on Asset Monetisation (CGAM) under the chairmanship of Cabinet Secretary. However, independent regulators must also be set up in sectors that are going for NMP and a specialised adjudication tribunal should be constituted. Also, a quick, efficient, and enforceable dispute resolution mechanism must be developed for such projects. The Government may prescribe the regulations for operation of these projects including valuation but should also provide reasonable flexibility to private parties. The Government role as the partner and regulator will need to be segregated and regulations simplified to achieve the desired outcome. This will provide more investor confidence.
- Support of State Government: The support of state governments is vital for NMP, even where the projects under the NMP are under central ministries or public sector enterprises. Although concessions are granted by authorities established by the central government, the developers depend on the state government and local government authorities for procuring clearances, licences and infrastructure facilities and there is no single window clearance available for projects. The state government should provide a firm assurance to support and not just on a best effort basis. This will help in the proper execution of the NMP.
- Regulatory changes required: Sectors where there has been no or limited private participation in operations such as the railways and gas pipelines will require regulatory changes. Such changes will be required to be made keeping in mind ease of doing business and in a timely manner to provide a conducive environment for monetisation of these assets.
- Foreign direct investment: While most of the infrastructure sectors in India (like roads and highways, electricity generation and transmission, ports, etc.) have been allowed 100% FDI under automatic route (i.e. without Government approval), to boost the actual inflow and raise confidence of foreign investors a transparent bidding process, strict contract enforcement along with an independent dispute redressal authority will be critical.
- Vendor due diligence: Investors would need adequate information regarding the brownfield projects. The Government must provide a vendor due diligence report on the said assets to the investors and also offer some support in mitigating the risks and issues associated with such assets. Further, a detailed due diligence of the technical, operational, and financial aspects of these assets and analysis of the monetisation model and the contract should be done by the private investors prior to investment for which the complete information must be provided.
- Transparency of process: Since public assets are planned to be monetised under the NMP, there should be an open, fair and transparent bidding process for selection of the private parties and fair valuation is achieved. Also, the design of the monetisation process should be finalised with prior consultation with the stakeholders.
While the long-term effect of the NMP will have to be seen, it does attempt to set a level playing field to attract private players and promote better competition and collaborations in improving and boosting the public infrastructure sector. Also, the state governments have been provided with a financial incentive under the NMP which may encourage them to also monetise their assets. Much of the success of the NMP will depend on successful execution through dedicated, sector-oriented platforms, transparency and strategic solutions.
* This is the first of our blog series on the National Monetisation Pipeline. We will in our next blogs analyse sector specific asset monetisation plan under the NMP.
This note summarises only the opportunities arising under the NMP and does not cover analysis of the sector specific pipeline under the NMP. This note has been sent to you for informational purposes only. The information and/or observations contained in this note do not constitute legal advice and should not be acted upon in any specific situation without appropriate legal advice. The views expressed in this note do not necessarily constitute the final opinion of Cyril Amarchand Mangaldas.