Hinging on getting incumbents on board

By: |
August 31, 2021 5:15 AM

The pace of progress will be determined by incumbent organisations; until they are fully on board, investors of long-term patient capital will need to remain patient

Until the incumbents are fully onboard, investors of long-term patient capital will need to remain patient.Until the incumbents are fully onboard, investors of long-term patient capital will need to remain patient.

Asset monetisation is not a new idea—neither in concept nor in execution. Several people in the government, and investors, have long argued that PPPs need not be limited to new-build infrastructure, and that there is significant efficiency improvement potential in the government’s operating assets. Over the last decade, several operating asset transactions have been brought to the market, and some have been successfully awarded. The discussion became mainstream in the last five years, as global investors continued to be desperate for cash-flow generating assets, and the government could not make construction risk financeable.

Several road-shows have been held to market the investment opportunities in the government’s operating assets. The last one was in February 2021, which was addressed by the Prime Minister, and sought feedback from investors and experts. Against this background, the key question in the minds of investors is when will the promised wave of investment opportunities hit the market?

A key reason for the long lag between announcements and actions is the resistance from incumbent organisations, which like living beings, have a pathological need to continue to exist and expand. Success of the National Monetisation Pipeline (NMP) will critically depend on the extent to which the Department of Investment and Public Asset Management and the NITI Aayog have been able to convince the relevant PSUs to be invested in the success of the programme.

Precedent is an indicator of this, and is a strong argument to address issues that arise during project preparation. So, roads and airports included in the NMP could reach transaction stage fairly quickly. The next set of six airports has been under preparation for some time. Kolkata and Chennai airports have seen stiff internal resistance to privatisation in the past; they would be a test of how much that hurdle has weakened. The sale of the Airports Authority of India’s minority stake in the DIAL and the MIAL may not see as much internal resistance, but investor interest would depend on how the ‘right of first refusal’ with the majority shareholder is addressed.

Coal mine auctions are under way. Telecom tower business is well established, and the incumbents have become marginal players in the sector now. PPP in terminals in major ports has nearly two decades of history, which could weaken resistance from the unions. This second set includes sectors that have a competitive market, and pricing of output does not need to be regulated. Thus, this is one less area where the incumbents could drag their feet.
Similar to ports, renewable energy and hydropower plants will attract high level of investor interest considering they will have PPAs and pre-approved regulated tariffs. Hydropower plants will become more valuable as the proportion of renewable energy increases in the grid. There could be merit in reconsidering to what extent hydropower plants should be retained in a manner so that they can be used by the grid operator.

Though sports stadia and urban real estate would also not require price regulation, I have not included these in the second set. In the past, real estate transactions have struggled with issues like clarity on title, encroachment, etc. More importantly, there is often a reluctance to sign off on real estate transactions, considering the wide range of potential valuations. Addressing the real and imagined concerns in probity leads to adding conditions that make the project unattractive to high-quality bidders. The Jawaharlal Nehru Stadium transaction preparation had started some time ago, but has not been brought into the market yet. This transaction could well be the pathfinder for several similar projects.

Oil and gas pipelines are owned and operated by strong PSUs. Also, modifying the pricing regime and getting regulatory approvals for it are preconditions to transaction structuring. These could well take significant time to solve. The same would apply to warehouses and silos of the FCI, etc. The Railways has a history of half-hearted attempts at PPPs, which have either not succeeded at the bidding stage (most recently, private train operations), or the investors have run into trouble subsequently (as with private container train operations).

It is in the context of the third set that I worry about excessive emphasis on capital-raising as the objective of the asset monetisation programme. Most PSUs will argue that they can raise capital cheaper than the private sector SPVs. This is a valid argument since it is the additional efficiency brought by the private sector that justifies the higher cost of capital. Those who are pushed by the institutional mechanism (core group of secretaries for asset monetisation) will choose the InvIT route. This is under way in power transmission. While InvITs provide cash-flow generating assets to investors, they do not lock-in performance commitments from the investors. Thus, it provides a comfortable via-media to the incumbents and the investors, missing out on the opportunity to improve efficiencies. Going forward, these could also become hurdles in sector-restructuring; the prerequisite to creating competitive markets.

In conclusion, the pace of progress on asset monetisation will be determined by incumbent organisations, and their commitment to making these successful. Until the incumbents are fully onboard, investors of long-term patient capital will need to remain patient.

 

The author is an infrastructure specialist and co-founder, AskHowIndia.org

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