The capex conundrum in our asset monetization plan

More than the first two, it is the third goal that the plan’s financial success is predicated on. The Centre’s target is to monetize ₹6 trillion worth of assets by March 2025. Of the five approaches outlined by the Niti Aayog to attain this value, the ‘capex approach’ accounts for nearly 41%, the highest. This approach essentially takes the planned capital expenditure for these assets—or a normative value of the same—and assigns the private operator to complete it.

 

The government’s expectation is that private entities that win the rights to operate these assets will make a capital expenditure of ₹2.47 trillion on them by March 2025. In doing so, they will effectively save the government from making this investment, and that will be recorded as a notional gain. Other than roads and power, this capex approach flows through every other infrastructure sector laid out in the NMP.

The government will also earn revenues by leasing these assets. This could be through upfront payments, annual fees and revenue sharing, among others. It will vary by sector, and will depend on the monetization model and terms chosen.

Capex vs Revenues

How does the target stack up against the revenue potential? Past ventures offer some evidence: for aviation and roads at least, the targets look far removed from revenue possibilities.

In 2019, the government leased six airports under the public-private partnership (PPP) model for 50 years. All six went to the Adani Group, which assured the government revenues of ₹115-177 per passenger. The Ahmedabad airport received seven bids, the most. Even assuming the maximum bid of ₹177, the annual payment to the Airports Authority of India (AAI) for the 25 airports earmarked under the NMP works out to ₹1,199 crore. At the mean value, it is ₹731 crore.

Contrast this with the monetization target: the NMP pegs a total capex of ₹10,782 crore by private players over four years at the 25 airports. Given that 24 of these airports get far fewer footfalls than Ahmedabad, the annual payout to the government could be much lower.

Frontloading Revenues

Unlike airports, additional capex is not a variable in road assets, as the big investments have already been made. These are all about revenues. There is also precedent in frontloading payments in PPP deals. In June 2020, Maharashtra awarded toll rights for the Mumbai-Pune Expressway and the old Mumbai-Pune corridor (NH-48), totalling 140 km, for 10 years for ₹8,262 crore: ₹6,500 crore upfront and the balance over three years. This works out to about ₹6 crore per km per year—now adopted as the benchmark by the Centre to arrive at the indicative monetization value.

The plan is to monetize 26,700 km, or 20% of national highways, till March 2025. But these are not all as lucrative as the Mumbai-Pune routes. The Niti Aayog lists 104 stretches adding up to 6,801 km. For the 10 longest of them for which revenue data was available, annual toll collections ranged from ₹6 lakh per km to ₹3.8 crore—lower than the ₹6 crore benchmark.

NIP Trickledown

A shortfall in projected revenues will limit how much the government can re-channel to create new infrastructure assets. The NMP runs concurrently with the National Infrastructure Pipeline (NIP), which envisages an investment of ₹110 trillion from 2019-20 to 2024-25. Of this, 4% is expected from asset monetization. The NMP clock has started ticking, with a monetization target of ₹88,190 crore for 2021-22.

How much the government realizes via revenues, or manages to pass on to private entities via capex, will depend a lot on transaction structuring and pricing. The government’s recent inability to sell key public sector undertakings points to an inhibition of private players to engage with public assets. With the NMP, which pivots around leasing rather than purchasing, the Centre is seeking to make a critical distinction from its privatization policy. Will the private sector follow?

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