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Decoding India’s asset monetization gambit

In the past three years, only about 1,408 kilometres of national highways were monetized. But now, the Centre plans to monetize 26,700 kilometres of roads via the national monetization pipeline by FY25. (Photo: Mint)Premium
In the past three years, only about 1,408 kilometres of national highways were monetized. But now, the Centre plans to monetize 26,700 kilometres of roads via the national monetization pipeline by FY25. (Photo: Mint)

  • The Centre’s track record on privatizing publicly held assets has been patchy at best. Will it be different this time?
  • Some private players believe that even if the government manages to pull off part of the headline figure of 6 trillion, it will be a good upfront return on the assets listed for sale under NMP.

KOTTAYAM : In the early 1990s, after being repeatedly frustrated by the jumbled and circuitous rail routes along India’s western coast, the Indian Railways (IR) decided to construct a new independent rail network along the Konkan coast. The Konkan Railway Corp. Ltd (KRCL), a joint venture between IR and the state governments of Maharashtra, Goa, Karnataka and Kerala, built a 741-kilometre broad gauge railway line connecting Roha near Mumbai to Mangalore at the southern tip of Karnataka’s coastline. By the late-90s, the line was ready to carry foodgrain, fertilizer and passengers through thousands of bridges and tunnels, which had been bored right through the scenic Western Ghats—in the process, halving the travel time between western and south-western India.

For a railway line to be profitable in India, it must carry more freight than passengers. But while the Konkan line quickly became popular with passengers, it struggled to originate freight traffic as the Indian Railway’s design had cut it off from industrial hubs and ports in the three states along its route.

Here, in the Konkan experience, lies a cautionary message for both the government and the private sector as they embark on the recently announced ambitious national monetization pipeline (NMP). To recover the 3,600 crore spent on the Konkan line, the Indian Railways effectively hiked the freight rates (a seemingly ‘market-oriented’ solution) by using a formula called “chargeable distance", which uses an inflated notional distance figure to calculate tariffs.

“When I joined the KRCL in 2005, Konkan rail was the shortest physical distance between western and south-western India," Anurag Mishra, former managing director of KRCL, told Mint. “But the inflated chargeable distance calculations by the Indian Railways meant we got zero freight traffic. Instead, freight still moved along the old complicated routes—through the south-central and south-western railway lines—because that was cheaper."

With limited revenue, and annual loan repayments quickly outstripping operational profit, KRCL racked up debt for a decade. “I told the railway board that if they would only guarantee me five freight trains a day, we could turn a profit," Mishra said. “They approved part of my restructuring plan—we got three, sometimes four freight trains a day, and half the IR loans were converted into preference shares. By the time I retired in 2009, KRCL was on (the) path to turning a profit. It continued to do well till passenger traffic was suspended across India during the covid lockdown."

The fine print
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The fine print

KRCL is one of the many rail assets lined up by the Niti Aayog for the NMP. The company is valued at 7,281 crore and is scheduled to be privatized in FY24. But even today, its freight value stands at 25-75% of the projections that were made when it was designed three decades ago.

Money, money, money

KRCL is illustrative of the many difficulties Union finance minister Nirmala Sitharaman will face as she invites the private sector to navigate a complex landscape mired with built-in contradictions of competition, authority and tacit government control as part of the NMP.

The NMP wants to raise 6 trillion by 2025 by selling a host of publicly-owned assets across the infrastructure spectrum, including roads, ports, airports, railways, power plants and transmission lines, gas pipelines, telecom infrastructure, mines and urban housing development projects. The minister believes this exercise is essential to keep the national infrastructure pipeline (NIP)—a programme announced in 2019 to build 111 trillion of infrastructure projects by 2025—alive.

India’s track record on privatizing publicly held assets has been patchy at best. Successive governments have invited the private sector into public projects such as roads, power transmission, mining and telecom with varying degrees of success. But every government has also, as a matter of course, routinely missed its annual disinvestment targets. The Air India sale is currently in its third iteration; stake sales in Life Insurance Corporation of India, Container Corporation of India Ltd, Shipping Corporation of India and Bharat Petroleum Corp. Ltd are all running behind schedule.

But the Narendra Modi government remains confident that the NMP will succeed, and confidence is something it is forced to project, since the pandemic has taken a wrecking ball to government finances. State governments typically spend twice as much as the Union government in a given year on infrastructure spending. However, with most states realizing lower revenues than they budgeted for in 2020-21, they have drastically cut their capex (capital expenditure) outlays this fiscal.

With tightening fiscal constraints at both the Centre and state level, the government needs a win on the NMP. While its fund-raising target of 6 trillion is only a fraction of the 111 trillion needed for the NIP, success here would shore up its credibility among overseas investors, lenders and institutions such as the World Bank. That’s at least the belief that is driving the current push.

While the Niti Aayog has listed assets worth 6 trillion for the NMP, by its own estimate, it can only raise about 3.4 trillion in long-term asset leases. The remaining assets on the list are to be developed via public-private partnerships, where the private partner only invests in the asset. No payment accrues to the government (see Chart).

A 6 September report by Systematix Institutional Equities notes that the NMP is “aggressive" and “over-ambitious" compared to the pace of privatization that India has so far been able to forge.

“In the past three years, a total of 1,408km of roads have been monetized and now 586km will be privatized through the infrastructure investment trust. Against this, the NMP wants to monetize 26,700km of roads by FY22-25—a 20x jump over four years," the report said. “This August, the Indian Railways witnessed a complete failure of its plans to award 109 routes for private passenger train operations. The key reason cited was (the) lack of an independent regulator," it added. Roads and railways account for a third of all projects under the NMP.

In the power transmission sector, the regulated tariff projects, part of the balance sheet of Power Grid Corporation of India Ltd, will have to be de-merged first before being privatized, and may pose associated transaction overheads such as the continuation of the tax holiday on assets. The clean energy assets on sale are 3.5 gigawatts of plants owned by public sector units. The challenge here will be to sell assets at book value at a time when newer plants are being built at ever-falling tariffs.

Bouquet of opportunities

Despite these complexities, at least a section of the private sector is pleased with the initial promise of the NMP. Kishore Desai, part of Hyderabad-based Megha Engineering and Infrastructures Ltd’s corporate strategy team, said that firms like his are excited by the NMP and NIP. “The two programmes offer a bouquet of opportunities to meet our ambitious plans to step up our investments in India’s infrastructure sector. Many of the assets listed are also marquee projects."

Dhaval Monani, resident fellow at IDFC Institute, is optimistic that the private sector can tease out gains from under-utilized government assets. “Of course, the headline number of 6 trillion is misleading, but if the government can pull off even part of this, it will get a good upfront return on its assets," Monani said. “The government has to also ring fence the funds raised, so they go back into infra creation and not the consolidated fund."

He says fears that the NMP may lead to furthering crony capitalism are unfounded. “Look at the bids for affordable housing projects under the Pradhan Mantri Awas Yojana. It’s mostly local developers in the respective districts winning projects," Monani said. “They are even able to undercut large corporates like Larsen and Toubro on such bids. I think if the government can keep asset sizes bite-sized, it can broaden the investor base to avoid asset hoarding by a few private groups."

The government is also keen to involve private investors from the get-go this time. “The NMP came about after intensive stakeholder engagements that ran through March and April," said a senior government official who was part of these discussions, but did not wish to be named. “We’ve taken views on concession agreements, their length and structure; the asset sizes that should be monetized; what levels of leverage to allow—all of these factors are being codified and working groups are being formed."

Wary banks

Domestic lenders, however, have conspicuously stayed silent since the NMP’s announcement—with good reason too. At the height of the bad loan crisis in 2017 that brought banks to their knees, the infrastructure sector accounted for a quarter of all non-performing assets. Central bank governor Shaktikanta Das indicated last year that industry had to stop relying on banks for infra lending and must explore other funding avenues.

“Even if the private sector is interested in the NMP, I doubt banks will willingly support these projects," a managing director at a large private sector bank told Mint on the condition of anonymity. “Given that our past experience is still fresh in our memories, we will not touch any infrastructure project where the government is a counter-party."

“Nitin Gadkari, as the Union minister for roads, has made public statements saying government officials should litigate less against private developers. But his ministry continues to file cases against developers. There’s no change on the ground. We (also) still see power purchase agreements routinely getting re-negotiated by states," the banker added.

Ultimately, both banks and private firms would want credible guarantees from the government, a stable policy landscape, and independent regulation and dispute resolution for the NMP to succeed.

Besides, not every public asset listed in the NMP may require a solution in the form of privatization. Mishra, the former managing director of Konkan Rail, says it’s difficult to see any case in favour of privatizing the KRCL.

“I don’t think the current management has been consulted on this decision. A private investor will need two assurances to invest—a minimum traffic guarantee from the railways and capex to double the existing line. If Indian Railways offers these concessions, KRCL won’t need to privatize to increase profits. And even then, the Konkan line is so deeply interlinked with the Indian Railways that there will be little operational independence for a private investor and limited freedom to set fares."

Perhaps, the government’s real intention is not to hand over all the listed assets or even to raise the stated 6 trillion by 2025.

“The NMP will count as a success even if we don’t achieve 100% of what is laid out," the government officer quoted earlier said.

“If the government is able to establish processes that set a blueprint for privatization, it’s a win for us. If you don’t set an ambitious target, no project gains the eyeballs and political reviews necessary to make (the) plans happen. The NMP is grabbing public attention and political support. Senior bureaucrats are involved. The machine is moving. That’s a win."

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