Asset monetisation-execution is the key

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Asset monetisation-execution is the key

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• Ambitious NMP: The government aims at earning upto Rs.6 lakh crores in four years from now, through an ambitous National Monetisation Pipeline (NMP). It badly needs funds as fiscal challenges abound, but the NMP's execution remains key.
• What is asset monetisation: The govt. gives away its assets (roads, mines) for a few years and taken a lump sum payment in return. Later, the assets come back to it. No sale is involved, unline privatisation. More assets can be built. Focus in NMP is on roads, railways and power, in addition to airports, ports, telecom, stadiums and power transmission.
• Focus of NMP: Govt. wants to focus on under-utilised assets, and use the PPP (public private partnership) and Investment Trusts methods. 
• How it works: A government asset that is under-utilised - not totally developed, not marketed well - will be valued by the private party at present value (PV) of cash flows (at current levels of utilisation). Govt. gets the money. Private company then develops it, and improves efficiency. It earns a lot. Economy benefits through efficiency.
• What about good assets: But if a highway project is doing very well, the private party only has to operate it as it is today, not invest anything new. The valuation of cash flows will assume a normal rate of growth of traffic. 

1. Private party pays govt. the PV of cash flows minus its own returns
2. Govt. gets less than what it would earn normally by operating the assets, and economy doesn't benefit incrementally (no efficiency change)

• Problem: The private parties will always want to take over well-run assets and not under-utilised ones, as they get more certain cash flows and returns in well-run assets. But then the government (public) suffers, so private incentives are mis-aligned in this approach. (remember that for any private player, cost of capital is always higher than that for govt.)
• Getting valuations right: For an asset being monetised for the long run (e.g. a highway), accurate estimate of growth rates (in traffic) is very difficult to make. So private parties may have windfall gains, or crushing losses. 

1. Too high a price initially will lead to very high toll prices, hurting consumers badly
2. Transporters will be hit, and so will the economy
3. What about competitive auctions? That can get the right price for government with efficiency gainst too, but it needs many bidders for the assets

• No maintenance investments: Private players will not be interested in investing in asset maintenance towards the end, and so when they hand over to the government, it would be a dead asset anyway. So it's practically a sale, not monetisation. Hence, PPP route is very problematic.
• InvIT route: By creating Infrastructure Investment Trust (InvIT), where monetisable assets would be transferred, govt. can reduce its risk.

1. InvITs are like mutual funds, where investors hold units and earn dividends
2. Trust's sponsor holds a minimum portion of total units issued
3. InvIT investors get the benefit of a portfolio of assets and diversification
4. Public authority has the rights to a large part of cash flows, and also to operate the assets; that reduces the problems in the other route, where valuations may go wrong, or user prices raised hugely

• Learnings: A public authority can raise funds cheaply and easily. Public authorities should develop infra, and monetise these. InvITs would be better than PPPs. Focus on under-utilised assets and not well utilised ones. Profesisonal monitoring of asset monetisation process is critical. 
• Summary: Only good execution will make asset monetisation a worthwhile exercise.

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