CONTEXT 

• The Government has announced an ambitious programme of asset monetisation.
• Under this programme, it hopes to earn ₹6 trillion in revenues over a four-year period.
• Asset monetisation will happen mainly in three sectors: roads, railways and power.
• Other assets to be monetised include: airports, ports, telecom, stadiums and power transmission.

ASSET MONETISATION

• Under asset monetisation, the Government gives up control of its assets, such as roads, coal mines — for a specified period of time in exchange for a lump sum payment.
  • At the end of the period, the assets return to the Government.
• Unlike in privatisation, no sale of government assets is involved.
• Thus, by monetising assets it has already built, the Government can earn revenues to build more infrastructure.

FOCUS OF THE PROGRAMME

• Two important statements have been made about the asset monetisation programme.
  • One, the focus will be on under-utilised assets.
  • Two, monetisation will happen through public-private partnerships (PPP) and Investment Trusts.

Monetising under-utilised assets 

• This is a win-win situation for both the Government and the private player.
• The Government gets a ‘fair’ value for its assets and the private player gets its return on investment.
• Also the economy benefits from an increase in efficiency.
• Thus, monetising under-utilised assets has much to commend.

Monetisation through Investment Trusts

• The other form of monetisation the Government has indicated is creating Infrastructure Investment Trusts (InvIT) to which monetizable assets will be transferred.
  • InvITs are mutual fund-like vehicles in which investors can subscribe to units that give dividends.
  • The sponsor of the Trust is required to hold a minimum prescribed proportion of the total units issued.
  • InvITs offer a portfolio of assets, so investors get the benefit of diversification.
• Usually, assets can be transferred at the construction stage or after they have started earning revenues. 
• But in the InvIT route to monetisation, the public authority continues to own the rights to a significant portion of the cash flows and to operate the assets.
• So, the issues that arise with transfer of assets to a private party — such as incorrect valuation or an increase in price to the consumer — are less of a problem.

CHALLENGES DURING ASSETS MONETISATION 

Monetisation of well-utilised assets:

• In case of properly utilised assets, the private player has little incentive to invest and improve efficiency.

Understanding through an example:

• Let’s take an example of a highway that has good traffic.

• • In this case, the private player has little incentive to invest and improve the efficiency of the highway. It simply needs to operate the assets as they are.
  • The private player may value the cash flows assuming a normal rate of growth of traffic. Therefore, it will pay the Government a price that is the present value of cash flows minus its own return.
  • The Government in this case earns badly needed revenues but these could be less than what it might earn if it continued to operate the assets itself.
• Suppose the private player does plan to improve efficiency in a well-utilised asset by making the necessary investment and reducing operating costs.
  • But in this case the reduction in operating costs need not translate into a higher price for the asset than under government ownership.
    • As the cost of capital for a private player is higher than for a public authority.
    • A public authority needs less equity capital and can access debt more cheaply than a private player.
  • Thus, the higher cost of capital for the private player could offset the benefit of any reduction in operating costs.

Preference for well-utilised assets:

• The benefits to the economy are likely to be greater where under-utilised assets are monetised. However, private players will prefer well-utilised assets to assets that are under-utilised.
• That is because, in the former, cash flows and returns are more certain.
• Thus, in this case of choice, private incentives in asset monetisation may not accord with the public interest.

Valuation and issues:

• It is very difficult to get the valuation right over a long-term horizon.
• Over a long term period it is difficult to estimate the factors on which the utilisation of an asset depends.
• These factors can be- the growth rate of the economy, the level of economic activity in the area, the prices of fuel and vehicles, alternative modes of transport and their relative prices, etc.
• Hence, there is always a possibility of over or under assessment in valuing the asset.
• In case of under valuation:  the Government will loses the revenue, while the private operator will reap windfall gains.
• In case of over valuation:  the winning bidder will raise the toll price steeply, in order to pay the overrated price for the asset. Thus, the consumer ends up bearing the cost.

Asset monetisation virtually amounts to sale:

• There is no incentive for the private player to invest in the asset towards the end of the tenure of monetisation.
• The life of the asset, when it is returned to the Government, may not be long. In that event, asset monetisation virtually amounts to sale.
• Thus, Monetisation through the PPP route is thus fraught with problems.

CONCLUSION

Following are the conclusions that can be drawn from the above:

• First, a public authority has inherent advantages on the funding side.
  • In general, the economy is best served when public authorities develop infrastructure and monetise these.
• Second, monetisation through InvITs is likely to prove less of a problem than the PPP route.
• Third, monetising under-utilised assets is better than assets that are well utilised for the consumers.
• Fourth, to ensure proper execution, there is a case for independent monitoring of the process.
  • The Government may set up an Asset Monetisation Monitoring Authority staffed by competent professionals.
  • The authority must put all aspects of monetisation under the scanner — valuation, the impact on price charged to the consumer, monetisation of under-utilised versus well-utilised assets, the experience across different sectors, etc.

 Hence, it can be concluded that- Asset monetisation is fine if executed properly.

Reference:

1. https://www.thehindu.com/opinion/lead/asset-monetisation-execution-is-the-key/article36144666.ece