The Narendra Modi-led government is expected to go big on asset monetisation with Finance Minister Nirmala Sitharaman spelling out the plans in her 2021-22 Union Budget.
“Monetising operating public infrastructure assets is a very important financing option for new infrastructure construction. A “National Monetisation Pipeline” of potential brownfield infrastructure assets will be launched. An Asset Monetisation dashboard will also be created for tracking the progress and to provide visibility to investors,” she had said in her Budget speech.
Later in February, Prime Minister Narendra Modi had said that the plan is to monetise 100 government and PSU-owned assets worth Rs 2.5 lakh crore ‘investment opportunity’.
As part of this ambitious plan, the Ministry of Road Transport and Highways has been set a target to raise Rs 30,000 crore through asset monetisation over the next three years.
Apart from this, the Minister for Road Transport & Highways, Nitin Gadkari, has given his own even more ambitious targets to the National Highways Authority of India to raise Rs 1 lakh crore through monetisation of highways in the next five years.
Recent reports suggest that till now the Ministry of Road Transport and Highways has made plans to monetise 7,200 kms of roads.
But how will highways and road assets be monetised?
Let’s first understand what asset monetisation is.
Asset monetisation is the process of conversion of assets, in this case contracts to build highways, bridges, roads, etc, into economic value.
The Minister for Road Transport & Highways in conjunction with the National Highways Authority of India (NHAI) has three main methods in order to monetise its road assets:
Toll Operate Transfer Model (TOT Model)
Under the TOT model to monetise publicly-funded highways, investors make a one-time lump-sum payment in return for toll collection rights of 15 to 30 years under this model.
Under the TOT model, publicly-funded projects that are operational for more than a year after beginning commercial operations can be monetised.
Projects under this model are awarded as a bundle of operational national highways, which allows the investor to offset the risks of one project against another.
The Delhi Noida Direct Flyway is one of the biggest examples of the success of this model.
NHAI had in September 2020 invited bids for the fifth TOT bundle package. According to reports, the company said it will launch 3-4 bundles under the TOT model of about 150 km each to attract investors this year.
Infrastructure Investment Trusts (InvIT) and Real estate investment trusts (RevIT)
Both REIT and InvIT are collective investment schemes similar to a mutual fund, which enables direct investment of money from individual and institutional investors in infrastructure projects to earn a small portion of income as return.
An InvIT is designed as a tiered structure with a sponsor setting up the InvIT which in turn invests into the eligible infrastructure projects either directly or via special purpose vehicles (SPVs).
NHAI is expected to launch India’s first government-backed InvIT by the end of March. Under the InvIT, six road assets worth Rs 5,000 crore or Rs 50 billion have been given in-principle approval for transfer to the InvIT.
Assets to be transferred to the InvIT include the 32.6 km Kotha-Kata bypass to Kurnool in Telangana, the 75 km Palanpur-Abu Road in Gujarat, the 31 km Abu Road-Swaroopganj Road in Gujarat, the 160 km Chittorgarh-Kota and Chittorgarh bypass in Rajasthan, and the 77 km Maharashtra-Karnataka border to Belgaum. The 32.6 km Chennai bypass may also be transferred to the InvIT.
Hybrid annuity model (HAM)
The Hybrid annuity model is similar to the TOT model, however under HAM, toll fee from the highways projects is collected by the Government/Authority sanctioning the project.
Furthermore, as part of the development of the project, the government will pay 40 percent of the project cost as construction support during the construction period. The balance 60 percent of the cost will be paid by the government as annuity payments over the operations period along with interest thereon to the concessionaire.
What will determine the success of the Road Ministry’s asset monetisation plans?
While the government is confident of its plans to raise funds, the success of its plans depends on the following factors:
- Subdued response from investors for NHAI’s offerings.
Out of the last four rounds of asset monetisation undertaken by the NHAI, two rounds failed to attract bidders.
As investors pay upfront value for projects and in most cases get the right to operate the road project and collect the tolls generated from it during the concession period.
The upfront value paid by the investors is linked to the accuracy of the projected revenue that the asset will generate, the terms of the contract with the authority, and the quality of disclosures maintained by the concession granting authority.
Market experts say that NHAI failing to attract bidders in two of its last four rounds of bidding indicates that the estimated value of the concession determined by the NHAI was not in line with expectations of the market
2. Terms of contracts
The terms of the concession contract are essential in determining the success of the NHAI’s asset monetisation plans.
One of the biggest factors involved in contracts with NHAI is the concession period offered by the government.
While the government has approved NHAI to give shorter concession period of 15-30 years, the reasons for restricting the concession period to a shorter duration, are unclear, market experts said.
While shorter contracts allow NHAI to re-assess the concession value at the time of a re-auction, newly-constructed assets are likely to fetch better bids today as compared to a re-auction 15-30 years later after undergoing wear and tear, analysts said.
Longer concession periods will also likely incentivise the concessionaire to invest in higher quality standards, they added.