In India’s asset monetization bet


For a railway line to be profitable in India, it must carry more goods than passengers. But while the Konkan Line quickly became popular with passengers, it struggled to generate freight traffic as the design of the Indian railway cut it off from industrial centers and ports in the tri-state along its route. itinerary.

Here in Konkan’s experience resides a warning message for government and the private sector as they embark on the recently announced ambitious National Monetization Pipeline (NMP). To retrieve the ??3,600 crore spent on the Konkan line, Indian Railways effectively increased freight rates (a seemingly “market-oriented” solution) using a formula called “billable distance”, which uses an inflated notional distance figure. to calculate the rates.

“When I joined KRCL in 2005, Konkan rail was the shortest physical distance between west and southwest India,” Anurag Mishra, former managing director of KRCL, told TSTIME. “But billable distance calculations inflated by Indian Railways meant we got zero freight traffic. Instead, freight still followed the complicated old routes – through the South-Central and Southwestern rail lines – because it was cheaper. “

With limited income and annual loan repayments rapidly exceeding operational profits, KRCL racked up debt for a decade. “I told the railroad commission that if they only guaranteed me five freight trains a day, we could make a profit,” Mishra said. “They approved part of my restructuring plan – we have three, sometimes four freight trains a day, and half of the IR loans have been converted into preferred shares. By the time I retired in 2009, KRCL was on track to generate profit.

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The fine print

KRCL is one of many railway assets lined up by Niti Aayog for NMP. The company is valued at ??7,281 crore and is expected 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 illustrates the many challenges Union Finance Minister Nirmala Sitharaman will face as she invites the private sector to navigate a complex landscape mired in the inherent contradictions of competition, authority and control government tacit under NPM.

NMP wants to raise ??6 trillion by 2025 by selling a multitude of public assets across the spectrum of infrastructure, including roads, ports, airports, railways, power plants and transmission lines, gas pipelines, telecommunications infrastructure, mining and urban housing development projects. The minister believes this exercise is essential to maintain the National Infrastructure Pipeline (NIP), a program announced in 2019 to build ??111 trillion infrastructure projects by 2025 – alive.

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India’s record in privatizing public assets is uneven at best. Successive governments have invited the private sector into public projects such as roads, power transmission, mining and telecommunications with varying degrees of success. But every government has also, of course, regularly missed its annual divestment targets. The Air India sale is currently in its third iteration; Sales of stakes in Life Insurance Corporation of India, Container Corporation of India Ltd, Shipping Corporation of India and Bharat Petroleum Corp. Ltd are all late.

But Narendra Modi’s government remains convinced that NPM will succeed, and confidence is something it is forced to project, as the pandemic has wreaked havoc on public finances. State governments typically spend twice as much as the Union government in any given year on infrastructure spending. However, with most states achieving lower revenues than budgeted in 2020-2021, they have significantly reduced their capital spending (capital spending) for that fiscal year.

With fiscal constraints tightening at central and state levels, the government needs a victory over the NMP. While her fundraising goal of ??6 trillion is only a fraction of the ??111 trillion needed for the PIN, success here would strengthen its credibility with foreign investors, lenders and institutions such as the World Bank. At least that’s the belief that drives the current push.

While the Niti Aayog listed assets worth ??6,000 billion for the NMP, according to its own estimate, it can only raise about ??3,400 billion long-term asset leases. The remaining assets on the list are to be developed through public-private partnerships, where the private partner only invests in the asset. No payment goes to the government (see graph).

A September 6 report from Systematix Institutional Equities notes that the NMP is “aggressive” and “too ambitious” in relation to the pace of privatization India has been able to forge so far.

“Over the past three years, a total of 1,408 km of roads have been monetized and now 586 km will be privatized through the infrastructure investment fund. Against this, the NMP wants to monetize 26,700 km of roads by fiscal year 22-25, a jump of 20 times over four years, ”says the report. rail operations. The main reason given was (the absence) of an independent regulator, ”he added. Roads and railways account for a third of all NMP projects.

In the electricity transmission sector, regulated tariff projects, which are part of the balance sheet of Power Grid Corporation of India Ltd, will first have to be defused before being privatized, and may result in associated transaction overheads such as that the maintenance of the tax exemption on assets. The clean energy assets for sale are 3.5 gigawatts of power plants owned by public sector units. The challenge here will be to sell assets at their book value at a time when new factories are being built at ever lower prices.

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Bunch of opportunities

Despite these complexities, at least part of the private sector is happy with NPM’s initial promise. Kishore Desai, a member of the corporate strategy team at Hyderabad-based Megha Engineering and Infrastructures Ltd, said companies like his were excited about NMP and NIP. “Both programs offer a bunch of opportunities to meet our ambitious plans to scale up our infrastructure investments in India. Many of the assets listed are also marquee projects. “

Dhaval Monani, resident researcher at the IDFC Institute, is optimistic that the private sector can profit from underutilized government assets. “Of course, the number of titles ??$ 6 trillion is misleading, but if the government can pull even part of that, it will get a good return on the initial investment, “Monani said of the creation and not the consolidated fund.

He says fears that NPM could lead to the pursuit of crony capitalism are unfounded. “Look at the offers for affordable housing projects under the Pradhan Mantri Awas Yojana. It is mainly the local developers in the respective districts who win the projects, ”said Monani. “They are even capable of undermining big companies like Larsen and Toubro on such offers. basis to avoid hoarding of assets by a few private groups. “

The government also wants to involve private investors from the start this time around. “The NPM came about after intensive engagement with stakeholders that took place in March and April,” said a senior government official who was part of those discussions, but declined to be named. “We have taken a position on the concession agreements, their duration and structure; the size of the assets that should be monetized; the levels of leverage to be authorized; all these factors are being codified and working groups are being formed. . “

Suspicious banks

Domestic lenders, however, have clearly remained silent since the NMP was announced, with good reason as well. At the height of the bad debt 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 said last year that the industry should stop relying on banks for infra loans and should explore other avenues of financing.

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“Even if the private sector is interested in NMP, I doubt the banks will voluntarily support these projects,” a managing director of a large private sector bank told TSTIME on condition of anonymity. “Since our past experience is still fresh in our memories, we will not touch any infrastructure project where the government is a counterpart.”

“Nitin Gadkari, as Union Minister of Roads, has made public statements saying that government officials should argue less against private developers. But his ministry continues to file a complaint against the developers. There is no change on the ground. We (also) still see power purchase agreements renegotiated regularly by the States, ”added the banker.

Ultimately, banks and private companies would want credible government guarantees, a stable political landscape, and independent regulation and dispute resolution for NPM to be successful.

In addition, not all public assets listed in the NPM necessarily require a solution in the form of privatization. Mishra, the former managing director of Konkan Rail, says it’s hard to see any case for privatizing KRCL.

“I don’t think the current management has been consulted on this decision. A private investor will need two insurances to invest: a minimum traffic guarantee from the railways and investments to double the existing line. If Indian Railways offers these concessions, KRCL will not need to privatize to increase its profits. And even then, the Konkan Line is so deeply tied to Indian Railways that there will be little operational independence for a private investor and limited freedom to set tariffs. “

Perhaps the real intention of the government is not to cede all listed assets or even to increase the declared amount. ??6 trillion by 2025.

“NMP will count as a success even if we do not achieve 100% of what is planned,” said the government official quoted above.

“If the government is able to establish processes that establish a pattern of privatization, this is a victory for us. If you don’t set a lofty goal, no project gets the eyes and political criticism necessary to make (the) plans come to fruition. NPM attracts public attention and political support. Senior officials are involved. The machine is moving. It’s a victory. “

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