Government plans to require an asset monetization monitoring authority to evaluate performance
The government has made an ambitious announcement asset monetization program. It expects to generate ₹6 trillion in revenue over a period of four years. at a time when Government’s financial condition is bad, is money that the government can certainly use. However, getting the right to monetize assets is quite a challenge.
In asset monetization, the government participates with its assets – such as roads, coal mines – for a specified period in exchange for a lump sum payment. At the end of the term, the property is returned to the government. Unlike privatization, there is no sale of government assets involved.
Read also | RSS affiliated trade union criticizes monetization plan
By monetizing already built assets, the government can generate revenue for building more infrastructure. Monetization of assets will take place mainly in three areas: roads, railways and electricity. Other assets to be monetized include: airports, ports, telecommunications, stadiums and power transmission.
First, underutilized assets
Two important statements have been made about asset monetization program. First, the focus will be on under-utilized assets. Two, monetization will happen through public-private partnerships (PPPs) and investment trusts. Let us examine each of these in turn.
Suppose a port or airport or stadium or even vacant land is not being used adequately because it has not been properly developed or marketed adequately. A private party may decide that it can put the asset to better use. It will pay the government a price equal to the present value of the cash flows at the current level of utilization.
editorial | Risks and Rewards: On the Asset Monetization Plan
By making the required investments, the private player can take advantage of a higher level of cash flow. The difference in cash flows under government and private management is a measure of improving asset efficiency. This is a win-win situation for the government and private players. The government gets a ‘fair’ value for its property. The private player gets his return on investment. The economy benefits from increased efficiency. Thus there is a lot to monetize under-utilized assets.
that are well used
Matters can be very different in monetizing a property that is being properly used, such as a highway that has good traffic. In this case, the private player has little incentive to invest and improve efficiency. It just needs to operate the properties as they are.
The private player may value cash flow assuming a normal rate of growth of traffic. It will pay the government a price that is its return minus the present value of the cash flows. The government earns badly needed revenue, but it may be less than what it could earn if it continued to operate the assets itself. There is no improvement in efficiency.
Suppose the private player plans to improve efficiency in a well-used asset by making the necessary investments and reducing operating costs. The reduction in operating costs need not translate into a higher price for the asset compared to government ownership. The cost of capital for a private player is higher than for a public authority. A public authority requires less equity capital and can obtain loans more cheaply than a private player. The higher cost of capital for the private company can offset the benefit of any reduction in operating costs.
As we have seen, where under-utilised assets are monetised, the benefits to the economy are likely to be higher. However, private companies will prefer well-used assets over under-utilized assets. This is because, in the former, cash flows and returns are more certain. Private incentives in asset monetization may not be commensurate with the public interest.
evaluation and issues
There are other complications. Long-term horizons, e.g., 30 years, are very difficult to evaluate accurately. Does anyone know what would be the growth rate of the economy in such a period? For a road or highway, the increase in traffic will depend on factors other than the growth of the economy, such as the level of economic activity in the region, prices of fuel and vehicles, alternative modes of transport and their relative prices, etc. If the rate of growth of traffic, set by the government in property valuation, exceeds that, the private operator will gain windfall.
Alternatively, if the winning bidder pays what turns out to be a hefty price for the asset, it will sharply increase the price of the toll. The consumer ends up bearing the cost. If the transporters have to pay more, the economy suffers. There is also a possibility that the roads which are currently free to use have been put up for monetization. Again, the consumer and the economy bear the cost. It could be argued that a competitive auction process would address these issues and get the government the right price while earning efficiency gains. But this assumes, among other things, that there will be a large number of bidders for many properties that will be monetised.
Finally, there is no incentive for the private player to invest in the asset at the end of the monetization period. The life of the asset, when it is returned to the government, may not be long. In that event, asset monetization is virtually equivalent to selling. Thus monetization through PPP route is fraught with problems.
another way to go about it
The government has indicated the creation of Infrastructure Investment Trust (InvIT), another form of monetization, in which the monetized assets will be transferred. InvITs are mutual fund-like vehicles in which investors can subscribe to dividend paying units. The sponsor of the trust is required to maintain a minimum prescribed ratio of the total units issued. InvITs provide a portfolio of assets, so investors get the benefit of diversification.
The properties can be transferred at the construction stage or after earning revenue from them. In the invitation route to monetization, the public authority has rights over a significant portion of cash flows and operating assets. Therefore, issues arising with the transfer of property to a private party – such as misvaluation or an increase in price to the consumer – are less of a problem.
Way
What can we conclude 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 and monetize infrastructure. Second, monetization through InvITs is likely to prove less of a problem than the PPP route. Third, we are better off monetizing under-utilized assets than well-used ones. Fourth, there is a matter of independent monitoring of the process, to ensure proper execution. The government may set up an Asset Monetization Monitoring Authority to be appointed by competent professionals. The authority should put all aspects of monetization under scrutiny – valuations, impact on the price charged to the consumer, monetization of under-utilised assets, experience in various fields, etc. – and document the lessons learned.
Asset monetization is fine if executed properly – and it’s always a big ‘if’.
ttrammohan28@gmail.com
.