Monetizing project assets

The Hindu reports that IVRCL Ltd has signed an agreement with TRIL Roads Private Ltd (TRPL), a TATA enterprise, to divest its stake in three highway projects - Salem Tollways Ltd (STL), Kumarapalayam Tollways Ltd (KTL) and IVRCL Chengapally Tollways Ltd (ICTL) - with a total project cost of Rs 2200 Cr and monetize these BOT assets.

STL had commenced commercial operations on the 53 km stretch of NH-47 from Salem to Kumarapalayam in Tamil Nadu from June 2010, KTL was operating another 47 km stretch on the same highway from Kumarapalayam to Chengapally from August 2009, and ICTL is planning to commence commercial operations on 54.83 km stretch of NH-47 from Chengapalli to Walayar via Coimbatore in the first half of 2013-14.

I have two observations on this practice. 

1. As India sets out on its massive $1 trillion infrastructure investment plan for the 12th Plan period, monetization of infrastructure assets is an attractive proposition. It frees up the balance sheet of infrastructure construction firms to take up newer projects. However, it is important that there be a sufficiently developed market in the management of the assets that are being monetized. Apart from outright sale, monetization can be done by securitizing the project asset either in the bond market or in equity market. 

2. A more important issue is what happens to the original financial structuring of a PPP project once its financing pattern is changed. For example, in BOT toll roads, the financial structuring is generally done on a 70-30 or 80-20 debt-to-equity model with 16-20% return to equity for a 25-30 year period. But once the construction and commissioning risks are off-loaded and the project asset transacted, it is certain to attract debt at much lower rate and allow for much higher debt-to-equity ratios. In other words, while the project cash flows remain unaffected by the changes in ownership pattern, its cost of financing comes down. This invariably benefits the original developer who, as with IVRCL, would either dilute his equity or even exit, and pocket a handsome rent in the process. 

I have blogged about this practice earlier. The British infrastructure regulation expert Dieter Helm has documented this trend in British government's concession agreements. He believes that it is costing the government atleast one billion pounds annually in funds siphoned away by enterprising concessionaires who dilute or divest their equity stakes for more debt.