Much will be written and talked about the Rs 6 trillion National Monetisation Pipeline (NMP) of the Government of India to monetise revenue generating infrastructure assets through long-term concessions. (instead of outright sale). It'll complement the Rs 111 trillion National Infrastructure Pipeline (NIP). There is no doubt that both are welcome steps.
This blog has written on multiple occasions on the need to signal intent and shape markets by announcing upfront the list of assets proposed for PPP financing and monetisation. This post will point to certain important requirements for successful execution of the NMP.
As with PPPs, its implementation will be the real test. And like PPPs, there are no short cuts and implementation capacity and governance will be the critical challenges. This is especially so given the political economy and the generally deficient corporate governance standards.
On the former (capacity), apart from isolated pockets, the state's ability to value, structure, tender, and contract assets is weak. The latter (governance) assumes even greater relevance given the general experience (and not just from India) of infrastructure service providers reneging on contractual obligations, stripping the assets, and seeking constant renegotiations at ever more favourable terms. Further, political economy concerns are never far away from infrastructure contracts. And controversies related to governance failings and crony capitalism can bring disrepute and derail the entire program.
There will be several suggestions to set up new institutional structures and the like to implement this. Most of them are likely to be superfluous, some (like an excessive focus on Dashboards etc) can even detract from the objective. This is an example of an oft-repeated suggestion which has little evidence and which is most likely a costly digression.
“If the Specific Relief (Amendment) Act 2018 is effectively implemented across India creating special courts for fast-track dispute resolution in PPP projects, it could significantly address some of these concerns.”
This, arguing for creation of a holding company to own and monetise all assets, is another one.
There are some important requirements for the success of the NMP.
1. A clearly defined, stable, strong institutional mechanism is essential to implement this. It'll require a team of professionally competent officers with reasonably stable tenures, supported by professional experts, to ensure its effective implementation. There will also have to be clearly defined sets of procedures and protocols for approvals within Departments and Government of India at large.
The team's responsibility would be to assist Departments by responding swiftly and clearly to clarifications on processes, decisions on new concerns or issues, and facilitating inter-Departmental co-ordination. It should also create the principles and guidelines on which valuation approach to use where, templates for different valuation approaches, project structuring templates, model tender documents, contracting principles, and model contract documents. The procedures and protocols should be clear enough and have equally clear accountability norms so as to ensure that approvals happen in a time-bound manner. The entire process should be reviewed at least once a quarter in detail by the Cabinet Committee of Economic Affairs.
2. Given their very nature and the politically challenging environment, many of the NMP transactions, even if done with the cleanest intent, will most certainly ignite controversies, trigger litigation, and lead to vigilance and other investigations. Officers, especially those leading the monetisation, will be vulnerable to accusations, media trials, disciplinary proceedings, and even witch hunts. Even when the decision is clear, officers will resist taking them for fear of such repercussions. It's most certain to be one of the biggest deterrents to objective decision-making.
There are no easy ways out. It'll require leaving officers to do what they do best, having higher institutional mechanisms to validate decisions, and for the political leadership to assume accountability where they should. In simple terms, there should be a distinction between due-diligence and process, and high-stakes decision-making.
Bureaucrats should be responsible for managing the process and sub-ordinate decisions. Given the importance of virtue signalling in such endeavours, a high level Committee, headed by a judge with unimpeachable integrity and professional repute, and consisting of similar others from diverse areas and public and private sectors, should be constituted to give the final stamp of approval on certain important decisions, especially relating to valuation. Policy and potentially politically fraught decisions should be the responsibility of the political executive in an appropriate forum - Minister, Group of Ministers, Cabinet Committees, and Cabinet.
3. There should also be a clear escalation protocol for decision-making. For example, if there is lack of consensus and uncertainty within the bureaucratic and high-level Committee on the methodology to be followed for valuation of an asset, the decision should get escalated to the political executive, and they should be held squarely accountable for the decision. The escalation protocol should also have clear timelines. In this regard, the monitoring by the CCEA will help.
4. Then there is the issue of getting the projects ready for monetisation. Many assets will have legacy issues, centre-state factors, and so on, which will require changes in rules and laws, some even legislative revisions. Resolving legacy issues relating to employees, land, and pre-existing contracts will be very challenging. There cannot be any comprehensive predefined and unambiguous guidance for resolving them. Discretion and judgement will be required to be applied on a case-by-case basis in many transactions. Again, in order to overcome the fear of subsequent investigations and disciplinary proceedings deterring officials, the political commitment and accountability is essential.
5. It may be a tactically sound approach to confine the first round of monetisation to a few very easily monetisable assets, which are likely to be free from disagreements on valuation approaches or valuation itself, or without complicated legacy factors. The national highways are a good example of de-risked asset class. Pluck the low hanging fruits of assets with precedents of successful monetisation. Apart from helping establish credibility of the process, this would also help build internal capacity and assess market demands and capabilities.
6. Any pipeline signifies a long-term nature of the asset monetisation program. That should be the case with NMP too. There should be an iterative approach to this involving constant improvements in the processes and documentations depending on emerging evidence and market conditions. This should be a major responsibility of the implementation team. The long-term nature also means that signalling intent and shaping market expectations, which are critical to attracting deeper pocketed infrastructure funds.
7. Valuation of any asset is tricky and an art. Most revenue generating infrastructure assets are regulated assets with stable and low returns profile. This also means that book value and enterprise value approaches are appropriate methods, depending on the nature of the asset. Further, given the political economy, incentives of governments to raise revenues for fiscal expenditures, and the volatility and irrational exuberance with public market valuations, the market value approach may not be a good method and should be deployed only under exceptional circumstances.
8. There are several likely risks with developers stripping assets through high dividend payouts and loading the asset company with debt, skimping on investment and other statutory obligations etc. Consider this.
Given the operation and maintenance (O&M) interest in these long life-cycle projects and the public interest involved, any change in management that results from a financial restructuring would distort incentives and necessarily raise important regulatory concerns. For example, outright sale would limit the role of the original project operator in a long-term concession into that of a construction contractor. Or the original contractor could dilute his equity gradually... Both trends raise concerns about O&M commitment.
The nature of today's infrastructure financing market encourages these actions and more. This paper discusses the second generation issues of infrastructure contracting in detail and offers several suggestions to limit them.
9. Finally, the cautions with privatisation and monetisation of infrastructure assets are well-known. Foremost, the government should avoid the urge to privatise to only raise money for fiscal expenditures. Instead, the primary objectives should only be to enhance economic efficiency and limit political economy inefficiencies due to public ownership. In the process, revenues will get generated.
Update 1 (30.08.2021)
The track record on asset monetisation has been not very encouraging.
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