Recent experience shows that there is ample global and local investor appetite for well-structured assets at valuations
Like most things in policymaking, especially those related to real (or purported) disposal of public sector assets, the National Monetisation Programme (NMP) has expectedly attracted a blizzard of critique and commentary. The rationale and the critique are both well-known. The ideological debate around privatisationis posited around world views rather than analytical outcomes. However, it is entirely fair to test the NMP against its purported objectives on technical-analytical grounds.
For starters, NMP is merely the latest avatar of a 1980s serpentine policy-path taken to sweat public sector assets to raise resources from the private sector. With increasing demands on the Union Budget, the importance of non-tax revenues has gone up too. Unfortunately, results have been underwhelming. Joint-sector companies experimented with it in the 1980s, but it never took off beyond the first experiments. The bolder privatisation roadmap, drawn up post the 1991 reforms, ground to a halt after a few (mostly small) divestments in 2002-03. A variant, in terms of outright sale of assets—like coal blocks and telecom spectrum—have also resulted in massive quagmire—political and economic—which have needed enormous executive bandwidth to untangle. In the last two decades, disinvestment (another ingeniously Indian contribution to the economic policy lexicon) has become de rigeur – selling small chunks of Public Sector Undertakings (PSU) in the public markets without changing their majority public ownership. This too has been sub-optimal—valuations of listed PSUs remained depressed, preventing the government from maximising relative value from the share sales. Very often, disinvestment has merely meant “left pocket, right pocket” transfers, with PSUs buying out stakes in other PSUs. NMP is a new experiment to cut through the logjam.
NMP is merely the latest avatar of a 1980s serpentine policy-path taken to sweat public sector assets to raise resources from the private sector.
The big change with NMP is that it isn’t a straight sale, but merely a lease-out of assets to private entities. In some ways, very similar to Lease-Rental Discounting (LRD) loans taken by owners of (mostly) commercial real estate. With a steady and visible stream of cash flows from a property, the owner can discount the same for a defined time period and raise upfront capital from a lender. The only difference between an LRD and what is being envisaged in NMP is risk-share—in the former, the lender gets a defined interest and the owner retains the cash flows, while in the latter the government lets go of the entire cash flows without committing to a defined interest payout. The question to ask is, given this is akin to the Government of India (GOI) borrowing money by pledging out assets on a risk-transfer basis—is the implied cost of borrowing lower than a vanilla long-term (20-30 year) G-Sec? If yields on recently listed Powergrid INVIT (PGINVIT) are to be any indicator, the answer is negative. At a starting IRR of 10-11 percent, the PGINVIT is certainly more expensive for Power Grid than raising 20-year bonds from the market (20-year G-Sec yields are at 6.3-6.4 percent levels). Ergo, the government is better off simply borrowing an equivalent amount from the public debt markets, instead of borrowing via an off-balance sheet LRD transaction with the same (or similar types of) investors.
With a steady and visible stream of cash flows from a property, the owner can discount the same for a defined time period and raise upfront capital from a lender.
However, financial purity is but one of that many imperatives of public policy. One, for good or for bad, it is a fact that both policy analysts (and market ones) look at on-balance sheet public debt very differently to off-balance sheet capital raising, even if the latter comes at a higher cost. Two, the LRD structure, where public assets are leased out, tend to generate a much better valuation multiple than the disinvestment structure of selling chunks of publicly owned companies. The example of PGINVIT is instructive—the market Price/Book multiple of Powergrid Corporation stock (a listed company with multiple rounds of share sale by the government) is an order of magnitude lower than what was extracted by transferring some of its assets to the INVIT. Finally, asset leases have far fewer regulatory, legal, and political hurdles to cross than privatisation, and therefore, are likely to be achieved far quicker.
A valid concern for the monetisation model is from the perspective of users. Many of the assets earmarked in the NMP are natural monopolies. Given that the private concessionaires are responsible for levying and collecting user charges, there is a risk of sharp increases there. A strong regulatory architecture to protect consumer rights becomes a sine qua non for such assets. The good news though, is that bulk of the early harvest assets—national highways, power transmission, airports—while being monopolies, already have strong regulatory oversight governing user charges. Similar oversight will need to be set up for newer types like railway stations, but there is now enough national experience in dealing with such cases.
Many of the assets earmarked in the NMP are natural monopolies. Given that the private concessionaires are responsible for levying and collecting user charges, there is a risk of sharp increases there.
India’s infrastructure needs are immense. Not just physical roads/ports/airports, but also health and education. Competing demands have put natural caps on public funding for infrastructure. The attempt to attract private investment, in the early 2000s, ended up badly—execution challenges around land acquisition, lack of capital market depth, charges of corruption, and cronyism. The denouement was large amounts of NPAs with banks and no residual risk appetite with the private sector. If government is the only game in town, it needs to find a funding game in town too!
In a nutshell, none of the Pareto Optimum positions—outright privatisation or enhanced public deb—are really co-terminus with the art of the political-economy possible. The Nash Equilibrium spots are broadly converging towards the NMP model. Recent experience with INVITs, via PowerGrid and NHAI, show that there is ample global and local investor appetite for well-structured assets at valuations far superior to the respective listed sponsors of the assets.
The views expressed above belong to the author(s). ORF research and analyses now available on Telegram! Click here to access our curated content — blogs, longforms and interviews.
Somnath Mukherjee is Managing Partner and Chief Investment Officer ASK Wealth Advisors.
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