An Alternative to Asset Monetisation?
Exploring the Canada Infrastructure Bank model as an alternative to the Rs. 6 lakh crores program.
Recently, Finance Minister Nirmala Sitharaman chalked out a plan of monetising the government’s core assets worth Rs. 6 lakh crores over the next four years.
Basically, it plans to transfer the assets that it has already built, such as highways, to private players. These private players will handle the operations and earn revenue for some years in exchange for making an upfront payment to the government. (Check this out for further details on asset monetization)
And, how does the government plan to use this money?
Yes, to create new infrastructure. Looks like a plan, right?
Well, many people are skeptical that this plan will favour only a handful of big players in winning the bid. And once privatised, these assets could be monetised in ways that the utility will go outside the reach of a major chunk of the population.
While we are no one to comment on the good or bad of the plan, we can take a look at other existing models. One particular model that caught our eyes was the Canada Infrastructure Bank (CIB).
Why solve for new infrastructure financing?
If you live in India, you would have probably seen a highway or a metro rail whose construction must have lasted your entire childhood. “For men may come and men may go, but I go on forever”, by Alfred Lord Tennyson, fits aptly to the situation.
Political parties come and go, but the construction is met with timeline extensions and cost overruns.
Okay, now let’s look at how public infrastructure is built. A typical road/ flyover project will look like this:
Usually, the capital structure of these projects is thin on equity with huge amounts of debt. And with bureaucracy and slow execution, they don’t generate cash inflows for a long time. How are they even going to repay the loans?
The entire process of infrastructure development needs to be improved, no?
Model of Canada Infrastructure Bank
Usually, governments spend money from their own pockets (or take loans) to fund infrastructure projects.
Now, the Canadian Government tried something new.
It set up a separate bank, CIB, which collects money from the private sector and invests in infrastructure projects. Investments by CIB in projects can be in the form of equity, debt, or even guarantees.
But CIB has just one goal: to get its capital back and provide good returns to its investors.
How is this going to help solve any of the problems, ReadOn? And how is this different from asset monetisation?
In asset monetisation, private players were made party to the risk and rewards after the assets had already been constructed. However, with CIB, as the funds are sourced from private players, they are made part of the risks and rewards right from the stage of construction. Also with CIB, the assets won’t be outrightly controlled by a handful number of private entities.
Also, the creation of a separate entity (CIB) solely to look after the financing and feasibility of projects would lead to better management and execution, no?
From an investor’s lens, because CIB functions like a typical bank, it helps public money to be employed in higher income-generating avenues rather than locking the money in low-yielding assets such as Fixed Deposits.
But, CIB hasn’t really taken off in Canada yet...
Canada does everything for free for the public. For example, a highway project in India will generate revenue through the collection of toll charges. But that does not happen in Canada. It’s free.
Imagine putting your money in CIB, which invests in highway projects with no revenues? Will you go ahead and put in your money?
Another problem that remains is that the CIB is still regulated and funded by the government. Couldn’t really get rid of bureaucracy, you see.
Finally and most importantly, CIB did not meet its investment target and leadership changes had to be made for better management and execution.
Do you think a model like CIB could work in India?
Yes, yes - we have started finding solutions for problems too :P Got bored of lamenting about stuff :) If you liked this approach, do share our work with your friends on WhatsApp
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