Asset Monetisation Pipeline: Explained

What exactly is asset monetisation and why is the Government doing it?

Finance Minister Nirmala Sitharaman has chalked out a plan of monetizing the government’s core assets worth Rs. 6 lakh crores over the next four years. The assets range from roads, railways, telecom, warehousing, mining, aviation, ports, stadiums to gas pipelines, power generation, and power transmission.

Hold on. What is asset monetisation in the first place? And, why now?

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India got her freedom from the British Raj in 1947. But the road to real independence was not going to be an easy one.

As former Prime Minister Manmohan Singh puts it: “The brightest jewel in the British Crown was the poorest country in the world in terms of per capita income at the beginning of the 20th century.”

Indians were now tasked to build the nation of their dreams: to transform a poor and drained economy into a flourishing one. And so, with Pt. Jawaharlal Nehru at the helm of affairs, began India’s Tryst with Destiny. 

But, the past had cast a shadow on India’s economic policy. The Nehruvian economy wanted to preserve the democracy of India at all costs and reduce dependence on other nations. To make young India self-reliant in the long run, the government gave increased thrust to industrialisation with a focus on heavy industries and capital goods.

However, the private players did not have the means or expertise to lay down the infrastructure. So the Government of India took charge of building the country and its infrastructure. 

Fast-forward 75 years. 

Times have now changed. Private players have amassed the wealth, experience, and competency to be able to manage and operate infrastructure projects. 

And well, running businesses is not the core competency of the government. It’s an added hassle. If they put their efforts into managing and operating the assets, who will take care of the policies? So it’s better to outsource the assets to private players for management, isn't it?

Now, how does the government plan to go for asset monetization?

Is it a fancy term for selling off the assets? Is the government selling its assets?!

Nuh-uh. The government has emphasized that ownership of the assets will be retained by them. The private sectors will have to ‘give it back’ after some time. 

This is nothing new. The government has entered into such Public-Private Partnerships (PPPs) in the past as well. 

One such model is Toll-Operate-Transfer (TOT), which the National Highway Authority of India (NHAI) used to monetize its highways in 2016. It has raised Rs. 17,000 crores in the last 24 months using TOT.

So, how does TOT work?

Private players bid to acquire operations of the asset, say Highway, for a fixed period. The highest bidder pays an upfront lump sum amount to the government. They are also required to operate the highways for a fixed period of time (say 20-30 years). 

Wow. Pay upfront to incur more expenses in the future. Why will anyone in their right mind do that?

Because the bidders get to pocket all the toll revenues (plus new avenues for revenue that they can unlock) generated during that period. The scope of earnings is immense. 

On the other hand, the government gets cash upfront which it can use for other activities and fast-track the development in the country. 

Like TOT, there are several other models and financial instruments, where the government transfers its assets for a price and gives the opportunity to the operators to make money out of them. Here is the sector-wise monetisation pipeline planned by the government:

Source: pib.gov.in

What do you think: What changes will this move bring in the entire ecosystem?

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