Asset monetisation addresses India’s stunted infra growth

Last week, Sydney-based Macquarie Group won the first toll-operate-transfer (TOT) bundle put on the block by the National Highways Authority of India (NHAI) – comprising nine highway stretches in Andhra Pradesh and Gujarat – with an eye-popping Rs 9,681 crore bid.

On its part, the NHAI was said to be expecting Rs 6,250 crore. That was a good guess, too, because other major bidders – such as Brookfield, IRB-Autostrade and Roadis-NIIF, among others – had quoted in that proximity.

The roads sector regulator was expecting a 25-30 per cent premium to the landed cost of construction of around Rs 7 crore per km. The winning bid was 50 per cent more. The justification for this lies in the source of funds, the returns’ expectation, and the increased efficiency in toll collection.

The Macquarie Group’s outsized bet should increase the government’s faith in asset monetisation as a way to fund India’s enormous infrastructure build-out.

This could also perhaps indicate that there is a fair bit more investor appetite to run infrastructure assets than build.

At CRISIL, we had said in late February that such auctions would draw ‘patient capital’ from abroad, rather than aggressive domestic or international investors, given the lower internal rate of return and risk on offer.

Scores of CRISIL InfraInvex, an index that tracks the investment attractiveness of infrastructure sectors, had indicated that roads and power transmission were the most promising for investments and the market seems to be endorsing that.

Also, while the infrastructure outlay for next fiscal is set at Rs 6 lakh crore, gross budgetary support is just 26 per cent of that. Which means the government has to lean on alternative and innovative financing mechanisms and internal and extra-budgetary resources (IEBR) to pony up rest of the money.

And this isn’t for roads alone. While the NHAI has its build-operate-transfer (BOT) and TOT packages, the Indian Railways has set sights on monetisation of surplus land, and from station redevelopment. Similarly, in the area of power transmission there is significant interest among the buyers for built assets and  Power Grid Corporation of India can potentially explore the possibility of monetising these assets, not only would the patient capital be inclined to invest, even other sectoral investors like Infrastructure Investment Trust, or InvIT, would lap it up.

That being said, asset monetisation alone won’t be enough to meet the gigantic mandate. The overall infra funding needs for the key infrastructure sectors is closer to Rs 50 lakh crore for the next five years.

Which would mean asset monetisation would need to be complemented by divestments, public listings, corporate bonds, and more of patient capital.

We also need to generate more ‘pull factor’ for private investments by de-risking good infrastructure assets and facilitate ‘value capture’.

What’s good to see is the government is cognisant of this imperative that it has to do the hard yards first, and materially de-risk business models before it can expect large-scale participation by the private sector. Recent macro data vouchers this: Public investments this fiscal, according to data from CRISIL Research, should be 76 per cent of all investments.

After a sharp slowdown in capital expenditure this fiscal due to the twin impact of demonetisation and GST, we expect the capex cycle to pick up and grow 13 per cent next fiscal to mark the first double-digit growth since fiscal 2013. What’s more, the bulk of the incremental capex next fiscal is expected to be in infrastructure, with just three areas – roads, railways and urban infrastructure – hogging almost two-thirds of it.

By default, that would mean public-private partnerships are firmly on the backburner.

Consequently, the much-awaited revival in private capex appears unlikely this fiscal. Private participation in infrastructure this fiscal would be largely limited to engineering, procurement and construction, or EPC, contractors – instead of more-skin-in-the-game concessionaires -- and refinancers in the case of asset monetisation. 

Overall, however, asset monetisation will only be a limited silver bullet given the gargantuan funding requirements – a drop in the ocean as it were.

So India needs to find ways to generate more capital, and that would mean stepping up on facilitations through more innovations.

In the context, it’s good to see the government starting off on the capital supply side by asking large companies to meet a quarter of their funding needs through bonds. On the demand side, it is persuading insurance and pension regulators to accord recognition to bonds rated in the ‘A category’ as well (compared with up to ‘AA rating’ now).

Sameer Bhatia is President, CRISIL Infrastructure Advisory