Monetisation lessons from NHAI

Its recent experience offers crucial insights into what makes an asset monetisation exercise successful

The National Monetisation Pipeline announced in the Union Budget comprises brownfield infrastructure assets that will be monetised in the short to medium term. Asset monetisation is not new to India. It has been undertaken sporadically across different infrastructure sectors in the past, the most visible ones being airports and telecom service providers.

However, the announcement of a “pipeline” in the Budget has a signalling effect, indicating the political will to pursue this measure with renewed vigour. Commentators and experts have rightly emphasised the importance of implementation to make this proposal a success. In planning the implementation capacity for this mega-monetisation exercise, learnings from previous asset monetisation would be a good place to begin. In this article, we review the outcomes of four recent asset monetisation exercises undertaken by the National Highways Authority of India (NHAI), which accounts for roughly 20 per cent of the aggregate procurement undertaken by the central government. This allows us to make a list of tangible to-dos as India prepares for its mega asset monetisation pipeline.

NHAI’s experience: Asset monetisation may be undertaken in several ways: Privatisation and strategic sale of government-owned assets, listing government-owned companies and diluting the government stake, are some of them. In the context of brownfield public goods, such as completed roads, asset monetisation involves leasing out completed road projects to private or public investors. The investors pay an upfront value for this “lease” in return for the right to operate the road project and collect the tolls generated from it during the concession period. The investors may be purely financial investors who, in turn, grant the operating right to firms with experience in infrastructure management and operation (see Table ). The upfront value paid by the investors is linked to the accuracy of the projected revenue that the asset will generate, the terms of the contract with the authority, and the quality of disclosures maintained by the concession granting authority. In 2017, the Cabinet Committee on Economic Affairs approved the NHAI’s plan for monetisation of national highways using the Toll-Operate-Transfer model. So far, the NHAI has undertaken four asset monetisation exercises, with mixed success. The table below gives an overview of the outcomes of these exercises.

Disclosure standards: The quality of information on the previous asset monetisation exercises is poor, with sparse information spread across press reports. For example, the outcomes of these exercises are neither systematically disclosed by the NHAI nor the Ministry of Road Transport and Highways. By itself, this is a deterrent for future investors. In any private or public auction, the bidders’ confidence to place a bid is directly linked to the transparency of the owner and auctioneer of the asset. For the NHAI to attract a larger pool of bids, it must put together a systematic ongoing disclosure framework for past and future exercises. 

The importance of implementing quality disclosure standards in the public procurement process is underrated. For example, a pilot project on improving disclosure standards undertaken by Ukraine from 2015 to 2017 showed that the adoption of systematic digitised disclosures (through their portal — ProZorro) yielded several positive outcomes. After the pilot, the average number of bids per tender went up by 15 per cent, and the average number of unique suppliers grew by 45 per cent for each procuring entity. Over 50 per cent of the Ukranian population also believed that ProZorro contributed towards reducing corruption, linking quality disclosures to a positive perception of the government. 

While the Budget promises a dashboard facility to track the progress of the assets that are henceforth included in the National Asset Monetisation Pipeline, this endeavour should be extended to the assets already monetised by the NHAI to build confidence in future monetisation exercises. This will also augur well for the price discovery process for the next round of bidding.  

Preparatory work: The key to making asset monetisation work is to combine projects of different risk levels into a single bundle so that the risk of the concessionaire is diversified. Since these are brownfield projects, the risks associated with these projects are largely linked and limited to the volume of traffic. The risks involved in a greenfield procurement project — such as litigation, protracted land acquisition proceedings, etc. — are absent. The accuracy of traffic projections, therefore, matters significantly. 

The table indicates that out of the four rounds of asset monetisation undertaken by the NHAI, two rounds failed to attract bidders. This indicates that the estimated value of the concession was not in line with expectations of the market on projected traffic volumes. It also underscores the lack of capacity within the NHAI in making these predictions. For instance, in the last bundle, the initial estimation was slashed by over 50 per cent six months into the bidding process due to the lack of a response, and was eventually cancelled six months later. The World Bank’s Benchmarking Infrastructure 2020 Report scores India at 60 points on project preparation. South Africa, where PPPs were introduced around the same time as India, scores higher as do countries like Colombia, Mexico and Vietnam. In the context of India, the report highlights the lack of affordability assessments and market sounding exercises, which are key elements that impact market response to the bid. 

Duration of the concession: The terms of the concession contract have an important role to play in the outcome. One of the key distinctions in India’s asset monetisation programme is the shorter concession period of 15-30 years. In this, the NHAI seems to be a global outlier, with most nations designing 50-75 year concessions. In 2019, the Airports Authority of India also leased out the Lucknow airport to the Adani group for a 50-year concession. 

The reasons for restricting the concession period to a shorter duration, are unclear. While this allows the NHAI to re-assess the concession value at the time of a re-auction, newly constructed assets are likely to fetch better bids today as compared to a re-auction 15-30 years later after undergoing wear and tear. The World Economic Forum’s Global Competitiveness Report 2019 also identifies our lag on the infrastructure quality front — we rank 72nd and 48th on road connectivity and quality of roads, respectively, out of 141 countries. A longer concession term will likely incentivise the concessionaire to invest in higher quality standards. 

The road ahead: The World Bank’s benchmarking infrastructure report (2020) assigns a score of 42 to India on infrastructure asset management, which is nearly 25 per cent lower than the global average. This reinforces the need and urgency to “outsource” the management of completed assets. A good start to building implementation capacity would be to review successful and failed asset monetisation exercises previously undertaken by the government. Anecdotally,  the learnings from these experiences may seem obvious, but hard data could yield more concrete insights on how to develop an effective implementation programme  for rolling out the National Monetisation Pipeline. 

The writers are researchers at the Finance Research Group, Mumbai