A 6 lakh crore monetization plan

On Monday, Finance minister Nirmala Sitharaman unveiled the government’s four-year infrastructure asset monetization plan with the explicit aim of raising ₹6 lakh crore by 2025. And in today’s Finshots we are going to talk about it some more.

The Story

Monetization is an ambiguous term. Sure, broadly speaking you could see it as this process of converting something—tangible or intangible — into money. But when you get to the brass tacks, it can mean so many things. Take for instance a land parcel. How do you “monetise” this asset?

Well, you could rent it out. You could build something on it and make money off of that. Or you could sell it outright. In each case, you are extracting money out of an idle asset and each time, you’re monetizing the asset. So when somebody uses the word monetization, you’ll have to seek more context.

And this is where this story gets interesting.

The Indian Government wants to raise ₹6 lakh crores or roughly $81 billion — by monetizing government-owned land, roads, stadiums, etc. The easiest way to do this perhaps is to sell them all — Cash-out and run for the woods. But that isn’t always a practical solution. For instance, consider the difficulty of selling a piece of road. If you started privatizing national highways, that could inconvenience a lot of people at the same time. And besides, most government-owned assets, specifically government-owned companies, are riddled with debt and nobody wants to touch any of them even with a barge pole.

So the alternative is to pick assets that still hold some value and monetize them without selling them outright.

How do you do that?

Well, consider roads once again. Instead of selling the road outright, you could transfer the rights to toll and maintain this asset to a private entity. You could sign an agreement working out the toll fee, the period during which the rights will remain with the third party, and flesh out other important details. In return, the private entity may be asked to commit cash upfront. This will give the government some much-needed financial reprieve and it will relieve them of all obligations to maintain the road.

This is what the government is alluding to when they’re talking about monetizing government assets. Contrary to popular perception, this isn’t a fire sale. If anything it’s an elaborate ploy to unlock value in assets that haven’t been put to optimal use.

What’s more? A significant chunk of these proceeds is expected to be ‘recycled’ back into new infrastructure projects. So yeah, this isn’t all that bad. And if you’re wondering what other assets the government could potentially sell, besides roads?

Well, you have the power transmission assets and InvITs. InvIT’s may sound like complicated financial instruments. But really, they’re not. Here’s what the government is likely going to do. They’ll take all the useful power transmission assets and put them in a trust. Once that’s done they’ll sell units in this trust to potential investors — beneficiaries of sorts. If you have the money, you could invest in one of these units and take home a sweet dividend at the end of every year. It’s like an IPO, but in this case, the investors receive some cash whenever those power transmission assets generate money. The government in the meantime receives money upfront. A win-win for all parties once again since there is no selling involved.

The government also hosts land parcels, guest houses, and other real estate assets that could potentially be put to good use. The objective now is to identify these assets, find the most appropriate way in which you could unlock value, and do it in a time-bound manner. If all goes according to plan, the government could raise as much as ₹1.6 lakh crore from road assets, ₹1.5 lakh crore from railway assets, ₹1 lakh crore from power sector assets, and about ₹50,000 crores each from gas pipelines and telecommunication assets.

Hopefully, this could go a long way in improving the government’s finances.

Until then….

Don't forget to share this article on WhatsApp, LinkedIn and Twitter