Author: Don Obrien

MF-like trusts key financing tool in mega asset monetisation push

Infrastructure Investment Trusts (InvIT) will be a key financing mechanism as the government kick-starts its ambitious plan to monetise brownfield assets, with a Rs 5,000 crore National Highways Authority of India (NHAI) InvIT issue expected to set the ball rolling.

InvITs for railways and power sector assets are being planned as well — even as a Public Private Partnership (PPP)-based template has also been prepared to monetise assets across sectors including ports, airports, shipping, telecom, warehousing, mining, and gas & petroleum product pipelines.

“The first tranche of NHAI InvIT transaction is expected to be completed by Q2/Q3 of FY2022 subject to market conditions and stabilisation of toll revenues in wake of Covid,” says the NITI Aayog’s National Monetisation Pipeline (NMP) FY’22-25. “(This) issue is envisaged to be privately placed, with indicative value fund raise at about Rs 5,000 crore.”

The first tranche of the NHAI InvIT is expected to include 586 km of road assets in Rajasthan, Gujarat, West Bengal, and Bihar, and is likely to be wrapped up by December. NHAI is also exploring a second tranche of follow-on issue of the InvIT.

“We have got good feedback from institutional investors. The InvIT route, as already tried in the PowerGrid issue, should get the monetisation plan off the ground immediately,” a senior government official said.

While InvITs and Real Estate Investment Trusts (REITs) are structured financing vehicles, other monetisation models on PPP basis include Toll Operate Transfer (TOT), Operate Maintain Transfer (OMT), Operations, Maintenance & Development (OMD), and Carry Operate Transfer (COT).

The Investment Trusts are somewhat like mutual funds, which enable small investors to buy units in the trusts that are listed on the exchanges, and to have a share in the income stream of these vehicles in the form of dividend and unit distribution. The other monetisation approaches are basically user fee-based.

After the successful PowerGrid InvIT issue comprising transmission assets earlier this year, the government has now lined up follow-on issues. The transmission assets considered for monetisation over FY 2022-25 are 28,608 circuit kilometre (ckt km), comprising about 17 per cent of PowerGrid Corporation’s total asset base. In 2021-22, transmission assets worth Rs 7,700 crore are expected to be monetised, including the transaction already completed in April-June.

The projects comprise 11 transmission lines, including six 765 kV lines and five 400 kV lines, with a total circuit length of 3,700 ckt km, and three sub-stations with 6,630 MVA of aggregate transformation capacity and 1,956 km of optical ground wire.

“There is high visibility of potential revenue and cash flows from the InvIT due to availability of additional 18 projects involving an investment of Rs 22,500 crore to be offered as a project pipeline to the InvIT,” as per the NMP.

“The (NMP) is likely to be positive for the chosen sectors if it is orchestrated well, with seamless regulatory support and the right ecosystem to meaningfully monetise the assets…The idea to increase efficiencies of brownfield assets, with a hand back caveat, brings some comfort. Asset monetisation in power can bring further investment in infra building,” said N Venu, MD and CEO, India and South Asia, Hitachi ABB Power Grids.

In the railway sector, station development, passenger train operations, goods sheds and hill railways are being monetised on PPP basis, while the government is keen to launch a Track Signalling and Overhead Equipment (Track OHE) InvIT. The plan is to monetise existing railway infrastructure across defined routes as a packaged asset.

Among other railway assets, 265 goods sheds out of the total 1,246 have been considered for monetisation over the NMP period, starting with 75 goods sheds in FY23. The government plans to invite private sector participation in augmentation and operations & management of these sheds as private freight terminals.

The Dedicated Freight Corridor Corporation of India plans to monetise 673 km of tracks either through grant of TOT-like concessions to private players, or through InvIT transaction with revenue in the form of Track Access Charge. As certain sections of the Western and Eastern dedicated freight corridors have already commenced, monetisation can begin in phases after more tracks are commissioned.

The government has used four key methods — market approach, Capex approach, book value approach and enterprise value approach — to arrive at the indicative value of Rs 6 lakh crore worth of assets to be monetised.

Multiple sectors and sub-segments identified in the NMP provide investors with a range of options, but “execution” will be key for such a bold reform move, said Manish Aggarwal, Partner & Head – Infrastructure, KPMG in India.

“Structuring of projects and ensuring a balanced risk framework is very important before these deals are launched in the market. We must avoid what happened in the recently launched PPP in trains initiative, where no bids (except two, one of which was by a government entity) came up,” he said.

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Oliver Bolt

Oliver Bolt

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