While writing the last instalment of this column, on the Chandigarh discom privatisation, it occurred to me that we seem to be in the early stages of a growing wave of operating infrastructure assets being transferred out of government control to the private sector. This is happening in a number of different ways.
Over the past few years, we have seen the toll-operate-transfer concession introduced in the roads sector, a number of existing airports being concessioned out late last year, the privatisation of electricity distribution companies, and most recently, the infrastructure investment trust or InvIT proposed by Power Grid Corporation of India Ltd., coming soon to a stock market near you.
We Recycle!
The fashionable term for this process of transfer or disposal is asset recycling or asset monetisation. The basic premise here is that public funds are somewhat uselessly trapped in assets that needn’t be held by the state and that if these assets are sold, leased, or given out on concession, funds can be raised to finance fresh government investments in public infrastructure.
One of the government’s most articulate proponents of the asset recycling programme is Amitabh Kant, CEO of NITI Aayog, who has been writing and speaking about this concept for over a year. In this rather cogent exposition of the benefits of asset recycling, he points out that the main objectives of the transfer of assets to the private sector are improving efficiency and raising money for further investment.
What is interesting and potentially significant about this article that it is signaling that the manner in which asset recycling has been done in the past is changing.
This is referred to as a move from outright privatisation to “structured partnerships”. He also mentions that any such process needs to carefully “manage stakeholders”. Let us look then at the asset recycling process from the lens of one of those stakeholders, the general public.
The Public Trust Imperative
However much we might consider ourselves to be free-market thinkers, most of us still instinctively expect to receive various goods and services from the state. Sure, private phone service is now ubiquitous – no one really uses MTNL or VSNL (remember them?) anymore. We have become used to paying tolls to private highway operators, or getting electricity bills from Reliance and Tata, and many of our best airports are run by GMR and GVK. Nevertheless, for most Indians, there is a lingering expectation that bijli, paani, sadak etc. are public goods that will and should be provided by the state.
This remains the case despite the cognitive dissonance many of us display in cursing the state for not doing enough while at the same time expecting solutions to our biggest problems to come from it.
As a consequence, public trust in both the government and the private sector is low.
Asset recycling through the two main models used so far—privatisation and the ToT-style concession—fall short on the public trust metric. Privatisations are difficult from a political economy perspective, often face opposition from employees and political opponents, and are hard to unwind if things go wrong. Plus, the government loses control of the asset completely. Concessions allow for some control and oversight through the concession agreement but are better suited when new assets are being created rather than for the transfer of existing ones.
Witness, for example, the high levels of public discomfort arising from the fact that the Adani Group won six airports out of the recent rounds of airport concessions, despite a previous recommendation from the Ministry of Finance that not more than two concessions be granted to a single bidder or group. And while, theoretically, the assets come back to the government after 30 or 50 years, concessions effectively represent a long-term transfer to the private concessionaire.
Let In Some Light And Fresh Air
Here is where the InvIT does a lot better than the other models. A series of transparency-related benefits that this structure offers suggests that the InvIT should, wherever feasible, become the default mode of asset recycling for the government.
First, the process by which an InvIT is taken to the market is robust and transparent by design, with all the SEBI-ordained rigour of an IPO. Extensive disclosures are made, investor consultations held, and a great deal of scrutiny exercised by an independent, trusted, securities market regulator.
Second, once the InvIT is up and running, it is subject to the same corporate governance standards and reporting requirements as a listed company, the highest standard in the market. Institutional investors and the public will also expect to be kept regularly informed of the performance and plans of the InvIT.
Third, while bringing in private sector efficiency and funds, the InvIT allows the government to retain greater responsibility towards the husbanding of important public assets. The government or PSU, as sponsor, owns units in the InvIT which allows it to exercise a degree of scrutiny as a key investor. Further, the investment manager is likely to comprise of experienced professionals who will be expected to bring best practices to the management of the InvIT’s assets. Ownership of the investment manager, at least in the initial years, can—and probably should—remain with the government, which allows for another layer of oversight.
Fourth, the trustee, who oversees the performance of the InvIT and the investment manager, must be SEBI-approved and cannot be associated with the sponsor or investment manager, providing an independent set of checks and balances.
Finally, while the proceeds of privatisation and the up-front fees on concessions following the ToT model go into the exchequer generally, and could be used for any government purpose, an InvIT is required to either distribute dividends to shareholders or reinvest in other assets, meaning that the funds are more likely to be used to develop new assets.
The first PSU InvIT is around the corner. Five of Power Grid’s high-quality transmission assets, which should perform well financially, have apparently been earmarked to be hived off into an InvIT and it was reported recently that the Powergrid Infrastructure Investment Trust was registered with SEBI earlier this month. The manner in which this InvIT comes to market and how it is managed subsequently will hopefully provide a healthy template for other government and PSU-owned assets to be exposed to the fresh air of private investment and public scrutiny.
Akshay Jaitly is President - 262 Advisors; and co-founder of Trilegal.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.
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