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Last updated: 25 Nov, 2019  

Infrastructure.9.thmb.jpg Providing momentum to asset monetisation

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Taponeel Mukherjee | 25 Nov, 2019
The success of the third toll-operate-transfer (TOT) auction by the National Highways Authority of India (NHAI) provides the momentum needed for India to embark on the path of swift and transparent asset monetisation in the next few years. Asset monetisation has received much attention, and a few large government asset monetisations have taken place in the last few years. It is about time the Government pushes the process ahead at a rapid pace.

The highway monetisations should serve as a benchmark of how rationality on pricing based on cashflows, a transparent auction process and significant investor interest can create value for all stakeholders. Whether the government is looking to monetise whole companies or assets, the driving factor is the "clarity of cash flows" as far as investor interest is concerned, and the eventual success of the monetisation is concerned. Mainly, the higher the clarity, the higher the eventual success.

In a world with low-interest rates, Indian assets indeed provide an attractive return vis-a-vis the global investment spectrum. As mentioned above, the focus on clarity of cashflows is of the essence because lowering the risk factors around the cashflows will be one of the significant drivers of more substantial capital in the asset monetisation schemes. The main risk factors that need to be continuously improved are the contract enforcement mechanisms around the cashflows, clarity on the auction process and rationality on price expectations incumbent upon the asset quality.

Auctions must be looked at as a mechanism to generate cash, and at once, as a mechanism to generate cash to spur the virtuous cycle of infrastructure creation. Effectively, asset monetisation must be viewed through the lens of an "infrastructure multiplier". Here for every rupee generated through the monetisation process, one looks at how much of new infrastructure can be created so that the new infrastructure can be monetised whenever warranted and so on.

Primarily, the aim must be to create a virtuous cycle that can be utilised to keep creating new assets by recycling the capital. There will be primarily two gains from creating the much-needed virtuous cycle. Firstly, the current capital in the system can be recycled towards creating new infrastructure projects. More importantly, as the investor

community views the success of the asset monetisation process, more copious amounts of capital will find its way into Indian infrastructure.

The asset monetisation route adopted by the government must also serve as a timely reminder to the corporate world that the path of asset monetisation must be used not when one has to, but when one can. The ability to do "carve-out" transactions that help monetise subsidiaries, assets and brand names in relatively less cash-constrained times, can help tide over issues when the going gets tough.

Essentially, the lessons from asset monetisation in the infrastructure sector have broad lessons in effective balance sheet management and optimal capital allocation, regardless of whether the balance sheet is that of a government or a corporation. Utilising existing assets to generate vital capital and being able to do so consistently is a skill that will be of great utility to one and all. At a broader level, all asset monetisation must look to deliver on the two fronts mentioned above of effective balance sheet management and optimal capital allocation.

Effective balance sheet management implies the ability to ensure that adequate liquidity is available on the balance sheet. Even high-quality assets funded using a weak capital structure will eventually suffer. Optimal capital allocation refers to the ability to invest the capital into the areas with the best returns.

Both the government and the corporate world must ask the question whether asset monetisation is achieving the twin-objective of creating an ironclad balance sheet and capital allocation decisions that maximise value. The thinking must go beyond merely asking as to how to raise capital? The questions around the best utilisation of the monetisation proceeds are equally essential, if not more. Not only because the usage of the proceeds adds value in terms of better returns or a stronger balance sheet, but because the best use of the proceeds helps the asset monetisation process itself.

As India looks to shore up balance sheets and partner with global capital to generate value, continuing to improve and scale the asset monetisation process will add value for all. The key is to start looking at

asset monetisation as a wholistic process that can deliver significant value if done well over the long-run.
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