Asset monetisation: A sustainable form of financing for infrastructure

Bangladesh has an inspiring story of growth and development, aspiring to be an upper middle-income country by 2031. Continued infrastructure development will be a key building block towards enhancing domestic growth and achieving this objective. 

It is estimated that Bangladesh will require $320 billion in infrastructure over the next 10-15 years. Sources of capital for such infrastructure projects will be challenging; hence exploring alternative well established financing solutions in developing markets is imperative for Bangladesh to gain access to broader domestic and international capital markets. 

For example, the Government of India has recently launched a four-year National Monetisation Pipeline (NMP) worth an estimated Rs 6 trillion, with an aim to unlock value of unutilised or underutilised public assets by engaging the private sector not only for financing resources, but also their technical knowledge and expertise to gain operational efficiencies with the management of existing physical infrastructure. 

This article provides various perspectives on the asset monetisation and its sustainability as a robust infrastructure financing tool.

Asset monetisation and PPP

Ever since the advent of public-private partnership (PPP) project delivery models in developing economies, there have been many issues discussed and debated in the literature on the implementation efficiency of PPP projects.

In response to the problems, governments with assistance from multilateral agencies such IFC and ADB, have come up with many schemes to sustain the private party interests in PPPs. In India, for example,  with the start of an asset monetisation (AM) policy, the government is entering into another dimension of private sector investment. 

AM, though relatively new, has been there in the form of Toll Operate Transfer (TOT) models as a part of the PPP framework.

While there is a push toward asset creation, on the other side, there is also a large task of asset maintenance management requiring extensive monetary resources and management expertise. As assets are created for an extended period, asset maintenance through AM is a crucial part of the lifecycle of the created asset to help preserve cashflow, which can then be utilised for other high priority needs such as new infrastructure needs or new asset creation.

Asset monetisation, also referred to as assets or capital recycling, is the method of releasing idle capital in government assets with an upfront payment of capital by the investors or asset operators. 

In a typical AM structure, the asset ownership will remain with the government while the facility will be leased out to a private party for a particular lease period. According to experts in the industry, AM has multiple benefits. 

First, it releases the maintenance management pressure on the government, and secondly, it helps tap into the management and operational efficiencies of the private sector, saving the government funds that can be utilised elsewhere, like other priority infrastructure development projects. 

Finally, the upfront capital has a positive fiscal benefit. It is not just a funding mechanism, but an overall paradigm shift in infrastructure operations, augmentation and maintenance that creates new cashflow for the government that would otherwise be absorbed for unintended purposes. 

AM helps in tapping the operational efficiencies of the private sector, creating cash flow that would otherwise be absorbed in various inefficiencies. A key attraction for AM is the absence of project completion risk, since the monetised projects have been operational, generally for at least two years, a mitigant desired by investors/operators given the poor track record of infrastructure project implementation in developing countries, including India.

To boost infrastructure development, Government of India has finalised the national monetisation plan which will include infrastructure projects across multiple industries.

Asset monetisation: Options and progress

In asset monetisation, the two broad options considered are toll operate transfer (TOT) and the InvIT (Infrastructure Investment Trusts). Apart from these, structured bonds similar to securitisations backed by underlying assets, are also other options. 

One of the main advantages of all existing assets monetisation is that there is no construction risk involved, which otherwise is present initially in any large infrastructure project (new assets). Hence, it is anticipated that existing assets earn greater value than new projects.

Toll Operate Transfer

The toll-operate-transfer (TOT) model typically has the objective of monetising the operational national highways or bridges. As part of the comprehensive bidding process under the TOT model, the government transfers the toll collection rights along with operation and maintenance obligations for 30 years to a private developer in exchange of an upfront lump sum concession fees. 

Under this model, typically, a bundle of assets (e.g. operational national highways, bridges) is transferred, which allows the investor to offset the risks of one project against another, although transactions involving one large asset have also been done. 

Moreover, as the underlying asset is already operational, investors need not have construction skills to participate in the bidding process. Since 100% Foreign Direct Investment (FDI) is permitted in this sector in Bangladesh, foreign investors can actively potentially participate in a TOT bidding process structure. 

Infrastructure Investment Trusts

Infrastructure Investment Trusts (InvITs) are like mutual funds that pool money from investors and are regulated by the local jurisdictions Securities and Exchange.  In India, there are 19 registered InvITs as on September 13, 2022. InvITs allow developers to monetise revenue generating infrastructure assets, while enabling investors or unit holders to invest in these assets without actually owning them. Therefore, given this basic structure of InvITs, the InvIT investor is more passive unlike the TOT investor who is supposed to actively manage the assets. 

Structured bonds

In structured bonds, the risk of intermittent variability of revenue is not directly transferred to the bondholder, although claims are broadly issued on the basis of revenue streams. Bondholders' realisations will be unaffected until the revenue receipts are adequate to meet the requisite bond payments. 

In case of a flexible rate bond, there might be variation in accordance with the changes in indexed rate. Rating of structured bonds critically hinges on the adequacy of cash flows; for instance, the rating would be high if the future bond payments are secured by a cash flow that is adequate enough.

Nevertheless, in a majority of cases this will lead to less cash on hand with the public authority. As a mitigating measure, issuance of structured bonds can be phased vis-à-vis periodicity of future cash flows with varied risk profiles, which will then be subscribed by different categories of investors as per their respective risk appetite levels, similar to securitized bonds. 

On the one hand, bonds having lower risk profiles may be more attractive to risk averse investors such as, large domestic pension and insurance funds, while on the other hand, the more risky assets may be favourable to foreign pension funds which look to invest in emerging markets in the quest of higher returns.

Advantages of asset monetisation

Asset monetisation is the need of the hour as it eases the maintenance management pressure on the government and enhances national productivity through private sector contribution, by tapping their efficiencies. The asset monetisation program offers an array of benefits to the economy. These are:

The asset monetisation program helps in converting the 'idle capacity to active capacity'; thereby contributes to national income and output.

It will help in raising the efficiency and productivity of the assets due to private sector participation and will create additional employment opportunities in the economy.

It opens-up generation of new sources of revenue for the government, which can be used for financing new/existing infrastructure projects.

Active and efficient use of assets will improve the production process and will provide improved quality goods and services to the consumers.

It will lead to value-added collaboration between the public and private sector and will foster synergy for infrastructure development.

Way forward

Infrastructure development is essential for faster economic development. Asset monetisation is critical in bringing efficiency and optimisation in the use of assets through private-public collaboration. It will open-up the fiscal space for the public sector by trading on the idle assets. 

The asset monetisation program will further leverage to take the best from global institutional investors. It will attract global institutional investors such as Sovereign Wealth Funds (SWFs), Pension Funds (PFs) etc to invest in Bangladesh. Asset monetisation will certainly promote sustainability and will boost the economy through its multiplier effects. 

The author was Chief Risk Officer at Butterfield Bank ($250B AUM), Deputy Chief Risk Officer at M&T Bank (US regional bank), and Director at Deloitte and Touche, Washington DC.