By Reya Ramdev
One of the critical bottlenecks in meeting the ambitious clean energy goals is transmission infrastructure at the intra-state level. The central government as well as states have been investing heavily in infrastructure. Over the past decade, the central grid has seen significant investments through the tariff-based competitive bidding (TBCB) mode, with the pace of investment accelerating in recent years. The intra-state network expansion, however, has not kept pace. As per the Central Electricity Authority’s (CEA) National Electricity Plan 2023-32, about Rs 9,160 billion investment would be required for the creation of new transmission infrastructure during 2023-32, of which more than 30 per cent is required at the intra-state level. Continuing this high level public financing of infrastructure is not possible by the public sector alone. Therefore, there is an increasing need to seek more private investment.
In this context, asset monetisation of existing assets and investment of proceeds in building more transmission lines at the intra-state level hold significant potential. Structured around mature brownfield assets for tapping private investment, monetisation of brownfield assets offers a less risky and more attractive way for
private funding.
According to industry experts, states have a significant potential for asset monetisation by leveraging brownfield transmission assets and mobilising much needed proceeds for new infrastructure investment. Moreover, transmission assets provide a stable cash flow over the concession/licencee period, which makes them suitable of monetisation.
So far, in the transmission segment, the Power Grid Corporation of India (Powergrid), India’s largest transmission utility, has already monetised five TBCB assets through the infrastructure investment trust (InvIT) route. Meanwhile, in 2022, the CEA, in consultation with a few states and NITI Aayog, prepared the guiding principles for monetisation of transmission assets through the acquire-operate-maintain-transfer (AOMT) model.
While there is limited monetisation experience in the power transmission segment in India, other infrastructure sectors such as roads, highways and airports etc., have already adopted the monetisation route, providing insights for value creation. An increased appetite for brownfield assets has been seen in the road and highway sector through the toll operate-transfer model, with a significant inflow of private and institutional capital and through the OMDA (operation, management and development agreement) model in the airport sector.
To discuss how monetisation strategies can work for the state transmission sector, the CEA, in collaboration with the National Investment and Infrastructure Fund, Powergrid Infrastructure Investment Trust and PFC Consulting Limited, recently organised a workshop with leading transmission industry players, financial institutions, legal experts and representatives from state transcos.
A key takeaway from these discussions is that it is particularly important to establish a robust payment security at the state level, as this shall be a cornerstone for bankability. For simplicity, the AOMT model, which provides a clear and practical approach, could be considered. States could tailor it to suit their specific needs and conditions. Further, the discussions emphasised the need for maintaining a strong record of timely payments to attract investors and enhance the asset value. Another issue discussed is the importance of choosing assets that are free of legal complications to ensure smooth transactions.
Monetisation models
Monetisation involves a fixed period of asset transfer, addressing fears of privatisation of transmission systems. For this, effective communication with stakeholders is critical to ensure acceptance and clarity on this approach. A transparent bidding process and identification of investors are necessary to build trust and accountability.
While monetisation offers numerous benefits, there are several issues that need to be managed. There are challenges regarding demarcation of assets (due to a meshed network), unpredictability of tariffs, inadequate payment security mechanisms, unclear operations and maintenance (O&M) obligations and the complex approval process of lenders as the sponsoring agency takes loan on collective assets.
The two models that were discussed at the workshop were the structured financing model (InvITs) and the direct contractual approach (AOMT model).
The InvIT monetisation model is intricate, but successfully tested and implemented by players such as Powergrid and Sterlite. The model seems somewhat intricate as it involves several participants such as the sponsor, trustee, unit holders, investment manager and project manager. However, it operates under a robust regulatory framework that SEBI oversees, instilling confidence among investors.
Powergrid’s operational assets developed through TBCB when monetised through the InvIT route have offered assured revenues to investors and helped in the discovery of optimum value.
The AOMT model, however, requires enablers to boost investors’ interest. The guiding principles for AOMT, which were issued by the Ministry of Power (MoP), provide a reference point for states. It was suggested at the workshop that states could modify the proposed structure as needed.
Moreover, a well-laid-out pipeline of assets to be monetised helps attract investors as they need to have a line of sight on future opportunities that will help them achieve the optimum scale of investments.
Learning from international experiences
International experience from New South Wales in Australia, the Philippines, Oman and other markets indicates the willingness of countries to hand over operations of the entire grid to private companies.
In Australia, the central government provided financial incentives to states (15 per cent of the price of an asset as incentive to states that sell infrastructure assets and reinvest 100 per cent proceeds in new infrastructure) to link monetisation to recycling and drive infrastructure investment. Asset classes such as ports, electricity generation, transmission and distribution, and roads have been leased/sold through this route.
Like New South Wales, in India too, states could consider setting up a ring-fenced fund for a structured recycling programme to help overcome public apprehension of monetisation and to leverage funds for new infrastructure investments. Acceptability of monetisation would increase if it is preceded by a well-structured and articulated asset recycling programme.
In the case of the Philippines, the concession model was more acceptable than privatisation because the permanent ownership of strategic assets was not transferred. Participants agreed that the model of monetisation of specific assets or bundle of assets within the publicly operated larger grid as proposed in India, would similarly be a prudent approach.
Meanwhile, in Oman, Nama has sold a 49 per cent stake in the Oman Electricity Transmission Co. to the State Grid Corporation of China, raising around $1 billion.
Another learning from the international experience is that the whole of grid tenders typically attract only a few specialised investors. As a result, less competition means the price may not reflect the true value of the businesses. On the contrary, concessions for specific transmission assets within a larger network are less complex and may attract more competition.
Demerger of identified assets
The bulk of state’s assets belong to the regulated assets category (regulated tariff mechanism [RTM]), which are housed in the parent entity’s balance sheet and not under separate SPVs. The monetisation of such assets, hence, may require a scheme of arrangement/demerger process, which may pose associated transaction overheads such as continuation of tax holiday on assets, capital gains tax, stamp duty, etc., due to asset transfer.
Prior to bid completion, such assets should be transferred to the SPV. This can be done by demerger or through a slump sale (that is, direct contractually) or through government orders in the case of statutory corporations/departments.
Also, the right-of-way (RoW) agreements and land to be transferred should be duly registered by the SPV. The treatment of warranties and defect liability assurances from suppliers and contractors should be structured to ensure that the SPV operates with the same level of protection currently available.
With respect to ongoing claims (employees/contractors/regulatory) or ongoing disputes, a clear settlement plan or a strategy for the assumption of risks by the state transmission utility (STU) will need to be created. Earnings from other sectors (such as the airport sector) on issues of employee claims/pre-existing disputes may be useful. Further, any pre-existing encumbrances or encroachments will need to be considered and dealt with.
Investor viewpoint
One of the strategies suggested was that a defined concession period matching the remaining useful asset life would help in cash flow visibility for investors. There is also a requirement for better governance on the relationship and risk allocation among key stakeholders. Unambiguous allocation of responsibilities between the sponsoring transco and the private sector entity can assist in reducing the scope
of disputes.
Another key point raised was the need for high quality technical, financial and legal diligence details for assets to be made available to investors, prior to bidding.
Regarding the cost of capital and valuation of assets, it has been suggested that for high quality assets, the following assumptions can be considered: a 12 per cent return on equity, a 70 per cent debt, cost of debt at 7-8 per cent, and earnings before interest, taxes, depreciation and amortisation multiple of 9x-9.5x.
Participants at the workshop also emphasised the importance of certainty and transparency around the bid process as key value drivers. Credit quality of state counterparties, track record for timely payments and well-working contracts, while doing risk assessment, would be important for investors. Also, there is need for a robust payment security mechanism to provide comfort to investors as infrastructure monetisation projects entail heavy investments.
It was suggested that certainty around the bid process, high level of preparedness with respect to consultations with regulators, treatment of pre-existing litigations related to transferred assets, treatment of existing human resource and associated costs that are directly connected to the transferred assets and payment security aspects are critical to encouraging private sector participation.
Hence, financial institutions have suggested that STUs may consider taking up certain obligations prior to tendering or as a condition precedent to effectiveness to strengthen the project’s bankability. These include the following:
Obligations related to RoW and transfer of land; treatment of warranties and defects liability assurances from suppliers; licence transfer; approval of tariff (in the case of the RTM model) to provide tariff certainty; and formulation of settlement plan for pre-identified asset-specific risks.
Signing and transfer of asset
Another recommendation made was to ensure a quick and smooth transfer of assets for fast operational turnaround. As part of the asset transfer process, all transmission service agreements and other key agreements signed with respect to assets under consideration need to be transferred to the SPV.
In the case of AOMT, the concessionaire would be responsible for the O&M of transmission assets. In the case of the InvIT model, while investors were comfortable with Powergrid continuing to operate the monetised assets, at the state level, investors may require O&M to be done by a private third party rather than by the STU that is monetising assets. So, O&M obligations may be transferred on a case-to-case basis after evaluating the developer’s interest and risk appetite.
The guidelines for the AOMT model propose the transfer of the monetised asset back to the sponsoring transco at a nominal cost of Re 1 at the end of the AOMT term. However, unless a waiver is specifically given by tax authorities, a nominal transfer price could still be subject to presumptive taxation. In any case, investors should not be liable to pay tax on the transfer back of the asset.
The Forum of Regulators may be approached to seek guidance on providing a uniform approach for monetisation of RTM assets. This would help in predictable cash flows through regulatory certainty. A pre-agreed regulatory approach to tariff determination for RTM assets that are to be monetised would be useful in this regard.
With regard to tariff approval, in the case of the RTM model, fresh tariff approval needs to be taken from the regulatory commissions. In other sectors, a floor tariff principle has been used to underwrite a minimum cash flow. In the case of TBCB projects, the relevant SPV itself could be used as the monetisation vehicle.
States’ viewpoint
Participating states endorsed the huge financing needs required for the creation of new transmission infrastructure and the need for tapping private capital through different means, including monetisation of brownfield transmission assets.
At present, states have a single transmission company. If a state has multiple transmission lilicensees, a regulation should be released by the concerned state electricity regulatory commission on the sharing of transmission charges by different transmission licensees operating in the state, as has been done by the Central Electricity Regulatory Commission.
According to state transcos, the issue of revenue certainty for the monetisation of RTM assets could be discussed by the CEA or the MoP with the Forum of Regulators, so as to evolve a common approach across the country.
Further, it was suggested that the concerned state regulators may be onboarded on the issue of monetisation of transmission assets. The issue of tax implication for assets can be taken up with the Ministry of Finance for clarity.
Conclusion
As India progresses towards net zero targets by 2070 and 500 GW of non-fossil energy capacity by 2030, the transmission network needs to be expanded significantly. Intra-state transmission capability will be extremely important. Asset monetisation will, therefore, be crucial for the power transmission sector as it needs huge capital investments. Addressing tariff-related concerns, choosing the right monetisation model and ensuring that there is a pipeline of investible assets will be some key factors to ensure that states’ efforts fructify.
