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Brownfield Asset Recycling for the government’s divestment programme

July 2019
The Confederation of Indian Industry (CII) has called upon the Government to consider Brownfield Asset Recycling as an option for its divestment programme. The low-risk nature of the model will help kickstart the private investment cycle. The model will help the Government raise resources for its infrastructure and capital expenditure programmes at a time when fiscal headroom is constrained.

The turmoil in the financial sector, slowdown in consumption and stalled infrastructure projects have made both lenders and investors risk-averse. Still struggling to recover from the legacy NPAs, banks have been slow to resume corporate lending at levels achieved earlier.

Investors, especially those in the infrastructure sector, have been hit hard by project delays because of regulatory approvals and issues related to land acquisition. As a result, the investment ratio (in current prices) has come down sharply from a healthy 39.6 per cent in FY12 to 31.0 per cent in FY19.

“However, the investment requirements for India to grow at 10 per cent over next five years is twice the amount invested in the past five years,” says Chandrajit Banerjee, Director General, CII. According to a CII report titled Investment Requirements in India: Roadmap for 2019/2020 – 2023/24, India needs an investment of Rs 451 trillion ($ 6.62 trillion) over the next five years to achieve a 10 per cent GDP growth rate by 2023-24.

“It is important to bring back investor and lender confidence to get the private investment cycle going,” says Banerjee. “Constraints on expansion of public investment owing to fiscal compulsions make it even more important and urgent to revive private investments. Brownfield Asset Recycling is a perfect low-risk tool to achieve this.” This is apart from the Government’s disinvestment plans where it sells its equity.
The Government could put up for sale some of its viable operating brownfield assets, such as ports, airports, power plants and roads. Private investors get low-risk project options to invest in. Low risk makes the projects attractive to lenders as well. Many international wealth funds and pension funds are also willing to bring in long-term funds into India for such projects. Government capital, in turn, gets freed up for fresh investments. The proceeds, however, should be earmarked for capital investments.

“This is clearly a win-win proposition,” says Banerjee. “Another benefit of the model is that with private-sector expertise coming into the project, project efficiency and overall profitability are likely to improve.” The success of the toll operate transfer (TOT) model for the roads sector gives confidence that a well-strategised model of Brownfield Asset Recycling can work well for many sectors of the economy, he concludes.