The power transmission sector is expected to face challenges posed by the changing power demand and energy mix. Huge investments would thus be required to strengthen and ramp up the country’s transmission system. According to the government, states have a significant potential for monetisation of their transmission assets by leveraging brownfield transmission assets and mobilising these proceeds for new infrastructure investment, which will have a multiplier effect on the respective state economies.
Towards setting up a common framework and approach for national and state-level transmission companies that are planning to undertake asset monetisation, the Ministry of Power (MoP) recently issued the guiding principles. The critical aspect of these guidelines is that the MoP has suggested an acquire-operate, maintain and transfer (AOMT)-based public-private partnership (PPP) model for the monetisation of assets. The AOMT model comprises a limited period transfer of ownership of a transmission asset to be monetised in the public sector. A special purpose vehicle (SPV) will be created for this purpose. At the end of a stipulated transaction period, the entire shareholding of the SPV will be bought back by the asset-owning public sector entity. For the stipulated transaction period, the investor will undertake operations and maintenance of the transmission network, including the right to earn transmission charges.
Power Grid Corporation of India Limited raised more than Rs 77 billion in 2021-22 by monetising five of its transmission assets through the infrastructure investment trust (InvIT) route. According to the Central Electricity Authority, the state transmission utilities together currently own 250,544 ckt. km and 640,924 MVA of transformer capacity as of October 2022. As per media reports, Uttar Pradesh, Gujarat, Karnataka, Odisha and other major states are keen to undertake the monetisation of their transmission assets.
Power Line takes a closer look at the details of the ministry’s guidelines, its objectives and the expected impact on the transmission sector…
Scope and objectives
The guiding principles are for the identified transmission assets of the state government-owned transmission undertakings and central public sector enterprises/public sector undertakings/other government organisations in the central sector. The guiding principles, however, are not mandatory and the respective asset-owning entities may adopt any other approach or model based on necessary due diligence for appropriately structuring transactions, on a case-to-case basis.
As per the MoP, these guiding principles will make available efficient capital for new investment in the transmission sector through upfront payment received from the monetisation process. Moreover, it will facilitate transparency, consistent approach and efficiency in monetisation processes to be undertaken by public sector transmission undertakings. Further, it will enable proficient project preparation and planning activities under a guiding framework for running credible transaction processes that instil investor confidence. Also, these will enable sharing of good practices and models for the monetisation of infrastructure assets for value maximisation and tapping private sector efficiencies.
The AOMT model
As per the MoP’s guideline document, a transco may take up monetisation of its brownfield transmission assets by hiving off assets supposed to be monetised by way of a special demerger under a new specific SPV. This is necessary in the case of regulated tariff mechanism (RTM) assets as they form a part of the transmission company’s balance, necessitating a demerger into an SPV to unlock value. Since tariff-based competitive bidding (TBCB) assets are housed in a project-specific SPV, such a demerger may not be essential. The SPV will apply to the respective regulatory commission for grant of a separate transmission licence to operate and maintain identified assets for a period, in consonance with the transfer agreement.
Under the AOMT model, the entire shareholding of the SPV would be transferred to an investor as part of monetisation and bought back at a nominal cost of Re 1 at the end of a stipulated period. For the stipulated transaction period, the investor will undertake operations and maintenance of the transmission network including the right to earn transmission charges, subject to provisions of the transmission service agreement. The investor would be selected through a competitive bidding process to acquire 100 per cent shareholding of the SPV.
Identification of assets
For RTM assets, the transco will identify assets that can be clearly ring-fenced, have identifiable revenue streams and are clear from all litigations, preferably with vintage of up to 10 years from the commercial operation date (CoD) for the purpose of monetisation. The estimated book value of these assets will be determined by an independent auditor that may be appointed by the transco. The key considerations for the identification of assets that need to be assessed at this stage by transcos are vintage of the asset, availability factor and associated maintenance cost; future capex requirements; and the need to bring scale in the transaction to attract credible players and investor entities.
The identification of assets and demerger into separate SPVs will be undertaken after taking into consideration the amount to be monetised over a long term (five years) and in a manner that multiple SPVs are created ab initio to reduce the impact of capital gains tax. The transco will preferably appoint an independent technical consultant for carrying out the technical due diligence of assets.
Tenure
The tenure of the transfer agreement will be decided by the transco on a case-to-case basis and may normally be coterminous with the economic life of the asset in the case of RTM assets, or residual licence period in the case of TBCB assets. In the case of bundle of assets under RTM that have been commissioned on different dates, the tenure may either be calculated based on the effective CoD, that is, the weighted average CoD, or be limited with the asset that was commissioned earliest.
SPV enterprise value
Asset enterprise valuation will preferably be done based on the discounted cash flow method. The enterprise value so determined may be reckoned as an undisclosed reserve value for the bidding process by the transco to enable efficient price discovery of the asset.
Tariff
For TBCB assets, the tariff adopted by the appropriate commission, as applicable during the tenure of the transfer agreement, will continue to be collected by the SPV, subject to the provisions of the transmission service agreement. Meanwhile, for RTM assets, the appropriate commission may specify a premium, which may be provided over and above the prevailing return on long-term government securities to arrive at the rate of return on equity applicable for the tenure of the transfer agreement. This shall be done prior to the monetisation process undertaken by the transco.
Bidding and evaluation
The transco may either adopt a two-stage process featuring a separate request for qualification (RfQ) and request for proposal (RfP) or adopt a single-stage two-envelope tender process, combining both RfP and RfQ processes. If desired, e-reverse auction may be adopted. The bidders may be given an opportunity to inspect the underlying asset base within a prescribed time window. The bidding may preferably be done by way of international competitive bidding and the bidder quoting the highest upfront payment may be selected as an investor.
Expected impact and challenges involved
To fast-track quality infrastructure creation, the government has identified asset monetisation as an important financing option for infrastructure creation. India has developed a solid track record of utilising innovative structures such as InvITs and PPP-based models to monetise assets, including toll roads, transmission assets, pipelines and telecom. As per the MoP, brownfield seasoned transmission assets, in particular, have attracted significant investor interest from long-term institutional investors owing to the underlying asset characteristics and availability-based business model, as demonstrated by successful InvIT-based monetisation for transmission assets in the public as well as private sectors.
That said, there are some challenges around the asset monetisation plan. Some states have expressed apprehensions as they believe that it is another step towards the privatisation of the transmission network. Further, they feel that the development is not in the interest of consumers availing of power at subsidised costs. This is because the paying customers would be transferred to the private company, which will be taking over the assets after monetisation, while consumers availing of subsidies and getting free power would be left with the state. Thus, the burden on account of transmission network monetisation would be both on common consumers and the government. Another industry concern around brownfield asset monetisation is with regard to pricing. The transmission assets are currently compensated by regulated pricing using a cost-plus mode. Hence, they may be priced differently going forward, given the need to integrate renewable assets into the grid. Contractually committing to retaining existing pricing would limit the ability of regulators to determine optimal tariffs for a greener grid. Hence, monetising such assets at this time would limit the necessary strategic flexibility.
Addressing these concerns adequately would be important to provide the much-needed capital and proceeds from the sale of assets to scale up the transmission infrastructure in the country.
Nikita Gupta