Abstract
Asset monetisation is resorted to by governments to raise funds for new projects. In India, the government has set an ambitious target to raise US$ 80 billion in five years. Out of this the road sector accounts for 27%. Toll Operate Transfer (TOT) model is used in the roads sector, whereby the right to maintain, operate and collect toll in an existing highway is given to the private sector for a specified period for an upfront consideration. Some of the questions that our research proposes to answer are:
a) Is the government getting a fair value for the assets?
b) How can the risks of the monetized assets be reduced to improve valuation?
c) How does the public authority set a reserve price?
d) How much value enhancement can be achieved by including a Minimum Revenue Guarantee (MRG) in the concession agreement?
Our research is based on the actual winning bids for some of the TOT packages. On comparing the valuations achieved by the TOT packages with the monetisation of roads in USA and France, we find that the valuations achieved are reasonable in one bid, but low in another. We also compare the bid price to what could have been the value in case the government had continued to operate the roads on its own. We write a customized program in SCILAB 6.0 to carry out a Monte Carlo Simulation so as to get the probability distribution of valuation under conditions of uncertainty. Valuation risks are due to traffic forecast, toll rates, interest rates, operating expenses etc. The Simulation reveals that the private sector has factored in a discount on the valuation to arrive at the bid price. The discount can be due to management costs and risk premium.
Next we study the composition of the different packages and find out what are the critical success factors that make a combination of assets more valuable. We also propose to value the asset using Real option valuation method if MRG is included in the contract. This can help us understand how the valuation improves by this risk mitigation measure.
The outcome of our research will help the government design a methodology to a) package assets in such a way as to reduce risks ; b) determine the value and set reserve prices for the assets to be monetized under conditions of uncertainty and c) decide upon including MRG in the contract. It will also help the private sector to come up with a profitable, but competitive bid. The relevance of this research, in the current context cannot be overstated.