Plans to monetise two operational pipelines of the Gas Authority of India Ltd (GAIL) through the Infrastructure Investment Trust (InvIT) route has created conflicting views within key government ministries with the Department of Expenditure (DoE) arguing that it should not lead to “erosion of the shareholders' value” of the natural gas firm.
One of the government’s aims to monetise publicly-owned assets is to bring private sector efficiencies in expanding business and operation and management (O&M), resulting in more value for the public and private parties.
“However, considering the extant Petroleum and Natural Gas Regulatory Board (PNGRB) tariff regulations, there appears to be no incentive for such efficiency as once the capacity utilisation reaches 75 per cent, tariffs are readjusted to reflect the increased capacity utilisation,” the Department of Economic Affairs (DEA) said in a note prepared on the plan.
“On the other hand, as the O&M shall be with GAIL, there is no scope for private efficiency. Therefore, MoPNG has to review whether within the existing legal/regulatory framework, pipelines are amenable for asset monetisation or some changes in legal/regulatory framework is required,” DEA said.
Cash flow valuation
The Dabhol-Bengaluru pipeline (DBPL) criss-crossing Maharashtra, Goa and Karnataka and the Dahej-Uran-Panvel-Dabhol pipeline (DUPL-DPPL) covering Gujarat, Maharashtra and Union Territory of Dadra-Nagar-Haveli with an estimated gross block of ₹5,000 crore have been identified for monetisation.
The initial valuation of future cash flows of these two pipelines is about ₹7,500 crore.
The proceeds from the lnvlT transaction are to be used by GAIL entirely for fresh investment in its transmission network expansion projects.
While piloting the proposal, the Ministry of Petroleum and Natural Gas (MoPNG) said that since the tariff is regulated, returns are limited at 12 per cent with the volume risk with pipeline developer. Further, GAIL's assets are mostly utilised for its own gas marketing volume and internal consumption.
According to the plan, GAIL will set up the lnvlT and create asset holding SPV’s for transfer/concession/lease of assets.
The monetisation of lnvlT units will alter the central public sector enterprise (CPSE) character of the SPVs, MoPNG said.
It has sought relaxation from the Department of Public Enterprises (DPE) guidelines for delegation of powers to ‘Maharatna’ CPSE’s, for equity investment limit of ₹5,000 crore in one project with an overall limit of 30 per cent of net worth for equity investment in JV/ subsidiary for investment in proposed SPV.
MoPNG has also asked for a waiver of stamp duty/GST on the transfer of assets/ leasing agreements to minimize financial loss due to tax. Otherwise, the transactional cost to be recovered in transportation tariff as a historical cost of acquisition under PNGRB regulations.
GAIL is the bulk user of its pipeline assets (back-to-back basis) and will be paying the tariff to the investors in case of asset monetization.
The DBPL pipeline
Under the PNGRB regulations for tariff determination, if the pipeline flow goes beyond 75 per cent, the tariff is adjusted accordingly to reflect the increased capacity utilisation.
In the case of the DBPL pipeline, wherein the capacity utilisation is beyond 75 per cent, the scope of increasing revenue substantially is not there. However, in the case of the DUPL-DPPL pipeline, the capacity utilisation is less than 75 per cent and hence the possibility of increased realisations due to higher capacity utilisation can be anticipated. Hence, the volume risk precipitates on the developer.
MoPNG also sought a waiver of capital gain tax on sponsor on sale of lnvlT units to protect value for existing shareholders.
GAIL, according to MoPNG, can fund its investment by a mix of debt and internal resource generation.
“GAIL is currently raising debt at less than 5 per cent per annum interest rate and the overall cost of debt for GAIL is around 5.5 per cent per annum. The benefits of taxation on the interest cost further reduces the cost of debt for GAIL. The low interest cost of debt for GAIL is mainly due to its ability to borrow funds from foreign markets without hedging costs. Thus, the debt model of financing may be more cost effective,” MoPNG said.
The DPE said that since the existing limits on the exercise of delegated powers by 'Maharatna' CPSEs have been laid down with the approval of the Cabinet, CCEA approval may be sought for the relaxations.
The DEA said that “GAIL appears to have fiscal space to raise resources through debt as its Debt Service Coverage Ratio is around 0.12 and it's cost of debt is around 5 per cent per annum”.
“Given that successful lnvlTs till date have a steady return of around 11-12 per cent per annum, raising resources through lnvlTs should not result in higher cost of capital to GAIL,” DEA pointed out.
Given the conflicting views, the government has decided to widen the mandate of the transaction advisor to explore the avenues available to GAIL for raising additional resources (debt, equity, lnvlT, etc.) and appraisal of their respective costs, the most appropriate asset monetization model and asset rights transfer model such as lease or concession.
The advisor should study the impact of the erosion of the market value of GAIL shares due to the transfer of operational revenue-generating assets and look into potential uses of the pipelines beyond captive usage by GAIL.