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Recently, Union Finance Minister unveiled the Centre’s four-year infrastructure asset monetization programme to raise ₹6 trillion under the National Monetization Pipeline (NMP) project.
Under the ambitious NMP, the government has identified 13 sectors — including airports, railways, roads, shipping, gas pipeline among others— which will be privatized as the government aims to monetize its brownfield infrastructure assets.
The monetization plan was first announced in the annual budget speech in February 2021. It will serve as a medium-term road map for the government’s asset sale initiative.
The plan is well-conceived, as it brings several intended monetization and divestment plans under one umbrella- National Monetization Pipeline (NMP). It is also timely given the government’s strained fiscal condition after the COVID-19 pandemic.
Let’s go through it in detail.
What is the NMP project?
- The National Monetization Pipeline involves leasing out central government assets valued at around Rs 6 lakh crore over a four-year period ending in 2024-25. NMP represents an alternative to an outright sale of assets.
- The major idea is to lease out brownfield projects, proceeds from which can be used to finance greenfield projects.
- Only underutilized assets will be monetized.
- The ownership of the assets monetized, though, will remain with the government, with the private players taking on the operational risk.
- Major sectors: The top three sectors by value identified for asset monetization include roads (27%), railways (25%), and power (15%) in the value of the total asset. While roads, railways, and power account for around 65% of the proceeds of the program. It also includes sectors such as telecom, aviation, mining, and warehousing.
- The potential models of road asset monetization would be Toll Operate Transfer (ToT) and Infrastructure Investment Trust (InvIT).
- Participation of states: The central government is also incentivizing states to participate in this program.
- For the FY22, the government through its asset monetization program plans to raise ₹88,000 crores.
- Govt plans to correlate NMP with the National Infrastructure Project announced earlier.
- An empowered committee has been constituted to implement and monitor the Asset Monetization program. The Core Group of Secretaries on Asset Monetization (CGAM) will be headed by the Cabinet Secretary.
Objective of NMP
The desired goal is to provide a clear framework for monetization and give potential investors a ready list of assets to generate their interest.
NMP aims to monetize the existing asset base and using its proceeds for new infrastructure creation, recycling the future assets and build multiplier effect on growth and revive credit flow.
Rationale behind Asset Monetization
A developing country like India needs asset monetization for the following reasons:
- Financing the infrastructure creation: With a massive infrastructure deficit, finding resources to build physical assets is a difficult task. Hence, the government wants to monetize existing infrastructure assets by leasing them out to private firms for a fixed tenure under a revenue-sharing model.
- Easing fiscal burden: It will help the authorities ease fiscal constraints and free up balance sheets for more greenfield infrastructure creation. For example, a stadium, built by the government that remains idle for the most part of the year, can be leased to a private party that can efficiently manage it by organizing cultural functions and allowing the public to use it for a fee.
- It could also provide States with the additional resources needed to sustain public investment during this period of stressed public finances.
What is the monetization of assets?
Under this, the government transfers revenue rights of an asset to private parties for a specified transaction period, in return for upfront money, a revenue share, and commitment of investments in the assets. Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), for instance, are the key structures used to monetize assets in the roads and power sectors. Other monetization models on PPP (Public Private Partnership) basis include:
- Operate Maintain Transfer (OMT)
- Toll Operate Transfer (TOT)
- Operations, Maintenance & Development (OMD)
OMT and TOT have been used in the highways sector, while OMD is being deployed in the case of airports.
Is asset monetization new to India?
No. India has been monetizing assets for a long time through public-private partnerships (PPP). In India, the concept was suggested by a committee led by Vijay Kelkar on the roadmap for fiscal consolidation in 2012. The committee had suggested that the government start monetization as a key instrument to raise resources for development.
- The Delhi airport has been built through the PPP mode. The project that started in 2006 has been completed at a total cost of ₹12,500 crores, enabling world-class infrastructure creation with no additional cost to AAI.
- In 2020, the Maharashtra State Road Development Corp. Ltd awarded the tolling rights of the Mumbai-Pune Expressway and old Mumbai-Pune corridor for ₹8,262 crores.
Australia: Asset recycling has been enacted in Australia through the Asset Recycling Initiative (ARI) of the federal government, which during the 2014-15 budget announced the Infrastructure Growth Package (IGP), a 10-year vision of infrastructure investment in the nation. ARI was aimed at encouraging states to recycle assets and utilize the sale proceeds for productivity-enhancing infrastructure by asking private firms to fund and run public infrastructure. This helped unlock more than $17 billion in infrastructure development across Australia.
- Making it attractive for the private sector: As ownership is not being transferred, GoI will retain oversight through the contract period. The contract, however, needs to be flexible enough to make it attractive for a private entity. Finding the balance within a government framework has been challenging in the past.
- The slow pace of privatization in government companies including Air India and BPCL, and less-than-encouraging bids in the recently launched PPP initiative in trains, indicate that attracting private investors’ interest is not that easy.
- Creation of a regulatory framework: Another challenge is creating a regulatory framework to deal with a monopoly, which is something that will happen in the railway projects under NMP.
- Structural challenges: Proper maintenance of asset register and title and encroachment may adversely affect the monetization plan. Similarly, land unavailability, delayed approvals and clearances, policy constraints, and lack of coordination among stakeholders could hinder the project’s progress
- Privatization of a state-owned industry can also cause job-loss anxieties among its workers.
- With proposed concession periods running up to 60 years for some assets, NMP deals, by contrast, could pose a long-term headache if they are not structured with end-user interests in mind, balancing the profit and utility motives.
- The sharing of risk and rewards between the public and private partners needs to be weighed carefully for each sector. Checks and balances are needed for actual infrastructure usage versus projections at the time of bidding.
- Due to current economic situation, revenue projections for PPP assets could be deflated now, leading to lower bids followed by super-normal gains for the operator in the future.
- Other challenges: Lack of identifiable revenues streams in various assets, level of capacity utilization in gas and petroleum pipeline networks, dispute resolution mechanism, regulated tariffs in power sector assets, and low interest among investors in national highways below four lanes.
- Preventing a monopoly: The government needs to avoid a situation where a few firms capture most of the assets.
- Structuring the deals: The key to success lies in the way the deals are structured to make them attractive enough for enhanced private sector participation.
- Smooth implementation: It would be important for the government to get the first few projects in each sector right to start things in the right direction. Smooth implementation of the first Rs 10,000 crore will determine the fate of the Rs 6 trillion monetization plan. Hence, achieving the first-year target of Rs 0.8 trillion is very important to build confidence in the market.
- Proper regulation: To maximize their profit over a limited time frame, investors would want to raise prices, limit competition or cut back on maintenance. Hence, we need proper bureaucratic ability and regulatory mechanisms to prevent this from happening.
- The central government and specifically the defence forces and the railways are sitting on substantial amounts of land within major urban centres. It may be easier to lease out some of this land since price benchmarks would be available from the cost of privately-owned land in nearby areas. Any capital expenditure incurred by private parties to make such land usable could be deducted from the upfront leasing fees payable to the government
NMP represents an alternative to an outright sale of assets. Its success will depend on execution.