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What is the National Monetisation Pipeline?

Editor, TRANSFIN.
Aug 24, 2021 1:23 PM 5 min read
Editorial

The much-anticipated National Monetisation Pipeline (NMP) has been finally unveiled.

The project, first announced in Budget 2021, expects to help the Government generate around ₹6Lcr ($81bn) of additional revenues through “monetisation” aka leasing of brownfield GoI infrastructure assets to the private sector in the coming four fiscal years.

These revenues are envisaged to be invested in building new infra assets and boosting economic growth.

But before we delve into the NMP, let’s get down to the brass tacks...

What is Asset Monetisation?

This is when governments generate revenue by unlocking the value of hitherto “languishing, not fully monetised or underutilised” public assets.

It’s important to note here that asset monetisation (AM) differs from disinvestments, which comprises the sale of state-owned stakes within public sector enterprises, and can also include the transfer of ownership in an entity (think Air India). AM, on the other hand, need not always involve the sale of public assets.

Some of the ways AM can be carried out:

  • Direct contractual approach - something adopted by the NHAI via modes like toll-operate-transfer (TOT) and operate-maintain-transfer. Involves bundling projects and giving them out to private entities that maintain and operate the asset. The Government body gets an upfront fee or annual payments from these private operators.
  • Structured finance - collective investment schemes like infrastructure investment trusts (InvITs) and real estate investment trusts (REITs) i.e. Securitisation of assets for raising bonds or placing them under trusts created under SEBI-specified guidelines.
  • Land monetisation - selling or leasing publicly-owned land parcels.

 

Coming to the NMP...

This four-year project (official report here) will involve Public-Private Partnerships (PPPs) such as toll-operate-transfer, operate-maintain-transfer as well as structured finance vehicles including REITs and InvITs. As such, asset leasing will take place via both direct contractual instruments and capital market instruments.

Any outright sale of assets or land has been ruled out: “...at the end of the day, these assets will be handed over back to the Government for further utilisation,” the NITI Aayog Chairman said yesterday.

Moreover, the NMP only includes brownfield infra assets (20+ asset classes across 12+ line Ministries/Departments). Monetisation through disinvestment and of non-core assets have not been included in the plan.

The NMP would be co-terminus with the remaining four years of the ₹100Lcr ($1.35trn) National Infrastructure Pipeline (NIP). The former will involve the leasing of assets across various sectors, in particular roads (27% share by value), railways (25%), power (15%), oil and gas pipelines (8%), and telecom (6%). Also on the table are 15 railway stations, 25 airports and 160 coal mining projects.

If all goes according to plan, GoI may end up raising ₹88,000cr ($11.88bn) via the NMP in the current fiscal, with annual targets for FY23, FY24 and FY25 set at ₹1.62Lcr ($21.87bn), ₹1.79Lcr ($24.17bn) and ₹1.67Lcr ($22.55bn) respectively. The monetisation value of the assets on the pipeline was determined by taking into account comparable market transactions, capex, book value or enterprise value.

Furthermore, Finance Minister Nirmala Sitharaman said “states are all more keen to move forward” on AM. In line with this, GoI will set aside ₹5,000cr ($675m) in incentives to encourage state governments to divest their stakes in PSUs. To compensate, the former is expected to provide states with a 100% matching value of the divestments. Likewise, if a state lists a PSU on the bourses, the Union Government will give it 50% of the amount raised. Or if a state opts for AM itself, it will receive 33% of the amount raised.

 

The Crux of the Matter

That the Government is eager to pursue AM was never a secret. Plans for the same have been afoot for nearly three years now (read our earlier piece on this here). AM’s lure is obvious - unlike stake sales, it involves only the temporary transfer of rights; the ownership of public assets is retained by GoI. As such, it is easy to sell to politicians and the public, many of whose attitudes towards privatisation remain mired in 1970s-esque suspicion.

But unlike disinvestment proceeds, which were always accompanied by set targets (the FY22 goal is ₹1.75Lcr ($24.12bn)), the AM drive was relatively disorganised. Until now.

The NMP is the first wholesome document clearly defining AM objectives, setting targets, categorising assets, and identifying impediments. As such, the “medium-term roadmap” is an achievement in itself. Now, whether this framework will be married to reality or marred by laxity remains to be seen.

While the plan has been outlined - and it is certainly quite ambitious - the road ahead is not without obstacles. The assets on the monetisation block are looking for temporary PPPs. As such, there’s no guarantee that all of them will elicit keen bidders (case in point: the coal mine auctions). Their monetisation is dependent on their profitability prospects.

Other potential roadblocks include regulated tariffs in the power sector, questionable levels of capacity utilisation in pipelines, limited investor interest in highways with fewer than four lanes, and lack of independent sectoral regulators.

 

Need for AM Speed

As per GoI’s press release, AM needs to be viewed “not just as a funding mechanism, but as an overall paradigm shift in infrastructure operations, augmentation and maintenance considering private sector’s resource efficiencies and its ability to dynamically adapt to the evolving global and economic reality”.

The open embrace of private sector participation is certainly a welcome change. But the latter part of the above statement points to the main reason why AM is more urgent now than ever before. Before 2020, it was supposed to be a way to raise capital to counteract the economic slowdown and make the economy regain its animal spirits. Today, it is about bringing a pandemic-struck economy emerging from its first recession in decades back to life.

Furthermore, the Government expects the fiscal deficit for FY22 to be 6.8% of GDP. And while the unexpected rise in tax receipts and the healthy YoY dip in fiscal deficit so far (18.2% of BE as of June 2021 vs 83.2% in June 2020) are positive signs, there are still three uneasy quarters remaining. With a Third Wave knocking and the year-end vaccination targets likely to be missed, further Government stimulus may be needed to keep the economy standing = further strain on the exchequer = more capital needed by the Government.

Enter, asset monetisation. The Government’s knight in shining armour. (Well, provided the plan is implemented properly and received enthusiastically.)

FIN.
 

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