Thursday January 6, 2022

National Monetisation Pipeline - January 2022

The government’s ambitious National Monetisation Pipeline (NMP) aims to raise Rs 6 trillion by leasing out brownfield assets to private players. Coming at a time of modest economic growth and a rising fiscal deficit, it aims to help fund a massive infrastructure-building spree over the next four years while minimising the impact on public debt. How feasible are the NMP’s goals? What are the likely outcomes and what pitfalls might lie ahead? This paper provides a view.

An Overview of the NMP

The NMP is designed to be coterminous with the National Infrastructure Pipeline (NIP), which was announced in 2019 and is set to run through 2025. Spread across some 8,000 projects – less than a quarter of which have commenced as of date, with many progressing slower than expected – the NIP aims to develop infrastructural investments worth a projected Rs 111 trillion. In comparison, the NMP targets raising Rs 6 trillion (i.e., less than 6% of the NIP’s overall target) by leasing out brownfield, de-risked public-sector assets. It covers 13 sectors, but the top five – roads, railways, power, oil and gas, and telecom – account for ~83% of the NMP’s aggregate value. The government views the NMP as a key part of a medium-term roadmap for infrastructure financing – one that does not result in the creation of fresh public debt.

Leveraging the NMP to fund the NIP

Side-stepping Contentious Issues

Large infrastructure projects such as the NIP demand long-term capital. India’s banking system is poorly suited to provide such funding, mainly owing to mismatches in maturity between assets and liabilities. Instead, for the past 20 years, the government has focused on non-debt capital receipts, including from disinvestment and public private partnerships (PPP). In practice, PPPs have been bogged down by unfavourably-designed contracts and inadequate support from within the bureaucracy. Meanwhile, disinvestment receipts habitually fall short of target, and very little such money has made its way into fresh infrastructure creation. The NMP would create an upfront revenue stream for the government while offering stable, longer-term (15-30 year) returns to investors such as pension funds and sovereign wealth funds. Moreover, asset-monetisation offers investors a degree of management control second only to outright privatisation.

Disinvestment and PPPs have both proved problematic, but monetisation avoids many of their disadvantages

Unlike disinvestment/privatisation, monetisation implies a transfer of revenue rights, not ownership, from public to non-government players for a pre-decided span of time. The operator is meant to adhere to strict KPIs and performance standards and to return control of the assets at the end of the specified period. Monetisation is thus a contractual, time-bound partnership between parties that is designed to unlock value from operational assets. Politically, this makes it more palatable in an environment like India’s where it is still a fraught issue to ‘sell the family silver,’ no matter how tarnished the silver may be.

A time-bound, contractual transfer of revenue (not ownership) rights…

Revenue from the NMP is meant to flow in over a 4-year period, though the targets are only indicative and are likely to vary between years, mainly on account of implementation issues. In the current fiscal (FY22), the government expects to unlock 15% of the aggregate value, i.e. about Rs 880 billion. However, by FY24 – which is also an election year, when public spending tends to surge – it is targeted to generate as much as Rs 1.8 trillion.

…that is meant to generate funds over 4 years

Advantages of the Monetisation Pipeline…

• Improved financial transparency: Leasing infrastructure assets to private players is likely to spur technology adoption, specifically in terms of revenue-tracking/collections. For instance, in the roads sector, this will take the form of close integration with the FASTag electronic-toll programme. This will usher in greater financial transparency.
• Enhanced asset value: Many of the assets proposed for monetisation are currently underutilised. Lessees would have the financial interest to maximise asset utilisation. They are also more likely to spend on maintenance, which might otherwise have been avoided/delayed. Ultimately, all of this raises the value of the leased assets, as well as other comparable infrastructure.
• Potential to ‘pull in’ new types of investors: Asset-monetisation may attract not just large investors like sovereign and pension funds, but also mid-tier players like infrastructure investment trusts (InvITs). Such investors may not be in a position to fund new infrastructure outright but a lease is a different ball-game. The success of such models can, in the longer term, spur more greenfield investments by a range of players.

Run well, asset monetisation could build new efficiencies, unlock value and draw in a new breed of investors

…and Some Challenges

Despite its obvious advantages, there are some grey areas around the NMP. First, there is no clear plan – even in a two-volume government document on the subject – as to how the funds raised will actually be channelled into new infrastructure projects.

Second, given India’s past track-record with PPPs and disinvestment, there is a likelihood of targets getting missed, perhaps by a long distance. Investors remain wary about operational and regulatory uncertainties in the infrastructure space, and many may hesitate to take the plunge. It may therefore require a few brave souls to lead the way.

A third concern – that lessees may exercise monopoly powers, including over pricing, or that they may lay-off workers en masse – is perhaps less salient. Most infrastructure assets are, by definition, monopolies, and without adequate safeguards, there is a risk that larger entities will scoop up the rights to multiple assets in the same space. However, India has mechanisms to check for abuses of monopoly power, including regulatory authorities such as the Competition Commission of India (CCI). Moreover, it is eminently possible to build price-checks into the contracts from the get-go. Similarly, the threat of lay-offs can be mitigated, at least in part, by entering into ‘wet leases’ that safeguard jobs – even if this involves a reduced pay-out to the government.

…but some obvious perils lie ahead

All said, the NMP is a welcome step in the right direction. Executed well, it could vastly improve asset utilisation, unlock huge value and draw the private sector more meaningfully into a sector with which it has historically been hesitant to engage in.