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Casting light on the National Monetization Pipeline

There has been significant progress in recent times in increasing investments in the infrastructure sector through various programmes and initiatives. Recently, India has announced the National Monetization Pipeline (NMP: Vol. I[1] and II[2]) on August 23, 2021, which proposes in monetizing INR 6 lakh crore worth important National Government assets from (4 years) Financial Year 2022 – 2025 by leasing these assets on a long – term basis to private players. In order to meet the government’s asset monetization objectives, this roadmap was launched in Budget 2021-22 by Finance Minister Nirmala Sitharaman and developed in line with Niti Ayog, it’s Vice Chairmen and its Union of Secretaries.
NMP focuses on increasing the significance of brownfield assets by involving the private sector, transferring income rights rather than ownership of the projects to them, and utilizing the proceeds for building the nationwide infrastructure. The ownership of the assets continues to remain with the Government with a mandatory handover to the public authority at the end of the transaction cycle, thus only enabling transfer to the private sector for better utilization and monetization and not outright sale or privatization. It is seen as a means for sustainable infrastructure financing. Presently, only two infrastructure sectors have been included, i.e., CPSEs (Central Public Sector Enterprises) and the assets owned by National Government line ministries.
The objective behind including brownfield assets, is to include projects in which investment has already been made, and where the asset is underutilized. The overall approximated price of the assets to be monetized would count for more than 66% with the sectors namely Roads (27%), Power (15%) and Railways (25%), being the three leading sectors, along with the rest of the sectors which are going to come i.e. coal mining (5%), natural gas (4%), telecoms (6%), aviation (3%), shipping ports (2%), petroleum product pipelines (4%), real estate (2%). Warehouse (5%) and Stadiums (2%)[3]

Significance of Asset Monetization as a core essence of NMP
The NMP has been viewed as a strategic step to cope with the significant financial consequences of India’s economic downfall, which has been exacerbated by the ongoing global covid-19, leading to drastic GDP contraction, rising fiscal deficits and also increasing public debts.
Asset Monetization is the process of unlocking the growth capital by repurposing the current assets and also expanding the country’s economy by using the funds generated from the transformation of underutilized public assets into commercial benefits. It has proved to be serving two broad goals, i.e. unlocking the profits from investments in public infrastructure and accessing the effectiveness of private sector in infrastructure administration and operations.
The government of India is seeking the monetization of existing infrastructure assets by leasing them to private companies for a specified amount of time in exchange for a share of the revenue. This would not only aid the government in alleviating budget constraints but also free-up the balance sheets to allow for the construction of entirely new infrastructure.
NMP is an efficient intrusion because it limits the government’s participation to identify important infrastructure and allows the private sector to produce revenue and share it with the government. The government would be likely to fund more infrastructure projects in the future since it will have more resources at its disposal to the private sector. This not only expands the opportunities for the private players but also helps in effective utilization of the already created unutilized assets. Thus, the engagement of the private sector in this area will be very beneficial to the total sector and the India economy.
 
The challenges associated with NMP
The National Monetization Pipeline is expected to be beneficial to the Indian economy, nevertheless, this big trillion plan comes with its concerns. The whole initiative of the massive NMP is having its concerns about implementation. Further, the leasing of railways, airports and other public assets has been criticized.
Along with that, the taxpayers and the consumers who have already once paid for the public assets would now have to pay for its usage by the private parties, which could burden the general public. The NMP has not imposed any additional financial obligations on the taxpayers, believing that it’s a better method to generate operating money. There is also criticism that a limited number of corporate units will control the majority of assets available under the NMP because of the absence of specified legal structure to govern the Monetization of assets which might create monopoly, unfair competition, price rise and might be prone to political interference and resistance. Once the Government hands over the assets to the private sector, there should be minimum interference in the day to day working to achieve maximum efficiency.
In this context, the risk involved in monetization of these assets can be over exploited by the private entities. In addition to this, legal concerns, and lack to of a strong bond market are among the structural factors that are expected to hinder private infrastructure investment.  There is a risk that the entire procedure would be a waste of money in case the leases are cancelled by the future administration since the government made this choice unilaterally. To prevent these risks, a legal framework must be established, and the government must ensure that these contracts are bankable, allowing the private players to develop and commercially utilize these assets while also protecting investors from any associated risks.
Notwithstanding the obstacles, this monetization would need continued political will, guaranteeing the fair approach and determining the best method to monetize all the assets along with attracting sufficient interest of the investors simultaneously.
 
The Indian Government’s method of asset allocation might scrutinize thoroughly this time. The idea of Monetization often gets confused with privatization. In the contrary, Monetization is different from privatization and in a sense, Asset Monetization, in its foundation, is a transition to a more structured contractual partnerships involving private entities. Specifically, in privatization, the assets are completely and permanently held by the private players, whereas, in monetization, the assets shall be restored to the government after the expiry date. Monetization represents a dynamic shift in operations, expansion, and infrastructure maintenance.[4] Asset monetization can be achieved through various alternative routes, like direct contracts in the form of Public Private Partnership (PPP) Concessions or Operate – Maintain – Transfer Concession models or through structured financial vehicles like Infrastructure Investment Trusts or Real Estate Investment Trusts.
It stated that the NMP is expected to bring rupees 6 lac crore for them which will then be utilized to create new facilities as a part of NIP (National Infrastructure Pipeline). Along with that, NMP, as a result of the new infrastructure developments seems to be a positive source for employment too. Since the investments in key assets will be leased can be swiftly recouped, without having to wait years for profits, the government is having a relief with the investments and responsibilities. With that, the government can now work at both the new infrastructure and its day-to-day course of operations. Moreover, for the sole purpose of profit earning, the private players would undoubtedly put up considerable effort to make the asset viable. The only critical aspect for the government to monitor is the successful implementation of the NMP Framework. If it is successfully implemented, India could get some significant benefits.
Suggestions for a successful NMP
Various challenges need to be addressed by the government while developing the scheme since differentiated market structures are required for various asset classes at various maturity stages. Numerous changes in the regulations are necessary due to very minimal private engagement in its operations like railways and gas pipelines. As public assets are expected to be monetized under the NMP, private partners must be selected through an open, fair, and transparent bidding procedure and a fair value shall be obtained. In India, a transparent bidding process, strict contract enforcement and an independent dispute redressal authority along with a well – functioning regulator will be critical to increasing actual inflow and raising the confidence of the foreign investor. The investors should be given sufficient details on the development and proper due diligence reports on the assets as well as assisting in managing risks and hazards connected with them by the government.
Despite the fact that concessions are issued by national agencies, developers mainly rely on state and local government officials to get clearances, license and infrastructural facilities, and there is no single window clearance accessible for projects. The NMP’s correct execution also depends in partnership with the state government. The state government must work closely and give a strong commitment to help rather than relying on best efforts.
Bottom line
The National Monetization Pipeline seeks to level the playing field in order to recruit private participants and encourage greater competition and collaboration in the public infrastructure sector.  Along with the Center, the state governments have also been given a financial incentive as a part of the NMP, which may motivate them to monetize their assets as well. The NMP’s success would be determined in large part by its implementation, which will rely on specialized, sector-specific platforms, transparency and strategic solutions. The government is now all set to develop a very strong structured pipeline. For that, it’s reasonable for the government to want to gather as many funds necessary for the economy of India, take leads on manufacturing and labor and make the economy flourish.
Finally, the monetization program’s success would be vital for the resurgence of infrastructure investment in India, and it will have a huge multiplier effect on India’s economic development. The execution of National Monetization Pipeline can prove to be the India’s boldest and biggest development in a long time.
AUTHOR
Ketan Mukhija, Partner, Link Legal
Akansha Gupta, Associate, Link Legal
 

DISCLAIMER
The contents of this article are for general information and discussion only and is not intended for any solicitation of work. This article should not be relied upon as a legal advice or opinion.
[1] https://www.niti.gov.in/sites/default/files/2021-08/Vol_I_NATIONAL_MONETISATION_PIPELINE_23_Aug_2021.pdf
[2] https://www.niti.gov.in/sites/default/files/2021-08/Vol_2_NATIONAL_MONETISATION_PIPELINE_23_Aug_2021.pdf
[3] https://www.india.gov.in/spotlight/national-monetisation-pipeline-nmp
[4] https://www.niti.gov.in/asset-monetisation-holds-key-value-creation-infrastructure

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