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Why in news?

The National Monetisation Pipeline was recently launched by the Union Minister for Finance and Corporate Affairs.

Present context:

Union finance minister Nirmala Sitharaman on Monday launched the National Monetisation Pipeline (NMP), through which the government aims to raise $81 billion by leasing out state-owned infrastructure assets over the next four years.

What the plan says?

• According to the plan laid out, the government is aiming to raiseRs 88,000 crore through asset monetisation in the current fiscal, Rs 1.6 lakh crore in 2022-23, Rs 1.8 lakh crore in 2023-24and Rs 1.6 lakh crore in 2024-25.
• The proceeds will be used to finance the Rs 110 lakh crore national infrastructure pipeline.

What is asset monetization?

• “Asset monetisation is about utilising the existing asset base and using the proceeds for new infrastructure creation.
• Objective is to enhance capex spending, resulting in a multiplier impact on growth and employment and reviving credit flow.
• Asset monetisation is the process of conversion of assets, in this case contracts to build highways, bridges, roads, etc, into economic value.
• The assets to be monetised are spread across 20 asset classes and12 line ministries.
• Different models will be followed for monetisation depending on the nature of the assets like operate, maintain and then transfer, or redevelop, operate, maintain and then transfer.
• The top five sectors by value under the government’s asset monetization programme are-
  • Roads (27%), railways (25%), power (15%), oil and gas pipelines (8%) and telecom (6%).

Understanding Monetization:

• In a monetisation deal, the government essentially transfers income rights to private parties for a fixed length of time in exchange for cash, a revenue share, and a commitment to invest in the assets.
• The primary structures used to monetize assets in the roads and electricity sectors, for example, are Real Estate Investment Trusts (Reits) and Infrastructure Investment Trusts (Invits). These are also traded on stock exchanges, giving liquidity to investors via secondary markets.
• While these are structured finance vehicles, additional PPP (Public Private Partnership) monetization methods include
  • Operate Maintain Transfer (OMT),
  • Toll Operate Transfer (TOT), and
  • Operations, Maintenance, and Development (OMD).
• Investing in Greenfield vs. Brownfield
  • Greenfield Project: A Greenfield project is an investment in a factory, office, or other physical company-related building or set of structures in an area where there are no existing facilities.
• Investment in brownfields:
  • Brownfield projects are those that have been renovated or improved.
  • The phrase refers to the purchase or lease of existing production facilities in order to start a new manufacturing operation.

Key points about National Monetization Pipeline:

• Brownfield assets: It attempts to increase the value of brownfield assets by involving the private sector, giving revenue rights rather than ownership of the projects to them, and repurposing the cash to build infrastructure across the country.
• Framework for monetisation: The NMP was introduced in order to establish a clear framework for monetisation and present potential investors with a ready-to-invest asset list.
• Long-term infrastructure funding: The Union Budget for the years 2021-22 has highlighted the monetisation of operational public infrastructure assets as a significant source of long-term infrastructure funding.
• Central government line ministries:Only assets owned by central government line ministries and Central Public Sector Enterprises (CPSEs) in the infrastructure sector are currently included.
• Attract private investment: The government has emphasized that they are brownfield assets that have been “de-risked” from execution hazards and should thus attract private investment.
• The remaining future industries include telecom, mining, aviation, ports, natural gas and petroleum product pipelines, warehouses, and stadiums, with roads, railroads, and electricity assets accounting for roughly 66% of the total projected value of the assets to be monetised.In terms of yearly phasing by value, 15% of assets with an estimated value of Rs 0.88 lakh crore are expected to be rolled out this fiscal year.
• National Infrastructure Pipeline:The NMP would run parallel to the Rs 100 billion National Infrastructure Pipeline (NIP), which was announced in December 2019.
  • The amount to be earned through monetisation is anticipated to be approximately 14% of the Centre’s budgeted spending of Rs 43 lakh crore under NIP.
  • NIP will allow for a more forward-thinking approach to infrastructure projects, resulting in more jobs, improved living conditions, and equal access to infrastructure for all, making growth more inclusive. Economic and social infrastructure projects are included in the NIP.
  • Other infrastructure-related initiatives include the Scheme of Financial Assistance to States for Capital Expenditure, Industrial Corridors, and so on.

Significance of National Monetization Pipeline:

• Medium-term strategy: It will act as a medium-term strategy for releasing the value of government assets.
• Produce revenue: It will produce revenue for PSUs and create jobs.
• Amount of financial support:It can also minimize the amount of financial support necessary to build the public sector unit’s capital foundation. Asset monetisation money can also be utilized to help PSUs improve their technology, decreasing their dependency on budgetary support.
• Aid in better financial management: Over time, it would aid in better financial management of government/public resources.

Associated Challenges:

• Lack of identifiable revenue streams in various assets.
• The slow pace of privatisation in government companies including Air India and BPCL.
  • Further, less-than-encouraging bids in the recently launched PPP initiative in trains indicate that attracting private investors’ interest is not that easy.
• Asset-specific Challenges:
  • Low Level of capacity utilisation in gas and petroleum pipeline networks.
  • Regulated tariffs in power sector assets.
  • Low interest among investors in national highways below four lanes.
  • Konkan Railway, for instance, has multiple stakeholders, including state governments, which own stake in the entity.

Future Aspect:

• The Key to Success Is Execution:While the government has attempted to address numerous issues as a result of infrastructure development in the NMP framework, the plan’s implementation remains critical to its success.
• Dispute Settlement System: There is also a requirement for an effective dispute resolution mechanism.
• Multi-Stakeholder Approach: The infrastructure expansion plan’s success will be determined by the participation of other stakeholders.
  • State governments and public-sector companies, as well as the private sector, are among them.
  • In this regard, the Fifteenth Finance Commission has proposed the formation of a High-Powered Intergovernmental Group to review the Centre’s and States’ fiscal responsibility laws.

Conclusion:

It would be important for the government to get the first few projects in each sector right to set the ball rolling in the right direction. Therefore, smooth implementation of the first 10,000 crorewill determine the fate of the 6 trillion monetization plan.