NMP will protect the exchequer and citizens
The National Monetisation Pipeline (NMP), prepared by the NITI Aayog, was launched on August 23 by finance minister Nirmala Sitharaman. NMP aims to create a virtuous cycle of “develop, commission, monetise and invest” in national infrastructure.
India remains hungry for new physical infrastructure across every conceivable sector. It has been working on plugging infrastructure deficit and this catch-up game, relative to other large countries, needs ever more financial resources. Building new infrastructure has two constraints for any country – access to patient, predictable and cheap capital; and execution capability, where government and private agencies can take up multiple marquee projects simultaneously.
NMP aims to address these challenges. It will help the government get upfront access to capital via interested private parties. These investors will, in turn, maintain and operate the monetised assets, generating cash flows, but also create technical and human resource capacity in the infrastructure sector. This virtuous cycle of resource augmentation, in turn, will help the government invest in new infrastructure immediately, without waiting for annual budgetary capital expenditure allocations.
In essence, the existing brownfield, de-risked assets, which are part of the fouryear monetisation pipeline, will help create execution capacities for new greenfield assets. This “asset sweating” is both innovative and productive. The government is monetising the rights to operate and maintain the assets, not their ownership. Each monetisation instance will involve bespoke contract design, terms and conditions, and pay-out structures.
Since its launch, the initiative has sparked some criticism. But a closer look at the concerns shows that these are illfounded, and tend to throw the proverbial baby out with the bathwater.
One criticism is that there will be execution risk in such a large programme. That such a risk is inherent to the concept is tautological – this is exactly why NMP is not adopting a one-size-fits-all approach.
Every asset will require a contract designed in a way that the government receives fair present value from the monetisation, while private parties get enough operational flexibility and regulatory visibility.
In fact, given that the contract terms can be 25 years or even higher, the bidding interest in the assets will itself be a good proxy to demonstrate that potential investors are confident of long-term regulatory stability and certainty.
A second criticism is that the taxpayers have already paid for these public assets — and, so, why should they pay again to a private party to use them? When an individual buys an apartment from a builder, the buyer still pays for the maintenance to the housing society.
When one drives on a tolled road, the user is paying for top-up usage charges. NMP introduces no new financial liability to the taxpayers and, in fact, represents a better targeted “user pays” structure. If a stadium in Delhi is not monetised, taxpayers around the country as a whole will pay for its upkeep. But a monetised stadium is paid for only by those accessing the facilities in Delhi. This is a much better way to generate operational revenues.
The third criticism is that there may not be any investor interest. On the contrary, India, as an investment destination, had two of its best Foreign Direct Investment years in FY 2019-20 ($74 billion) and FY 2020-21 ($81 billion). This fear seems unfounded, especially because the hypothesis can only be tested in the material and not in the abstract. With global liquidity conditions remaining benign, NMP represents a finely timed, pro-cyclical intervention.
The fourth criticism is born out of scepticism about a sub-optimal contractual and judicial framework to make such a plan a success. Again, this objection is both premature and generic. The contractual framework remains what it is, with or without NMP. Strengthening the judicial processes is ongoing work, and all gains will naturally and automatically accrue to the design and execution of NMP too. In fact, anecdotal evidence from the Insolvency and Bankruptcy Code (IBC) supports this positive feedback loop theory. IBC shows that even transformational and overarching legislative interventions can be made agile and self-correcting based on previous experience.
The fifth concern is that a few business houses will corner the bulk of the assets offered under NMP. Instead, recent experience suggests that public-private partnerships now involve transparent auctions, a clear understanding of the risks and payoffs, and an open field for any and all interested parties. NMP actually provides granular four-year visibility to potential investors, who can decide what they are interested in and when, and hence can prepare their own strategies to win the bid transparently.
The asset monetisation idea has already been tried by the National Highways Authority of India and Power Grid Corporation of India in various forms. Even at the state-level, the Mumbai-Pune Expressway is maintained by a concessionaire against tolling rights. In the NMP design too, there is no sale of family jewels – a transfer of rights in lieu of a financial consideration is a common leasing principle used in the world of finance from time immemorial.
As global economic conditions remain volatile and uncertain, raising financial resources upfront is a bold, constructive and confident policy statement. It signals to the world that India is open to business with the interests of the public exchequer and the citizens firmly protected.