The Treasury Secretary presented the National Monetization Pipeline (NMP) of Rs 6 lakh crore to the nation on August 23. NMP is following another pipeline – a National Infrastructure Pipeline (NIP) of Rs 10.25 lakh crore – which was commissioned on December 31, 2019 and will be implemented over the 2022-25 period to coincide with the NIP timeframe. NMP is quite ambitious about its size and the types of assets proposed for monetization. It includes assets from more than 12 line ministries and more than 20 asset classes. It deals with the monetization of assets owned by the government (e.g. stadiums), non-commercial organizations and agencies under the government (streets of NHAI, warehouses) and commercial central public companies (CPSEs – Powergrid Power Transmission Lines). NMP expects to monetize an average of Rs.1.50 billion in assets annually.
The NMP was presented as a whole new idea. It is not so. Three years ago, the late Finance Minister Arun Jaitley announced in the 2018-19 budget that the “government will start monetizing selected CPSE assets using InvITs from next year”. The Department of Investment and Public Asset Management (DIPAM) has been tasked with taking on the monetization agenda in 2019. DIPAM announced the monetization process on March 8, 2019. An alternative mechanism for obtaining approval for asset monetization has been created. In April 2019, a monetization threshold of Rs 100 crore was imposed, prohibiting asset-holding CPSEs from monetizing more than Rs 100 crore themselves.
The government has monetized three types of assets so far – NHAI roads, airports from AAI, and transmission lines from Powergrid. The monetization of NHAI road goods according to the Toll Operate Transfer (TOT) model began in 2017. The contract for the first TOT was signed in April 2018 for the concession of a bundle of nine selected sections of national highways with a total length of approximately 700 km for Rs 9,681 crore. signed to an Australian company – Macquarie Group. Two more street bundles were monetized under TOT3 and TOT5, the remaining two scrapped. The NHAI has achieved a total monetization of approximately 17,000 billion rupees through these three transactions. The concession for operation, management and development (OMDA) of six airports – Ahmedabad, Jaipur, Mangaluru, Thiruvananthapuram, Lucknow and Guwahati – was awarded by AAI to Adani Airports in 2019.
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The government has been able to monetize just over 25,000 billion rupees over the past four years as part of its monetization program. However, the goal of Rs 6 lakh crore or Rs 1.5 lakh crore per year is bold – impossible perhaps for the following reasons.
First, monetizing CPSE assets is more complex than even privatizing. Monetization involves the transfer of business assets or a company with business assets to a private partner. Important decisions have to be made about the duration of the concession, the type of rights transferred, the regulation of tariffs, the service standards to be complied with, etc.
There are also conflicting public policy and preference issues. Can a single party be assigned all six airports or should it be limited to a maximum of two or three airports? Or what would happen to AAI’s loss-making airports? The government recently decided to pool loss-making airports with profitable airports. Due to its inability to address these complications, the government has been unable to monetize the second tranche of six airports in the past 30 months. The government will face hundreds of such problems in the implementation of the pipeline, which seems very unlikely.
Second, monetization involves the transfer of assets / land in long term leases where the government does not want to see assets being sold. The government tried to emphasize this in the announcement of the NMP. The monetization transactions are for a long period of time. Six airports were given away for 50 years. The shorter the time frame, the less profitable the asset will be for the recipient if they make large investments to achieve their full potential. This inconsistent policy goal would stand in the way of achieving optimal monetized value.
Contract negotiation
Third, monetization transactions are not standard transactions. Any asset monetization requires the negotiation of a very comprehensive contract. The assets are very different. It is difficult to standardize monetization transactions. It’s getting tough as hell to structure these monetization transactions across 20 different asset classes.
Fourth, most ministries / organizations have never monetized. The railways have never done a monetization transaction well. They didn’t even like the idea of monetizing railroad tracks. Their station development and monetization program has been running for seven years but has not seen seven stations develop successfully. Monetizing warehouses, sports stadiums, power plants and ports would be very difficult issues.
Fifth, the government could end up making the monetization program just another debt-taking program. There is an indication that an NHAI-owned SPV will be the operator of the monetized road goods. To do this, the SPV would borrow to repay NHAI’s debt. This type of monetization would not be a real monetization, but a means of borrowing twice for the same asset. A type of HPCL-ONGC transaction in various guises.
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Sixth, the government has delegated the CPSEs’ powers over the monetization program to itself. In the MNP mechanism, the government has decided that all monetization transactions with Rs 100 crore or more will be structured, processed and approved by the government. Rs 100 crore is a starvation wage. That means almost every monetization transaction would be carried out by the government. The complex multi-tier institutional mechanism created by the government for the general implementation and oversight of the asset monetization program is likely to become the millstone at the neck of the program.
Seventh, the government is over counting monetization proceeds. The goal of Rs 6 lakh crore includes two types of proceeds. The first type of revenue is the monetization value that the owner of the public property realizes in prepaid as NHAI receives a one-off payment for giving us a bundle of roads to a TOT model concessionaire for the right to collect tolls for 30 years and withhold. The second type of monetization proceeds are the investments the private sector party would make to process the concession. For the licensed airports, the private person receives the right to develop plots on the airport property on the city side. It is wrong to assume that the second type of revenue is monetization revenue available to the government or its agencies for further infrastructure investments.
Given these challenges and difficulties, I don’t see that the government could even hit 20% of its monetization target in four years. The NMP is too much talk, far less action and implementation.
(The author is a former finance and economy minister of the Union)
