#11: Government's innovative solution to infrastructure funding.

COVID has wreaked havoc on economic progress. Everyone knows that. But no one knows the real solution to it. Especially as there is an impending third wave, the general sentiment around economic recovery is mired with ‘ifs’ and ‘buts’.

Yet, there is one area where government spending results in positive economic impact almost every time - infrastructure. It is in line with this thought that an infrastructure vision for the country in the form of a ‘National Infrastructure Pipeline (NIP)’ was released in December 2019. It was highly ambitious, to say the least. It envisaged an infrastructure investment of ₹111 lakh crore over a five-year period from FY 2020 to FY 2025.

This needed lots of capital. A detailed plan for the sourcing of such finance was laid out and it included an ‘Innovative and Alternative Financing Sources’ to meet about 15-17% of the expenditure envisaged under the NIP.

It is under this idea that the present scheme of ‘National Monetisation Pipeline (NMP)’ is being rolled out. I will come to an explanation of the NMP, but first this -

India is an emerging economy. Basically, it means that India is not an underdeveloped economy, but not a fully developed one either. It is trying hard, with limited resources, to scale up its growth. To scale with limited resources, there is only one way out - innovation. The NMP is all about innovation. Let us understand the NMP -

The strategic objective of Asset Monetisation Programme is to unlock the value of investments in public sector assets by tapping private sector capital and efficiencies.

That might seem fancy. But it basically says the following -

1. The government will unlock its locked-up capital in public assets like roads, railways, power generation and transmission, gas pipelines, etc. without selling these assets.

2. It will do so by tapping private sector capital, which also brings efficiency (the assets will be leased to private players under PPP models for revenue).

There will be three key facets to such arrangements -

1. The government will monetize only the ‘rights’ in these assets, not ‘ownership’. The assets will be handed back to the government at the end of the contract’s life.

2. The assets involved be brownfield projects, i.e. projects that are already in operation (not new upcoming projects).

3. The entire transaction will be done as structured partnerships such as Operate Maintain Transfer (OMT) or Operate Maintain Develop (OMD).

The Numbers

• Core assets of the Central Government with an estimated value of ₹ 6 lakh crores will be put for monetization for a period from FY 2022 to FY 2025.

• The year-wise indicative value of the monetization pipeline will be -

• The top 5 sectors will capture ~83% of the aggregate pipeline value. These are -

  • Roads (27%)

  • Railways (25%)

  • Power (15%)

  • Oil & Gas Pipelines (8%)

  • Telecom (6%)

The Framework

PPP (Public Private Partnerships) will not be the only instrument for monetization. The government is hoping to use capital market instruments such as Infrastructure Investment Trusts (InvITs) too.

Further, the Central Government has stated that it will share the proceeds with the concerned State. This is especially important because most Central government schemes that fail to take the States on board have to face failure sooner or later.

Therefore, as an incentive for asset monetization, additional allocation equivalent to 33% of the value of assets realized is envisaged to be deposited in State consolidated funds or in account of State public sector enterprises owning the assets.

Opportunities

The NMP is expected to result in numerous opportunities for infrastructure companies such as Reliance Group, Adani Group, L&T Infra, GMR Group. Right now, it seems to be a win-win for everyone involved.

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Surbhi Singhal is a Chartered Accountant and a Company Secretary; and the founder of Advance Thinktank. The company specializes in preparing custom research reports regarding investment opportunities in India, tailored to the client's needs.