NMP plan: Low-risk assets attractive but road may be fuzzy, say experts

The Central government’s National Monetisation Pipeline (NMP), which focuses on leveraging value derived from operational projects, will have to face the same test of contractual sanctity and regulatory oversight, which public-private partnership (PPP) endeavours have so far countenanced.
 
Risks associated with greenfield investment, however, have been alienated and it reduces the cost of capital.
 
According to N Venu, managing director and chief executive officer, India and South Asia, Hitachi ABB Power Grids, there was an appetite among Indians for investment in asset monetisation. The document, however, itself admits that “successful implementation of NMP hinges on an effective governance framework with an escalation matrix for real time monitoring of progress”.
 
Amit Kapur, joint managing partner, J Sagar Associates, said earlier PPPs covered new and existing assets while the present one was limited to existing assets, mitigating construction risk. “Ownership will remain with the state-owned enterprise but the right to operate, maintain, refurbish, etc may be transferred for a defined period, after which the asset reverts to the government. Hence the high capital entry barrier has been removed,” he said.
 
Nonetheless, the challenge for private operators will be to sustain volumes at a time when the economy has slowed though a senior executive in a construction firm said NMP was a better-structured PPP.
 
Arvind Mayaram, former finance secretary who was involved in preparing the initial PPP framework, however, said a strategy paper on dealing with the existing issues that came up in infrastructure should have preceded this plan.

According to Kapur, a robust contractual framework that allocates risks and risk mitigation fairly secures a revenue stream to a project, and ensures a fast-track dispute resolution to address unforeseen change as also disputes was required. “Having said that, some of the risks that must be considered would include credit risk where the facility/asset is being supplied to state-owned enterprises, compliance risks of changing laws (like climate change and environment protection laws, tax laws), and force majeure risks, and latent and patent defect issue of projected life and capacity of the asset.”
 
Rigorous due diligence can address the issue, Kapur added. “If the Specific Relief (Amendment) Act 2018 is effectively implemented across India creating special courts for fast-track dispute resolution in PPP projects, it could significantly address some of these concerns.”
 
Venu said since a revamp of infrastructure in the post-Covid period was required, it would help India build better infrastructure, which is the central pillar of growth. “There will be a spillover effect, creating a cycle of demand, unlocking resources and value for the economy,” he said.
 
The NMP document, however, is not clear on the use of proceeds of monetisation. It says 5-6 per cent of the National Infrastructure Pipeline (NIP) can be financed through asset recycling.
 
At the same time, the document also mentions there is a pressing need on the public outlay towards social sector priorities and economic stimuli initiatives in the wake of Covid–19, thereby “necessitating exploring of alternatives mechanisms such as asset monetisation with an increased vigour”. This leaves the door open for use of funds for other than infrastructure-building purposes.
 
The government had last year come up with the Rs 111-trillion National Infrastructure Pipeline and the Rs 6-trillion NMP is its corollary.
 
Mayaram said if monetisation money from the assets was not reinvested but taken away from public sector undertakings as special dividends, it would “hollow out” the investment potential of the companies and there would be no release of capital for further infrastructure creation. “All future earnings will be capitalised in the four-year period (FY22-25) and consumed, depriving future revenue,” he added.
 
PSU assets also have ownership issues, like land which is leased to them by the states, and joint ownership of facilities with other government companies.
 
Kapur says there may be implementation issues as well for PSUs due to existing laws and contracts. “Besides, the industrial relations aspect will need to be addressed.”
 
The government plans to have real time monitoring through the asset monetisation dashboard, a concept which was also envisaged for the NIP. This, it says, will help all stakeholders in monitoring the implementation of projects by comparing actual progress vis-a’-vis planned pipeline for the NMP assets.
 
Assets in road and airport sectors have been monetized in the past and do not have complex structures. Mayaram points out the power sector, on the contrary, has a lot of variables which impact the revenue stream of future operators. “Even in the airport segment, the government will be offering smaller airports that have low traffic at present which means that the operator will be doing city side development to earn revenue which will take away the land for future expansion of the facility,” adds Mayaram.