National Monetization Pipeline demonstrates both its potential and its limitations

admin November 5, 2021
Updated 2021/11/05 at 7:28 AM

The National Monetisation Pipeline (NMP), launched by Finance Minister Nirmala Sitharaman, is anticipated to bring in approximately 25.96 lakh crore for the government. Following through on the Budget’s intention to monetize public assets to finance new infrastructure spending, the government has published a list of projects and facilities that will be sold to private investors via structured leasing and securitization deals over the following four years.

What is the National Monetisation Pipeline, and how does it work?

The NMP specifies which public assets will be leased to private parties. Only brown-field assets will be leased out under the NMP, which are assets that are currently operating. As an example, an existing functioning airport might be leased out to a potential investor. It is possible that assets that have not yet been developed, such as undeveloped land, will not be leased out. When assets are leased out, there will be no transfer of ownership from the government to the private sector. The government only intends to hand up ownership of its assets for a limited time, after which they must be restored to the government unless the lease is renewed.

Will NMP be beneficial to the economy?

The government thinks that leasing public assets to private investors will assist to free up money that is now trapped in these assets. Assume the government has spent tens of millions of rupees on a road project. It may take decades for the government to recoup its investment via yearly toll receipts. Instead, the government may recoup a significant portion of its expenditure by leasing the right to collect tolls to a private operator for the following 30 years. Under the National Infrastructure Pipeline, the government may utilise this money to construct new infrastructure (NIP). In reality, the NMP revenues are projected to account for about 14% of the entire infrastructure expenditure under the NIP. All of this expenditure, according to the administration, will increase economic activity. Analysts also think that the government has discovered the appropriate paradigm for infrastructure development via the NMP. They argue that the government is better equipped to address the ground-level problems of infrastructure development, while the private sector may run and fund these projects indirectly via the NMP.

What are the possible risks?

The distribution of government assets to private investors is often influenced by political factors, which may lead to corruption. Indeed, many in the opposition believe that the NMP will favour a few close-knit corporate companies. The anticipated increase in economic activity as a result of increased government expenditure may need to be balanced against the opportunity costs. For one thing, the money collected by the government via asset leasing comes from private sector wallets. As a result, increased government expenditure will be offset by decreased private spending. The NMP also ignores the numerous structural issues that stymie private infrastructure investment, such as legal ambiguity and a lack of a strong bond market. It is worth mentioning, however, that the private sector is seen to manage and distribute assets better than the government. The NMP may benefit the economy to the degree that it liberates assets from government control. Concerns have also been raised that leasing airports, railroads, highways, and other public assets to private companies would result in increased consumer costs. Consumers may suffer if the government simply hands over management of public utilities to private firms without taking measures to promote more competition.

What awaits us?

The NMP’s success will be determined by private investor demand for brown-field government assets. Previous government disinvestment initiatives, such as the sale of Air India, failed to attract investors due to the government’s strict requirements. The purchasers of Air India’s stock were required to have a specific amount of net worth and commit to investing in the airline for at least three years. Many experts said the government was asking too much from bidders for a debt-ridden airline. The amount of interest shown by private investors in assets leased under the NMP will be determined by asset price and selling conditions. Concerns have been made in the past regarding the distribution of airports and other assets to private corporate organisations. As a result, the government’s method for allocating assets this time may be scrutinised. There will very certainly be a need for an open, competitive asset auction.

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