India's National Monetization Pipeline

19 Dec 2021 economy · finance · india

The National Monetisation Pipeline was a policy announced by the BJP government in India in August 2021. This policy was not widely covered in any of the national newspapers, and there were no policy analyses that went deeper than the headline numbers highlighted by the government. While some articles started coming out in September with more details about the government’s expectations, I couldn’t find any criticism of the government’s approach. A tired comparison to Australia’s asset monetisation plan was everywhere, but this did nothing but scratch the surface. (The same comparison was repeated in multiple publications including The Print and India Today.) This post is a summary of my understanding of the policy after reading some detailed coverage in the September 27, 2021 issue of the India Today magazine.

This post is broken up into three sections: What, Why and How. I have included footnotes with sources for all the figures that are mentioned in this post.

What?

India’s National Monetization Pipeline (NMP) was unveiled by the government in the last week of August 2021. It is a policy that aims to raise Rs. 6 lakh crores¹ over the 4 years between 2021 and 2025.

The pipeline plans to put up existing, operational government-owned assets for monetisation. Private companies can get “revenue rights” to these assets, which will enable them to enhance them (such as widening operational roads) and provide new services using them (such as new trains on existing railway tracks). The ownership of the assets will remain with the government. And when the tenure of monetisation ends, revenue rights will revert to the government. In effect, the government is leasing out its assets to private players.

The question for private players who are considering any investment is clear:

1. Can they use the asset to generate enough revenue to recoup the capital that they invest?
2. If they can recoup the capital, can they make a profit on the asset in the limited time for which they will hold the revenue rights?

Government’s expectations

For assets that are monetised, the government expects the following three things from the private sector entity:

1. Upfront capital
2. A share of revenue generated from the asset during the period of monetisation
3. Investment commitment towards the monetised asset

The government expects the private player to increase efficiency, enhance the quality of service, and increase userbase through service improvements, so that they can charge enough to make money despite having to pay a share of their revenue back to the government. In reality, most private players that will monetise an asset will probably use all three strategies.

Connection to National Infrastructure Pipeline (NIP)

NIP is the flagship policy that the Indian government unveiled on August 15, 2019 (India’s Independency Day). This policy’s goal was to invest Rs. 100 lakh crores into infrastructure projects in India during the period from 2019 to 2025. This policy is planned to end at the same time as the NMP.

NMP is one of the ways in which the government is raising money to invest in the NIP. (The government’s revenues from NMP will be re-invested in “new infrastructure” that will be built as part of NIP.)

The NIP’s headline number was ambitious. The total infrastructure investment in India in the preceding 5 year period from 2013 to 2018 was Rs. 46.48 lakh crores, according to the Department of Economic Affairs (DEA).² In effect, Modi’s plan was to double infrastructure investment.

Surprisingly, I could not find any summary of how this policy is going after 2019. The official policy document marks several of the important Key Performance Indicators as “TBD (To Be Decided).” The latest mention of this policy was in the Budget speech in February 2021 where new projects were added to NIP. It is already 2 years since the policy’s implementation period began, but there seems to be no mention of it anywhere on Government websites or any media coverage of how much investment has come in through this policy and whether the government is meeting its phasing goals for the project.

My read of the numbers is that the government is falling short of the capital expenditure planned under the NIP:

Period	Planned CapEx from Centre under NIP3	CapEx as in Budget 2021-224	Percentage of CapEx achieved
2019-20	5.62 lakh cr.	3.35 lakh cr.5	59.60%
2020-21	8.39 lakh cr.	4.39 lakh cr.6	52.32%
2021-22	8.31 lakh cr.	5.54 lakh cr.7	66.66%

Comparing Expected Revenue

To put this number in context, here are some headline figures for the Indian economy. All figures in the second column are in lakh crore INR (= 1 trillion INR). The figures for government revenue and expenditure are from the “Actual” values of 2019-20, the last year which has published “Actuals” figures and was not affected by the Covid19 pandemic. Figures are taken from the PRS India Union Budget analysis.

Header	Value (lakh crores INR)
NMP’s expected revenue (5 years)8	6
NMP’s peak yearly revenue (2023-24)9	1.8
Actuals, 2019-20
Government receipts (without borrowing)	17.5
Government borrowing	9.33
Government expenditure	26.86
Defense expenditure	4.52
Education	0.89
Railways	0.69
Government subsidies (petrol, food, fertiliser, others)	2.62
India’s 2019-20 GDP	145

So, the government’s peak yearly revenue from NMP would cover the government’s expenditure on Education and Railways. Looking at these figures, it’s clear that the NMP is not as ambitious as the NIP.

Why?

There seem to be two major reasons for this policy:

1. Public sector management of public assets is inefficient: This is tacitly accepted throughout the NMP policy document, especially in sections where the policy talks about “unlocking value” in existing assets. The government recognizes that efficient management of public assets is essential to the economy’s growth. However, to achieve this, the management is outsourced to private players.
2. Government borrowing is at a limit: For the NIP, the government must raise Rs. 100 lakh crores in the 2020-2025 period. Until now, it seems that the main method for raising this capital has been government borrowing. (I could not find concrete figures for how much of the borrowing has gone into NIP projects.) The debt-to-GDP ratio is just above 62.9% in 2020-21. Moreover, over the remaining period of the NIP, until 2025, the government plans to bring this ratio down to 60%, according to the recommendations from the 15th Finance Commission. This means that the government has to pay back about Rs. 4.5 lakh cr.¹⁰ of the oustanding liabilities to achieve their debt-to-GDP ratio goal. So, more borrowing is not the solution to fill the gap in NIP capital. The government sees monetizing existing assets as the only viable option.

One thing jumped out at me after reading through the literature about both NMP and NIP. NMP’s underlying assumption is that the private sector is better at efficiently maintaining infrastructure compared to the public sector. So, one is forced to question the government’s wisdom in trying to build more public infrastructure under the NIP, which will be managed by the public sector, while it is accepting that public sector management is inefficient in the long-run.

How?

Details about the implementation of this policy are completely missing from the original policy document. Most media coverage about the NMP simply skips covering this part, because there is nothing to be said.

Firstly, the details that are missing are: what kind of rights will be part of “revenue rights,” how much upfront capital and revenue share the government will demand for each type of asset. One has to assume that these numbers will never be set in stone, because the private sector will expect them to be negotiable based on their existing scale. They will also hope to get a “wholesale” discount, if they decide to invest big in NMP. The government would not want to tie its hands during these negotiations by publicly announcing a minimum value for any of these figures. So, the public will probably find out about NMP projects only after the negotiations have been completed and the government has already made a decision about these numbers.

Secondly, whether the private sector is even interested in taking over management of mismanaged public assets, investing capital in them and trying to turn them around, is up for debate. There has already been some criticism of the two major asset classes that are up for monetisation:

1. Roads: Roads make up 27% of the expected revenue from NMP. 26,700 kms of roads that are operational or under construction with at least 4 lanes are up for monetisation. These roads are part of the National Highway network and the toll collection rights have been retained by the National Highway Authority of India. The criticism of this asset class is that 4-lane roads are already being managed efficiently by the NHAI, and that as long as toll collection rights remain with the NHAI, it seems unlikely that private players would want to put in any unrecoverable capital in the enhancement of this asset class. (As in the long term, NHAI will reap the benefits of the private player’s capital investment.)
2. Railways: Railways make up a further 26% of the expected revenue from NMP. 400 railway stations and 90 passenger train operations are up for monetisation. Currently, Konkan Railway seems to be the only railway entity in the country which has atleast one private stakeholder involved in its management. Given this relative lack of experience in the private sector, getting them involved in operations through asset monetisation seems akin to throwing them into the deep-end of the swimming pool. An approach in which entities that have experience managing operations can work with entities that don’t have any experience in an effort to build the private sector’s experience would be preferable. This approach would also give them a close look at the potential for profit in Railways operations.

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Policies die in the implementation phase, where ambitious projects transform into reams of paperwork making their way through an incompetent, circuitous and intolerably slow bureaucracy. Private sector players are unable or unwilling to invest the resources required to cut through this regulatory red tape. The very existence of the red tape will tilt the field towards a very small number of players, and this policy might result in an oligarchy. This concern has been raised before, and the government seems to be willing to accept the risk of oligarchy as long as they are able to get the capital required to enact wider benefits. In a nod towards the influence of the reigning monopolists in India (namely, Ambani and Adani), the leader of the opposition did not mention their name in a press conference in which he was criticizing the NMP. Instead, he chose to refer to them indirectly as “2 or 3 people that you already know about.”

With a goal of raising Rs. 0.88 lakh crore⁹ by April 2022 under the NMP, missing implementation details raise questions about the government’s ability to achieve their target.

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