National monetization pipeline: ambitious and in the right direction
By Abhaya Agarwal & Gunjan Jain
The National Monetization Pipeline (NMP) is an ambitious medium-term plan to monetize brownfield assets. Through NPM, the government aims to increase investment in infrastructure to boost economic growth, attract large-scale long-term capital and diversify infrastructure financing. The NMP provides a framework conducive to the optimal use of brownfield assets. Harnessing the efficiency and private sector capital to redevelop or renovate and operate world-class facilities in each of the infrastructure sub-sectors will help unlock the value of investments in public sector assets. Obtaining monetary values, in terms of initial considerations or annualized payment from the private sector for existing assets, aims to provide finance for new infrastructure. The estimated value of the NMP corresponds to approximately 5.4% of the total infrastructure investment envisaged under the National Infrastructure Pipeline (NIP). The NMP was therefore established co-terminus with the NIP.
In addition, the NPM provides sufficient clarity on the number, size and type of assets that would be made available in the market. This will boost investor confidence. NMP includes several sub-sectors and assets: roads, railways, gas pipelines, telecommunications, warehouses, stadiums, etc. 73% of the total value. The Infrastructure Investment Trust (InvIT) structure will be a privileged model for the implementation of the NMP, especially after the first successes in the road and electricity sector. Operational projects with sufficient cash flow clarity will be grouped together to attract investors.
Road assets worth Rs 1.6 lakh crore, or 26,700 km, will be monetized, the potential models being Toll-Operate-Transfer (TOT) and InvIT. TOT and InvIT have already been successfully introduced to the industry. However, the relative lack of attractiveness of the bidding processes for TOT’s third and fourth beams underscores the importance of structuring traffic risk considerations in the project contract and packaging. Therefore, project preparation will assume a critical role in the success of the NIP. Likewise, the InvIT model has been a preferred route for the road; however, challenges such as lack of road traffic data coupled with low market appetite and liquidity issues may need to be overcome.
In the railways, more than 400 stations, 90 passenger trains and other assets worth Rs 1.5 lakh crore are expected to be monetized. The government has already launched the station redevelopment program. Indian Railways assets are generally located in prime locations with high business value. However, they are underutilized. The redevelopment of New Delhi Station is one such project, which will generate substantial employment and transform the station into a world-class facility. Different stations will have varying potential income levels. The capital investment for each station should be carefully calculated, taking into account the feasibility of the project and the maximum payments to the government. In NPM, private actors are expected to invest significant capital in existing public assets to eventually earn income. Will future income justify the investment? It should be evaluated.
In addition, the government plans to monetize 8,154 km of GAIL pipelines through the InvIT model, building on the InvIT-based structure in natural gas transportation sponsored by Brookfield, which has acquired 100% ownership of 1,375 km of the East West pipeline from Kakinada to Bharuch. a private sponsor for a period of 20 years against an initial consideration.
It is important to ensure that the foundation provided by monetizing the first set of assets is strong. Valuations at this point are essentially prescriptive estimates and provide only a benchmark. The actual monetization value will be determined based on a detailed assessment or feasibility studies at the stage of structuring the transaction. Additionally, careful planning, project packaging, and coordination will be required to resolve underlying structural and legacy issues. This will require a commitment from all government entities involved, such as line ministries and state departments. Equally important will be to bring in the right set of partners to complete the deal and the execution. Actual realization will depend on various factors, such as the economic scenario, timing of the transaction, available capital, and investor interest, to name a few. Although the NMP provides an overview of the assets included, clarity of contractual terms with a balanced risk-return framework will provide better playing conditions for investors. It would be important for the government to succeed with the first projects in each sector in order to set the ball rolling in the right direction. The smooth implementation of the first Rs 10,000 crore will determine the fate of the Rs 6-lakh-crore monetization plan. The NPM will be implemented over a four-year period, while the real benefits can be seen in the second or third year of the plan period once implementation accelerates.
Respectively, partner and manager, Infrastructure, EY India