The National Monetisation Pipeline can be a game changer if it has the support of the stakeholders and regulatory ecosystem
Much ink has been spilled on the merits and shortcomings of the recently announced National Monetisation Plan (NMP). Its supporters tout how the policy can potentially unlock capital to be reinvested in new (and much-needed) infrastructure, while providing attractive opportunities for investors.
The two models propounded are (i) ‘leasing/licensing’ of brownfield assets — providing tolling and operational rights through contracts of operating projects, and (ii) infrastructure investment trusts (InvITs). Neither of these methods are new.
The NHAI has been successfully implementing Toll-Operator-Transfer concessions, where a private operator operates a road project in consideration for a tolling right. The NHAI also has an InvIT in its pipeline.
Similarly PGCIL has floated PowerGrid InVIT, for its operating transmission assets. Even prior to this, short or medium term management contracts, where private entities operate water utilities or hospitals were not uncommon.
Is this then new wine in an old bottle? Well, not quite. Private sector participation in India is not new. India’s PPP programme has been lauded as a success though undeniably the sheen has worn off, requiring a relook. Investor sentiment has been weak in projects where they take on construction risks and are unable to assess viability.
At the same time, the need for new infrastructure cannot be ignored. The NMP seeks to address these two issues, by requiring upfront or periodic payments by the private sector to the government and redeploying those payments in new infrastructure.
The NMP seeks to set out a comprehensive roadmap for the process of evaluating the investment needs for greenfield projects, the financing gap, screening and shortlisting of assets and monetisation method, obtaining approvals for the project and structuring of the transaction. The ambition of the NMP appears to be providing a sustained project flow in a form attractive to investors during the next four years to enable suitable planning by the investors as well as provide steady returns to the Central government for project creation.
The NMP applies only to Central projects. However, realising the importance of a comprehensive programme and the requirements for State-level infrastructure, additional grant allocation of 33 per cent of value of assets realised has been proposed to incentivise the States.
Most projects are large-scale in nature to rouse the interest of investors. The NMP also proposes the bundling of smaller projects, especially in the airports sector. However, one would have liked to see the corresponding planned investment in greenfield projects by the Central government, as the monetisation is predicated on funds required for new asset creation.
Laws need amending
Even where the projects under the NMP are those under the Centre’s aegis, the support of State governments is vital. The regulatory environment in India is complex, with both State and Central government oversight with a plethora of compliances and approval requirements. Although some existing concession agreements contemplate State support through contract, the Centrecould, in consultation with the relevant State governments provide for a broad-based policy and regulatory support.
Further, even certain Central laws would need amendment to enable the NMP. One of the changes that has been brought in by the Finance Act, 2021 is exemption of stamp duty for transfer of assets between government entities. However, further rationalisations and exemptions may be required for stamp duty and other taxes on concessions and implementation of structures (including through demergers) for asset recycling.
Other regulatory changes may be imminent, especially in sectors where there has been no or limited private participation in operations such as the railways and gas pipelines. Given the short timelines for the programme, the speed in which new laws to usher a conducive environment can be enacted would be critical.
Investors would need adequate information and notice on the legacy issues that brownfield projects often suffer from as well as support in mitigating these. The government may even consider ring-fencing the investors against such past issues to shorten the timeline and risks associated with a thorough due diligence.
The contractual framework would be key with appropriate risk allocation being its bedrock. In the past, the Central government proposed sector-specific regulators and infrastructure dispute redressal bodies. This would certainly bring more investor confidence.
Finally, the public’s needs should be considered through proper benchmarking and KPI measures with strict monitoring and fair consequences for breach. Contract renegotiation can benefit both sides, with the parties being able to renegotiate the benchmarks and KPIs based on significant changes in demand, technology and user requirements.
The NMP is a bold policy that can usher in positive transformation. However, its ambitions would need the support of its various stakeholders and the legal and regulatory environment as well as responsiveness to change.
The writer is Partner, Economic Laws Practice