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In this week's FinMail, we understand the National Monetisation Pipeline in detail. We also understand how it is arguably the way governments will adopt to fund their developments.

The Story:

FM Nirmala Sitharaman on 23rd August 2021 launched the National Monetisation Pipeline developed by Niti Aayog which will help generate ₹6 lakh crore in cash flows for the government over the next 4 years (FY22-25)


₹6 lakh crore is not a small number to promise. So if this big number is being promised, there is something big that the government is going to do here, right?


Well, it definitely is a big thing. In fact, a reform, if it is implemented and turns out to be a success. We are going to discuss the Asset Monetisation Pipeline in detail in this FinMail and also explain how it fits as a piece in the government's big plan.


Brief Recap:

In last FinMail, we understood how the government is looking towards the private sector to hand over its traditional non-strategic businesses and how private player's presence in the Infrastructure sector is necessary for an economy's progress. While that has been covered, now is the time to focus on how the government wants to boost the Infrastructure of the country and this is how National Monetisation Pipeline fits into the plan. So let's not take much of your time and start right away.


Does Asset Monetisation mean that government is selling assets to the Private Sector?

The straightforward answer would be No!

For those not in the loop of the previous FinMail, Asset Monetisation and Asset Selling are two different things.


Let's understand the difference between Asset Monetisation & Asset Selling.

So, let's assume that you have an extra flat that you don't use to stay in. The way you generate cash from it decides what method you are adopting. If you sell this flat, you are selling your Asset and hence it is Asset Selling. If you are giving out your flat on rent, it generates cash flow for you. In this case, the flat still remains yours so it is not Asset Selling but Asset Monetisation. And hence asset monetisation is the action or process of earning revenue from an idle asset.


How Asset Monetisation fits into the government's big plan of pushing the Infrastructural development of the country?


A few years back in FY20, the National Infrastructural Pipeline was introduced which aimed at an Investment of about ₹111 lakh crore over a period of 6 years in the nation's infrastructure. If you thought that ₹6 lakh crore was a big number, then ₹111 lakh crore is way way way higher.


And thus arranging such an amount for investing in the nation's infrastructure is a difficult job to do and thus the government has planned different ways to source the money for the job. Let's take a look at it in brief:-


18-20% of the financing of NIP would be done through Centre's Budgetary resources i.e. centre's budget


24-26% of the financing would be done through State's budgetary resources


40% to be financed via extrabudgetary resources, private sector investment - in form of debt, from banks, NBFCs, selling equity to private players, accruals from PSUs and through external aids.


10-12% of financing would be done by developing a new Development Financing Institution (DFI)


and the remaining 5-6% financing would be done via Asset Monetisation.


So as you can see, Asset Monetisation is in fact a small piece in the government's big plan but this small piece is in fact a big piece on its own and thus implementing this would be a tough job to do and if done right, there would be no remarks but only appraises.


Now a question that might have come across your mind is that why is development for Infrastructure is so damn necessary?

Is it really a thing that must be done? Well, let us answer that as well.


Why does the government want to invest heavily in infrastructure?

If we look at developed nations around the globe and the pattern of how they become what they are today, we will find one common factor regardless of their unique economic advantage which is having a good infrastructure system at their centerfold.


Even the quality of life is majorly determined on the basis of how good the infrastructure of a country is. Infrastructure is the synonym of growth & development as it acts as a base for the fulfillment of other economic activities.


So how exactly having a good infrastructure helps to elevate the growth to the next level? Let's understand this with a bunch of examples.


Infrastructure is defined as the 'basic physical and organizational structures and facilities (e.g. buildings, roads, power supplies) needed for the operation of a society or enterprise'. It directly supports the operations.


So for instance, if the required infrastructure is good then it will directly add up to the efficiency of operation to be conducted as it will take lesser time and fewer resources. It will not only cut the time consumption & cost but also that time and resources can be further utilised somewhere else for some other productive work hence, 2x benefits. Let's understand it with some real-life (more relatable) examples:-


Role of infrastructure in country's development:

Water supply

It is estimated that waterborne diseases have an economic burden of approximately $600 million (₹4,440 crores) a year in India as per the Joint Monitoring Programme 2017 report. That too after improved water supply sources.


As a result, the government needs to spend on the infrastructure (water pipelines, water supply facilities, etc). Imagine what wonders it could do if every person has access to clean drinking water, it would not only improve their health but also dependence on government health benefits would go down and healthy people will contribute more (economically) to their families and ultimately the larger family - the country. In short, a healthy person is a boon for the economy while a sick person/s is a curse for an economy's prosperity.


Power & Telecom

Do we even require to explain this to you? No, right? Just imagine 1 hour of electricity cut or even worse, slow or no internet connection. Can't even imagine if you are living in a metro or sub-metro city while on the other hand, people in the rural or semi-urban areas have to go through this on a daily basis. Just ask about this to our Co-Founder. (har kisi ke ghar roz light nai hoti laxxman) Okay, we move on to the next thing ;)


Transportation Facility

One of the most important sectors for any economy to prosper is Logistics, in fact, the economy's progress depends on logistics and not the other way around. Read our IG post on the same to understand what we mean.


Better transportation facilities mean lesser transportation costs with faster speed. It helps businesses to make their products/services available to more potential customers. And at broader levels, it creates more prosperity.


Other Infrastructure Facilities

Apart from these major facilities, there are a bunch of other facilities that adds up to the economy by making the lives of people a little better. For example, a sanitation facility, it could create havoc of diseases if it goes wrong, prime requisite. Along with that, there are other health-related facilities such as availability of clinics & hospitals which is essential.


Mining, warehousing, distribution of govt benefits/schemes, etc are key infrastructure facilities that boost the economic growth of a country.


And thus we can understand how important Infrastructure is and thus the government has to keep investing in it and upgrading them for the overall progress of the economy. And that is what NIP & NMP wants to achieve; cater to the current needs as well as to become future ready.


Understanding Asset Monetisation Pipeline

Asset Monetisation is the government's ambitious plan to unlock the real value of the idle government assets by involving private players in infra sectors like Roads, Railways, Power, Telecom, Gas, Mining, Aviation, Warehousing, Ports and Stadiums.


Before we understand how does Asset Monetisation will work, let us take a quick look at how the ₹6 lakh crore would be sourced across sectors.


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Asset Monetisation is a commonly adopted practice of transferring the govt assets for a certain period (let's say 15 years) and getting the money and then investing the money into other efficient assets.


In any given country, the majority of public infrastructure is owned by the government or government institutions, and thus it is expected that they are going to deliver the basic infrastructure services to the general public. But in an over-populated country like India, it is not an easy task to do. So more often than not, governments 'delegate' some work to private agencies to carry on duties on their behalf and pay them in return.


A common example of this can be the National Highways which a private company builds, they operate it for a certain time (remember paying tolls on highways? mostly they are operated by private entities), and then after 10-20 long years, they transfer the highway back to the government.


This way the government could earn money on an initial stage and so they don't have to wait for toll fares to recover their investment money.


Just like that, the government would transfer the assets to private players. The private players will operate such assets to earn revenue and then return it back to the government after the agreed period of time. Here the government will not choose the private entity to whom it wants to transfer the assets instead, a bidding process will be done wherein the highest bidder (we know who will be the highest bidder, don't we?) gets the asset for a pre-determined period of time. This way the government will get the best value of its assets.


In short, the government would unlock their investment money in the initial years itself instead of waiting for it to recover over years and thus this would help them generate cashflows which they can again invest in other assets to be monetised later on.


Is asset Monetization a general practice?

The answer is Yes. It is a tried and tested concept in other countries. Govt tries to maximize their profits to be generated from assets and for that each country has its own model of monetising assets as per their law & governance. The models of Australia, Canada, China, France, Singapore and US could be used as a case study to implement this plan with all due diligence and there after accurate execution. In fact 'Asset Recycling' was one of the models applied by Australian Govt, where it monetised its assets and used the money received in the creation of another asset and further monetising that asset.


Is this a reform?

Now that we have understood how the government plans to monetise its assets and unlock their real value, let us understand how this can turn out to be a reform that will change the way Government Invests in Infrastructure and how it would be no less than a reform if implemented successfully.


The Asset Monetisation Pipeline expects to recover the value of idle assets beforehand rather than waiting for the asset to deliver the value in later years. This is less risky for the government as the government doesn't have to risk certain years to wait for the money to recover. The govt would receive its share early on while the risk would be passed on to Private entities.


In the event that all of this that has been thought and visualised by the government remains as it is or if not exactly then onto the track, then it can be the way forward how the government will carry on with Infra Investments.


They will have a source of cashflows ready to be unlocked whenever they want to fund their new investments and thus the nation's Infrastructure can develop much faster.


The cycle of cash flows

This would create a cycle of cash flows for the government which would be a great reform in itself. Let's understand this.


So there's an asset with the government which the govt decides to monetise. Now they will transfer this asset to any private entity and receive a certain amount beforehand.


This amount that is received would be invested to create another infra asset/project. After the completion of the project, this again would be monetised and the money would be received beforehand and again the money would be used to create another infra asset which again would be monetised and the cycle would continue.


(Samaj rahe ho aap, hai? Samaj rahe ho)


So yeah, this monetisation pipeline does seem a great great great thing to do to develop the country's infrastructure on a rapid basis but all it lies is on the execution, on-ground reality rather than on paper.


Benefits of NMP:

In the last FinMail, we had discussed the benefits of privatisation and how it could benefit the economy. Though it is not exactly privatisation, let's narrow down to the benefits of Assets Monetisation specifically.


1. Cashflows for Govt:-

Govt will get the money by leasing/renting out its assets, which can be used to meet the fiscal gap or even further fund capital expenditure. Thus, it will fast-track economic development.


2. Optimum utilisation of assets:-

PSUs and govt owned institutions have lots and lots of assets that are either unutilized or underutilized, acting as a capital blockage. Those assets aren't generating any monetary benefit while it should. Hence, an idea to solve this problem is to give it out to someone who can use it and pay a lease to the govt


3. Inviting private players:-

Those assets will be leased out to private entities and we know what private companies bring to the table. So all the benefits of privatisation that we discussed in last FinMail will come down here.


Now that we have talked about its benefits, let's discuss the limitation as well.


Criticism:

Actual Realisation vs Projected Realisation

As we saw earlier, the pipeline has laid sector-wise valuation which would aggregate to ₹6 lakh crore of asset monetisation. We also understood how this monetisation process would work, which is that the private entities would be invited to bid on such assets and the transfer would be done to the highest bidder.


And that is where the bug lies in the plan. Let us clear that for you.


Okay so, the government has its own valuation laid out for its variety of assets that it has to monetise but, it is a possibility that the bidders would not see the exact value that the government has determined.


What if there's no bidder that can match the government's valuation? There's a bidder but they are not ready to pay that much. In some cases, what if there's no bidder as well? Meaning no private player is interested in that particular asset.


So there's a possibility that there could be a difference in what the government expected to monetise and what the government actually monetised. The smaller the gap, the better and vice versa. If the gap is big enough, maybe the government drops the plan to monetise that asset/s. And the funding could experience a gap as well.


So all of this is good on paper while for witnessing the actual greatness of the plan we would have to wait till the first phase of monetisation begins.


That is it for this week's FinMail. Happy Teacher's Day, keep learning.

 

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