Finance Minister has recently announced the framework for the National Monetization Pipeline (NMP) and its process is under discussion.

What is Asset Monetization?

• Asset Monetization involves the creation of new sources of revenue by unlocking of the value of hitherto unutilized or underutilized public assets.
• Internationally, it is recognized that public assets are a significant resource for all economies.
• Many public sector assets are sub-optimally utilized and could be appropriately monetized to create greater financial leverage and value for the companies and of the equity that the government has invested in them.
• This helps in the accurate estimation of public assets which would help in the better financial management of government/public resources over time.

What is the National Monetization Pipeline?

• The NMP names a list of public assets that will be leased to private investors.
• Only brown-field assets, which are assets that are already operational, are planned to be leased out under the NMP.
• So, to give an example, an airport that is already operational may be leased out to an investor.
• Assets that are yet to be developed, such as an undeveloped piece of land, for example, may not be leased out.
• Importantly, there won’t be any transfer of ownership from the government to the private sector when assets are leased out.
• The government only plans to cede control over its assets for a certain period of time, after which the assets must be returned to the government unless the lease is extended.

Will NMP help the economy?

• Better control and utilization: Economists generally believe that scarce assets are better managed and allocated by the private sector than by the government. So to the extent that the NMP frees assets from government control, it can help the economy.
• Freeing Capital: The government believes that leasing out public assets to private investors will help free capital that is stuck in these assets.
• Infra generation: The government can use this money, in turn, to build fresh infrastructure under the National Infrastructure Pipeline (NIP).
• Economic boost: In fact, the proceeds from the NMP are expected to account for about 14% of the total outlay for infrastructure under the NIP. The government believes all this spending will boost economic activity.
• A perfect model: Analysts also believe that the government has now through the NMP found the right model for infrastructure development.
• Source of finance: The government, they say, is best suited to tackle the ground-level challenges in building infrastructure, while the private sector can operate and offer indirect finance to these projects through the NMP.

For example, say the government has invested thousands of crores in a road project. It may take the government decades to recover its investment through the annual toll revenues.  Instead, the government can recover a good chunk of its investment by leasing out the right to collect toll for the next 30 years to a private investor.

What are the risks?

• Political lobbying: The allocation of assets owned by governments to private investors is often subject to political influence, which can lead to corruption. In fact, many in the Opposition allege that the NMP will favour a few business corporations that are close to the government.
• Burden of opportunity cost: The expected boost to economic activity due to higher government spending may also need to be weighed against the opportunity costs. For one, the money that the government collects by leasing out assets comes from the pockets of the private sector. So higher government spending will come at the cost of lower private spending.
• Legal uncertainties: The NMP also does not address the various structural problems such as legal uncertainty and the absence of a deep bond market that hold back private investment in infrastructure.
• Sheer Privatization: There are also concerns that the leasing of airports, railways, roads and other public utilities to private investors could lead to higher prices for consumers. If the government merely cedes control of public utilities to private companies without taking steps to foster greater competition, it can indeed lead to poor outcomes for consumers.
• Policy compulsion: The government’s past disinvestment projects such as the sale of Air India did not catch the fancy of investors owing to the stringent conditions set by the government. In the case of Air India’s sale, the buyers were supposed to possess a certain minimum net worth and stay invested in the airline for at least three years.

What lies ahead?

• The success of the NMP will depend on the demand for brown-field government assets among private investors.
• Many analysts also believed that the government was expecting buyers to pay too much for a debt-ridden Air India.
• The pricing of assets and the terms of sale will thus determine the level of interest that private investors show for assets leased under the NMP.
• In the past, doubts have been raised about the allocation of airports and other assets to certain private business groups (say Adani Group).
• So the process that the government adopts this time to allocate assets may come under scrutiny. There is likely to be a demand for an open, competitive auction of assets.