THE Finance Ministry on Monday unveiled a four-year National Monetization Pipeline (NMP) worth Rs 6 lakh crore to unlock value in brownfield projects by engaging the private sector, transferring to them the rights but not the ownership in projects; and using the funds for infrastructure creation across the country.
National Monetization Pipeline
NMP aims to provide a medium term roadmap of the programme for public asset owners; along with visibility on potential assets to private sector.
The pipeline has been developed by NITI Aayog, in consultation with infrastructure line ministries, based on the mandate for ‘Asset Monetization’ under Union Budget 2021-22.
- The aggregate asset pipeline under NMP over the four-year period, FY 2022-2025, is indicatively valued at Rs 6.0 lakh crore.
- The estimated value corresponds to ~14% of the proposed outlay for Centre under NIP (Rs 43 lakh crore).
- This includes more than 12 line ministries and more than 20 asset classes.
- The sectors included are roads, ports, airports, railways, warehousing, gas & product pipeline, power generation and transmission, mining, telecom, stadium, hospitality and housing.
- The top 5 sectors (by estimated value) capture ~83% of the aggregate pipeline value. These top 5 sectors include: Roads (27%) followed by Railways (25%), Power (15%), oil & gas pipelines (8%) and Telecom (6%).
- In terms of annual phasing by value, 15% of assets with an indicative value of Rs 0.88 lakh crore are envisaged to be rolled out in the current financial year (FY 2021-22)
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Sector wise Monetization Pipeline over FY 2022-25 (Rs crore) |
Sector wise Monetization Pipeline over FY 2022-25 (Rs crore) |
What is monetization?
In a monetization transaction, the government is basically transferring revenue rights to private parties for a specified transaction period in return for upfront money, a revenue share, and commitment of investments in the assets.
Real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), for instance, are the key structures used to monetize assets in the roads and power sectors.
While these are a structured financing vehicle, other monetization models on PPP (Public Private Partnership) basis include: Operate Maintain Transfer (OMT), Toll Operate Transfer (TOT), and Operations, Maintenance & Development (OMD).
OMT and TOT have been used in highways sector while OMD is being deployed in case of airports.
The Framework:
Currently, only assets of central government line ministries and CPSEs in infrastructure sectors have been included.
Monetization through disinvestment and monetization of non-core assets have not been included in the NMP.
The framework for monetization of core asset monetization has three key imperatives:
What are InVITs and ReITs
What are Infrastructure Investment Trusts (InvIT)?
InvITs are collective investment vehicles similar to a mutual fund, which enables direct investment of money from individual and institutional investors in infrastructure projects to earn a small portion of the income as return
- InvITs enable developers of infrastructure assets to monetise their assets by pooling multiple assets under a single entity (trust structure)
- In India, InvITs are governed by SEBI (Infrastructure Investment Trusts) (Amendment) Regulations, 2016.
Safeguards for Investors:
- There are certain rules that the InvIT issuers have to follow designed to safeguard the investor.
- First, the sponsor has to hold a minimum 15% of the InvIT units with a lock-in period of three years.
- Second, InvITs have to distribute 90% of their net cash flows to investors.
- Lastly, the InvIT is required to invest a minimum of 80% in revenue generating infra assets.
Minimum Investment in InVITs
- In 2019, capital market regulator Securities and Exchange Board of India reduced the minimum investment limits on InvITs and REITs, making them more accessible.
- The minimum subscription limit for REITs was brought down to Rs50,000, from the earlier Rs2 lakh. For InvITs, it was reduced from ₹10 lakh to ₹1 lakh.
Structure of InvIT:
Like mutual funds, they have a trustee, sponsor(s), investment manager and project manager.
- Trustee has the responsibility of inspecting the performance of an InvIT.
- Sponsor(s) are promoters of the company that set up the InvIT.
- Investment manager is entrusted with the task of supervising the assets and investments of the InvIT.
- Project manager is responsible for the execution of the project.
What are Real Estate Investment Trusts (REIT)?
Real Estate Investment Trusts (REITs) invest in and manage commercial real estate. They earn rental income from their investments, which they pass on to their investors.
- Investors also profit from capital appreciation in the underlying assets. REITs have to distribute 90% of their cash flows to their investors at least once in six months.
- The basic deal on REITs is that you own a share of property, and so an appropriate share of the income from it will come to you, after deducting an appropriate share of expenses.
- Essentially, it’s like a group of people pooling their money together and buying real estate except that it’s on a large scale and is regulated.
Why need InvITs and REITs?
- Infrastructure and real estate are the two most critical sectors in any developing economy.
- A well-developed infrastructural set-up propels the overall development of a country.
- It also facilitates a steady inflow of private and foreign investments, and thereby augments the capital base available for the growth of key sectors in an economy, as well as its own growth, in a sustained manner.
- Given the importance of these two sectors in the country, and the paucity of public funds available to stimulate their growth, it is imperative that additional channels of financing are put in place.
What are Greenfield and Brownfield
The Greenfield project means that a work which is not following a prior work. In infrastructure the projects on the unused lands where there is no need to remodel or demolish an existing structure are called Green Field Projects. The projects which are modified or upgraded are called brownfield projects.
- Green field investment refers to investment in a manufacturing, office, or other physical company-related structure or group of structures in an area where no previous facilities exist.
- Brownfield investment refers to purchasing or leasing existing production facilities to launch a new production activity
Challenges to NMP:
- Lack of identifiable revenue streams in various assets.
- Level of capacity utilization in gas and petroleum pipeline networks.
- Dispute resolution mechanism.
- Regulated tariffs in power sector assets.
- Low interest among investors in national highways below four lanes.
- The lack of independent sectoral regulators.
