Making NMP work

Source: This post is based on the following articles published on 31^st August 2021:

• Asset monetization mustn’t end up as a Potemkin show – Livemint
• A monetization move that doesn’t tick most boxes – The Hindu
• Making NMP work – Business standard 

Relevance: Resource Mobilisation 

Synopsis: Challenges in the Implementation of National Monetisation Pipeline (NMP) and suggestions to overcome those challenges. 

Is asset monetization new to India? 

Asset monetization is not a new concept in India. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaresi) Act of 2002 introduced the concept of monetization of stressed assets to turn the illiquid ones among them fungible and create a market for non-performing assets. 

Issues/Challenges 

1. India’s Poor record in contract enforcement: India ranks No. 163 among 190 countries on the World Bank’s index for contract enforcement, and not much progress has been made on this. The case of India’s insolvency code shows how weak judicial infrastructure and a poor debt market can pose a challenge to the success of a well-designed law.
2. Asset recycling is not a silver bullet that always works well for the public or eases the sovereign debt: For instance, In Chicago, the US, where 36,000 parking slots were handed over to a private consortium, asset recycling only made parking more expensive. In the case of Transport of London, which was being operated by a private operator, it had to be bailed out twice by the UK government from near bankruptcy. 
3. Risks involved in the prescribed modes of implementing the monetisation: The main instruments proposed for implementing the NMP are public-private partnerships and a stock market-based investment trust (InvIT). Both have serious shortcomings, as experience demonstrates.
4. Issues in PPP: PPP in infrastructure has been a financial disaster in India. After the 2008 financial crisis, as the world economy and trade plummeted, and as India’s GDP growth rate slowed down, many PPP projects failed to repay bank loans. 
5. Issues in Infrastructure Investment Trust (InvIT): An Infrastructure Investment Trust (InvIT) is being mooted as an alternative means of raising finance from the stock market. The idea is based on the current stock market boom. However, the current high stock prices seem like a bubble with heightened uncertainties in the global financial market. With the U.S. Fed committed to reducing its assets purchase programme, it may cause financial instability. 
6. External Instability: Rising external debt by foreign portfolio investors carries a greater risk to external instability. Foreign portfolio investment has skyrocketed by 6,800% in 2020-21, over the previous year, to $38 billion as per RBI data. This, perhaps, poses a greater financial hazard as portfolio investment is risky.

Suggestions/measures 

1. Asset Monetisation Plus Privatisation: The government could adopt both measures of selling and leasing assets, depending on the nature of each asset and also the associated risk and return, etc. The centre should retain its ownership only of those assets that have a chance of offering the Centre higher returns in the future. 
2. Resource Mobilisation: Government should also cash in the other two methods of raising resources;
   • Setting up of a development finance institution (DFI). 
   • Raising the share of infrastructure investment in the central and State Budgets. 
3. Trust building measures by the government: In order to make the NMP work, the government will have to make matching investments of its own i.e., In institutional and regulatory capacity. 
4. Independent Regulators: If the NMP is to work, each sector in which assets are to be monetised will need an independent, empowered regulator with no connections to the bureaucracy. 
5. Participatory governance: In a democracy, policymaking must be done through public consultation. This is especially so for any project that has wide ramifications and could affect the lives of citizens at large.