The National Monetization Pipeline: At a cross ‘roads’

The Multiplier Effect

In 1956, the United States federal government passed the Highway Revenue Act, which created the Highway Trust Fund, the Interstate and now regarded as one of the greatest and most important public works projects ever undertaken in the history of the United States more so as a recovery measure post war and a shining example of the multiplier effect on an economy that can result in from intelligent investment in infrastructure. The Margaret Thatcher led privatization reforms in Britain have similarly been credited with increases in productivity and efficiency.

As the Indian economy emerges from the Covid-19 pandemic, policymakers have identified core asset monetization as one of the key levers for economic growth and recovery. At its heart its an antifragile idea- a crisis allowing us to build back better with private investment in infrastructure – facilitating the augmentation of existing brownfield infrastructure and creating the conditions for confident private investment.

The NMP envisages capital raise from the private sector through, a direct contractual model, whereby core assets will be leased/ made available for operation to the private sector, and through raising structured finance, whereby capital is proposed to be accessed through use of pooling mechanisms such as Infrastructure Investment Trusts (InVits) and Real Estate Investment Trusts (REITs). While neither of these approaches are new, the scale envisaged in the NMP is unprecedented and the monetisation of mature brownfield assets, provide an opportunity for long term, catalysing network effects.

A true partnership and developing a proper framework: India’s experience with public partnerships (PPPs), has too often this has lacked the trust inherent in a true partnership, underpinned by an inherent suspicion of the motivations of the private sector. To truly realize the benefits of PPPs, the current mindset needs to shift to the recognition that profit are the bedrock of private commercial endeavour, and profit-seeking is not a zero-sum game which trades off public interest. Win-win partnerships require contractual frameworks on an equal footing- with the state as counterparty, not sovereign. This will also require the state to tread cautiously regarding conflict and separating their regulatory role from their asset-owning one

Many developing countries have a special legal framework governing PPPs, and it may be time for India have a similar law to emend the role of the state on conflict and contractual principles and smoothen friction seen previous PPPs.

Auction processes too could be better prescribed. Directives by the European Commission, for example, stipulate different auction procedures that customised by publica authorities for the project at hand. Some of these allow public authorities to negotiate with bidders within the auction process, allowing the public authority to better understand and meaningfully address project risks.

In India, the space for constructive discussion during tenders tends to be limited. Fears around accusations of collusion, or unfair dealings, cause a natural reluctance by public authorities to address genuine commercial concerns of bidders. One-sided contracts in favour of the public authority do not necessarily serve public interest as business failures in a public project hurts the users of the project, and its financial backers.

A specialised PPP law can also bring about a shift in mindset on the basis for contract allocation, not to the bidder with the highest bid but the one able to invest in and improve the infrastructure through the life of the contract.

The framework must also provide room for amendment of contractual terms. Flexibility in contractual terms to arrive at the right solution makes business, financing and operation and maintenance easier. Most PPPs span multiple decades, and it is not always possible to provide for accurate adjustments for potential future events.

Such a framework for review or amendment of contracts should be principle- based, rather than rule or word based, and allow for space for a constructive discussion between key stakeholders such as financiers of the project. Periodic review or provision for mandatory contract revision as has recently been introduced in Brazil and it engenders flexibility in PPP contract.

Establishing independent regulatory bodies operating under a set of well-defined parameters can prove invaluable to successful PPPs, be it for tariff or standard setting, or dispute resolution.

Lastly, infrastructure development and monetisation must be sustainable and socially sensitive basis, given that we are trustees of such infrastructure for future generations. A study conducted by the Economist concludes that sustainable infrastructure can only be delivered when all three pillars of the sustainable development goals—economic, environmental, and social—are considered together, and that infrastructure is a means of delivering essential services.

The road previously travelled

It is not just contractual structures, frameworks and incentives that need to be flexible, but also mindsets and thought processes. India grew stupendously faster than anticipated in the last two decades, and yet our earlier infrastructure development laws always lagged. This time, we should be ready for it and be flexible and fair.

This article has been co-authored by Cyril Shroff, Managing Partner and Santosh Janakiram, Partner & Head – Projects, Cyril Amarchand Mangaldas.