Insights into Editorial: Imperatives for land monetization – INSIGHTSIAS

 

Introduction:

The setting up of the National Land Monetization Corporation (NLMC) is a progressive step in the quest to implement the government’s asset Monetization programme.

The Centre has taken the view that there are assets lying idle with various departments and PSUs that can be better put to use through the Monetization scheme.

The Finance Minister had announced plans to set up a special purpose vehicle for this purpose in the Union Budget 2021-22.

In August, 2021, the government of India launched the National Monetisation Pipeline (NMP).

 

Need of National Monetisation Pipeline (NMP):

Building new infrastructure has two constraints for any country including India:

1. Access to patient, predictable and cheap capital and
2. Execution capability, where government and private agencies can take up multiple marquee projects simultaneously.

India needs more infrastructure but the public sector simply doesn’t have the resources to build it. There are two possible responses.

For setting new infrastructure, one can think of bringing in the private sector with a contractual framework for what it has to do, and then let it bring its own resources.

To recognize that there are more risks in the construction stage and it is perhaps better to let the public sector build the asset and then sell it off to private players or if not an outright sale, let the private sector manage it.

 

 

How would this Land Monetization work?

1. The NLMC would pool together all the assets in the form of land and buildings owned by the government that can be sold and then implement a plan of either selling these or leasing these out to other parties(primarily be private players).
2. The Railways, for instance, has a lot of land that will probably not be used and can be leased out.
3. The same holds for PSUs that have either acquired land for expansion and never used it or have legacy assets.
4. There are several units which are non-functional and hence the property owned can be sold.
5. There is a big opportunity for the government to earn revenue. If the property is sold, it would be equivalent to disinvestment; if leased out, it would provide a non-tax revenue flow.
6. Depending on the government’s priority, the decision can be taken on long leases or sales.
7. The NLMC is needed because it would otherwise be difficult for each entity or department to carry out the monetization plan.
8. The new company, which will be set up under the administrative jurisdiction of the finance ministry.
9. NLMC will hire professionals from the private sector just as in the case of similar specialized government companies like the National Investment and Infrastructure Fund (NIIF) and Invest India.

 

Function of the NLMC:

1. Central Public Sector Enterprises (CPSEs) are those companies in which the direct holding of the Central Government or other CPSEs is 51% or more.
2. At present, CPSEs hold considerable surplus, unused and under-used non-core assets in the nature of land and buildings.
3. NLMC will also advise and support other Government entities (including CPSEs) in identifying their surplus non-core assets and monetizing them in a professional and efficient manner to generate maximum value realization.
4. NLMC will act as a repository of best practices in land monetization, assist and provide technical advice to the Government in implementation of asset monetization programmes.
5. The SPV set up for this purpose will professionally carry this out. As this idea takes shape and begins to deliver results, states can also consider the same as there are several idle assets that can be put to better use.
   1. One example is the several state-run educational institutions where the rooms can be rented out to say, call centres or private coaching businesses outside of class timings. So far, there has been no attempt to better use these facilities.

 

Government’s targets through disinvestments process:

1. While the Government had set a target of Rs 1.75 lakh crore through disinvestment in its Budget estimates in 2021-22, the target has been revised to Rs 78,000 crore — for the year 2022-23, the target is Rs 65,000 crore.
2. Any move to raise the target amount of Rs 78,000 crore will depend on the completion of the proposed public issue of Life Insurance Corporation by March-end.
3. The monetization plan can also be linked with the government’s other priorities so that they are targeted towards specific segments.
   1. For instance, the government may be able to link bidders for a land parcel to a specific goal, say, affordable housing or a renewable power plant.
4. A lower reserve price may be considered for some of these projects in the form of a subsidy.
5. For some of the loss-making companies which are no longer viable, the NLMC can work out modalities of selling out various segments—land, buildings, and plants and machinery—as the government takes a call on dealing with the staff, which can either be provided an exit route or re-deployed in other PSUs.
6. Companies where the government would like to completely exit would be the ones that would qualify for such an asset sale.

Hence, an approach similar to disinvestment would be advisable, wherein the government has gradually lowered stakes in companies.

Recognizing the wide range of specialized skills and expertise required for asset monetization in real estate market research, legal due diligence, valuation, master planning, investment banking, land management etc.

It has been decided to hire professionals from the private sector, similar to other specialized Government companies like National investment and infrastructure Fund (NIIF) and Invest India.

NLMC will be a lean organization with minimal full-time staff, hired directly from the market on contract basis.

Flexibility will be provided to the Board of NLMC to hire, pay and retain experienced professionals from the private sector.

 

Conclusion:

Valuation is the biggest challenge when it comes to real estate.

If land is to be sold, then we need to get the parcel valued and this is where there can be some difficulties.

Maintaining transparency is the key to adequate realization of the asset value.

Recent experience suggests that Public-Private Partnerships (PPP) now involve transparent auctions, a clear understanding of the risks and payoffs, and an open field for any and all interested parties.

Thus, the utility of PPP in greenfield projects cannot be neglected.

Hence, it is imperative that such proceeds be reserved for future capex and this can be a useful source of financing the National Infrastructure Pipeline.