The logic behind the recycling of assets proposed by the National Monetization Pipeline is simple: the way for the government to spend more on infrastructure without increasing taxes or the fiscal deficit is to lease out existing government assets and use the proceeds to make greenfield investment in physical or social infrastructure.
That is an eminently sensible idea. Greenfield investment in infrastructure is difficult for the private sector because of the high risks involved. The initial investment in infrastructure is therefore best left to the government, which can not only bear the risk but is also able to finance it more cheaply, as its borrowings incur lower interest costs. But once the project is up and running, the government can monetize it by leasing it out to private sector players. As the Kelkar Committee said: ‘while the government has a major role in building infrastructure, should it maintain and operate roads or power stations? No, not at all. Once the commanding heights have been built, they can be sold to private entities for routine operation.’ This would, said the committee, ‘start a virtuous cycle of fresh investment fed by additional revenues.’
Consider what the World Bank has said: ‘For the public sector, AR (asset recycling) offers a unique opportunity to receive upfront capital from the private sector in lieu of future income from those assets. It also allows long-term risk transfer and gains private sector efficiencies in asset management. AR is also suitable for institutional investors meeting their preference for brownfield assets with established revenue profile.’
Some opposition parties have criticised it as selling off assets created by us taxpayers. Leaving aside the fact that it’s not a sale but a lease, why would any taxpayer object if the asset is sold at a fair value? After all, the proceeds from the sale will fund another bit of infrastructure, which can then be said to be funded out of the original taxpayers’ money. The assumption here seems to be that the asset will be sold for a song to the government’s cronies.
In the absence of checks and balances, that may well happen. That is why the Kelkar Committee clearly said, ‘The Committee cannot overstate the criticality of setting up of independent regulators in sectors that are going in for PPPs.’ These regulators must be staffed, not by retired bureaucrats or political cronies, but by private sector managers who have a working knowledge of the projects involved, experts in the subject and the big investors in the projects.
Another objection to the monetisation scheme is that many of the assets being leased out are monopolies and the private operator may jack up prices in the future. That is the reason every sector where such assets are monetised must have independent regulators in place. In addition, the Kelkar Committee also said there should be clearly laid down dispute resolution processes. These should, as far as possible, avoid recourse to the courts, to minimise delays. Stipulations for levels of service and pricing will of course be written into the contracts.
Theoretically, the lump sum being received is just the present value of the cash flows the government would have got by owning and operating the asset. In practice, though, it may well be higher in view of competition among bidders who may be able to spot ways of making operations more efficient. In fact, in Australia, the New South Wales government was successful at setting up bids for assets and getting high payments for them by industry standards. In India, the evidence for private players being more efficient is rather obvious.
It’s true that implementation will be the key to the success of the programme. It’s also true that we have had a long learning curve, not always pleasant, in private-public partnerships. Yet Powergrid has successfully carried out an InvIT for Rs7735 crore and the share price has done rather well. NHAI has Sebi approval for launching a Rs 5100 crore InvIT. Under the TOT model, 1400 kms of road assets have been monetized. Airports have been leased to the private sector. The railways have seen private sector participation in several areas, ranging from redeveloping stations to private freight terminals. Similar initiatives have also been taken in the ports sector. The pipeline is merely a compendium of such plans for the period FY22-25.
Asset recycling is a comparatively new concept---as the World Bank says, the space is evolving with lessons being captured from AR programmes in Australia, Brazil, China, Indonesia, Japan, Mexico, Uruguay, the United Kingdom, the United States and more. There is no need to reinvent the wheel—we can learn from similar programmes in other countries. The World Bank is under no illusion about the risks involved, saying that, ‘A robust risk management process is critical across the AR steps, including selecting quality asset(s), monetization and investment models, private sector risk appetite, financing market capacity, and management of proceeds. Special attention should be given to stakeholder consultation, procurement, and equitable risk allocation processes.’ In short, there are plenty of risks and while every effort should be made to mitigate them, there will inevitably be unforeseen situations. That is why the Kelkar committee suggested, ‘Periodic review of PPPs…..are a must to help address issues before they become endemic and to mainstream innovations and foster new ones that improve the successful delivery of PPP projects.’
The final objection is that the programme is too ambitious and the monetization figure will be nowhere close to the Rs 6 trillion target. That could well be the case, if the projects are left to the tender mercies of the bureaucracy.
It’s ultimately up to the government to prove the naysayers wrong. It will have to ensure fair play, co-ordination between various ministries, between the centre and states and, most importantly, identify the projects where the money earned from monetization should be spent. As a Nomura report said, ‘ We think the appetite of the private sector will also depend on other factors like the duration of concessions, institutional mechanism for dispute resolution, ability to operate the projects at commercial rates, and regulatory and taxation issues, among others.’ The government will have to put in place all the administrative checks and balances before embarking on the process.
Asset recycling is no magic bullet. The amount targeted forms just 5 per cent of the total spending envisaged in the National Infrastructure Pipeline. But as the economy recovers from the pandemic, monetisation of existing government assets is one way to kickstart growth, without increasing taxes or debt.
Most importantly, by approving the monetisation pipeline, the government has reiterated its commitment both to infrastructure spending and to the private sector. That should boost the latter’s confidence in these difficult times. It will unveil new opportunities for capital accumulation for the private sector, which is the engine of economic growth.
To be sure, the way ahead is unlikely to be smooth sailing. But we need to commend the government for mustering the guts to embark on this new voyage.
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