The government of India recently announced an asset monetization plan, wherein existing public assets worth Rs 6 trillion would be monetized by leasing them out to private operators for fixed terms.

The plan has generated a lot of print so it is worth discussing its pros and cons.

About NMP

• The identified assets are primarily concentrated in roads, railways, power, oil and gas, and telecoms.
• The lease proceeds are expected to be used for new infrastructure investment which, in turn, will contribute to the government’s ambitious Rs 111 trillion infrastructure investment plan.

Important issues raised by the plan

[I] How much should the government expect to raise from the plan?

Revenue Potential

• In deciding the amount to bid for leasing rights, bidders compute the present discounted value of the annual cash flow from the asset for the duration of the lease.
• The biggest uncertainty in this calculation surrounds the cash flow on these public assets.
• Rates of return estimates on public capital in the US have been estimated to be upwards of 15 per cent.
• However, this is India with its myriad uncertainties regarding pricing, bill collection, asset quality, regulatory framework as well as policy reversals.
• Hence there is significant uncertainty regarding the revenue potential of the plan.

[II] Is the plan likely to increase the efficiency of the economy?

a. Efficiency of the economy

• The NITI Aayog believes that the private sector is better at managing and operating the identified public assets than the public sector.
• There is certainly scope for efficiency gains. However, there are significant efficiency impediments too.
• One set of efficiency issues surrounds usage fees. A second factor related to efficiency is the effect of the plan on competition.

b. Stressed sectors

• The identified assets belong to core sectors of the economy spanning transport, energy and communication.
• Sectors like telecoms and ports have already seen rising concentration of ownership in recent years.
• An acceleration and extension of this trend to other segments of the infrastructure landscape would be seriously worrying.
• While some of this could well be rationalized through the stipulation of rules for the allocation of leasing rights, the plan is silent on this.

c. Financing of the lease bids

• If bidders finance their bids using domestic savings, there is a clear opportunity cost of the plan since these savings would otherwise have been invested in alternative projects.
• Moreover, the bidding for scarce domestic savings by prospective investors will also raise domestic interest rates which will put downward pressure on domestic private investment.
• It would also be worth reminding ourselves that the last round of PPP-based infrastructure funding routed through banks ended up with a heap of NPAs in public sector bank balance sheets.

Biggest flaw of the NMP

• No clear objective: The biggest drawback of the plan is that it fails to articulate the reasons for public sector inefficiency in asset management.
• No focus on management: If it is personnel-related, then privatizing management may be the right answer. If the inefficiency is related to constraints on pricing and bill collection, then the roots of the problem are unlikely to be addressed by leasing out their management to private operators.
• No clear assessment of underperforming sectors: The plan document also fails to outline whether the identified brownfield assets are the public sector’s highest cash flow assets or the relatively under-performing ones.

Better alternatives for the govt

• The way around this is to welcome foreign investors to bid for the assets.
• But this will require serious political will since entrenching foreign influence on Indian public assets will generate controversy.
• On this aspect too, the announced plan is low on details.

Way forward

• If the private sector is indeed more efficient in running infrastructure assets, the most efficient strategy would be to lease out the worst-performing assets rather than the best performing ones.
• The NITI Aayog would do the policy landscape a big service by following up the proposal with a white paper that addresses some of these efficiency-related issues.
• Without that, the monetization plan, while intriguing, is incomplete.

Conclusion

• A monetization plan envisages the private sector paying an upfront fee to the government which the government uses for new infrastructure investment.
• As much as private bidders finance themselves by borrowing, this amounts to the private sector borrowing and handing over the funds to the government to invest in infrastructure.
• This could enhance efficiency in infrastructure investment only if the government faces higher interest rates in capital markets than the private sector.

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