Economic Undertakings

Why we shouldn’t ditch the asset monetization plan


In our current polarized atmosphere, one is to expect negative reactions from those on opposite sides of the political divide. Parties that supported certain policies when in power have now become their bitter adversaries when in opposition. Of course, those who defend them now have spoken just as much in their opposition when they were not in government. Whether it’s farm laws, monetization, or a host of other initiatives, we’ve seen the same drama play out every time.

Faced with an economic slowdown that only worsened after the pandemic and a huge shortage of funds for investment, the government sought to monetize brownfield assets by unlocking their potential value. The proceeds are to be used for new investments in infrastructure. Thus, the right to collect tolls on existing highways would be offered for about thirty years to private investors in exchange for an initial payment. Oil and gas pipelines would also be leased to private actors, as would seaports and airports. Assets offered for monetization include airports, seaport terminals, rail lines, stations, stadiums, warehouses and a host of other government assets with unused potential.

One of the first rounds against this scheme was fired by a former chief economic adviser. Its main argument was that leasing was not the best option because outright sale would add more value and avoid the delicate issues of dismemberment and maintenance of leased assets. There is no doubt that an outright sale would bring higher returns, but given the “clearance sale” cries of opposition parties when even leasing is considered, it is unlikely that the sale would have been feasible. Potential buyers would be wary of the consequences of an unpopular sale. This may have led to the kind of blockage we have seen in the implementation of agricultural reforms.

Critics also raise the valid point that leased assets would not be properly maintained. After all, no one washes a rental car. But the rental agreement could contain clauses requiring the return of the assets in the same condition in which they were offered, with the exception of normal wear and tear. There could be differences of opinion on what constitutes normal wear and tear, but an independent authority, whose decision on this would be final, could be part of the rental agreement. Government companies like ONGC regularly lease their offshore vessels (OSVs) for operation and management to third parties. The ports do the same for their ships such as tugs or speedboats. In each case, there is a maintenance and return protocol. In the case of the lease, the protocol should only cover yield and could deal with both maintenance and dismemberment of assets.

Other objections revolve around whether monetization aims to substitute the skills and efficiency of the private sector for the supposed lethargy of government control. If leasing a public asset improves management efficiency, that would be an added bonus. But that is not the point of the exercise. Thus, we do not need to debate whether the private sector is inherently more efficient (the jury is out on this one) or has fewer constraints (it certainly is) because these are neutral with respect to this one. to the value of this scheme.

Likewise, the concerns expressed that this decision would lead to a greater concentration of power in the hands of the private sector are irrelevant. Whenever the government cedes ground by opening up sectors that were hitherto exclusively reserved for itself, it runs this risk. This did not prevent them from allowing private operators to operate freight trains or terminals in seaports. It has not even prevented private operators from operating airports.

One criticism is that when the private sector bid for these projects, it would likely need institutional funding for at least part of its spending, which would result in a “crowding out” of other investments. Surely this would apply to any investment, private or public? Public sector companies (PSUs) raise funds from banks and even the National Highways Authority of India (NHAI) uses public funding. We do not prohibit PSUs or the NHAI from raising funds in the market. In fact, we actively encourage it because it reduces the burden on government spending. So why quibble if it’s done here?

Could this program lead to the concentration of economic power in a few hands? Some worrying trends have been observed recently in areas such as telecommunications, airports and seaports, but this trend predates the current proposal. This is, however, a caveat that policymakers should beware of. The necessary checks can easily be incorporated into the offer documents to ensure that the system does not create or strengthen monopolies of any kind.

The point is, our expectations of this program have been far too high. When first mentioned, it had the limited purpose of unlocking the intrinsic value of brownfield assets by leasing them and using the proceeds to finance infrastructure projects. From there, we raised the bar so high that the program is now accused of failing to improve the performance of PSUs, risking crowding out other investments, and even failing to cover all infrastructure spending. of the government. Out of a total of Rs 111,000 billion for the government’s ambitious infrastructure plan, monetization should yield less than 5%. Does that mean we should give it up? Can one plan fund such a massive plan? Different schemes and sources will bring their own offers to boost the total prize pool. Do not minimize their size.

This column first appeared in the paper edition on September 25, 2021 under the title “The choice to monetize”. The writer is a former secretary (expedition), government of India


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