~ by Indranath Mukherjee
On 23rdAugust 2021, the Finance Minister of India, Nirmala Sitharaman unveiled the National Asset Monetization Pipeline. This entails a limited period license/ lease of brownfield assets, owned by the government or a public authority, to a private sector entity for an upfront or periodic consideration. Brownfield assets imply assets for which investments have already been made but these assets are under-utilized. These under-utilized brownfield assets are in 13 sectors in the infrastructure space such as roads, railways, airports, mines, power etc. As per the estimate, the government is going to earn INR 6 lakh crores from the year 2022 through 2025 from this monetization plan. Just to put this in context, the estimated amount is about 1/6th of annual budget of GoI.
While on paper this plan sounds good, few questions should be asked for better understanding of the plan. How will the government earn this amount? Given that the government has not been able to generate revenue from these assets, what will the private entities do that will change it? Brownfield assets mean that public money has already been spent to build these assets; will people have to pay again to use them to the private entities? What values will be added by the private entities to these assets? And finally, how will the government spend the money it plans to generate through this monetization process? In this article, I try to explore these questions.
Let us first look at the context in which the announcement has been made. Indian economy has not been in a great shape for a while. This fiscal crisis was brought upon by the government itself by its poor economic management in the pre-Covid 19 pandemic period. The pandemic made the situation worse. The government is levying excessive taxes on petrol and diesel to finance its revenue expenditure. Such continuous increase in taxes on petrol and diesel has inflationary consequences.
The Union Government thought that it will be a good idea to give its un/under-used assets on rent/lease to private entities and generate some income. INR 6 lakh crores is a serious amount of money and we will see how much of it will be realized in the coming years.
Although monetization may sound like a new concept, in theory it is same as privatization of Public-private partnership (PPP) which is essentially a time-bound contract between a private party and a government agency for providing a public asset or service. Our past records of PPP are not particularly encouraging. This kind of deal at scale requires competence in designing complex contracts. Unfortunately, we don’t have any evidence of such competence within the government or outside of it in India. We of course have the option of getting the competency from outside of India.
Assuming that we will be able to design the right contracts, the question that will arise is around implementation. Will government agencies need to monitor proper execution of the contracts? Will implementation also involve agency cost?
Monetization is a supply side policy measure giving incentive for the private business housed to invest. How will the private entities finance their investment in these assets? As we have seen in the past, they will borrow from the public sector banks. High-cost infrastructure in a poor country like India doesn’t generate the adequate amount revenue flow to justify this kind of investment. At the day end of the day, such borrowing will give rise to more non-performing assets (NPA). If we look at the cycle carefully, publicly funded assets will get into the hands of private entities who will borrow public money to invest in these assets and most likely will fail to generate the target revenue in a struggling economy. Government will then have to bail them out using public money again.
Another critical question is regarding the process of allocating these assets. How transparent will the distribution process be? Will only a handful of people close to the government get these contracts? This will create further monopoly or duopoly in the system. That is going to harm the economy even further.
If we assume that everything will be done fairly and the private entities will be able to generate lot of revenue from these brown-field assets, the question is how the government will use this money. In principle, the money generated from such assets will be used to create new capital assets. But if we look at the trend from 1991 when such process began in India, whatever revenue has been generated from public assets, it has gone to finance revenue expenditure. This has been most prominent since 2014. We haven’t seen any new capital assets being created. Expenses on vanity projects like building Central Vista shouldn’t count as building new capital assets.
The NMP draft says that the center will incentivize to the state governments to monetize which is a good thing. How states or the center do it fairly and competently will remain to be seen.
* Indranath is the Head of Operations, Strategic Analytics at AXA XL (a division of AXA). He is also a reputed keynote speaker, author and quizmaster.
Note: Opinions expressed in the article are exclusively those of the author.