The government recently announced an ambitious asset monetization program to raise 6 lakh crore rupees upfront, by selling revenue rights to national assets such as roads, railway stations, trains, ports, telecom and power infrastructure. The well intentioned program aims to raise money for new infrastructure, while allowing more efficient private sector players to manage existing assets.
The Niti Aayog’s comprehensive yet lucid Monetization Guidebook document deserves praise for its clear fonts, helpful charts and a general aesthetic not seen in typical Bharat Sarkaar documents. It mentions “The strategic objective of Asset Monetisation programme is to unlock the value of investments in public sector assets by tapping private sector capital and efficiencies. Which can thereafter be leveraged for augmentation/ greenfield infrastructure creation.”
There’s good thought process that has gone into designing this program, and it often draws inspiration for some monetization schemes already being done (such as existing toll road concessions).
However, as the government said several times, this is technically not a sale of assets, divestment, or privatization. The private player can pay to exploit the asset for a while, but not own it.
It is like selling rights to grow and take all the apples from your apple orchard, while you retain the ownership of the orchard.
It sounds great in theory. It can even work in practice on a smaller scale, such as one toll road. However, large, national scale monetization has several issues that require a lot more clarity. We understand the government’s incentives to do this. However, the deal must also work for private investor. Else, like many past divestment programs, this well-intentioned plan may never really take off.
To be fair, the government seems to be aware of this issue. The guidebook mentions:
Transfer of such rights in lieu of an upfront/ periodic consideration is defined by a well-defined concession/ contractual framework.
This sounds well-intentioned. The need for a ‘framework’ is correct. However, when it comes to Indian government (irrespective of political disposition), the ‘framework’ can often mean a prison for the private player. Our bureaucrats, who design such ‘frameworks’ are great at protecting the government. They aren’t as good at considering the private players point of view. Often, our babus have a superior moral stance: they are doing this for the country, while the private player is a greedy monster looking for profits and returns.
What will be the driving principle of this monetization program framework? What comes first, the private players return, or public welfare? For instance, if some private toll road operators are falling short on returns, can they increase the toll road price? What if people (read voters) living in that area protest? Who will the government favor then?
While mathematical formulas and financial equations can be created, what will be overall stance of the government towards private players who had paid money upfront? Bottomline: can the government be trusted into the future?
If trust levels are low, the scheme will have few interested parties. It will also require a much higher return rate for a private player to take such regulatory/ political risks. I may have the right to sell apples from this orchard, but what if the government decides to set the apple prices? Or what if the water meant for the orchard is diverted to other villagers? If the government is off the hook in running the orchard, has already collected money upfront, will it really care the orchard is supported?
Given such risks, the returns required would be much higher. The NIFTY Index returned almost 12% per annum for the last 20 years. A private player can simply park their capital in a liquid NIFTY index fund and make these returns long-term. Now imagine paying that same capital to run a railway station, a toll road or a transmission line, where frequent run-ins with the government and general public will be a way of life. What return rate would you want for all that extra headache, risk and stress? 15%? 20%? Discount the projected revenues at these rates over 25 years, and the upfront amounts the government earns becomes quite small.
Unlike what some may believe, Indian government assets aren’t amazing or a pot of gold. They are clunky, weary, and hard to run. Anyone running them should be suitably rewarded. Else, there won’t be many takers. Private capital will simply move elsewhere with better returns and lesser headaches.
A special point about (any) governments aversion to full privatization of good PSUs and prime land sales. These are the two things the government actually has a lot of, and is something the private players actually want. This is what will eventually raise serious money for the government. The narrative about PSU and land sales are akin to selling family silver is incorrect. Certain PSUs and prime land will be of much better economic use if the government sells them. Also, we have huge government debt. Hence, advising a debt-ridden family to sell the oxidized, blackened and unused silver dinner sets to pay off loans isn’t a bad idea at all.
The asset monetization program has fantastic intent. It also shows a long overdue, renewed focus on economic growth. However, the ‘framework’ must ‘work’ for private players. Separately, certain PSU and excess land sales must be pursued too.