Balanced asset monetisation

Subir Roy

Senior Economic Analyst

The government has announced its plan to create a national monetisation pipeline to generate Rs 6 lakh crore over a four-year period (2022-25) through the leasing of brownfield assets (those already on the ground) in sectors like the railways, airports and coal mining. This will help fund the government’s national infrastructure pipeline which envisages spending Rs 100 lakh crore to build social and economic infrastructure.

The logic is simple enough. As there is no sale, the government cannot be accused by its political opponents of selling the family (nation’s) silver through privatisation. But these assets which have put behind themselves the risk involved in setting up very large projects (they often face multiple hurdles and are hugely delayed) under government hands are not generating the potential revenue that they can.

To appropriately monetise these assets, the aim is to put them under efficient private sector operators. They will be able to extract a larger surplus than is available at present which will be shared between the government through its lease income and the operator’s takeaway.

The World Bank is strongly in favour of the public sector going in for ‘asset recycling’ which has been engaged in by countries as diverse as the US, UK, Japan, Indonesia, Mexico and Uruguay. It describes the process as receiving upfront capital from the private sector in lieu of future income from those assets. This enables governments to transfer long-term risk and simultaneously benefit from efficient private sector management of risk.

But all these positives have not prevented controversies from coming up. Perhaps the problem lies with the difference between outright sale of assets which the World Bank is happy to live with and long-term leasing which the government has embarked upon with an eye on national politics.

Kaushik Basu, former chief economist of the World Bank and chief economic adviser during UPA rule, feels that broadly the idea of putting to better use underutilised assets is a good one. Ideally, the State should itself be able to run things efficiently as is the case with South Korea and the Nordic Scandinavian countries. But that does not seem to be possible in India.

However, Basu is categorical that leasing for 25 years, instead of selling, is the worst possible option. Through this process, you effectively sell at a much lower price than what you would get if you sold outright. Lease is an effective sale at a price which will capture less than the value, with the rest going to those who get the lease. Thus for the State, it is better to sell outright.

Plus, there is going to be wear and tear in the asset which will be greater because the lessee knows that the asset does not belong to him. As a user, he does not have a vested interest in retaining the long-term quality and value of the asset. Thus there is likely to be a good deal of asset stripping as a result of which the government is likely to get back highly depreciated assets, more than what would happen in the normal course.

Additionally, there is the risk that by leasing assets which can be cornered by powerful business interests, monopoly-like situations can be created, with the government unable to get rid of the demons that it has spawned. This happened in Russia under Boris Yeltsin in the nineties when the oligarchs created a stranglehold on the economy.

There is also controversy over the figure of Rs 6 lakh crore. This is the likely current value of the assets but what will come in will probably be around half that figure. Besides, even at Rs 6 lakh crore there is little sense in juxtaposing the figure against Rs 100 lakh crore, the value which it has put on the national infrastructure pipeline. A better way to raise money for the infrastructure is to create a sovereign wealth fund from the foreign exchange reserves.

The way out is to go for limited sale by carefully designing auctions.

We all want fewer government regulations which gives the private sector room to operate efficiently but regulation is needed to ensure that the operators of leased assets do not overcharge customers and there is also no collusion between two powerful operators in the same field creating a duopoly in which situation the consumer suffers. Regulation is also needed to ensure that the operator of an infrastructure asset which serves a unique purpose and only one or two can operate in the space like an airport or a lone railway line serving a particular area does not overcharge customers. So, at the end of the day, leasing, instead of creating freedom from overregulation, can end up in a lot of regulation surviving out of necessity.

Those opposed to the leasing idea point to the effect that it is likely to have on the employment situation. They say that those leasing assets will not create jobs as the private sector players will use the latest technology to run operations efficiently with as few workers as possible.

Under present conditions, with very high unemployment, it is not the time to be lean while trying to be efficient. The private sector needs space to run things efficiently but there is also a need for a welfare state during a period of low consumption in the wake of the pandemic, when all, except the rich, have suffered a loss in income and many poor people have lost their jobs.

Under leasing, monopoly or duopoly can be created in the hands of the big corporations. Capitalism is good if under it a competitive private sector operates. The best way to ensure competition may be to split infrastructure assets into small parcels and sell them through carefully designed auctions and not lease them in large chunks.

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