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Tuesday, October 19, 2021

National Monetisation Pipeline shows promise — and limits

Amartya Lahiri writes: Government must address the low revenue potential and efficiency hurdles that could trip up its asset monetisation plan.

Written by Amartya Lahiri |
Updated: September 19, 2021 7:50:31 am
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. (Illustration: C R Sasikumar)

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

The plan has generated a lot of print so it is worth discussing its pros and cons. Though there are many important issues raised by the plan, due to space constraints, I will confine the discussion to two issues: (a) How much should the government expect to raise from the plan? (b) Is the plan likely to increase the efficiency of the economy?

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. Consequently, the risk-adjusted returns on public assets in India are likely to be lower than the US estimates.

To get a sense of the potential revenues at stake, note that with a 10 per cent annual real return for 30 years and a 5 per cent real discount rate, the discounted cash flow on Rs 6 trillion public assets is Rs 9.6 trillion. A desired cumulated 100 per cent profit over the 30 years would imply that investors would bid around Rs 4.8 trillion for the leasing rights. Small variations in the assumptions underlying the calculation can push the estimated revenue down to Rs 1.5 trillion or up to Rs 7 trillion.

This range of revenue estimates suggests that there is significant uncertainty regarding the revenue potential of the plan. But, crucially, even in the most optimistic scenario, revenue generated by the plan is unlikely to exceed 5 per cent of the government’s overall infrastructure investment target of Rs 111 trillion. Hence, its revenue potential is limited.

The second question is whether the plan will enhance the 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. Can the lessee freely choose the price of the services from the asset? If so, could we end up seeing significant increases in prices?

A second factor related to efficiency is the effect of the plan on competition. Could the plan induce the cartelisation of key segments of the infrastructure landscape? 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 rationalised through the stipulation of rules for the allocation of leasing rights, the plan is silent on this.

A third set of efficiency-related issues surrounds the 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.

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.

More generally, the monetisation plan envisages the private sector paying an upfront fee to the government which the government uses for new infrastructure investment. Inasmuch 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. But this is not true.

Perhaps the biggest drawback of the plan is that it fails to articulate the reasons for public sector inefficiency in asset management. If it is personnel-related, then privatising 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.

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. 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 monetisation plan, while intriguing, is incomplete.

This column first appeared in the print edition on September 18, 2021 under the title ‘Assets and liabilities’. The writer is Royal Bank research professor of economics, University of British Columbia.

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