I was surprised by my negative reaction to the FM’s announcement of the National Monetisation Pipeline (NMP) to lease a slew of “brownfield” (already developed) but underutilised public sector assets to the private sector with the objective of raising Rs 6 lakh crore over the next four years. I was surprised because I did not expect to be a critic of efforts to not just monetise “dead capital” but also to remove the heavy hand of bureaucratic intervention in the management of public assets. I have long been an advocate of competition and I should have welcomed this announcement. Instead, what coursed through my mind was the thought that this was one more seemingly good scheme generated in the crucible of a consultancy firm that will not see the full light of day.
The assets identified for lease cover the full range of infrastructural and public service utilities. These include roads, railways, ports, power, mining, aviation, oil and gas pipelines, warehouses, hotels and even two sports stadia. Nearly seven decades back, most of these assets were deemed to be of strategic public interest and placed under the control of state-owned public enterprises (PSE). It was argued then that the private sector could not be entrusted with the custodianship of these socially important assets. In the years since, the PSEs have disappointed even their most ardent well-wisher. Barring a few exceptions, they have failed to deliver on their financial and social objectives.
As a result, there has been a call to privatise many of the PSEs. I too have been a votary of such a move. And I still am. But I am not enthused by the NMP. I have no issue with its economic or financial logic. The idea of creating “structured public-private partnerships” to unlock value from public sector assets and to recycle the revenues so raised into new infrastructure makes eminent sense. But I am concerned. My concerns are three-fold and relate to its philosophic underpinnings (to sound somewhat pompous).
First, the design of the NMP is out of sync with contemporary pressures. The world is in the crosshairs of existential challenges — global warming, pandemics, geopolitical chaos and fundamentalism. India has to additionally tackle endemic poverty, disappointed expectations, social polarisation and the erosion of democratic institutions. In this context, this scheme has been set within too narrow a frame.
NMP has been conceptualised around the metrics of financial value. The assets are valued on the basis of conventional financial metrics (enterprise value, book value, net present value, the costs of comparable assets). They are then leased (not sold) at appropriately discounted lease charges. The focus of the investors is, understandably, to recover their upfront payments plus earn their threshold return within the stipulated lease period.
I am no apologist for the government, and I have little doubt the private sector will unlock greater financial value from these assets. But I do have a problem with a model that looks at public utility assets through the narrow lens of finance only and, thereby, underrates their potential contribution to public welfare. My concern is the model seemingly absolves the government from the responsibility to unlock the intrinsic “social” (to include “smart” and “clean” ) value of these assets.
Second, NMP is designed to attract deep-pocketed financial institutions (PE firms) and industrial conglomerates. This is because the valuations are so high that few other entities will have the resources or the risk carrying capacity to respond. The result will be a deepening of the concentration of capital and existing inequalities. There will be economic and social implications. The model does not build in safeguards to manage or mitigate these implications.
Third, the government should have asked itself a fundamental question before placing a substantial share of public assets on the block: Why have these assets been so poorly managed? Was it because of bad leadership, inadequate talent within the PSEs, and/or systemic and structural shortcomings? The reason for asking this question is because the answer would have helped define the appropriate steps needed for enhancing their productivity.
The fact is that if the reason for low productivity was poor leadership or lack of talent, the transfer of these assets to a different, private sector-led organisational and investment structure would make sense. But if the reason had to do with structural impediments, then such a change may not be warranted, at least not in the first instance. For, the private sector cannot tilt against windmills. The example of gas pipelines is illustrative. These pipelines are indeed hugely underutilised. But this is not because of the “inefficiency” of GAIL, the PSE operator. It is because of structural factors beyond the control of GAIL that have impeded the growth of gas demand. These factors are the shortage of domestic gas supplies; the regressive taxation system; the relatively uncompetitive price of gas and the perennial tussle between the Centre and state governments over land access. The operatorship of these pipelines is not, in short, the reason for the stressed state of these assets. A similar point can be made about most of the other assets identified for monetisation. Their low productivity is because their PSE operators have faced a combination of systemic hurdles related to weak dispute resolution mechanisms; regulatory miasma; lack of transparency in governance; pricing distortions and intrusive bureaucratic intervention.
The point is that until and unless these systemic problems are addressed, the private sector will find it difficult to harness the full value of these assets and the transfer of operatorship to them will offer at best a partial palliative. On the other hand, if the problems do get addressed, the PSEs could well be better custodians as the government shareholder will have presumably mandated them to look beyond just the accretion of financial value.
Private-public investment structures make sense, but they must be modeled to also generate social value. In today’s world, there are no shortcuts to sustainable development.
This column first appeared in the print edition on September 6, 2021 under the title ‘On assets, a narrow view’. The writer is chairman, Centre for Social and Economic Progress (CSEP)