National monetization pipeline shows promise – and limits



The Indian government recently announced an asset monetization plan, in which existing public assets worth Rs 6 trillion would be monetized by leasing them to private operators for fixed terms. The identified assets are mainly concentrated in roads, railways, electricity, oil and gas and telecommunications. The rental proceeds are expected to be used for further infrastructure investments which in turn will contribute to the government’s ambitious infrastructure investment plan of Rs 111 trillion.

The plan generated a lot of impressions, so it’s worth discussing its pros and cons. While there are many important questions raised by the plan, due to space constraints I will limit the discussion to two questions: (a) How much should the government expect to withdraw from the plan? (b) Is the plan likely to increase the efficiency of the economy?

In deciding on the amount to bid for the rental rights, bidders calculate the present present value of the asset’s annual cash flow for the term of the lease. The greatest uncertainty in this calculation concerns the cash flows on these public assets. Estimates of rates of return on public capital in the United States have been estimated to be over 15 percent. However, this is India with its myriad uncertainties regarding pricing, bill collection, asset quality, regulatory framework as well as policy reversals. Therefore, risk-adjusted returns on public assets in India are likely to be lower than US estimates.

To get an idea of ​​the potential revenues at stake, note that with a real annual return of 10% for 30 years and a real discount rate of 5%, the discounted cash flow on public assets of Rs 6 trillion is of Rs 9600 billion. A desired cumulative profit of 100% over 30 years would imply that investors would bid around Rs.48 trillion for rental rights. Small variations in the assumptions underlying the calculation can drop the estimated income to 1.5 trillion rupees or up to 7 trillion rupees.

This range of income estimates suggests that there is significant uncertainty regarding the income potential of the scheme. Importantly, even in the most optimistic scenario, the revenue generated by the plan is unlikely to exceed 5 percent of the government’s overall infrastructure investment target of Rs 111 trillion. Therefore, its earning potential is limited.

The second question is whether the plan will improve the efficiency of the economy. NITI Aayog believes that the private sector is better able to manage and operate identified public assets than the public sector. Efficiency gains are certainly possible. However, there are also significant barriers to efficiency.

One set of efficiency issues relates to user fees. Can the tenant freely choose the price of the services from the asset? If so, could we end up seeing significant price increases?

A second factor related to efficiency is the effect of the plan on competition. Could the plan induce cartelization of key segments of the infrastructure landscape? The identified assets belong to key sectors of the economy covering transport, energy and communications. Sectors like telecommunications and ports have already seen an increasing concentration of ownership in recent years. An acceleration and extension of this trend to other segments of the infrastructure landscape would be of great concern. While some of these elements could well be rationalized by stipulating rules for the allocation of lease rights, the plan is silent on this subject.

A third set of efficiency issues concerns the financing of leasing offers. If bidders finance their bids using national savings, there is a clear opportunity cost of the plan since these savings would otherwise have been invested in alternative projects. In addition, the pursuit of scarce domestic savings by potential investors will also raise domestic interest rates, which will put downward pressure on domestic private investment. It would also be worth remembering that the last round of bank-channeled PPP-based infrastructure finance resulted in a bunch of NPAs on the balance sheets of public sector banks.

The way around this is to invite foreign investors to bid for the assets. But this will require serious political will as the strengthening of foreign influence over Indian public goods will spark controversy. On this aspect too, the announced plan lacks details.

More generally, the monetization plan calls for the private sector to pay an upfront royalty to the government which the government uses for new infrastructure investments. To the extent that private bidders finance themselves by debt, it is up to the private sector to borrow and return the funds to the government to invest in infrastructure. This could only improve the efficiency of infrastructure investments if the government faces higher interest rates in the capital markets than the private sector. But this is not true.

Perhaps the biggest downside to the plan is that it fails to explain the reasons for the public sector’s inefficiency in asset management. If it is about personnel, the privatization of management may be the right answer. If the inefficiency is linked to constraints on pricing and bill collection, it is unlikely that the roots of the problem will be resolved by leasing their management to private operators.

The plan document also does not specify whether the identified brownfield assets are the highest public sector cash assets or the relatively underperforming assets. If the private sector is indeed more efficient at managing infrastructure assets, the most effective strategy would be to lease the worst performing assets rather than the best performing ones.

NITI Aayog would do the political landscape a great service by following up on the proposed white paper that addresses some of these efficiency issues. Without it, the monetization plan, while intriguing, is incomplete.

This column first appeared in the print edition on September 18, 2021 under the title “Actifs et passifs”. The author is a professor-researcher in economics at the Royal Bank at the University of British Columbia.


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