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NMP: Unlocking Value

In India, with a deep ideological core of influencers with socialistic mindset, privatization of state owned assets is an emotionally charged and usually controversial issue that triggers immediate intense reaction. The government had announced a plan to monetize public assets in current budget for fundings fresh capital expenditure on infrastructure. Following this recently the government has announced a national asset monetization plan, where Rs. 6 lakh crore of government assets across sectors like roads, railways, power, aviation, sports infrastructure, shipping, telecom, and housing are proposed to be monetizes over next four years.

Indicative value of the monetization pipeline year-wise
FY 2022   ----------------- Rs. 88190 crore
FY 2023    ----------------- Rs. 162422 crore
FY 2024    ----------------- Rs. 179544 crore
FY 2025    ----------------- Rs. 167345 crore

According to Amitabh Kant, “The strategic objective of the program is to unlock the value of investments in brown field public sector assets by tapping institutional and long term patient capital which can thereafter be leveraged for further public investments.” Under the plan, private players can invest in projects for a fixed return using the InvIT route. They can also operate and develop the assets for a certain period before transferring them back to the government. And some assets like warehouses and stadiums can also be leased out on long term basis. According to Nirmala Sitharaman only those assets will be sweated which are either languishing or are being underutilized. The money thus raised will be further invested into infrastructure.  The government has emphasized that these assets will not change ownership; these brown field assets will continue to be owned by the government and would come back to the government after the end of the lease period. 

Asset class                                                           Value (crore)
Roads                            ---------------------------------  1,60,200
Railways                        ---------------------------------  1,52,496
Power Transmission       ---------------------------------  45,200
Power Generation          ---------------------------------   39,832
Telecom                          ---------------------------------   35,100
Warehousing                   ---------------------------------  28,900
Mining                             ---------------------------------  28,747
Natural gas pipeline        ---------------------------------  24,462
Product Pipelines/Others --------------------------------- 22,504
Aviation                            ---------------------------------  20,782
Ports                                 --------------------------------- 12,828
Stadiums                          ---------------------------------  11,450


To be sure, it is not a new concept. India has been monetizing assets in the past through public-private partnership (PPP), like Delhi Airport. However, the government track record of past years is not very inspiring; given that the target seems difficult-if not impossible-to achieve. See table below for its divestment record. 


Divestment Record (Rs. Crore)
Financial Years                      Budget estimates             Actuals
FY 2017                                            56,500                          47,742
FY 2018                                            72,500                        100,045
FY 2019                                            80,000                          94,727
FY 2020                                          105,000                          50,304
FY 2021                                          210,000                          32,886

Thus it seems a daunting task. Besides, a lot will depend on market conditions. For example, if the current global liquidity surplus flows into India, it will be so much easier to hit the target. Then, there could be asset specific challenges wherein there may be a lack of clearly identifiable revenues streams in some assets. 

To learn from elsewhere, asset recycling was attempted in Australia with great success. Across Australia the government could unlock more than $17 billion. So, it can be done if we monetize these assets the right way. If the plan is implemented well, it would also mean optimal utilization of assets, their proper maintenance, provision of high level and quality of service, improvement in efficiency of operation and generation of fresh employment. To top it all, the government will get released and additional resources to spend on social sector. And yet, it may not be cake walk for many reasons.

The private players, to begin with, would like to maximize their profit over the limited time period; so they would perhaps prefer to raise prices, cut back on costs (such as upkeep), and limit competition. We have before us the example of Singapore where the state had to nationalize its suburban trains and signaling systems because the main private operator had underinvested in maintenance; this in turn led to very poor service for the passengers. In New South Wales, post privatization electricity prices doubled and the government had to step in.

Questions are also being raised about (lack of) bureaucratic capability and rigour of regulatory regime. For all one knows this

exercise may lead to concentration of power in hands of few business houses. Witness the current concerns being raised about airports (Adani), or telecom (Ambani and Mittal). Moreover, privatization is likely to lead to job losses since most public sector units are over staffed. In brief, if NMP deals are not structured keeping interests of all stakeholders in mind – end users, employees, concessionaire, govt, all of them – while balancing the profit and utility motive, then it would be a bad exercise. In 2014 budget the government had promised to set up an apex body to devise new PPP models, learning from past mistakes; nothing come out of it. If it had taken birth, India’s institutional capacity for the NMP would have been more mature by now. 

So, how do we ensure that the plan goes for a successful implementation, rather than turning out to be a damp squib. For this a number of prerequisites can be suggested.

One, given the limited execution capacity of the government, Niti Aayog needs to hand hold ministries through the whole process. Together they should finalize, fine tune, and formalizethe asset monetization details. Remember, the current year target is stiff, the portfolio of assets across the spectrum very wide and diverse and there are only 7 months remaining this financial year. And yet a proper and detailed operational plan is needed. Two issues are very crucial. Firstly, the contract needs to be flexible enough to make it attractive for all the parties; this is not easy by any stretch of imagination. Secondly, regulatory framework must be designed to thwart the evil forces of monopoly (like in Railways).

Two, the government must show pragmatism. It must value assets fairly but not expensively, even if it has to exercise restraint. At least for the initial rounds of transactions valuations can make or break. 

Three, in many years the state is currently a dominant player. So the regulatory framework must be so devised that it helps the licence/concessionaire deliver what is expected rather than creating a policy and legal quagmire. The regime has to be transparent, impartial, free of government influence, and free of ideological overload. Once autonomy is granted there should be no interference in dealing with unions, etc. Will the govt. be able to adopt a hands off policy?

Privatization has been a disappointment in case of railways. It expected to garner Rs. 30,000 crore from the privatizations of lines, but actually received bids worth only Rs. 72,00 crore. While some say it was because private players were not allowed to lease rolling stock, others suggest that the railways itself wasn’t keen on the idea. Whatever, it led to a still born child.

In conclusion, we could say that the government should refrainfrom abusing its sovereign authority, act more like a partner and be pragmatic.              

The author is a noted economist and management thinker.

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