Making NMP work

Dysfunctional govt-pvt sector relations must be repaired

The announcement last week of the National Monetisation Pipeline (NMP) has come in for some well-deserved critical comments, given the government’s poor record on disinvestment overall. As this newspaper has previously argued, there are also complex questions to be asked about how it will be executed. The NMP will need to be transparent and remunerative, as well as attractive to private sector investors. This is not an easy task under Indian conditions. The problematic experience with public-private partnerships (PPPS) in the past 15 years should have revealed that the interface between the state and the private sector in India is dysfunctional. Outright privatisation of assets would at least have taken the government out of the equation and perhaps reduced the salience of this dysfunction. But monetisation is similar to PPP arrangements in that the government remains a major stakeholder and the private sector operates the asset in question.

Thus, in order to make the NMP work, the government will have to make matching investments of its own: In institutional and regulatory capacity. Here the claim from senior officials of the government that the motivation for the introduction of the NMP is more efficient use of state assets and not a thirst for revenue will be tested. Monetisation is not a short cut around the introduction of administrative efficiency. It instead makes administrative reform and institutional renewal even more urgent. Nor can this exercise in capacity expansion be postponed any further: There must be sufficient expertise in place at least before the agreements on the NMP are drafted.

Certain principles must be blended into those agreements if they are to be sustainable and welfare-enhancing. First, they have to be constructed to avoid the concentration of economic power or the formation of monopolies. This is particularly relevant, given that some of the assets on offer might be considered to aid in the formation of natural monopolies. The error that led to a significant proportion of airports being leased to the same industrial group cannot be repeated. Second, the long-term nature of the monetisation proposals means that there will inevitably be some renegotiation during the tenure of the contract. But the blatant undermining of process by politically connected oligarchs in the past, wherein winners of auctions or other licences have simply used their political connections to force better deals, must be precluded in the auction design.

Finally, there is the question of dispute settlement, which lies at the heart of the government-private sector dysfunction. Regulatory independence has eroded in recent years at the hands of power-hungry bureaucrats in line ministries. If the NMP is to work, each sector in which assets are to be monetised will need an independent, empowered regulator with no connections to the bureaucracy. Expanding judicial capacity, particularly at high court level, can also no longer be postponed. It is impossible to imagine that there will be investor interest from anything other than cronies and would-be oligarchs unless there is a parallel attempt to build up the speed and independence of regulation and dispute settlement. In recent years, the government’s early attempts at administrative reform have run out of steam, perhaps overtaken by the pressure of events. There is now a ~6-trillion reason to speed them up again.