Monetisation of government assets
Leasing government-owned land would be easier and should be accorded higher priority
The 2021-22 Union Budget, presented in Parliament on February 1, highlights the central government’s ambition to invest ~111 trillion in infrastructure between FY2020 and FY2025. Six months later in August 2021 the Niti Aayog released a study titled “National Monetisation Pipeline (NMP)”. Volume I of the NMP document outlines the raising of ~6 trillion from private sources over FY2021-2025 by leasing out government owned assets. Volume II of the NMP includes the amounts each category of assets is expected to bring in. The sources of funding for Indian infrastructure projects are usually about:
20 per cent from the central government; 55 per cent from state governments, banks, non-bank financial corporations and bond issuance; and the balance 25 per cent comes from equity participation and innovative financing vehicles. These proportions of funding sources could be different depending on specific projects. The NMP is expected to provide only about 5.4 per cent of the government’s projected infrastructure spending over the next four years. However, every little bit helps.
Under the NMP, government would “lease” instead of “sell” several classes of assets. Leasing of toll roads, railway stations and power transmission-generation assets are expected to bring in 27, 25 and 15 per cent respectively of the NMP’S goal of raising ~6 trillion. It is unclear for what lengths of time specific categories of government-owned assets would be leased out. For instance, the time periods for which toll roads would be leased could be very different from making railway stations available for private management. It is likely that private parties would seek long leases for their investment to be remunerative.
The rationale for the NMP is probably not just to make publicly-owned assets yield user fees but would also be a signal to the management in public sector firms to shape up.
The following numbers are purely for purposes of illustration. To lease a toll road for 10 years, private parties may offer ~60 upfront to the government if the revenues over those 10 years are estimated to have a present value of ~100. The calculation of the private firm could be that ~10 would be needed as initial capital investment and another ~10 set aside for risks, including legal costs, leaving ~20 as profit. Public interest would warrant leasing out government-owned assets in such cases since the government has other pressing needs for the ~10 needed as an initial investment. However, it is quite possible that under the NMP, private companies would cherry-pick better run profit-making publicly-owned assets, which do not need any initial investment.
An implicit part of the thinking in the NMP proposal is that public sector management is hugely inefficient and the private sector would do much better at extracting value. Well, we have the contrary experience of the poor performance of public-private partnerships (PPPS) during the first decade of the 21st century. Several private companies that borrowed heavily from public sector banks have since defaulted. In some cases, the loan default resolution process has resulted in assets being sold at less than 10 per cent of enterprise value. Government is continuing to pick up the pieces to resolve insolvencies by setting up the National Asset Reconstruction Company Limited (NARCL). Further, the government has provided a guarantee of ~30,600 crore for the security receipts to be issued by NARCL to acquire impaired loans. Obviously, past defaulters should be barred from bidding for any leases under the NMP.
The NMP refers to Real Estate Investment Trusts and to examples from Indonesia, Australia and the US, all of which are not that relevant to leasing of government assets in India. The NMP document would have been more practical if it had provided indications of price consultations, without naming the private sector companies, which have expressed interest in leasing governmentowned assets. The NMP document mentions that there would be no stamp duty on transfer of assets between government-owned entities. However, it is unclear whether there would be any duties if assets are handed over to private owners for the lease duration. Perennially loss-making Air India is a representative example of a government-owned entity which needs to be leased out or preferably sold in full. The recurring losses would stop if the government were to convince a private buyer to take it over, including all outstanding debt. Stemming haemorrhage in Air India and other PSUS, which are systemically loss-making, by divesting government’s equity share should be given higher priority than the NMP.
The NMP expects that leasing of roads would contribute the most towards its overall target of bringing in ~6 trillion. Even with the assistance of highly qualified experts, it would be difficult to evaluate which specific government-owned assets should be leased out first and what benchmarks should be used for projecting cash inflows for assets, which are illiquid by their very nature. The NMP proposal reconfirms that the government is targeting relatively complex ways to raise revenues. The central government and specifically the defence forces and the railways are sitting on substantial amounts of land within major urban centres. It may be easier to lease out some of this land since price benchmarks would be available from the cost of privately-owned land in nearby areas. Any capital expenditure incurred by private parties to make such land usable could be deducted from the upfront leasing fees payable to the government. It is in the collective national interest that the NMP should be executed transparently and that it should succeed. However, no amount of financial engineering can circumvent systemic flaws in governance and excessive delays in the Indian judicial system. These two gorillas in the room need to be addressed too if NMP is to achieve even partial success.