National Monetisation Pipeline: Amid privatisation struggles, can Modi make ‘asset recycling’ work?

Prime Minister Narendra Modi came to power insisting he would put in place “minimum government”, since the state has no business being in business. Yet, over the last seven years, his government’s ambitious privatisation plans have consistently come up empty.

The most prominent of these efforts has been the shambolic attempts to sell national carrier Air India. But even the grand plans for government to get out of business have struggled. Recent moves to attract private players into railway operations, for example, have failed, with bids being put in by only two companies for just three of the 12 route-clusters on offer. One of those two companies, as it happens, is state-owned.

Faced with a mismanaged economy that was slowing precipitously even before the Covid-19 crisis hit and a significant drop in government revenue caused by the still-messy application of Goods and Services Tax and an inexplicable corporate tax cut, Modi’s administration has had to scramble around to find ways of raising money to spend on big-ticket projects, or simply hack away at India’s massive state debt.

This week, the government unveiled its latest effort to do this: a National Monetisation Pipeline.

‘Infrastructure creation’

Unlike privatisation, which seeks to sell state-owned companies to the private sector, or disinvestment, in which shares of public sector units are sold to non-state firms or individuals, the National Monetisation Pipeline seeks to do something else.

“The NMP is talking about brownfield assets where investment has already been made, which are either languishing, not fully monetised or remaining underutilised,” said Finance Minister Nirmala Sitharaman. “So, by bringing in private participation, you are going to monetise it better, and with whatever resource you are getting, you can put it into further infrastructure creation.”

The idea is also known as “asset recycling”.

Essentially, the government gives over operational duties and revenue rights to a private operator for assets like roads, power transmission lines, stadiums, warehouses and more. In return, the government gets a chunk of money up front, that it ideally invests in other infrastructure, essentially unlocking value in existing projects so that it can plough the money into fresh development. In an ideal world, this allows government to build an ambitious infrastructure plan, without adding to existing government debt.

A key aspect of this approach is that the government is not handing over ownership of the underlying asset. At the end of a set period of time – presumably several decades – the revenue rights revert to the state.

Unlocking capital

Another difference from other privatisation efforts, which often focus on loss-making public sector units, the effort here is to pick ones that aren’t necessarily struggling, on the assumption that the private sector can unlock efficiencies that government cannot.

“For government entities sitting on piles of operating assets (such as roads, power lines and plants, ports, and railway tracks), recycling unlocks capital for both, fresh investments and deleveraging,” wrote Sudip Sural, a senior director at CRISIL, which worked with the NITI Aayog to develop the asset recycling plan last year. “Operating infrastructure assets with stable cash flows for long tenures attract long-term investors such as pension and insurance funds. And for the economy and the public at large, more infrastructure is built, more jobs are created.”

All of this sounds great. So why hasn’t the government been asset recycling all along?

The answer is in the actual execution. By keeping ownership and only transferring revenue rights for a set period of time, the government is essentially taking a fresh look at the much-maligned Public Private Partnership model, commonly known as PPP.

“To my mind, this is PPP by the side-door,” Vinayak Chatterjee, co-founder and chairman of Feedback Infra told BloombergQuint. “Unfortunately, the market confidence among domestic and foreign investors in PPP formatting and level-playing field is on very slippery ground. The private sector today does not have the confidence, with all that has happened in the last two decades... The apprehension now is that once you have got into this PPP business, then the PPP framework requires a huge amount of debate, discussion, and tweaking before we actually see money coming in, as we’ve seen recently in the very lukewarm bids for the private train operating contracts.”

Conglomerate capitalism

Indeed, it will be this debate – about the actual structure of these agreements that will be key. Will the government have the capacity to regulate the operations of private players, but do so in a way that is not overbearing? Is litigation or political interference likely? Without ownership of the projects, will the private players actually invest in efficiencies or revert to rent-seeking practices?

“It’s important to prevent today’s lump-sum gains to the government from becoming a cost tomorrow,” wrote Andy Mukherjee. “In New South Wales, where electricity prices doubled in five years after poles and wires were privatized, the government had to step in with an Energy Affordability Package to lower the burden on consumers... Without bureaucratic capability and regulatory acumen, the Indian program could become a transfer of taxpayer-funded assets to a handful of business groups. This is a concern because of the rising concentration of economic power in everything from transport to telecom.”

This is no alarmist concern. The Modi approach to the indian economy has been characterised by some as ‘conglomerate capitalism’, with the government making clear its preference to build up a few national champions, even at the risk of monopolistic behaviour.

The pseudonymous author Sonali Ranade has gone further, arguing that this entire approach is a bad way to privatise since it “does not result in any addition to gross savings in the economy, either by bringing in foreign savings, or by attracting a significant synergy premium.” Ranade insists that the scheme is, instead “tailor-made for rent seeking at all levels of the babudom and politicians” and only being carried out because the central government is broke and needs cash upfront.

Suit-boot

Another consideration is the political impact of such a move.

As an expert analysis of Australia’s asset recycling programme put it, “Having enough public assets to potentially monetize is a key pre-requisite for an asset recycling scheme, but equally important is the willingness of the general public to accept private investment and management of infrastructure. Previous negative experiences with privatisation in a country may cause lasting damage to public perception of asset recycling.”

Does Modi have the political capital to pull off this sort of effort? The government has been at pains to insist that ownership will not be handed over to private players, and this should not be characterised as selling the family gold. Yet that is the exactly the line the Opposition has taken, and it is one with deep purchase in India.

Former Prime Minister Atal Bihari Vajpayee’s tenure is generally seen to have been much more privatisation friendly than Modi’s seven years, with conventional wisdom – sometimes reflected in surveys – suggesting that voters did punish Vajpayee for such moves.

Despite deploying small government rhetoric for many years, Modi has shown himself to be vulnerable to accusations of encouraging crony capitalism, as with his retreat on the land acquisition laws in 2015, and his current struggle to implement the farm laws.

The public may not care for the nuances of concession models versus full sale of public goods, particularly if the net effect of such moves will be to see prices going up. Yet, if the government is overbearing on the question of price controls or shows itself to be vulnerable to political pressure on that front, how many private players will be interested in putting money upfront for such projects?