Last week, the Center released National Monetization Pipeline, a document listing various public properties that will be leased out to private companies over the next four years. Government believes that monetization under-utilised public assets Will bring about ₹ 6 lakh crore to the government And help build new infrastructure to boost the economy. NS Opposition accuses government of selling valuable national assets For “Crony Capitalists”. In a conversation moderated by Prashant Perumal J., Montek Singh Ahluwalia and Ajay Shah discussed the move. Edited excerpt:
What do you think of the government’s view of monetizing operating assets to create new assets?
Ajay Shah: The big strategic question is this: On the one hand, we have the government developing and owning public assets forever. And it has certain consequences. On the other hand, we have the Public-Private Partnership (PPP) model, where the private sector will develop and operate the assets. We have found that the PPP model faces several difficulties. The government does not have the capacity to negotiate and deal with contract negotiations and difficulties. Many pieces of the development process are difficult for private people to solve. So, is there any way? Conceptually, it seems that there is a way out, which is that the government should do the initial development of the infrastructure, which is the high-risk phase, create an operational asset, and then sell the assets to private people. Should give. So, assets move to the public balance sheet and the private balance sheet. The money collected by the government can go back to the development of the new property. I think this thought process has merit, given the constraints of state capacity in India.
Montek Singh Ahluwalia: Many people have objections about bringing the private sector into the infrastructure. There is no dispute that we need more infrastructure but the public sector does not have the resources to build it. There are two possible reactions. One, for new infrastructure, one can think of bringing in the private sector, setting up a contractual framework for what it has to do, and then letting it bring in its own resources. The second is to acknowledge that there are more risks in the construction phase and it is better to let the public sector build assets and then sell it to private players or, if not an outright sale, let the private sector manage it. We have a huge amount of infrastructure to build in the future and we have huge value in the existing infrastructure. So, why not realize that value and let the public sector use the resources to build the infrastructure we need?
Of course there will be problems. The first is whether you are getting enough value from the property. It depends on the quality of the bidding process and whether enough private players are attracted to bid. The second is cronyism. The only way to ensure that asset monetization does not lead to cronyism is to make the bid conditions such that the people eligible to bid are not a small, predetermined set. However, due to the capital intensity of the project, not everyone will be able to bid. Still, you can be sure that there is adequate participation.
Why would the government choose asset monetization instead of outright privatization?
Montek Singh Ahluwalia: I don’t know what factors were taken into account in making this decision. I think we should monetize and privatize because we don’t know what is best. One reason the government does not want to do outright privatization is if it involves the transfer of a scarce resource such as land. The land is so valuable that you might not want to just hand it over. It is easy to justify a 30-year lease because at the end of that lease the land remains with the government. In another context, if the land has no great value, you can simply hand it over. So I think these are issues of choice.
Ajay Shah: I would like to take a closer look at the trade-off between outright privatization and asset monetization. The first is this: do we want to build a society with a huge public sector? How much do we want the domination of the state over the society? I think that less state dominance of society is important. The second aspect is practical. When a private person builds an infrastructure asset, it is better because one person has the selfishness to create a high quality asset. Economist Lawrence Summers once famously said that no one in the history of the world has ever washed a rental car. If I am a private investor in a highway through a complex asset monetization contract, I do not actually own the highway and I will take less care of the asset. There is a lot of risk involved in entering into a complex contract with a government organization as the Indian state is not a great party to the contract. Therefore, a clean asset sale eliminates the complexity of government intervention.
Are there ways to ensure that no assets are being liquidated by private investors with a limited time horizon?
Montek Singh Ahluwalia: When you have a 30-year contract, for example, your incentive to put money into the property, which will ensure it remains productive in the 31st, 32nd, and 33rd years when you own it, So it becomes less in comparison. This is an unsolved problem. People should think about this. One option would be to allow renewal of the lease before the lease expires. But then you need a competitive process there. If you take Taj Hotels, for example, which owns a fixed lease-value property in Delhi, they did not let the hotel run at the end of the lease hoping to renew the lease. So, the problem can be solved.
Ajay Shah: The question is how much complexity do you want to create in the contract. Imagine I got a highway contract for 30 years. In the contract, the government may embed certain clauses stipulating various conditions. But you’re soon starting to get closer to the complexity of the PPP world. The more complex you make the contract, the more difficult it is for the Indian state to achieve the necessary state capacity to maintain the contract. Often the Indian state is involved in Grandfather, So private people are not comfortable in making complex contracts with the Indian state. Now, this doesn’t mean that outright selling is easy. With outright sale, we will still have a government regulator and we will face the problem of regulatory capacity. The trade-off is about the cost of building contract capacity versus the cost of building regulatory capacity.
What about the risk of assets owned by some large companies and its impact on consumers?
Montek Singh Ahluwalia: Due to the limited number of private companies, bidding for the property may not be entirely justified. If you bid to include foreign players, you are not limited to smaller players. As far as the consumer being held hostage to a particular player is concerned, many of these projects are monopolistic by their very nature. You don’t have competition in the sense that if you’re handing a road from Delhi to Agra to a private player, there isn’t a parallel road competing with it. You can probably go by rail, or you can go by air. But there is only one major highway between Delhi and Agra and you definitely don’t want the person who got it to start behaving like a monopoly. So what do you do? You set out in the operating agreement that you have signed the Terms of Service. Now all this is subject to the poor contracting capacity of the government. But in theory, it is possible to have a relatively more complex contract, and have a way of doing justice to sufficiently credible, independent regulators within the terms of that contract. It may not be easy as many believe that government-appointed regulators will give favorable decisions to the government. Therefore, the regulatory authority should not be under the institutional control of the ministry entering into the contract. But these are all areas we need to experiment on. However, the important thing to ask here is: what is the alternative? We can limit ourselves to what the government can do with its resources and accept the lower trajectory of infrastructure development; Or we can take these risks and go for a higher trajectory. We should do the latter.
Ajay Shah: I agree with what Montek said about experimenting with multiple paths, rather than assuming we know the correct answer. I think if you have a simple problem like a highway, it makes more sense to sell outright to the private sector. But there are many problems that are far more subtle. So, I think it’s healthy for us as a society to go with an epistemological skepticism and an attitude of experimentation and learning. Regarding crony capitalism, I would like to say that opening bids to global players will be extremely valuable, not least because the large amount of money required to build the infrastructure is best financed through global corporate finance structures. Foreign organizations are particularly important in achieving the most efficient systems because Indian financial organizations need to address the weaknesses of Indian finance. I am attracted to scattered shareholding companies as owners of operating assets. Many elements of policy can and should be modeled in favor of greater competition.
How can we address the issues that have hindered disinvestment and monetization efforts?
Montek Singh Ahluwalia: The history of our privatization efforts is replete with cases where the system really does not want to be privatized. Therefore, it puts forward conditions that the government finds very sensible. For example, any government would like to say that when it is privatizing something the new owner will not be able to get rid of the extra staff. But if you are a private owner, making management changes and minimizing extra labor is one of the key things in efficiency. If you come up with a privatization offer that says you can’t get rid of employees, you’re going to end up with bad bids. In the mid-1980s, when Rajiv Gandhi was the Prime Minister, it was agreed that we could privatize Scooters India. At that time, Bajaj Auto was ready to take the terms which were quite reasonable. But the conditions with which the ministry had guaranteed Bajaj Auto to say ‘no thanks’. I do not know what conditions will be imposed in the asset monetization program. But I think there are things like this that should already be addressed in the policy document.
Ajay Shah: Take the example of Food Corporation of India warehouse in Mumbai, which has 120 acres of land. The question should be whether you really want government property on such a huge land in Mumbai. The best conceivable use of that land is probably to sell it, raise money and pay off the public debt. So, this is a classic personalization question. If you try to look at it through an asset monetization lens, you’ll start thinking, ‘I want to give this asset to a private seller who will be depositing wheat in it as an agent of the government for the next 30 years. Will continue’. It really doesn’t make much sense. So I think we should ask first principles questions about how many of these assets we really want under government control.
Montek Singh Ahluwalia is the former Deputy Chairman of the then Planning Commission; Ajay Shah is Professor at the National Institute for Public Finance and Policy
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