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TeaThe property recycling craze in Australia is reaching India with the leasing of Port Kembla and Port Botany near Sydney in 2013. So does the fear that handing over control of public utilities to a smaller private sector will hurt the consumer.
Cash-strapped Indian government has identified 6 trillion rupees ($81 billion) in existing revenue-generating assets, which it will monetize over four years to fund an ambitious $1.5 trillion pipeline of new infrastructure . But while New Delhi aims to replicate the success of fundraising overseas, it also needs to heed a warning from Australian Competition and Consumer Commission chairman Rod Sims last month: privatize to increase the efficiency of the economy, or at all. Don’t privatize either.
Policy makers in India envisage partnerships with revenue-earning operating concessions in return for upfront payments or investments. Deals with the state retaining long-term public ownership would be structured as “contractual partnerships”. However, in order to maximize their profits over a limited time frame, investors will naturally want to raise prices, limit competition or cut down on maintenance. Singapore had to nationalize its suburban trains and signaling system because the main private operator invested less in maintenance, causing frequent breakdowns and stranded, angry passengers.
Similarly, it is important for the government to prevent today’s lump-sum benefit from becoming a cost tomorrow. In New South Wales, where electricity prices doubled in five years following the privatization of poles and wires, the government had to come up with an energy-efficient package to ease the burden on consumers. Indian taxpayers, who are already struggling under extortion over energy, simply cannot tolerate such leniency.
Without bureaucratic capacity and regulatory skills, the Indian program could shift taxpayer-funded assets to a handful of business groups. This is of concern because of the increasing concentration of economic power in everything from transportation to telecommunications. The airport and port are strongholds of billionaire Gautam Adani’s conglomerate, which is also looking to acquire Container Corporation of India Ltd, a state-owned logistics firm. The wireless carriage business, once filled with a dozen operators, has effectively turned into a monopoly led by India’s richest man, Mukesh Ambani.
The privatization of a state-owned aluminum manufacturer only raises concerns about job-loss among its employees. Once control of utilities was out of the hands of the government for years, even decades, the wider public would worry about high user fees levied by operators of roads, railways, airports, electricity grids and gas pipelines. .
Another takeaway from the Australian experience is to let consumers see for themselves whether they are getting a fair setback. As the Sydney Morning Herald wrote this year, the 2018 sale of Westconnex, a controversial motorway in Australia’s largest metropolis, limits the network’s “risk to freedom of hearing of information requests and budget estimates”, in addition to ” capacity of the State Auditor”. To keep the general project under scrutiny.”
It is also important to take into account the lag in institutional maturity. For an emerging market, India already has fairly well-established investment trust and toll-operate-transfer structures. But does it have the legal and regulatory mechanism to make politically sensitive infrastructure truly risk-free before asking the private sector to put a price on it? Even where environmental clearances, land acquisition and construction are in the rear-view mirror and there is certainty over future traffic, weak regulators can present difficult-to-price risks of their own.
take aviation. After a year and a half of Covid-19, India is still imposing capacity caps and pricing floor and ceiling on flights, refusing to come to passengers at airports to save some inefficient airlines. Such arbitrariness stems from considerations of political economy, which will not go away quickly. The Canada Pension Plan Investment Board, Brookfield Asset Management Inc., Australia’s Macquarie Group Ltd and Singapore’s sovereign wealth fund GIC Ptey, as well as local financial institutions, are likely to bid for the public properties on offer, and they may even that some win, but they can never equal their ability to influence strong domestic business groups and rules.
Then there’s the state’s execution capacity, which is questioned by government-run banks, the largest life insurer, a large oil refinery and long delays in selling Air India Ltd, the national carrier. The foamy equity markets resulting from massive global and local liquidity glut provided a golden opportunity for policy makers to extract great value for assets, excluding Air India. Maybe she just left already. Startups with no current earnings — and some that probably have no future profits — swept the board by swooning public capital markets. The government just kept waiting.
Property concessions can also be affected by bureaucratic delays. By the time New Delhi starts selling them, the US Federal Reserve could shrink its already bloated balance sheet. Emerging-market assets may get short-shifted. Even more so if it turns out that the coronavirus will keep coming back in waves in countries that are slow to reach universal vaccination, or are unable to deliver boosters frequently.
However, timing is not everything. Finding the right balance between public and private interests will determine the success of a patient asset recycling program — not just the amount raised this year or next. This is perhaps the most important lesson from Down Under.—bloomberg
Read also: Government land, don’t sell assets: FM Sitharaman on Rs 6 lakh crore asset monetization pipeline
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