The finance minister has recently released an ambitious program, National Monetization Pipeline (NMP), to fetch around 5.96 lakh crore by leasing out various public assets to private companies over a period of four years, believing that such cash flows would help the government to build new infrastructure to boost the economy.

The NMP includes assets such as railway stations, freight corridors, airports, power generation and transmission, natural gas pipeline, warehousing, telecom, renovated national highway segments, etc., which are operational and yielding revenues. Given the resource constraints of the government for undertaking huge capital outlay for infrastructure development, the idea of transferring the control of government over these revenue generating assets for a certain period to a private party “for an upfront or periodic consideration” sounds pragmatic.

Nevertheless, it raises many questions. The first is: given the experience under the disinvestment and privatization that the government practiced ever since economic reforms were launched which often ended up in missing the set targets year after year, how certain are we to achieve the targets under the NMP? Today’s economy is no way different from what we witnessed for the last two years: dismal economic growth and stagnant tax-GDP ratio are still haunting the nation, rather more intensely under the ongoing pandemic. In such a scenario, market is sure to factor in the dire state of economy and therefore, asset monetization under such a dismal economic scenario may not fetch fair value for the assets to be monetized. 

One may of course, argue that the risk of fair-value realization can be addressed through quality bidding process and the participation of large number of bidders for the many assets to be monetized. But looking at the capital intensity of the assets to be sold, one must admit that parties eligible to bid are likely to be less in number, unless government opens up bidding to global players. Otherwise, such limited participation of players in the bidding process may lead to ‘cronyism’, which, as some economists argue, may result in economic stagnation and social discord.

The next important question is: what would be the impact of assets being owned by a few large corporates on the consumer? This may not impose any new risk on the consumer, for these assets by their very nature, are operating as monopolies and hence face no competition. That said, it must also be admitted that when the road is handed over for a limited period, the private company may not pay adequate attention for its upkeep to reduce its operational expenses, or may resort to price-escalation in the anxiety of maximizing its profit over a limited time horizon. Such increased burden on the consumer will have its own repercussions on the economy as a whole. Indeed, experiences from countries like Singapore and Australia who have earlier gone with monetization of assets very much warn about this risk.

This could however be managed to a certain extent by entering into a relatively complex contract with the bidder and by adjudicating within the terms of contract by a credible independent set of regulators. This proposition however poses two challenges: one, such complex contracts may deter private firms from participating in the bidding, and two, people, believing that regulators being appointed by the government tend to be always on the side of the government, may not repose faith in them. So, regulatory mechanism must be outside the purview of the ministry that is entering into the contract. These are however, problems that have no right answer and hence need to move along with them with a sense of optimism of evolving right solutions as the government moves forward.

Lastly, the history of privatization of assets by government reveal that often times our governments, irrespective of the parties in power, have tend to impose such conditions on the acquirer of an asset which to the government appears sensible, while the bidder sees it as a disincentive. For instance, an acquirer of an asset wants to scale down the excess staff to improve operational efficiency. But if the government says that such scaling down is not permitted, then we may end up with poor bids.

So, that being the challenge, there is going to be a big ‘if’ in monetizing the assets. May be, keeping this in view, some economists are wondering if ‘debt-monetization’ would be a better alternative to build infrastructure. There being no takers for bank credit and as the financial market is thus flush with liquidity, it may sound wise for the government to borrow directly from market and invest the same for infrastructure development.

Of course, some may argue that such a move may lead to ‘crowding-out’ of private investment besides posing inflationary threat. There could also be an argument that such borrowing cost may further worsen the government’s fiscal metrics. But with liquidity overhang in the market, there appears to be little scope for crowding-out of private investment. Secondly, in the light of pandemic-driven pressures on consumer demand playing havoc, inflation risk may not be that threatening.  Lastly, even cost of borrowing would work out less for the government than the private borrowers. Over and above all this, investment in infrastructure can be speeded up with no time lag through market borrowing rather than relying on asset monetization through private investment, which is sure to take its sweet time as it was experienced under privatization exercise.

Nonetheless, looking at the urgency for the infrastructure development, and to make the NMP deliver the intended results, government may have to address upfront all the issues such as designing bidding process for attracting large number of bidders, framing of effective contracts keeping consumers’ interest in mind, etc. in a policy document.