Is monetising public assets a good idea?

The challenge is in structuring the complexity of contracts with private players

September 03, 2021 12:15 am | Updated December 04, 2021 10:29 pm IST

B.LINE:Nirmala Sitharaman,Union Minister for Finance & Corporate Affairs during Launch of the National Monetisation Pipeline (NMP) Along with NITI Aayog VC Dr Rajiv Kumar and CEO Amitabh Kant (l) , in New Delhi, on 23.8.21 Pic : Kamal Narang

B.LINE:Nirmala Sitharaman,Union Minister for Finance & Corporate Affairs during Launch of the National Monetisation Pipeline (NMP) Along with NITI Aayog VC Dr Rajiv Kumar and CEO Amitabh Kant (l) , in New Delhi, on 23.8.21 Pic : Kamal Narang

Last month, the Centre released the National Monetisation Pipeline , a document listing the various public assets that will be leased out to private companies over the next four years. The government believes that monetising underutilised public assets will bring in almost ₹6 lakh crore to the government and help build new infrastructure to boost the economy. The Opposition has accused the government of selling off valuable national assets to “crony capitalists”. In a conversation moderated by Prashanth Perumal J. , Montek Singh Ahluwalia and Ajay Shah discuss this move. Edited excerpts:

What do you think of the government’s idea of monetising operating assets to build fresh assets?

Ajay Shah: The grand strategic question is this: on the one hand, we have the government developing and owning public assets forever. And this has certain consequences. On the other, we have the public-private partnership (PPP) model, where the private sector will develop and operate assets. We have found that the PPP model runs into many difficulties. The government does not have the capacity to enter into contracts and deal with contract negotiations and difficulties. Many pieces of the development process are difficult for private people to solve. So, is there a way out? Conceptually, it seems that there is a way out, which is that the government should do the early development of infrastructure, which is the high-risk phase, create an operating asset, and then sell the asset off to private people. So, the asset goes off the public balance sheet and into the private balance sheet. The money collected by the government can go back into developing new assets. I think there is merit in this thought process given the constraints of state capacity in India.


Montek Singh Ahluwalia: Many people have reservations about bringing in the private sector into infrastructure. There is no dispute that we need more infrastructure but the public sector simply doesn’t have the resources to build it. There are two possible responses. One, for new infrastructure, one can think of bringing in the private sector, set up a contractual framework for what it has to do, and then let it bring its own resources. The second is to recognise that there are more risks in the construction stage and it is perhaps better to let the public sector build the asset and then sell it off 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 embedded in existing infrastructure. So, why not realise that value and let the public sector use the resources to build the infrastructure we need?

Of course problems will arise. The first is whether you are realising adequate value from the assets. This depends on the quality of the bidding process and whether enough private players are attracted to bid. The second is cronyism. The only way of ensuring that asset monetisation doesn’t lead to cronyism is to make the bidding conditions such that the people eligible to bid are not a small, predetermined set. However, because of the capital intensity of the project, not everybody is going to be able to bid. Even so, you can ensure that there is sufficient participation.

Why would the government choose asset monetisation over outright privatisation?

Montek Singh Ahluwalia: I don’t know what considerations went into making that decision. I think we should do monetisation and privatisation because we don’t know what’s best. One reason that the government might not want to do outright privatisation is if it involves the transfer of a scarce resource like land. Land is so valuable that you may not want to just hand it over. It’s easier to justify a 30-year lease because at the end of that lease the land stays with the government. In another context, if the land is of no great value, you could simply hand it over. That’s why I feel that these are issues of choice.


Ajay Shah: I would like to put more considerations on the table on the trade-off between outright privatisation and asset monetisation. The first is: do we want to build a society where there is a gigantic public sector? How much do we want state domination of society? My view is that reduced state domination of society is important. The second aspect is practical. When a private person builds an infrastructure asset, it tends to get done better because a person has self-interest in making it a high-quality asset. The economist Lawrence Summers once famously said that never in the history of the world has anyone ever washed a rented car. If I’m a private investor in a highway through a complex asset monetisation contract, I do not really own the highway and I will take less care of the asset. Entering into a complex contract with a government organisation involves great risk because the Indian state is not a great party to have a contract with. So, a clean asset sale puts an end to the complexity of government interference.

Are there ways to ensure that there’s no asset stripping by private investors with limited time horizons?

Montek Singh Ahluwalia: When you have a 30-year contract, for example, your incentive to put money into the asset, which would ensure that it remains productive in the 31st, 32nd and the 33rd year, goes down compared to when you own it yourself. That’s an unresolved problem. People should think about that. One option would be that you allow a renewal of the lease even before the lease ends. But then you need a competitive process there. If you take the Taj Hotels, for example, which owns valuable property in Delhi on a fixed lease, they didn’t allow the hotel to run down right at the end of the lease in the hope that the lease will get renewed. So, the problem can be resolved.


Ajay Shah: The question is how much complexity you want to build into a contract. Imagine that I’ve got a highway contract for 30 years. In the contract, the government can embed some clauses stipulating various conditions. But you’re soon starting to go 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 state capacity required to uphold the contract. All too often the Indian state engages in dadagiri, so private people are not comfortable entering into complex contracts with the Indian state. Now, that doesn’t mean that outright sale is easy. With an 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 regulatory capacity versus the cost of building contracting capacity.

What about the risk of assets being owned by a few large companies and its impact on consumers?

Montek Singh Ahluwalia: Because of the limited number of private players, bidding for assets may not be totally fair. If you open up bidding to include foreign players, then you’re not limited to small players. As far as the consumer becoming hostage to a particular player is concerned, many of these projects by their very nature are monopolies. You don’t have competition in the sense that if you’re handing over a road from Delhi to Agra to a private player, there isn’t a parallel road competing with it. You can maybe go by rail, or you can go by air. But there’s only one major highway between Delhi and Agra and you certainly don’t want the person who has got it to start behaving like a monopolist. So, what do you do? You lay out in the operating contract that you signed the terms of service. Now all this is subject to the government’s poor contracting ability. But in principle, it is possible to have a relatively more complex contract, and to have a way of adjudicating within the terms of that contract with a sufficiently credible, independent set of regulators. This may not be easy because many people believe that regulators appointed by the government will give judgments favourable to the government. So, the regulatory authority should not be under the institutional control of the ministry that enters into the contract. But these are all areas we need to experiment with. Here, however, the critical thing to ask is: what’s the alternative? We could limit ourselves to what the government can do with its own resources and accept the lower trajectory of infrastructure development; or we could 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 many pathways rather than presuming that we know the right answer. I feel that if you have a simple problem like a highway, then outright sale to the private sector makes more sense. But there are many problems that are far more subtle. So, I feel it’s healthy for us as a society to go in with an epistemic scepticism and an approach of experimentation and learning. About crony capitalism, I would like to say that opening up bidding to global players will be extremely valuable, not least because the vast amounts of money required to build infrastructure are best financed through global corporate finance structures. Overseas organisations are particularly important in obtaining the most efficient arrangements because Indian financial organisations need to deal with the infirmities of Indian finance. I’m attracted to dispersed shareholding companies as the owners of operating assets. A lot of elements of policy can and should be modelled in favour of more competition.

How do we overcome issues that have stymied past disinvestment and monetisation efforts?

Montek Singh Ahluwalia: The history of our efforts at privatising is littered with cases where the system doesn’t actually want to privatise. So, it puts forward conditions which to the government look very sensible. For example, any government would like to say when it is privatising something that the new owner will not be able to get rid of excess staff. But if you’re a private owner, making management changes and also scaling down excess labour is one of the key things in efficiency. If you come up with a privatisation proposal which says that you can’t get rid of the staff, you’re going to end up with poor bids. In the mid-1980s, when Rajiv Gandhi was the Prime Minister, it was agreed that we can privatise Scooters India. At that time, Bajaj Auto was willing to take over on conditions that were quite reasonable. But the conditions that the ministry came up with were guaranteed to make Bajaj Auto say, ‘no, thank you’. I don’t know the conditions that will be imposed in the asset monetisation programme. But I think these are the sorts of things that should be addressed upfront in a policy document.


Ajay Shah: Take the example of a Food Corporation of India warehouse in Mumbai occupying 120 acres of land. The question should be whether you really want a government asset occupying such a large area of land in Mumbai. The best imaginable use of that land is probably to sell it off, raise money and pay down public debt. So, that’s a classic privatisation question. If you try to view this through an asset monetisation lens, you will start thinking, ‘I want to give this asset to a private vendor, who will continue to store wheat in it as an agent of the government for the next 30 years’. That really does not make much sense. So I think we should be asking first principles questions about how many of these assets we really want under government control.

Montek Singh Ahluwalia is former Deputy Chairman of the erstwhile Planning Commission; Ajay Shah is Professor at Jindal Global University

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