This policy is an asset
On infrastructure monetization, the government is on the right track
It will be unfortunate if the only lens through which the national monetization pipeline is viewed is the income it will earn for the government – around Rs 6 lakh crore over four years. This is not an exercise to fill the budget deficit in difficult times. At least it shouldn’t be. This is not a discount sale of India’s assets – strictly speaking, it is not a sale at all as the pipeline will be monetized through a form of lease and will continue to be owned by the government. It is about building many other assets for New India. If properly implemented, alongside privatization, this could be critical for Narendra Modi’s government.
Building infrastructure is long, expensive and complicated, but absolutely necessary. It defines the competitive advantage of a nation. It has a huge multiplier effect in the economy and forms the basis for rapid double-digit growth. Financing infrastructure is a huge challenge. The Prime Minister has pledged, more than once, most recently on Independence Day, a sum of Rs 100 lakh crore towards investment in infrastructure over the next five years. On its own, the government does not have the budgetary leeway to finance the full amount. Private participation, from India and abroad, is essential for ambition to become a reality.
Public-private partnership in infrastructure is nothing new. It has been implemented in different forms over the past two decades. Any major infrastructure project has two distinct components: construction and operation / maintenance. In the past, the private sector was encouraged to partner with government at the first stage. Intuitively this made sense since the private sector in India is known to be more efficient than the government in both the execution of projects since their inception and in their management. To borrow an analogy from commerce, it has an absolute advantage over the government in both aspects. However, seen in terms of comparative advantage, the government would own it in the first part of the project (building) and the private sector in the second (operation and maintenance).
The first step in a large infrastructure project requires above all two things. First of all, a multitude of clearings linked to land acquisition, environmental and forest clearing and several other stages of “red tape”. Second, it requires raising significant capital to finance the project. While the private sector can do both of these activities, it may be easier and less risky for the government to do them. After all, permissions are all the domain of government agencies. These will likely be more cooperative if the government runs a project. On the finance side, budget allocation can provide the financial muscle needed for big budget projects, while the private sector would have to shoulder riskier and more expensive finance. Needless to say, the government is at a great disadvantage on the operation and maintenance side due to political economy constraints in imposing appropriate user fees (look no further than power outages bankrupt) and poor discipline in maintaining its own assets (look no further than most government offices).
Ten years ago, PPP had a bad reputation because this theory of comparative advantage was ignored. Too many projects led by the private sector from the start have gone bankrupt due to excessive delays in “approvals” which have resulted in blockages or unaffordable increases in costs. Many projects were funded by banks with unrealistic assumptions, which ultimately led to a wave of NPAs in the banking system. In any case, banks, whose deposits are short-term, should not lend for infrastructure, which has a long-term return horizon. In the end, the losses ended up being socialized, that is, billed to the taxpayer, while in the few projects that have worked well, the profits have passed into private hands.
The Modi government made a very appropriate course correction by bringing back into the government fold the first half of an infrastructure project, namely its building. The logical next step is to lease the constructed assets to the private sector for operation and maintenance. The government revenues can then be used to build new infrastructure projects. When these are monetized, it frees up resources for another build cycle, creating a virtuous circle.
As with privatization, the devil lies in the implementation of the policy. There is a danger that the terms of the contract will be set in such a way as to discourage private sector participation. There is a risk of political backlash if the terms are seen to favor private parties. It is also possible that too many assets are cornered by a handful of actors leading to oligopolies or monopolies in certain sectors, thus harming the interests of consumers. The lack of credible independent regulators in these infrastructure sectors could become an obstacle to successful implementation. The government must hold regulators accountable by freeing them from administrative ministries and the Indian Competition Commission must remain vigilant.
It would take a lot of work and courage to run the national monetization pipeline. The returns would be worth it.
Dhiraj Nayyar is Chief Economist, Vedanta.