Asset Monetisation For Dummies: Why Government’s Plan To Monetise Assets Is The Best Way Forward

Finance Minister Nirmala Sitharaman has announced an ambitious programme of asset monetisation. National Monetisation Pipeline (NMP) lists out the brownfield infrastructure assets planned to be monetised.

By 2024-25, the government plans to monetise several existing roads, trains and railway stations, gas and oil pipelines, power transmission lines, warehouses and sports stadiums etc, to generate additional receipts for government or additional investment totalling nearly Rs 6 lakh crore.

The sectors included are roads, ports, airports, railways, warehousing, gas and product pipeline, power generation and transmission, mining, telecom, stadium, hospitality and housing. Top five sectors cover about 83 per cent of estimated monetisation value: roads (27 per cent) followed by railways (25 per cent), power (15 per cent), oil and gas pipelines (8 per cent) and telecom (6 per cent).

What is monetisation of an asset? How is it different from privatisation or disinvestment? Why is government planning monetisation? What are its benefits? What are the risks and challenges in implementing this ambitious plan?

When the owner of an asset is not able to extract full benefits by using the asset, he invites another interested party to monetise the asset, ie, use the asset for better value extraction and give the owner a fixed income or share in profits in cash or kind.

If I own a vacant home and I rent it out, it is monetisation. If I own a piece of agricultural land that I cannot cultivate myself and I give it to a share-cropper to cultivate and give me a share of the crop produced, it is monetisation.

If I give my single-storey home to a builder to demolish it, construct a multistorey house and I get to own some of the floors, it is monetisation. If I own a mine or oilfield and I don’t have money to dig, extract and process, I enter into an agreement with someone to invest in necessary extraction machinery etc, and give me a share of mineral/oil produced, it is monetisation.

In monetisation, I remain the owner and only hand over the asset under some sort of management contract which may or may not involve any additional investment by the other party. The type of agreement will vary from simple ‘licence to use the asset without modification’ or long term lease with permission to carry out addition/alteration. The agreement may or may not permit commercial use of asset so handed over.

Monetisation is getting more income out of idle or under-utilised assets without losing ownership.

The NMP involves leasing out 20 types of brownfield assets — those that are already built on government-owned land — to the private sector in return for lump sum or periodic payments. The private sector will be asked to bid for operating such assets for 25 years, for a lump sum payment upfront, but without giving away ownership of the assets to the bidder.

The government is telling private operators: look, here is a road, airport, railway station, oil/gas pipeline, godown, stadium etc that you can operate for 25 years. Please calculate what you can earn from it in various ways over the next 25 years; discount that cash flow to its present value (PV), deduct from that your profit margin, and pay me the balance amount as upfront rental.

Assets proposed for monetisation include: 26,700 km of roads, railway stations, train operations and tracks, 28,608 CKT km worth of power transmission lines, 6 GW of hydroelectric and solar power assets, 2.86 lakh of km fibre assets and 14,917 telecom towers, 8,154 km of natural gas pipelines and 3,930 km of petroleum product pipelines, 15 railway stations, 25 airports and the stake of the central government in existing airports, 160 coal mining projects, 31 projects in nine major ports, 210 lakh MT of warehousing assets.

Outright sale of assets — lands, buildings or shares of a government company is thus different from monetisation. When government sells only minority shares of a government company while retaining majority shareholding, it is disinvestment and when government tries to sell its majority shareholding in a company, it is privatisation. Past cases of privatization include BALCO, Hindustan Zinc, Videsh Sanchar Nigam Limited etc.

Government had sold 45 per cent shareholding in Hindustan Zinc for Rs 769 crore in 2002, retaining 30 per cent shareholding. It has since become the world’s second-largest zinc-lead miner and one among the top-10 silver producers. That 30 per cent residual stake is now worth over Rs 25,000 crore. It is anybody’s guess whether the company would have enhanced its value so much had it remained under 75 per cent government ownership.

Although monetisation term is new, the underlying idea is old and has been tried by past several governments since 1991. The terms then used were public private partnership (PPP) projects, build operate transfer (BOT) etc. Delhi and Mumbai airports and many other airports have been handed over to private operators. Highways/expressways have been built based on monetisation of government’s ownership rights. Discovered oilfields have been allotted based on sharing of surplus oil after recovery of capital expenditure. The government is now extending its scope far and wide to cover a variety of assets.

If monetisation has been happening under different labels for past 30 years, why should there be so much furore when the idea is extended to many more sectors? What are the concerns and criticisms?

The first criticism is that the plan is too ambitious. It is beyond government’s capacity to execute it, given the not so encouraging past performance of disinvestment/privatisation/monetisation. It is alluded that the timid bureaucracy will delay the tendering process and there may be other problems like resistance from government/PSU (public sector undertakings) employees or court cases. Even under-performance of an ambitious plan may yield better outcome. (10 per cent of 100 is more than 90 per cent of 10) Government will have to learn from past problems in moving ahead.

The second (criticism) is that monetisation is actually disguised privatisation. When the monetised asset is handed back to the government at the end of the monetisation period, it may have almost nil value. It may be completely exhausted/worn out/fully milked asset having limited residual life and utility. So why not sell it upfront?

It is generalised criticism and may be true for some segments of NMP but the key point is that there may not be many bidders in market for outright sale. Monetisation gives an easier exit route if things don’t work out as planned. With sale, one is stuck. So monetisation may have greater chance of success than privatisation.

The third concern is that proposed programme may result in public assets getting into the hands of a few crony capitalists. What one should expect is open and transparent bidding and then leave the outcome to the market. If there are not too many in the market to bid then so be it.

Unless governments change their attitude to business from controller to facilitator, there will always be shortage of risk-taking entrepreneurs in the country. Critics presuppose that no new challengers will emerge in business world and the Indian business ecosystem will continue to be dominated by a few big businesses that we can count on our fingers today.

The fourth criticism arises from ideological opposition to diluting the role of government. These critics fear that once the public assets are handed over to private businesses, they will levy and increase all sorts of user charges, end various freebies — explicit/hidden subsidies — being extended now to deserving and non-deserving both.

This is an old debate and is raked up against every incumbent government. The harsh reality is that the government does not know how to do business, its decision-making is delayed which results in timely investments not being made, timely commercial decisions to buy/sell not being taken in time and timely revision of rates and tariffs not being done regularly. Governmental system suffers from inertia, hobbled by all sorts of oversight.

Monetisation of public assets does not prohibit the government from giving any freebies. If government wants to give X units of electricity or Y litres of water or Z GB of mobile data or free travel passes on bus/metro/rail or just about anything free to any class of beneficiaries, government can buy these from service providers and distribute. Why ask the service provider to make it free for this or that person?

In the current public policy debate on privatisation of public sector undertakings and increasing role of private sector in economic activities, critics are up in arms spreading the narrative of government trying to “sell the country to crony capitalists” through privatisation and monetisation. This is mischievous.

There is a deep rooted political ideology of poverty-worship. Somebody had long back taunted the Prime Minister of running a 'suit-boot ki sarkar'. How can suit-boot be a term of abuse and taunt? It should be an aspirational goal to let everyone be able to have suit-boot.

A communist/socialist mindset where to be rich is considered a sin, to be poor is a cherished virtue has actually held back our economic progress. It has de-industrialised states and promoted a culture of dole-giving mai-baap sarkar. We have so many job seekers and need to lionise job creators. Abusing wealth creators will not help.

Public policy must respond to changes. It cannot remain static. Even the 1950 Constitution of India had undergone more than 100 amendments and will undergo more as needed. Under Industrial Policy 1956, the public sector was expected to occupy commanding heights of the economy and it did well at a time when neither banking nor capital market was developed and only government could make large investments. It is not so now. Economy has expanded, population has grown (from 36 crore in 1951 to about 138 crore now) and government does not have enough money to meet huge investment needs of both social and economic infrastructure.

Capital market is today well developed and so it makes sense to take up projects on PPP basis and to follow a policy of government getting out of routine businesses that can be more efficiently run by private sector.

The government had invested Rs 400,909 crore as equity and Rs 149,150 crore as loans in 434 central public sector enterprises (CPSEs) as on 31 March 2019. They earned profit of Rs 177,932 crore during 2018-19 out of which 73 per cent was contributed by 63 companies in petroleum, coal/lignite and power sectors.

As on 31 March 2019, 189 CPSEs had accumulated loss of Rs 140,307.55 crore. In fact, the net worth of 77 CPSEs was negative Rs 83,394.28 crore. Total capital employed in these 434 CPSEs was Rs 3,167,331 crore and return on capital employed is about 10.06 per cent.

This clearly shows that the performance of CPSEs has been mixed. Some have done very well financially while others have destroyed capital. Some have done well because they operate in monopoly but their monopoly profiteering and inefficiency creates a high cost economy that hurts everyone. Our industry has become uncompetitive and cannot push exports without which many industries cannot survive well.

When singling out particular industrialists for political attacks, the critics forget that when large investments are to be made in mega projects of industry and infrastructure, there are risks of uncertain incomes and no individual tycoon will put entire personal wealth on stake. He will put in a part and raise balance from banks and capital market so that the risk is proportionately distributed.

The relationship between the state and private business is an important aspect of governance system. Businesses need an environment of security and maintenance of law and order that only state can provide. The decade of 1970s and 1980s showed that when government went on excessive control mode, it spawned a licence-permit and inspector raj, fuelling corruption.

Through progressive liberalisation, controls were whittled down from 1991 but still Indian industry suffers from overload of regulations which adversely affect its cost competitiveness in international market.

When the state dominates business, it kills initiative for efficiency and brings discretionary regulations, enforced selectively and arbitrarily. When the business dominates the government, it throttles competition and reduces public welfare.

We need a balance. We need robust systems of fair and transparent regulations in public interest. We may trust businesses to comply with regulations and not meddle with their affairs too much but breach of trust must invite swift and certain punitive action.

We should have respect for people who create wealth for themselves and for others, who create job opportunities. Mistakes of a few wilful defaulters should not be used to vilify wealth creators as a class. A risk-averse system will not create the kind of growth needed to meet the aspirations of young India, 65 per cent under 35 years of age.

This piece was published on the author's Facebook page, and has been republished here with permission.