Finance Minister Nirmala Sitharaman recentl announced a pipeline of assets that the government plans to monetize. The government, through the National Infrastructure Pipeline (NIP), has a target to collect six lakh crore rupees in the coming four years ending 2024-25. Out of this Rs. 88,000 crore will be collected in the current FY alone. The plan covers 20 classes of assets spread over 12 ministries or departments. The most important three sectors, considering value, have been roads (Rs.1.6 lakh crore), railways (Rs.1.5 lakh crore) and power (Rs. 85,032 crore).
Some other sectors include airports, ports, telecom, and stadium and power transmission. One important thing to notice is that there is no land for monetisation. Only the projects where investment has already been made, that is, brown field projects are to be monetised. It is reported that private sectors will be given these assets for monetisation and some foreign companies have also shown interest in investing in these projects.
Some elaboration of the NIP
Monetisation does not mean complete selling. Assets will be given to private players for 25 years. They will utilize the assets in more efficient ways than the public sector. The investors will develop and utilize the assets and earn revenue from them for specific time periods and then return it to the government in a developed form. The targeted six lakh crore will be invested by the government for development of the other infrastructure projects.
So, there are two important aspects. One, the government will focus on under-utilized assets and two, monetization will happen through Public Private Partnership (PPP) and Investment Trusts (InvTs). It is expected that cash flow will increase in the hands of private sectors. The difference between the present cash flow under government management and that in private hands will represent the extent of improved efficiency in utilizing assets.
A simple measure of monetization
The very simple and easy formula behind any investment plan is known as Net Present Value (NPV) estimation. NPV can be obtained by adding all discounted future returns on investment or cash flow of every year to the present day. That is the value of future cash flows would have to be converted into the value of the investment in its incurring year. If the value of all the returns exceeds the present value of the investment, then the investment project is profitable. If it is negative then no one would accept the investment projects. The formula is NPV = summation of all Rt/(1+i)t, where R represents constant return on investment in each year and i refers to the rate at which the future yearly returns are discounted and t means the time period in a year.
A social scientist, Dr.Sonali Ranade, wrote an article in The Wire in August 2021. She assumed that the return on monetized assets to be 4% (net of inflation), the return earning to be discounted at the real rate of interest 6% (not nominal rate of interest) and total time period to be 25 years as the government has decided. On these assumptions the total return would be 51.3%. That means in this NPV calculation, for every Rs.100 of assets monetized, the return or cash flow yield from the assets that the investors can expect is Rs. 51. Moreover, every investor has to invest more money in each project to increase efficiency of the project and there is also risk premium in every venture and there will also be other costs. Considering all aspects, the return would be around 35% on an average. Depending on this simple formula, therefore, the government can expect around rupees two lakh crore, instead of rupees six lakh crore - as has been targeted.
Points of concern
Firstly, in most of the PSU assets, there are private shareholders who hold a considerable portion of the shares. Private shares cannot go to the government exchequer. So the expected value of monetization should be less than targeted.
Secondly, Arun Kumar, former Professor Jawaharlal Nehru University, (in an interview to NDTV) stated that the economy is in a very bad shape. So, it is very doubtful whether many investors would come forward with huge resources to invest in these government disinvestment ventures.
Thirdly, T.T Rammohan, Professor, Indian Institute of Management, Ahmedabad, pointed out (the Hindu, August 28, 2021) that in many projects, like roads, the biggest pie to be monetized, had been built with cheapest funds. This was because the government could get money for spending at cheapest rates. Additionally, the return from toll collection for road usage could not depend fully on efficient collection methods. The growth of the economy, number of vehicles on the roads and other factors are very relevant in the case of roads. At the same time, one can expect the similar thing to happen in case of railways and the power sector’s monetization plan. In lastly, if the government has been successful in earning such a huge amount of money in this manner, then that would crowd out other private investments. In that case, availability of money for the private investors for other projects will be scanty. Then it will be a very dangerous situation as the interest rate would go up significantly.
In that case, the cost of production of the entire economy would be higher and the Indian economy would lose competitiveness. That may affect foreign trading as well. This situation may also lead to higher inflation and the exchange rate may also rise.
The way forward
If efficiency of the projects rises after the monetization of assets, it is good for the economy. But that could be done on a smaller scale by examining sector specific issues. Additionally, the government has to set up a committee of very qualified independent professionals, as has been suggested by Rammohan. Transparency in the monetizing process is very important. Otherwise, there will be a chance of corruption which may lead to an increase in uneconomic financial and political burdens.