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In Retrospect

Emergence of an oligarchic state?

NMP, possibly aimed at financing the NIP, reminds of the Russian experience where a handful of businessmen went on to control the national resources

Emergence of an oligarchic state?
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Since November 2016, Indian citizens are aware of the term 'demonetization'. 'Asset monetization' is a new concept which has been floated by the Union Government in 2021. Politicians, economic commentators, and academics are debating on this issue across different platforms. But the common people of India are not very clear about the meaning and objectives of asset monetization!

In this article, we shall try to address the following issues pertaining to the asset mobilization programme initiated by the Union Government: (i) The concept (ii) Reason for monetizing public assets (iii) Action plan of the government (iv) Major concerns (v) Experiences of other countries.

Concept of asset monetization

In December 2017, the World Economic Forum came out with a document titled 'Recycling our infrastructure for future development', where it introduced the concept of 'infrastructure asset recycling'. Asset recycling (AR) is broadly a two-step process — first, to monetize value from revenue-generating public assets, and second, to use the monetized proceeds to invest in existing and / or new infrastructure assets. Monetizable public assets can be toll roads, bridges, airports, transit systems, power generation and grids, warehouses, etc.

In the Union Budget 2021-22, 'Monetization of Assets' has been identified by the government of India as one of the three pillars for enhanced and sustainable infrastructure financing in the country. The Budget also envisioned the preparation of a 'National Monetisation Pipeline' (NMP) to provide a direction to the monetization initiative and visibility of investors. In pursuance of the same, NITI Aayog was tasked with the creation of the National Monetisation Pipeline (NMP) for brownfield core infrastructure assets. Unlike the physical pipelines used for transportation of water or oil, here the meaning of the 'pipeline' could simply be anything from information to processes, to services, or actual products.

Prior to this initiative, the Government of India (GoI) undertook an exercise in FY 2019-20 to lay the infrastructure vision for the country. The report on the National Infrastructure Pipeline (NIP), detailing the infrastructure vision for the country, was released in December 2019.

As per the report of the task force on NIP: "The vision, mission, and strategic goals would be towards improving the ease of living or physical quality of life for each individual in the country. And investment in infrastructure would aim to achieve the aspirational standards in consonance with SDG 2030 for the same." The Sustainable Development Goal (SDG) for 2030, as adopted by all United Nations member states in 2015, provides a shared blueprint for peace and prosperity for people and the planet, now and into the future. To achieve this goal, the NIP envisages infrastructure investment of Rs 111 lakh crores over a five-year period (with an annual average investment of ~Rs 22 lakh crore) from FY 2020-21 to FY 2024-25.

Through the asset monetization programme, the GoI expects the private sector entities to operate and maintain the assets, based on the terms of contract / concession, generating returns through higher operating efficiencies and enhanced user experience. Funds, so received by the public authority, are reinvested in new infrastructure or deployed for other public purposes. Such contracts include provision for transfer of assets back to the public authority at the end of such contract. Thus, the framework for monetization of core assets has three key imperatives.

❋Monetization of 'rights' and not 'ownerships'. Assets are handed back at the end of transaction life.

❋ Brownfield de-risked assets, stable revenue streams

❋ Structured partnership under defined contractual framework with strict Key Performance Indicators (KPIs) and performance standards.

The stated objective of NMP is to mobilize finance for NIP. Theoretically, it is a programme to recycle the existing assets to produce new assets. Thus, instead of NMP, a more appropriate name of the programme could have been 'National Asset Recycling Pipeline' (NARP). The inappropriate name may create apprehension among citizens about the proper utilization of the monetized fund for the development of infrastructure.

Reasons for monetizing public assets

There are multiple reasons why the GoI has taken this asset monetization route to mobilize funds.

To finance the huge investment needed for NIP: To implement the National Infrastructure Pipeline (NIP) in the remaining four years (2022-2025) of the programme, the government needs a huge fund. The coffer is empty. The debt-GDP ratio of India has crossed 60 per cent. (Unconfirmed data suggests it is around 90 per cent). Budgetary deficits are rising and there is no sign of V-shaped economic recovery. During the last financial year, Indian GDP had shrunk by nearly eight per cent and, for this year, ADB has projected a modest growth of around 10 per cent on a YoY basis. The inflation rate is high at over 5.5 per cent and the unemployment rate has touched the ceiling. Unfortunately, India is passing through a phase of 'stagflation'. No private entrepreneur will be motivated to make a fresh investment in such a situation.

The government's refusal to tax the rich: the Union Government could have taken the responsibility to infuse more funds to the economy by imposing a tax on the most affluent 10 per cent of the Indian citizens. Many eminent economists suggested so. But the Union Government refused to listen to their advice.

To balance risk between the government and private partner: The Union Budget 2021-22 had announced to mobilize, through disinvestments of PSE, Rs 1,75,000 crores in the current fiscal year, as compared to Rs 50,304 crore in 2019-20. Public sector insurance companies and banks were also added to the long list of PSEs identified for 'strategic disinvestment'. The tepid response from the private investors might have encouraged the government to look for other options. The Indian private sector, dominated by crony capitalists (the Indian equivalent of Russian oligarchs), is also not keen to take risks by investing in PSEs listed, by the government, to divest. Consequently, the Union government has taken an additional soft option of leasing the public assets to the private entities in the name of 'monetization'. In this case, the private entities face much less risk as the government — the legal owner of the asset — also shares the same.

There is a basic difference between asset monetization and outright sale / disinvestment of public assets. In the case of the latter, the state transfers the asset and the risk of managing the same to the private buyers. But in the case of asset monetization programmes, the ownership of the asset remains with the state. As per the NITI Aayog document on NMP guideline, 'Asset Monetisation, as envisaged by the Union Government, entails a limited period license / lease of an asset, owned by the government or public authority, to a private sector entity for upfront or periodic consideration. Transfer of such rights in lieu of an upfront / periodic consideration is shaped by a well-defined concession / contractual framework. This enables a balanced risk-sharing framework between the public authority and private party.

Action plan of the government

The government aims to attract funds to the tune of Rs six lakh crore (USD 81 billion) by monetizing its core assets in the 13 strategic sectors (refer to Table 1) through this pipeline. These identified assets will be leased out to the private sector on a long-term basis.

The NMP has laid down the conceptual approaches and potential models, like Operate-Maintain-Transfer (OMT) and Operate-Maintain-Develop (OMD), for asset monetization, under the Public-Private Partnership (PPP) model.

NMP envisages mobilizing over 50 per cent of the projected fund through asset monetization of two sectors, namely Road and Railways! Other key sectors are: Power (transmission and generation) and Telecom. Global retailers will be interested in warehouses.

As the GoI has converted Ordnance Factory Board's 41 factories into seven independent corporate entities with an objective to make India one of the world's top 10 defense manufacturers and exporters, analysts believe that in the near future, the Defence sector will also be added to the NMP. The formation of seven independent corporate entities may be the first step towards selective privatization of defense establishments through the asset monetization route.

Major concerns

Analysts are sceptical about the success of this initiative. The bitter experience of the common man on the previous two major programmes of the Modi government, GST and demonetization, have eroded the much-needed confidence in the Union Government which is a prerequisite for the success of NMP. Experiences of the common people on toll tax and other ill-conceived PPP projects will go against such an initiative. Like the demonetization programme, which ended in a total mess, critics fear that the NMP would also fail miserably.

NMP has been conceived on the basic assumption that private sectors would utilize the public assets more efficiently as they follow better managerial and business practices. One popular parameter used to judge the efficiency of the private sector enterprises is the amount of profit they earn at the end of the year. Government data indicates that in 1918-19, 51 per cent of the registered companies of India declared that in the respective financial year they had not earned any profit. And 43 per cent of companies declared that in 1918-19, their profit figures were less than rupees one crore! This indicates that 94 per cent of the registered private enterprises were either not efficient or not big enough to infuse a huge amount of funds required to participate in the asset monetization programme. Thus, the government will have to rely on a few large business conglomerates to bail it out. It means, in the future, a conglomerate of big crony capitalists (like Russian oligarchs) will control the core sector strategic assets of the nation. Analysts have named this approach of the Modi government to extend support to a limited number of corporate houses to build up a few national champions, even at the risk of monopolistic behaviour, as 'Conglomerate Capitalism'.

It is reported that the public assets will be leased for a long-term period of 25 years. Experts have calculated that if the actual value of the assets is Rs six trillion, as claimed by the government, the total value of upfront rental it can expect from such monetization will be in the region of Rs 2.1 trillion or less. In fact, given the normal discounting rates of 50 per cent in such cases (100 per cent returns on capital), the government should expect no more than Rs 1.5 trillion, as reported by The Wire. This means that the private companies will be able to control these strategic public assets by paying only one-fourth of the market value of the assets. In this context, noted economist, Kaushik Basu commented: "Defenders of monetization are right in saying government assets are being leased, not sold (like renting a home). But when the government is close to the private buyers, the outcome is worse. It's effectively selling at the price of renting. That's how the Russian oligarchs stripped state assets."

Though the government would remain the official owner of the asset, after such a long lease period, the asset value might depreciate to zero. In addition to this, there is a strong possibility that the private partners will strip the asset before returning the same to the State. It is contended that in the long-term, the status of these projects will impact the interest of common citizens as there is currently no clarity on checks and price caps that the government will impose on these private players.

The most important issue of the debate is an ethical one. These public assets were built by the State with the help of taxpayers' money. The users of these assets normally pay nominal charges (say road tax of the vehicle, purchase of railway tickets at a nominal price, etc.) to cover the operational and maintenance expenses of the assets. Once these assets will be rented to the corporates, they will enjoy total control of the operation and impose additional taxes (like the exorbitant toll tax one has to pay while using highways built under the PPP model. In NMP, the actual owners of the public assets (citizens of the country) will be compelled to pay additional charges for using the same! It is also not clear; the new asset thus created through asset recycling would remain under state control or be rented again to private entities!

Experiences of other countries

A World Bank study suggests that considering the long-term nature (>25 years) and involvement of public assets, Asset Recycling (AR) requires clear policy, a regulatory and institutional framework, transparent processes, and political commitment. Experiences on Asset Recycling so far suggest that an AR strategy should have an end-to-end approach from asset selection, bundling, the right AR models, and new asset development.

Here, we shall briefly discuss the Russian experience where, during the change from communism to semi-capitalism, rose the oligarchs — a small number of individuals who used their political power to gain control over public assets.

The transition in Russia has not been a revolutionary jump to a market economy and democracy but an incremental process that has so far resulted in a hybrid system, aptly called 'oligarchic capitalism'. In India also, since 1991, when the Economic Reform was enforced on India in the form of liberalization, privatization, and globalization, crony capitalism began to flourish. In recent years, when the space of economic reform and privatization have gained new momentum, the economic might and political power of a few business houses have increased at an alarming rate. In this context, the rise of Russian Oligarchs has to be discussed to get an idea of where the NMP would lead the nation to, if Kaushik Basu's apprehension about Russia's experience becomes true for India also.

In 1991, a small group of Russians emerged from the collapse of the Soviet Union to claim ownership of some of the world's most valuable petroleum, natural gas, and metal deposits. This resulted in one of the world's greatest transfers of wealth. By 1997, five of those individuals were on Forbes magazine's list of the world's richest billionaires. Then, within a short span, there were 17 on this list. The emergence of this group, commonly referred to as the Russian oligarchs, is part of the story of the Russian post-Soviet economic reforms, described in Marshall Goldman's book, 'The Privatization of Russia: Russian Reform Goes Awry'.

In 1991, the new Russian government, under Boris Yeltsin, embarked on a course of reforms called 'shock therapy' with the ultimate goal of preventing the return of communism to Russia. The policy, which was fully supported by influential Western advisors, was to immediately free price controls and privatize state-owned enterprises as quickly as possible. Goldman argued that it was a mistake to focus only on the privatization of state sectors. "You've turned a state monopoly into a private monopoly, but the private monopoly doesn't operate with much difference," he commented.

Is Narendra Modi's India following the path of Russia under Boris Nikolayevich Yeltsin, and emerging into an Oligarchic state? The writings on the wall are bold and clear.

Views expressed are personal

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