Home / Opinion / Views /  Don't let asset monetization end up as a Potemkin show

Asset monetization is not a new concept in India. The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Sarfaresi) Act of 2002 introduced the concept of monetization of stressed assets to turn the illiquid ones among them fungible and create a market for non-performing assets. India’s National Monetization Pipeline (NMP) takes this concept further. It aims to unlock the potential of brownfield assets owned by the government by tapping institutional and long-term capital. It is hoped that the money raised by these investments can be deployed on infrastructure creation. The NMP is welcome as far as its basic idea goes, but one needs to worry about the country’s readiness to adopt it.

The world’s infrastructure investment needs are projected to reach $94 trillion by 2040. Asia’s alone are estimated at $1.7 trillion every year from 2016 to 2030 just for the region to maintain its pace of development. No government can do this without the participation of private players. With its debt nearing 60% of gross domestic product (GDP), India’s government has no option but to look for alternate means of raising capital to fund infrastructure development. The question is, how does one tackle this challenge? Asset monetization—or recycling as it is commonly known—is one way. But it is not been free of concerns.

It enables a government to fund necessary infrastructure through proceeds from the sale or lease of public assets (typically fixed assets) to the private sector. While the finer details of the model that India’s government plans to adopt are still unknown, New Delhi has stated that it intends not to sell public assets outright, but to retain ownership. This decision not to sell and follow a lease-based model, however, should have been based on financial instead of political considerations.

The government could adopt both measures of selling and leasing assets, depending on the nature of each asset and also the associated risk and return, etc. For that, it should assess each project in its own right, and only then should it decide which assets are best monetized, and how. If at all ownership must be kept, it should be of assets that have a chance of offering the Centre higher returns in the future, and not deadwood. Also, while implementing the NMP, the government should ponder monetizing even good assets, which can yield more, than focusing only on underperformers.

Another concern that arises is about the workability of the plan, given the weak institutions that India has. With weak judicial infrastructure and an immature bond market, such a policy would need careful adoption. India ranks No. 163 among 190 countries on the World Bank’s index for contract enforcement, and not much progress has been made on this. The case of India’s insolvency code shows how weak judicial infrastructure and a poor debt market can pose a challenge to the success of a well-designed law.

Any plan that requires public-private partnerships will be successful only if both parties enter contracts on equal terms and the government desists from wielding its sovereign authority over its partners, so that the confidence of investors is retained throughout the contract periods. Political risk runs high in any government partnership with a private entity. This risk is higher if public trust in the government is low. What if there is a change of government at the Centre and it wishes to cancel a concession agreement? Creating any gap between rights and remedies will impair the rule of law. It will also shake investor confidence. Such a policy might also be subject to political gimmickry and will have to be ring-fenced from political-freebie temptations.

As the execution of good policies has been our Achilles heel, the government must create an asset monetization process that is fair and transparent. There exist a number of innovative models, including the Limited Concession Scheme in Indonesia, Infrastructure Investment Trusts in India and Revenue Securitization in Mexico and Uruguay. The experience so far suggests that an asset-recycling strategy should take an end-to-end approach from asset selection and bundling to adopting the right auto-regressive models for predictions, ring-fencing revenues, and allowing new asset development. Absent details, any profit projection is merely a hypothesis.

In Chicago, US, where 36,000 parking slots were handed over to a private consortium, asset recycling only made parking more expensive. In the case of Transport of London,which was being operated by a private operator, it had to be bailed out twice by the UK government from near bankruptcy. Thus, it should be clear that asset recycling is not a silver bullet that always works well for the public, or even for the cause of easing sovereign debt.

In a democracy, policymaking must be done through public consultation. This is especially so for any project that has wide ramifications and could affect the lives of citizens at large. In one like India, which has a large number of domestic peculiarities and challenges, ranging from the absence of strong public institutions (the judiciary included) to significant information asymmetries, it is dangerous to go down a path that remains largely untested and could spring unwelcome surprises. A policy such as our NMP must necessarily rest on strong institutional pillars. Else, it could end up as yet another forgettable attempt at reforms

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