A scheme for privatisation of public enterprises can have many goals. It concedes that the private sector can deliver efficiencies that the public sector cannot. It can generate funds for a cash-strapped government. It can push the ideological position that the government should get out of the way and facilitate private entities in the marketplace.
The National Monetisation Plan (NMP) runs with a similar copybook. And it is larger, grander and more expansive than earlier programmes, but with a twist: it seeks to garner ₹6-lakh crore over a four-year period (2021-21 through 2024-25) by leasing rather than selling government/public authority-owned assets to private sector entities. Up for leasing out are assets spread across roads (27 per cent), railways (25 per cent), power (15 per cent), oil and gas pipe line (8 per cent) and telecommunications (6 per cent), accounting for around 85 per cent of the total monetisation value, with civil aviation, natural gas, shipping, etc., filling in the rest.
According to the Union Government, the NMP has been proposed with the objective of “tapping private sector investment for new infrastructure creating”. It is not simply a “fund making mechanism”. The framework of NMP has been designed to “monetise the rights and not ownership”; to offer “stable revenue streams” and a “structured partnership with contractual framework.”
Notwithstanding the merits of NMP as claimed by the government, the exercise is complex and it raises many issues and concerns, the first of which is lease financing by the private sector. In India, a simpler and straightforward process of disinvestment has not met with success. In the past 10 years, the government’s own targets (going by the numbers in the various Union Budgets) have been consistently missed, and in part have succeeded because one government entity was nudged into investing a stake in the entity being put up for privatisation by another. As set out in the Table, the numbers tell the story rather well.
The latest data (as set out by the Controller General of Accounts) reveals that during April-July 2021, the disinvestment proceeds amounted to ₹8,371 crore as against the budget estimates of ₹2,10,000 crore.
The NMP comes at a time the outlook on private corporate investment has not been very encouraging. According to the RBI study entitled “ Private Corporate Investment: Growth in 2020-21 and Outlook for 2021-22”, a total capex of ₹1,60,407 crore would be incurred by the private corporate sector in 2020-21, translating into a sharp dip of 30 per cent from the planned phasing of the previous year. This sharp dip is attributed to all the channels of financing. This reflects the lack of appetite of private sector for new projects in the current environment. At a time when the capex financing is significantly down, the success of financing brownfield investments by means of leases is doubtful. And if the scheme meets with a poor response in the first year, it is unlikely to pick up in the following years.
In any case, from where will the private sector mobilise resources to bid for the auctions? Private sector entities are not cash rich. In case they are willing to participate, they most must go for a bank loan. The banks are sitting with large non-performing assets and are not disbursing credit enthusiastically. According to the data released by the RBI, during the financial year so far (up to August 17), there was a contraction in non-food bank credit by 1.2 per cent. Furthermore, during the same period, contractions were evident in credit disbursal in the cases of infrastructure (0.1 per cent), power (0.4 per cent), roads (1.6 per cent) and above all, for all industries, the contraction was to the tune of 1.7 per cent.
The RBI study entitled “Changes in Sectoral Bank Credit Allocation: Development Since 2007-08” has observed that the allocation of industrial credit has recorded a deceleration of 1.6 per cent (CAGR) during 2014-15 to 2020-21 as compared with increase of 19.6 per cent (CAGR) during 2007-08 to 2013-14. The study said: “During 2014-15 to 2020-21, overall credit growth decelerated, primarily driven down by reversal in credit growth to the industrial sector because of deleveraging by non-financial firms, increasing dependence on non-bank sources for financial resources, and some risk aversion on the part of banks, especially by the other-group of banks to lend to industries, which got further compounded after the outbreak of Covid-19 pandemic.” This further corroborates the lack of private sector appetite for investment as evident from the credit offtake data.
Apart from the constraints in credit disbursal, there is the associated interest cost which could be higher than the revenue realised from the lease of assets. There are also limitations to liquidity support from the RBI to enable banks to provide loans as in this there are potential threats to inflation. Any liquidity support by the RBI is nothing but printing money.
Further, the private sector entities will not own but manage the brownfield assets, mostly in public utilities. These are likely to be prone to public pressure, protests, political vicissitudes and the like. Therefore, a fine coordination involving the State and local governments will be required to drive the NMP successfully. In the current political climate, this may not always be easy.
One important part concerns the budgetary arrangements, which are not clear. Apparently, like the disinvestment proceeds, the receipts from the lease will be recorded as non-debt capital receipts. Given the lack of fiscal space and the hard budget constraints of the government, the resources so mobilised are likely to be spent to meet the revenue components (bulk of which are mandatory) of total expenditure and capital expenditure and will take a hit. As evidence suggests, this has been happening over the years. Illustratively, during the four months of the current fiscal (April-July), according to the CGA data, out of the total capital expenditure of ₹5,54,108 crore, only 23.2 per cent has been spent as compared with 27.1 per cent of the corresponding period of the previous year.
In addition, road developments by NHAI and station development for Railways have underlying challenges. NHAI mobilises resources through the issuance of capital gains bonds. Servicing of these bonds (repayments and interest payments) are burdens on the NHAI. Some private sector operations have been taking place at major railway stations. Any further loading could result in discontent and discord among the existing lease-holders because of the entry of new players.
Thus, while the criticality of infrastructure both physical (for example, roads, railways and power) and social (for example, health and education) are well recognised, the timing, the framework and the process involving NMP raises many issues that cannot be swept away. NMP is unlikely to fire up investments, grow infrastructure or be a game changer. The plan lacks practical insights.
Pattnaik is a former central banker, and Rattanani is a journalist. Both are faculty members at SPJIMR. Views are personal. Through The Billion Press