In her maiden budget presented to Parliament on July 5, 2019, Finance Minister Nirmala Sitharaman laid a roadmap for catapulting the Indian economy to $5 trillion by 2024-25, its most crucial component being investment in infrastructure to the tune of a mammoth Rs 100,00,000 crore (US$1.4 trillion) over a period of five years (read: 2020-21 to 2024-25). As for funding, 39% of this amount was to come from the Union Government and States each and the balance 22% from the private sector.
The Centre’s contribution at 39% works out to around Rs 40,00,000 crore over 5 years or Rs 800,000 crore per annum. Against this, the revised estimate (RE) for capital expenditure during 2020-21 was Rs 439,000 crore. Even assuming that all of this was on building infrastructure, it is just about half of what was required. For 2021-22, the Budget allocation is Rs 5,54,000 crore or 70% of what is required.
This is when for these years, Modi – Government kept very generous fiscal deficit (FD) target 2020-21: 9.5% of GDP and 2021-22: 6.8%. In monetary term, these are about Rs 1850,000 crore and Rs 1500,000 crore respectively. From 2022-23 onward, it is committed to return to fiscal discipline aiming to reach 4.5% in 2024-25. Therefore, it won’t be able to sustain even the capital spending of 2020-21/21-22. The mandarins in finance ministry are well aware of this. So, they are looking for alternative ways.
One of these is monetization of public assets – both green-field projects as well as brown-field in areas such as roads, highways, railways, ports, power transmission lines, gas pipelines and so on. It involves ‘transfer of revenue rights to a private player for a specified period of time say up to 20 years or more in lieu of an upfront (or periodic) payment defined by a well defined concession/contractual framework’. This way, the Government intends to unlock value and leverage the proceeds from sale of ‘revenue rights’ for investing in new projects.
It intends to garner over Rs 600,000 crore from this exercise. Prima facie, this looks great as with this much money in hand and assuming debt-equity ratio of 4:1 (a jargon for ‘borrowing Rs 4/- for every one rupee of a person’s/entity own money), it can arrange for funding worth Rs 2400,000 crore. Going further, if the Government can rope in a private partner contributing an equal amount under a joint venture (JV), projects worth Rs 4800,000 crore can be executed.
Since, the arrangement only involves selling of the ‘revenue rights’ and ownership of the asset continues to be with Government, it can’t be dubbed as privatization per se. So, it also escapes any criticism that invariably goes with mere whisper of any move to sell public assets lock, stock and barrel.
But, chartering the course – as delineated above – is easier said than done. Let us face some harsh realities.
A private firm interested to take an asset say, a road under the proposed model would like to ensure that it gets a reasonable return on the capital he gives to the Government upfront. To get there, it (i) will conduct due diligence to fully satisfy itself about the quality of the asset and its capability to generate a good income (revenue minus expenses) stream during the contract term (ii) enjoy full flexibility in operating the asset that would include inter alia fixing charges for the services rendered by it – free from any outside interference.
While, on (i), there can no squabbling, (ii) can be a bone of contention. When, the Government or its agency runs a public utility, it is prone to offering the services at subsidized rates; for instance, fixing passenger fare in case of Railways or toll tax (expressway) or power tariff at below the cost of making these available. It also involves offering services on routes which are not lucrative. The under-recovery arising there from is normally paid from the budget. The unpaid amount if any, remains on the balance sheet of the agency to be eventually cleared as and when funds are released from the exchequer.
When, the asset is transferred to a private operator, he would like to take it free from any of these encumbrances. He would also seek full immunity from any untoward incident (for instance, protestors laying siege on toll plazas at national highways during farmers’ agitation). In fact, the bidder will insist on inclusion in the concession/contractual framework, all safeguards necessary to protect his interest during the pendency of the lease period.
If, the Government is unable to give these assurances and write them in the agreement, the deal will come unstuck. In case, the bidder decides to go ahead sans these safeguards, he will build in a very high rate of return in his financial calculations to compensate for all the associated risks leading to a very low bid amount for the asset. In either case, the asset monetization program will turn out to be a damp squib. The proof of pudding is in eating.
In August, 2021, the Government had put up for auction 109 railway passenger routes offering rights to run passenger services for 35 years hoping to garner Rs 30,000 crore. The exercise ended up in a fiasco as the bidders backed out ‘citing rules favoring the national transporter, lack of a truly independent regulator, curbs on route flexibility and other unresolved issues’.
In early 2019, the Prime Minister’s Office (PMO) had proposed to the National Highway Authority of India (NHAI) (the agency has executed majority of the expressway/highway projects) to stop construction; instead, focus on monetization of the assets already built. The PMO had recommended auction of all completed projects under the so-called toll operate and transfer (TOT) model. Under TOT, private companies were to take over completed roads for 10 to 20 years and make an upfront payment to the NHAI. Two years on, there is hardly any progress. Things are unlikely to change overnight.
To conclude, what appears to be an attractive proposition on the face of it, is not so in reality. The biggest bottleneck in the way is cumbersome procedures involved in striking such deals and bureaucratic red tape that goes with it. Moreover, an overarching stipulation that ‘the ownership of the asset remains with the Government’ makes the typical babu’s role even more excruciating. In the name of protecting state interest, he goes on increasing the clauses in the agreement – to a point of making the bidder totally uncomfortable.
There is dire need to bring about a drastic change in the way Indian bureaucracy works. Modi should drive bureaucrats to be ‘resilient’ and ‘pragmatic’ in their approach. This could help in untangling many a knots and improve investor confidence.
The Government also needs to reform the way subsidies in India are administered. Currently, this is done by pricing services/utilities viz. passenger fare, power tariff, toll tax etc at below the cost of making these available or the market price. This must stop. Instead, it should give subsidy ‘directly’ to the beneficiary as income support and leave suppliers to fix tariff based on market forces.
Together with unshackling of bureaucracy, this will ease the process of transferring revenue rights and help in giving a head start to the asset monetization program.