National Monetisation Pipeline: Pipedream or Bold reform?

India is struggling with a large fiscal deficit. This was expected due to two reasons. Large spending commitments due to Covid and falling tax revenue. Last year the finance minister had budgeted the deficit to be 3.5 percent of the GDP for the fiscal year 2020-21. The actual deficit turned out to be 9.3 percent. In rupee terms the slippage of actual over budgeted was Rs 10 lakh crore. This shortfall has to be made up by fresh borrowing. For the present fiscal year, i.e. 2021-22, the budgeted deficit is 6.8 percent of GDP or Rs 15 lakh crore. This too will be made up mostly by fresh borrowing. The plan is to borrow 12 lakh crore, which makes up more than three fourth of all the financial savings of the households in India. The fresh borrowing keeps adding to the debt mountain of the Central government, which is now at 60 percent of the GDP. This is the highest it has been in 14 years.

Seen in the light of an acute fiscal crunch, the National Monetisation Pipeline (NMP) is an ambitious idea.

The N.K. Singh led expert committee on fiscal responsibility had recommended a debt to GDP ratio of 40 percent. So, the current indebtedness levels are dangerous and could be unsustainable. Also, it is worth a reminder that today’s borrowing is nothing but a tax on future unborn generations. The more reckless the spending today, the less is the fiscal space available tomorrow. Unless of course growth picks up very strongly.

It is in this context that the government has to seriously think about other avenues of raising revenue or reducing spending, without sacrificing its core responsibility of governance, social and national security. It is true that seen purely in terms of fund flows, the deficit situation Is worrisome. But seen from a balance sheet perspective, it is much better. The government may have a lot of unfunded spending obligations, but it also has assets on its balance sheet which can be “monetised”.  Of course, we are not talking about selling off the Taj Mahal or the Gateway of India. But there is a philosophical case to be made to divest assets in areas where a private party might function more efficiently and generate more value from the same asset than the government.

The NMP is a fresh approach to Public Private Partnership. Its success will depend on the devil which is in the details. And the risks of capture, by potential private monopolies, of public assets are real and need to be addressed.

The revolution in telecom or cable TV has shown to what heights privatisation can take a sector, which languished under a state monopoly for decades. The same is true for private courier services, or airlines and hotels. But successive governments have found it difficult even to mention the taboo word of “privatisation”. That Lakshman Rekha was crossed in this year’s budget speech. Will that ambition be translated into reality? The record is not inspiring. For the last seven years the privatisation (or disinivestment) targets have been consistently missed by a wide margin. For instance, last year the target was 2.1 lakh crore, and not even 10 percent was realised.  Even in years when the target was achieved it was because one PSU was asked to buy the shares of another PSU, which is like the left pocket paying the right pocket.  Remember that this is a ruling party which has promised minimum government and maximum governance.

Seen in the light of an acute fiscal crunch, the National Monetisation Pipeline (NMP) is an ambitious idea. It aims to transfer (not sell) operating assets to private parties, and encash the value up front as a lump sum payment from an auction. The finance minister had announced this idea in her budget speech, and the details were unveiled on August 23. 

The resources raised will not wholly go to plug only the fiscal deficit, but to those respective corporate bodies. In the next four years the government estimates raising 6 trillion rupees from the NMP, of which 0.88 trillion is to be realised this year itself.

The proposals are very ambitious, and go beyond sectors like power, roads and railway assets as mentioned in the budget speech, to a total of 14 sectors, including telecom towers, gas pipelines, warehouses, solar projects and even stadiums.  Many of these assets don’t belong to the government per se, but rather different corporate entities, such as the National Highway Authority of India, or Power Grid Corporation. The resources raised will not wholly go to plug only the fiscal deficit, but to those respective corporate bodies. In the next four years the government estimates raising 6 trillion rupees from the NMP, of which 0.88 trillion is to be realised this year itself.

Given its record on privatisation these numbers are very ambitious and unrealistic. Also, the risk perception varies from sector to sector. The cleanest case is of toll highways, which anyway the NHAI has been monetising. The private party that wins the bidding, signs a “concession” agreement to collect toll revenues for the next 15 or 20 years. The value of the bid is obviously the discounted present value of all the tolls that would be collected in the future. Note that the toll cannot be fixed by the toll operator. It is to be notified by the government.

If the bulk of the 6 trillion rupees to be earned from bidders, is to be borrowed from banks, are the banks willing to take this risk? And who bears the risk of bad loans? Will it fall on taxpayers?

What if there is political agitation to make the road toll free? This indeed has happened in the case of the Noida toll bridge which went toll free in 2016. Or the Mumbai Pune expressway which has fought a battle to make it toll free. Indeed, that expressway is the oldest (since 2004) and most successful example of a monetised asset, but has not been without its own controversies. What if traffic drops to zero due to a pandemic-induced lockdown? Who will bear that risk?

There are also other risks of abrupt cancellations of long-term contracts. The Power Purchase Agreements in Andhra Pradesh where the present government cancelled PPAs by the previous one led by the Telugu Desam Party, are a case in point. These are the kind of contingencies that the NMP agreements have to specify.  In essence the private operator gets the monopoly right to collect the toll for a long period in exchange for the upfront value. How is the quality of service to be ensured? Will there be a regulator? Not all private entrepreneurs would be willing to take on such risks of political upheavals. Such a political minefield is not easy to navigate. So does this mean that only “cronies” will bid, as they are better at “managing risks” or due to an implied quid pro quo? These are the uncertainties plaguing the NMP.  Due to such factors, detractors will surely accuse the government of selling assets (“family silver”) cheaply or only to cronies.

Another important question is how is the money going to be raised by the private parties? If the bulk of the 6 trillion rupees to be earned from bidders, is to be borrowed from banks, are the banks willing to take this risk? And who bears the risk of bad loans? Will it fall on taxpayers?

The NMP is a fresh approach to Public Private Partnership. Its success will depend on the devil which is in the details. And the risks of capture, by potential private monopolies, of public assets are real and need to be addressed.

(Dr.Ajit Ranade is an economist and Senior Fellow, Takshashila Institution)