Lack of clarity on NMP process, timing

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 market place. 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 Rs. 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%), railways (25%), power (15%), oil and gas pipe line (8%) and telecommunications (6%), accounting for around 85% of the total monetisation value, with civil aviation, natural gas and shipping etc. filling in the rest.

From where will the private sector mobilise resources to bid for the auctions? Private sector entities are not cash rich.

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 ten 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 Table 1, the numbers tell the story rather well.

Table1: Disinvestment proceeds (Rs. Crore)

 Fiscal Year

Budget Estimates (BE)

Actuals (actuals as a %age of BE)

2011-12

40,000

18,083 (45.2%)

2012-13

30,000

25,890 (86.0%)

2013-14

55,814

29,368 (52.65%)

2014-15

63,425

37, 737 (59.50%)

2015-16

69, 500

42,132 (60.62%)

2016-17

56,500

47, 743 (84.50%)

2017-18

72,500

100,045 (138%)

2018-19

80, 000

94, 727 (84.50%)

2019-20

105, 000

50,304 (47.91%)

2020-21

210,000

32,000 (15.24%)

Source: Various issues of Union Budget, Ministry of Finance, Government of India

The latest data (as set out by the Controller General of Accounts, CGA) reveals that during April-July 2021, the disinvestment proceeds amounted to Rs.8,371 crore as against the budget estimates of Rs. 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”, published in the September 2021 issue of the RBI bulletin, a total capex of Rs.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 top pick up in the following years.

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 top 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 RBI during the financial year so far (up to August 17, 2021), there was a contraction in non-food bank credit by 1.2%. Furthermore, during the same period, contractions were evident in credit disbursal in the cases of infrastructure (0.1%), power (0.4%), roads (1.6%) and above all, for all industries, the contraction was to the tune of 1.7%.

The RBI study entitled “Changes in Sectoral Bank Credit Allocation: Development Since 2007-08” published in the September 2021 issue of RBI bulletin, has observed that the allocation of industrial credit has recorded a deceleration of 1.6% (CAGR) during the period 2014-15 to 2020-21 as compared with increase of 19.6% (CAGR) during the period 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.

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. It comes at a time of deep distress in State finances, so there is pressure to push the scheme to stand it up as a success.

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 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 2021), according to the Controller General of Accounts (CGA) data, out of the total capital expenditure of Rs. 5,54,108 crores, only 23.2% have been spent as compared with 27.1 % of the corresponding period of the previous year.  

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.

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.

To conclude, 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. It comes at a time of deep distress in State finances, so there is pressure to push the scheme to stand it up as a success. This opens the doors to distortions in the price discovery process and therefore concerns on entrenched interests getting the upper hand. All in all, this is unlikely to fire up investments, grow infrastructure or be the game changer that it is being painted as. Monetisation of assets is an attempt to replace public investment by private investment without transferring ownership. But the plan lacks practical insights.

(R.K.Pattnaik is a former central banker, Jagdish Rattanani is a journalist. Both are faculty members at SPJIMR. Views are personal)