Will asset monetisation drive give desired results?

• Follow

The government’s intention to sell the revenue streams of infrastructure projects to raise an estimated Rs 6 lakh crore (trillion) upfront will help plug the country’s infrastructure deficit provided the money is invested in the creation of assets that generate wealth or enhance wellbeing and not to meet current expenditure.

Several questions pop up about the government’s turbo-charged initiative. Should such wholesale leasing of roads, railways, power transmission lines, power generation plants, natural gas pipelines, telecom towers, warehouses, mines, airports, ports and urban estate be done within a short span of four years? Will government realise the best value? Will the proceeds be invested in projects where the benefits exceed the cost? Or will this exercise end up in good projects being leased out and the proceeds flowing into projects of lesser utility?

Asset monetisation may have a greater chance of attracting patient capital from insurance and pension funds as the projects being offered have entered the stage of commercial operation. The early stage risks of obtaining land and securing clearances, which typically delay the execution of projects with large environmental and social impact, would have been mitigated.

Will private sector respond?

Private investors should be interested in operating projects that offer attractive returns and have stable cash flows since interest rates in the developed countries are close to zero and capital is looking for profitable opportunities. They would do a better job of operating and maintaining infrastructure projects than government agencies. Even those that operate efficiently like the Delhi Metro, Konkan Railway and Karnataka State Road Transport Corporations, struggle to be profitable.

Asset monetisation is a new phase in the evolution of public private partnerships (PPP). The earlier phase that began at the turn of the century of getting private investors to build infrastructure projects with borrowed money and transfer them to the government after operating them for a certain number of years, has ended up badly with banks, mostly in the public sector saddled with non-performing assets or bad loans.

In the years leading up to 2010, banks were competing to lend. They had relaxed their norms considerably. For example, Gajendra Haldea, a whistleblower official of the erstwhile Planning Commission, had written a paper in 2010 called, ‘Sub-Prime Highways’. The allusion was to sub-prime mortgages that had crippled banks in the US and Europe and thrown their economies into recession after the collapse of Lehman Brothers, an investment bank in 2008. Haldea had analysed 20 highway stretches and shown that the cost that formed the basis for bank lending was 90% higher than the cost estimated by the National Highways Authority of India. Private developers had no stake in the highways they were building as even their own equity contribution had come from banks.

PPP experience

PPPs were an improvement over private investment in infrastructure with government guaranteed returns. India saw a rash of such ‘fast-track’ projects in power generation (and distribution in Odisha) promoted by Enron, Cogentrix and AES Transpower soon after the 1991 reforms. A plane load of US energy investors had descended on Delhi led by Hazel O’Leary, Energy Secretary in the Bill Clinton Administration. None of those investors exited neatly. Enron’s Dabhol power plant had no takers for its costly electricity. The government reneged on its contract and took it over. For that political adventure, it had to pay about $300 million in damages to Enron’s contractors – Bechtel and GE.

Getting private investors to develop PPP projects by borrowing from the market was a bad idea. It is better for the government to borrow and invest because it can get cheaper money. It can also bear the early stage risks of land acquisition and securing of clearances. But delays in execution negate the benefits of cheaper finance in government-executed projects and result in cost overruns.

Shailesh Pathak, who oversees infrastructure development at L&T, says the government’s execution risk can be mitigated by setting up limited-life (says 10 years) project-specific companies (called special purpose vehicles) manned by public sector professionals empowered to deliver the project within that time frame. Konkan Railways and Delhi Metro brought in private sector efficiencies. This is both because of the reputation of E Shreedharan, who headed the two projects, and the free hand that governments gave him. Other examples can also be cited. When Satyam Computer collapsed owing to promoter fraud, the government brought in a committee of wise mean to nurse it back to health and sell it to the Mahindra & Mahindra group. A similar strategy was adopted when Infrastructure Leasing and Financial Services (IL&FS) went bust.

The success of asset monetisation depends on how well the contracts are structured. If they are poorly crafted, users might end up paying for deficient service, or overpaying as in the Delhi-Noida tollway.

The Delhi-Noida toll bridge concession to the IL&FS group was so badly drawn that it seemed like a project designed to transfer money from users. The 10-km stretch with half-a-km bridge across the Yamuna cost Rs 408 cr to build. It opened for traffic in 2001. By 2014, it had collected Rs 810 crore in toll fees. Yet the company claimed that it had not earned the promised return on investment and the initial concession of 30 years should be extended to 70 years. The Allahabad High Court was not impressed and made the bridge toll free.

Governments have a poor record of protecting the consumer interest. The privatised Delhi Airport has been criticised for charging carriers very high rates for its services. Even the food at Indian airports is exorbitantly priced. Though AERA is supposed to regulate airport economic services, and airport operators earn substantial sums from rentals, it has not intervened. The Airports Authority of India plays along.

The problem with infrastructure development, whether by the private sector or the government, is the lack of accountability, as Haldea observed in his book, ‘Infrastructure at Crossroads’. This lack, allows policy to be manipulated. In asset monetisation, multiple stakeholders have an interest. Relatively influential stakeholders will tend to lobby and make the terms sweeter for themselves at the expense of the others. If fair competition is enabled and performance standards relating to quality of services are enforced, the private sector can hardly exploit the citizen. As Haldea observed, unless the greed of a private entity is accompanied by corruption or negligence in the government, rent-seeking cannot normally occur.