“Asset monetisation is a good way of raising non-tax revenue. It could be earmarked exclusively for financing public sector component of infrastructure. It is perfectly workable provided the terms of the asset monetisation are transparently decided and the process of bidding for the assets is also seen to be fair and competitive. Let us choose five projects in the first instance and hold an investors conference within the current year.” – M S Ahluwalia.
Industrial Economist [IE]: How workable is the concept of asset monetisation?
MSA: Perfectly workable. Transparency is the key for the bidding process of public assets that needs to be fair and competitive. There are many who object to any sale or transfer of a public sector asset on the grounds that it amounts to “selling the family silver.” They need to be persuaded that there is nothing wrong with that if the realisation is being used to buy other pieces of family silver, ie infrastructure assets which the government will build initially and then sell.
IE: There is the assurance of not parting with the asset, only leasing it. How credible is this claim?
MSA: I can understand the desire not to have an outright sale where the asset involves underlying land which is expected to rise in value over time. However, we must acknowledge that leasing will realise less value and therefore less to invest in other infrastructure. I think a long lease (thirty years or more) would work.
IE: Over a couple of decades ago, the concept of build, operate and transfer [BOT] was floated. It did help in drawing upon the resources of private entrepreneurs to expand infrastructure. The most visible impact was seen in expanding highways. Can’t we scale up on this experience?
MSA: It isn’t just in highways that it has worked. It worked for modernisation of major airports and also for ports.
IE: What are the safeguards you suggest to ensure the success of this concept?
MSA: Transparency is important in terms of the leasing arrangement. A key issue is price indexation of the user charge. It is not good enough in my view to say the charge will be the same on a per kilometre basis as in other national highways. This is because the government may well tolerate a steady erosion of the user charge on publicly owned highways. Some automatic price indexation to an appropriate price index (reflecting the cost of maintenance), may have to be allowed. You probably also need protection against future changes in the law. No one is going to invest in infrastructure development and operation unless there is assurance that any change in the tax regime will be absorbed by the government from its lease revenues or by consumers in the form of higher user charges.
I also think it is important to discuss the lease terms with investors in a public consultation and invite suggestions for modification which are made public after which the government takes a final decision on the terms and invite bids. It is extremely important that the conditions for qualification for bidders should be fair and not designed to exclude competition.
IE: What will be the alternative revenue source for meeting the large requirements of infrastructure?
MSA: I don’t think there are any easy revenue sources. If you take a comprehensive look at our fiscal prospects over the medium term you will realise that we need to increase government expenditure (both Centre and states) as a per cent of GDP by at least 5 per cent points. This is on account of the massive investment needs of infrastructure and the separate need for additional expenditure on education, health, R&D including agriculture and defence. In addition, we need to reduce the fiscal deficit by around 4 per cent points of GDP. That is a turnaround of 9 percentage points of GDP.
If we can’t reduce the scale of existing subsidies – and that doesn’t look politically likely – we have a lot to do to raise resources through tax reforms and other non-tax revenue. Asset monetisation is a good way of raising non-tax revenue. It could be earmarked exclusively for financing the public sector component of infrastructure development.
IE: Your priorities for the selection of sectors
MSA: Roads, airports, national stadiums… The Jawaharlal Nehru National Stadium would be an excellent choice. It could attract many bidders and must have adequate flexibility to develop and market the stadium. Choose five projects in the first instance and target an investor’s conference within the current year.
