Is monetising public assets a good idea?

ForumIAS announcing GS Foundation Program for UPSC CSE 2025-26 from 26th June. Click Here for more information.

Synopsis: Two experts, viz. Montek Singh Ahluwalia (MS) and Professor Ajay Shah (AS), share their views over Asset Monetisation programme of the government.

How can govt go about monetising operational assets?

Both experts mention ways in which govt can pursue monetisation of assets:

We need more infrastructure, but the public sector simply doesn’t have the resources to build it. Also, we have huge value embedded in the existing infrastructure. So, why not realize that value and let the public sector use the resources to build the infrastructure we need. There are two possible responses.

  • Let private sector build: One, for new infrastructure, one can think of bringing in the private sector, set up a contractual framework for what it has to do, and then let it bring its own resources.
  • Govt builds the asset and then the asset is sold: The second is to recognize that there are more risks in the construction stage, and it is perhaps better to let the public sector build the asset and then sell it off to private players or if not an outright sale, let the private sector manage it.
The government does not have the capacity to enter into contracts and deal with contract negotiations and difficulties. Similarly, many parts of the development process are difficult for private sector people to solve. Here’s a way out:

Early development by the govt and then asset is sold: Government should do the early development of infrastructure, which is the high-risk phase, create an operating asset, and then sell the asset off to private people. So, the asset goes off the public balance sheet and into the private balance sheet.

The money collected by the government can go back into developing new assets. There is merit in this thought process given the constraints of state capacity in India.

Why the govt chose asset monetisation over outright privatisation?
We should do both monetisation and privatisation because we don’t know what’s best.

  • One reason that the government might not want to do outright privatisation is if it involves the transfer of a scarce resource like land. It’s easier to justify a 30-year lease because at the end of that lease the land stays with the government.
  • In another context, if the land is of no great value, you could simply hand it over.
Sale of an asset is much more practical rather than a reduced state domination

  • Ownership of an infra asset means the private sector will take more care of it and put efforts to make it a high-quality asset.
  • Entering into a complex contract with a govt involves great risk because the Indian state is not a great party to have a contract with. So, a clean asset sale puts an end to the complexity of government interference.
Can we ensure that there’s no asset stripping by pvt investors?

Asset stripping means selling assets at a profit without regard for the company’s future. In this case, it means that after the contract period is over (let’s say 30 years), then the incentive for a pvt sector player to put money into the asset, to ensure that it remains productive even after the contract period ((in 31st, 32nd and 33rd year) goes down. This doesn’t happen when the asset is owned by the private sector player.

Preventing asset stripping can be done via:

  • Renewal of lease before it ends: One option would be that you allow a renewal of the lease even before the lease ends. But then we need a competitive process there.
The question is how much complexity you want to build into a contract. The private sector is not comfortable entering into complex contracts with the Indian state. Now, that doesn’t mean that outright sale is easy. With an outright sale, we will still have a government regulator, and we will face the problem of regulatory capacity.

The trade-off is about the cost of building regulatory capacity versus the cost of building contracting capacity.

Source: This post is based on the article “Is monetising public assets a good idea?” published in The Hindu on 3rd Sep 2021.

Print Friendly and PDF