The finance minister recentlyidentified 6 trillion Rupees worth of assets to be leased out to private entities in order to raise a fund of USD 1.5 Trillion to create infrastructure. Undoubtedly, infrastructure is one of the key markers concerning the economic and social development of any country. The global infrastructure needs, across fifty countries, between 2016 to 2040 areexpected to reach USD 94 Trillion. Infrastructural expenditure is adirect contributor to the economic growth of a country, thereby forcing countries to undertake debt. The investment and debt cycle have a massive impact on the spending and borrowing capabilities of a State and the utilization of existing funds for building infrastructure. Asset recycling or asset monetization [“AM”] can be an escape plan in these situations.
AM is a widely used business practice where the government or any other business entity, disposes of its existing non-performing or underperforming assets in order to create capital and reinvests it into another project to get additional benefits.
Asset Monetization is atwo-step process:
1. Liquidation– wherein the existing assets of the state are liquidated or leased by the government to private entities and investors.
2. Re-investing– the funds raised through the liquidation in the first phase are then invested to create new infrastructure like building roadways, airports, pipelines, etc.
AM is a cost-effective and efficient use of the State funds, as it facilitates the use of capital that was previously locked up in erstwhile and non-productive or lesser productive assets, for creating new or renewed assets, to fulfil the needs of the public. Further, the older assets continue to exist and are utilized to raise governmental revenue.
Principally, AM unlocks the value from public investment in infrastructure andutilizes the efficiencies of the private sector to create harmony in the infrastructure sector. However, AM is a cumbersome process requiring extensive planning and management. Further, the fund generation and allocation requires political support, intra-governmental collaboration and engagement of the concerned stakeholders.
The Indian Plan of Action
AM is not a new concept in India and has been effectively used to redevelop railway stations under the Station Redevelopment Program, roadways through the Toll Operate Transfer Model and Governmental disinvestment in various Public Sector Undertakings. Despite the popularity, theInternational Monetary Fund reported that India was one of the top five economies with the largest governmental capital locked in infrastructure, as of 2015.
Need for AM
The Pandemic along with the negative implications of certain governmental policies has continued to disrupt the revenue and growth of the country, thereby putting the country inneed of economic relief. Monetisation is not only the most viable solution but also has a more probable success rate.
Further, the Government, introduced theNational Infrastructure Plan (NIP) in the Union Budget 2021-22, with the aim of creating world-class infrastructure thereby improving the standard and quality of life and infrastructure in the country. The NIP is essentially broken into a three-limb strategy, whichincludes creation of institutional structures, asset monetisation and enhancing capital expenditure in infrastructure investments.
The Actual Plan
The Government has planned to monetise assets acrossthirteen sectors, including but not limited to airports, ports, railways (inclusive of trains, stations, colonies), stadiums and the telecom sector. The valuation of the assets in India would be based on the Potential Asset Base (PAB) which would entail assets across different ministries. The valuation of the assets considered under the PAB for monetisation would be calculated through ‘Indicative Monetisation Value’ (IMV). The IMV would include calculations based on the actual value of the asset, the productivity of the assets, and the realization capability of the asset. The amount determined would be realized by upfront accruals or through private sector investments. In terms of individual sectors, the Planenvisages to raise more the 50% of the funding from roads and railways by monetising 15 railway stadiums, 25 airports and 160 coal mines.
The Plan suggests that the government retain the ownership of the assets, while private entities utilize and develop it to the best of their potential. This is an attempt to firstly, ensure that the government is able to get more value than the market value of the assets while retaining ownership. Secondly, the money received from leasing the assets at a premium will increase governmental consumption and help India’s overall fiscal position. Thirdly, looking at the bigger picture, in case of AM, the lessees would generally be local operators who would rely on banks and foreign investors to raise funding, which would in turn increase credit generation and FDI, which is believed to be a boost to the economy.
The major problem that the current AM plan faces is the lack of a regulatory framework to monitor the control and termination of control of the private entities. The funds generated (equating to 6 trillion rupees) would be used to create new infrastructure and increase cash flow. A major drawback of the Plan however, is the lack of a futuristic approach. Utilisation of future funds today, is a disregard for the rights of the future generations and intergenerational equity. Further, the government has not taken into consideration that assets like coal mines, thermal and hydro power plants, are a depleting resource and may not receive long term investors due to both economic and environmental reasons which would put a few big players in a monopolistic position.
Sustainable Development and Need for AM
TheUnited Nations Sustainable Development Goals [SDGs] are a guiding force to ensure combined and consistent actions by member states to ensure a better standard of living for the present and the future global citizens. SDGs seek to improve the economic and social conditions of individuals while protecting and maintaining the environment. Infrastructure and its expenditure are a key contributor to the global carbon footprint. Infrastructure building requires excessive use of raw material, energy, labor force and resources, and does not always comply with the budgetary allowances available to the government. Further, the neglect of the old assets for the attraction of new ones puts excessive pressure on the environment.
Asset creation, maintenance and development is economically draining and waste generating.SDG Goal 11 requires and encourages nation-states to create and develop sustainable cities which naturally includes the efficient utilization of assets and waste management. Re-modelling the existing assets by utilizing the efficiencies of the private sector, not only saves resources but also provides additional resources to achieve better economic inclusion.
AM also ensures better allocation of financial and non-financial resources which aligns itself withGoal 12 of SDG which requires nation-states to adopt a sustainable consumption pattern. The major indicator for efficient utilization of natural resources under Goal 12 is to reduce the material footprint and the domestic material consumption rate. Further,Target 12.5 also requires states to adopt a national recycling policy in order to reduce waste generation. Demolition or deconstruction of existing assets leads to tons of waste products, both of hazardous and non-hazardous nature. However, the same can be prevented by attracting investment from private entities and reusing the existing product.
AM also has a direct link with climate change and protection and could provide for gapping the asset requirements of the future generations. Abandoned assets of the states are modelized and utilized to meet the needs of the existing citizens. Further, the environment is not destroyed and exploited in order to make space and generate resources for new assets.
Therefore, the AM planned by the Government is a step towards achieving the global goals of sustainable development.
AM is the bridging step towards the demand for infrastructure and the limited resources in the present and the future. Proper implementation of AM plans is the only way to ensure the true realization of the SDGs. However, due to the lack of an appropriate legal and governmental framework, the AM of India is an ambitious leap which can do more harm than good. Not only does it have the potential to impact competition and consumers but to also have a negative impact on the assets of the government due to misuse. Further, the failure in generation of the expected funds can hamper the future spending capabilities of the country.
It is pertinent to note that India’s asset monetization plan is majorly influenced by the plan followed in Australia in 2012. “Contractual partnership” with private entities would make them either expect monetary benefits or competition limitation which could have more negative impacts than positive, specifically when undelivered. The AM undertaken in New South Wales, wherein the reduction of competition in the privatized electricity sector puts more burden on the consumers, is a perfect example.
Secondly, giving excessive control to non-government entities in a welfare and socialistic state like India, can lead to job reduction. Additionally, it is also important to see the stake of consumers. The lack of governmental control will also put the consumers at a risk, in the absence of any governmental remedy.
Lastly, the lack of a proper regulatory framework to govern the role of private entities in different undertakings can greatly affect the success of the AM plan as seen in Australia; therefore, the same should be kept in mind too. Asset monetization, though a leap towards a sustainable economy, may not be sustainable without proper planning and strategizing.
About the Author
Varada Jahagirdar is a Final Year Student at Institute of Law, Nirma University, Ahmedabad.
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Preferred Method of Citation
Varada Jahagirdar “Asset Monetization: An Ambitious Plan for the Indian Economy or Paving a Path towards Sustainable Development?” (20 October, 2021)