August 30, 2021The Intersectioneconomics

Extracting value from underutilised public assets is good public policy

The National Monetization Pipeline (NMP) is a desirable shift in thinking especially if state and municipal governments can use the model to extract revenues from their unutilised assets

Mint This is from The Intersection column that appears every other Monday in Mint.

HLL Biotech, a government-owned company, has a state-of-the-art vaccine manufacturing plant near Chennai that has remained unutilised since 2012. Last week, the Supreme Court heard a petition asking the court to direct the government to produce Covaxin, and help ameliorate the current global shortage.

Across the country, public assets like road-side parking, municipal grounds and public advertising are free-for-all, often captured by the rich, powerful and unscrupulous.

Efficient use of defence land can release resources for military modernisation and create massive employment

Police and defence services have parade grounds in city centres that are used only a few days every year. The true cost of these parades is invisible to accountants but staggering for economists.

I could cite more examples, but the scale at which India wastes its public assets boggles the mind. Imposing parking charges on a mere 1.5% of Bengaluru city roads could add 5% to its annual budget, and reduce traffic congestion and air pollution in the process. Yet, oblivious to their own wealth or unable to monetise it, India’s governments rely on taxes and devolved funds to fill their coffers.

How free’ parking favours the city’s richest.

It is easy to blame corruption and inefficiency for the poor state of public services like policing, health, education, transport and so on. What a lot of people miss is that there’s only so much you can do when you are cash strapped. The simple truth is that governance and public services cannot improve unless public finances are substantially bolstered.

In an October 2020 column I flagged the need for local governments to raise their own revenues.

That is why the National Monetisation Pipeline (NMP), announced by the Finance Minister last week, should be welcomed. Ambitious financial targets apart, to the extent that it creates public awareness that government should extract value from its assets, it marks a profound shift in thinking. Niti Aayog’s policy documents show how the monetisation model can be adopted by state, municipal and rural governments. If the idea catches on, post-pandemic revenue-starved governments across the country can find new resources to finance the higher demands on public expenditure.

Vivek Menezes captures these dangers in his column. It quotes some of my responses too.

I know what you are thinking. What about corruption and cronyism, right? Well, yes, however well-intentioned the policy is, however well-designed the contracts are, they are inevitable. But if we allow this objection to have a veto, then we will only have corruption, cronyism and sanctimony, but no public policy of any kind. The practical solution is make the policy design corruption-resistent to the extent possible, insist on transparency, promote market competition and punish wrong-doers.

A genuine commitment to market competition is the answer to many of India’s economic and social problems. But I do wonder whether such a commitment can be endogenous.

There are sensible things that can be done to prevent egregious outcomes: do not shelter companies from competition, do not give away exclusive rights, do not fix prices. Some of these can be built into contracts, while others are broader statutory and regulatory issues. Monetise assets but do not assign monopolies” is a good rule of thumb.

By leasing out assets instead of selling them outright to private investors the NMP attempts to strike a political middle ground. And this compromise might be its fundamental limitation. As anyone who has rented out a home knows, the tenant somehow takes less care of the property than the owner would like. The friend who borrows your vehicle somehow seems to return it in a poorer condition. Some of this is to do with the psychology of ownership, but some of it is objectively true. Owners and tenants have different incentive structures.

Will government officials have a sophisticated understanding of economic incentives at a granular level so as to structure contracts appropriately? Unlikely. A lot of training in economic reasoning is necessary.

Now the government faces the puzzling situation of ensuring that the private sector lessee maintains the asset to standards the public sector itself is not capable of. Competition and market forces can help to some extent, but the private sector management can just as well decide to cut costs by stingeing on maintenance of an asset it does not own. So the monetisation process should design and allocate assets in a way that the lessee has a natural incentive for their upkeep.

Ownership matters in other ways too. If you decide that your asset is unprofitable, you could split it and sell the parts, reconfigure the them in different ways, merge them with other parts or perhaps even scrap them all. Where such creative destruction is necessary for viability, a long-term lease is a poor substitute for ownership.

We are likely to find that clearly defining the asset and delineating it physically is a tricky affair. Legal and physical boundaries of public assets are often unclear. Most assets are often surrounded by grey areas. The grey areas have well-developed political economies that are invested in the status quo. Questions on asset boundaries and the resolution of ownership of the grey areas can be vexing and time-consuming. Among other things, this will determine the kind of investor who will bid for the asset.

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When considering long-term relationships, getting good investors is more important than getting the highest price. This is something that our administrative system will struggle with. It is zealous about extracting the last paisa but has few ways of ensuring discretion and good judgement.

Pranab Mukherjee’s retrospective tax contributed to the undermining of the Indian republic.

Ultimately, the NMP will deliver public value to the extent that the government shows itself to be a law-abiding player. It is just as well that the ghastly retrospective tax law was done away with before this new policy was announced.

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