HLL Biotech, a government-owned company, has a state-of-the-art vaccine manufacturing plant near Chennai. It has been mothballed since 2012. Last week, the Supreme Court heard a petition pleading the court to direct the government to use it to produce Covaxin, amid the current shortage. Across the country, public assets like roadside parking slots, municipal grounds and advertising surfaces are free-for-all, often captured by the rich, powerful and unscrupulous. The 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 may not be visible to accountants but is 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. Yet, oblivious to their own wealth, or unable to monetize it, India’s governments rely on taxes and devolved funds to fill their coffers.
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.
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 the government should extract value from its assets, it marks a desirable shift in thinking. Niti Aayog’s policy documents show how the monetization model can be adopted by state, municipal and rural governments. If the idea catches on, post-pandemic revenue-starved governments across the country could find new resources to finance higher demands on public expenditure.
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, corruption is 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, therefore, is to make the policy design corruption-resistant, insist on transparency, promote market competition and punish wrong-doers.
‘Monetize assets but do not assign monopolies’ is a good rule of thumb. There are sensible things that can be done to prevent egregious outcomes: Do not shelter companies from competition, do not give away exclusive rights and do not fix prices. Some of these can be built into contracts, while others are broader statutory and regulatory issues.
By leasing out assets instead of selling them outright to private investors, the NMP strikes a middle ground between statists and reformers. But this political compromise might be its biggest economic 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.
Now the government faces the remarkable situation of ensuring that a private-sector lessee maintains an 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 skimping on the maintenance of assets it doesn’t own. So the NMP implementation should allocate assets in a way that the lessee has a natural incentive for their upkeep.
Ownership matters in other ways as well. If you determine that your asset is unprofitable, you could split it and sell the parts, reconfigure 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 also likely to find that defining an asset clearly and delineating it physically is a tricky affair. The legal and physical boundaries of public assets are often unclear. Most assets are often surrounded by grey areas. These grey areas have well-developed interest groups that are invested in the status quo. Questions on asset boundaries and the resolution of ownership of grey areas can be vexing and time-consuming. Among other things, they will determine the kind of investor who will bid for the asset.
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.
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. It has a better chance now.
Nitin Pai is co-founder and director of The Takshashila Institution, an independent centre for research and education in public policy