Asset monetisation plan must meet 3 prerequisites to succeed

Whether or not the government succeeds will depend on how successfully it controls the bureaucracy involved in the scheme.

The better a government’s policy is, the louder the Opposition shrieks. This is a written-in-stone rule. It’s true of all governments, always, wherever there is a real Opposition. 

The latest example in India is the government plan for leasing out publicly owned assets--in many cases that description is a joke--to the private sector. 

The deal is actually very simple. The government is saying to the private sector: “We will hire out things that we don’t use at all or don’t use very well. You run it and pay us according to whatever payment plan we both agree on”. 

This is like when people who own flats or houses that fetch no rent but cost to maintain rent them out, they rent them out.

A lump-sum advance payment is required. After that the tenant stays for the period of rent agreement, paying the owner according to the terms agreed upon. This puts the burden of using the asset efficiently on the lessee. This is how palace and fort hotels, to give just one example, make so much money. 

The pompous sounding asset monetisation plan is as plain vanilla as that. In its simplicity lies its charm. It’s not PPP, as the Grand Vazirs of infrastructure are saying. Excellencies, it most emphatically is not “PPP by the side door.”

Meanwhile, Congress-loving economists are saying it’s a good plan but hard to implement. Others, too, have said the same thing in different ways. 

This is because similar ideas in the past had been appropriated by the Congress cronies. The period 2005-10 is littered with their wrong doings. The huge NPAs, for example, are because of that. 

But the BJP knows that outright privatisation is dead in the water. No one has that kind of money. So why not lease out?

Three prerequisites 

That said, successful leasing depends crucially on three things. One, a fair agreement; two, contract enforcement; and three, an insistence and observance of the doctrine of promissory estoppel. 

Fairness: This basically means that the weaker party to the contract has a 50:50 chance of delivering. It’s what’s called a level-playing field. But how do you determine fairness? Economists have given this a lot of thought and there are many ways of deciding whether an outcome is fair. 

But to the best of my admittedly limited knowledge, there is no fool-proof method of determining if a process is fair. And this is the real challenge before the Modi government. 

It would do well therefore to consult some good theoreticians who ought to participate in the drawing up of contracts. Bibek Debroy is a good name to start with. 

Enforcement: This requires a simple deliverable, like pay so much money every month or quarter or half-year or year. As long as the contract is kept simple it will be self-enforcing. 

Here, what the growth economist William Easterly once described as the “dead hand of the bureaucracy”, must be kept at bay. These guys can, and will, ruin any arrangement. That's their unique skill. 

What the government must do is to gather business people, lawyers and economists and ask them to help without any babu causing trouble. 

Promissory estoppel: Finally, the government must explicitly commit to observe this principle, which says that if one of the parties to a contract has fulfilled its part, the other side must do the same or pay up. 

Our central and state governments have been utterly cavalier about this, largely because of arrogant and ignorant babus with no skin in the game. 

That’s why in the end whether or not the government succeeds will depend on how successfully it controls its servants. 

The rest, as they say, is a matter of detail.