🤔 Why is the Government Renting Land?
The government is failing to meet its disinvestment targets and is looking at a new revenue stream: renting land. (Reading Time: 3 mins)
Real estate is amongst India's favourite investment classes.
Institutional investors poured in $4.2 billion, whereas NRIs bought real estate worth $13.1 billion.
It is this enthusiasm to own more and more land that is set to take the Indian real estate industry to a market cap of $1 trillion by 2030.
And based on this enthusiasm, the government is launching the National Land Monetization Corporation.
What's that? ReadOn to find out!
Purpose of the National Land Monetization Corporation
The Indian government, like the Indian people, is also fond of land.
It owns around 13,505.44 sq km of land in India, which is divided between several central public sector enterprises (CPSEs) and ministries.
That's about nine times the size of Delhi.
The government has been buying all this land to boost infrastructure development but now quite a lot of it (approximately 9,510 sq km) is just lying unused.Â
So, why not put it up on rent or lease?
That's exactly why the National Land Monetization Corporation (NLMC) was born.
To strike deals with the private sector to convert this idle land into a resource for the government.
It has been allocated an authorised share capital (maximum amount of money for which shares can be issued) of Rs 5,000 crores and paid-up share capital (amount of money already received from shareholders) of Rs 150 crores to start with.
Plus, CPSEs have also identified 3,400 acres of land that the NLMC can start leasing or renting out.
So, it is almost ready for business.
It can now invite public investment in these lands through Real Estate Investment Trusts.
Also, if a particular private player finds a government plot or building particularly useful, they could consider buying it from the government.
This could help the government sell off a CPSE's asset and strategically divest it or shut it down.
But why set up a separate company for leasing land?
Well, the government feels that NLMC will be able to strike deals faster if there is no government bureaucracy involved.
Benefits of Asset Monetization
Okay. Looks lucrative. But why did the government suddenly come up with this idea?
You see, India is already the sixth-largest country in terms of government spending ($330.52 billion).
However, we are still a developing country, and we need massive amounts of investment in infrastructure to achieve our goal of becoming a $5 trillion economy.
So, why not use the existing infrastructure to generate more revenue and create more infrastructure?
India is not the first country to think of this plan. Many other countries like Australia are also recycling government infrastructure to make full use of it.
And, well. Land is not the only asset that the government is planning to monetize.
Under the four-year National Monetization Pipeline launched last September, the government has also devised plans to utilise other unused core assets like roads, railway stations, and airports.Â
How? By leasing them to the private sector.Â
Yes, the government has come up with several models like operate-maintain-transfer, toll-operate-transfer.Â
Under these models, a private sector enterprise can lease an airport or a road, contribute towards its management and earn money from its operations.
Okay, we get airports. But how do you earn money from a road?Â
By setting up a toll booth.
Sounds simple, no?
All in all, the plan has the potential of earning Rs. 6 lakh crores for the government.
The move highlights the government's growing push to bring in the private sector to govern public assets.Â
Plus, this way the government does not have to divest off all its public sector enterprises.
A win-win?
In theory, yes. But in real life, the plan has many flaws.
For instance, the government has no way of determining whether the private sector will be interested in a particular government core asset. Some rural swathes of land may even be useless for businesses and may not attract any bidders.
This is exactly why the auction of railway routes last year was a failure.
It attracted several bidders but ultimately, no one was interested in leasing the railway routes for a 35 year period.
So, the auction was just a waste of time and effort.
Second, it is very difficult for private players to determine what the appropriate bid for such a long term investment should be. For example, if another lockdown is announced tomorrow, the company that bid on railway routes would lose out a lot of money. So, it becomes difficult to quantify the fair value of the contract, no?
This dilemma could also put off many investors.
Also since they have to ultimately return the asset to the government, there is no incentive to develop the asset or maintain it efficiently. This could come back to bite the government later.
Most importantly, the entry of private players in this public sector environment may pinch our pockets. For instance, roads that were initially free to travel on could now have heavy tolls. Railway ticket prices could be increased by the players to get the most out of their investment.
So, ultimately we could have to bear the cost of asset monetization.
Nonetheless, the proposal has promise. Now the future depends on execution.
Do you think asset monetization is a good idea?Â
Let us know on Twitter.
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