In a world where governments, including the Bangladesh government, face challenges in mobilising resources to invest in infrastructure and income generating assets, the idea of asset recycling (or capital recycling) has become an attractive idea or an alternative public investment option. The idea of asset recycling is similar to the idea of property portfolio management where proceeds from sales of some properties in a portfolio are used to finance purchases of new properties. From an individual investor's point of view it only involves rebalancing a share portfolio without involving additional finance. The basic idea with public assets is the same; sell or lease some existing public assets like state-owned business enterprises or ports to private sector buyers and reinvest the sale proceeds into new assets like urban transport networks, new airports or roads.
Asset recycling can create opportunities for new investors to invest in various sectors in the economy including infrastructure. The asset recycling initiative will leverage a significant increase in private sector participation by investing in assets previously owned by the government. Over time these investors are likely to increase their investment in these newly-acquired enterprises to grow and expand their market share. All sale proceeds are to be directed by the government towards building new asset portfolios where private investment is not forthcoming. This has become more so where the private sector's willingness to take risk has significantly diminished following the global financial crisis (GFC). In a situation where Bangladesh, like many other counties, faces constraints to borrow to invest in income-generating assets, asset recycling can be an attractive alternative option.
It is well-recognised that the public sector has much higher ability to take demand risk than the private sector for some types of projects, such as ports, airports and railways. Public investment in those types of projects can enable the market to mitigate demand uncertainty in either way. If they turn out to be commercially profitable and generate steady income, then they can be sold off at a profit. But the government must make those investment decisions on a very realistic project evaluation as in a country like Bangladesh political consideration creep into making such decisions.
However, it must be borne in mind that when assets are sold and proceeds are used entirely to repay public debt, net public sector debt will remain unchanged. At the same time the use of sales proceeds in part or in full to pay for current expenditure, tax cuts or non-commercial infrastructure will increase net public sector debt. Here the key message is asset recycling must be applied only and exclusively to investment in new income-generating assets, which will result in a sustainable process of maintaining public assets, even enhance their value rather than liquidation of public assets. Such strict criteria involved in the concept of "asset recycling'' distinguishes it from privatisation or public-private partnership.
The contribution of public enterprises in Bangladesh to gross domestic product (GDP) is quite substantial accounting for close to 20 per cent. There is a very high level of administrative control by the regulatory ministries over these enterprises, thus the corporate governance structure remains extremely weak. While these enterprises are required to prepare annual reports and financial statements, they are not usually available to the public. There is lack of transparency in decision making as well as lack of accountability in these enterprises. Public enterprises also have very close ties with the government, therefore the party in office can exert significant influence over appointments of chief executives and members of the Board of Directors of these enterprises.
In some instances public enterprises in Bangladesh have a different purpose, mission and objectives which relate to some aspects of public service and social outcomes. But even under those circumstances, if best practices in corporate governance are not applied, that may cause diminished market value of those enterprises. The utmost concern relating to public enterprises in Bangladesh include issues of corruption, bribery and inefficiency. Therefore, increased exposure to competitive market forces can go a long way to mitigate those issues of concern.
Given that there is a desperate need to build infrastructure to keep the growth momentum going but lacking the ability to mobilise enough resources through the budgetary process , asset recycling remains the most viable option for the Bangladesh government to undertake those infrastructure investment without borrowing as public borrowing has also become increasingly difficult for a number of reasons. Public ownership in Bangladesh is quite widespread extending to sectors such as manufacturing, energy, water, transport and communication, real estate and construction, agriculture and banking and finance. The extent of ownership of public enterprises within these sectors varies from wholly owned to minority ownership. But public enterprises in Bangladesh also operate under a varied competitive market conditions.
The criteria to be used to recycle assets will largely depend on the market structure within which these public enterprises operate. Where public enterprises operate in a competitive market structure, the changes to the ownership should not have any effect on market outcomes in terms of price and quantity supplied, e.g., state-owned enterprises (SOEs) in the manufacturing sector. In effect, the government could ask for and realise full market value that would prevail under private ownership. In industries, where public enterprises exert significant market power (i.e., able to determine prices or supply), transfer of those assets to private ownership will require instituting effective regulatory regime to insure safeguarding public interest, e.g., electricity generation and transmission and gas supply. Industries in the second category currently have no effective regulatory framework. Then there are SOEs cutting across a number of industries who provide what can be considered as essential products or services which are supplied not always at market prices. These products and services are provided to mitigate economic distress experienced by middle or low-income groups. These enterprises will be hard to transfer to private ownership. This group of public assets can create structural constraints.
Bangladesh government is a very large real estate owner not only in the major urban centres like Dhaka and Chittagong but also across the whole country. Most of these real estates are largely geared towards providing accommodation to public servants on a very concessional rate or free. Given that the compensation packages for public servants are now almost in line with those in the private sector or even better in some instances, such fringe benefits (I presume such fringe benefits as concessional rent or free housing are also not taxable) given to them go against the basic principle of equity and fairness because private sector employees have to compete in the market for rental accommodation while public servants are protected from the competitive market forces. This creates serious distortions in the property market, in particular rental market. It also creates serious distortions in the labour market by distorting the incentive mechanism. These public assets can earn massive financial gains to the government if public properties are sold off at the current competitive market prices, and that can open up enormous opportunities to reinvest in building and upgrading schools, hospitals, universities, vocational education centres, rail and road transport and public housing for the poor.
In the overall scheme of things as the situation exists now in managing public enterprises in Bangladesh, asset recycling is potentially a worthwhile policy option to reconfigure public assets. This will shake up the management of public enterprises resulting from increased exposure to market forces and at the same time, this can be an additional tool to undertake new investment in infrastructure and other worthwhile projects. But there is always a danger that the sale proceeds may be spent on projects to garner electoral support or on projects that will not pass the normal cost-benefit test.
Muhammad Mahmood is an independent
economic and political analyst.
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