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Air India disinvestment: Are we Learning Lessons in Privatization?

Banks and asset reconstruction companies are saddled with large number of such complex assets. When there is a huge difference between the book value and market value who will take the hair-cut?

Dr. Pallavi Mody | August 21, 2017 | Updated 16:56 IST
Air India disinvestment: Are we Learning Lessons in Privatization?

Nationalization and privatization are the two alluring terms between which the pendulum of political economies swings. Governments, committed to welfare, not only nationalized existing businesses but also invested huge sums of money in post-war period.  Winds of privatization blew in 1980s with Ronald Reagan and Margaret Thatcher at the helm in US and UK respectively. Privatization for efficiency remained their motto.

Ms. Thatcher during her term as PM (1979-1991) initiated the privatization boom, which was emulated around the world. During her term, more than 50 companies were sold or privatized raising more than 50 bn pounds for the exchequer. The interesting names were British Petroleum, British Telecom, British Airways, Jaguar and Rolls Royce. Mr. Reagan during his term (1981-89) too saw privatization of airports, railroads, power agencies and weather satellites.

Nationalization of businesses like airline, banking and insurance and massive public investment in basic and key industries defined socialist tilt of the government in post-independence India. However, the operational efficiency of Public Sector Enterprises (PSEs) remained suboptimal. The PSEs were often compared with white elephants that survived on tax-payers money.

Privatization of Public Sector Enterprises (PSEs) was an important pillar of the agenda of 'Reforms of 1991'. 26 years down the line, the government of India has been struggling to find a policy that works. The slogans like 'it is no business of the government to be in businesses' have a lot of appeal but falter at the level of execution.   

Privatization or disinvestment as it is called in India has followed three distinct routes.  One, government has sold a part of the equity of the PSEs and listed them on the stock exchange. More than 32 PSEs and 20 public sector banks in categories of Navratna, Maharatna and Miniratna form the PSE Index stocks. By granting operational autonomy to these profitable PSEs like HPCL, BPCL, BEML, Coal India and SBI - the government has retained majority ownership and the income in form of dividend.

The second route has been the outright sale or strategic disinvestment of PSEs. Government has so far sold 10 PSEs through this route.  The noteworthy names include IPCL to Reliance, VSNL to Tata Telecommunications, Hindustan Zinc to Vedanta and Modern Foods to Hindustan Lever. Cabinet approval to sell Air India is a step in this direction.

The third route has been shutting down and liquidating the PSEs where the market value is low. About 17 PSEs have been closed down. Bankruptcy and insolvency code passed in 2016 would help shut down further the unviable businesses.

Air India is amongst the oldest PSE of India. JRD Tata established Tata Airlines in 1932 which was renamed as Air India in 1946 and was nationalized in 1953. Air India for international and Indian Airlines for domestic operations enjoyed monopoly over Indian skies during the period 1953-1991.

With economic liberalization of 1991, government followed 'open sky policies' and the aviation sector was opened to private players. Several Full Service Players (FSA) viz. Jet, Sahara, Damania and Modiluft as well as Low Cost Carriers (LCC) viz. Air Deccan, Go Air and IndiGo entered the aviation space. The aviation market witnessed tough competition between FSA and LCC and ensuing price war. The government decided to consolidate Air India & Indian Airlines in 2007 to take the advantage of the synergy. However the flagship airline of India could not compete against the new and nimble airlines. Air India's market share dwindled to 13%. The airline has been surviving on public money.

Indigo, the largest passenger airline of India with 41 per cent market share got excited and registered the intent to buy. However within a week, there was change of heart. The airline changed its position. Indigo made it clear that it was interested only in international division and LCC arm of Air India. Indigo further clarified that any partnership with government was not acceptable. There has been no other serious contender.

The task of strategic disinvestment of Air India is complex. The balance sheet of Air India is not only debt-ridden but has some unusual assets.  Air India showed the traits of Raja Maharaja, over the years there has been huge collection of artwork in form of sculptures, murals and paintings. Valuing these assets is a challenge. The other valuable assets include premium commercial space in major cities in India as well as London, Tokyo and Hong Kong. Air India owns prime slots of the takeoff and landing at the major international airports. Air India's association with Star Alliance that provides global connectivity to the airline too has commercial value.

If no serious buyers turn up, what are the options with the government? Will the government take the third route of shutting down and liquidating assets? How will government recover value from these unusual assets? Banks and asset reconstruction companies are saddled with large number of such complex assets. When there is a huge difference between the book value and market value who will take the hair-cut?

The writer is Professor at SPJIMR. Views are personal.


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