On June 28, 2017, the then Finance Minister, Arun Jaitely had announced the ‘in-principle’ decision of the Union Cabinet for strategic divestment of Air India (AI) and five of its subsidiaries.
Over 50 months thereafter, on September 8, 2021, the Government has informed about it decision to privatize AI and its 100 percent subsidiary namely Air India Express Limited (AIEL) and its 51 percent share in Air India Air Transport Services Limited (AIATSL). The iconic Maharaja – as the airlines is nicknamed – has gone back to the hangar of Tata Group almost 68 years after the company was nationalized in 1953. The AI privatization saga reveals four major pitfalls.
First, the move has been half hearted from the day one. This half-heartedness is a manifestation of an inherent tendency amongst the bureaucrats and the political class to retain some controls even after divestment as also to ensure that employees continue to enjoy a protective cover even under the new boss.
The first attempt during 2017/18 came a cropper because in that offer, the Government insisted on retaining 24 percent shareholding with itself, retention of the employees besides imposing other conditions such as a minimum lock-in period of three years etc. An additional rider was a requirement that the acquirer will have to take over a major slice of the debt on the books of AI. The investors showed no interest.
Eventually, the half-heartedness has given way to whole-heartedness even as the Government decided to sell 100 percent of its stake as also letting the acquirer shed employees after one year. It has also allowed the bidders to quote the ‘enterprise value’ – a financial jargon for letting them get away with very little debt on the balance sheet of the divested undertaking.
But, the delay has come at a heavy cost to the Union Government. When, the disinvestment was initially mooted, AI had a debt of around Rs 50,000 crore. According to the secretary, DIPAM (department of investment and public asset management), AI has been making loss of Rs 20 crore per day. No wonder, its cumulative debt has now ballooned to around Rs 77,500 crore.
Second, after a disinvestment plan is taken on board, the scale of indifference to working of the concerned PSU gets perked up which aggravates the deterioration in its financial health. As on March 31, 2021, AI had debt of Rs 58,000 crore (this includes ‘sale and lease back’ or SLB liability Rs 12,000 crore). During the next 5 months till August 31, 2021, additional debt of Rs 3500 crore accrued. Furthermore, the Maharaja has piled up ‘unpaid bills’ of oil PSUs, airport dues and dozens of other vendors aggregating to Rs 16,000 crore.
All put together, AI has liabilities of Rs 77,500 crore. Of this, Tata will pay only Rs 18,000 crore by taking over debt of Rs 15,300 crore and give Rs 2700 crore as equity. That leaves a whopping liability of a minimum around Rs 60,000 crore with the Union Government (this could increase further as and when more unmet obligations come out of the cupboard) which will be transferred in its entirety to a special purpose vehicle named Air India Asset Holding Company Limited (AIAHCL).
The Centre will retain the non-core assets such as land, buildings, housing colony etc which on sale, could fetch about Rs 15,000 crore. Even if all of it is realized (there is a big question mark over this given the complexity and uncertainty involved in the process), the AIAHCL would be saddled with Rs 45,000 crore. This amount will eventually come from tax payers’ pocket and is over and above a whopping Rs 110,000 crore already sunk since 2009-10 to keep it afloat.
Third, bureaucratic red tape rules the roost. Almost all processes starting from conception, getting approvals, Preliminary Information Memorandum (PIM), Request for Proposal (RFP), inviting financial bids, selection of bidder, Share Purchase Agreement (SPA) and so on, crucial to successful completion of disinvestment are hamstrung by it. Add to this, the reluctance of bureaucrats to take timely decisions fearing they might be questioned after retirement.
The sale of AI has not remained unaffected by this malady. Some measures – reportedly under consideration – such as leaving decisions in regard to PIM, RFP and SPA to the DIPAM only (at present, these issues are decided by an inter-ministerial committee co-chaired by secretary, DIPAM and secretary of the concerned administrative ministry) are half-baked reforms.
Fourth, PSUs are often pushed into a ‘loss making’ situation by the political establishment (fully aided by the bureaucracy). This happens because of continuous interference by the latter in the working of these undertakings which is manifest in excessive manpower, high overhead cost, inflated payments to vendors etc. In case of AI, in 2007, it reached its Nadir when the political bosses directed the management to procure 111 aircrafts (for Rs 70,000 crores) which was 4 times the requirement of only 28 put up by the management.
When, a firm creates a huge liability (the aircraft purchases were funded by borrowings from a consortium of banks) with no matching business to put the assets to use, it inevitably leads to an unsustainable situation. The cash generation is bound to be too little vis-à-vis the requirement to amortize the loans. The irony is that then Government did nothing to boost utilization of the aircrafts. Far from that, it gave away excessive bilateral seats and profitable routes to foreign/private airlines thereby ensuring that most of these aircrafts sit idle.
The other flawed decision was merger of Indian Airlines with AI (2007). Even as there was little to gain by way of synergies (mergers are normally driven by this logic), vast differences in the work culture ethos, compensation packages, age profile of employees of the two entities led to operational inefficiencies thereby compounding losses and increasing debt of the combined entity.
To conclude, persistent neglect of AI for over a decade and even during the period when its sale was under consideration has cost the exchequer dear. It is better late than never. By taking a call on it now (the deal is expected to be consummated by December, 2021), Modi – Government has averted more drainage of resources besides garnering Rs 18,000 crore (paid by Tata) plus another Rs 15,000 crore being the value of non-core assets retained by it.
With dozens of PSUs divestments lined up, it is imperative that the Government takes the right lesson from mistakes of the past – as discussed above. That will help maximize realization from the sale of profitable undertakings and minimize the liabilities arising from abandoning the loss making ones.
For instance, in case of AI, if only it had acted with alacrity in 2017/18 offering to offload 100 percent shareholding and no other encumbrance, it could not only have prevented further increase in debt but also successfully leveraged its lucrative assets (apart from 141 planes, it controls 4,400 domestic and 1,800 international landing and parking slots at domestic airports, as well as 900 slots at airports overseas, besides ownership of iconic brands like Maharaja) to secure a much higher valuation thereby reducing its burden.
Let us hope, henceforth Modi goes for a wholehearted approach and with a proactive and supportive bureaucracy, he gets much better outcomes from sales in the pipeline.