By Mythili Bhusnurmath
Merely because we have failed to turn AI around in the past, it does not mean we should compound the error and settle for a distress sale. It is better to bide time.
The best laid schemes of men and mice oft go awry. This oft-quoted line from English poet Robert Burns’ ‘To a mouse’ might have been written for the much-awaited, much-debated stake sale by the government in the national carrier, Air India (AI). With less than a month left to go before the deadline (May 14, 2018) for the submission of EOI (expression of interest) and domestic airlines showing no interest, the government’s much-vaunted plan seems headed for an ignominious end. Despite the fact that, unlike most disinvestments where the government, typically, sells a small stake, here it is willing to cede control, reducing its stake to just 24 per cent, post divestment.
So why are there no takers for what was once regarded as the jewel in the crown and cherished as the Maharaja? What ails the Maharaja and, in turn, is apparently souring the offer government has put on the table? Does the plan need a ‘recalibration’, as an un-named government official is quoted as saying in a news report? What kind of ‘recalibration’? Is there a fine line between being flexible and conceding too much? A danger of being carried away by the (mistaken?) view that privatization will be construed as a measure of government’s commitment to reform?
There are no easy answers. Most, apart from Leftists caught in time warp, will agree there is no case for the government to run an airline. More so, one that’s been losing money hand over fist for years now and needs costly infusion of scarce taxpayer resources to stay airborne. Remember, AI has been the subject of not one, but many attempts to turn the airline around; the latest being the turnaround plan approved by the previous UPA government, under which Air India was to receive a bailout package of up to Rs 30,231 crore for a period of 10 years, starting 2012.
However, all that changed with the new government. With the airline not showing any sign of improvement despite infusion of funds and Niti Aayog opining that ‘further financial support to an unviable non-priority company in a matured and competitive aviation sector would not be best use of scarce financial resources of the government’, the die was cast.
In what was hailed as a landmark decision, in June 2017, the Cabinet approved strategic disinvestment of the airline. The government, it was announced, would sell 76 per cent in AI, after hiving off a substantial amount of debt to a special purpose vehicle, along with 100 per cent stake in Air India Express and 50 per cent stake in Air India SATS Airport Services Pvt Ltd, a joint venture services company managing airport logistics. Only to find that, contrary to expectations of huge investor interest, the announcement seems to have left potential buyers cold.
So, what are the sticking points? Principally, two, (apart from the huge debt): one, the 24 per cent stake that the government intends to retain, post divestment, and two, the employees. Take the first. It does not take much intelligence to realize that no potential buyer will relish the idea of the government retaining 24 per cent. True, company law requires a minimum of 26 per cent to block special resolutions, so the scope for interference is limited. Nonetheless, this is unlikely to reassure potential investors. Governments are not like other shareholders. They can, and do, interfere even with much smaller stakes.
Agreed, the bid document does contain a clause that the government will sell the balance 24 per cent ‘in time’. However, ‘in time’ has not been defined. Granted, the aviation sector is notoriously cyclical and few airlines anywhere in the world have made profits on a sustained basis. So, it is extremely difficult to specify a timeframe upfront. But the alternative of leaving it open-ended is just as problematic. Especially given government’s track record in strategic divestments like Balco and Hindustan Zinc Ltd, where the government residual share is yet to be transferred.
In that case, is selling the entire stake, ie 100 per cent rather than 76 per cent a better option? On paper, the argument of retaining 24 per cent is that the government will be able to cash in on the upside of a higher share price once the airline is listed. In practice, however, it is not possible to quantify the likely gain from selling 24 per cent later or the higher price one might get from selling 100 per cent today. At the same time, a bird in hand is worth two in the bush; especially when oil prices are on an upward trajectory. So, there is a strong case for the government to exit, totally.
The second sticking point, AI’s huge staff, is just as tricky, if not trickier. Any potential buyer is bound to want a free hand to deal with the, admittedly, bloated staff strength. But can a government, especially one that is headed for elections in little over a year, afford to antagonize powerful labor unions by giving potential buyers a free hand to rationalize (retrench?) staff? Will the promise to give stock options to employees act as a sweetener? A generous VRS (voluntary retirement scheme) could be an option. But how will it be funded?
Again, there are no easy answers. What is certain is that some flexibility in the terms and conditions is essential if the sale is to elicit greater interest. What is also certain is that given the tepid response, the proposed timelines — selecting the winning bid by September 2018 and completing legal transfer of ownership by December 2018, are both unrealistic and overly ambitious.
Yes, as Jitendra Bhargava, former executive director, AI, and vociferous advocate of complete government exit, says, “For last two decades, the Air India’s turnaround plan failed to work. This is the perfect time to disinvest as the airline will only go from bad to worse in future if it remains under bureaucratic control.”
But what if the present proposal does not attract meaningful bids? Should we act in haste and sell the Maharaja for a song? As the experience of Alitalia and Japan Airlines has shown, there is no guarantee that once an airline is in private hands, the government will be able to wash its hands off and let it sink if it is no longer viable. Merely because we have tried and failed to turn AI around in the past, we should not compound the error and settle for a distress sale. Having waited so long, it is better to bide time. By all means sell AI, fully. But make haste, slowly!
(The author is an economist and former central banker)