Air India Privatisation: Lessons from the Past
The decision to privatise Air India (AI) is absolutely well-timed. A large swathe of the Indian middle-class is increasingly impatient at having to foot the bills for excesses and corruption of politicians, policy-makers, bankers and others. Let’s face it; we have been carrying the burden of this white elephant for a long time without realising it, since bailout funds released by the exchequer cannot easily be correlated to increased taxes. 
 
The government has decided to set up a committee, headed by finance minister Arun Jaitely, to explore disinvestment options for Air India and its five subsidiaries and decide the quantum of divestment (100%, 74% or 51%). The Tatas, who founded and built AI into a top airline (only to have it nationalised by prime minister Nehru in 1953) are, naturally, front-runners to acquire the now bloated and troubled airline. However, it is important that the National Democratic Alliance’s (NDA’s) mistakes (in 2002) should not be repeated this time around. 
 
For starters, AI owns prime properties around the world which need to be liquidated to reduce its gargantuan debt burden of Rs52,000 crore and make it more attractive. AI has been making losses for a decade and is living off a Rs30,231-crore bailout sanctioned by the United Progressive Alliance (UPA) government in 2012. Nearly Rs24,000 crore of this has been disbursed without even a plan or effort to reduce the debt burden. Over time, its market share has shrunk to 14% of the domestic traffic and 17% of the traffic from India. 
 
The UPA government was primarily responsible for pushing AI deep into the red through the reckless purchase of aircraft. The Central Bureau of Investigation (CBI) is understood to be investigating those deals. But three years after the NDA has taken charge, there is still no attempt to cut costs, shed assets and reduce the taxpayers’ burden. Consider this. As recently as May 2017, the Times of India reported that AI had floated a Rs3.5 crore tender to convert its iconic building at Mumbai’s Nariman Point into an art-museum to house its precious art collection which, apparently, includes the works of VS Gaitonde, 
 
MF Husain, B Prabha, Anjolie Ela Menon, KH Ara etc. These are paintings that would fetch crores of rupees each, not to mention over 2,000 pieces of antiques, sculptures and woodwork. Along with the sale of the AI building, it would have ensured a significant cut in bailout funds. It is only last week that the museum plan was finally shelved. 
 
Unlike the UPA government, we can be fairly sure that the NDA will move forward with AI’s disinvestment in a determined manner. They did it under prime minister AB Vajpayee, with Arun Shourie as disinvestment minister. Unfortunately, zeal and speed alone are not the best way to realise good value for the family jewels. Some of the decisions of 2002 became controversial and gave the appearance of a fire-sale. Worse, the disinvestment ministry flatly refused to bar companies that had defaulted on loans from public sector banks and institutions from the privatisation process. In effect, the government was willing to give them valuable public sector units (PSUs), when they were unable to repay the existing loans on their primary business. 
 
Blunders of NDA 1
 
As India gets ready for a massive disinvestment exercise, it is worth revisiting the blunders last time, to ensure that they are not repeated. It is important to recall that AI was referred to the disinvestment commission headed by GV Ramakrishna way back in 1998 when its problems were significantly smaller and could have been fixed with a capital infusion of Rs1,000 crore and induction of a strategic partner through global bids, followed by a public offering. This was before the disastrous merger of AI and Indian Airlines, which only damaged its finances and adversely impacted staff morale. 
 
The disinvestment commission then recommended the sale of Centaur Hotels at Mumbai and Delhi owned by AI’s subsidiary, Hotel Corporation of India Ltd (HCIL), by separating them from the parent company. This was quickly accepted by the NDA regime followed by controversial divestments in 2002 that realised a pittance of the real value of these valuable properties. Such disinvestment only transfers substantial public wealth to private hands. The Airport Centaur was a prized property contiguous to the Mumbai airport. The Juhu Centaur is a 6-acre asset in one of Mumbai’s poshest suburbs. And, yet, no global hospitality chain found it worth making a financial bid and both hotels were sold to single-bidders who seem to have ignored restrictive terms and later managed a dilution. 
 
Airport Centaur, along with a strategically located petrol pump, was acquired by an unknown entity called Batra Hospitality Pvt Ltd (Batra) for a mere Rs83 crore. This was below the base value of Rs92 crore fixed by JP Morgan. The terms of the bid were repeatedly improved in favour of the buyer without calling for fresh bids. Just four months after the sale, Batra flipped the hotel to the Sahara group for Rs115 crore along with the petrol pump. The shadowy group then proceeded to expand and remodel the Hotel by acquiring questionable development permissions. Sahara’s political muscle ensured that all questioning voices were soon silenced and the beleaguered group is now in possession of a hugely valuable property. 
 
Juhu Centaur was sold to a financially unstable consortium headed by Ajit Kerker, former managing director of the Taj group of hotels, for a low Rs153 crore (a report of the comptroller and auditor general of India claimed that an earlier valuation of the property was significantly higher). It got repeated payment extensions and was also shut down due to labour problems for long periods, defeating the very purpose of selling the Hotel as a going-concern. In all the 15 years since disinvestment, Tulip Star (its new name) has been embroiled in litigation and financial trouble. In December 2013, an asset reconstruction company had put it up for sale at a reserve price of Rs1,315 crore, after the loans extended by public sector banks for the acquisition turned bad. The loss-making Hotel remains unsold. Juhu Centaur would surely not have done any worse under AI and real estate appreciation may have offset losses. The sale of Udaipur’s Laxmi Vilas Hotel, a 29-acre property belonging to the Indian Tourism Development Corporation (ITDC), which was sold at a paltry Rs7.52 crore to Bharat Hotels Ltd, was also highly controversial. 
 
Let’s look at the Tatas’ previous experience with disinvestment. They acquired a 25% stake in Videsh Sanchar Nigam (VSNL) in 2002 and picked up another 20% as part of an open offer. The sale agreement included the transfer of 740 acres of surplus land valued at over Rs6,156 crore (in 2009)  to a separate entity. This has still to be formally completed, even after an astonishing 15 years, because of a lack of clarity over tax issues. Will the AI disinvestment avoid such minefields? 
 
As taxpayers, who have funded AI’s bailout, we need to watch how the government goes about valuing and selling AI. Jitendra Bhargava, former executive-director of AI, turned whistleblower, says, AI still has extremely valuable assets in its subsidiaries such as AI Engineering Services Ltd, AI Transport Services Ltd, Alliance Air and AI Express. The committee handling disinvestment must ensure that each subsidiary is unbundled to extract full market value through a transparent process. Besides, the bilateral rights that it still holds as a national carrier must be properly valued. More importantly, let there be no fake privatisation with loss-making public sector banks funding private sector acquisitions.
Comments
Silloo Marker
7 years ago
J.R.D. Tata who was so fond of the airline he helped establish must be turning in his grave at the goings on. Public money needs to be used in a more transparent manner and the sale of the remaining assets of Air India should be handled with all details put up in the public domain for suggestions and objections.
Ramesh Poapt
7 years ago
execellent!
Samir Shah
7 years ago
There is little doubt that if the NDA had not divested VSNL, today it would be another MTNL, feeding off tax payer scraps. IPCL would have been another HOC. Companies with no vision, no plan, no way to match the intensity and agility of private players in their domain. PSU's in India are profitable only when they have a monopoly, or a significant first mover advantage, or a cost plus pricing (with other govt owned entities being the primary customers).
Samir Shah
7 years ago
It was a long time ago, and my memory is hazy. But at least part of the reason why the divestment program of NDA I failed to attract many bidders is because the sale process was fraught with potential legal challenges, and it was not at all clear to really serious players that they would bid for a divestment asset, and then instead of celebrating the win, they would be mired in all manner of accusations and legal challenges and CBI enquiries. So the sale process (especially of the hotels) attracted shady operators
Samir Shah
7 years ago
Valuation done before or after the sale is an opinion. The price realized in an open, transparent auction is fact. What can be criticized is the auction process. Not whether price determined through the auction matches some valuation exercise.
Samir Shah
7 years ago
When one is considering divesting public assets, especially those which have been mired in losses for taxpayers, one should consider more things than the price one gets for the asset. Needless to say, there must be a transparent auction of the asset (or company). However, the real test then is not the value extracted by the buyer or the government. It must be a) Whether the asset's operational performance has improved significantly post privatization, b) Whether the sale has improved the "real" competitive intensity in the market (For example, for airlines today, Air India is not competition. It is a bunny). c) Whether tax payer liabities towards the asset have actually ceased
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