Apart from ensuring efficient operation, the sale of Air India will provide major fillip to disinvestment target and open the floodgates for further privatization

The biggest news on the economic policy front recently has been the privatization of Air India. This has happened after years of debate and discussion and efforts made by various governments to do something about Air India which had become an albatross around the neck of the government. In 2001, an effort was made to offload 40 per cent of the equity of Air India to the private sector whereas in 2018 this was raised to 76 per cent. Both these efforts failed because they focused on disinvestment and not complete privatization. This meant that the private sector would always have the Government as the big brother breathing down their neck. Moreover, the bid parameters prepared on both these occasions did not take into account the sensitivities of the private sector. The reason behind these moves was that the Government was still not prepared to let go Air India and was concerned about the political ramifications of privatization. Moreover, the bureaucracy always has the propensity to play safe and they formulated the terms and conditions accordingly. Notably, 2018 was very close to the 2019 general elections and it is never possible to go for large-scale structural reforms close to an election.

Having come into power with a comfortable majority, the current government embarked upon a clear path of reforms. Finance minister, in her budget speech, clearly outlined growth as an objective to be pursued and stated that privatization of public sector units would be one of the priorities. The Government mentioned that it would go ahead with privatizing two public sector banks this year, and divide the public sector units into strategic and non-strategic sectors, also mandating that the latter category would be privatized. Air India was on top of the list but there were enough sceptics who doubted the will of the Government as well as the capacity of the bureaucracy in implementing these measures. However, the events have proved the doubters wrong and Air India has been sold to the TATAs. As Ratan Tata tweeted, it was like a ‘homecoming’ because the Government had taken over the airlines which had been set up by the TATAs. I read somewhere that JRD Tata had told the then minister, Jagjivan Ram, that the government would not be able to run the airline properly as it required a skill set very different from that required for running government departments. Future events clearly showed how prescient JRD Tata was. Mr Tata was retained as the chairman, and for a couple of decades, Air India performed creditably well as one of the best airlines in the world. However, over the time the inefficiencies of the government working culture led to the decline of Air India. After 1991, the spurt in the number of private sector airlines further worsened the situation for Air India. The 2007 merger between Air India and Indian Airlines also turned out to be unsuccessful.

Since 2009-10, Rs 1.10 lakh crores has been pumped into Air India. It has been argued on various platforms that this amount of taxpayer’s money could have been utilized much better if spent on sectors like education and health. In fact, the secretary of the department made a statement that the government was losing Rs 20 crores every day while running Air India. The net worth of Air India was minus 44,000 crores. A pragmatic privatization plan was prepared where, out of the cumulative debt of Rs 61,562 crores as of August 31, 2021, the Tatas would be taking over a debt of Rs 15,300 crores and the remaining Rs 46,262 crores will go to an SPV called Air India asset holding company. The government expects to retire Rs 14,000 crores of this debt through monetization of assets as per the newly declared policy of the national monetization pipeline. In addition, the government will get Rs 18,000 crores. This amount, by itself, would not be sufficient to help the government to achieve its disinvestment targets of Rs 1,75,000 crores for 2021-22. At the moment, only Rs 9,111 crores has been achieved through disinvestment. The story of the last two years had been similar, where against the target of Rs 2,10,000 crores for 2020-21, only Rs 32,847 crores was achieved whereas for 2019-20 only Rs 15,297 crores was achieved against the target of Rs 1,05,000 crores. It can be seen from the figures that so far the government has not been very successful with its disinvestment plan. However, Air India privatization would give a major fillip to the entire process of disinvestment. Many more such deals are likely to be made in the future. The Shipping Corporation of India, BPCL and BEML, are some of the corporations next in the line for privatization.

It will be interesting to see how the TATAs can turn Air India around. It is not going to be a cakewalk as there is enough competition in both the external and the domestic aviation sector, with Indigo cornering as much as 57 per cent of the market share in the domestic sector as compared to about 13 per cent of Air India. There is no doubt that a large infusion of capital will have to be made by TATAs to improve the level of services to make the airline profitable. The TATAs can do so but it will take time and an influential leadership. The employees of Air India need to be handled tactfully. In recent years, Air India has offered VRS schemes and has reduced the number of their employees from around 27,000 to 13,500 and the employee per aircraft ratio from 221 to 95. There is a long way to go from here. A system of performance-linked rewards should be introduced for the employees and facilities put at par with those prevalent in the rest of the industry. The private sector will be able to take decisions in a much more commercial manner than it has been possible for Air India as a public sector corporation. Tatas are today running two airlines in joint venture – Air Asia and Vistara and none of the two are earning profits. In any case, the situation is likely to be better than it is today.

Privatization of Air India is a major economic reform that has been made possible by a strong political will and leadership, and initiatives taken by the top bureaucracy. Credit must be given to the Secretary of DIPAM and his team for successfully carrying out this reform. It is a feather in the cap of the Civil Service as well. It also indicates the government’s determination to proceed further with its policy of reducing the role of government in the economy. It augurs well for the future.

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NMP is indeed a bold reform initiative but its effectiveness will depend on how the structural impediments are removed and unemployment challenge is averted

The Union Budget for 2021-22 clearly brought out that the economic policy of the government is geared towards growth which would lead to the overall prosperity of the people. Privatization policy was also clearly mentioned in the budget. In addition, the budget spoke of the need to create a national monetization pipeline of brown field projects to finance fresh investment in physical as well as social infrastructure. NITI Aayog was tasked to prepare the policy framework for this announcement and, recently, the Government of India announced its policy along with a detailed guidebook covering all aspects of the same. The government declared that it has prepared a national monetization pipeline that would unleash a latent potential of six lakh crore or USD 81 billion by 2025. The target for the current year is Rs 88,000 crore. It is indeed a very ambitious programme and also a very bold reform initiative.

The policy says that there will be no sale of assets and only brownfield assets would be leased out for a certain period of time to private sector investors or an investment trust that will operate and maintain the assets as well as make investments and, at the end of the lease period, hand over the assets back to the government. The assets identified for this purpose are roads valuing 1,60,200 crores; railways 1,52,496 crores; power transmission 45,200 crores; power generation 39,832 crores; gas pipeline 24,462 crores and mining 28,747 crores. Additionally, there are some other sectors also like telecom, sports stadiums etc.

The strategic objective of the national monetization pipeline, according to NITI Aayog, is to unlock the value of investments in public sector assets by tapping private sector capital and efficiencies which can thereafter be leveraged for the augmentation of greenfield infrastructure creation. In essence, this means that a lot of public sector assets are lying underutilized and they are not being managed and operated efficiently because of the inherent structural impediments of the public sector, and which can be transformed by the private sector to generate resources that can be utilized for the development of new infrastructure. There is no denying the fact that to achieve a high rate of growth, India needs substantial investment in infrastructure which raises the question of the availability of resources. For quite some time, economists and administrators have been grappling with this problem of financing infrastructure. The national monetization pipeline is an innovative solution in this direction and, by all means, can be called a significant structural reform in creating value in infrastructure.

However, the crucial thing is the implementation of this policy. Historically, we have seen that the ambitious targets of disinvestment have not been met year after year due to various procedural bottlenecks. In light of this, it is difficult to see how such a massive scale monetization of public assets can be executed in the given time frame. Personally, I feel that it would be difficult to achieve the 88 thousand crores target for the current year and six lakh crores till 2025. The matter of Air India privatization and that of BPCL pending for years exemplify how such matters take a long time to materialize.

The experience of public-private partnership (PPP) would be vital in implementing the NMP. Various models like upfront lump-sum payment or annuity payment were devised to implement PPP and they are as many success stories as failures. I remember one of the first PPP projects in UP was the bridge on the Noida Delhi highway. The private concessionaire was expected to collect toll for a certain number of years but there was a massive agitation by the farmers and residents of the area after some years and, finally, the toll barrier had to be shut down. There were views on both sides. Some claimed that the PPP agreement had been drafted to give extra benefit to the concessionaire while some felt that the concessionaire was entitled as per the agreement to collect toll for the stipulated number of years. In any case, the whole episode showed the kind of problems that a PPP agreement can lead to. Even in NMP, this crucial issue of valuation of the assets, amount of lump-sum payment and other terms and conditions would determine the success of the policy. The private sector has often argued that the PPP documents are prepared in a manner that private developers do not get a reasonable rate of return on their investment, making it unviable for them. There is no doubt that the civil servants who draft the agreements along with consultants are inclined to err on the side of caution. They deliberately want to put such conditions which would shield them against any inquiry in the future. Naturally, this leads to putting conditions that impact the viability of the project. NMP is a new policy and the civil servants do not have prior experience and, despite the guidelines formulated by NITI Aayog, there is a likelihood that such terms and conditions may get framed that adversely impact the rate of return to the private investors, implying that they would not evince interest in bidding for the assets. Of course, in the case of PPP, things improved over time as the civil servants got more experienced and repeated guidelines were issued by the government. Similar learning experience is possible in the case of NMP but this will take time, making it difficult to achieve the NMP targets in the prescribed time frame.

The fear of subsequent allegations of corruption is not entirely unfounded. You can look around and see the number of cases of privatization or disinvestment where inquiries are going on and there have even been court directives to investigate and lodge criminal complaints. It is, thus, important that the Government of India evolves the system to protect the civil servants from any undue harm if they faithfully, and with bona fide intentions, carry out the NMP exercise.

Apart from above, the private sector would only come forward if it gets a higher rate of return than it would get through an alternative opportunity of investment. Not all assets listed in NMP are likely to give this kind of a return. This could lead to a situation of cherry-picking where the private sector bids for assets with the greatest potential of returns and avoids the others. The implication being that not all assets listed in the NMP will get a private bidder. The more lucrative assets will get bidders while the ones with less potential will remain with the public sector. I saw an example of this when in Uttar Pradesh we wanted to bring in the private sector in power distribution in the districts. We found that the private sector was keen to take up only the city areas where it was easy to collect power dues and did not want to go into the rural areas at all. This meant that the state power corporation would lose its best accounts and remain saddled with the most problematic. We had then decided to offer a package of rural plus city consumers. Not many bids were received as per this model. This is very much possible in the NMP also. We already saw when the Railways wanted the private sector to run some trains, only the public sector corporation IRCTC came forward. This again gives weight to my argument that the entire NMP list of six lakh crores is not likely to get private bidders.

Moreover, there would be issues relating to the employees. Will the private sector retain them? Will the terms and conditions remain the same? What will happen to the crucial issue of reservation in case the private sector does recruitment of its own? There are various social objectives that these assets are fulfilling and it would need to be seen whether the private sector would continue to do so. Moreover, if the public sector has not been performing then it is due to various structural impediments which would need to be analyzed, otherwise, they would constrain the working of the private sector also. Further, a private-sector monopoly is no better than a public sector one.

It is also important to see how the regulators would respond to this kind of initiative. There would also be the need for an open and transparent dispute resolution mechanism. Finally, a special independent authority would need to be created to monitor the entire process.

NMP is a bold reform initiative that could unlock funds for further development of social and physical infrastructure but there are a lot of implementation issues that need to be handled. Also, we should be aware that the targets set are far too ambitious.

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