Air India privatisation: What happens when we forget first principles

August 28, 2020 7:15 AM

If the strategic sale of Air India had taken a few years earlier, the government would not have had to provide fiscal support to the airline all these years and would have also realised a better price.

According to the Public Enterprises Survey 2018-19, Air India had the second highest loss amongst the Central Public Sector Enterprises.

By Kumar V Pratap

I remember putting up an article entitled ‘Privatisation is the only option for revival of Air India’ to my boss at the Planning Commission in 2011 for permission to publish that article. It went through a number of desks, and finally to then-deputy chairman of the Planning Commission. Finally, permission to publish the article was denied as it was felt that a headline in a newspaper saying that ‘Plan panel feels that Privatisation is the only option for revival of Air India’ may not be appropriate. I was also told that my reasoning was based on first principles and, therefore, probably not deep enough for such a profound recommendation.

Eight years hence, and after incurring an additional Rs 50,000 crore in losses (at an average of over Rs 6,000 crore per annum; net loss of Air India in 2018-19 was a whopping Rs 8,556 crore), we have come to the same conclusion, as the government tries hard to sell the company: Privatisation is the only option for Air India.

According to the Public Enterprises Survey 2018-19, Air India had the second highest loss amongst the Central Public Sector Enterprises (CPSEs) and accounted for more than a quarter of losses (26.8%) of all loss-making CPSEs in that year. With the high level of losses, the company is only able to continue functioning because of doles from the government—this is highly inefficient, given the other high priority demands on government resources. In fact, the NITI Aayog, in its recommendations on strategic disinvestment of CPSEs in May 2017, while referring to the fragile finances of Air India, had stated that further financial support in a mature and competitive aviation market would not be the best use of scarce financial resources of the government (Rajya Sabha 2020).

There is enough theoretical justification for the strategic divestment of Air India to a private company. Welfare theory argues that privatisation tends to have the greatest positive impact in cases where the role for the government in lessening market failures is the weakest, i.e. for state-owned enterprises in competitive markets or markets that can readily become competitive (Megginson et al, 2001). Airline operations in India is one such market. Reflecting on the hobbling effect of multiple objectives that CPSEs are saddled with, Shleifer and Vishny (1994) state that public enterprises pursue political goals, which may conflict with profit maximisation, so very apparent from the performance of Air India.

The Economic Survey 2019-20 is very categorical about why such loss-making CPSEs should be privatised, deriving its recommendation from evidence based on the before-after performance of 11 CPSEs that had undergone strategic sale from 1999 to 2004 in India. It finds that privatised CPSEs, on an average, perform better post-privatisation than their peers in terms of net worth, net profit, return on assets, return on equity, gross revenue, net profit margin, sales growth, and gross profit per employee. It also finds that the return on assets and net profit margin turned around from negative to positive, surpassing that of the peer firms, which indicates that privatised CPSEs have been able to generate more wealth from the same resources.

The analysis clearly affirms that strategic disinvestment improves firm performance and productivity, and unlocks their potential to create wealth. With the separation of ownership and management in the company form of organisation, it should not really matter whether the ‘ownership’ is public or private. However, the above analysis clearly shows that ownership matters.

Although high losses, a continuously declining market share, and having a large unionised labour force are huge negatives, among the most valuable assets of Air India are the bilateral landing rights in the most popular airports of the world. Besides, India is the third largest civil aviation market in the world and growing at double-digit rates (up to FY2019). However, the Covid-19 pandemic is a huge dampener to the entire aviation sector, because of requirements of social distancing and compulsory quarantine, which has led to supply disruption in terms of the number of seats on offer as well as demand obliteration. Nevertheless, on balance, the company is still attractive and has managed to elicit interest from some of the leading airlines in the world, including Germany’s Lufthansa, the UAE’s Etihad, Singapore Airlines, and our own, the Tatas. The government should swiftly complete the sale to cut down fiscal support to address its losses and unlock the productive potential of the company.

India is the market leader in the world as far as private participation in infrastructure is concerned. The Private Participation in Infrastructure database of the World Bank (ppi.worldbank.org) ranks the country second in the developing world, both by the number of public-private partnership (PPP) projects as well as the associated investments. It is time India took commensurate steps in the field of privatisation (disinvestment) of public assets as well, as a means of improving efficiency and augmenting resources, thus helping her regain the position of the fastest growing large economy in the world.

Publication of my above referred article in 2011 may not have made any material difference to the destiny of Air India. The point that is being made is that if the same decision of strategic sale of Air India would have been taken a few years earlier (possibly using first principles), and actioned quickly thereafter, the government would not have been required to provide fiscal support to the airline all these years, using the resources so freed up more efficiently, while also realising a better price, currently Covid-19 impacted, for the company.

Former joint secretary (Infrastructure Policy & Finance), Ministry of Finance, and current joint secretary (UT), Ministry of Home Affairs. Views are personal.

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