On Saturday, Finance Minister Nirmala Sitharaman said that the sale of Air India and Bharat Petroleum Corporation Limited (BPCL) will be completed by March 2020. Here we have a look at the challenges before the government in accomplishing these stake-sales.
Air India
“The airlines industry has been a deathtrap for the investors ever since Orville (Wright) took off,” is how Warren Buffett summarised his dislike for the aviation sector at Berkshire Hathaway’s 2013 annual meeting. Though Buffett was talking about the American airlines companies, his statement cannot be an exaggeration even if it is applied to aviation businesses in India. Airlines as a deathtrap for investors can be especially emphasised a million times over in case of Air India – the country’s flagship carrier.
That the Government has no business in being in business can be best understood by a mere cursory look at Air India’s financial statements. Rapt bureaucracy has abused the company time and again ever since the JRD Tata-was nationalised in 1953. A mountain of debt (Rs. 58,000 crores as on March 2019), consistent losses (Rs. 8,880 crores in 2018-19) and an endless string of bailouts from the Government (Rs.29,000 crores as recently as 2018) tell the sad story of the Public Sector Undertaking’s (PSU’s) financial woes.
Air India losses continue to mount even as the government continues to infuse equity.
Employee Unions and Complex Structure
A never-ending spiral of financial problems is just one of Air India’s several issues. The 11,000-employee company is under constant pressure from its unions who want their jobs and residences (provided by the company) secured post an implementation of a restructuring exercise. Mass agitations from employees can derail any effort at securing the future of the airlines. In such a scenario, it becomes imperative to provide an assurance to the employees and take them on board going ahead.
Over the years, Air India has dipped its fingers in several businesses. Besides its subsidiaries in the flights business, it has a host of subsidiaries operating hotels (Hotels Corporation of India), ground handling (Air India Air Transport Services Ltd.) and engineering and maintenance services (Air India Engineering Services Ltd.). Sadly, none of its subsidiaries except the low-cost airline, Air India Express, has clocked a profit in recent times.
Lessons from History
It was the NDA government in 2002 that initiated the process of divesting Air India. However, the zeal with which the government tried to privatise the airlines was not met with a zestful interest from corporate groups. The hasty privatisation of Air India-owned Centaur Hotel in Mumbai is a case in point. Over the past two decades, the hotel, located at a prime location in the vicinity of Mumbai airport has merely changed hands and has been lost in litigation rounds. Needless to say, its value has not been truly unbundled. The final toll in such poor execution has to be borne by the taxpayers. Such failures must prove to be a lesson to the Narendra Modi Government.
Caution – Privatisation Ahead
Merely replacing the bureaucrats with a professional management is not going to help in solving the Air India conundrum. While a full-fledged privatisation is surely the way ahead, its implementation must be a road that demands caution. It is evident that the Government’s act of shaving off Air India’s debt of Rs 29,000 Crores has not sweetened the proposed deal enough. The government deserves credit for deciding to make the company asset-light by selling off its properties. However, the slowdown in the real estate market has failed to trigger a response from the market and only 32 of the 111 properties have found takers
Last year, the government failed to rouse any interest for Air India’s 76% stake. A total of zero investors came forth to bid for the airlines. Surely the investors are wary of government’s involvement going ahead. Now the Government is aiming at doing away with its 100% stake and even relaxing FDI norms (currently, FDI is limited to 49% stake in aviation sector).
The government has time and again, poured citizens hard-earned money into the ill-fated airlines. In 2013, the UPA Government planned to infuse Rs. 30,231 crores in the company up to FY 2020-21. Till FY 2018, the company has received Rs. 27195 crores from the government. Yet there is no cure in sight.
It will only be wise if privatisation does not end up being a mere change of hands – from government to a private company which defaults on its loans. It will be gross injustice to the people of the nation if the buyer of Air India meets the same fate as that of Jet Airways or Kingfisher Airlines. Thus, privatisation needs to be done with an overhauling of the airline itself.
In this sense, Finance Minister’s intention of completing the sale of Air India by March 2020 is a welcome statement. It indicates that the Government is not inclined to bear the cost of running Air India for long. It is pulling the plug on the ever-leaking fuel costs and employee benefits and thereby saving itself from incurring a huge budgetary deficit.
Bharat Petroleum
While Air India is a mess that any investor would be hesitant to get into, Bharat Petroleum Corporation Limited (BPCL) is an affair that can prove too expensive for an investor.
BPCL has an annual refining capacity of 38.3 million tonnes (15% of India’s total refining capacity). Even though BPCL’s indebtedness stood at close to Rs. 43,000 crores, it is not in a crisis situation like Air India. For starters, BPCL is a profit-earning entity. Its refineries operate at a capacity utilisation of close to 100% and its petroleum products find a steady demand in the country.
A Pricey Affair
The Government owns 53.29% in BPCL. At current market price of Rs. 521 per share, this stake has the potential to realise more than Rs. 60,000 Crores. Needless to say, it is crucial for the Government to find a buyer for its stake in BPCL so as to meet its Rs. 1.05 Lakh Crores disinvestment target for this year. The divestment proceeds will be critical to the government to meet its fiscal deficit target of 3.3% of GDP in fiscal year 2019-20.
The biggest challenge for the Government will be to a find an investor with the financial might to buy its stake. Besides home-grown Reliance Industries, global oil conglomerates like Aramco, Shell and ExxonMobil can be the potential buyers. However, a shift to electric vehicles and the imminent environmental challenges may dampen the proposed deal.
Oil Marketing Companies as Government Arms
Moving ahead, the Government will need to assure the buyer that it will relinquish its control on BPCL in entirety. Traditionally, Oil Marketing Companies (OMCs) like BPCL, HPCL and IOCL, have been used by the government to push its inclusive agenda. It has traditionally pulled the strings of fuel prices and subsidies to puppeteer the OMCs. The most recent example of this was in October 2018, when during times of high oil prices, the government directed the OMCs to gulp down a loss of Rs. 1 per litre instead of pushing it on to the customers.
Beware Of The Arm twisting
A private investor, Indian or from abroad, will be desirous of a level-playing field in the oil arena. Privatisation would mean that the investor will expect the same subsidies from the government that a state-owned OMC will obtain. Any arm-twisting to make an investor fall in line with the government’s fuel policy will prove to be a deterrent going forward. If price discovery in petroleum products has to be dynamic, the government must divorce itself completely from BPCL. This demands a complete transparency in contracts and agreements.
In conclusion, both Air India and BPCL suffer from peculiar challenges. Significant caution on the policy-making front and a strong willpower is the call of the hour to meet the March 2020 deadline to complete the stake-sales. The government will do well to think through the implementation lest it falter on details while chasing a deadline.