The state-owned ailing flag carrier is in news again. Air India, which has been under losses for over a decade now, has made operating profit estimated at a little over Rs 100 crore in the financial year 2015-16. During his independence day speech, prime minister Narendra Modi spoke about bringing in a new culture that eventually helped in turning around loss-making public sector behemoths Air India and BSNL.

Making an operating profit for the first time in a decade is certainly an achievement for the company which has always been in red since its merger with Indian Airlines in 2007. But there is more to this growth story than meets the eye.

Air India has been struggling with mounting debts since the beginning. And the government has made a lot of investments to keep it functional. The losses of Air India were Rs 5,490.16 crore (2012-13), Rs 6,279.6 crore (2013-14) and Rs 5,859.91 crore (2014-15). The finance ministry in 2012 gave over Rs 30,000 crore under a bailout plan, stretching over a period of nine years, to turn around the company.
There are 157 central public sector enterprises (CPSEs) which are audited by the CAG. In 2012-13, as per CAG data they had accumulated losses of Rs 1,10,285 crore. In the same year, MTNL, BSNL and Air India together made losses of about Rs 18,000 crore, while the total losses of all the CPSEs were Rs 28,562 crore. Air India was the second highest loss-maker after Bharat Coking Coal.

Even though it has made an operating profit in the last financial year, at net level the company is still under a huge loss because of high interest and maintenance cost. The accumulated loss of the company is more than Rs 44,000 crore.

While the prime minister speaks of bringing in a new work culture in PSUs, sectoral experts say his statement is somewhat off the mark.
The PM’s statement may have grabbed headlines given the long history of the national carrier being under losses, but it portrays an incomplete picture of the company, says Jitender Bhargava, former executive director, Air India. He says there is no merit in the PM’s statement and no single evidence to suggest that the government has addressed any of the structural or governance issues at Air India.

Factors like low fuel prices – down from $106 per barrel to $36 per barrel in these two years – and the selling of some of the aircraft have helped the company register operating profit, he adds. Last year, the company sold nine of its 21 Dreamliner planes to a Singaporean lessor and added Rs 7,000 crore in its kitty. It took back these planes from the company on lease later. Also, low crude oil prices played a major role in the airline’s performance.

“It is important to understand that the company is not at all making profit. When you sell your aircraft and put that money back into your kitty what happens? It is not that they have done something spectacular to achieve the result,” Bhargava says.

While the operating profit has been registered there has been no improvement in the key performance parameters like aircraft utilisation, growth in market share and revenue, and passenger traffic, adds Bhargava.

“The data by DGCA (directorate general of civil aviation) shows that the market share is on a decline. It is last in terms of on-time performance, and the payment to passengers for cancellation of flights is the maximum,” he says.

The government has shown no intention of selling off the carrier. In June 2016, civil aviation minister Ashok Gajapathi Raju had ruled out disinvestment of the carrier. He said that the company’s books were so bad that nobody would buy it even if the government wanted to sell.

Slow on disinvestment

The government essentially has two options in the public sector: either revive loss-making units like Air India, or disinvest. A decade after the privatisation of CPSEs was put on the back-burner, it was expected that the Modi government would come out with a comprehensive policy to take up the strategic sale route more aggressively.

While the finance minister in the union budget 2016-17 proposed certain changes in the way the department of disinvestment functions to get the government out of running many CPSEs, the NDA government is slow in implementing its plans on disinvestment.

Unlike the Atal Bihari Vajpayee-led NDA government (1999-2004) which aggressively pushed strategic sales, selling 18 ITDC hotels and also privatising many other PSEs including Videsh Sanchar Nigam Limited (VSNL) and Bharat Aluminium Company Limited (BALCO), Modi-led NDA is still working to start the process. 

Modi, of course, preferred revival over disinvestment in Gujarat. Many of the state PSUs like GSFC, GNFC and Gujarat Alkalies and Chemical Ltd were successfully revived by his government in the state. He, however, is yet to  fine-tune his public sector strategy.
While the government has roped in NITI Aayog to identify CPSEs where the government should give up its management or to what extent they should divest, nothing concrete has happened on ground.

Market analysts see strategic sale (sale of stake to private companies or complete privatisation) as a good alternative to divesting stake in CPSEs. It is seen as a strong message in the market which will also fulfill the PM’s promise of ‘minimum government and maximum governance’.

With a strong conviction that the government has no business to be in business, Pranav Haldea, managing director, Prime Database, says this is the wrong track followed by the government. “There are far greater priorities for the government including infrastructure, healthcare and education, where they should focus. This is why the entire strategic divestment agenda is on hold,” he says. Even if these companies were to turn profitable these are not the sectors where the government should focus, he believes. 

The government has also completely changed its stated position on the lines of strategic divestment to make these PSUs work. “The government can extract far greater value by finding a strategic buyer for these companies than trying to make them work. Of course, it is a huge political issue and that is why we are seeing this change in the government’s stand. I do not think they have been able to garner the requisite support for doing a strategic divestment. It is a much safer strategy to say that they are making it more profitable. It is a highly political issue rather than just pure economical one,” says Haldea of Prime Database, which compiles data on capital markets and related matters.

Admitting a significant improvement in the functioning of the bureaucracy across different sectors and ministries, he says, “There are changes in terms of greater accountability, faster decision-making and probably that has resulted in the better performance of the some of the PSUs.”

Though finance minister Arun Jaitley has budgeted an ambitious target of earning Rs 56,500 crore through disinvestment in the current financial year, it is taking way too long for the government to even come close to it.

Through the minority stake sale, the government aims to earn Rs 36,000 crore, for which the department of investment and public asset management (DIPAM) has already appointed merchant bankers for various companies including ITDC, MMTC, SUUTI, Oil India and NMDC. But on the strategic sale front, through which it aims to earn over Rs 20,000 crore, not much work has been done. NITI Aayog has sent multiple lists to the prime minister’s office (PMO).

Observers feel that the problem does not lie with the prime minister’s claim of turning around sick PSUs but in justifying the government’s blind faith in the loss-making companies.

Reena Ramachandran, a former CMD of Hindustan Organic Chemicals and an independent director, says no major changes have taken place since the NDA came to power as far as structural reforms are concerned. Factors that have led to the profits at Air India are cosmetic and it has nothing to do with the efficiency and improvement.

The fuel price decline has played a major role in generating operating profits. “In the last one year, profitability of all the sectors which use petroleum products has improved. The profitability of those like ONGC who make these products has dropped,” she says.

Bhargava also feels that Air India is still running the way it used to be – by bureaucrats and the ministry. “I do not know with what objective he [Modi] made the statement, if it has been made to make buyers interested in Air India,” he says. Bhargava, who has written The Descent of Air India (2013, revised edition 2016), says no one is projecting the depth of the problem.

While the government has plans to establish a holding company in the petroleum sector and closing down a few of the loss-making companies, only time will tell how it is executed.

“It is difficult for them to close down many of the companies because of political reasons. We will have to wait to see how it is done. Because for the last 20 years we are hearing about IDPL [the loss-making drugs and pharmaceutical company] but there has been no change,” says Ramachandran.

jasleen@governancenow.com

(The article appears in the September 1-15, 2016 issue)