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Saturday, October 9, 2021

Some lessons from Air India privatisation

The privatisation of Air India is a big moment. Given the tortuous two decade history of failed attempts, this is some achievement. Much will be analysed in the coming days. This post will instead confine to some observations that contradict the conventional wisdom on privatisation of public assets. 

Business Standard has the quick facts,


Some observations that upend conventional wisdom and draw attention to the complex nature of public policy making and implementation.

1. Conventional wisdom has it that privatisations are transparent and procedurally driven exercises to divest public shareholding. Frame procurement rules and set bidding terms, then bid out the asset, and market participants will compete to buy the asset. And anything involving backdoor negotiations is always vitiated and undesirable. 

The reality could not have been more different. This privatisation could not have happened without important backdoor negotiations and influencing and significant understanding on all sides. It's unlikely that the Tatas would have taken the plunge on purely commercial considerations and without its own deep legacy and existing ownership of Vistara and Air Asia. Even with the legacies, it would have required some significant prod. 

2. Conventional wisdom focuses on orthodox models of price discoveries like auctions, highest offer bids, least cost bids etc. It is a very simplified view. Instead, in reality there is a vast spectrum within which real-world privatisations happen. 

Take the example of national highways in India. It started at the turn of the millennium with the belief that governments could get private developers to build and maintain roads without incurring any public expenditure, by relying on tolls. But it slowly dawned that private investors could not assume the large construction risks. Policy then oscillated to BOT annuity models, which completely absolved private investors off any commercial risk. It took more than a decade and half to iterate and settle on hybrid models that allocated risk more fairly and efficiently. It involved a collective journey of realisation within the system and among all stakeholders.

On the same lines, the nineteen years of recurrent failed attempts were critical in convincing the decision-makers within Government of India that privatisation without assuming the vast majority of Air India's debts was impossible. The failures were a critical learning requirement for not only the decision-makers but also in shaping the public debates to accept the privatisation of the kind that has happened. This underlines the importance of path dependency in decision-making. 

3. This brings us to another conventional wisdom, one which has it that privatisations are done to unlock resources for the government. It is an article of faith that privatisation by selling public assets will always generate money for the government to spend elsewhere. 

But this one generates only a small amount in cash inflow and leaves the government with most of Air India's debt and guarantees. Instead, Air India is a great example of privatisation to cut losses. Sample this,
The government, which has invested Rs 54,584 crore since 2009-10 as cash support and Rs 55,692 crore as guarantee support for Air India, has not succeeded in turning around the company. An estimate by the government said it would cost the government Rs 620 crore per month to operate the airline, which is losing Rs 20 crore daily, said Department of Investment and Public Asset Management Secretary Tuhin Kanta Pandey.

Imagine the losses that could have been avoided with this realisation in 2009-10. But this expectation glosses over political economy realities and path dependency factors.

One can only hope that Air India creates a precedent of looking at privatisation as also a means to ring-fence and cut losses. 

4. The non-controversial nature (at least till now) of the privatisation underlines the importance of transparency and procedural credibility. Even the opposition criticism have been confined to the ideology of selling public asset, but has not been vitiated by questions of preferential treatment and corruption. 

5. Finally, as a guidance for others willing to embrace the idea of privatisation to cut losses, but avoiding going through the long-drawn path dependency of repeating tenders, a good strategy would be to undertake a reasonably long Expression of Interest (EoI) path. Issue the EoI, elicit market preferences through an objective and transparent process and then formulate and issue the Request for Proposal (RFP). Complement it with stakeholder consultations. The most critical requirement is transparency of the process and credibility of those undertaking it.

1 comment:

Jerry Hultin said...

Good points about privatizations. Similar concepts can be applied to new large infrastructure projects. For instance, the Port Authority of NY & NJ appears to use an “innovation” phase but the process is so short and awkward that little innovation is possible. Similarly, the US defense acquisition process. The New York Academy of Sciences, which I chair, is leading a study into better processes which we hope wlll lead to lower costs, more innovative solutions, and bringing projects in “on budget and on time.”