A safe landing for the Maharaja’s privatization flight
The Indian government was caught between Scylla and Charybdis with Air India, as it was neither possible to revive the company by injecting more money, nor an option to liquidate it, given the greater interest of the parties stakeholders. At the end of August, Air India’s total debt stood at ??61,562 crore, mainly raised via sovereign guarantees to finance its losses.
The Tata Group has effectively taken over nearly a quarter of Air India’s total debt for 100% ownership. It will keep its 12,000 casual workers for one year. Under the agreement, Tata Group will stick to a business continuity clause for three years and will also retain its brand for five years as part of the divestiture agreement. A special purpose company, Air India Assets Holding Ltd (AIAHL), was formed to take over the remaining debt of ??46,262 crore and approximately ??14,718 assets, including real estate. This will be monetized over the years to pay off lenders, whose loans are now backed by a government guarantee. This guarantee will ensure that the lenders do not face a haircut.
The question some observers have raised is whether this is the best possible option available to the government to revive Air India. There is no denying that selling the airline to a private player was the best and only option left for the government, given its additional losses and our economy bleeding. Any additional tax support or an ongoing government guarantee would have been worse for the country. If executed well, the government’s monetization plan can bring in sufficient sums of money to pay off most of the airline’s debt. In particular, prime real estate that the government has retained can be capitalized for this purpose.
Some claim that Air India got a better price under the Insolvency and Bankruptcy Code (IBC) resolution mechanism than through a direct sale of its shares. This is a mistaken argument. Under the IBC, Air India’s fate would have been worse. Most of its planes were leased and the airline is in default. In December 2020, a UK court reprimanded Air India for its unpaid dues of more than $ 17.6 million to China Aircraft Leasing Company Ltd (CALC) in connection with an aircraft leasing contract for the lease and maintenance. If the matter fell within the jurisdiction of the IBC, article 14 of the Code would not have allowed repossession of the property once the moratorium was declared. This would have been detrimental to the preservation of the value of the aircraft. It would also have resulted in massive maintenance expenses. More importantly, under the IBC, these lessors are treated as operational creditors and face a higher risk of a significant haircut as part of any resolution plan.
The government has therefore shown both wisdom and pragmatism in embracing privatization. However, the excitement of keeping good assets tied to bad loans can take government one step and two steps back. Efforts to sell some of the properties at sought-after prices failed last November and the company had to renew its bid to raise funds by auctioning around 38 real estate assets, some of which it was unable to sell during the previous auctions, lowering the reserve. price of certain goods. Last June, it put out a tender for a number of its properties with the aim of increasing ??270 crores. The end result is always expected.
Two things are now essential for the success of the agreement. First, AIAHL’s ability to set up an effective monetization system and repay the debt incurred. Second, Tata’s ability to make the system more efficient. The former would be a greater challenge if the government tried to play it alone, given its inexperience in monetizing assets. A better approach might be to partner with private actors to increase the effectiveness and value of the program. This could be done as part of the national monetization pipeline, with the search for private actors who can provide expertise in execution and planning. A lack of identifiable revenue streams for various assets, their level of capacity utilization, dispute resolution mechanisms, etc., are likely to be key challenges in executing Air’s asset monetization plan. India owned by AIAHL. Well-structured monetization transactions are likely to be the key to success.
Some ideas of mortgage-backed securitization in the United States could be adopted, with adequate safeguards in terms of ease of liquidity and insulation against insolvency. Securitization of rental income through an ad hoc vehicle, for example, could give good results. In addition, the government should focus on developing the Indian debt market while increasing transparency and raising standards of governance. Investor confidence is essential to the success of any debt market. The development of such a market is determined by its depth, breadth, resilience and the choice of instruments available to meet the demands of market participants. We have made commendable efforts in this direction, but as the cliché says, “Photo abhi baaki hai. There is more to come.
The Air India case should be a reminder forever that it is not for a government to be in business, especially where private actors can play a more effective role. The government should be an arbiter, not an active player. Privatization is a bitter pill, but it is a pill that will cure India’s malaise. This will boost efficiency and is a mantra for building a “new India”. The current government is off to a good start and it is now follow-up on which success depends.
Neeti Shikha is Associate Dean, Indian School of Public Policy, New Delhi. These are the personal opinions of the author.
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