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Air-India privatisation plan in disarray as SIA pulls out

India's ambitious plans to privatise its loss-making national airline are in a shambles after high-profile Singapore Airlines pulled out of the bidding at the weekend.

And the rebuff was a paralysing blow for the country's wider divestment programme.

Five months into the current financial year, the government of Prime Minister Atal Bihari Vajpayee has nothing to show for its efforts to sell stakes in state firms, and is nowhere near its target of raising $2.55 billion.

"Not one of the 27 PSUs cleared for divestment this year has been privatised," former Finance Minister P Chidambaram wrote in the India Today newsmagazine on Sunday, referring to the country's public sector units.

"None will be in 2001-02," Chidambaram, widely acknowledged to be one of the architects of India's economic reforms, added.

Singapore Airlines said its decision was prompted by what it called "the intensity of opposition to the privatisation of Air-India from various quarters".

Divestment Minister Arun Shourie said Singapore Airlines' withdrawal was indeed 'a substantial setback' for reforms that began in 1991 and have proceeded in fits and starts since.

"The atmosphere created by fabricated allegations is scaring away bidders," Shourie told reporters, in a remark that appeared to bear out Singapore Airlines' claim.

SCANDALS FORCE BACKPEDALLING

Though Vajpayee has attempted to give impetus to the reforms, his government has been embroiled in a series of scandals that have forced it to backpedal on what will be a painful process for hundreds of inefficient firms.

Singapore Airlines joined hands with the Tata group -- a salt-to-software conglomerate -- to bid for a 40 per cent stake in Air-India, but gave up, perhaps exhausted by the creeping pace of reform and the shrill rhetoric excited by its move.

The lesson for India from the SIA experience is to make the privatisation process more transparent, Chidambaram told Reuters.

"It confirms the growing dissatisfaction with the process of divestment followed by this government," he said. "So far the disquiet was confined to India. This disquiet is now spreading to potential bidders in other countries.

"The government will do well to abandon its present course and devise a more transparent process of divestment," he said.

GOVERNMENT HOPEFUL

But the experience has not deterred the government from going ahead with the sell-off of its stakes.

Pradip Baijal, secretary in the divestment ministry, said he was optimistic about completing stake sales in at least half-a dozen companies this year.

"I do hope to complete the transaction at least six or seven companies where the process is in an advanced stage this calendar year," he said.

Shourie, a former World Bank economist, has railed in recent months that the privatisation programme is being hobbled by 'fractured politics and noise' from corporate interests.

His elevation to cabinet rank in a ministerial reshuffle on Saturday is a signal Vajpayee's government is stepping up its priority on divestment, analysts say.

Opposition from powerful labour unions and from political parties within Vajpayee's own ruling coalition has been so intense that the government has been able to sell only a bakery and an aluminium firm since reforms began 11 years ago.

Yet Baijal believes things will work out.

"The process will go on and intense opposition has to reduce. How long can tax payers go on supporting the loss making state firms?" Baijal asked.

DISMAL NUMBERS

Private investors would find the poor performance of the state-run firms unacceptable.

Of the 240 state-run firms that make items from condoms to steel, more than a hundred are deep in losses.

A survey shows that during the period from 1986-87 to 1997-98 these firms never earned profits after tax that were in excess of five per cent of total sales or six per cent of capital employed.

The price to earnings ratios of most are in single digits -- around four or five -- far below comparable private sector firms in India or abroad, a divestment ministry paper said.

And their bloated workforce makes it hard to trim staff since politicians fear antagonising labour will lose them mass support.

Naturally enough, few want to take on these white elephants. So India has failed to attract big overseas names, except a handful, for the companies it has put on the block.

Which makes the collapse of the Singapore Airlines' bid all the harder to swallow.

SIA, the world's third most profitable airline, and the Tatas were the only players left in the bidding for Air-India after another competitor -- the Hinduja group -- pulled out on Friday.

The Hindujas said it was not possible to partner the government in running Air-India, but their bid had been banned by the country's law ministry, which said it did not meet guidelines the government set for participation.

Air-India with a fleet of 27 aircraft, has posted losses for six years in a row and is saddled with a debt of Rs 3.3 billion.

Singapore Airlines, which is trying to hike its stake in Air New Zealand, says its investments in Australasia demand more attention and a substantial financial commitment. Besides, the slowdown of the world economy is affecting the airline business.

RELUCTANT TO LET GO

There is also a perception that the government is reluctant to relax its grip and wants to use the proceeds from piecemeal sales to bridge its yawning fiscal deficit.

"The truth is the government does not want to make a clean exit. It wants to retain a crucial stake, appoint its own directors and run the business through a proxy," Chidambaram wrote, referring to the tussle over Air-India.

Analysts say the government has little choice but to aggressively pursue privatisation and cut through the opposition.

"You have no choice. Other countries are privatisating aggressively. If we don't it will have a severe impact on the economy," Baijal said.

Yet Vajpayee's programme has its sceptics.

"It is a national setback," said Saumitra Chaudhuri, economic advisor to rating agency ICRA, referring to SIA's departure. "The whole thing smacks off lack of coherent decision making. It is a telling commentary on the government."

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