Business: Privatisation; Ready to take off

Privatisation finally becomes a reality as the Government sells one company and reduces itself to a minority in another.

The nine-year-long journey from disinvestment to privatisation finally ended on January 25, 2000. That was the day the Cabinet Committee on Disinvestment (CCD) cleared the sale of 51 per cent of the government's equity in Indian Airlines (IA) and 74 per cent equity in Modern Foods. If the follow-up procedures are completed soon, the two public-sector companies will become privately owned before the beginning of the next financial year on April 1, 2000. Says Pradip Baijal, secretary, Department of Disinvestment: "Now we are privatising in the real sense. So far only minority stakes of the government had been sold in bits and pieces."

The sale of Modern Foods is an easy deed since both the buyer (Hindustan Levers) and the price (Rs 105.45 crore) are settled (see box). But it's the sale of the Rs 3,543-crore IA that's not yet a closed chapter. To begin with, the prospective buyer into the airline -- called strategic partner -- will be offered only 26 per cent shares, with the government retaining 49 per cent. The remaining 25 per cent will go to the employees of IA, the public and financial institutions through a maiden public issue in the next couple of months.

Two factors could limit the number of strategic partners. Foreign airlines are not allowed to bid either directly or indirectly for a stake in IA. According to Baijal, this is in consonance with the current aviation policy that restricts foreign participation in any domestic airline's equity to 40 per cent. However, companies completely owned by non-resident Indians can bid for the stake. Industry observers foresee this as an opportunity for the Hindujas to make a bid for IA. The more likely candidates for bidding are, of course, the two private domestic carriers, Jet Airways and Sahara Airlines.

LEVERAGED

Once Asia's largest bread manufacturer, Modern Foods has just acquired another distinction: the first Central government-owned company to be privatised. The 35-year-old company with 14 bread manufacturing facilities spread all over the country would be a prize catch for Hindustan Levers (HLL) -- or any other company -- with an eye on India's fast-growing processed-food market. For unlike the popular belief, Modern Foods makes, or has the facilities to make, many more food products than just bread. It's into flour milling, fruit-juice bottling, oil milling, fruit-pulp processing and beverage franchise.

No wonder when bids for 74 per cent stake in the company were first invited two years ago there were 10 applications. The government selected only four bidders -- Nestle, Evergreen, Britannia and HLL. However, thanks to the procrastination in the decision-making and the Modern Foods' losses (Rs 6.5 crore in 1997-98), all bidders other than HLL had opted out by the first week of January. The country's largest manufacturer of fast-moving consumer goods surely did not mind that. Says Irfan Khan, manager HLL: "Our track record with Tomco, Kissan and Kwality has shown that we can turn around sick companies."

The Government too is happy with the Rs 105.45-crore sale deed. Says Pradip Baijal, secretary, disinvestment: "We had done all kinds of valuation for the company and the price we finally got is more than any valuation." Under the sale agreement, the chairman and five directors on the Modern Foods board will be from HLL. The Government will have two directors. The HLL can offer voluntary retirement schemes, but it is barred from retrenching any employee for one year. Hopefully, the Modern Foods will start making dough much before that.

The first reaction from the two airlines has been less than enthusiastic. That's because both Jet and Sahara are currently investing in expanding their fleets. Jet Airways is inducting ATR planes to increase its presence in regional routes. Sahara too is inducting ATRs and two new-generation Boeings. Clarifies Parvez Damania, managing director of Sahara Airlines: "Since we are investing in expanding our own fleet, we are not interested in buying stakes in Indian Airlines right now." Adds a senior Jet Airways official: "Right now, Indian Airlines does not interest us because of age difference in our fleets. The average age of our fleet is 3.08 years, which will come down to 2.7 years after the acquisition of new planes. The IA's average fleet age is six years."

Another likely bidder is the Tatas, who abandoned their ambitious Rs 1,475-crore airlines project in September 1998 complaining that the then Ministry of Civil Aviation did "not intend to allow competition and attract competition". Since that's no more the case, the Tatas may well revive their interest in IA which was owned by them before its nationalisation.

At 26 per cent, the strategic partner's stake will be much less than the government's 49 per cent. But the Government has assured full management autonomy to the bidder which will be guaranteed through an agreement. The Government will also assure further dilution of its stake in favour of the strategic partner "as and when it gets a good price for its equity holding". The better price realisation will, of course, depend on how quickly the efficiency of IA improves after the sale of 51 per cent of government equity. The airline has turned the corner in the past two years posting marginal profits. According to advance estimates, the year 1999-2000 will end with a net profit of about Rs 39 crore. The airline has been making profits since 1997-98 after a history of losses prior to that.

IA urgently needs fresh infusion of funds to modernise and expand its fleet. According to the Kelkar Committee report submitted in 1998 -- which had first laid out a detailed road map for the airline's privatisation -- if the airline did not renew its fleet in a phased manner, its share in domestic air traffic will fall to 11 per cent by the year 2003. Its current share is 40 per cent. Its present fleet of 53 aircraft includes 26 planes which have to be phased out soon. Says Anil Baijal, chairman and managing director of IA: "Fleet renewal is essential and the funds we raise will be used for that purpose. The Government's decision to privatise the airline gives us both comfort and confidence."

IA also plans to expand its international operations. It's especially interested in European destinations like Frankfurt, Geneva, Rome and Manchester which have been vacated by Air-India. It currently flies to 17 international destinations such as Dubai, Singapore and Sir Lanka. Confirms Ashish Bhatia, a Mumbai-based aviation analyst: "IA wants to go global. This requires investment in global marketing and aircraft acquisition." In addition IA also wants to link many small towns to international destinations. It has drawn up plans for Lucknow-Dubai and Bangalore-Bangkok services.

Clearly, the airline intends to make good use of its long-awaited freedom from government control. At least five years have passed since definitive talks for its privatisation first began. Also, much of IA's plans will have to be altered to suit the vision of the new strategic partner. But as long as this privatisation does improve competition, efficiency and service quality, the prolonged wait for it will be worthwhile.

Especially so since the success of this maiden privatisation will determine the fate of the 100-odd PSUs which are awaiting transfer to private ownership. The ones immediately in the pipeline are Balco, Kudremukh Iron Ore, NEPA Paper Mills, IPCL, ITI and MECON. In kicking off privatisation the Atal Bihari Vajpayee Government has begun well. But it must carry forward the task if the country does not have to divest its dream for a meaningful public-sector disinvestment.

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	Feb 7, 2000