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June 2018

Perspectives: The Month Through India’s Eyes

Over the past month, media coverage focused on a mix of corporate news and government policy initiatives. Topics which received extensive news coverage include setbacks in the divestment process of India’s state-owned airline (Air India), police violence against protestors in Thoothukudi (Tuticorin) and a recent shift in the government’s staffing plan for senior administrative positions.

Setbacks in the Divestment of Air India

The Indian government’s on-going attempt to divest its stake in Air India hit a roadblock last month when it failed to receive any bids from investors before its stipulated deadline. Various media publications weighed in on the underlying reasons for the lack of interest from buyers and the challenges before the government.

The Indian Express highlighted the unattractive deal structure and the operational inefficiency of the airline as a key deterrent for buyers. “…Industry analysts believe it was the government’s decision to retain 24% stake that ultimately proved to be the big deterrent. In clarifications sought by interested bidders, as many as 11 questions pertained to the government retaining the minority stake… [Secondly,] what had generated significant buzz [among potential buyers] was the possibility of the airline being broken up for sale… a week after AI’s preliminary information document was published, IndiGo announced it was pulling out of the race because… it didn’t “have the capability to take on the task of acquiring and successfully turning around all of Air India’s airline operations”… [Thirdly,] AI has the largest number of employees per aircraft among Indian airlines… [Compared to AI’s] 234 employees per aircraft… IndiGo had 111 employees per aircraft… Jet Airways had 142… and low-cost carrier SpiceJet, 140. The employees-per-aircraft ratio is a key metric used in the industry to identify the operational efficiency of an airline. Eventual reduction of contractual employees was one of the measures to be undertaken by Air India as part of its turnaround plan… Faced with such a commitment, it is perhaps not surprising that bidders baulked at the offer terms which expose the investor to labour risks; limit the opportunities to create synergies with a strategic investor’s other airlines; and which leave open the prospect of political interference on strategic and day-to-day matters as a result of the government’s retention of a 24 per cent shareholding”

Livemint suggested that reorganizing the company into smaller entities and restructuring deal terms could help make the opportunity more attractive. “For a start, the company should be reorganized into seven entities: (1) Aviation—passenger and cargo (includes Air India Express and Alliance Air); (2) Leasing—all owned aircraft assets; (3) Airport services—ground handling (already created); (4) Hotels (already created); (5) Maintenance, repair and overhaul (MRO, already created); (6) Loyalty programme—flying returns; (7) Legacy—to include excess assets, human resources and liabilities not critical to other entities. Restructuring and building these entities will ensure maximum value during sale and minimize financial loss to the government. Further, it will ensure that services provided between entities are competitive and comparable to market rates. The aviation entity’s restructuring should include a detailed study on traffic and routes to optimize ticket pricing and load factors… All excess assets (the Mumbai office, Delhi land assets, etc.) and excess employees must be moved to the legacy entity. All liabilities of approximately ₹50,000 crore must also be moved to the legacy entity; it is important to sell the company debt-free. This will ensure the buyer has freedom to buy the company as per its own capital structure requirements, thus allowing for a wider bidding audience.”

A column in the Hindustan Times echoed the need to simplify the deal structure but also expressed skepticism about the government’s ability to implement these changes. “…It was almost inevitable Air India would not sell. Now this means the government has to re-think the way it wants to privatise the airline. But if the second attempt is to be different it must begin with the admission that the first was riddled with ill-advised, uncalled-for and unnecessary conditions. They have to be dropped. In fact, surely the solution is to offer all 100% for sale and to do so on simple terms without silly restrictions? Actually, why not do what Margaret Thatcher did when she was privatising British Gas and British Telecom: write-off the entire debt and ask buyers to bid in terms of what they believe the airline’s potential is henceforth worth? Rational as this may seem, will the government act so radically with less than a year left before the next elections? I doubt it.”

Police violence against protestors in Thoothukudi (Tuticorin)

A citizen’s protest against Sterlite Copper (a copper smelting unit of the Vedanta conglomerate) took a violent turn when the police resorted to firing at the crowd of protesters, resulting in the death of 11 civilians. Media coverage unanimously condemned the violence and various publications weighed in on the causes and implications of the clashes.

The Hindu condemned the attack and the state’s use of excessive force. “…the Tamil Nadu government failed to gauge the intensity of what was coming… It raises questions about the government’s failure to drive this point home forcefully, and casts a doubt about the real intent of some of the protesters, possibly a small section comprising hardline groups. The immediate task is to compensate the public for its losses and end the alienation of the affected communities through talks… Any police response must be commensurate with the gravity of the situation; there is no place for heavy-handedness and a disproportionate use of force. The inquiry must establish who gave the orders to fire and on what basis. Also, why the police failed to intervene well before the protest developed an angry head of steam… An urgent process, such as an all-party meeting, is needed to heal the wounds, and infuse confidence in the community. A credible environmental audit should be undertaken, without compromising on the ‘polluter pays’ principle. The TNPCB, which usually scores poorly on transparency, should commission credible experts to assess the quality of air and water in Thoothukudi. Only such verifiable measures will build public confidence, and make orderly industrialisation viable.”

The Hindustan Times highlighted the state’s poor track record in implementing environmental laws effectively. “The anti-Sterlite protest in Tuticorin is not the first in which citizens have taken on a company on the issue of pollution and human rights. It won’t be the last either, unless corporations learn to follow India’s green norms and respect human rights, and, more importantly, the State implements the laws in letter and spirit… The State has enough institutions, laws and funds to counter apprehensions of the people. But more often than not, it fails to use them judiciously and effectively, leading to an atmosphere of distrust… Take for example the case of district mineral foundations (DMF), which were set up in 12 mining states in 2015 after the amendment of the central mining law… of 1957. The DMFs, which actually recognises that to date mining has only benefitted companies, individual miners and the State but not the impoverished communities, sits on neat pile of cash contributed by mining companies, determined on the basis of their royalty payment: Rs 13,398 crore, as per the latest information released by the Union ministry of Mines. But according data provided by the states to the Centre, only 17% of the amount (Rs 2 260 crore) of the DMF amount has been spent till the end of 2017.”

An article on LiveMint analyzed the situation from the economic point of view and underscored the political risk for industries exposed to environmental concerns. “The Tamil Nadu government’s order to permanently shut down Vedanta Ltd’s copper smelter is a reminder that policy and political risk lurks around the corner in India for companies that clash with the environment and local population’s interests. These risks are particularly elevated for industries such as mining, but even infrastructure projects such as ports are not immune… The bigger concern for investors is if the Vedanta episode marks a shift in the risk levels faced by the industry. In this case, it has taken a political turn after the unfortunate death of protesters in police firing. The government has used public sentiment as one of the reasons for ordering a permanent closure. Risks such as these can hardly be foreseen and there is little investors can do to mitigate them. While policy risks are an accepted risk in some industries, when you add political risk it makes for a more potent combination, particularly in industries that are exposed to environmental concerns.”

Government’s decision to allow lateral hires for senior administrative positions

This month, the Indian government announced the opening of ten positions within the administration at the Joint Secretary level to lateral entries. The positions cover important departments including economic affairs, revenue, financial services and commerce. Media houses reacted positively to the announcement and advocated the need for change in India’s administrative organizations.

An article in the Hindustan Times by the CEO of Niti Aayog (the policy think tank of the Indian government) spoke about the opportunity to boost ministry-level capabilities by tapping into the private sector. “India has a huge talent pool, laden with intellectual capital that outpaces any other country in the world. Unfortunately, at the policy and ministerial level, utilisation of the best and brightest has not been enabled at an institutional level… while it is not the first time that lateral entries have been attempted, it is certainly the first time that a group of 10 at the joint secretary level is being inducted, out of the more than 450 JS-level positions in the government… It is also imperative to allow civil servants and government officials to be placed in the private sector for periods of three to five years at a time. While the [the Indian Civil Services] produces outstanding individuals, to make these individuals truly well-rounded, they should have the option to gain experience and specialisations through private-sector placements.”

Livemint supported the move and advocated giving the new hires space to perform. “The Narendra Modi government’s move to invite lateral entries needs to be welcomed… Specialists coming from outside are likely to bring fresh ideas and help improve outcomes. Further, rather than being dependent on officers of a particular service, this gives the government a wider pool of talent from which to select officials. However, it will be important for the top leadership to make sure that lateral entrants get space to perform. It is likely that the existing elite in the bureaucracy will not like this change. This is an important experiment and will be closely observed by various stakeholders. State governments would also do well to attract talent from outside to improve policy outcomes, as at the aggregate level they get to spend more than the centre.”

The Economic Times also supported the move to widen the talent pool accessible for the government. “The government’s decision to allow lateral entry in senior positions is welcome, and long overdue. India is rapidly globalising, and many fields are getting increasingly complex, making the case to look at competence developed outside the government compelling… But why restrict this only to talented and motivated “Indian nationals”? Moving to an open system from a closed system will free the administrative machinery from the domination of “services”. But there has to be a robust institutional mechanism to select candidates to prevent the system from being misused. Hiring on a contract basis also makes sense, and will lower the burden on contributory pensions. Lateral hiring is in sync with the system adopted by many countries that include US, UK, Australia… Civil servants should reckon to competing with domain experts from outside, apart from other cadres within.”

 

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