Financial Daily from THE HINDU group of publications
Monday, Nov 08, 2004
Logistics - Foreign Direct Investment
National carriers need FDI wings
Mr Praful Patel observed: "We first need to give a level playing field to our carriers and at a later stage we can allow foreign airlines to pick up stake in domestic airlines". He refused to give a timeframe by when this could happen. He was, however, enthusiastic about private Indian carriers flying foreign routes by early December 2004. How could the sauce be sweet for desi private carriers but sour for state-owned airlines?
Mr Patel's logic appears to be that if foreign airlines were allowed to invest in domestic carriers they would gobble them up. Yet, one of the most successful private domestic carrier has foreigners as CEO and COO and it was not technology but funds that mattered. Had IA and AI been liberally funded by the Government even five years ago to speedily acquire new fleet, there would not have been so many unutilised bilaterals.
Was Air India not a premier airline flying to Cairo, Sydney, Rome, Geneva, Zurich, and other important destinations when it had the right fleet? Who is responsible for not allowing AI and IA to buy new aircraft? Is it not true that the then government refused to approve an AI proposal to buy eight Airbus A 310s which had received Public Investment Board (PIB) okay in 1991? Six years later, AI leased the same aircraft types and, in the process, lost market share.
In 1995, the AI board submitted a proposal to induct 21 medium-capacity long-range aircraft (either Boeing 777 or Airbus A 340s). After going through numerous rounds and three governments, AI drew a blank. Ten years later, in 2004, AI is leasing three Boeing 777-200s. Similarly, IA was never allowed to buy new aircraft after its last fleet renewal 18 years ago in 1985-86. Today it is managing with some more leased A 320s that cannot even fly direct from Delhi to Singapore.
Obviously, everyone knows that state-owned carriers cannot soar on their own legs as successive governments have cut their wings. In 1992, the then Congress government opened the domestic skies to private carriers. While some committed fell by the wayside, a few like Jet Airways and Sahara quickly enhanced their fleet size. They had no problem in regularly renewing their fleet and acquired next-generation aircraft. Is this level-playing field?
AI and IA are being now accused of not utilising bilaterals, and, riding on this logic, the Government is going fast forward to pass on such routes to private carriers. Jet and Sahara may even share the London route, as the recent India-UK bilaterals have raised the frequency to 40 per week and neither AI nor IA has the aircraft.
The decision of the Government to hike the foreign direct investment (FDI) cap for the domestic aviation sector raises a number of issues. Unlike other areas, be it manufacturing, mining, services, tourism or even real estate, foreign investors, per se, were never seen to making an open demand for a hike in the FDI cap unless it was on market friendly terms.
After the previous NDA regime dropped the move to disinvest government holding in its 100 per cent owned Air India and Indian Airlines, status quo continued under the UPA dispensation. Similarly, the alternative of infusing government funds (estimated at over Rs 2,500 crore) in the two carriers has also not made any headway. Thus, the entire debate of a hike in FDI in aviation got identified with the needs of private domestic carriers, and the latest government decision to move that way has all but confirmed the suspicion of many that the two public sector airlines will be allowed to die a natural death.
This is notwithstanding the promises made in the hard-to-implement Common Minimum Programme in favour of public sector units and the communication of the UPA National Advisory Council chairperson, Mrs Sonia Gandhi, to the Prime Minister Dr Manmohan Singh, on granting autonomy to PSUs.
In a way, the long-awaited civil aviation policy has also been seemingly diluted even before it has been presented following the government decision to bar foreign airlines from picking a stake in domestic carriers.
The central piece of the Union Cabinet's decision include:
The only silver-lining in the decision is the shifting of the approval process from the mandarins of the Foreign Investment Promotion Board (FIPB) and the Civil Aviation Ministry to the automatic approval channel administered by the RBI. Established private domestic carriers such as Jet Airways, Air Deccan and Sahara may benefit immediately. Others waiting in the wings the Vijay Mallya-promoted Kingfisher Airways, the Nusli Wadia-backed "Go Airline" and few more may also stand to gain.
One is not suggesting that all these airlines will want FDI. But looking at the balance-sheet of Jet Airways and Air Sahara (which made losses of Rs 245 crore and Rs 195 crore respectively in 2002-03) and their communication to the Naresh Chandra Committee, they may want FDI. The Air Deccan chief, Capt Gopinath, has gone on record that he would hunt for investors to shore up the fortunes of his low-cost carrier. Interestingly, Mr Vijay Mallya has expressed dismay that foreign carriers are not being allowed to bring in FDI. In sharp contrast, Jet Airways and Air Sahara, during their discussions with the Naresh Chandra Committee and subsequently with the Civil Aviation Ministry, opposed FDI from foreign airlines. So much so, even the Civil Aviation Minister, Mr Praful Patel, raised the bogey of foreign airlines making a backdoor entry should they be allowed to invest in domestic carriers. The lobby is working the same way it did when Tata Airline was prevented from taking off. Is it not strange that such lobbies remain effective despite regime changes?
The Finance Minister Mr P. Chidambaram's efforts to seek FDI, including from foreign airlines, was aborted right at the start. Else, the Left may not have said that it has no objection on the FDI cap hike, though in private domestic airlines only. Such a myopic view has actually served to create two classes of airlines one owned by private individuals and the other by a government that does not know which direction to head.
As per the Naresh Chandra Committee's first report submitted early this year, private domestic carriers such as Jet Airways and Air Sahara should be allowed to operate full-fledged international services. The shares of Air India and Indian Airlines should be first privately placed with domestic financial institutions and FIIs which will, in turn, appoint management boards for both carriers and subsequently expedite their disinvestment.
While the Committee pleaded for 49 per cent FDI in all Indian carriers (both public and private), it specifically noted that it would be irrational not to allow foreign airlines to hold equity. Similarly, it said there should be no entry barriers as that would artificially limit competition. But the most significant recommendation was for creating a level field to ensure fair competition. For this it wanted all airlines to maintain separate books of accounts pertaining to air transport services to ensure transparency. Such accounting standards and consequent transparency clauses are urgently required in the Indian aviation sector to get transparent FDI. The Cabinet should have built in this provision for monitoring the funding of any domestic airline project.
It is clear that Indian Airlines, being a domestic carrier, will continue to remain unattached. IA has not acquired any new aircraft to renew its fleet after 1986-1991, when it completed the induction of 31 Airbus A-320s; one of these crashed in Bangalore on February 14, 1990. The subsequent plan to buy 43 Airbuses, which the IA board approved in March 2002, remains in suspense. It is a different matter if its choice of aircraft was right considering the dramatic change in the global aviation scene and also within the country in the face of an imminent approval to private domestic carriers to fly international destinations.
None of the private airlines would have waited endlessly, like IA, to bring in new aircraft. With the Government raising the FDI cap to 49 per cent and its approval through the automatic route of the RBI will give IA the shocks. It is well known that the aircraft market is slowly hardening and comparatively newer aircraft are not easy to obtain even in the leasing market. Lease rentals have risen sharply, pushing up operational costs.
It is true that purchases are better than leasing. However, if delayed, not only acquisition but also leasing will become expensive. Any market share loss in the intervening period will get difficult to regain. IA is facing this hard fact. The entry of Air Deccan has already eaten into the market share of both IA and Jet Airways.
In this context, foreign funds should be equally welcome in IA, especially as the Government does not have money to fund it. The meagre Rs 137 crore approved by the Cabinet for clearing IA's dues incurred following the merger of Vayudoot has come 12 years after the unwanted and forced merger. In these 12 years, Jet Airways has not only acquired 41 next generation Boeings and a few ATR 70s that helped it garner a 44 per cent market share, which is higher IA's. The liberal grant of bilaterals to foreign carriers has sharply eroded the overseas market share of the two official carriers. The Government should not have the right to direct FDI into airlines of its choice. It should allow foreign fund even into the state-owned carriers. But can it? Obviously, it cannot because of the CMP. For one, the Government has tied itself in so many knots that unless it frees itself it will not be able to free the official carriers. If such knots are necessary for its survival then it should forget about the survival of IA and Air India.
The first knot that needs to be untied is to revive disinvestment in both IA and AI. For FDI to flow into official carriers, the Government will have to either divest part of its 100 per cent equity or create additional equity for allotment to foreign funding bodies, which again would mean reduction in its shareholding. Perhaps, the Government can retain one carrier and strengthen while selling off the other. In either case, it will have to be more liberal and open to FDI, especially from foreign carriers.
What is difficult to fathom is the logic of denying FDI from foreign carriers. If the Government can hold road shows in the US and Europe to invite foreign capital from telecom companies in telecom, insurance companies in insurance ventures, US-based military and defence aircraft companies for HAL, FMCG companies for making washing machines, televisions, refrigerators, and so on, in India, why not aviation?
Even China has finalised plans to induct FDI in its premier foreign carrier before it is listed in the stock market. Australia has allowed 49 per cent foreign equity in its domestic ventures.
Even the US permits 26 per cent foreign equity from foreign airlines in its domestic airlines. In large countries such as China, Australia, the US and India, the needs are different. They are unlike Malaysia, Thailand, Singapore or the EU nations, where an hour's flight will take one out of these countries' borders. Comparisons should be logical, as flight time also makes a difference in market penetration.
The Prime Minister and the Finance Minister addressed important gathering of wealthy foreign investors in the US and the UK. While the Prime Minister said foreign investors will be received with open arms, as India requires nearly $150 billion for developing its infrastructure, the Finance Minister assured foreign investors that they should not be apprehensive of the Left, as the UPA Government knew how to carry all. But despite their strong conviction that what they believed in was right, they did not seem to be having their way.
(The author is a Delhi-based freelance writer.)
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