Common strands in today's controversies

By C. R. L. Narasimhan

Are there any similarities between the Dabhol Power Company's controversial project and Air India? The owners of both have expressed their intention to quit. Even though the circumstances leading to that decision are very different. Air India's future ownership is in the news because of a conscious policy of divesting public ownership in commercial undertakings.

The DPC's project has been beset with controversy right from the beginning. Enron, the majority equity-owner of the DPC, has recently been saying that it wants to sell its equity at cost and get out from the project altogether, paving the way for a ``final resolution" of the controversy.

For Air India the Government, at present owning all 100 per cent of the airline's equity, wants to sell at least 40 per cent to a strategic buyer who will thereafter assume management control of the airline as well. Hopefully the strategic partner will turn around the ailing airline.

The Government will not be selling out entirely whereas Enron wishes to do just that. But irrespective of whether the original owners get out completely or keep an equity stake, they are likely to retain influence over the two entities. For Air India that is fairly obvious. In fact, continued interference from the airline's controlling ministry - Ministry of Civil Aaviation - is very likely no matter who takes a strategic stake and manages Air India. It will be naive to wish otherwise. If at all Enron sells its stake, the DPC controversy would earn a respite. The buyer of its stake must have not only the money to pay for the stake but also the technical knowhow to run it successfully. Who knows whether Enron, which has a large expertise in trading in LPG and other fuels, might remain in technical alliance even while ceasing to be a promoter?

There is a striking similarity in the ways the two (possible) sell-offs are unfurling. Enron has offered to pull out of DPC after apparently exhausting all other options. The highly publicised wrangle involving the DPC on the one hand and the Maharashtra State Electricity Board (MSEB) and the Maharashtra Government on the other might be about the sanctity of power purchase agreements (PPA) and other legal contracts. Certainly the State and the Central governments have been at the receiving end of bad publicity. Especially for the future of foreign direct investment (FDI) the continuing fiasco sends out entirely wrong messages.

On the other side both DPC and Enron have not escaped allegations of padding up the project cost and adding unwanted extra facilities that have made the power from the project costly. Moreover, as the Godbole Committee has pointed the original legal and other agreements have been terribly one-sided. The implication of all the above is that the decision by Enron to sell out is neither altruistic nor commercial. It is more akin to cutting a loss and going away (although one will never know the correct factual position).

Part of the reform agenda

The Central Government's moves to sell its stake in Air India might be part of the economic reform agenda dealing with public sector disinvestment. Yet even by the standards of the India's PSE sale programme Air India's has been controversial. The Government cannot be seen to be lenient or bend rules. For instance, since strategic considerations matter in deciding who will own the country's flag carrier the Hinduja's have been kept out from the final bidding. Others dropped out earlier on leaving the field to just one bidder. That will further complicate the Government's decision making.

Whatever happens next, Air India's sale cannot and evidently should not be made to resemble a distress sale. Yet there are compelling, non-ideological reasons in welcoming a private sector strategic partner. Air India has a minuscule fleet which is also obsolete, has an appalling productivity record. Recently the Civil Aviation Ministry has been cashing the airline's bilaterals and increasing competition. The new strategic partner will therefore have less leeway in exercising commercial judgment in these. All these make Air India look less attractive to the bidder. But like the difficulty in valuing Enron's stake in DPC it is extremely unwise to put a number on Air India at this stage.

Then there is the issue of commercial viability. How do both fare? As for the airline industry analysts say the outlook is bleak. Overcapacity is leading to a wave of consolidation. Air India now relegated to a small regional carrier, just does not have the muscle to be counted in the international league. Apparently, international airlines fell that instead of putting money in Air India they can try other promising pastures. That seems to be weighing with Singapore Airlines, the one remaining serious co-bidder with the Tatas. Dabhol's problems are not due to the global scenario but entirely local. Simply put it has not been able to produce power at an affordable price. Barring some substantial financial reengineering DPC might never be viable. But at this stage prospective buyers of Enron's stake might not all be swayed by commercial considerations of the above nature alone. For Air India success would lie in ``unlocking'' its value - a common enough recipe for all public sector undertakings now eclipsed for a variety of reasons. The DPC 's project is a valuable asset but it has to be made viable. In that sense anyone stepping into Enron's shoes will have to adopt an attitude of give and take.

The other major point of similarity is of course that the House of Tatas is emerging as a favourite in both. In Air India's case the process of acquiring control has been forthright. Having survived the meandering ten odd stages of a PSE sale the Tata's have run into two unexpected problems: the withdrawal of all other bidders leaving the field entirely to them. This could be an embarrassment and will complicate matters. Second, the reluctance of their partner SIA to go through at this late stage. Clearly the Government will have to bend its rules. Tata's have expressed their interest in Enron's stake. Provided the legal and commercial hassles over DPC are cleared. Again a strong intervention of the Government is on the cards. For Tatas ultimately it will be a question of either or of choosing between the airline or the power project. Too much to hope that there will be another similarity- of Tatas buying up both.

Send this article to Friends by E-Mail

Section  : Business
Previous : Digital animation industry poised for rapid growth
Next     : Beyond employee satisfaction