India needs less interference with free-market structures and a stronger safety net: Mohnish Pabrai

On Air India privatisation, the government must be flexible, says Mohnish Pabrai, Pabrai Investment Funds , talking to ET Now's Tanvir Gill. Pabrai says the important thing is to make it healthy and sustainable long term and then move from there.
Edited excerpts

All the news reports doing the rounds with regards to Air India's divestment say it would be a piecemeal sale. Basically, splitting the airline into two or four units. Is that the best way to privatise Air India or sell it as a consolidated entity?
If you are going to break it into different pieces, it makes it a little bit easier because if there is a buyer who wants to hold things, they can still do that but if different companies or entities are interested in different pieces, then Air India does have a number of very distinct businesses within the umbrella of the Maharaja. So yes, if the government is flexible, then that is a good way to get a good outcome.

But would not a consolidated piece fetch a better value at the end of the day? This is a one-time revenue resource for the government and it is like selling the family jewel. Would not that be a better way of looking at divesting Air India then going into some of parts or breaking it down and then selling it off?
Yes, if I were the government or the owner of Air India, I would not look at it so much as getting the highest value and those sort of things. I would look at how do I extricate myself from this situation in a manner where all the constituents are taken care of.

You cannot take the approach which says that the Government of India wants the highest bidder and the Government of India wants no one to be laid off and a whole series of other criteria. One has to be flexible, especially if one wants to take care of the staff and some of the other issues that Air India has.

First of all, Air India needs to get reconfigured to play to its strength. When you look at the Indian domestic air market, it is very well served by the domestic carriers and private players. The private aviation players in India have done an incredible job. One of those entities or may be a new entity would be the logical buyer for the domestic network. The slots and assets that Air India has are quite valuable but any buyer would need lexibility on how the staff and the excess staffing of Air India is dealt with.

No buyer would want to take that on but there is a lot of precedent for how public sector enterprises which are bloated and overstaffed get trimmed down. A simple way to do that is to do voluntary buyouts.

If the government, coupled with a deal with a private buyer for a significant amount of money to enable the volunteer buyout, then you can get the staff rationalised. A lot of Air India employees would take them up on that offer and the Indian economy is growing and they would not have much trouble finding other employment.

There is Air India and there is Air India Express which is the low-cost carrier headquarter in Kochi. Now the government is saying that both will be sold as one entity and not separated. But you are saying, sell the international and domestic to different buyers. Would that work better?
In my opinion, the ideal buyer for Air India is a combo of Singapore Airlines and Indigo. I do not know of any operator in India who is as good as Indigo on the domestic front and internationally, there are very few carriers as good as Singapore Airlines. An entity like Singapore Airlines coupled with people like Rakesh Gangwal who used to run United Airlines, used to run Air France and now is the promoter of IndiGo, should be brought together and the magic will happen.

IndiGo would actually do the whole thing on their own but they would need a lot of guarantees and assurances of the government to take away a lot of the bureaucracy and the buyouts and all that. You could also have someone like Singapore Airlines come in to take the international and you could have someone like IndiGo come in to take the domestic. That is another possibility.

Two big ponderables are debt and staff. The government has said that it is going to assume non-core debt but core debt is still huge? Secondly, the government may consider absorbing staff and other PSUs but it is easier said than done for flight staff versus the on-ground crew. How do you think the situation is going to be tackled?
I would not think of any scheme which would transfer Air India employees to other PSUs. I would lead the free market deal with that and I would offer voluntary buyouts where people get a lump sum payment and decide to take it and leave Air India.

Regarding the debt, as long as the debt is against assets that are going to the buyers for example airplane debt and so on, there is no issue. You cannot burden or expect a buyer to take on debt which is because of years of losses to Air India. You have to segregate the two and bottom line is that the government quite frankly is better off even if Air India is sold for Re 1 and it does not have any future obligations. So, it needs to be flexible and find a solution that works for all the constituents and be flexible on the pricing and the debt.

Keeping a level playing field for the aviation industry, the government has allowed 49% FDI in Air India now and no further preferential treatment. Also clarification came in from Mr Jayant Sinha, the minister of state for Aviation, that they could look at conditional majority stake where the overall stake can go up but 51% still stays with Indian entities.
This means the minority stake within that majority comes in within Indian entity -- essentially looking at a foreign strategic owner tying up with an Indian player. While there is interest from foreign carriers, as I understand, the tendency is to have ownership and management control which the government wants to keep in its own hands. Is it still an attractive proposition for a major foreign carrier to make winning bid with several caveats attached in these deal contours especially working out a minority holding for an Indian entity so that the overall stake or the majority of the stake stays within the government and a minority Indian entity.

I always find that the government is overly hung up on these percentages and the amount of foreign ownership and such and quite frankly, foreign owners do not have horns growing out of the heads and if I were the benevolent emperor of India, I would just do away with all those rules.
I would make it that even a foreign entity can come in and buy 100% of Air India without any issues. I would focus on other pieces which are more important and which is taking care of the people, thus creating an entity that has a strong viable future. It can go head to head with Emirates, head to head with others -- the best in the world and beat them at that game that is what I would focus on.

One more contra view to this entire privatisation process is that if Air India is successfully privatised, there would not be any national carrier in India. Generally, the government is responsible for transportation as we have seen with railways, state bus services, etc, and there is well financed state transport system world over. The parliamentary standing committee has said government should review its decision or we will lose our Maharaja, a national pride. What is your thought on this contra view?
We have been discussing for decades. There is a valid point. At this point, India has a very vibrant thriving private sector in aviation that quite frankly should be the envy of the world. It is excellent. It does a great job at a great price with great safety and such. So even in the United States, which is one-fourth of the global economy, there is no national carrier and they seem to do just fine. We have not had an issue. Many advanced economies in the world do not have national carriers and that is a moot point because we have a vibrant aviation industry in India and quite frankly Air India is a sick unit. It is a money losing unit.

The important thing is to make it healthy without worrying too much about the ownership structure. The important thing is to make it healthy and sustainable long term and then move from there.

This has been long discussed an issue and some contentious issues are yet to be ironed out but this time overall divestment drive has been very strong. Do you think the sale will happen this year?
Well from all the things you have been telling me of all the requirements the government seems to have, I would be a pessimist if they ever get a sale done. If the government is serious about a sale of Air India, it needs to be very flexible on price, very flexible and open up a big cheque book to care of the people and be very flexible on the breakups or ownership structures and all of that. I would say they need advisors advising them on the sale, who come from the private sector and who look at it from pragmatic lens to get to a point which is a win-win for everyone and India.

That is all about your opinion on the Air India sale and insightful thoughts there but we have a budget coming up. As an investor, we are expecting that there would be some tax tweaks for markets and investors at large and so as an investor, what is your own expectation on Budget this time?
Probably invite any of the billion plus people in India on your show and they probably would have a better perspective on the budget than I would. I have never considered government actions, possible future government actions or any investments I ever make. That is just not part of the calculation and I do not spend any time thinking about what the government will do, etc.

I can say that I am not very optimistic that this will happen but I hope the direction the country takes in general is less interference with the free-market structures and a stronger safety net. What I mean by that for example is we have a lot of government meddling in setting prices or floor prices or market prices of various agricultural outputs and commodities and the driver is to take care of the farmers and then of course they take stock and buy huge amounts of cereals and grains and so on.

A better approach is for the government to get out of the business entirely. It would be very difficult politically but focus on transfer payments to the weaker section of society which is now Aadhaar and payment systems enabled. Let the Indian agricultural sector which is a huge portion of the economy unshackle itself, so it can compete with the best in the world. The way it is set up right now, the incentive structures are for farmers to grow. What the government will give the highest price for is not what the market wants. Because agriculture is such a large portion of the economy, I wish that is the direction they go in and of course it is politically very hard to get rid of the price controls and price supports but what they can do is never increase it from now on; freeze it, so that over time it becomes irrelevant. At the same time, dramatically boost the social safety nets so that people are taken care of but they are not taken care of by meddling in the free market.