Compete, don't collaborate

At a time when the government is protecting the consumer from the sharp surge in global oil prices by cutting import and excise duties, and forcing the PSUs to absorb some “losses”, it’s difficult to argue against it.

It remains true, however, that while the government’s actions suit us right now, they are completely crippling the oil PSUs by robbing them of the power to make decisions, ensuring that when there is genuine competition once Reliance and Shell set up their own pan-Indian marketing networks, the PSUs will be spectacularly unprepared.

There is, of course, the whole issue of not allowing oil PSUs to fix their own prices without the government’s OK.

After all, since India doesn’t import any petroleum products, the government can just as well control prices to a large extent by just continuing to cut the ridiculously high petroleum duties that only serve to fill up the finance ministry’s coffers and add to the oil PSUs’ monopoly profits—when import duties were 20 per cent, refinery margins in India were $2–3 per barrel higher than those in other countries.

Why constrict the PSUs’ freedom by making ridiculous price bands beyond which they cannot raise prices, and then not even allow this limited freedom to be exercised?

But I’m not talking of just this. At a recent meeting, when ONGC wanted to set up an 800 MW power plant based on gas produced by it in Tripura, the petroleum ministry opposed it saying producing power wasn’t ONGC’s core function.

Surely the profitability of the plant is something ONGC’s management would have looked at?

In the event, ONGC will be forced to produce less gas—it is forced to cap 2.5 million cubic metres of daily production—and the country will continue to suffer from power shortages.

For over a year now, ONGC has been trying to set up a small network of petrol pumps from the licences issued to it as well as to Mangalore Refineries, which it took from the Birlas over a year ago, and turned around (proof, I suppose, that the company’s management isn’t as stupid as the government thinks!).

Since it is very difficult to set up a network as a government company—you have to reserve pumps for scheduled castes, war widows, economically backwards, and so on—ONGC proposed a joint venture with government-owned financial institutions to set up the pumps, making this company, in effect, a non-government one.

While it is perfectly understandable that Ram Naik sat on ONGC’s proposal since he didn’t want to lose control of the pump-allocation business, it’s not clear why Mani Shankar Aiyar’s following in his footsteps. After Bharatiya Pump Party, as the BJP got to be known then, perhaps it’s time for a United Pump Alliance!

What’s even more frightening are the proposals to merge various oil PSUs—while all PSUs were to be merged into an ONGC-led one and an IOC-led one, the latest proposal appears to be to have just one giant oil PSU.

Indeed, reports suggest the idea emanated from Aiyar’s ire over some oil PSUs bidding for the same projects overseas and what he called frittering away of precious national resources, or words to that effect. Imagine, the minister’s upset over what most would regard as just old-fashioned competition that boosts efficiency levels!

No one can disagree with the hypothesis, made most effectively by ONGC Chairman Subir Raha, that India’s oil companies need to be bigger if they are to compete with giants like Exxon-Mobil, or that it makes sense for companies to be fully integrated instead of being either just exploration and production companies (like ONGC) or refining-marketing companies (like IOC, HPCL, and BPCL).

To the extent that ONGC is going to set up its own petrol pump network anyway, it makes sense to allow it to take over an HPCL or a BPCL, and vice versa.

The issue, however, is two-fold. Global experience shows that most mergers don’t deliver anywhere near the value originally envisaged—indeed, most destroy value, and the mega Compaq-HP merger is the most recent example of this.

In any case, since most oil PSUs are over-staffed by 20–25 per cent, a merger involving IOC, ONGC, HPCL and BPCL will mean the full staff of an HPCL, for instance, will be redundant—if you’re not going to get rid of this excess, the merger’s doomed from the very start. Two, the tax advantage being touted as one of the biggest reasons for the merger will disappear once there’s a full-fledged VAT chain in place.

But what of the point that there’s an unnecessary duplication of resources that happens when, for instance, an IOC and an HPCL set up their own parallel storage and dispensing networks, as opposed to having the same one when they’re merged?

That’s a powerful point, but the answer’s staring us straight in the face, and it’s called the common-carrier principle. That is, all assets that are being duplicated (like storage depots, for instance) be made available to every player on a non-discriminatory basis.

So, if an IOC tank has spare storage, it has to be made available to an HPCL, or a Shell, or a Reliance, or even a merchant importer—in fact, if independent importers were allowed to use the facilities belonging to an IOC, there’d be a lot more competition in the market place. We’d all benefit from the competition and there’d be a lot less duplication of resources.

That, however, requires that an oil regulatory body be set up. And that’s something the petroleum ministry’s been delaying for ages. In less than a hundred days, Aiyar’s done a great job in identifying the major problems correctly. It’s just that his solutions are the wrong ones.