Old w(h)ine

Now that the Synergy in Energy committee has rejected the petroleum ministry’s view that the state-owned oil firms need to be merged, the ministry is reviewing whether the report should be accepted or not.

It is easy to see why the committee has not recommended the merger route though this has clearly been the petroleum minister’s preference.

As the committee points out, just 29 per cent of all mergers and acquisitions globally have succeeded in increasing returns for shareholders.

It also points to the fact that post-merger, there will be a greater likelihood of oil cartels and monopolies—a plausible end result since the petroleum minister’s explicitly stated intention in proposing a merger is to prevent state-owned firms from competing with one another.

Also, as the committee points out, since getting rid of workers rendered surplus by a merger will not be possible in India, one of the benefits of merging gets ruled out.

In any case, where a merger is contemplated, it is best that this be addressed by professionals looking at the pros and cons of such a deal commercially, because such a view would look at far more complex issues than the simplistic one of trying to prevent competition between two state-owned firms.

It is of course ironic that while the ministry (rather, minister) has been in favour of merging state-owned firms so that they integrate all the way from prospecting for oil to running petrol pumps, existing state-owned firms wanting to do just that are stopped in their tracks.

Inorganic growth is fine, it would seem, but organic is not!

That having been said, the committee’s alternative to merger has little to recommend it. It is naïve in the extreme to argue that if there is a National Shareholding Trust (NST) whose members are eminent personalities from the government, and the public and private sectors of industry, this will eliminate interference by the government in the running of a state-owned firm.

It is easy to see that the members of the committee see themselves as the kind of people who would fit the bill! As for the problems with such an approach, it ignores the well-known danger of a mismatch of objectives between agent and principal.

This is at the heart of many of the problems of state-owned industry, and is not a problem unique to India because it is an issue well recognised in economic literature.

If the argument is that a trust or holding firm acts as a buffer between the minister/ministry and the company management, that is precisely the function that the board of directors is supposed to serve.

If the board can be easily subverted, despite the existence of public enterprise selection boards that independently appoint functional directors and chief executives, it is not hard to see that a determined minister will find members to put on a trust who will do his bidding.

The government has no shortage of control levers. All major expenditure has to be okayed by the administrative ministry. Why, even the chief executive’s travel plans need ministry approval.

While it is all very well to say that the administrative ministry should not be allowed to have a say in such matters, the theory of parliamentary accountability opens the door to all manner of intrusive conduct.

The only way to free firms from the yoke of government control is to sell them to private investors. Every other idea—including the navratna promise of providing greater freedom, of signing MoUs with government, and so on—has eventually proved a sham.