By R. Sasankan
The big rationale for the plan to privatise Bharat Petroleum Corporation
Ltd (BPCL) was the need to inject competition in the petroleum industry
-- a fact that Union minister for petroleum and natural gas Dharmendra
Pradhan articulated back on November 19, 2019 when he announced the
selloff plan for the state-owned Bharat Petroleum Corporation (BPCL).
This argument was exactly the opposite of what then Prime Minister
Indira Gandhi made when she chose to nationalise Burma Shell Refineries
in 1976 to create BPCL.
The Modi government's policy stance on the subject has not met with any
great resistance from any quarter save for some muted expressions of
restiveness from the trade unions. The BPCL privatisation plan hit a
major roadblock after the pandemic hit the country last year and it is
only now that the government has started to try and once again hustle
the process after indications that the enormous dangers of the crisis
have begun to abate.
But it forces us to now confront the question that has loomed before us:
does competition in the petroleum sector really yield efficiency gains
for the consumer? It must be acknowledged that fair competition helps
create a healthy market that ultimately benefits the consumer and the
market players themselves. However the phrase has never been clearly
defined in the Indian context. What precisely did Pradhan mean when he
spoke of competition? Can mere privatization of BPCL raise the level of
competition in India's oil and gas sector?
In a truly competitive market, the price to the consumer ought to be
controlled by the most efficient producer and distributor of petroleum
products. The entry of private integrated oil companies such as Reliance
Industries Ltd and Nayara have failed to have any effect on the final
price to the consumer which continues to be determined on the basis of
import parity, distribution margins, and taxes that have become a major
source of revenue for both the Central and State governments.
RIL and Nayara are more efficient in refining and distributing petroleum
products compared with the dominant public sector oil majors. But they
have failed to pass on the full benefits to the consumers. The
privatization of BPCL will not change this market dynamic. I do not
believe that the government is ready to bring the oil and gas sector
completely within the ambit of the goods and services tax which would
circumscribe the rent-seeking tendencies of federal and state
authorities battling the compulsions of meeting multiple policy
objectives.
Pradhan is a mature politician who is au fait with the practices of the
international petroleum industry and he cannot be unaware of the fact
that oil majors prefer to invest in countries with a stable and
effective regulatory system. The value of the assets go up considerably
in such markets. India has quite a few private players in the E&P
sector. There have been continual demands for the creation of an
independent regulator for the upstream sector. Even the Planning
Commission favoured the idea of an independent regulator. The existing
Directorate General of Hydrocarbons (DGH) has often been projected as a
regulator which it is not. It only operates as the technical wing of the
ministry of Petroleum and Natural Gas and has no power to take
decisions on any subject.
India has had a very chequered history when it comes to regulators
especially in the petroleum sector. For example, the Petroleum and
Natural Gas Regulatory Board (PNGRB) -- the so-called downstream
regulator -- has been ineffective from the very beginning. Most of the
provisions of the PNGRB Act could not stand up to scrutiny before the
Supreme Court. Its functioning has been badly hamstrung by the fact that
the major petroleum products and certain sections of the PNGRB Act have
not been notified till date. The wide difference in the prices of major
auto fuels such as petrol and high speed diesel (HSD) across the
country largely reflects the different state-level taxes and some
specific costs attributed to small volumes in remote or harsh and
inaccessible areas. The government had advertised for a consultant to
redraft the PNGRB Act but we have not got anywhere with the plan to
reformulate its provisions. In the case of the mid-stream sector, the
natural gas markets are not fungible and government continues to
determine the price of natural gas for different end uses.
There are a host of other issues facing the Indian consumer. This is
amplified by the observations made on the latest report of the apex
auditor, the Comptroller and Auditor General of India. "There were 3,463
instances in 91 out of 188 outlets (40 belonging to Indian Oil
Corporation, 25 to Hindustan Petroleum and 16 to Bharat Petroleum) when
dealers were not prompt in changing the prices at the prescribed time of
6 a.m. The daily prices were manually revised within the range of 587
minutes before 6 a.m. and 1,078 minutes after 6 a.m. Overcharging from
customers by the dealers at such instances could not be ruled out”.
The 188 outlets (61 automated and 127 non-automated) were picked up from
the 55,013 retail outlets under the control of the three government oil
marketing companies. The report, which was tabled in parliament by the
government, identified the gremlins undermining the objectives of
genuine competition as the dealers' lack of promptness in changing
prices, absence of sustained connectivity, and overcharging due to flaws
in the automation system.
The hapless Indian consumer is forced to bear the full brunt of the
consequences arising from the infirmities in the system. Fuel
adulteration has been a perennial problem. According to the erstwhile
Oil Coordination Committee, the predecessor of PPAC, both public and
private players are guilty of adulteration. One more foreign private
player cannot make any great difference to the situation in a vast
country like India.
The root cause of fuel adulteration goes back to the kickback-based
allotment of retail outlets where the going rate at one stage was Rs 10
million per pump. That is now a matter of history but those who invested
in those outlets are keen to maximise their returns. A large number of
retail outlets were cornered by politicians who were able to influence
the country's petroleum policy till the market was partially deregulated
in the 1990s.
I acknowledge that adulteration and theft of fuel at the point of
delivery because of faulty metering or short supply is an enforcement
issue. The current regulatory regime is fully empowered to deal with
such malpractices but that does not happen. Effective intervention at
the level of the ministry of petroleum and natural gas can make a lot of
difference and minimise the plight of the consumers.
But we need to create a fully fungible energy market that is
independently regulated without artificial barriers of "notified
products" before the objective of genuine competition is achieved. The
public and private sectors must compete on a level playing field. All
energy sources would be required to compete in such an energy market.
The entry of a few private sector players will not change the situation
unless the government actively puts the pieces of regulation in place.
Efficiency gains through a contrived privatisation process will never
reach the consumer. India's energy sector needs massive reforms (which
goes well beyond the privatization of BPCL) if India aspires to reach
China's current per capita GDP even by 2050! Without such reforms, India
will remain energy poor and, thereby, economically poor.
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