By R. Sasankan
Competition is an over-abused expression in India's tightly regulated
market where outcomes are decided more by whimsical policy-making than a
free play of market forces. The petroleum sector has had a very
chequered history in its long and fruitless quest to find a workable
model incorporating the elements of competition and a modicum of free
and fair rules of the game. Unfortunately, the hapless consumer of
petroleum products has been denied the freedom of choice flowing from
the benefits of price and quality that might be expected from an
unfettered play of market forces.
The late prime minister, Mrs Indira Gandhi, brought the country’s
petroleum sector almost completely within the fiefdom of the public
sector. Her son, Rajiv Gandhi, took the first stab at private sector
participation in the petroleum industry with the creation of the
Mangalore Refineries and Petrochemicals in which the Aditya Birla group
became a partner. Later, Reliance Industries and Ruias of the Essar
Group were allowed to set up refineries and retail outlets with the aim
to encourage competition.
In October 2019, the Modi-led cabinet appeared ready to take a giant
leap forward when it decided to privatise the Mumbai-based Bharat
Petroleum Corporation Ltd (BPCL). At a press conference, then petroleum
minister, Dharmendra Pradhan, said the government was keen to ensure
that an international oil major picked up the government's 52.98 per
cent stake in BPCL so that the sorely-needed “competition” could be
injected into India’s downstream sector.
It was obvious that the government had Aramco of Saudi Arabia in mind.
After all, the Saudi oil giant had articulated a desire to enter India’s
vast retail market. The pandemic Covid-19 wrecked Aramco’s plans and
threw a wrench in the privatisation plan for BPCL. The government has
gamely pressed on with its decision to sell of its stake in the public
sector refinery. After a long and arduous process, there are three
players in the fray for BPCL: the US-based Apollo Global, 1 Square
Capital and Vedanta. The first two are US-based private equity companies
and the third an Indian company with interest in mining and E&P.
Once again, the government’s dream of fostering competition has been
queered. Private equity companies -- whether Indian or foreign -- do not
run oil companies and their declared intent is to dismantle the
acquired assets and sell them to maximise profits. Such an outcome is
politically inconvenient for the Modi government: BPCL is rated as the
best-run oil marketing company in the country and shredding it to bits
is just an unimaginable and unacceptable outcome for most Indians.
It is now becoming increasingly obvious that the government made a
colossal blunder when it decided to bar Indian PSUs from bidding for
BPCL. India’s largest oil marketing company, Indian Oil Corporation
(IOC), was keen to throw its hat into the ring and made its intentions
known in no uncertain terms. In its enthusiasm to rope in a foreign oil
major into the country, the government decided to keep IOC out of the
bidding process -- overlooking the fact that the mere participation of
India's oil behemoth would have prompted foreign companies to ramp up
their bids.
With the government deciding to go ahead with the bidding process, it
must now pick from one of the three in the fray. Among them, Apollo
Global appears to have nudged ahead of the other two. Even as the
government is keen to maximise the value of its stake in BPCL, it does
not want the company to be carved up and sold -- which makes a lot of
sense from the perspective of a private equity player but not for a
government that is looking to stoke competition in the sector.
Apollo Global is believed to have given an assurance to the government
that BPCL’s status will not be altered for the first four years. It has
indicated a price of above Rs 900 billion for the government's stake.
Still, it looks politically embarrassing for the government to sell BPCL
to a private equity company. It has to also deal with a couple of other
regulatory issues arising from BPCL’s stake in Petronet LNG and IGL
which cannot be resolved that easily. The Modi government is unlikely to
pressure the regulator SEBI to grant a favourable decision.
So, what happens if the privatisation plan hits a gridlock?
One of the most compelling reasons for pursuing an aggressive
privatisation process by selling the government's stake in a vast number
of public sector companies is the fact that the proceeds will help it
trim the mounting fiscal deficit. But this masks the fact that the
fiscal deficit isn't such a huge problem as is being made out. The
former finance secretary, Dr Vijay Kelkar, can help the government to
find a way out as he did in the past with his plan for cross holdings.
The government should enlarge the scope of bidders by including the PSUs
which were kept out of the first round of bidding. IOC will definitely
toss in its offer. There could be another formidable new player in the
revised round -- Gautam Adani who is preparing to enter the
petrochemicals sector. But he has one major drawback: he doesn't have a
strong raw material base to support his endeavour. That problem can be
solved if he acquires a refinery. Neither IOC nor Adani will inject any
competition in the downstream market. If the Ambanis and Ruias could not
do it, it is going to be a bit of a stretch to imagine that the Adanis
will be able to do it.
Competition in petroleum, more particularly in the downstream sector,
will remain a dream for the time being. There is nothing wrong in
selling BPCL and HPCL to whoever pays the highest price. Even foreign
oil companies can acquire them provided we regulate the sector
meaningfully. The larger question is whether the petroleum ministry will
permit a formidable, independent regulator to function. The present
regulatory regime is pretty useless.
Talk of competition without an effective regulator is just a lot of hot air.
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