The Hindu Business Line : Oil sector disinvestment: The end or means?

AS ON March 31, 2002, 13 public sector enterprises were engaged in producing, refining and selling oil and other allied products. All these enterprises (excluding Bongaigaon Refinery) recorded a total net profit of Rs 12,715 crore in 2001-02, and Rs 11,727 crore in 2000-01.

The share of ONGC was Rs 6,198 crore (48.7 per cent of the total) and that of Indian Oil Corporation (IOC) was Rs 2,885 crore (22.7 per cent), followed by Gas Authority of India (GAIL) at Rs 1,186 (9.3 per cent), Bharat Petroluem Corporation (BPCL) Rs 850 crore (6.7 per cent) and Hindustan Petroleum Corporation (HPCL) Rs 788 crore (6.2 per cent).

These five top companies accounted for a total net profit of Rs 11,907 crore, or 93.6 per cent of the total net profit of all oil PSUs.

Ironically, the Disinvestment Minister, Mr Arun Shourie, has been working hard to disinvest some of the Government's equity stake in these public sector companies to a strategic partner.

The issue raised a lot of controversy. The whole question was examined by the Cabinet Committee of Disinvestment, which took the decision to disinvest HPCL to a strategic investor and, in the case of BPCL, to go for a public offering of shares.

Even after this compromise, the issue went to the Supreme Court which, in its historic judgement on September 16, 2003, held that the Government cannot privatise HPCL and BPCL without taking parliamentary approval as both these companies were brought into existence by Acts of Parliament.

Instead of trying to bring about political consensus, the Government developed cold feet as many within the BJP — and the NDA — were opposed to the privatisation of the oil majors.

Mr Ram Naik, the Petroleum Minister, openly welcomed the Supreme Court's decision. Mr George Fernandes, the NDA Convener, felt so strongly against the move that he wrote an open letter to the Prime Minister, Mr Atal Bihari Vajpayee, to reconsider the entire question of disinvestment.

The Swadeshi Jagran Manch was also against disinvestment and has demanded that Disinvestment Ministry be disbanded. The Government had, under the circumstances, no option but to put the disinvestment of BPCL and HPCL in cold storage, as the Congress Party had expressed its unwillingness to disinvest profit-making oil PSUs and thus denied its support to the Government on this issue.

But Mr Shourie, the biggest champion of disinvestment, devised another scheme to disinvest certain segments of Indian Oil Corporation (IOC) because IOC was created in 1964 by the merger of Indian Refineries Ltd. and Indian Oil Company.

The Supreme Court verdict was not applicable to it and, hence, it could be privatised by an executive decision. The decision to do so raised a storm of controversy.

The Government, instead of following the spirit of the verdict of the Supreme Court that major, possibly controversial, decisions should be referred to Parliament for its approval, decided to bypass the Supreme Court and carry out disinvestment of a still bigger oil PSU, IOC, through the clandestine fiat of the executive.

It may be noted in this connection that the Government, in an earlier decision, had decided that IOC as well as two other navratnas — the Oil and Natural Gas Commission (ONGC) and Gas Authority of India (GAIL) — will not be privatised and in view of the security concerns, these companies will continue in the public sector.

The Disinvestment Ministry's proposal to break up IOC seems to go against the Government's decision. However, it would be better to consider the case on its merits.

First, IOC is the only company listed in the Global Fortune 500. IOC is an integrated company that carries on the activities of exploration, mining, refining, marketing and distribution. The world over, there is a trend to develop integrated oil companies and make use of economies of scale.

In this context, the proposal to sell the marketing wing to a strategic investor, reducing the company merely to an exploration and refining company, is unwise.

Second, IOC is a highly profitable company. It earned net profits of Rs 2,720 crore in 2000-01 and Rs 2,885 crore in 2001-02, and a still bigger net profit of Rs 6,115 crore in 2002-03. During the three year period (2000-01 and 2002-03) the total net profit earned by IOC was Rs, 11,720 crore.

Would it be desirable to transfer such a highly profit-making integrated company to a strategic investor drawn from the private sector? Would it be desirable to cut its marketing wing so that it becomes dependent on the private sector to push the sale of its products? When the country has accepted the mixed-economy philosophy, efficient PSUs should be allowed to co-exist with private sector units, and competition between them fostered in the national interest.

To have exclusive faith in the efficiency of the private sector has not been upheld by the efficiency criteria developed by management experts. It is the culture of the organisation that determines efficiency, rather than the ownership pattern.

Third, the current turnover of IOC is $26 billion. This is still small judged by the international standards, where Royal Dutch/Shell has a turnover of $236 billion. Yet, IOC is the best that India has. It would be much wiser to nurture it and allow it to grow as an integrated oil company so that it ultimately catches up with world leaders, rather than reduce its size and cripple it.

The philosophy of globalisation impels us to promote the growth of our best-managed companies so as to become globally competitive. This is a much healthier course to follow.

Fourth, Mr Shourie is acting with blinkers on, and is thus unable to see beyond his limited goal of garnering more resources by pushing disinvestment through any channel he can think of. Whereas logic demands that he should have sought remedial actions for loss-making companies, such as National Textile Corporation (NTC), he seems keen to disinvest highly profitable PSUs, such as IOC, to private groups such as Reliance.

Such a policy has been aptly described by Prof Ashok Rao as "privatisation of profits and nationalisation of losses". Moreover, to pick up a strategic partner amounts to putting the profits of PSUs into the pockets of big business in the private sector.

Prof. T. T. Ram Mohan, of Indian Institute of Management, mentioned: "Mr Shourie has erred not merely in his choice of firms but in his insistence on a particular method — strategic sale — (that entails handing over managerial control of a public sector company to private promoters) as the norm for disinvestment."

Fifth, Mr Shourie's insistence that public sector companies such as IOC, not be allowed to participate in the bids for disinvestment on the plea that it is not `genuine privatisation', has been seen as "collusion" with private sector big business, particularly the Reliance group.

While IOC participated in the bid for IBP Ltd. and won it, it was denied this opportunity later. The former Disinvestment Commission Chairman, Mr G. V. Ramakrishna, charged Mr Shourie for acting in "unseemly haste" by asking Reliance and Shell to be ready to take up HPCL.

Such a partisan attitude on the part of disinvestment minister does not project a good image of the person involved. This has angered several persons within the NDA dispensation and its sympathisers. The Swadeshi Jagran Manch, therefore, urged that the Disinvestment Ministry be disbanded and that the disinvestment proposals should, if at all, emerge from the ministries concerned.

IOC and HPCL account for nearly three-fourths of the market outlets for petroleum products. IOC has offered to take up stake in HPCL and thus add to the coffers of the Government nearly Rs 10,000 crore to reduce its budget deficit. It will, moreover, , strengthen IOC. Such a course is much wiser because it helps the Government meet the Budget deficit and, at the same time, it makes an integrated IOC grow stronger.

It appears that the Government has now realised that there is merit in the criticism of disinvestment policies. Such policies, if pursued, would make trade unions of all shades — from Right to Left — stand arrayed against the Government. Even the Bharatiya Mazdoor Sangh (BMS) belonging to BJP is opposed to disinvestment of profitable PSUs. Consequently, the IOC disinvestment has been shelved for the time being.

Some persons apprehend that it is a tactical retreat in view of the forthcoming Assembly elections in December 2003. Whatever may be the reason, it is obvious that Mr Shourie has been directed to tone down his rhetoric on disinvestment so as to placate the NDA partners who are stoutly opposed to his policy, as also the RSS and SJM lobbies, deadly opposed to Mr Shourie's policies of selling PSUs cheap to the private sector.

The Government has already been criticised by the Congress(I) and the Left parties for selling PSUs for a song. It has, therefore, to decide whether disinvestment is an end or a means. If it is a means, it must be decided whether it is judicious to go ahead with the disinvestment of highly profitable PSUs and thus weaken the Government's resource position in the long term, in view of some short-term, though uncertain, gains.

(The author, a former president of the Indian Economic Association, is Visiting Professor, Institute for Human Development, New Delhi.)

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