The Hindu Business Line : Petro retailing conundrum

SOME ADVICE FOR the Government, which is reported to be reviewing the norms for petroleum product retailing: Free the sector fully and drop all the entry barriers that have made petroleum product retailing a preserve of the public sector oil companies. The most restrictive of barriers is the minimum investment norm for a private player. As per this norm, private players wanting to enter the transportation fuels retailing business should invest, or commit, a minimum of Rs 2,000 crore in the oil sector. This norm ensured that only three private players qualified — Reliance Industries, Essar Oil and Royal Dutch/Shell — the last named due to its investment in an LNG import terminal at Hazira.

When it was set, the norm was seen basically as a protective shield to keep multinational players away from the lucrative retailing business. Then, the Government, in its wisdom, decided that it would prescribe the maximum number of outlets that each of the private players can put up. Such questions of why there should be a restriction or why the government should decide on how many outlets a private player can put up were never raised. Thus, though the retailing sector was supposedly freed from April 1, 2002, it never was in the full sense of the term and it continues to remain so with the Government now setting the retail prices for the transportation fuels.

In its Mid-Term Appraisal of the Tenth Plan, the Planning Commission noted that petroleum products retailing needs "private sector efficiencies" and recommended that the Government should look at lowering the Rs 2,000-crore investment barrier in order to attract more players. One cannot agree with these observations more. In fact, the government should go a step forward and do away with the minimum investment norm. What the petroleum products retailing sector needs today is competition. While allowing free entry to prospective players will be one step in this direction, the more important one would be to free the entire pricing process which is now strictly under the government's control. One of the factors that prompted the Government to review its policy now is that none of the private players permitted to set up retail outlets has commissioned the sanctioned numbers. If only the Government delved a little more deeply into the whys of this, it will find that the more the number of retail outlets and higher the volumes, the more spectacular the losses for private (and PSU) retailers of petrol and diesel. In fact, Essar Oil has reduced its volumes at retail outlets in the last few months to cut down on losses. So why will these companies commission newer ones?

The artificially low prices set by the Government for petrol and diesel compared to their prevailing market prices are sending the entire products marketing sector into a tailspin. If there is a respite now for the oil marketing companies, it is thanks to the retreat in global crude oil prices from their highs and not because of any government initiative. The Government should take a holistic approach to the petroleum sector and frame a comprehensive policy to free the industry in the real sense of the term rather than micromanage segments. The earlier this is done, the better.

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