By R. Sasankan

India’s public sector is a monolith and, over the years, many politicians have dreamed of reshaping and remoulding this giant edifice. Very few have worked up the courage to undertake such a daunting enterprise. A few have attempted piecemeal reforms but these have never yielded great results. But ideas abound – and many of these have coagulated into noble intentions that have found expression in the annual budget speeches, without setting explicit targets or time frames to fulfil these objectives.

Way back in the 1980s, the finance minister of the Congress government announced a policy decision to close down all sick Public Sector Undertakings (PSUs). Six months after the announcement, I had visited Udyog Bhavan, which houses the ministry of heavy industry, to find out how much progress had been made on this laudable proposal. A South Indian bureaucrat, who had a great sense of humour, smiled at me and sarcastically commented: “Do you think this proposal will ever work? In independent India, only one public sector has so far been closed down and that was the Banana Corporation of India which had only three employees.” The bureaucrat knew how the system worked and his cynicism was justified. But politicians have their own compulsions to spin big dreams – and have continued to do so. The Congress was succeeded by the National Front, the UPA and the NDA. None has had the courage to close down any loss-making PSU so far.

The Modi government had named Arun Jaitley as the finance minister during its first term in office. Jaitley had always enjoyed a good equation with the Prime Minister and had the political stature to implement even difficult decisions. In one of his budget speeches, he announced the government’s intention to merge the oil and gas PSUs to create a corporate giant. Consultants were brought in to assist the bureaucrats in working out the plan. His intention was not merely to bridge the fiscal deficit but to reshape the oil sector, which had too many bit players. The basic assumption that underpinned this objective was simple: India was a large country and, therefore, it needed large corporations, not small and fragmented entities.

Jaitley wrestled with the idea during his five-year tenure but succeeded only in persuading the upstream major Oil and Natural Gas Corporation (ONGC) to acquire the government stake in downstream major, Hindustan Petroleum Corporation Ltd (HPCL). The ONGC management was reluctant but did not have the courage to oppose it. Petroleum minister Dharmendra Pradhan was very close to Jaitley and could not, therefore, oppose it either. The proceeds from the sale of the government stake in HPCL helped Jaitley bridge a widening fiscal deficit -- a grander version of the device that Dr Vijay Kelkar employed when he was finance secretary in 1998. It is a different matter that ONGC could have gainfully used the money to acquire oil and gas assets overseas.

Jaitley’s successor, Nirmala Sitharaman, did not show much interest initially in pursuing her predecessor’s goals and the plan looked as good as dead and buried. But it has popped up once again in her latest budget speech where she has spoken about consolidating the PSUs and, in the process, even privatising some of them. This is an even grander objective that the one Jaitley had envisioned.

True, there is a crying need to create genuine competition in the oil and gas sector. Multiple oil and gas PSUs are engaged in pseudo-competition that has given rise to inefficiencies that the consumer is being forced to pay for. The primary focus of oil marketing companies (OMCs) has been on building more outlets to grab market share at a huge cost, even though they were all owned by the Government of India.

This has led to poor outcomes: the OMCs have been allocating large capital outlays to build more outlets while sales per outlet have been falling over the years. In the upstream sector, there is no earthly reason why we should have two companies in operation when the prospectivity of the Indian sedimentary basin has been poor. We have had no major oil find since Bombay High and the cost of lifting every barrel has been steadily increasing. To make things worse, the Chinese walls have been broken with downstream companies trying to swim upstream and vice versa at very significant costs.

The idea of selling some PSUs to private players also makes little sense. After all, you can never get the true replacement value of assets on the ground. What you will get is the value for the cash flow that the PSU was generating and this would be sub-optimal because of the current structure of the industry.

Any meaningful reform in the downstream sector is not possible without competition. This is possible only if a global oil major enters the Indian market to compete with the PSU oil marketing companies. It is not going to be easy for any private player, however powerful and resourceful, to compete in India’s retailing market without a share in the marketing infrastructure which is virtually monopolised by the PSU oil marketing companies. Viewed against this background, the move to privatise Bharat Petroleum Corporation Ltd (BPCL) makes sense. It should not be a distress sale. The move, however, has run into problems as divergent interests pull in different directions, with no one having the power or influence to scuttle the plan.

Sitharaman has come up with an ambitious, overarching plan that seeks to consolidate entities across the public sector: the template covers oil companies, banks, insurance firms et al. Oil experts, however, feel that any plan to consolidate the petroleum sector should not nibble away at the integrated structure that has been in place since the 1960s.

The oil sector has three clearly demarcated areas: upstream, downstream and mid-stream. The PSU upstream players are ONGC and Oil India, downstream companies are IOC, BPCL and HPCL, and the solitary player in midstream is GAIL India Ltd. E&P players -- ONGC and Oil India -- can be merged into one upstream major. Though both are saddled with aging fields and stagnating production, their merger makes eminent sense unlike the earlier move to merge Oil India with IOC, which was a proposal mooted by a consultant hired during Jaitley’s tenure. This obviously means that HPCL --which was foisted on ONGC -- will have to be delinked. The same logic will apply to Mangalore Refineries and Petrochemicals Ltd (MRPL) which ONGC acquired for want of success in E&P. Both these companies should join the downstream giant that will emerge, which can be none other than an expansive Indian Oil Corporation (IOC).

BPCL has already been earmarked for privatisation. The entry of RIL and Nayara made no difference to the plight of the Indian consumer who was denied quality fuels. In the midstream, GAIL is both transporter and marketer of gas, an “irreverent combination” that is sought to be undone by bifurcating it into two companies. The transportation business should obviously remain in the public sector.

According to experts, this structure is the most suitable for India and not the so-called integrated companies with upstream and downstream operations being merged under a unified management. In such a scenario, the role of Shastri Bhavan, which houses the petroleum ministry, will be severely curtailed. The petroleum minister, who is answerable to parliament, will however continue to oversee the entire oil sector.

That brings us to the more contentious issue of regulation. It is evident that the upstream Exploration and Production (E&P) sector should have an independent regulator. The present Directorate General of Hydrocarbons (DGH) – which masquerades as a high-sounding independent regulator – is actually a toothless tiger and operates as a wing of the petroleum ministry without any decision-making powers whatsoever.

The present downstream regulatory setup should be smashed and reconceived. The Downstream Regulatory Act, whose many provisions had been struck down by courts, should be re-drafted with the help of experts. The government should stop the practice of appointing superannuated bureaucrats as the regulator. None of the worthies appointed till date has had any impact on the industry. And there is no doubt that the mid-stream operations of a badly divided GAIL should be brought under the control of the regulator.