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Press Release [FREE Access]
Petro Intelligence » Privatisation Not The Answer To Consumer Woes

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.



To download the latest issue 'Volume 28 Issue 3 - May 10, 2021', click here
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Data Section
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