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Home > News > Columnists > Praful Bidwai

Don't Privatise Oil Companies

October 22, 2003

Let's imagine a hypothetical scenario. Assume that your government owned a highly profitable, technologically sound, decently modernised, and relatively well-managed Public Sector Enterprisein a major infrastructural field.

It happened to be your Third World country's sole company (private or public) to belong to the Fortune 500 list of the world's biggest corporate giants. It continues to give the public a massive return on investment, with dividends on equity as high as 60 percent, even 200 percent. Sixty percent of the company's profits come from its retailing business where there is stiff -- and growing -- competition. The company is in a globally ramified industry where size matters, and where consolidation rather than fragmentation is the dominant trend -- and key to success. In short, the company is like the goose that lays the golden egg.

Would you want to sell off that company? Or worse, would you bleed it to sure, cruel death by divesting it of its most profitable component? And would you do this just because your country's highest law court had debarred you from selling off some other companies without obtaining clearance from the national Parliament under whose Acts they were nationalised in the first place?

Bizarre as this might seem, the scenario is not in the least bit hypothetical. Indian Oil Corporationis a Rs 120,000 crore-turnover reality. And surreal as the whole plan might seem, selling off IOC is precisely what Divestment Minister Arun Shourie insists the government must do.

This is being rationalised on the ground that the fate not just of divestment, but of economic 'reform,' indeed of the economy itself, hangs by the slender thread of privatisation of the oil PSEs. If Bharat Petroleum Corporation Ltdand Hindustan Petroleumcannot be sold off because of the Supreme Court's stay, then the very least the government must do is privatise IOC. Or else, disaster will befall us all.

Yet, the stock markets do not reflect any trend towards disaster. They may not accurately mirror the state of the economy; but they do indicate the state of private business's mood. And that is definitely buoyant. The Sensex has risen by a good 500-plus points or by 12 percent over its level on the day the Supreme Court barred the BPCL-HPCL sell-off. No wonder the IOC sell-off proposal has drawn flak not just from the political Opposition, but even from economists and opinion-shapers of different hues, including staunch supporters of neo-liberal policies, who don't oppose privatisation in principle.

For instance, a majority of our newspapers, including the highly pro-business 'pink' financial papers, have opposed it -- and accused Mr Shourie of distorting the minutes of the Cabinet Committee on Divestment, which do not mandate hiving off IOC's 11,000-odd retail outlets, but only say that 'the ministries of petroleum and divestment have been directed to examine if the marketing assets of IOC can be disposed of separately.'

Professor T T Ram Mohan, who teaches at the Indian Institute of Management, Ahmedabad, has sharply criticised Mr Shourie for not working jointly with the petroleum minister, but presenting him with a fait accompli. He argues that Mr Shourie is driven by his 'antipathy to the very concept' of PSEs; that he is 'unsuited' for his job and must be divested of his portfolio.

Strong words indeed! But they contain a great many truths. Put simply, the proposal to privatise IOC makes neither economic nor political sense. Take economics. The oil sector is a highly globalised business where the only way an Indian oil company can remain competitive is by aiming for a big size. IOC (turnover, $26 billion) is a giant by Indian standards, but it is puny in relation to global companies such as Exxon Mobil or even Royal Dutch Shell ($235 billion).

IOC has proved its competitiveness not only in oil refining with its world-class capacity of 38 million tonnes, but also in marketing. Two years ago, it beat the aggressive Reliance group to take over the small public sector marketing firm, IBP.

IOCalso has plans to expand abroad. It has acquired a number of petroleum outlets in Sri Lanka. The other oil PSEs are impressive too. Together they generated profits of Rs 23,252 crores last year! HPCL alone paid a dividend of 200 percent. International management consultant A T Kearney ranks it among India's 16 best-managed private and public companies.

IOC must expand its operations through upward and downward integration. We need to create a huge public oil conglomerate, or at least strong partnerships between IOC, BPCL, HPCL, above all, ONGC, which too is a world-class -- and increasingly global -- player through its subsidiary ONGC-Videsh which has taken up numerous blocks for exploration and production in different countries. Less than five years ago, then finance secretary Vijay Kelkar sensibly proposed a strong, long-term partnership between IOC and ONGC. Mr Shourie is doing the opposite.

All over the world, vertical integration, and mergers and acquisitions, have promoted growth and competitiveness in oil. Thus, after such mergers, the after-tax profits of US oil companies rose by over 140 percent to $40 billion between 1999 and 2000. Their growth was especially spectacular in the case of Chevron-Texaco and Phillips-Tosco Similarly, China -- whose example our policy-makers cite in great admiration -- has also followed the world trend and consolidated its oil companies.

Politically too, selling off oil companies makes no sense. The government has never offered even a half-way credible justification for it. There are a number of reasons why a vital sector like oil should remain under public control and accountable to the people via the government: including the crucial importance of this energy resource; the long-term objective of energy conservation (which no private sector company would want to promote); the need to cater to the requirements of different strata of the population (for example, kerosene and diesel, the demand for which far outstrips that for petrol); and promoting public accountability through Parliament. The issue is not just a technical one, of approaching Parliament to amend an Act which it had passed. The issue is about making economic policies accountable in the true spirit of democracy.

Decisions on divestment cannot be made by ministers, bureaucrats or accountants, especially in respect of PSEs that have been created as an 'instrument of service' or 'to subserve the common good' or promote 'public interest.' This very rationale was cited when Burmah Shell, Esso and Caltex were nationalised in the 1970s after India's far-from-happy experience with them in the Bangladesh war: they failed to keep the supply-lines functioning. It'd be unfair to change the oil PSEs' status without Parliament's approval.

By bypassing Parliament, the government counterposes economic policy-making to democracy. This is wrong. No economic policy has succeeded anywhere unless there is strong political support for it and unless it's tied to a larger programme of improvement and transformation of governance. In India, such support has always been missing. On the contrary, privatisation here is driven by an authoritarian agenda; arbitrary decisions are made without Parliamentary debate or approval.

This agenda has a special obsession with the mode of divestment -- namely, transfer of control to a 'strategic partner,' usually, some favouredbusiness house. This has made privatisation seem scandalous in India -- just as it has become 'robberisation' elsewhere, as Nobel Laureate and former World Bank chief economist Joseph Stiglitz puts it.

People like Mr Shourie are ideologically driven zealots of the neoliberal 'free market' model. They live in a time-warp and are blind to the negative effects of privatisation of public services in many European countries, one of the worst examples of which is British railways, water and bus transport. Privatisation there has undermined quality of service, safety, even management calibre. Our policy-makers operate with the nave formula: 'government bad, private good.' They are wrong to have piggybacked on the third-party Jessop litigation in the Supreme Court to plead for a reconsideration of the BPCL-HPCL verdict.

The assumption that privatisation is the only route to modernising PSEs has repeatedly proved wrong. Take airports. Our existing PSE, Airports Authority of India, is already in the throes of serious modernisation. It has invited bids from international designers and contractors to revamp Indian airports along the lines of Singapore, Hong Kong and Kuala Lumpur. They include Norman Foster, Kisho Kurokawa, Zurich Airport Authority, and Lufthansa-Lehmer. The cost of modernisation --including building new terminals at Delhi and Mumbai -- is estimated at $1 billion. But the AAI's reserves alone are more than half this amount! Its bank investments equal about a fourth of the total. The rest of the capital can easily be generated through low-interest loans. By contrast, a private builder would seek a 12 to 16 percent return on investment, much of it financed by high-interest borrowings.

If India's experience in private electricity generation is anything to go by, especially with the now-disgraced and bankrupted Enron Corporation, such high-cost infrastructure development will violate all criteria of competitiveness. Enron's plant in Maharashtra produced 'gold-plated' power, which cost more than double the price of electricity generated by the state's public sector board. So, it's time to pause and take a break from target-driven divestment.

Above all, it's time to jettison dogma-as-policy.

Praful Bidwai

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Number of User Comments: 39

Sub: Bidwai or Shourie?

I have yet to see a positive article from this author. Over the years I have seen some completely biased and irresponsible writing. If I ...

Posted by Ashish Patel

Sub: surprised

Haaaaa, what a surprise. Mr Praful is capable of writing something other than Guj riots and Hindu Bashing. Really excited to know this. But he ...

Posted by Ramesh

Sub: Hazy thoughts

It is very difficult to feel sympathetic to whatever Mr. Bidwai writes. Sometimes one would like to know what are the principles of the columist, ...

Posted by Prasanth

Sub: Good sense should prevail

There is not a single point that supports selling of IOC. Then why so much desires to do so? It is sure there is a ...

Posted by Achintya Das

Sub: for once i agree with mr.bidwai

the absurd proposal has put the last nail in the coffin of the presently pursued pursued disinvestment policy... well lets start with a few logics ...

Posted by pranavganesh



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