A Wise Decision

-- By Dasu Krishnamoorty

A week of hectic and high-voltage deliberations at Prime Minister Atal Behari Vajpayee’s residence failed to resolve the gridlock of disinvestment in oil PSUs, specially the Hindustan Petroleum (HPCL) and Bharat Petroleum (BPCL). The cabinet committee on disinvestment chose to wait for three more months before taking a decision. Other public sector units which escaped immediate disinvestment are the Indian Oil Corporation (IOC), the National Thermal Power Corporation (NTPC) and the Oil Natural Gas Corporation (ONGC).

To clear Disinvestment Minister Arun Shourie’s plans will need reckless courage because it would mean overriding a nation-wide opposition and overlooking more than half a century-old history of oil intrigue and bloodshed. Apart from the Congress and the left parties, even the BJP and NDA allies of the government are against the sell-out.

The disinvestment of HPCL and BPCL will undo the efforts and sacrifices of those visionaries and engineers (led by K. D. Malaviya) who did the nation proud by erecting a broadbased indigenous hydrocarbons capacity. Everything about this effort was Indian – from exploration, production, refining to transportation and distribution. All this in the face of hurdles created by world oil monopolies. Thanks to the Oil and Natural Gas Commission (ONGC), India produces 50 per cent of its oil needs

In Italy, Enrico Mattei was assassinated because he tried to set up an indigenous oil industry in the poster years. Dr Mohammed Massaged of Iran was ousted and jailed in 1953 because he had nationalise oil. Today, oil is bonding the old cold war rivals Russia and the United States who have recently signed an agreement intended to increase Russia´s oil exports to the US and loosen the grip of the OPEC over oil supplies and prices. The health of the world economy is thus linked to assured availability of oil.

The economic reforms lobby in India wants to liberate oil from state control and place it in the hands of private and foreign companies who do not value our national interest. Behind the foreign oil majors are their governments which do not hesitate to discipline a government that does not co-operate with the majors. This knowledge should be enough to discourage the disinvestment gurus from selling the highly profit-making HPCL and BPCL.

To privatise them amounts to forgetting a saga of national humiliation when Caltex, Burmah Shell and the Standard Vacuum Oil Company refused to help us in the production of oil, preferring instead to invest in refining. The country successfully sought and obtained Soviet and Rumanian co-operation in oil exploration. All this was undone in 1997 when the Chandrashekhar government announced the New Oil Exploration and Licensing Policy eliminating state presence in oil exploration and production.

As far back as 1993, the Rangarajan Committee laid stress on the need for substantial disinvestment in the public sector. It stated that the percentage of equity to be divested could be up to 49 per cent for industries explicitly reserved for the public sector. It recommended that in exceptional cases, such as enterprises with a dominant market share, the limit could be kept at 26 per cent.

In the second phase in 1999, the NDA government decided to bring down its shareholding in the PSUs to 26 per cent in most cases. However, the government would retain majority holdings in PSUs involving strategic considerations. Two years ago, the government announced that it was ready to reduce its stake in the non-strategic PSUs even below 26 per cent, if necessary. Also, there would be increasing preference for strategic sales and the entire proceeds from disinvestment/privatisation would go to the social sector, the restructuring of PSUs and retirement of public debt.

In BPCL, the disinvestment would have been for 30 per cent keeping 1.2 per cent equity for employee stock options. In HPCL, the government would have divested 25.01 per cent to the strategic partner. Recently, the Supreme Court ruled that the courts could not be approached to interfere with economic measures and policy-making authority of the executive. This was a setback to the PSU lobby. But its gain was the sale of IBP to another PSU, the Indian Oil Corporation (IOC). The Government defended the sale saying it would add value to the PSU and fetch a higher valuation when disinvested.

Another setback to the PSU lobby was the ban on the oil PSUs bidding for other oil company disinvestment. A core group of secretaries suggested that oil PSUs should not be allowed to bid for the disinvestment of BPCL and HPCL. Not only that, some ministers dismissed the IOC plea for a ban on Reliance from participating in the sale by pointing out that when Binani Zinc bought out Hindustan Zinc it gained a near total control of the Indian zinc market. Yet Binani participated in the bidding for Hindustan Zinc. Can we undo a mistake by repeating it?

The other issue to be looked into seriously is the small number of bidders for the PSUs. Most of the PSUs received just two bids and in the case of Paradeep Phosphates, there was only one bidder and the price bid was also lower than the minimum price. The bidders are likely to form a cartel as they did in the case of telecom contracts. That will certainly frustrate the main aim of disinvestment.

The bureaucrats had always conspired to work against the PSUs. But the BJP is in favour of lifting the ban on PSUs bidding for BPCL and HPCL To scoff at the security concerns raised over transferring the two oil retailing giants to private sector is to indicate lack of wisdom. The privatisation of oil terminals cannot be a precedent. The petroleum ministry has suggested the merger of the two firms to create greater value in the event of disinvestment. The ministry does not favour a strategic sale immediately.

The strategic sale of the two highly-profitable oil PSUs could derail crucial projects for capacity addition – HPCL has planned to set up the nine million tonne Bhatinda refinery at a cost of 100 billion rupees while the BPCL has plans for a six million tonne Bina refinery in Madhya Pradesh at a cost of 65 billion rupees. The ministry also is aware of the high dividend paid by the two companies. In 2001-02, the two PSUs paid dividend equal to their paid-up capital without budgetary support from the government. The two posted net profits of 7.8 billion rupees and 8.35 billion rupees respectively and paid dividends of 3.39 billion rupees and 7.88 billion rupees.

The monopolies scenario too has to be considered. There is speculation that Reliance is trying to grab the two firms as it did the Indian Petrochemicals Corporation (IPCL). It is necessary that the government should have a minimum holding of 51 per cent in all public sector oil companies as they are of strategic importance to the country similar to defence There are only two bidders in the fray, one Indian and the other foreign. It is not going to be competitive bidding. It is not necessary to sell PSUs which are generating profits and which are serving the interests of the country’s economy.

If it is a matter of raising funds to undo budgetary deficit, more funds than necessary can be raised by merely cutting down wasteful government expenditure and recovering just a part of the non-performing assets in the banking sector. Also, the vagaries of the bourses cannot be a valid reason for the sale of profit-making public sector companies.

Under threat is the status of the ONGC as the nation’s leading oil exploration and production company. The threat could arise form the terms under which foreign and private companies are allowed to exploit oil-fields discovered and developed by the ONGC. It actually happened. The ONGC was cheated of the investment it made in the Panna-Mukta oil-fields (Gujarat) and Ravva (Andhra Pradesh) fields in its contracts with Enron-Reliance and Videocon-Marubeni consortia. As the government began depleting the oil pool account, ONGC was compelled to sign joint ventures with foreign and private firms.

Saturday's decision to postpone the process of disinvestment of oil PSUs by three months should give time to the PSU lobby to build pressure on the government to backtrack on its plans.