Disinvesting in oil PSUs

The government has decided that the petroleum sector is not 'strategic'. It will therefore be possible to reduce government shareholding in the oil and gas PSUs (public sector undertakings) to below 50 per cent. However, there would be no standard formula to be applied to all the PSUs; each case would be decided on merit and it may well be that more than 50 per cent share is retained in one or more of the important companies. Those of us who read Vikram Mehta's well-argued piece earlier in these columns, and a number of others, which appeared subsequently, would understand and appreciate the rationale behind the government's decision to disinvest. On the other hand, some of those who were involved in the management of petroleum product supplies during the wars of 1948, 1965, and 1971 would tend to stress the strategic' nature of the problem. It may be remembered that up to the mid-seventies, the oil industry was dominated by multinationals, namely Caltex, Burma Shell, and Esso. Notably, there is some evidence that these companies did not cooperate with the government in moving supplies close to the border. It will be argued that wars, although important, would be few and far between and the peacetime development and efficiency of the oil industry should be our primary concern. PSUs do have a number of disadvantages. They are constrained by procedural delays in obtaining government approvals for critical decisions, audited by the Comptroller and Auditor General of India, regulated by the firmans of the Central Vigilance Commission, and obliged to be model employers. To enable these PSUs to function effectively, these 'obstacles' need to be removed. Perhaps the only way of doing so is by reducing the government's share to below 50 per cent. At present, the government faces a conflict of interest while managing the PSUs. It controls the petroleum sector as a shareholder and regulates it with powers derived from statutes like the Indian Petroleum Act and the Essential Commodities Act. In industrialised countries such as the UK or the US, the government is not a shareholder and manages exclusively with statutory powers. Such management is certainly possible in India also. However, there could be some problems arising out of the relative underdevelopment of the industry. Statutory powers are more suited to restraining oil companies from doing anything that is socially undesirable rather than to directing them to do something that is socially desirable. Another notable feature to be kept in mind is the critical relevance and indispensable nature of oil and gas products to the daily lives of all the citizens. India has 26 sedimentary basins of which only 6 have been explored for oil and gas, and only moderately, at that. As the majority shareholder, the government can and does direct the ONGC to meet the set exploration targets even when returns are not assured. This is to ensure that a certain percentage of the oil demand is met from indigenous sources, which guarantees the security of supply. Another example is supplying petroleum products to the remote areas of the country: it is not possible for the oil companies to recover the costs of such supplies, but should considerations be allowed to affect the quality and quantity of supplies? Similarly, if flash floods or other disturbances cut off an area, the cost of supplies via alternative routes may not be fully recoverable at the normal rates and there would be a strong upward pressure on the prices. It is one thing to direct the government-owned Indian Oil Company to ensure supplies in such circumstances and quite another to make certain that a similar order is carried out by a privately owned company. The problems to be overcome by the government would be compounded by the lack of competition in the oil industry, which is likely to be dominated by a few players for quite some time to come. While each PSU has to be considered on merits, the sequencing and phasing of disinvestment in the sector as a whole would have to be managed with these factors in view.