Is the oil sector deregulation a myth?

After considerable discussion and debate, the government of India dismantled the Administrative Pricing Mechanism last year. The intention behind the dismantling of the APM was to create a free and competitive market for petroleum products, and to ensure the viability of the oil companies which would be freed from price control by the government.Budget 2002 had fixed a flat rate subsidy on LPG and kerosene, which essentially implied that prices of these two products would vary with changes in international prices. However, despite the sharp increase in crude oil prices that we have witnessed for several months now, domestic LPG prices have remained unchanged. This clearly goes against the spirit and intent behind the dismantling of the APM. What is more serious, however, is the fact that while oil companies should normally be revising prices of gasoline and gasoil on a fortnightly basis, they have not been able to do so and are still taking decisions that are essentially dictated by the government. This is clearly not in the interests of the oil companies, because it would squeeze their returns from investments, making it difficult for them to cater to an expanding market and to provide quality service. The prevailing situation would also make it difficult for the oil companies to modernise and keep on upgrading their technology, all of which is detrimental to their performance. When the APM was dismantled, it should have been preceded by the establishment of an appropriate independent regulatory structure, because even in a free market situation, there would be issues of unfair competition, equity considerations and the need to monitor servicing of unattractive segments of the market, which would require decisions by an independent regulatory authority. Unfortunately an independent regulator was not established, with the result that the ministry is today functioning as the regulator, which binds the decision making capacity of the oil companies. What is even more important is that in the absence of an independent regulator, oil companies themselves could be taking certain steps which are against the interests of the consumer, who has no recourse to a transparent and open system of regulation and can hardly be expected to seek government intervention on every issue. Another important measure that would be essential for promoting competition in supply of petroleum products would be the establishment of retail outlets by private companies. It is indeed disappointing that the disinvestment process for BPCL and HPCL has been stalled for no rational reasons other than political arthritis. While HPCL is now targeted for disinvestment in favour of a strategic investor, BPCL is due for a similar outcome through a public offering. There is some discussion that the sell off agreement would still involve leaving the government with powers to block decisions on issues such as refinery capacity expansion for HPCL. This would be at the expense of the tax payer and, hence, the consumer, because the price expected for HPCL would go down accordingly. Nor would such provisions create investor confidence in the policy regime, which would still be seen to leave several brakes on the functioning of the market in a free and fair manner. It is not understood why we have imposed restrictions on marketing of petroleum products, such as laying down stringent criteria regarding the size of the company for retailing gasoline and gasoil. If a small company has the ability to go in for focused, small scale retailing, then this should be encouraged in the interests of promoting competition. Currently, private sector operators are certainly at a disadvantage in parallel marketing of LPG and kerosene simply because public sector companies have the benefit of government subsidy. However, public sector companies do have to function under the handicap of decisions by the government, when really speaking, speed is important in a market with significant changes in international prices, which affect domestic operations. An argument is often put forward that the consumer?s interests have to be protected against sudden price increases in the international market. This in actual fact is ill-conceived, because not permitting the oil companies flexibility of decision making leads to inefficiencies in their operations, which actually affect the consumer adversely. It is, therefore, high time that we removed the bottlenecks in pricing decisions. There is, of course, urgency in establishing a regulatory structure and process that would protect the interests of both producers and consumers. Hence, it is hoped that in the current session of Parliament, the Petroleum Regulatory Bill is enacted without delay, particularly since this is a measure which should have come into force at least a year and a half ago.