Will Reliance rule the oil sector?

Theoretically, that seems fair enough — after all, most of us believe that public sector companies can never be as efficient as privately-owned ones, and economies of scale do matter. The problem, however, is that during all this talk, no one appears to be concerned about issues such as monopoly power and how this can distort consumer as well as other markets. So while Reliance Petroleum’s new Jamnagar refinery may be a lot more efficient than Indian Oil’s new Panipat one, whathappens if Reliance controls half or more of the total market for petroleum products in the country?

Put this question to the government, and they’ll tell you there’s no hurry. While the ministry of petroleum and the Oil Coordination Committee (OCC) carry out this function right now when the petroleum sector is still not fully decontrolled, an independent and statutory oil regulatory authority will be in place when the sector is fully opened up in the year 2002.

The problem, however, is that, over a period of time, not too many people trust either politicians or bureaucrats to do the right thing. The fact that Reliance is reported to be very skilful in manipulating the political environment do esn’t help matters either.

Take the case of Reliance Petroleum’s deal with the public sector Indian Oil, whereby the latter will pick up a large part of Reliance’s products for the next ten years, and will market it on its own account — in other words, Reliance has a captive buyer and is saved the burden ofsetting up a very expensive all-India dealer network costing several thousands of crores.

While senior IOC officials say that the deal is fairly well-balanced now, it is well-known that right through several stages of the negotiation process, there was tremendous pressure on IOC to sign the contract even though it was, at that point, loaded against it and in favour of Reliance Petroleum.

The damages that IOC would have had to pay Reliance for not picking up its produce, to cite one instance, were higher than those Reliance would have had to pay for not supplying produce to IOC. Similarly, while IOC would be making large investments to supply this produce to the market, there were not enough safeguards to prevent Reliance from walking out of the arrangement when it felt it was ready to do its marketing on its own. It is also true that when a certain joint secretary in the ministry of petroleum and a director on IOC’s board resisted this political pressure, he was removed from the IOC board.

A lettercurrently doing the rounds in the petroleum ministry, ostensibly signed by concerned employees of the oil companies and sent to various members of Parliament among others, makes several similar allegations of how Reliance is using its political clout to kill the competition.

Apart from repeating the IOC-Reliance story, it alleges that Reliance has managed to delay clearances for refinery projects of some of the public sector oil companies; that, by getting the government to commission a pipeline from its refinery to central India, it will manage to kill the market for some of the new refineries being planned by the public sector units — BPCL’s Bina refinery, for example, makes little sense if a pipeline delivers Reliance’s products into the central heartland of India, and HPCL’s Bhatinda refinery makes little sense if Reliance ups its total capacity to around 40 million tonnes as some reports suggest from time to time.

Now, it’s quite obvious that all the allegations in this letter, as indeed is thecase with most anonymous letters, shouldn’t be taken at face value. Delaying clearances for rivals, for instance, is a game that most organisations play when the political environment makes it possible to do so. In any case, it is difficult to prove such instances — in many instances, the delays may have more to do with the public sector oil company’s own inefficiency as compared to rivals’ scheming. And if Reliance’s products through a central India pipeline are cheaper than one from a new refinery, then so be it — that is the logic of the market place.

The point, however, is that at a time when all companies are scrambling to position themselves for a market which will be fully deregulated in three years, surely it makes sense for the government to appoint an independent regulator to ensure that there is complete transparency in various decisions being taken. A regulator who, apart from looking into complaints by various players, will also examine each proposal to ensure that consumer interests aretaken care of.

Even in most developed countries, such mergers/alliances are always examined by anti-trust authorities to ensure consumer interests are protected. The long-drawn anti-trust case against Microsoft is testimony to this — the exact damage was never quantified, it was just argued that Microsoft was limiting competition and therefore hurting consumer interests. Only a third world country, and a third-rate government, can rest content in the belief that big is necessarily beautiful and bigger is better.