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Spell it out and stick with it

The government must clarify its position on competition in the petroleum sector

Written by Vikram S Mehta | February 3, 2009 1:31:22 am

The government should take advantage of the respite in oil prices and establish a transparent,predictable and durable mechanism for setting petroleum product prices.  That they have not done so yet may stem from politics but also perhaps because of a fundamental ambivalence towards competition.  Certainly the twists and turns in pricing policy over the past years has suggested that the government is not unequivocally  supportive of private sector involvement. Their policies have  effectively emasculated competition.  The purpose of this article is to urge the government to clear this ambivalence. This is not because I am an advocate of competition (which I am) but because against the backdrop of the global financial crisis and the still unhealthily strong linkage between economic growth,energy demand and environment impact,I do not believe we can afford continuing confusion.

The accepted wisdom is that competition is desirable and that  market forces foster  innovation and efficiency. I subscribe to this view but I also accept that competitive markets do not inevitably lead to efficient markets.  Competition is vulnerable to being undermined through collusion and cartelisation.  Indeed even Adam Smith,the apostle of free markets acknowledged that “people of the same trade seldom meet together even for merriment or diversion but the conversation ends in a conspiracy against the public or in some contrivance to raise prices”. 

The central issue is not therefore whether there should be competition or not — it is the substantive intent of policy.  What does the government really want?  Does it want  private sector involvement and if so,across the entire value chain from exploration and production to refining and marketing,only in selective segments,or does it wish to return to the command and control dirigsme of earlier years?  The government must bridge the gap between rhetoric and reality and bring competition policy out of the netherworld of ‘de jure’ free markets and ‘de facto’ administered control.

The government’s policy on competition was defined by the gazette notification of April 2002,which stated that the petroleum sector should be deregulated; that the administered price mechanism should be replaced by market based pricing,and that private companies should be encouraged to invest across the entire value chain.  There were conditions attached but the underlying message was clear. All companies,whether public or private,that met these condition would operate on the same playing field.

The notification continues to define the current de jure policy.  The de facto reality is of course very different.  The government has reintroduced administered pricing of petrol and diesel and it has not removed the susidies on LPG and kerosene.  This in itself does not skewer competition. All players can still be treated equally even under the current circumstances of re-regulation.  Competition gets circumscribed when the rules of the game favour one group over another,as is the case today.  The government has ‘used’ re-regulation to tilt the field . Thus government companies are granted oil bonds to compensate them for the losses that they incur on account of the differential between the ‘administered’ selling price of products and the international cost of procuring the crude.  The private sector receives no such compensation.  Public sector LPG marketers are subsidised but there is no subsidy for private players. The consequence has been the almost total retreat of the private sector from the oil products  market.  What adds grist to the mill is the fact that private companies had to invest Rs. 2000 crores in prescribed oil industry infrastructure to secure the  marketing licence and they did so on the assurance of comparable terms and conditions with  public entities.

The price of international oil has currently slipped into our comfort zone.  It is not however likely to remain there indefinitely.  Anyone with a historical bent knows that the oil industry is cyclical and that prices will slip out again.  No one knows when this might happen; nor at what pace.  But everyone must realise  that when it does happen the government should not  confront the same financial conundrum that they  faced over the past several years.  Their oil companies — the navratnas will,for instance,end FY 2008-09 with an ‘underrecovery’ of over Rs. 100,000 crores and this despite the positive margins that they have earned ever since oil prices came off the boil a few months back. The hard truth is that if the government does not have a well defined and clear policy for  product pricing the next time oil prices start to rise,the damage to the entire industry will be irremediable. 

A clear policy mechanism cannot be derived unless the decision makers clarify their thoughts on the nature and extent of desirable competition.  A related but equally important outcome of clarity would be to remove jurisdictional ambiguities surrounding the role of the petroleum regulators.  Today there are two regulators one for the upstream (exploration/production) and the other for the downstream (refining,marketing and gas).  Their roles and responsibilities have been explicitly set out but despite that  there is still considerable tension between the ministry and the regulators.  One gets the impression that while the government has appointed these regulators to foster competition,they remain reluctant to give them the tools and substantive freedom to secure that objective. 

There is no sanctity about competition.  But there is sanctity about clarity.  Confusion in policy is regressive,not simply for the companies but also for the consumers and the government.

The writer is chairman,Shell group of companies in India. Views expressed are personal

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