A request submitted by Reliance Industries Limited [RIL] to the government allowing it to deal in marketing and distribution of ‘subsidized’ LPG [liquefied petroleum gas] draws attention to a very crucial aspect of reforms that holds the key to supplying oil products at low cost on sustainable basis. This relates to breaking the monopoly of public sector undertakings [PSUs] in the downstream oil sector by letting players from private sector in.
At present, infrastructure, storage, handling [and other logistics], marketing and distribution of petrol, diesel, LPG, kerosene etc is dominated by oil PSUs viz., Indian Oil Corporation Limited [IOCL], Bharat Petroleum Corporation Limited [BPCL] and Hindustan Petroleum Corporation Limited [HPCL]. 2 fundamental factors have contributed to their predominance.
First, relates to entry barriers such as an entity should have invested a minimum of Rs 2000 crores [US$ 300 million] in any of the specified activities viz., exploration & production of hydrocarbons, LNG [liquefied natural gas] terminals, oil refineries, pipelines etc. The petroleum and natural gas minister, Dharmendra Pradhan has recently stated that government is contemplating to relax this bar.
The second factor has to do with government’s policy of subsidizing sale of oil products through IOCL/BPCL/HPCL. Until 2010, subsidization covered all major products of mass consumption viz., petrol, diesel, LPG and kerosene. However, in June, 2010, subsidy on petrol was withdrawn followed by diesel in November, 2014.
Under subsisting dispensation, government directed oil PSUs to sell these products at prices below their cost of import/refining and distribution and reimbursed them for resultant loss. The loss was shared between exchequer [via subsidy] and upstream oil & gas companies viz., Oil and Natural Gas Corporation [ONGC] and Oil India Limited [OIL] as discount on crude supplies [in 2015-16, their contribution was reduced to bare minimum].
During 2015-16, even as subsidy on LPG and kerosene declined drastically [courtesy, plummeting international price of crude oil], the government switched over to direct benefit transfer [DBT] of LPG subsidy in to the bank account of the beneficiary. For kerosene, DBT is being tried in select districts from April, 2016 and full scale switch-over will depend on the outcome of trials.
The routing of subsidy only through downstream oil PSUs had put companies in private sector to a serious disadvantage. This is because without subsidy, it was impossible for the latter to match the price offered by the former [albeit with subsidy support]. As a consequence, thousands of retail outlets opened by RIL and Essar Oil Limited [EOL] in early 2000 were closed.
[These outlets were set up following the decision of then NDA government under Vajpayee to dismantle the extant Administered Pricing Regime [APR] and Oil Pool Account [OPA] through which subsidy was scheme was implemented. The UPA – dispensation which took over in 2004, resurrected subsidy and started giving it through oil PSUs thereby disturbing the level playing field rendering private sector retail outlets un-viable].The removal of price control and withdrawal of subsidy on petrol [June, 2010] and diesel [November, 2014] has reduced the discrimination against private companies to a great extent. This has prompted RIL and EOL to resurrect their closed outlets. It has also bolstered the prospects of more entities coming forward to set up outlets [subject of course, to the pace of liberalizing entry norms].
But, continued subsidization of LPG and kerosene [these account for a sizeable chunk of turnover in petroleum segment and is all to set increase substantially in view of Modi’s commitment to give 50 million more LPG connections to poor in next 3 years on top of 30 million already given during 2015-16] through oil PSUs continues to be a major bottleneck and will deter entry of private operators.
True, implementation of DBT in LPG has helped in combating endemic problems of leakage and mis-use [saving Rs 15,000 crores annually for the exchequer]. But, continued delivery of subsidy through the oil PSU [after selling at the market price, it transfers subsidy amount to the account of the beneficiary and then, claim reimbursement from GOI] denies the economy full benefits of DBT.
This is also inconsistent with the spirit of DBT which requires direct interface between the beneficiary and the government. If, you start involving a commercial entity [PSU is indeed one] for delivering subsidy also then, the purpose gets defeated. It does nothing to eliminate the stranglehold of oil PSUs – with its associated inefficiencies – in the marketing and distribution.
Sans elimination of bogus beneficiaries and fictitious claims, the present modus operandi of delivering LPG subsidy [since January, 2015], is thus no different from the previous dispensation under which oil PSUs sold the product at below cost and claimed reimbursement of under-recovery from GOI [kerosene is covered under it for now]. Ironically, the economy continues to be bereft of competition.
Implementation of DBT in true spirit should involve freedom to the beneficiary in buying LPG [and kerosene] from any outlet of its choice and claiming subsidy support from government via direct transfer to his account. This will promote competition in the true sense bringing more players to sell and reducing cost [then, RIL or any other private company need not have to make special petition].
If, Modi wants his subsidy rationalization initiative to be truly ‘transformative’ that has the potential to bring real savings and benefits to the society then, he must take steps to completely de-link subsidy payments from the seller [even if he/she happens to be a PSU]. A PSU should operate like any other commercial entity and must not be involved in administration of welfare schemes.
Without this, any degree of relaxation in entry norms for participation of private companies [including MNCs] in retailing of petroleum products will fail to enthuse them.