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The Socialist-Mercantilist myopia that seems to drip from almost every sentence of Mr. Bidwai’s piece Don’t Privatise Oil Companies at Rediff.com needs to be addressed not only because of the ill conceived reasoning but also because it perpetuates the very myths which got us into the Public Sector mess in the first place. This being the first time I try “fisking” a piece please forgive any inadvertent shortcomings.

This [Privitisation] is being rationalised on the ground that the fate not just of divestment, but of economic ‘reform,’ indeed of the economy itself, hangs by the slender thread of privatisation of the oil PSEs. If Bharat Petroleum Corporation Ltd and Hindustan Petroleum cannot be sold off because of the Supreme Court’s stay, then the very least the government must do is privatise IOC. Or else, disaster will befall us all.

I am not aware of the propaganda that maybe doing the rounds about the criticality of privatisation, but I can understand the rationale. The idea is to let loose those forces in the economy that have been systematically sabotaged by mercantilist and socialist policies. These policies which were put in place to support the social fabric of our country and cater to the unique needs of our diverse nation have only succeeded in building monopolies that earn their profits not from delivering value but through rent-seeking behaviour. At the same time the government managed Oil Pool turned into such a mess that at times it threatened to topple the government’s jittery fiscal foundations.

Yet, the stock markets do not reflect any trend towards disaster. They may not accurately mirror the state of the economy; but they do indicate the state of private business’s mood. And that is definitely buoyant. The Sensex has risen by a good 500-plus points or by 12 percent over its level on the day the Supreme Court barred the BPCL-HPCL sell-off. No wonder the IOC sell-off proposal has drawn flak not just from the political Opposition, but even from economists and opinion-shapers of different hues, including staunch supporters of neo-liberal policies, who don’t oppose privatisation in principle.

The sensex rally I think has less to do with the particular vagaries of government’s current policies and more to do with the fact that the much maligned private sector is doing a damn good job in pretty bad times. The reports that the current rally is not a speculative boom in the Sensex, but an all round expansion in market capitalisation is to me - an amateur believer in the Austrian Business Cycle Theory - a positive sign that this is the real economy at work.

For instance, a majority of our newspapers, including the highly pro-business ‘pink’ financial papers, have opposed it — and accused Mr Shourie of distorting the minutes of the Cabinet Committee on Divestment, which do not mandate hiving off IOC’s 11,000-odd retail outlets, but only say that ‘the ministries of petroleum and divestment have been directed to examine if the marketing assets of IOC can be disposed of separately.’

I think the modalities of the disinvestment process should be worked out meticulously and not on the ad-hoc basis on which they seem to have been conducted thus far. The rapid and unsystematic method in which the Soviet Industries, for instance were hawked, seems to have done Russia more harm than good creating a small and powerful elite.

Professor T T Ram Mohan, who teaches at the Indian Institute of Management, Ahmedabad, has sharply criticised Mr Shourie for not working jointly with the petroleum minister, but presenting him with a fait accompli. He argues that Mr Shourie is driven by his ‘antipathy to the very concept’ of PSEs; that he is ‘unsuited’ for his job and must be divested of his portfolio.

Prof. Ram Mohan wants George Fernandes to be Disinvestment Minister. I wonder if the country should trust a tainted former socialist who in some ways epitomises all the things that can go wrong when Socialist ideology meets realpolitik with this delicate task. Besides Mr. Shourie seems to be the least political of the motley bunch that rules are nation today (though this is a matter of opinion and may fall before hardfact).

Strong words indeed! But they contain a great many truths. Put simply, the proposal to privatise IOC makes neither economic nor political sense. Take economics. The oil sector is a highly globalised business where the only way an Indian oil company can remain competitive is by aiming for a big size. IOC (turnover, $26 billion) is a giant by Indian standards, but it is puny in relation to global companies such as Exxon Mobil or even Royal Dutch Shell ($235 billion).

This seems to be an argument for privatisation. All the global giants which Mr Bidwai chooses for comparison are privately owned and seem to be doing a pretty neat job of providing services across the world. Keeping the company nationalised seems to serve only to keep it a dwarf stunted not because of lack of a market but by the government’s and Mr. Bidwai’s inability to see that keeping it nationalised is not helping it grow.

IOC has proved its competitiveness not only in oil refining with its world-class capacity of 38 million tonnes, but also in marketing. Two years ago, it beat the aggressive Reliance group to take over the small public sector marketing firm, IBP.

Something seems to have been overlooked. Reliance has built the world’s largest grassroots refinery and aromatics plant with the largest private sector investment at a single site in India. This within a few years of starting up and in fact being the companies first project. Also global competitiveness is determined by technology an area in which the PSEs have been far behind the pack. An illustration of the fact is the low discovery and exploitation of oil resources, which apart from a few places like Bombay High is almost non-existent. You can pick some detailed facts about the global oil industry here.

IOC also has plans to expand abroad. It has acquired a number of petroleum outlets in Sri Lanka. The other oil PSEs are impressive too. Together they generated profits of Rs 23,252 crores last year! HPCL alone paid a dividend of 200 percent. International management consultant A T Kearney ranks it among India’s 16 best-managed private and public companies.

IOC must expand its operations through upward and downward integration. We need to create a huge public oil conglomerate, or at least strong partnerships between IOC, BPCL, HPCL, above all, ONGC, which too is a world-class — and increasingly global — player through its subsidiary ONGC-Videsh which has taken up numerous blocks for exploration and production in different countries. Less than five years ago, then finance secretary Vijay Kelkar sensibly proposed a strong, long-term partnership between IOC and ONGC. Mr Shourie is doing the opposite.

Even well managed companies can start floundering pretty fast in the face of such massive competition as has been admitted exists in the international market. When competing with Exxon and Shell the only motive strong enough to make you win is profit, national pride fizzles out pretty fast in the face of eminent financial disaster.

The recent revelation that the Government is trying to get the Oil companies to swallow the subsidy bill illustrates rather poignantly why the PSEs can never be internationally competitive while they are still owned by the government.

The decision making is centralised in Ram Naik’s Ministry and even though there is some nominal freedom the 4 or 5 central oil PSEs aren’t allowed to do their own pricing but must refer back to the ministry before any change. This despite the dismantling of the APM a year and a half ago. Besides while accepting that these companies are supposedly well managed Mr. Bidwai does not hesitate to give his own prescriptions for their future.

All over the world, vertical integration, and mergers and acquisitions, have promoted growth and competitiveness in oil. Thus, after such mergers, the after-tax profits of US oil companies rose by over 140 percent to $40 billion between 1999 and 2000. Their growth was especially spectacular in the case of Chevron-Texaco and Phillips-Tosco Similarly, China — whose example our policy-makers cite in great admiration — has also followed the world trend and consolidated its oil companies.

Again a strong argument not so much for merging the Indian mini-moths but for privatising them, though the trend today maybe towards consolidation in the future there may arise a need to break down the companies or even shut them down, if they are kept public there will be a strong aversion to matching the markets needs, take for instance the stand of the coal miners in England in the face of Thatcher’s moves to shut down unviable coal mines in the 1980s.

Politically too, selling off oil companies makes no sense. The government has never offered even a half-way credible justification for it. There are a number of reasons why a vital sector like oil should remain under public control and accountable to the people via the government: including the crucial importance of this energy resource; the long-term objective of energy conservation (which no private sector company would want to promote); the need to cater to the requirements of different strata of the population (for example, kerosene and diesel, the demand for which far outstrips that for petrol); and promoting public accountability through Parliament. The issue is not just a technical one, of approaching Parliament to amend an Act which it had passed. The issue is about making economic policies accountable in the true spirit of democracy.

Freedom to choose, is the political argument for disinvestment. Individuals have the right to choose in what order and on what goods they will spend their money. The much abused tax-and-subsidise regime runs contrariwise to this basic freedom. When products are subsidised prices fall, increasing the demand beyond the capacity to supply, and creating scarcities. More often than not the victims of these scarcities are the same people in whose name the subsidy was instituted i.e. the poor. Low prices and long lines go hand in hand.

The availability of artificially cheapened fuel also acts as a significant disincentive to the creation of alternatives as well as to wastages and inefficiencies in the consumption process.

Decisions on divestment cannot be made by ministers, bureaucrats or accountants, especially in respect of PSEs that have been created as an ‘instrument of service’ or ‘to subserve the common good’ or promote ‘public interest.’ This very rationale was cited when Burmah Shell, Esso and Caltex were nationalised in the 1970s after India’s far-from-happy experience with them in the Bangladesh war: they failed to keep the supply-lines functioning. It’d be unfair to change the oil PSEs’ status without Parliament’s approval.

By bypassing Parliament, the government counterposes economic policy-making to democracy. This is wrong. No economic policy has succeeded anywhere unless there is strong political support for it and unless it’s tied to a larger programme of improvement and transformation of governance. In India, such support has always been missing. On the contrary, privatisation here is driven by an authoritarian agenda; arbitrary decisions are made without Parliamentary debate or approval.

This agenda has a special obsession with the mode of divestment — namely, transfer of control to a ’strategic partner,’ usually, some favoured business house. This has made privatisation seem scandalous in India — just as it has become ‘robberisation’ elsewhere, as Nobel Laureate and former World Bank chief economist Joseph Stiglitz puts it.

I agree at least in spirit with this point. Though historically the PSEs may have been forcefully appropriated from their private owners, at the moment they are the property of the Indian Public, and since Parliament for all its flaws does represent the country it should decide upon the disinvestment process. This again is not an argument against, but an argument for a more systematic approach to disinvestment. The Gaidar-Chubais episode in mid 90s Russia is rather scary, though less likely in India.

People like Mr Shourie are ideologically driven zealots of the neoliberal ‘free market’ model. They live in a time-warp and are blind to the negative effects of privatisation of public services in many European countries, one of the worst examples of which is British railways, water and bus transport. Privatisation there has undermined quality of service, safety, even management calibre. Our policy-makers operate with the naïve formula: ‘government bad, private good.’ They are wrong to have piggybacked on the third-party Jessop litigation in the Supreme Court to plead for a reconsideration of the BPCL-HPCL verdict.

The problems in Britain as best as I can tell are not so much that the Private companies are doing a bad job, but that the government has acceded to lobbying and is using tax-pounds to subsidise loss making private companies. The argument goes in Whitehall apparently, that the cost of renationalising is too high so let us just give them subsidies. When assured of regular subsidies, the provision of good service becomes a secondary non-consequential matter. A subsidised prvate company is no different in attitude than a government owned company.

Here is an article by Anand Sivaramakrishnan at The Hindu is an article that runs in a similar vein to Mr. Bidwai’s but illustrates an important point, both author’s confuse government regulated markets for free markets.

The assumption that privatisation is the only route to modernising PSEs has repeatedly proved wrong. Take airports. Our existing PSE, Airports Authority of India, is already in the throes of serious modernisation. It has invited bids from international designers and contractors to revamp Indian airports along the lines of Singapore, Hong Kong and Kuala Lumpur. They include Norman Foster, Kisho Kurokawa, Zurich Airport Authority, and Lufthansa-Lehmer. The cost of modernisation –including building new terminals at Delhi and Mumbai — is estimated at $1 billion. But the AAI’s reserves alone are more than half this amount! Its bank investments equal about a fourth of the total. The rest of the capital can easily be generated through low-interest loans. By contrast, a private builder would seek a 12 to 16 percent return on investment, much of it financed by high-interest borrowings.

Again a majority of these airports are privately run, and have reached their state of sophistication not through overcharging customers but by providing value-for-money services. I am told by a reliable source that Chattrapati Shivaji International Airport at Mumbai is one of the most expensive airports in the world as far as the cost to the passenger is concerned. The services offered there border on the medieval.

Indian Airlines uses planes that were used in America in the 1980s. Even the Americans who had a tightly regulated aviation market till the early 80s realised fantastic reductions in the cost of travel once the Aviation Industry was deregulated. In India, Air Deccan is trying to do something that Indian Airlines would never dream of doing, competing with the Railways on price.

If India’s experience in private electricity generation is anything to go by, especially with the now-disgraced and bankrupted Enron Corporation, such high-cost infrastructure development will violate all criteria of competitiveness. Enron’s plant in Maharashtra produced ‘gold-plated’ power, which cost more than double the price of electricity generated by the state’s public sector board. So, it’s time to pause and take a break from target-driven divestment.

I am a customer of the martyred MSEB, and frankly I think their service sucks. Their lines are down atleast once a week, power goes out without warning and at odd hours in the day, there is a grave risk of loss of data and loss of expensive computer equipment. Their officers are doing a pathetic job of keeping the lines in order, during the monsoons there were two electric fires at the same spot on a junction where the cable was lying with an exposed joint open to be touched and handled by passers by (imagine some hyperactive 8 year old).

Enron may have been bad in itself but it was to a large extent the worse handling of the deal by MSEB and the Government of Maharashtra that caused the project to fail. They actually denominated the purchases in dollars at a time that RBI policy was driving the rupee down. How smart is that?

Also another often overlooked point. South Mumbai and Lutyen’s in Delhi are probably the only two places that get uninterrupted power(sic.). Lutyen’s has the PM and President to thank for it, South Mumbai has Tata Power. That company has such a low profile but does such a fantastic job.

People have often told me the Brihanmumbai Electric Supply and Transport Undertaking (BEST) is a very well managed company, but a careful look reveals, the management is pretty bad. As far as I know the Transport Div. runs a loss, which is subsidised by the Electricity Div. which in turn is the marketing and distribution wing of Tata Power.

In addition to that Tata Power provides electricity to the Suburban Railways, Bandra-Kurla Complex and other important locations throughout Mumbai that can’t afford powercuts. That looks like a big argument for private power to me.

Above all, it’s time to jettison dogma-as-policy.

Looking in a mirror before publishing such embarrassing statements should be mandatory policy for all writers. :-)

Though the government seems to consider the Oil PSEs very critical it seems to give the beleagured Indian Renewable Energy Development Agency Ltd (IREDA) only lipservice in comparison.

On the other hand Royal-Dutch Shell has atleast three subsidiaries (Shell Hydrogen, Shell Solar and Shell Renewables) that work exclusively towards developing technologies in non-conventional energy sources. Contrary to popularly held belief companies do plan for their futures and in this case for a world without oil.