The strategic sale of BPCL couldn’t be carried out because the Government wants to regulate fuel prices
After over three years of having initiated the sale of its entire 53.29 per cent shareholding in Bharat Petroleum Corporation Limited (BPCL)—a Central public sector undertaking (PSU) in the sector of refining and marketing of petroleum products—the Government has decided to put it on hold. What could be the reason behind this move?
Adopted a big-bang approach to privatisation (when government sells its majority stake in a PSU and transfers control to a private entity) in the Budget for 2021-22, Finance Minister Nirmala Sitharaman had divided Central PSUs in two broad categories—i.e. strategic and non-strategic.
The former is subsumed under four subgroups: atomic energy, space and defense; transport and telecommunications; power, petroleum, coal and other minerals; and banking, insurance and financial services. The non-strategic category includes all other sectors such as hotel and tourist services, industrial and consumer goods, trading, and marketing.
As per the plan, the government’s intent was to privatise all undertakings in non-strategic sectors (all loss-making enterprises in this category will be closed). In the case of CPSUs in the strategic sector, it would undertake privatisation with the caveat that at least one (and a maximum of four) will be retained in the public sector.
BPCL being an undertaking in the sub-group ‘power, petroleum, coal and other minerals’—considered vital for maintaining the country's energy security—the Government might be contemplating to retain it in sync with energy security. But this was at variance with the decision of BPCL privatisation in 2019-20, much before the 2021-22 Budget announcement. Perhaps there was a retrospective change of policy.
A second major reason could be the lengthy and cumbersome process of approvals and red tape. Under the extant procedures for granting approval, the Niti Aayog identifies companies for strategic disinvestment which are then considered by the Core Group of Secretaries on Divestment (CGD), a long-drawn process by itself. It then goes to the Alternative Mechanism (AM)—a group of ministers including those of Finance and Road Transport & Highways—for approval.
After the AM’s approval, the Department of Investment and Public Asset Management (Dipam) moves a proposal for in-principle approval of the Cabinet Committee on Economic Affairs (CCEA).
In short, strategic divestment involves around 12 steps, which inevitably lead to delays in starting the process. And when the Government enters the market, the conditions may not be favorable.
In a case like BPCL, the challenge is even bigger as it needs bidders with deep pockets. For instance, during 2019-20, it needed a strategic investor who could pay around Rs 60,000 crore (prevailing share price multiplied by the number of shares corresponding to 53.29 per cent holding).
In that year, the market environment was favorable even as the international price of crude oil (fortunes of oil companies move in tandem with it) was hovering around $70 per barrel. The Government could have got strategic investors willing to put the required sum for buying its entire stake. But the bureaucrats were not ready.
During 2020-21, thanks to the Covid pandemic causing large-scale destruction of demand globally, the average price of crude declined to just about $40 per barrel (in April 2020, it had plummeted to a low of $20 per barrel). This made the market environment highly unfavorable.
That apart, the entire Government machinery was too preoccupied with mitigating the consequences of the pandemic—protecting both lives and livelihoods of people.
During 2021-22, the price recovered and ruled above $70 per barrel, most of the time leading to significant improvement in the market environment. But the officials were not ready yet again, leading to deferment of the sale to 2022-23.
During the current fiscal, the international crude price has zoomed because of the Ukraine war, economic sanctions imposed by the US and the European Union on Russia, and the resulting disruption in supplies of oil and gas. With crude price hovering around $120 per barrel (at one point, it had even touched $140 per barrel) and substantially higher valuations of oil companies, this was a propitious time for carrying out the sale. But it was not to be.
The Government’s decision to put BPCL sale on hold at this juncture—when market conditions are favorable and all procedures needed to conduct the sale already in place—may sound a bit puzzling. To unravel the puzzle, let us look at the following:
In theory, petrol and diesel prices were deregulated in June 2010 and November 2014, respectively, as the oil companies were given the freedom to fix their retail price, using a formula that combines their respective import parity price (IPP) and export parity price (EPP) in the ratio of 80:20.
But, in practice, political control over the retail prices of petroleum products is still there. The Government can do this because of the three oil marketing Central PSUs—Indian Oil Corporation Limited (IOCL), Hindustan Petroleum Corporation Limited (HPCL), and BPCL—which account for around 90 per cent of the domestic fuel retail network. Well, technically HPCL is a subsidiary of the Oil and Natural Gas Corporation (ONGC), but then ONGC is itself a Central PSU.
The managements of ONGC/HPCL, IOCL, and BPCL receive tacit instructions from their bosses to maintain the prices at the desired levels—that is, the levels that top politicians desire. These are often unrelated to the market determined-prices. For instance, the current pump price of petrol in Delhi is Rs 97 per liter which corresponds to a crude benchmark of $90 per barrel—as against the current crude price of $115 per barrel for the Indian basket. If these undertakings were really free to fix the price based on the formula (linked to $115 per barrel), the pump price would have been Rs 110 per liter.
Against this backdrop, if one of these oil PSUs (that is, BPCL), accounting for about 25 per cent of the retail outlets, goes into private hands, the Government’s ability to influence fuel prices will be diminished significantly.
In the current scenario, when the international oil price is projected to remain high, Prime Minister Narendra Modi can’t afford to allow an unrestrained hike in the retail prices of fuels—especially in
view of a number of impending state elections. He would like to keep the leverage to influence
fuel prices. Hence the decision to put the sale of BPCL on the backburner.
But this is a patently unwise move. Already, an artificial cap on retail prices has led to a drastic cut in fuel supplies from private firms such as RIL and Nayara Energy. They can’t match the prices offered by HPCL, IOCL, and BPCL. Even the latter won’t be able to absorb the under-recoveries beyond a point, which will manifest in reduced supplies from them sooner rather than later.
Besides, it will impact the valuation of BPCL as and when it is taken up for strategic sale in the future.
A big bottleneck that comes in the way of strategic sales is the desire of the establishment to remain in the driver’s seat eternally. Until there is a change in the mindset, privatisation of BPCL or, for that matter, of any other PSU won’t happen. And if it happens, it won’t fetch a good price.
The author is a policy analyst. (www.uttamgupta.com)
