Proposed Integrated Public Sector Oil Major
In the recent budget, the Finance Minister had proposed creation of an ‘integrated public sector oil major’ in order to come at par with the level of performance of the international and domestic private sector oil and gas companies. This idea is not new, and was earlier proposed by NDA government of Atal Bihari Vajpayee, and then also Mani Shankar Aiyer in UPA Government. The target companies were IOC, ONGC, BPCL, HPCL and GAIL. The current plan is to extend this merger to create a ‘behemoth’ consisting of all the 13 oil producing companies –whether upstream or downstream.
Questions+Answers
This appears to be a prima facie welcome move to reform the oil sector and make it competitive at a global level. But only a close analysis will indicate as to how further it will succeed and to what extent it may fail. Here are some of the questions for your examinations:
How is the Merger of Companies intended to make the oil sector globally competitive?
The proposal has indicated several means by which this merger can contribute to making the oil sector globally competitive. These include:
Withstanding oil price volatility
Oil price volatility refers to the sudden increase or decrease in crude oil prices owing to the market conditions. A sudden change has a very big effect on the economy and has the capacity of overturning the government budget. But this can be withstood with the help of pre-planned measures. So, the merger of these companies will increase their chance of maintaining the competitive level by withstanding oil price volatility. This is possible through the profits that they will earn through refining businesses by making oil prices low to make up for the losses in upstream.
Greater capital
If the eight companies merge, their combined capitalization in the market will amount to $80 billion, which will make it the ninth largest oil company in the world. This will be larger than the two big oil companies- Rosneft of Russia and Mukesh Ambani led Reliance Industries.
Greater profits and revenue
As per the data available of the financial year 2015-16, the combined profit of these companies was Rs 45,500 crore and revenue was Rs 9,32,000 crore. On the other hand the planned capital expenditure was only Rs 87,600 crore. The figures indicate the amount of profit that they are capable of earning.
Economies of scale
Economies of scale refer to a proportionate saving in costs of production by undertaking large scale production. So the companies with their combined production can avail of the economies of scale and as a result be capable of bearing the risks of business. This results in taking high investment decisions with greater return to stakeholders.
What negative effects can this merger have on the economy?
Learning from other’s experiences
It is noteworthy that India is not the first country to have come out with such a merger plan. There is a history of similar mergers across the world. But unfortunately, such mergers and acquisitions have failed to achieve the required goals. We, in fact, have an example of this in India which can provide us a good insight into the issue of mergers. After the merger of Indian Airlines and Air India, they started facing the problems of different work culture and also different policy decisions. There were often clashes in policies leading to their inefficient functioning. If such a small merger could create so many problems for the companies, a merger of eight can create havoc.
Limitations of PSUs in Welfare State
We cannot altogether ignore the role that a PSU plays in a welfare State like India, where it is supposed to run with a dominant welfare motive than with a profit motive. One of the main aims of any merger is to save in manpower and resources. But saving in manpower will amount to job losses for many. A PSU cannot do this due to a responsibility imposed on a government organization to save the people from unemployment and poverty. So, it cannot even make a change in its policy that will result in shutting of departments or change in skills. It definitely does not have the resource to train all the existing staff in a particular manner to increase efficiency through merger.
Impact of monopoly
There is already a monopoly of PSUs in some areas of trade in the oil sector. Combining the PSUs will result in an even greater monopoly in the oil sector and will curb competition to a large extent. This will prove counterproductive for customers as they will have to suffer due to lack of alternatives in increase in prices or may face problems in supply. It is also a fact that decision making in PSUs is influenced much by the bureaucratic and political decisions, which is not present to such a large extent in case of private enterprises. The fear is that decisions may be put on hold or pressurized decisions may be made and customers will have no option in such a case but to fall prey to such decisions.
Conclusion
From the above observations, it is clear that although this step can help significantly in making the Indian PSUs competitive at the international level, it can have a negative impact on the home economy instead. While promoting competition elsewhere may be making the home market anti-competitive. It should not be forgotten that every step taken by the government should be first for development of the Indian economy, which is a priority, given the lagging behind of our economy from many economies across the world. Allowing the private sector to prosper side by side with the public sector is very important to maintain a globally competitive economy. If at all the PSUs are to be made globally competitive, they must develop some kinds of Public Private Partnership to get the knowledge and technical know-how of private companies like Essar Oil and Reliance Industries. They should not move on for such a merger which can have a drastic effect on the economy.
