The rape game begins again

Don’t blame Sinha for what he’s doing to the oil PSUs — like Draupadi, they are everyone’s wife

FROM a union minister getting public sector units (PSUs) under his charge to foot the bill for hauling members of his constituency all the way to Delhi, to the finance minister’s plan to get the oil PSUs (like Indian Oil and Hindustan Petroleum) to help tide over his budget deficit, the rape of PSUs is an age-old game Indian politicians play.

Coincidentally, the huge spat we are seeing between Reliance Petroleum and Indian Oil Corporation (IOC) over who is going to pay for the products produced by Reliance, is itself the result of the then (United Front government) petroleum ministry insisting IOC sign a one-sided contract — due to IOC’s insistence, however, the final contract was a balanced one, but more of that later.

The finance minister’s plan is truly ingenuous, as on a surface view, it appears to be hurting no one. Under the plan — that’s why the Excise Act was amended through an ordinance a few days ago — the government will sharply hike excise duties payable on various petroleum products, to mop up around Rs 2,000 crore till the end of March. While this is done, the oil companies will be told this hike is not to be passed on to the consumer.

But for the plan to be complete, the interest of the PSUs must also be taken care of. So, these PSUs are to be issued government bonds for this Rs 2,000 crore — that’s their interest also taken care of, right? Wrong, and here is the catch. The oil PSUs will be issued bonds bearing an interest rate of around 7 per cent, whereas they borrow funds currently at around 10 per cent — so they will have to pay the additional 3 per cent. And given that the higher excise duty will be applicable for the coming financial year as well, the oil PSUs will have to pay another Rs 12,000 crore out of their pockets — they will fund this through borrowings, and will later be issued the 7-per cent bonds.

Again, they will pay the difference in interest rates, and for a full year, that is a loss of around Rs 360 crore. (These PSUs, by the way, are owed over Rs 10,000 crore by the government, and even this is to be taken care of by issuing 7 per cent bonds — given that the PSUs have borrowed at 10 per cent already, that adds up to another Rs 300 crore loss annually).

The problem for the Indian Oils and Hindustan Petroleums, sadly, does not stop there. They will have to pay the additional Rs 12,000 crore excise duty to the taxman immediately, but there is no telling when they will get even the bonds. So you could have a situation — as in 1997 when the government never repaid the oil PSUs — of the oil PSUs having no cash to even pay their import bills. The way things are, we are headed back in the same direction, fast — history repeats
itself, as farce, the second time around.

The Reliance-IOC spat: In the mid-1990s, when the Reliance Jamnagar refinery had been built, and expanded, the oil sector was fully controlled by the government, and so whatever petroleum products were produced by Reliance (or anyone else) were sold through the oil PSUs. However, with the government committed to decontrolling the sector, the question was what was Reliance to do with the products it produced but did not consume in-house?

Clearly, it could build its own marketing network of petrol pumps and storage depots — at a cost of over Rs 10,000 crore — or it could tie-up with existing players like IOC, to use their network. Reliance, naturally, wanted to tie-up with IOC, at least till such time that it could set up its own network. That is how the Reliance-IOC tie-up talk began, and it was proposed that IOC would guarantee (like the way Maharashra did with Enron’s Dabhol Power) to pick up around 8.5 mn tonnes of Reliance’s products, and the balance would be marketed through a 50:50 Reliance-IOC joint venture (JV).

Now while the petroleum ministry was pushing for this, IOC’s top brass refused to toe the line, as the penalties for Reliance not keeping its side of the bargain were much lower than those to be paid by IOC if they didn’t sell Reliance’s products. More important, while IOC would be guaranteeing the sale of Reliance’s refinery, Reliance was still left free to sell on its own, under its own brand name — that is, IOC would look after Reliance’s interests till such time Reliance was able to establish its own network to compete with IOC! Despite the huge pressure from the ministry, IOC’s top brass removed this anomaly, and ensured that Reliance would not be allowed to sell on its own — either it was sold through IOC, or through the JV.

So far, so good. But for reasons best known to petroleum minister Ram Naik, the joint venture agreement was never cleared for three years. So, IOC is now in a situation where Reliance is insisting the contract obligates IOC to guarantee to lift all its 17 or 18 million tonnes of petroleum products. And with the ministry not clearing the joint venture, Reliance insists it is free to look at options of also setting up its own marketing network at the same time! IOC is left with all the responsibilities, and none of the rights.

So why blame just Finance Minister Yashwant Sinha? The oil PSUs, indeed all PSUs, are like Draupadi, fair game for a whole lot of people.

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