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Disinvestment blues and opportunities

THE OUTCOME OF Saturday's meeting of the Cabinet Committee on Disinvestment has widely been interpreted to be a setback for the disinvestment programme in its entirety even though nearly all the decisions related to the petroleum sector. The disinvestment programme has arguably been one of the most controversial of the reform measures. Despite some recent significant success in carrying forward the programme, there was always the possibility that it might stall on account of one or other of the controversies that were never fully doused. The latter — for instance, the methodology to divest — have remained in the background even as the public sector sale programme was gathering steam. Since there has been no convincing resolution of the major issues — admittedly easier said than done — the programme was bound to hit a roadblock, as it did recently.

Few expected the sale of the two integrated Government-owned oil companies — HPCL and BPCL — to sail through. The CCD decision on these was already postponed four times. No decision will now be taken until December. In a surprising move, the Government has also decided to defer the less controversial divestments it had planned in the other oil companies owned by it — Indian Oil, GAIL and ONGC — on the ground that an integrated view on the entire hydrocarbon sector's ownership issues needs to be taken. Those would have involved a public offer of shares bringing down the level of Government ownership in stages but — quite crucially — not below the level needed to retain management control. In contrast, for HPCL and BPCL, the Government had planned a strategic sale wherein a successful bidder acquires management control simultaneously with a chunk of shares. This form of sale has become increasingly popular and was used with telling effect in many divestments such as Balco, CMC , HTL and very recently VSNL. The controversy over the appropriate methodology is a very old one. Presumably some kind of consensus would be worked out among the various stakeholders and equally importantly among the political parties both of the ruling coalition and outside before December. That the process of public sector sale is largely political despite the economic rationale underpinning it is well recognised in all countries having a record of successful divestment.

Two types of opposition have caused a postponement of the strategic sales of the two petroleum companies. The first is the "energy security" angle: opponents to the divestment — the Defence Minister and the Petroleum Minister being the most prominent — say that the country's strategic interests might be compromised if two profitable oil companies with a presence across the entire value chain fall into foreign hands. Protagonists of a quick sale, however, dismiss that possibility. The country's largest oil company with a 56 per cent market share, Indian Oil, will remain under Government control. Besides, other key companies such as ONGC (in exploration) and GAIL (distribution logistics) are not being privatised. Besides, as part of the opening up of the economy, international oil majors already have a major role in oil prospecting and exploration within the country. Another related argument against the strategic sale route is the fear of creating a powerful private sector player who might then use its dominant position to stifle competition. This argument needs to be looked at from the angle of the proposed competition law in this country. Altogether it is clear that the disinvestment programme will proceed further only if certain related issues are addressed. Its success parameters need to be redefined. Its impact on capital receipts is well known and can be critical to the budget at a given point. Far more beneficial will it be to use it as a spur to all round reform.

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