Oil sector
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This article is written by Kushang, from Himachal Pradesh National Law University (HPNLU). This article talks about the privatization of Bharat Petroleum Corporation Limited (BPCL). The article also mentions the impact, benefits, and issues of privatization of PSUs like BPCL.

Introduction

“The Government has no business to be in business.” The phrase that one might have come across in recent times is now being seen as a philosophy. The phrase relates to the privatization of the Bharat Petroleum Corporation Limited (BPCL). The government has decided to privatize this unit. It is surprising as  BPCL had been making a profit continuously for a long time. Privatization means the transfer of ownership, property, or business from the government to the private sector. It means transferring the ownership from government to private companies. But, the concept of privatization is not very new to India. In 1991, when India was facing major economic problems, various policy changes were made to the economic ideology of the country. The LPG policy which stands for liberalization, privatization, and globalization was introduced by the then Finance Minister of India, Mr. Manmohan Singh. This Policy opened the Indian market for foreign investment and promoted globalization. The economy of India improved. The privatization aspect of the LPG policy aimed at bringing Foreign Direct Investment (FDI) as that leads to increasing the financial strength of the economy of the country. Privatization also leads to less political interference in work and reduces red-tapism which may exist in Public Sector Undertaking (PSUs). Apart from these merits, there are other benefits like efficiency and increased competition in the market. Currently, the announcement of the privatization of BPCL has again started the debate over the merits and demerits of privatization. Especially, when the PSUs are making a profit like BPCL.

Oil sector in India

With the discovery of the first oil deposits in Digboi town of Assam, the oil sector of India was established in 1889. Since then, the oil and gas industry in India has been increasing rapidly. India was the 3rd largest consumer of oil in the world in 2019 with a consumption of 5.16 million barrels per day (mbpd) of oil in 2019. India is also the 2nd largest oil refiner in the world with a capacity of 249.9 million metric tonnes (MMT). Rajasthan is the second-largest producer of crude oil after the offshore field Bombay High in India with a share of about 23% of total crude oil production of the country. ONGC (Oil and Natural Gas Company) is the largest company in the Indian oil sector and contributes about 75% of the total Indian oil production. The oil sector in India has been constantly developing and attracting investments as well.

Privatization of the oil sector

Currently, various Public Sector Units are being privatized by the government. BPCL is one among such PSUs. It is one of the largest stakeholders in the Indian oil sector. Thus privatization will have a major impact on the oil sector. This step of the government has been considered as the biggest ever privatization drive. The government invited bids for the sale of its entire 52.98% stake in BPCL. This step has led to mixed reactions from the people. Thus, it is important to study why people are having so much debate on the issue of privatizing this major giant in the Indian oil sector.

BPCL privatization

Bharat Petroleum Corporation Limited (BPCL) is the second biggest refiner in the oil sector of India. It has four refineries in Mumbai, Kochi, Bina in Madhya Pradesh, and Numaligarh in Assam. With around 14,800 retail outlets, BPCL is one of India’s best public sector companies.

The company has performed really well over the years and has made it to the Fortune 500 list for the past 16 years. The company which was awarded the status of Maharatna in 2017, has a market share of about 24% in petroleum products in India. As stated above the government holds around 54% stake in BPCL and in November 2019, announced that it would privatize various public sector units including BPCL.

With the announcement, various debates arose as to why the government wants to privatize an organization that has done really well in the industry. About 12000 permanent workers and thousands of contract staff were also shocked by this decision. This led to widespread protests from their side. It is being stipulated that the privatization process of Bharat Petroleum Corporation Limited will take place by March 2021. The government has shown a very firm stand on privatization and as the Oil Minister stated “..the government has no business to be in business’ speaks volumes about the intention of the government.”

The bidding will be a 2 stage affair, with qualified bidders in the first EoI (Expression of Interest) phase being asked to make financial bids in the second round. The offer document also stated that a private company having a net worth of USD 10 billion is eligible for bidding and a consortium of a maximum of four firms would be allowed to bid. It was also expressly mentioned that Public Sector Undertakings (PSU) are not eligible for the bidding process. The privatization of BPCL is important for meeting the record of Rs. 2.1 Lakh crore target the finance minister has set from disinvestment proceeds in the budget for 2020-21.

Impact of privatization of BPCL

BPCL being a major player of the Indian oil sector has a large impact on the Indian economy as well. Recently, net profit in the June quarter doubled for BPCL. Net profit in April-June was Rs 2,076.17 crore. Apart from this, BPCL has a CSR share of about Rs. 180 crores. The government is trying to bridge the fiscal deficit by the profit that they will gain from the privatisation of BPCL. However, in the long run, this step would not be enough. BPCL being a profitable unit provides a profit of Rs. 2050 Crore monthly. Thus, the economy would be affected in the long run. The employment issue would also be one of the impacts the privatization of BPCL will have. The impact analysis of the privatization of such a profit-making public sector undertaking of the country would be clear only when a clear benefit analysis is made. There are various issues and challenges also which indicates the bad decision of the government. Thus, let us analyze a few of these merits and issues related to the privatization of BPCL in India and what it holds for the future of the country.

Benefits

It is important to study the benefits that this decision of the government will bring to the country. The privatization will bring an end to the cross-holding structure existing in the oil sector. This cross-holding structure was formulated in the 1990s as the government sold its shares in Oil India Ltd (OIL), Gas Authority of India Ltd. (GAIL), and Indian Oil Corporation (IOC) to raise funds. This cross-holding may lead to a situation where there is a lack of competition and more conflict of interest in the sector.

There is a chance of an increase in salaries of the workers as stated by N. Vijaygopal, the Director (Finance) BPCL. Privatization may also lead to benefits to the consumers due to competition and price cuts. Even the shareholders can reap good returns on the shares of BPCL. Apart from these direct benefits, there are other important benefits like it will reduce the burden on the government, and thus the government can focus on other resources. Also, red-tapism and government interference would be reduced in the sector which would increase the efficiency of the unit. The entry of private players in the sector would also lead to quality and efficiency due to competition. Thus, these are few benefits which one can relate to the privatization process of Bharat Petroleum Corporation Limited (BPCL).

Issue and challenges

The reason that BPCL privatization has led to so much debate is due to various issues related to it. The fact that BPCL is India’s one of the most profit-making PSUs raises more questions as to the need for privatization when it is doing so well. Some of the issues and challenges are-

  • A major controversy surrounding the privatization of BPCL is that these units are running profitably. Also, the oil sector is a sector of strategic importance to the nation. Thus, there is no need for privatization in the oil sector. 
  • The most important factor which has made headlines as well as the possible layoff of the employees when BPCL is privatized. People claim that multiple units of the refineries would be shut down to just single units as private companies may not aim for increasing production. Hence, this might lead to layoffs.
  • Also, people fear that privatization would pose a threat to new recruitments. For instance, the Kochi refinery in Kerala is the only PSU that is actively recruiting people. Thus, privatization may hinder job opportunities.
  • Another issue related to privatization is the potential disturbance that may be caused to proposed or ongoing projects of BPCL. Even the state government has become doubtful about the situation. For instance, the Kerala government proposed to set up a Petrochemical Park near the Kochi refinery. The park was to receive feedstock from the refinery. Thus, the government of Kerala expressed its concern due to its 25000 crore investment in Petrochemical Park. This may be affected due to the privatization process.
  • Privatization in sectors like oil can lead to other challenges like pollution. As the main motive of these companies is to make a profit they may not give much importance to pollution. In PSUs, the government can regulate these issues efficiently and maintain an optimum level.
  • The same argument holds true for the social welfare motive by which PSUs work. This may be comparatively less important for a private company. This would lead to the discontinuation of several social schemes such as the allotment of fuel stations and providing employment to vulnerable people of society.
  • More work stress is also an issue that would affect its existing employee.
  • There can be issues related to transparency in the private sector.
  • The government may also lose out on benefits of the profit earned by BPCL, which is a very profitable unit.  
  • There have been various protests by trade unions against this decision. The issue is still existing and there is a need to make these trade unions acceptable to privatization. This can be done by proper communication between the government and the trade unions related to the workers of BPCL.

Thus, these are a few challenges that the privatization of BPCL will face in near future.

Conclusion

Thus, it is no doubt that the privatization of the oil sector would bring major changes to the economy of the country. Still, there are certain issues that may arise in the future. BPCL has contributed a lot to the Indian economy as a very successful PSU but it has to be seen if it can manage the same level of profitability even after privatization. The privatization of BPCL is being considered to be the largest in India. However, various people have raised their concerns against this decision of the government. Employees, workers, or trade unions have staged protests against the decision. However, the stand of the government in this matter is very firm. The government is very much determined for its disinvestment scheme. The concerns regarding the employees were highlighted in the news however the government has assured that no adverse situation would arise for the workers of BPCL. The privatization scheme of the government also took a decision to privatize Air India. But it faces comparatively very less controversy than the BPCL privatization decision. This is because Air India needs support. It is working on loss and is a burden for the government. Thus, the privatization of such a unit is not being seen as a surprising act. However, a ‘maharatna’ PSU like BPCL, which has constantly contributed to the country’s economy has led to debates. The process of Privatization of BPCL is expected to be completed by March 2021. Thus, only time will tell if PSUs working well in the economy need a new owner in the form of private companies or should it be under government control.

References


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