WHAT principles should govern bids from public sector undertakings (PSUs) for majority control of other PSUs up for privatisation? There is still some fuzziness about this, as is evident from the case of IBP, the petroleum distribution PSU up for privatisation.
On Tuesday, the media reported that IOC had submitted the highest privatisation bid by far, over Rs 1,200 per share according to most newspapers. Yet the market price of IBP opened at Rs 862 and quickly crashed to Rs 690 before recovering.
Now, since the winner is supposed to make an open offer to all holders, you might think that the market would have pushed up the price close to the winning bid. Instead it travelled in the opposite direction.
Why? Because the market was confused and divided on whether the privatisation would go through at all. The main aim of privatisation was, supposedly, to get the government out of the business of running commercial enterprises.
Raising money to bridge the fiscal deficit was supposed to be secondary. If the only aim was to raise money, the companies could simply have bought back the government shares on sale, without going through the long and politically difficult procedures of privatisation.
Now, most market players assumed that IOC, BPCL and HPCL, the three big public sector oil companies, would put in cosmetic bids for IBP to give the illusion of great competition. It had proved difficult to stir up much competition for other PSUs being privatised.
Indeed, no worthwhile bids at all were received for Hindustan Zinc, Air-India, Indian Airlines or several ITDC hotels. So, no eyebrows were raised when the three public sector oil companies were allowed to bid for IBP.
To the surprise of many, IOC put in the highest bid. Some officials are reported to have objected that this would not amount to privatisation at all, and would simply transfer ownership from one government entity to another. This is undoubtedly true. Because of this, the market was initially uncertain whether the IBP auction would go through.
The government has now clarified that IOC will get IBP after all. Yet it is revealing that doubts continued even after the submission of bids, till the very moment of formal announcement.
You can argue that, as a matter of principle, other PSUs should not have been allowed to bid for IBP. But once they were allowed to bid, it would have been outrageous to abort the bidding process.
Some years ago, many observers jeered when the finance ministry obliged some oil PSUs to buy part of the government holding in other oil PSUs. This was financial smoke and mirrors to produce a bogus reduction in the fiscal deficit.
There was some jeering again when BPCL and HPCL were asked to buy out the government holding in stand-alone PSU refinery companies at Kochi, Chennai, Numaligarh and Bongaigaon. There was no auction, and the take-over prices were officially determined and implemented, with no open to minority shareholders.
However, the IBP case is surely different. Unlike in the other cases, there has been an open auction. IOC has not been handed IBP on a platter at a pre-determined rate, it has beaten some of the biggest heavyweights in the world (Including Shell, Kuwait Petroleum and Reliance) fair and square in the marketplace. It will make an open offer to minority shareholders.
Yet a good case can be made that IOC, BPCL and HPCL should not have been allowed to bid at all. The reason is not just that this goes against the aim of getting the government out of commercial business.
It also increases the degree of government monopoly in the oil business. IOC is by far the biggest player, dominating several regions. It has justified its very high bid for IBP on the ground that, otherwise, it may have been obliged to reduce or shut down some refining capacity. But this logic surely applies with far greater force to private sector refinery companies like Reliance Petroleum and Mangalore Refineries.
As long as administered pricing was the rule, stand-alone refineries could come up without worrying about profitability, and enter into contracts with the PSUs enjoying monopoly rights over distribution. But administered pricing is about to be abolished.
The private sector players have not yet been allowed to set up large distribution chains, and these cannot be set up overnight. Disputes on distribution have arisen between IOC and Reliance, between the Birlas and HPCL at Mangalore. In theory competition from imports is allowed, but in practice this competition will be illusory without strong private distribution chains.
So, it is important to end the government monopoly on distribution and encourage competition. Going by this logic, none of the existing PSUs should have been allowed to bid for IBP. The winning bid of IOC ensures that, when the market finally opens up, IOC will have an even stronger distribution stranglehold than before.
The next stage in the process will be the privatisation of HPCL and BPCL. If we are serious about competition, it makes little sense to allow IOC to bid for either of them. Nor should HPCL and BPCL be allowed to bid for each other. It makes sense to leave the next auction entirely to private sector players.
Are such precautions really needed? Some people point out that a regulator is going to regulate prices and distribution. So, does it matter whether there is a high degree of monopoly in distribution?
The simple answer is yes. The regulator can cap monopolistic profits, but that is not the same thing as encouraging competition. We need competition from many players, and, this means reducing the hold of PSUs. It is of course tempting to try and get a higher privatisation price by letting PSUs bid freely.
But when the government is both buyer and seller, a high price brings only illusory gains. We need the reality of competition rather than the illusion of a lower fiscal deficit.