The return of the bad penny: merger of oil PSUs
By Shankkar Aiyar | Published: 19th February 2017 04:00 AM |
There is a certain kind of predictability about some ideas. No matter how emphatic the rejection, they make a comeback—it is almost as if bad ideas have a homing device embedded in them.
One such bad penny has made a comeback in paragraph 105 of Budget 2017. “We propose to create an integrated public sector ‘oil major’”, which the government believes “will be able to match the performance” of global and local private players. It is unclear as to what the logic of the new persuasion is for the government to readmit an idea rejected twice.
The lure of ‘big is bountiful’ has seduced and haunted governments in India every decade—in 1998, 2005 and now in 2017. It made its first appearance in 1998 during the tenure of Atal Bihari Vajpayee. In fact, Santosh Kumar Gangwar, then MoS Petroleum told Rajya Sabha that merger would be advantageous, will “enhance efficiency and competitiveness” and “total optimality”.
The idea was examined by a group of ministers under Yashwant Sinha. It concluded that the merger of oil PSUs would result in a monopolistic situation—in distribution of essential goods like motor spirit, LPG and kerosene.
The Vajpayee regime, for good reasons, opted to promote choice for consumers. Indeed, it also chose to promote competition by liberalising the entry of private players in retailing of fuel.
The bad penny returned six years later during the UPA regime. The idea was packaged in M&A jargon —scale drives efficiency and can be leveraged to compete for global oil fields. It caught the imagination of the Singh Parivar. To examine the idea, Manmohan Singh set up a committee under V Krishnamurthy with policy pundits G V Ramakrishna, Gopi Arora, Vijay Kelkar, B C Bora and U Sundararajan as its members.
The committee, after examining diverse opinion, rejected the idea for merging oil PSUs. It observed in its 35-page report the need for enabling competition to strengthen energy security, and that “any mega entity dominating the energy market has ambiguous implications” and is not advisable. The merger proposal was summarily junked.
Rejection though has not detained the idea. Déja vu, it would seem, has multiple entry visa into India’s policy discourse. The idea this time is a vertically-integrated mega corporation. The government is reportedly looking at a mega merger—of ONGC, OIL, GAIL, IOC, HPCL and BPCL. This would create an entity with a market capitalisation of `6.6 lakh crore and with revenues of around `8.5 lakh crore.
Hypothetically, the merged entity could figure in the top 10 oil companies by market capitalisation and top 15 by revenues. It is being argued that the merger will enable size and deliver financial heft.
So how do the numbers stack up? Well, the merged entity will have revenues of $125 billion and market value of around $100 billion. To get a perspective, consider the global players: Exxon Mobil has a market value of $340 billion. Other petro pashas such as the Royal Dutch Shell, PetroChina or Chevron are all in over the $200-billion mark.
Size does matter. So does context. Adequacy of heft is defined by context and need. The question that must be addressed is whether lack of size dented India’s quest. Fact is, India has since 2000 invested over $19 billion in 25 countries to acquire share of gas/oil output. And indeed, if lack of heft had been a hurdle, what stops PSUs from coming together? After all, there is also such a thesis as synergy in common ownership. Remember that the investments by PSUs are backed by sovereign, well, heft.
The idea for merger is also backed by the promise of efficiency through synergy. But this req
uires rightsizing—presumably the job losses have been factored. There is also the key question whether mergers deliver? The jury is out, but those at AT&T, AOL, Time Warner, Bank of America and others will tell that a lot depends on cultures, constants and variables. It could turn into a slippery slope of debt and destruction of shareholder value.
The 2005 Krishnamurthy Committee, which met with M&A experts, quotes that barely 29 per cent of mergers deliver returns. The Indian experience is not very different from that of global players. Yes, there have been mergers of banks. But remember, many were preceded by near-death encounters triggered by scams or scandal and driven by the need to survive.
Budget 2017 states that the purpose is to improve the performance to match those of global and Indian private players. It’s a laudable thought. It is important to realistically assess expectations from synergy in the Indian context, to review recent history.
The merger of Indian Airlines and Air India was also about synergy, optimality and performance. And if mergers do deliver optimality, why stop at oil PSUs—why not merge insurance companies, PSUs in the power sector?
The merger will kill competition, deny choice. It will also unveil new risks. The merged entity will host over a lakh of employees. Unions will follow and so will vulnerability—threats of disruption to production and in distribution. Countries such as Mexico, for decades, suffered the consequences of monopolistic conditions—the leverage of “pay or else” enjoyed by unions.
To appreciate the possibility, think 1970s and 1980s—the railways, telecom or airlines! Is the private sector large enough to countervail a disruptive strike say in production/distribution of motor spirits, LPG or kerosene?
The Vajpayee and the Manmohan Singh regimes took on board these factors. The clincher, above all of these factors, was the concern about the political risk. The merged entity, with revenues of over `8.5 lakh crore, will be a state within a state—if it were to be a state it would be ranked fourth among states.
There are the unions and then the many MPs and MLAs, owners of pumps and dealerships—influential and affected parties. Interrogation of recent history, particularly in Brazil and Venezuela, is useful to appreciate the spectrum and potential of political risks.
It is well-established that the biggest reason for failure of mergers is lack of strategic rationale. The criticality of energy security in the aspiration for growth demands a review of the idea. Let not notions masquerade as firstname.lastname@example.org