CAG says 3 state-owned oil firms ignoring own software for logistics

National auditor says state-owned companies make monthly adjustments that aren't best for saving costs, efficiency

You might think state-run oil marketing companies spend a lot of effort to move petrol, diesel and cooking gas. You might also think the process is efficient. You are right on the first, wrong on the second.

An audit report on the logistics chains of IOC, HPCL and BPCL, which among them control 91 per cent of the trade, shows the companies don’t stick to their software-based optimised plan, preferring manual adjustments every month instead. The result is an escalation of costs and delays to boot.

These results are from a check carried out by the Comptroller and Auditor General of “Supply logistics operations of (petrol), (diesel) and (cooking gas) in oil marketing companies”. CAG’s report was tabled in Parliament last week.

For an IT superpower like India, this is quite revealing. Every month a linear programming-based optimised logistics plan the companies drew up is jettisoned regularly. The impact often is a 100 per cent to 4024 per cent variation in the “quantity planned for logistics movement vis-à-vis actual quantity uplifted”.

The companies' written responses showed they are unwilling to cooperate with each other in bolstering each other’s capacity, negating the basic reason why they are state owned.

A chance for savings

For instance, the petroleum and natural gas ministry asked these companies to do a pilot run for “movement of bulk LPG from source to bottling plants on an industry wide basis”. A savings of Rs 52.52 crore from the three-month period was observed. The companies were advised to “estimate the saving potential by May 2016 so that the model could be implemented with effect from July 2016”. Five years after the audit, nothing has moved.

IOC told CAG it would not help since those savings “projected during pilot run was fictitious and industry logistic plan has not much relevance in today’s scenario considering the increased capacity of logistics infrastructure”. HPCL said “the exercise benefitted only companies which had inadequate infrastructure and the company which had adequate infrastructure had to suffer”.

At each stage of the report, the auditor and the companies sparred. While the auditor has refrained from imputing costs to annual operations based on its analysis, the test checks for a period of ten months during the audit span are revealing.

The table shows the location-wise ranges of variation in quantity (in percentage) of petrol, diesel and cooking gas actually transported by the three oil marketing companies versus planned movement during selected 10 months.

These companies are supposed to frame a logistics plan for their marketing operations: it is their primary responsibility.

Digital tools

The CAG report notes these companies' linear programming software considers variables such as market-wise projected demand, availability of bulk products, and achievable capacities of their bottling plants and depots. Based on those results the companies place their requirement for trucks, rail rakes and most importantly work out the sequence of movements.

Given the complexity of the exercise, it should be expected that the companies will use digital tools. In practice, every month there is potentially a wide variation as the table shows. The petroleum ministry and the companies said in their written responses that the extent of diversion was minimal.

Yet as the CAG report points out, “LPG is a deficient product and 50 per cent of the requirement is met through import in the country. During the period from 2014-15 to 2018-19, the three Oil Marketing Companies paid total demurrage of Rs 2,227.20 crore which is 12.69 per cent of the total freight paid during this period. In respect of 63 per cent of the cases, detention of vessels was due to reasons viz., non-availability of storage space, shutdowns, demand forecast issues etc. which were controllable by the Oil Marketing Companies. The major reason for detention of vessels was insufficient port facilities; however, Oil Marketing Companies and MOP&NG did not make adequate efforts to sort out the issue relating to capacity constraints”.