)
The oil ministry intimated ONGC its decision to do away with the policy with immediate effect through a letter on 1 October. The policy is applicable to tenders for seeking services and equipment and did not cover raw material purchases.
"The relevant provisions of material management manual and tender conditions for service contracts stand modified. All concerned are advised to carry out similar modification in tenders for charter hire of Rigs and Lump Sum Turn Key (LSTK) contracts also," the firm told its top executives in a recent internal circular. As the new guidelines are to come into effect immediately, ONGC will reschedule dates of opening of tenders where technical bids were yet to be opened.
Domestic industry has hailed the government's move. "Abolishing the decades-old policy on price preference is a welcome reform. This will lead to competitive and efficient bidding environment attracting serious bidders and bring in global investments as well as technological advancements in the sector," Sashi Mukundan, Chairman of Confederation of Indian Industry (CII) National Committee on Hydrocarbons who is also the Regional President & Head of Country, India, BP Exploration (Alpha) Limited told Business Standard.
The policy was formulated by the government in May 1984 and has been in effect since then even as the criterion and extent of preference have undergone changes. The issue of price preference on goods and services was last reviewed in 1997 and preference of 10% to domestic bidders over the foreign bidders in global tenders floated by ONGC and Oil India (OIL) for contracts continued.
ONGC had been opposing the policy on several grounds including that the Indian industry now has fair exposure to global environment and should be able to compete with foreign counterparts without further protection. Besides, the additional cost to oil companies due to the policy was earlier reimbursed to them under Administered Pricing Mechanism (APM). With the abolition of APM and introduction of market pricing now, the increased in cost is absorbed by ONGC.
It would also be impossible for ONGC to compete effectively with other exploration and production companies in the New Exploration and Licensing Policy (NELP) bidding process if it continues to provide price preference to domestic bidders. Also, thanks to the policy, participation by foreign bidders in ONGC's tenders has reduced considerably leading to restricted competition and higher costs.
Former ONGC Chairman R S Sharma, however, said the policy should have been removed in phases. "The withdrawal should not have been a sudden move. There should have been a proper notification. The government could first change price preference to purchase preference which could then have been phased out gradually," he told Business Standard. Under purchase preference, a domestic bidder is allowed to match the foreign bidder's quote within the 10% range.
The matter was re-examined in the ministry last month when both ONGC and OIL reiterated their positions. The ministry sough the finance ministry's opinion which said, "the current formulation of price preference is not conducive to a competitive and efficient bidding environment." The oil ministry, therefore, decided to do away with the policy. The change in policy will impact state oil firms' investment outlay for 2012-17 which is over Rs 421,229 crore. Around 67% of this is proposed to be spent for exploration and production of oil and gas. ONGC is the largest executing company of oil and gas sector projects.
