Sunil Jain: Mani's ghost

RATIONAL EXPECTATIONS

One the face of it, the fact that the sales at outlets run by PSU oil-marketing companies have fallen from about 240-250 kilolitres (kl) per month three years ago to around 140-150 today, justifies the ministry of petroleum's (MoP) decision to tell them they cannot set up any more retail outlets for the time being""sounds just like the Mani Shankar Aiyar days, when the ministry was even advising GAIL on what kind of pipes it could buy, pre-coated or uncoated! Over the past three years, with the threat that private sector rivals would soon come in (even fellow PSUs might, overnight, become private firms), PSU oil firms added around a third more to their capacity. It's a bit disconcerting, of course, that the MoP decision will give rivals like Reliance more time to catch up with the PSUs network""the ban does not apply to pumps that are allotted to the families of Operation Vijay or those from the government's discretionary quota!

The argument made by the ministry is that the rapid increase in retail outlets has meant PSU oil pumps are cannibalising one another's market. This, it reckons, is lowering margins at the retail level and, to make this up, pumps are resorting to more adulteration. Since the question is posed this way, the answer is obvious: reduce the number of pumps, the volumes will go up, as will the margins, and the adulteration will fall.

If only life was so simple. While lower margins are certainly a temptation for adulteration, the single-biggest reason for adulteration is the huge price differential between what are for all practical purposes similar fuels. When diesel retails at around Rs 37 a litre and kerosene at Rs 11, no matter what margins you give dealers, there will be huge adulteration""in the past, when the differentials have been lower, anecdotal evidence suggests, the adulteration has been lower. The solution is correct inter-fuel pricing as well as enforce strict monitoring of quality""yet, the ministry's anti-adulteration cell hardly works and there are cases where the ministry has prevented oil firms from taking action against dealers known to adulterate fuels.

Equally strange is the ministry's refusal to tackle the other reason for plateauing sales, that of rampant theft. No matter how energy-efficient the economy is getting, it is not possible to explain why the consumption of fuels like diesel and petrol is growing as slowly as they are. Diesel grew 1.4 per cent in 2005-06 and petrol 4.9 per cent""just look at the sales of automobiles including two-wheelers, and the absurdity stares you in the face. In the past few years, the sales growth of diesel has even been negative, but this was easily explained by the spurt in kerosene growth (since kerosene was mixed with diesel). This year, however, even kerosene sales have fallen. In which case, it is likely there are huge clandestine imports taking place, and/or industrial solvents or other refinery by-products are being sold as diesel/petrol""tackle this, and watch official sales shoot up.

Some years ago, the ministry was alerted to the fact that one private sector firm was selling C9, a refinery extract, as diesel (C9 had a lower excise duty)""the ministry was alerted when a diesel engine manufacturer said he'd been getting queries as to whether the warranty would hold if C9 was used! Yet, nothing happened of the case. A couple of years ago, when I examined the data in detail, it was found the states where diesel sales were falling were Gujarat and Maharashtra, so it is obvious this is the region where the ministry needs to concentrate upon.

It can be nobody's case that oil PSUs should set up retail outlets without paying attention to demand levels. It is equally true that the oil PSUs have done little to differentiate themselves, so it is unclear as to what they really plan to do with the pumps they've set up. All sell at the same price, so there is no incentive for customers to switch from one to the other, nor have they managed to show any discernible difference in product/service quality. Neither do they offer special discounts, or volume-based schemes for distributors/large customers the way Reliance does or MRPL has begun doing.

Yet, it is foolish to assume oil PSUs are doing badly just because per-outlet sales are falling""per-outlet sales fall in each industry after a certain level, the important thing is to ensure the outlets break even. Also, companies set up more outlets to deliver better service to customers (in the petrol pump case, to reduce waiting lines for customers), sometimes even to ensure a presence in major markets""Maruti loses lakhs on each Baleno, but still retains it as it doesn't want customers to migrate to Honda, for instance, once they want bigger cars. In any case, it's unclear how a set of bureaucrats can decide a retail plan for oil firms""one, they're not marketing people, and two, all plans have to be decided by the situation on the ground.

Equally, it's difficult to see how PSUs can compete with a Reliance when just half their retail outlets can be allotted on efficiency grounds (within each category, such as the 2 per cent for sports persons, a third have to be women, and preference is to be given for widows!), and in the case of the 25 per cent reserved for Scheduled Castes/Scheduled Tribes, the pumps are by and large even financed by the oil companies. If PSU oil firms don't do as well as Reliance, their managers are not the only ones to blame.

suniljain@business-standard.com