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By M.V.Ramakrishnan
Whenever public-sector undertakings get into serious trouble and threaten to sink in deep waters, the Government comes to their rescue with liberal financial support. It lends them huge amounts of money on easy terms, and if things get still worse it writes off the loans and accumulated interest. Sometimes it agrees to convert the outstanding dues into 'equity', which is just an artificial way of writing them off. There are also some scenarios in which the Government extends substantial financial support to PSUs for other reasons. For instance when it requires them to sell their products to the consumers at a concessional price, it makes good the difference between that and a profitable 'retention price', specifying both the selling and retention prices. This is so in the case of domestic nitrogenous fertilisers produced in the public sector as well as the private and co-operative sectors. In all these contexts the financial aid is given from the exchequer, and the loss is proportionately borne by the taxpayers--who are not only well-to-do persons paying income tax and wealth tax, but also poor people who pay the excise element included in the price of a cake of soap or a box of matches. But in some contexts the Government adopts a system of 'administered prices' not with the intention of subsidising both the consumers (with a concessional price) and the producers (with a retention price), but of ensuring that the consumers pay uniform and stable prices all over the country, and that the producers are not adversely affected by volatile international market trends. This is the rationale of the 'administrative price mechanism' (APM) which governs the production and sales of petroleum products. The idea is implemented in this case through a system of 'oil pool accounts' maintained by the 0il Co-ordination Committee (OCC) in the Ministry of Petroleum and Natural Gas . The Central Government fixes the retention and selling prices of domestic crude and most petroleum products. The oil companies are required to surrender to the oil pool all the money recovered from customers after adjusting their own claims. Thus the oil pool accounts are expected to be self; -balancing in the long run, the entire liability being passed on to the consumers of petroleum products, and not any part of it to the taxpayers. 0t course, the consumers do include poor people who buy kerosene in the ration shops under the existing public distribution system. One would naturally expect the scheme (like all schemes) to be administered on rational lines. But a recent report of the Comptroller and Auditor General of India (CAG) reveals that there are several glaring flaws and anomalies in the operation of the APM. Loopholes The most conspicuous weakness in the system is that while the OCC fixes the retention prices on the basis of a cost-plus formula (covering all operational costs, interest on borrowed funds and depreciation of capital assets, and adding a handsome return on capital) it undertakes no independent scrutiny of the cost data furnished by the oil companies themselves. This is not an isolated instance of omission, but a general malaise of over-generosity from which the Government seems to suffer whenever dealing with public-sector undertakings and vested interests in the private sector. We had noted that this was precisely the overall weakness in the scheme of retention price subsidy for urea (Business Today Online, Jan 6, 2000). There is nothing basically wrong with the concept of 'costplus' if the Government wishes to protect an industry from the vagaries of the market place. But obviously there should be some reasonable standards of efficiency and economy, and adequate safeguards to ensure them. If no questions are ever asked and things are allowed to be taken simply for granted, there can be a temptation to be inefficient or extravagant or perhaps even to load extraneous elements on to the costs declared. The CAG observes: ''A well-knit team of professional cost accountants and chartered accountants within the OCC and the Ministry is an imperative for am independent verification of cost data that determine reimbursement to the oil companies... (But) it was found that the OCC functioned implicitly as an extended arm of the oil companies under the administrative control of the Ministry, as the staff deployed were taken exclusively from the oil companies. This had inherently undermined objectivity .... Internal check in the Ministry was institutionally absent". Nor did the Ministry ever ask for the assistance of the Bureau of Industrial Costs and Prices (BICP) in this context. The audit report cites a couple of striking examples of laxity induced by the total absence of accountability. Some oil companies were borrowing huge amounts of money at high interest rates and were also making heavy investments in other agencies for much lower returns. Such simultaneous and unprofitable loans and investments added up to thousands of crores of rupees. And some oil companies were purchasing expensive power from outside sources while their own captive power plants remained under-utilised . 0f course, all such shocks were absorbed by the retention prices and the oil pool accounts. Loose ends There were other serious anomalies too in the manner in which the APM system was being administered: The retention prices are fixed in such a way that the oil companies are assured of a post-tax return of 12 per cent on their net worth. They include an element of corporation tax, but the actual tax paid by the oil companies was considerably less than the provision. The CAG noticed overpayments of Rs. 2,100 crore over a five-year period (1993-98) in the case of several companies, and the total for all of them would be much more. (It will be recalled that the same thing was happening in the case of the urea subsidy). The progressive amount of the security deposits charged by oil companies on gas cylinders and regulators was Rs 3,400 crore in 1998. An amendment to the Companies Act in 1988 had specified 16.21 per cent as the proper rate of depreciation for gas cylinders. But the oil companies continued to charge 100 per cent depreciation in their books in the year of purchase, and the OCC went on allowing this and calculating the retention prices on that basis. (Do you smell Urea again?) Even if one overlooks this irregularity, it is obvious that the oil companies having fully recovered the cost of the cylinders in the very first year, and the security deposits actually belonged to the oil pool. But the companies were allowed to retain them all, and the cumulative interest on them in 1998 was Rs 1,500 crore, which should have legitimately accrued to the oil pool. There were wide variations in the marketing margins allowed by the OCC when fixing retention prices for different companies. The CAG points out that in marketing there is no scope for any significant variations either in operating costs or in returns on capital; and he estimates that overpayments on this account during 1993-98 would have been more than Rs 1,000 crore. Low norms A concealed element of manipulation in this free-for-all regime was related to the way the per-tonne retention prices were fixed, based on the twin concepts of 'standard throughput ' and 'standard production pattern'. Standard throughput is the quantum of crude expected to be refined annually, and standard production pattern is the specified proportion of various distillates obtained in refining. These standards were laid down by the Government separately for each refinery; they were to be reviewed periodically, and revised if necessary in the light of new facilities and fresh developments. The per-tonne retention prices of various products were so fixed that at the specified level of production in the specified pattern, the refinery would get full compensation for the costs incurred and the guaranteed return on capital. Any production above this level meant that the oil company would get more than the guaranteed profits, since there was no reduction in the retention price for the surplus output. The normal achievable capacity was to be taken into account for fixing the standard throughput. But the levels fixed in 1993-94 and 1996-97 fell considerably short of the actual levels of production achieved in preceding years. This was so in spite of new capital additions which had increased the capacity of the refineries. As a result, the actual production tended to be far more than the specified level, pushing profits above the guaranteed limit. (Urea, urea!) The CAG has not assessed the financial effect of this distortion; but random audit checks had revealed that in terms of depreciation charges alone the oil companies had derived an extra benefit of Rs 10O crore, and there would have been much more relating to other costs. Improvement in the standard production
pattern is normally the result of better operating practices, which are
subsequently adopted by all oil companies. There is an incentive scheme to
reward such progress; but instead of making it an one-time award and
revising the standard production pattern all round, the OCC went on
perpetrating the incentive claims of all the oil companies year after year
indefinitely. Random audit checks revealed excess benefits of Losers Except for the Kerosene oil sold in the ration shops, all petroleum products can perhaps be classified as luxury goods. Therefore, one cannot really object to a system which aims to secure reasonable profits for the producers and passes on the entire liability to the consumers. But surely one must protest when the system is undermined by so many distortions. It is not possible to visualise what might be the financial effect of the extremely easy-going manner in which the cost-plus formula was implemented. But the random audit checks in the specific contexts mentioned above have revealed overpayments of Rs 6,200 crore during the five years 1993-98, and the actual amount must be far higher. An important fact mentioned by the CAG in an overall review of the accounts of all public -sector undertakings of the Central Government is relevant here. In 1998-99, he points out, 144 Central PSUs earned profits totalling about Rs. 31, 000 crore, out of which Rs. 22,000 crore was the contribution of 35 companies functioning in areas where product prices are administratively fixed or regulated, guaranteeing them all an assured margin over their costs. Out of this, Rs 11, 500 crore was contributed by 18 companies in the oil sector. To add considerably to their profits in the dubious ways discussed here is surely objectionable. Moreover, the story does not end there. As mentioned, the oil pool accounts are expected to be self-balancing in the long run. But what actually happened in the Nineties is that the selling prices fixed by the Government (and paid by the consumers) fell far short of the retention prices. As a result, huge arrears materialised in the settlement of the oil companies' claims. This is the famous 'deficit' in the oil pool accounts, and it was more than Rs 18,000 crore in 1997. Staggering under the enormous burden of this liability, the Government of India took a short-cut by issuing ''10.5 per cent Oil Companies Non-Transferable Bonds 2005". So what will happen when the oil companies encash these bonds in due course ? The Government will honour its commitment by draining the exchequer, of course. Which means, in other words, that the formidable liability for the unpaid balance will be passed on to the taxpayers, and not the consumers of petroleum products (except to the extent they also pay taxes). So then, here is a system in which there is no Government subsidy at all, and yet the taxpayers somehow get involved. Moral: let the winners swim in the oil pool, and let the losers drown! |
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