The ONGC solution PDF Print E-mail
Wednesday, 10 September 2014 00:00
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Implement it in other PSUs as well

Given the steady decline in its output, from 24.7 million tonnes of crude oil in FY10 to 22.3 million tonnes in FY14, it is not surprising the government thought it necessary to investigate the fall in production at India’s top oil producing PSU. After all, this is despite ONGC’s reserve replacement ratio (RRR) being more than 1 for 9 years—that is, it created more fresh reserves each year than the oil it took out—and the current RRR is 1.9. What that suggests is that either the fresh reserves are not being evaluated correctly or the PSU’s production is way behind schedule. Private sector rival Cairn India, by contrast, has seen its production rise from 7.42 million tonnes in FY11 to 10.85 million tonnes in FY14. Which is why the previous ONGC chairman Sudhir Vasudeva did well to hire consultants BCG India to come out with a solution. After studying 41 of ONGC’s ongoing projects with a capex of R79,000 crore, BCG found that over half were delayed with, in some cases, the delay stretching for nearly a decade. The consultant has suggested several measures like rating of vendors, but the most important one is moving away from the current L1, or lowest-priced, system of tenders to one based on the most economically advantageous tender. This means looking at a life-cycle cost as well as selecting firms that have a history of expertise and on-time delivery. Given how L1 pricing has been the bane of each PSU, it is time to look at implementation of this recommendation in other PSUs as well.

Making PSUs more competitive, though, will require more than just sensible tendering processes. The most important change, and this will apply to even ONGC’s new tendering system, will be to insure this against losers going to court. Several years ago, BSNL had the largest number of subscribers in rural India, but after a series of tenders that were scrapped after the losing party went to court, it lost several years and, in the bargain, its rural edge. The only way to insure against this is for the government to appeal, in the Supreme Court, the view that PSUs are ‘instrumentality of the state’ and, therefore, honour-bound to act like the government would—that is why a PSU tender can be challenged in a court while that of a Bharti Airtel cannot. This will be a bit of a long-drawn process, but needs to be addressed if PSUs are to progress. Over the longer term, of course, the government will have to think of the incentive structures that need to be put in place for PSUs to act like their private sector counterparts, to take risks and maximise production/profits; to weigh the pros and cons of, say, investing R30,000 crore in an Air India and compare how PSUs like Hindustan Zinc have done in their post-privatisation phase. This includes a serious re-look of the current system of hiring chief executives as well as the compensation system and the government’s chokehold over the PSUs and the fact that the PSUs are made accountable to ministries and fall under the purview of the 3Cs—CBI, CVC and CAG. The BCG recommendations on ONGC are very good ones, but are only the starting point.



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