by R. Sasankan

E.F. Schumacher is the economist who coined the phrase “small is beautiful” – and blasted the conventional wisdom that bigger is better.

Finance minister Arun Jaitley has rubbished the notion by coming up with the startling suggestion to merge state-owned oil companies to create an oil behemoth that will emerge as a dominant player in the oil and gas space.

Put simply, this is a recipe for disaster and attempts to merge organisations into a monolith that will spark a clash of cultures and undermine the operational efficiency of the new entity. The merger of Air India and Indian Airlines had ruined two reasonably well-run aviation companies. The tragedy could be worse in the case of the oil sector.

The first thing that crossed my mind was that such a merger would ensure the pernicious culture of ONGC and IOC would overwhelm the relatively clean and efficient culture that exists in the smaller entities and foist a Delhi-centric, politics-inspired culture of pelf and privilege that would sap innovation and enterprise and spread the rot of corruption throughout the new entity.

I have seen this play out in many ways in the past three decades that I have covered the petroleum sector and nowhere has this been more evident than at the time of picking top executives at state-owned units.

Back in the 1980s, the Public Enterprises Selection Board (PESB) had forwarded a list of three candidates to the Ministry of Petroleum and Natural Gas from which it could pick one for the post of director (finance) for Oil and Natural Gas Commission (ONGC).

The usual practice is that the candidate who tops the list is given first preference. It is only when this person cannot be appointed for some reason that the second nominee gets the chance to be selected.

The candidate who topped the list hailed from a south Indian state. Though politically a lightweight, he was acknowledged to be upright, competent and non-controversial. That is when the shenanigans began. Suddenly, his house and office were raided by the Central Bureau of Investigation (CBI) and this was promptly reported in the media to discredit his credentials.

Within a couple of weeks, the Ministry initiated the process of selecting the number two candidate on the list and he was appointed director (finance) of ONGC. Immediately after that the CBI acquitted the raided candidate. Buta Singh was the country’s home minister. The victim resigned from ONGC and took up a job with a Mumbai-based company.

We have heard of similar developments in African countries. This happened in India and that too in the country’s bluest of the blue chip company, ONGC. Candidates with deep pockets can influence the politicians and enforcement agencies and ONGC has always had candidates with such deep pockets.

In the 1990s, the PESB recommended a list of three candidates for the post of director (HR) of Bharat Petroleum Corporation Ltd (BPCL). The list contained the name of an executive director of Indian Oil Corporation (IOC) but he was placed second on the list. This person was so influential that he wanted to wrest the post.

While forwarding the list to the Appointment’s Committee of the Cabinet, the then petroleum minister pushed up the name of the IOC man to the top and downgraded the person who was originally named as the top candidate to the second position. The then President of India, K.R. Narayanan, came to know about this injustice and took up the matter with then Prime Minister Atal Behari Vajpayee. Almost simultaneously, the very same IOC candidate was blasted by the then chairman M.A. Pathan for inspiring an anonymous letter against his colleague who was in the race for the post of director in the company.

I have pointed out these few instances in ONGC and IOC to substantiate my point that in terms of basic culture, these two oil giants have a lot in common. But this cannot be the culture that Prime Minister Narendra Modi would want to encourage in the integrated oil giant. The proximity of these companies to the centre of power by virtue of being Delhi-based has wrecked their corporate culture.

I asked a few renowned oil men to gauge their views on Jaitley’s proposal. Although they did not question the intention behind the move, they denounced it as downright ridiculous. Instead, they suggested further bifurcation of ONGC and IOC to make them more efficient.

The Mumbai-based BPCL and HPCL have an entirely different culture. These nationalised PSUs have their roots in Shell and Caltex and they simply cannot co-exist with ONGC and IOC. By any reckoning, BPCL and HPCL are far more transparent than ONGC and IOC.

GAIL was created out of ONGC. But it had the fortune of being headed by Vineet Nayyar, an honest man who, with his director finance K.K. Kapoor who later became its CMD, eliminated the wasteful culture of ONGC and IOC. GAIL has a proper system. It had even resisted pressure from a senior official of the ministry to favour the French contractor for the 1400 km long HBJ pipeline in a dispute settlement. Though Delhi-based, it is substantially different from ONGC and IOC in all areas of corporate governance.

There is a world of difference between Oil India Ltd (OIL), the junior upstream company, and ONGC. Although ONGC is a far bigger, OIL men prefer their separate identity.

In an integrated set-up, it will be ONGC and IOC that will call the shots. By now, Prime Minister Narendra Modi should be quite familiar with the culture of Delhi that allows unscrupulous people to manipulate the system to grab the spoils of office. Almost all politicians in the country prefer a culture of patronage for their own devious ends. This is precisely where the merger plan is going to flounder.

Arun Jaitley’s proposal comes at a time when even the largest multinationals are questioning the wisdom of vertical integration. In recent years, Conoco realized that there was no particular benefit from having downstream and midstream operations and decided to break up them up into two companies. Marathon adopted a similar strategy earlier.