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What is APM dismantling all about?

Salil Panchal/Morpheus Inc

One of the buzzwords for the government when it speaks of the reform process - besides divestment and telecom deregulation - has been APM dismantling.

You must have wondered whether this complex term (linked to the petroleum sector) would have any impact on your daily life.

Would the price of petrol, diesel, LPG, kerosene shoot up? Or does this actually mean that these products will actually cost less?

Let us have a closer look at what APM dismantling is all about.

What does the term APM dismantling mean?

In recent years, the term APM (administered pricing mechanism) dismantling has become a crucial issue which politicians, economists and oil/petroleum corporate bigwigs have discussed in detail.

The term literally implies the removal of an administered (read artificial) pricing mechanism of petroleum products and a gradual shift towards a pricing based on pure market dynamics.

How were petro products priced before APM was dismantled?

Prior to April 1, 2002 - when the new regime set in - domestic prices of some of the petroleum products were partially `insulated' (protected) from volatile international crude oil prices (from which these products are derived) and certain products like kerosene and LPG were subsidised.

The oil companies were told how much to sell and at what price.

To get a clearer picture let us take a quick look at the selling mechanism of the four main petroleum products used in India - petrol, diesel, kerosene and LPG.

Petrol (motor spirit)

Earlier, due to government control, price of petrol was always higher than that of other fuels (like diesel). Petrol prices have been kept at Rs 33 per litre while for diesel it stands at Rs 17 per litre.

Further, over the years, both petrol and diesel have been amongst the highest taxed of all commodities through state-related sales tax and customs and excise duties.

All these factors have led to an overall higher consumption and usage for diesel compared to petrol. Petrol accounts for a sale of 9.3 m tonnes though margins on sale of petrol are higher than that of diesel.

(High speed) diesel

This is the highest selling amongst the fuels accounting for 85 per cent of the automotive fuels.

Sales are through two forms - at the wholesale level to state-owned corporations like the railways and transport companies, and secondly through retail pumps to heavy commercial vehicles and the agricultural sector.

This is the market, which has caught the eye of most of the leading domestic and international oil companies, where they visualise greater expansion.

Superior Kerosene Oil (Kerosene) This is sold through the public distribution system (PDS) of various state governments and through retail sales outlets. Because of its wide-scale usage the government has and will continue the subsidy for the PDS kerosene.

LPG (liquified petroleum gas) This is one of the fastest growing segments for oil companies and the consumer base and the distribution/penetration of the product has grown over the past three years.

How will pricing change for the retail consumer now? Will petrol and diesel cost less?

In India's socio-economic climate, petroleum products have always and will continue to be looked at very closely by the government.

What this means is that even with the dismantling of the APM process, the government will continue to have an indirect say and view on the pricing of these key fuels.

This is not simply because the taxes levied on such commodities are crucial to the state governments but also because the government has still to take a clear view on how much foreign competition and free market pricing should be allowed.

The recent Exim Policy has still not allowed free imports of petroleum products. If free imports are allowed it would have an impact on petroleum prices in various parts of the country.

Existing oil companies (along with some of the government ministries) will continue to have a say on how pricing of these petro products should be.

So till then even as more players, both domestic and international, come in, the prices of diesel and petrol will not dip substantially. A pure free market scenario could arrive, but in India it is likely to take more time.

Then what does all this talk of deregulation for the oil industry imply?

We have seen that steps have been taken at the pricing level. The oil industry has witnessed deregulation in recent years through private players who have been allowed to market LPG products.

The big thrust will be at the retail level with the expected entry of large players like the Reliance group (with Reliance Petroleum having recently merged with Reliance) and the Essar group, through Essar Oil.

They will aggressively compete with public sector undertakings (PSUs) at the retail and marketing level and the overall distribution network map for petrol and diesel sales is expected to alter dramatically.

From a management perspective, the running of oil companies is also expected to change specially with the government announcing that it will divest its stake in petroleum giants Bharat Petroleum and Hindustan Petroleum.

Most of the leading private and public players are likely to bid for these as there are obvious advantages to gain in terms of existing network and distribution.

What will be the impact on the performance of oil companies post-APM?

While analysts are finalising on the exact numbers and targets, a latest report on the `marketing margin deregulation' issued by a leading BSE/NSE registered institutional brokerage and research outfit, states that marketing margins in some of these products will improve post-APM.

Incidentally, earlier oil companies got a 12 per cent return.

The study shows that in terms of petrol, the increase in margins would be gradual and current margins would double by March 2004.

Competition from newer players would be low, particularly in urban areas where few new petrol pumps have come up.

In the case of diesel, the competition will be strong from new players and expansion would be seen across the national highways and new government-backed projects.

And as far as kerosene is concerned, the government would prefer to cut subsidies in the coming years and thus margins may not be very high. LPG pricing would remain sensitive and thus any large increase in margins is unexpected.

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