He Likes to Rethink Afresh

IIPM : EXECUTIVE EDUCATION

Rather than letting policy tangles halt its growth progress, RIL ‘quit India’ and eyed the world as the market for its refinery products, writes NARESH MINOCHA

This is the case of a conglomerate that was initially not allowed to sell some of its products directly in the domestic market. This is also the case of India’s most influential business house that was later allowed to sell its products without receiving any subsidies from the government, but had to compete with government-subsidised products that were sold by the state-owned units. In normal circumstances, what would a promoter in such circumstances have done? Close down the particular manufacturing base, or register it as a sick company with Board for Industrial and Financial Reconstruction.

Most entrepreneurs would have opted for either of these solutions, both in the global and domestic arena. But then, one can’t expect the Mukesh Ambani-owned Reliance Industries to behave like any other company. After all, it has influenced policy-making in this country for decades. Faced with such hostile policies and regulatory environment, RIL decided to ‘secede from India’ and look at the world as its market. It decided to export the products manufactured at its 33 million tonnes per year refinery at Jamnagar, Gujarat. After over six years of lobbying, RIL did the unthinkable in April 2007. It transformed its refinery & the adjacent petrochemicals plants into an export oriented unit (EOU). Although EOU policy allows companies to sell half their produce in the domestic market, RIL exported 60% of its refinery products valued at $6.99 billion in the first half of 2007-08. The changeover to an EOU, along with its export focus through SEZs, constitute an interesting study of an entrepreneur, who turned policy discrimination at home into a global business opportunity.

For years, both policy makers and experts contended that an EOU refinery was not viable as it was impossible to do the 20% value-addition to imported inputs as was mandatory under the rules. In fact, the government had rejected applications in the 1990s on the grounds that these projects lacked capability to attain the minimum value addition. But it approved eight EOU refineries that showed the capabilities to do so. Till today, none of them have seen the light of the day, or are seriously talked about.


Now look at what RIL did. Prior to transforming the Jamnagar refinery-cum-petrochemicals complex as an EOU, it floated Reliance Petroleum (RPL) to set up a 27 million tonnes per year refinery, along with a 90,0000 tonnes per year polypropylene (PP) plastic plant at the same site as an SEZ. Although the current SEZ scheme does not stipulate any value-addition norms, setting it up binds the promoter to export commitments, at least to maintain foreign exchange neutrality. For RPL, it meant higher exports of refinery products & petrochemicals.

In October 2007, RIL unveiled a proposal to set up a refinery-linked-petrochemicals complex to produce 2 million tonnes of olefins annually, including daily-use plastics. It also announced a proposal to set up the world’s largest integrated combined-cycle coke gasification complex within the SEZ to produce power and petrochemicals. The plan was to invest Rs.600 billion on the SEZ. According to a recent project report, the proposed SEZ complex has the potential to earn a net foreign exchange of $23-26 billion over a 10-year period. The figure does not include export earnings of the Jamnagar EOU in the past seven years. It clocked Rs.64.10 billion in exports in the first year of its operations in 2000-01. And today, it has emerged as India’s largest manufacturer-exporter. All this leads us to a few basic questions: would RIL have achieved this feat if it had the freedom to market its refinery products in the domestic market? Would it have amplified its global vision for exports subsequently?

The answers to the questions can be traced to policies for dismantling controls in the oil & gas sector notified on November 21, 1997. Under them, controls were to be phased out by March 31, 2002. On February 26, 1999, the Ministry of Petroleum & Natural Gas took note of refinery projects proposed by Reliance & Essar Oil Limited (EOL). The ministry stated that “RPL/EOL would be treated at par with other PSU/JV refineries… in the matter of off take of their controlled products during the transition period.”

Surprisingly, the ministry changed its assurance the next month. In a communication to the two companies on March 19, 1999, it stated that RPL/EOL would solely be responsible for the sale, including exports of surplus quantity, of the refinery products. “Any under-recovery/loss in such exports will be borne by RPL/EOL itself,” it added. The ministry also facilitated an agreement between RPL & IOC for domestic marketing of price-controlled products during the transition period as well as after that.

Under the marketing agreement, the ministry decided that Reliance’s production of five price-controlled products would be uplifted by IOC, Bharat Petroleum and Hindustan Petroleum in the ratio of 50%, 25% and 25%, respectively, during the transition period. In reality, the latter two state-owned firms never signed any formal agreements. Thus, Reliance was at the mercy of public sector marketing firms. The ministry made Reliance wait for three years to grant it marketing rights for sale of petrol & diesel.

This increased pressure on Reliance to step up efforts on the exports front. In addition, Mukesh decided to set up his own chain of retail outlets. Reliance currently has 1,423 outlets, but they are finding it difficult to survive as they have to sell at prices higher than the subsidised prices of state-owned marketing entities. Reliance keeps referring to the lack of a level-playing field, but, for once, has been unable to convince the policy makers. Reliance managers admit to have been making “representations for compensation at par with PSUs to offset retail losses.” But it seems to be in vain.

So now, RIL plans to acquire retail assets abroad to add muscle to its export efforts. It made its first acquisition in September 2007 with Gulf Africa Petroleum Corporation. Ironically, , it seems that failed reforms in the oil sector have helped an Indian firm think globally.

For more articles, Click on IIPM Article.

Source : IIPM Editorial, 2008

An Initiative of IIPM, Malay Chaudhuri and Arindam chaudhuri (Renowned Management Guru and Economist).

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