In a big boost to managing costs and bringing latest technology in projects of state firms, the oil ministry has abolished the decades-old system in which domestic suppliers would win contracts even if their price bid was up to 10% higher than a competing foreign offer.
The change in the policy, which was implemented to help domestic supplier grow, will have a direct bearing on planned expenditure of Rs 421,229 crore on various projects of state-run oil and gas firms between 2012 and 2017, officials said. The government thinks that the policy of "price preference" has served its purpose as domestic suppliers have had adequate exposure to international competition, and they should now stand on their own feet.
This move is in continuation of recent policy reforms announced in oil and gas sector to global private investments that included deregulation of diesel prices and raising the price of domestic gas, government and industry sources said.
The policy of price preference was formulated in May 1984 and continued in one form or other despite stiff resistance by state oil companies, sources said.
Companies, particularly ONGC, Gail India and Oil India were against allowing price preference to domestic vendors to ensure level playing fields, sources said.
The oil ministry has taken a "considered decision" to do away with the existing price preference policy after a wider consultation, an oil ministry official said. The oil ministry also took the opinion of the finance ministry, which said that "the current formulation of price preference is not conducive to a competitive and efficient bidding environment", the official said.
"It has been ONGC's experience that due to price preference policy to domestic bidder's, participation by foreign bidders in ONGC's International competitive biddings has reduced considerably, leading to restricted competition resulting in higher costs to ONGC," a company executive said.
State oil firms' investment outlay for 2012-17 is over Rs 421,229 crore and 67% of the amount is proposed to be spent for exploration and production of oil and gas. ONGC, which is India's biggest energy explorer, is the biggest executor of oil and gas sector projects.
A GAIL India spokesperson said the company has discontinued the practice of giving price preference to domestic vendors over the global companies. "As far as its implications is concerned, the number of serious bidders will increase and it will generate better competition in the process," the spokesperson said.The government had initially thought that the Indian industry required protection against the foreign giants. "It is felt that Indian industry now has a fair exposure of global environment and should be able to compete with their foreign counterparts successfully, without any further protection," a government official said.
As APM is dismantled and market pricing is introduced for most of the petroleum products, there is no such reimbursement to the oil companies. State oil firms absorb increase the cost due to price preference policy, which often leads to cost overrun, the official said.
Executives in public sector companies said that some domestic companies took advantage of the price preference to bag contracts, but lack of competition discouraged them from completing their contracts on time, that led to project delays. ONGC strongly lobbied with the government to abolish the system.
"Under the new exploration licensing policy (Nelp), ONGC has to compete with other oil companies; domestic and international, to secure blocks for exploration. It will not be possible for ONGC to compete effectively with other E&P companies in the Nelp bidding process if it continues to provide price preference to domestic bidders," an industry source said.
Source: The Economic Times
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