Sunday, April 20, 2008

Unfair competition

With the government being lawmaker, it can decide the rules of the game and make the others play according to those rules. Many times, these rules are in favour of the minority stake holders of the government. For e.g. government employees form a minuscule percentage of the entire workforce. But most of the employment and labour rules are in favour of these minuscule minorities, thus stifling many business plans.

Off-late, the government wants greater participation of private industries in the non-core areas of the government operated institutes, businesses, etc. But, here too, it is not ready to give the private sector a fair chance for competition. One glaring example is the case of fuel retailing. While the government has offered oil bonds to state-run oil industries in order to offset their losses, it has not provided any help to Reliance and Essar, who have to dig in their own pockets to absorb the loss due to under pricing of petrol and diesel. As a result, Reliance announced the closure of several of its petrol pumps, resulting in job loss to all those directly and indirectly employed in those pumps.

In IIT Bombay, which is a government run institute, the government slowly wants to pull out of non-core areas and instead deploy private companies to take care of those works. The institute's house keeping staff is being replaced with people from private professional house-keeping companies. The messes in new hostels are being operated by private caterers instead of government employees. But, here comes the hypocrisy in the government's intentions of privatisation. While the institute authorities have permission from the Petroleum Ministry to use domestic gas cylinders (cost = approx. Rs. 320) in the government operated messes, the private messes are asked to operate on commercial gas cylinders (cost = approx. Rs 1000). The messes require around 10 cylinders everyday (for inmate strength of around 400). In spite of this, the private mess operators are able to provide food to the hostel residents at cost that is lower than government operated messes, with better service, of course. But the private messes have to operate with a lot of constraints. For e.g., while in government operated messes, sweet, in dinner, is served with no restriction on the amount, in the private mess there is a strict restriction. The caterers running these messes themselves acknowledge that if permitted to use domestic cylinders for cooking, they could further reduce the costs. This move is beneficial to the students as it reduces the expenses on food by some extent. It also provides a fair platform for comparison of the government run messes and privatised messes. But the institute authorities have done nothing to take up this case with the Petroleum Ministry authorities. As a result, one of the most important inputs in cooking is available to the private caterer at thrice the price at which it is available to the government run messes. This is nothing but bullying by the government authorities. So, while the institute-run messes get a lot of subsidy (approx. 600*20 = Rs. 12000 per day for every mess), the privately run messes have to live with the ever fluctuating (read increasing for the past 1 year) prices of commercial cylinder. This is unfair, both, on the caterer as well as the students who are members of these messes. The students have to pay more because of the use of commercial cylinders and the caterer loses his margin because he can't go beyond a particular price he charges for the food.
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  1. well...i can see this issue I see it, if oil ministry giving subsidy to govt run mess is the prerogative of oil ministry. The losses, finally, falls on the government (and hence on the tax payer...) but finally, in the overall picture, it is the govt which is bearing the losses.

    If they ask private participation, and pvt operators compete (without subsidy), there is obviously profits that the operators see, which is why they get interested.

    Now, if hostels in pvt colleges get subsidy for their gas, then they should get...otherwise they are a private mess operator, and such rules should apply to them too.

    (but i heard that IIT pays nearly 8 or 9 Rs per day per student in these private messes. Their bills actually run up to 40/42 a day)

    Though, the first part about oil bonds and losses to pvt sector is interesting. When prices are controlled so strictly, Reliance knew what it was getting into. I dont know how they calculated ROI for their gas stations, when oil so highly subsidized in India.

  2. @ kaushik

    1. About Reliance: Sometime around 1998, the government formulated a polict that would dismantle the Adminstered Price Mechanism (APM) for petrol and diesel. This meant that petrol and diesel prices would be determined by the market. It was actually meant to improve private participation in the field. If APM would have been successfully dismantled, we would be seeing higher prices of fuel, but perhaps Reliance could sell fuel at lower prices and encourage tough competition. But since petrol, diesel and kerosene prices are politically sensitive, the government decided to play it to its advantage. Being the controlling stake holders in oil companies, it could force them to hold prices to the level it desired. This was not visualised by RIL (I wonder why). Hence, RIL is in a mess now.

    The taxpayer is indirectly bearing the cost through oil bonds. But tax-payers form probably one-twentieth of the entire population. And they are not a vote bank. These oil bonds mean that there is less money available for actual development work, which would be more beneficial to the country's citizens.

    2. About the mess. The caterer himself showed calculations stating that if he could use the subsidised cylinders, he could reduce the rate he charges by atleast Re. 1/-. So, here the student would share the benefit, but the taxpayer would have been at a loss. But the tax payer is already at a loss due to the thousands of crores of subsisdy given. So, another few thousands would not make any difference.

  3. Well, I see why the government controls oil prices so tightly!! It has become $4 a gallon here now, when it was around $2.70 a gallon a few months ago!!! I don't think India is in a position to allow free market to determine oil prices. the LPG @ home costs around 1200Rs. Even the middle class will protest to such a hike...

    (but i just read, as i type, manmohan saying that price hike is inevitable)

    But regarding the mess, I still think it is unfair for the Pvt Mess in IIT to be given subsidized LPG, if the other pvt messes in the country are not given the subsidy.
    Rules should be the same everywhere.

  4. kaushik, if you say that it is unfair for the private mess in IIT to receive subsidized LPG, why should any mess at all receive subsidized LPG?

    There appears to be no benefit in providing subsidized LPG to government-run messes. You are well aware that the quality of food in H-12 mess is far better than many of the government messes in IIT. The cost to the inmates too is less than or atleast comparable to the costs to inmates in other hostels.