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Retailers jointly evaluating options on infrastructure such as bottling plants, depots and terminals

• Three state-run oil marketing companies (OMCs) in India are working together to outsource the creation and maintenance of logistics infrastructure that can be used to cut expenses in a challenging business environment.
• All the three OMCs—Indian Oil Corp. Ltd (IOC), Bharat Petroleum Corp. Ltd (BPCL) and Hindustan Petroleum Corp. Ltd (HPCL)—refine and market petroleum products, and require common infrastructure such as bottling plants, depots and terminals. Most of these facilities are currently built and operated by the companies themselves.
• The heads of the three OMCs have agreed in principle to follow this “common user facilities” approach, said R.K. Singh, chairman and managing director of BPCL. “This can be one of the ways in which we can bring down costs. We can follow a BOT (build, operate and transfer) or BOOT (build, own, operate and transfer) model. The operations and maintenance of some of our existing facilities can also be outsourced.” Some such common user facilities were already in place, albeit in a “small and scattered way”, and the idea is to widen the initiative and make it meaningful, Singh said.
• The companies are jointly evaluating factors such as the locations at which these facilities can be set up and managed by a third party, said a senior official in charge of logistics at one of them. He did not want his company or himself to be identified.“Wherever the scale of operations is large enough to justify economy of scale, we may decide to run these facilities ourselves,” this official said. “But in many areas, where the operations are on a smaller scale, it may make sense for the three companies to jointly utilize these facilities.”
• Ratings firm Crisil Ltd, one of the agencies appointed as a transaction advisory partner, is drafting a paper outlining the opportunities and challenges of such an arrangement, the official said. An email sent to Crisil on Friday didn’t elicit any response.The oil ministry is “extremely concerned” about how OMCs can minimize costs and improve margins, said another official with one of these firms on condition of anonymity. “There are discussions on a case-to-case basis to see where we can strategically share resources, but the matter is at a very nascent stage.”
• An email sent to IOC on Friday remained unanswered.HPCL chairman S. Roy Choudhury wasn’t immediately available for comment.Singh and the official cited above said OMCs will first need to empanel a set of firms on their technical ability and then call for bids from among them to execute specific projects.The Indian Express reported in March that due to the high prices of crude prevailing at that time, the oil ministry had directed state-run fuel retailers to share each other’s storage facilities to reduce expenses by improving utilization. An arrangement to outsource the infrastructure and then share it can work well for OMCs, analysts said.
• “It will help decapitalize their balance sheets and turn a large portion of the fixed costs into variable,” said Arvind Mahajan, executive director with international audit and consulting firm KPMG in India. “There is huge pressure on OMCs to reduce costs as oil prices have been ruling high and are likely to be so for some time. Also, the subsidy received from the government doesn’t cover their costs entirely and products like diesel are still under price control.”
• BPCL’s Singh estimates the proposed creation of outsourced common user facilities will pare operating expenses to one-third.OMCs have been battling high crude prices and, till recently, a depreciating rupee was eating into their margins. In the last one year, the price of Brent crude has risen 9.58%, while the rupee has lost 7.82% against the dollar.Public sector OMCs purchase crude mostly from international markets in dollars and sell finished petroleum products such as diesel, kerosene and liquefied petroleum gas at government-regulated prices below cost to keep inflation in check.
• In the nine months ended December, the total under-recoveries of the three OMCs stood at Rs. 97,313 crore, according to data from the government’s petroleum planning and analysis cell. In the same period, the total expenditure incurred by them ballooned to Rs. 5.48 trillion, 34% higher than the year-ago period. This expenditure was almost 102% of their collective revenue.Though the government usually subsidizes a significant portion of such under-recoveries incurred on account of selling fuel below market price, helping OMCs report a profit for the full fiscal, a large portion of these has to be absorbed by the OMCs.
• Kalpana Jain, senior director at international audit and consulting firm Deloitte Touche Tohmatsu India Pvt. Ltd, finds similarities between the proposed creation of common user facilities and sharing of telecom towers by mobile phone operators that began some years back.“When these telecom companies started operations, they built their own towers, but now they are managed by separate firms and are being used in common,” Jain said. The use of common facilities by OMCs “will prove to be a cost-effective solution over time and will help firms focus on their core business”.

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