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Indian Oil Corporation is now planning to enter the retail sector. The announcement came on the day the state-owned oil-marketing giant declared a sharp rise in its operating loss for the first quarter of 2006-07.
The timing was significant. Indian Oil Corporation's operating loss (it earned a net profit because of a one-time income from the sale of its stake in ONGC) rose mainly because its majority shareholder, the Indian government, did not allow it to raise petrol and diesel prices, even though rising international crude prices were putting pressure on its bottom line.
So, what was the way out? The Indian Oil management must have realised it should develop an alternative revenue stream where it does not have to seek the permission of its shareholders before raising prices. And retail was one such option. Already, many Indian Oil petrol pumps have opened stores where stationery and food items are sold. And they are doing good business.
Now, they want to take the next step by developing those pumps as big retail stores. Considering that most of the Indian Oil petrol pumps are located in prime areas, the idea of building multi-storeyed retail stores is going to be a money spinner for the company. All that the Indian Oil management must ensure is to obtain necessary permission from the local authorities to bring about changes in the land-use norms.
Experts will debate whether the Indian Oil strategy to enter the retail sector would be detrimental to its image as an oil sector player and whether this would undermine its growth as a sharply focused oil-marketing company. Whatever little information is now available suggests that the retail venture will be managed by a separate outfit and fears of any damage to its core oil-marketing operations may be exaggerated.
But what this initiative underlines is the new phase of managerial enterprise in India's public sector. Not that public sector companies have not diversified into new areas in the past. But these diversifications have always been restricted to areas related to their core activities. Thus, ONGC would only plan retail oil marketing.
And NTPC will think of getting only into power trading. Indian Oil planning to enter the retail sector, thus, marks a new beginning in the way public sector managements are looking at their businesses.
The change is evident not just in the way diversification plans are being finalised. The Indian Railways, which also functions within the constraints of a public sector set-up, has shown how it can think out of the box and improve its performance in a highly competitive environment.
Last year, it increased the maximum permissible loading level in wagons by about 11 per cent. This brought about a dramatic improvement in its freight traffic and revenue. Playing the volumes game, the Indian Railways is now laying more stress on marketing its services instead of waiting for its customers to approach it and offer business.
The results are for all to see. In the first quarter of the current financial year, the Indian Railways has increased its freight movement in two of its key markets - cement and iron and steel - by 30 per cent.
This was creditable as the growth in these industries' production was not more than 10 per cent in this period. Not surprisingly, the Indian Railways' market share in domestic cement transportation rose to 48 per cent in April-June 2006, up from 40 per cent in the same period of 2005. In iron and steel, the increase in the Indian Railways' market share was even more impressive - going up from 33 per cent to 40 per cent in the same period.
For the first time in recent years, the Indian Railways has begun increasing its share in the transportation of oil and petroleum products. And this additional business is not coming just from the state-owned refineries, but also from the private sector oil-refining companies.
Private sector-dominated road transportation today faces a major challenge from the Indian Railways. And all this has been achieved while earning more profit. Today, the Indian Railways earns a surplus of over a billion dollars every quarter.
The interesting point is that Indian Oil and the Indian Railways are part of the same public sector set-up, where lack of operational autonomy, and political interference are cited as key constraints adversely affecting the performance of a large number of public sector undertakings.
So, why is it that an Indian Oil or an Indian Railways can think out of the box, show enterprise and plan for growth, while several other public sector undertakings fail to even meet the business challenge of facing competition and staying afloat?
True, operational autonomy is an important factor. But is there something more than just operational autonomy that differentiates a performing public sector company from a loss-making one? Why is it that the India Post management has failed to get its act together and exploit its tremendous real estate advantage? And how is it that Indian Airlines some years ago bravely faced competition from private airlines and even held on to its market share in spite of several constraints and now it seems to be withering away?
It is perhaps time to focus a bit more on the role and importance of operational managers in charge of public sector companies. It is easy to blame factors like the absence of operational autonomy, or political interference. It is time to recognise that a good manager can make a lot of difference.