|Fear of decision-making|
|Wednesday, 11 April 2012 00:18|
Cairn wants to explore for more oil. No one else can touch its Rajasthan field. But government won’t allow it
Higher FSIs will lower housing costs. Giving subsidies to RIL would have kept it from exiting petroleum retail. But this was not done as govt feared it would be seen as pandering to India Inc!
Perhaps the best example of policy paralysis you can get, assuming you’re still looking for one, is what’s happening on Cairn India in neighbouring Rajasthan (http://bit.ly/IpnWWE). In a nutshell, Cairn India has a block from which it is producing 125,000 barrels of oil every day and wants to do some more exploration to find additional amounts of oil. While both Cairn and its partner ONGC are convinced there is oil to be found, the government refuses to give it permission to do so—if the oil found is to the extent Cairn-ONGC estimate, this means the government will get $15 bn extra (around 70-75% of whatever is produced in the field accrues to the government!) in terms of its net present value.
So why isn’t the government giving permission? It’s a bit of a long story that involves the costs of exploration (more on this later) but the primary reason why the permission isn’t being given is that the Production Sharing Contract (PSC) that governs Cairn’s oil concession doesn’t permit this. There is a dispute over this since Cairn thinks there is no explicit prohibition in the PSC, but the government view is the PSC is quite clear that exploration can only be done for a certain period of time, after which the concessionaire can only do production.
So we’re stuck in a situation where India has a huge energy shortage and it clearly needs the oil, no one apart from Cairn can touch that oil for the next two decades or so, but Cairn is not getting permission to explore. In such a situation, whether the PSC allows it or not, as long as there is no loss to the government, you’d think the government would want to get the oil out. So perhaps the fear is the dreaded ‘C’s, the CAG, the CBI and the CVC? If Cairn is given permission to explore more even though the PSC doesn’t allow it (let’s assume the government is right in its interpretation of the PSC for the purposes of this column), what will they say? Turns out, in its review of the Cairn project last year (http://goo.gl/yeiER), the CAG said “approval by the GoI of such extensions should be on clear financial quid pro quo—beyond the existing PSC provisions—for the benefit of GoI or its parties.”
If the CAG doesn’t have a problem with it, why isn’t the government moving? The fear of being seen in bed with India Inc? Given the large number of scams that regularly erupt, from 2G to Coalgate, sections of it are signing up cosy deals quite regularly, so what’s wrong with being pro-active in matters that help everyone instead of just the chosen few? Or is it that the government simply doesn’t want industry—like the French presidential hopeful Francois Hollande who, like the late Indira Gandhi, hates the rich so much, he wants to put a 75% tax on them! For what it’s worth, the government is not the only one who thinks this way. After reading the Cairn story, a senior colleague said it sounded like a plug for allowing Cairn to go beyond what the law allowed—tongue firmly in cheek, he said it was ‘probably inadvertent’!
While it’s okay for journalists to be high and mighty, the government has to be mindful of the consequences for the economy. When companies like Reliance and Essar started arguing they would exit the petroleum retailing business due to the huge government subsidies several years ago, it would have made perfect sense to simply extend these subsidies to them as well. After all, if the government is going to bear a subsidy when a customer buys petrol from an IOC outlet, why not pay the same subsidy when the consumer goes to a Reliance outlet? There’s no additional subsidy burden since, if Reliance shuts shop, the same consumer will go to IOC and buy the subsidised petrol—but if you ensure Reliance stays in the business, there’s that much less IOC and other PSUs need to invest in setting up new petrol pumps to meet growing consumer needs. Yet, when this was suggested, it was rejected by politicians as being ‘pro-Reliance’ and therefore unacceptable!
Similarly, in the case of housing, it is obvious that raising the FSI limits will lower costs (Indian cities have among the lowest FSI in the developed world) for the aam aadmi, but this never gets done—because it will be seen as pandering to the builder lobby?
To get back to the Cairn story, one explanation for the government not giving permission is that it is not certain Cairn, or anyone else for that matter, isn’t padding costs—this is the argument made in the case of Reliance’s KG Basin gas fields. Under the current scheme of things, all costs (padded or unpadded) are recovered by the concessionaire, and only after this are the profits shared with the government. So, if Cairn was to submit padded cost bills, the government would end up losing its due. Which is why, for instance, the government wants to check each cost, which is why the CAG has to look at each item of expenditure and see whether it is ‘allowable’ or not. Why not just simplify this and ask firms to just bid on how much of the topline they will share instead of on the bottomline? The number will be lower than what these companies are promising today—since they’ll be sharing the relatively larger topline—but it will be easier to administer and even ensure the government reduces interference in the oil companies’ business. A similar problem is caused by linking the government’s share to a complicated formula (the ‘investment multiple’ is the ratio of revenue to investments made)—why not do away with this stepped formulae?
Given the huge hit the India story has taken—an investment banker friend said he can no longer get foreign investors to even discuss India-related projects—the government needs to seriously think about how to fix things. Signing cosy deals with a few firms while refusing to do the right thing for industry as a whole simply isn’t going to cut it.