Reliance-Oil Ministry war has pointers for crony capitalism

When the country’s government and its biggest private sector oil company are at war, it sends negative vibes all around.

But this is precisely what the oil ministry and Reliance Industries Ltd have been doing (warring, that is) for the last eight or nine months, ever since the Ambani flagship announced that gas output from KG-D6, its once prodigious gusher in the Krishna-Godavari offshore region, will see a dramatic drop due to “technical reasons.”

A few days ago, Mukesh Ambani’s company upped the ante and warned that gas supply could end almost completely by 2015 if the ministry did not clear more investments to raise output.

The ministry has now responded , and said that it would be more than happy to clear investments provided the company gave complete access to data. The last audit by the Comptroller and Auditor General (CAG) said the company did not share all the data it had.

Reliance is yet to respond to this conditional offer, but three points can be made immediately.

One, Reliance’s announcement that gas output will fall has coincided with moves to seek market-based pricing, raising suspicions that the two issues are interlinked . Only an independent specialist probe will establish whether KG-D6 is facing real technical problems in raising output or not.

Two, that Reliance cannot always get its way with government is good news for governance. The folklore is that what Reliance wants it gets. One should be happy the Reliance has found it countervailing power in government that has larger public policy goals in mind.

Three, but this is not just about Reliance and the government. This spat has consequences for how foreign investors will view India as a destination. In fact, the tussle between Reliance and the oil ministry is symptomatic of the fundamental flaws in several policy-making areas involving energy pricing, privatisation, the contractual obligations of government and its private partners, etc. More than anything else, it is a comment on the opaque nature of decision-making in the government and the consequent stranglehold of crony capitalism.

The third point is the reason why we have battles raging on every front - from telecom spectrum, to coal block allocations to oil and gas pricing to airport fees and land allotments.

We have had liberalisation and privatisation in all these areas, but none of it has been designed in a transparent manner with clearly stated public policy objectives.

Consider just a few examples.

We allowed private sector parties to invest in oil exploration and production, but every aspect of the production sharing contract is so messy - investments have to be approved, pricing has to be approved - that it is as good as no privatisation at all. Why ask private parties to prospect for oil if you are going to micromanage all their decisions? Couldn’t government just have given them the blocks and taken its share of products (or revenues) in a predetermined ratio?

We have a telecom policy that originally had universal access as its primary goal. In this structure, it made sense to keep spectrum prices low. But the government was never clear about the tradeoff between keeping costs low and improving tax revenues. It is in this confusion that an A Raja did his own thing and ignited a crony-capitalist scandal.

In coal, at one end we have a nationalised monopoly in Coal India. At another end, we have hungry power plants. In order to encourage private power plants to come up, coal mines are allocated, allegedly for captive use. But the bidding is on the basis of power tariffs, not the value of the coal handed over. Does coal have no other use beyond thermal energy? When coal is pilfered right under Coal India’s nose, what is the possibility that the private owners will not steal their own coal for a quick private buck?

[caption id=“attachment_382940” align=“alignleft” width=“380”] Reliance is right to seek market-based gas pricing, but the problem could also lie in the way it is seeking a remedy. Reuters[/caption]

Then we have a gas policy, where the government wants cheap gas for fertiliser and power plants, which means regulating prices. But does gas have no use beyond fertiliser and power? Why should costly gas be subsidised either by government or the private sector to feed a fertiliser policy, which, in itself, if seriously flawed?

Then we have an oil pricing policy, where the idea is to subsidise diesel, kerosene and cooking gas. But the net effect of this policy is to ensure that the country’s biggest refiners - Reliance and Essar, among them - will export all their stuff while the public sector oil companies bleed to death or live on delayed doles from the exchequer. Can there be a more asinine policy than this where one sector is bled while the other is pushed out of the local market by subsidies to the public sector?

The country’s airline sector is going down the tubes. But Air India is a holy cow. And Kingfisher, too, cannot be allowed to sink easily. So, to rescue both, the government announces a Rs 30,000 crore bailout for the former and a possible opening up to foreign investment in domestic airlines, allegedly to help the latter. And then, because one reason for their downfall is the high cost of aviation fuel, largely due to high state taxes, airlines are asked to import the fuel and avoid state taxes. Effectively, the centre has given airlines a scheme to avoid state taxes. If the GAAR policy is applied in spirit here, the aviation minister should be hauled up - for the idea is clearly to sidestep state taxes. How daft can policy get?

We can go on and on, but the short-point is this. In India, policy areas have been deliberately left vague and subjective because this is what allows the politician-crony capitalist nexus to operate.

These are the basic operating principles of crony capitalism.

#1: Allot projects - hand out mines, airports, spectrum or oil blocks - on the basis of the highest bids (or rigged bids). So everything looks hunky dory.

#2: Once the deal is signed, since it is obvious that no one can make money from it, start tweaking the policy so that both the politician and the businessmen benefit. Thus, after a coal block is allocated for the lowest power tariff bid, the allottee will be allowed to sell the coal to another plant. Thus, a captive mine becomes a merchant mine.

Similarly, after allowing GMR and GVK to bid heftily for the Delhi and Mumbai airports (46 percent revenue share in Delhi and 38 percent in Mumbai), the government started modifying rules to allow the winning bidders to make money. Now, airport tariffs are soaring dramatically, making the whole purpose of privatisation - improved operations at affordable costs - irrelevant.

It is quite clear who benefits from all this confusion: politicians and crony capitalists. The former make private gains by fiddling with policies to favour private parties, and the latter obtain a licence to make monopoly profits.

If we have to move away from such skullduggery, clearly the government needs to operate more transparently in all areas where big stakes are involved. Policies need to be framed on the following lines.

First, open competition must be the norm in all sectors, whether it is oil, or coal, or power, or airports. No clause restricting competition in any sphere must be tolerated.

Second, every sector must have an arm’s length (arm’s length from the government, that is) regulator, both to ensure competition and for rivals to take their disputes to, and to ensure fair pricing. This is particularly needed in areas that tend to be ripe for natural monopolies to develop - as in airports, or power generation.

Third, market-based pricing must be the norm even for natural resources. Thus when coal mines are privatised, the operator must bid based on the long-term value of the coal blocks he is allocated. Power producers must bid on tariffs based on the long-term coal supplies they can tie up - whether domestic or imported. The two sectors, coal and power, cannot be mixed up. If the country wants cheap power tariffs, it should open up the power sector to all kinds of fuels, not just coal. Coal prices can be kept in check by free imports, competition, and effective regulation to check unfair practices.

Fourth, subsidies must be explicit for anyone or in any sector. If the government wants to keep gas prices low for fertiliser, it should subsidise it from the budget. Ditto for power. The centre loves this logic when it applies to states. It recently asked them to subsidise power tariffs directly from state budgets, but doesn’t do the same when it comes to gas or coal where it wants to directly regulate pricing.

If these principles are applied to all scarce and natural resources, it will have paved the way to clarify issues and end policy confusion. The Reliance-Oil Ministry war is the right backdrop against which one can address the larger issues of rent-seeking behaviour and crony capitalism.

Reliance is right to seek market-based gas pricing, but the problem could also lie in the way it is seeking a remedy.