The Cairn decision: Why the govt is no longer an honest broker

In his recent coming out party, Prime Minister Manmohan Singh complained that the media was playing accuser, prosecutor and judge. Sure, the media has become increasingly shrill and judgmental, but the PM would do well to look around him: the government, the legislature, and the judiciary have been doing precisely this. Each plays accuser, prosecutor and judge in its own way.

Case 1: When it recently cleared the Vedanta investment in Cairn India after a delay of 10 months, the UPA government added all kinds of strings to the deal: that Cairn must share the royalty burden with ONGC, the 30% owner of Cairn’s Barmar oilfield in Rajasthan.

ONGC currently shoulders the whole burden. In doing so, the government played a partisan role on behalf of ONGC, when the dispute should have been settled through arbitration.

The reason? ONGC is planning a further public offer of shares, and the company needs to show some money in the till to get investors to bite.

It’s not as if government is always protecting ONGC. It’s not. When not seeking to raise money by selling ONGC shares, it is busy raiding ONGC’s treasury. The country’s largest oil producer was recently asked to shoulder 38.5% of the burden of subsidizing diesel, kerosene and cooking gas, up from 33% earlier. The point is, even ONGC needs an independent ombudsman to protect its interests. The fox cannot be put in charge of the hen-pen.

Case 2: When the Delhi High Court ruled last year that the office of the Chief Justice of India was a “public authority” and hence should come under the ambit of the Right to Information Act, the Supreme Court under former Chief Justice KG Balakrishnan, promptly filed an appeal against the High Court judgment with itself. Now the Supreme Court will be both appellant and judge in this case.

Balakrishnan apparently was not in favour of judges disclosing their assets. His family is now under a cloud for allegedly owning assets in excess of their known sources of income. (See Firstpost story on this)

Case 3: As in ONGC’s case, the government’s position as judge, jury and executioner does not always work to the advantage of public sector companies. Bharat Sanchar Nigam Ltd (BSNL) and Mahanagar Telephone Nigam Ltd (MTNL) are cases in point. They were once the market leaders in their respective spaces. Today, they are bleeding mummies. While BSNL had losses of Rs 2,725 crore in 2010-11, MTNL’s were even bigger at Rs 2,826 crore. Reason: like the oil companies or Air India, government ownership means a lack of freedom to take profitable decisions.

And this is not counting venal action by their ministers. Dayanidhi Maran, when he was Communications Minister in UPA-1, got BSNL to set up an entire telephone exchange to give his brother’s company Sun TV a near-free ride, according to one report. When public sector becomes the private property of ministers, they cannot do well.

Case 4: The penchant for playing all roles has not been a monopoly of the UPA government. The NDA regime unleashed a scorched earth policy when it wanted to disinvest Videsh Sanchar Nigam Ltd (VSNL), which held a monopoly in international telephony. Not only did it end VSNL’s monopoly two years ahead of schedule, but it also ensured that the company took no steps to build an alternative revenue model when the monopoly ended. It also failed to compensate VSNL for the loss of monopoly, which was the unique selling proposition when VSNL shares were listed in India and abroad. The Tatas inherited an empty shell - almost - and investors were left sucking their thumbs.

Case 5: As owner of the decrepit Doordarshan, the government mandates that private TV channels must share TV feeds of all cricket matches played in India. Why should a government meddle in such a non-core activity like telecasting cricket matches? Cricket is not a strategic asset. Or is it? Why else would a Sharad Pawar be running the International Cricket Council when he should be spending time improving Indian agriculture?

Case 6: In the coal sector, the government in majority owner of Coal India, which has a monopoly in coal production ( barring captive mines given to some companies). Government is thus coal producer, regulator and price controller. The notified (i.e. controlled) coal prices in India are one-fifth world levels. Thanks to this, Coal India has little incentive to expand production. It is the world’s largest coal owner with the least incentive to improve its working, for any improvement in efficiencies will be used to keep coal prices lower. Coal India is thus happy to make money from controlled prices, and let the country’s dependence on imported coal rise. In five years, 30% of the country’s coal needs will be met from imported coal.

In short, the exact mess created by subsidised oil (which has finished off the financial capabilities of Indian Oil, BPCL and HPCL) will be replicated in coal, which is even more important for the country’s energy security than oil because power plants depend on it.

Case 7: The Reserve Bank and Sebi are watchdogs of the credit and securities markets to take care of systemic and market stability. But babus in the Finance Ministry lord it over both the regulators anyway. The Finance Ministry has now become a super-regulator, having created a Financial Stability and Development Council (FSDC) where the RBI Governor and the Sebi Chairman are merely members. The Finance Minister is their boss anyway. But now he heads a committee where they are mere members.

The biggest financial indiscipline emanates from the Finance Ministry. The biggest cause of inflation is loose fiscal policy. But the Finance Minister is boss of the two guardians of the financial system.

The signals are that the ministry is becoming too powerful vis–vis the regulators. The previous Sebi chief, after being promised an extension, and other officials who were doing a good job, have been shown the door. The regulators have got the message. Or ask yourself: Why is it that no government official has never been questioned for insider trading? Leaks about government policies almost always emanate from the offices of government babus in Delhi. They roil market prices, as the recent scare of the renegotiation of the Indo-Mauritius Double-Tax Treaty did. The Finance Ministry confirmed the news the next day? So who gained from this leak? When regulators are beholden to the government, how can they catch governmental wrongdoing?

Worse, regulators now seem to be joining the list of villains. VK Sibal, former Director-General of Hydrocarbon, is now being investigated by the Central Bureau of Investigation, for favouring a private firm - and it’s not Reliance.

Case 8: During the United Front and NDA regimes, the Tatas made several attempts to start an airline, but were foiled by various Civil Aviation Ministers - allegedly at the behest of Indian Airlines, but also at the hidden urgings of private sector players like Jet. Once again, the government, instead of playing neutral regulator or umpire, batted on one side or the other.

The moral: When government ministers are players and judges in the game, when the judiciary will play both judge and accused in the RTI game, it is time to sit up and change the rules.

A few simple things need to be ensured:

1. No minister should have any role to play in public sector companies

2. Policy-making has to be separated from running public sector businesses

3. No institution should be allowed to be its own judge

4. Financial and other regulators must have their autonomy guaranteed

Else, what the PM accused the media of will become the norm across government. It already is.