Archive for October, 2014

Father, forgive them, for they know not what they do

It is truly ironic that, at a time when the Prime Minister of India is enthusiastically promoting the “Make in India” brand, one of his key Ministries has set in motion actions that, if carried to fruition, will ensure that a critical energy resource will be increasingly imported, at tremendous cost to the Indian nation. I refer here to the attempts by the Petroleum Ministry in Delhi to reframe the terms and conditions for the award of acreages for exploration for oil and gas in India. A contractual model that has stood the test of almost three decades and led to the discovery of petroleum reserves in India for the first time since independence by private investors, both Indian and foreign, is sought to be replaced by a revenue-sharing regime that has been hastily cobbled together on the basis of a report (the Rangarajan Committee Report) drafted by a Committee that had few members with any long term experience of the petroleum exploration sector, especially its contractual arrangements. For the lay reader, who would not be familiar with the jargon of petroleum contracts, I will discuss the issues in generic terms of what the actions imply for private investment in this sector.
Probably because of its experience in recent years with certain companies, where there were reductions in annual gas production in relation to estimates, the government wants companies to commit to a certain level of annual production, with penalties payable for production shortfalls beyond a certain level. This approach betrays a fundamental lack of understanding about the behaviour of petroleum reservoirs, scarcely what one would expect of a Petroleum Ministry! There is also a stipulation that revenues from oil and gas production will first flow into an escrow account, with government having the first right to revenues from this account. Any financial dispute between the company and the government can lead to choking off the access of the company to revenues from petroleum production, hampering its cash flows and hindering its future production plans. Not only that, no banker in her right senses would advance loans to a company which is insecure about its revenues from production. The revenue-sharing model itself suffers from some glaring infirmities — it is neither fiscally progressive nor does it provide any incentive to companies to develop marginally profitable oil and gas fields. Finally, the absence of contractual stability means that companies are dependent on the munificence of the government to not impose onerous fiscal terms on them in the future, again a sureshot recipe for hesitation in the financial community to fund such ventures, given the potential uncertainty of future cash flows.
In essence, what all the above adds up to is an exercise in contract micromanagement by the government, exactly what companies were exercised about over the last decade. The pervasive environment of distrust that the intended petroleum regime is set to engender will drive away potential investors. In all this, the government (and, more specifically, the Petroleum Ministry) has done no introspection on how its errors of commission and omission have contributed to a lukewarm investment climate in this sector, seeking instead to blame the existing contractual regime and so-called rapacious companies. Whether through oversight or design, the Directorate General of Hydrocarbons (DGH) was never developed into a highly professional regulatory organisation on the lines of the Norwegian Petroleum Directorate. Staffing of the DGH never took into account its multifarious tasks, which included functioning as a central repository for geological/geophysical data, strategising the bidding process for exploration acreages and managing the issues subsequent to award of contracts, ranging from coordination of grant of licences/leases by different governments, interpreting and handling contractual issues and effectively monitoring petroleum operations at every stage. As it transpired, confidence was never reposed by the government in the DGH to carry out its regulatory functions, with the result that, at every point, the DGH referred contractual issues to the government for decisions, although there was a Management Committee structure in place in the existing contracts. With the Ministry seeing a succession of generalist bureaucrats flitting in and out of the exploration desks, there was no overarching policy for dealing with issues raised by companies. The result was ad hocism of the worst sort, compounded by the ideological predilections of whoever happened to be the Petroleum Minister at the time. Add to this cauldron of indecision a cocktail of uninformed public and parliamentary criticism, ex-post facto comments from the Comptroller and Auditor General (CAG) and Central Bureau of Investigation (CBI) enquiries and you had a perfect recipe for bureaucrats reaching the conclusion that “no decision is the best decision”. Decisions on gas pricing and the like were kicked upstairs to the Group of Ministers while decisions on permitting additional exploration work programmes, approving development plans and costs incurred by companies on operations were tossed around in the Ministry. No effort was made to use dispute resolution mechanisms in the contract (sole experts, arbitration, etc.) to resolve issues. Finally, the government took the safest, time-honoured course of action: it set up an Expert Committee to overhaul the entire contractual system.
We are, therefore, in a situation today where the attitude of government towards private investment in the petroleum sector appears to be one of maximum revenue extraction, in contrast to the philosophy prevailing in the Petroleum Ministry corridors in the 1990s, when it was recognised that, to encourage risky exploration ventures, government had to be ready to forego some early revenues in the interests of promoting energy security. Unfortunately, in the atmosphere of mistrust and “trial by media” that exists today, any such approach would be immediately categorised as a sellout. The bureaucracy, habitually cautious by nature, sees no reason to stick its neck out and spend the next twenty years giving reasons in different fora for its decisions. The country is the ultimate loser in three ways: (a) not being one of the high potential petroleum-endowed countries, the present approach will drive away investors and reduce private domestic and foreign direct investment in this sector, thereby reducing chances of adding to petroleum reserves and putting greater strain on foreign exchange reserves, more so with the inability of the two national oil companies to make any significant petroleum discoveries in the last 25 years; (b) the total lack of clarity on gas pricing, and the subsidising of inefficient fertiliser and power producers through artificially keeping gas prices low, will adversely affect the economic viability of developing renewable energy sources, which remain uncompetitive, harming the future of both energy and ecology in India; and (c) the combination of (a) and (b) above will severely hamper energy security by dampening private enthusiasm to develop energy sources like shale gas and coal bed methane which (as the USA has shown) can completely alter the energy scenario in a few years. With the Middle East becoming more and more volatile by the day, India has to start seriously worrying about how its future energy needs are going to be met. Unfortunately, there does not appear to be any vision of the future guiding and informing the actions of the Petroleum Ministry mandarins. One can only wring ones hands and echo Jesus Christ “Father, forgive them, for they know not what they do”.

Maharashtra, the day of reckoning — whither after?

The Ides of October are here and Maharashtra is heading for its tryst with the 2014 election results after one of the most acrimonious state elections in recent times. With two political alliances unraveling within the space of hours (although the bickering was going on in full public view), the stage was set for a no-holds barred free for all. After the Lok Sabha elections in May, the ruling Congress (INC) -Nationalist Congress Party (NCP) coalition already faced an uphill task in retaining power in the state. After their split, the point of no return has been reached and both these parties will have to move to the opposition benches. Ambition got the better of the Bharatiya Janata Party (BJP), leading to it terminating its 25-year coalition with the Shiv Sena (SS). Both these partners, with their eyes set on the Chief Minister’s chair, were unwilling to go the extra mile in forging an alliance that could have almost certainly wrested power. Their split has left the arena somewhat more open for all four parties, with Raj Thackeray’s Maharashtra Navnirman Sena (MNS) filling in the gaps. While it would be foolhardy to predict the end-result in a multi-cornered contest, with many disgruntled elements from the major and minor parties in the electoral fray as independent candidates queering the pitch for the main contenders, it looks as though INC and NCP candidates will eat into each other’s votes and hand the election on a platter to the BJP. As things stand on Election Day, it appears that the BJP will end up with about 145 seats, the SS with 55 seats and the NCP and the INC with 30 seats each, leaving about 10 seats for the MNS, with independents and smaller parties taking the remaining 18 places in the 288-member Assembly. I am not a psephologist, so readers should take my prediction with a generous pinch of salt and a tolerant, amused smile. What does seem likely, though, is that the BJP, either on its own, or in alliance with the smaller parties, will come to power. One would certainly hope that Maharashtra is not condemned to a fractured mandate and a further five years of a squabbling coalition government. But what is disturbing in the current fire and thunder of election campaigning is the lack of any clear agenda for development and growth in the utterances and manifestos of all the five major contenders. Since they are mouthing the same old tired promises and clichés, with freebies being thrown in for each and every section of society, it is probably appropriate to try and highlight the areas that any government concerned with inclusive growth should zero in on.
The primary focus has to be on the sectors relating to what are traditionally known as the four factors of production — land, labour, capital and entrepreneurship. The formulation of a realistic land acquisition policy to replace antiquated acquisition procedures is urgently required, with adequate benefits to the person parting with her land, while also ensuring that the process does not take too much time. Infrastructure projects in Maharashtra have been hamstrung by inability to access land, leading to inordinate delays and cost escalations. Property rights have to be guaranteed; there are far too many disputes on title to land, leading to major uncertainties in land transactions. There was a lot of discussion in Maharashtra a decade ago on the move to a Torrens type land registration system, in vogue in many Commonwealth countries (Australia, Canada, New Zealand, etc.) for over a century, which gives an indefeasible title to those included in the register of land holdings maintained by the state. Apart from securing property rights, this system also makes land a fungible asset, with the owner being able to use this asset to raise capital. Of course, Maharashtra also needs to dispense with its Rent Control Act and remove the lingering legacies of the Urban Land Ceiling Act to free up land in its growing cities and towns for productive use.
Labour laws are the second area in urgent need of a complete overhaul. Investment in manufacturing will take place only when companies have a measure of freedom to employ and retrench workers. The latter can occur for a variety of reasons, including poor management and technological change. Rather than trying to keep a moribund concern going, it makes greater sense to retrain and redeploy workers in other productive areas of the economy. This, however, requires a thorough restructuring of labour legislation, aimed at providing for flexibility in the labour market, together with safeguards and safety nets to assist workers in the transition from one job to another. Today’s situation is a “lose-lose” one; the employer either goes in for labour-saving technology or simply shuts shop when a crisis threatens her unit. No wonder the unorganised labour force, with no job security, no skills and no adequate social safety net, constitutes 90% of the entire labour population. Maharashtra needs to take a leaf from the efforts of Rajasthan and some other states in this area (and go even further) if the state is to continue and grow as a manufacturing powerhouse in the decades to come, creating more and more jobs for a growing young population.
Access to capital has to be one of the primary engines of inclusive growth. This includes not only availability of credit to medium and small enterprises but participation in financial processes by the population at large. The Pradhan Mantri Jan Dhan Yojana should be aggressively marketed in the state of Maharashtra to ensure that every household has a bank account within the next two years. Consumers can then avail of not only bank finance for their needs, but also related instruments like insurance. The next government in Maharashtra should aggressively use technology and the Aadhaar card system to link all its citizens to payment systems, preferably with bank accounts or else mobile wallets. All government payments to employees, scheme beneficiaries, vendors, etc. should be through the electronic mode.
The fourth leg of reforms has to aim at encouraging a thriving entrepreneurship through both easy capital provision and, equally importantly, through simplifying procedures for setting up business. India remains one of the most difficult countries to do business in and Maharashtra, while somewhat better than the national average, still has a long way to go if it aims to benchmark itself against international rather than intra-national competition. The inspector raj which dogs entrepreneurs through their business lives needs to be eliminated through processes of self-certification. The same will also apply to the host of local government clearances that are needed to get a business off the ground. Setting specific time limits for clearances and holding public officials accountable for delays and/or attempts to secure illegal gratification will need to be pushed by the state government. In fact, the same levels of responsiveness and accountability need to be evident in the delivery of all public services, whether it is for a driving licence, a ration card, registration of a First Information Report with the police or a death certificate. Information technology can help, but up to a point; staff who delay/withhold service delivery with ulterior motives need to be shown the door at the earliest (though that subject will merit a separate blog). This will, of course, require a political leadership that is ready to eschew extraction of economic rent from decision making processes.
There are four other areas where government energies need to be focused. Building human resources to serve as an input for the knowledge economy requires achieving 100% compulsory secondary education, with skill development opportunities for future growth sectors. This involves a complete revamp of the current education system, with greater accountability for teachers, more meaningful curricula and a shift from meaningless university education bereft of any development of knowledge and/or skills. Managing water, especially groundwater, poses another major challenge for Maharashtra, given its fast depletion and the growing demand from industries and burgeoning cities, as well as from the agricultural sector. Significantly improving the power situation to promote industrial growth is yet another crucial area. Finally, as one of the most urbanised states in India, Maharashtra has to pay attention to making its cities the engines of growth. This implies devolution of powers to urban local bodies, developing efficient, responsive city government systems and attracting investment to these cities from India and the world.
I am not for a minute claiming that a government in Maharashtra will be able to address all these issues immediately or that there will not have to be a wider dialogue on policy and constitutional issues with the national and local governments. What I do hope for is a leadership in the state which recognises the centrality of these issues to the development story and is willing and able to devote itself to building a consensus on them. The history of nearly all the present actors in the political Mahabharata in Maharashtra gives one no cause for reassurance. Ultimately, it is for the leaders in Maharashtra to decide whether they wish to leave their imprint on the history of the state in the wake of a long line of distinguished political figures and social reformers, of whom the state is justly proud, or whether they are content to remain footnotes in history.