It’s been literally ages since I stepped into a bookstore…No, I haven’t given up reading, it’s the entry into my life of that phenomenon called flipkart.com. Tom Sellers talks in his book “Liberation Management” of the WOW experience. We in India experienced that feeling with the introduction of ATMs and the railway online reservation. But one of the most recent enthralling experiences has been the online purchase of books, which, in the Flipkart case covers the purchase in addition of a wide variety of products, ranging from books to mobiles, computers, etc. Right from the point where one selects a book (or any of the other products marketed by Flipkart), a series of clicks and some minimal typing completes the entire purchase process. Enter your mailing address and the product is in most cases ready for shipping. The “Cash On Delivery” (COD) system enables the customer to pay the courier on delivery of the product; where this facility is not available, online credit card payment facility is provided. An SMS/e-mail from Flipkart informs the customer of the number of days within which the product will reach her. What is more interesting is that in the event of any delay in the shipment by the courier, a representative of Flipkart contacts the customer on mobile phone to ascertain whether the shipment has reached. If it has not, Flipkart pursues the delivery with the courier company (I can personally vouch for this in the case of one delayed delivery by the courier).
But this article is not intended to be a eulogy to Flipkart, though I humbly doff my (non-existent) hat to them for their fantastic marketing strategy. It is rather aimed at oil marketing companies which sell cooking gas to the vast Indian market. Rare is the location where the public does not have grievances against the irregular and unpredictable supply of gas. The oil companies, IOC, HP & BP, need to take not a leaf but the whole book from the Flipkart method of marketing their products. They have a spread of retailers over numerous locations in India, each with their set of customers, each of whom has their unique voucher numbers. Why not visualise a future scenario like this? The customer phones, sends a sms message from a pre-approved mobile or landline number or goes online to register for a gas refill from an email address registered with the company. The order goes to the concerned company, which then passes on the order to any one of the dealers within easy proximity of the customer. The order will go to that dealer who has the most comfortable stock position at that point of time. Based on the delivery schedule of that dealer, a sms message/e-mail will be sent to the customer giving a identification number and intimating the likely date of delivery. In the case of an order placed on phone, a token number will be given to the customer: enquiries regarding the delivery date can be done on phone or through interactive voice response systems. The Cash on Delivery system will provide for payment by the customer at the time of delivery of the gas cylinder. Once the cylinder has been delivered, the delivery person will record the fact of delivery and credit the amount realised from the customer once he returns to the dealer.
What are the likely attempts to tamper with this system and how are these to be tackled? The obvious one is the practice of a gas agency to sell gas cylinders at a premium to either non-gas owning household customers or to industrial consumers, while showing the sale as having been made to a bona-fide household customer. The linkage of the supply with a unique token number should reduce the chances of a bogus delivery. A random daily verification of a certain proportion of deliveries by a third-party agency (to which the company outsources this function) should act as a further check on underhand dealings. The company can also monitor the frequency of refills being ordered by a particular household to check any unusual pattern of repeated refills at periods more frequent than would normally be expected and carry out actual on-site investigation where there are grounds for suspicion. Most importantly, the gas agency will not be able to exercise any discretion regarding when it will supply the cylinder since its delivery schedule in relation to its stock will be subject to online monitoring by the company. Agencies which show tendencies to cheat the customer should have their licences cancelled.
Of course, the above measure is being suggested in a scenario where there is still no genuine competition in retail gas supply. Should the winds of change sweep through the oil and gas marketing sector, as they have through the aviation and telecom sectors, the customer will find that it is the companies supplying the gas which are chasing him for their custom rather than the other way around. Till that happy day arrives, I commend the above solution to the oil companies for easing the woes of the ordinary housewife. She will even be willing to pay more for a cylinder (though that may change in an environment of greater competition).
8 Nov
What the oil companies can learn from flipkart.com
5 Aug
Don’t kill the goose…
The extended gestation period is finally over and the Government of India has taken a decision on allowing the transfer of its stake in Cairn India by Cairn Energy to Vedanta. What is disquieting about the decision is the manner in which the issues relating to royalty and cess are sought to be dealt with. As far as royalty payments are concerned, the approval has been made contingent on royalty being cost recoverable from the revenues from the producing oilfield. This was a condition that ONGC, in particular, had been insisting on before it would consent to the transfer of holding interest from Cairn Energy to Vedanta. The other condition laid down is that Cairn India would withdraw arbitration proceedings in respect of cess payable on production from the fields in the Rajasthan block.
Press reports on the issues relating to payment of royalty by the contractor repeatedly refer to a “historical policy anomaly” in the decision to exclude royalty payment from the fiscal regime of upstream petroleum contracts of that time. Since this does not bring out the true picture as to why private investors were exempted from royalty payments under contracts signed in the Fourth Round of bidding (under which the Rajasthan block was awarded), certain clarifications are in order. Royalty was a component payable by the national oil companies, ONGC and OIL, under the administered pricing mechanism in existence for the public sector oil producing companies. Right from the mid-1980s, when the Third Round of bidding for exploration was launched, policy makers recognised that private foreign investment would be attracted only if the risk-reward package was such as to offset the rather lukewarm perception regarding the prospectivity of exploration acreages in India. The Fourth Round continued this policy of government extracting revenue from production only after the private contractor had recovered a major portion of its investment in exploration activities and development of petroleum discoveries. Consequently, royalty was excluded from the fiscal terms to which companies were subject. It was hoped that early recovery of costs by the private bidder would serve as an inducement to attract private companies (both Indian and foreign) to invest in exploration activities in India. Given the balance of payments position in 1991 and the desperate need to accelerate oil and gas exploration efforts and augment oil and gas production at that time, the decision to exclude royalty as a component of the fiscal package was an appropriate decision if private investment, especially foreign investment, in this sector was to be realised. It is unfortunate that we tend to forget the critical foreign exchange position at that time and the energy crunch that required bold measures to increase oil and gas production through private investment.
There remains the issue of ONGC being asked to foot the entire royalty payment on production from the Barmer block, although it is, firstly, only a 30% stakeholder in the block and, secondly, as a constituent of the contractor, is not liable for any royalty payment. As this is an onshore block, royalty would accrue to the Government of Rajasthan and there is no likelihood that the State Government would forego an important source of revenue. The issue then really boils down to whether the Government of India would work out an arrangement to compensate ONGC for the royalty paid by it on behalf of the contractor to the State Government. Under the Fourth Round, the Government of India would share in the profits from production after recovery of costs by the contractor. At average oil prices of US$ 80 per barrel, the Government of India stands to make about at least US$ 25 per barrel over the life of the oilfield. Royalty at 12.5% (US$10 per barrel) would still leave a considerable surplus with the Government of India after compensating ONGC for payment of royalty. It is, therefore, eminently feasible for the Government of India to reimburse ONGC for the royalty paid by it and still make a handsome return from the block. The option being reported in the press of royalty payments by ONGC being made recoverable from the contract costs is inappropriate, both from the viewpoint of the economics of the venture and the implications for investor confidence. Any alteration in the fiscal terms will affect the returns to the private investor. There is no reason why the private investor should forego returns promised to it under the PSC. There is also the issue of such a change in the PSC being introduced at the stage of production. Any such move would seriously undermine investor confidence in the sanctity of contracts entered into with the government.
It appears that Cairn India has gone into arbitration over the issue of payment of cess on oil produced from the block. Since we are not privy to the signed PSC, it is not possible to comment on this issue, save to say that the provisions of the PSC would definitely have a bearing on the outcome of the arbitral proceedings. However, to make the withdrawal of arbitration claims a precondition for approving transfer of ownership in Cairn India smacks, to say the least, of an element of compulsion – not the best way to continue to attract private investment in this sector.
When India embarked on the upstream petroleum exploration rounds post-1991, one of the major concerns of foreign investors was the slow pace of and inconsistent decision making in the Indian government. Twenty years later, if the same concerns continue to dog investors, the impact on private investment would be adverse. Recent NELP rounds reveal a rather lukewarm response and if investor apprehensions are not addressed, we may see a further slide in investor response in future rounds. In fact, such an approach of the government in one infrastructure sector could well have an impact on investment in other sectors as well. If we want the goose to continue laying golden eggs, we must ensure that we do not kill the goose.
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