Crony Statism?

Yesterday, talking about the previous evening's IPL match, a friend said that he was happy that Mumbai Indians had lost, largely because he can't stand Nita Ambani. I then went on to add that I too found her syrupy way of talking about how she and her Reliance foundation was doing some great work for schools in remote villages etc, quite jarring, particularly when it comes on at the end of Aamir Khan's "Satyameva Jayate" shows, which in themselves have a very sincere appeal.

Perhaps it is a bias I have developed over the years because of my inability to come to terms with somebody, however rich the family might be, living in that 27-storey edifice of an Antilla, in Mumbai. I have written about it ealier too, asking a question as to what kind of value system such a person imparts to the students of the government-run IIM, Bangalore, where he presides over the Board of Governors (check here). This is particularly so when compared with the totally contrasting lifestyles of namma billionnaires like Azim Premji, Narayana Murthy, etc.

Even as I was pondering over this, came this talk by the venerated Sri Gopalkrishna Gandhi (quoted in the ToI; for the full text, click here), where he has said about the Ambani's as below:

Gandhi also targted the Reliance Industries, dubbing it a "parallel state" that exercised prower brazenly over natural and financial resources.

"We used to talk of black money as a parallel economy and so it continues to be. But Reliance is a parallel State. I do not know of any country where one single firm exercises such power so brazenly, over the natural resources, financial resources, professional resources and, ultimately, over human resources as the company of the Ambanis," said Gandhi.

"From (B R) Ambedkar who spoke of economic democracy to Ambani who represents a techno-commercial monopoly of unprecedented scale, is a far cry indeed," he said.

Talking about the economic health of the country, Gandhi said the economy had seen some phenomenal successes with many homeless getting houses and other items of necessity. "Our economy is startling if you do not want to see its other side. If you see that side, you will see it is schizophrenic. Corporate greed has crossed all bounds, as has corporate tastelessness," he added.

In addition, was this piece by a certain Mr Mahesh Murthy (on Facebook - accessible here) on the alleged gas pricing mega scam, involving again who else, but Reliance:

What’s the big noise on Mukesh Ambani, gas pricing, Rs. 25,000 crores loss and Gujarat all about?
Let me take a little time to set down the facts. Of course, you can come to any opinion after reading what follows, but that is always the case in such contentious matters. So here goes:
1. In the late 90s, an oil company, Cairn, made discoveries of significant gas in the Krishna Godavari (KG) basin. In an effort to create a level playing field to allow private and public companies to bid for the same projects – all on lands and seas owned by the government, the government created a New Exploration and Licensing Policy (NELP)
2. Under the first NELP plan, bids were called for contractors to explore and develop these Government-owned potential oil fields. Reliance Industries teamed up with a Canadian firm, Niko Resources (90% Reliance, 10% Niko) and won the right to explore and develop 12 out of 24 blocks offered. (You can find details on the Indian govt website here: petroleum.nic.in/NELP-I.doc).
3. Since then there have been several more NELP bids, and Reliance has won a few of those.
4. Reliance-Niko outbid ONGC, Cairn and others to these blocks.
5. The basic bidding criteria – and you can read a sample bid document here http://petroleum.nic.in/n... if you have the interest and patience – was the amount of profit share offered to government of India by the bidder, and the lowest operating cost the bidder commits to that it can adjust every year. These bidding criteria have changed slightly since – but that is not germane to the issue.
6. Here’s a simple way to understand it. The government owns the fields: some are on ground, some are in shallow water and some are in deep water but all in Indian territory. The winning bidder would explore and develop those fields at its cost. It would bid what its cost was – the lower the better. Once the gas was found, it was allowed to first recover its stated costs, and then pay revenue share to the government. If gas was not found, it would simply return the fields to the government – indeed 13 of those initial 24 fields were returned to the government. These two factors: committed low operating cost and committed high revenue share to government helped government determine who would win the fields – in each case, government calculated the most valuable economic option to itself.
7. In effect, the winning bidder merely had a contract to operate on government property, then apply some fixed costs for equipment and some variable costs of manpower and ops – and produce gas for all of us.
8. The first contracts were awarded in 2000, Reliance found gas, and signed its first long term contract in 2002 – for 17 years – with NTPC – another government undertaking – to provide it gas at US$ 2.34 per million British thermal units – or mBTUs. This is the price they committed to charge from 2002 to 2019 – which catered for all their present and future anticipated costs.
9. A little after this time the Ambani brothers split – remember that? -and the big bone of contention then was that Anil wanted gas from RIL for his energy project RNRL and finally the agreement was that he would get it at the same price that RIL was giving it to NTPC at: $2.34 per mBTU
10. During this time, the price of natural gas globally went up significantly. This wasn’t due to increased costs – it’s perhaps closer to supply and demand and also to how a cartel like OPEC operates – you set the price you think you can get away with, regardless of input costs.
11. While this could be good news for countries like India with large oil and gas reserves – it shouldn’t really make much difference to an operator who has taken a government field on a lease – after all, his costs – of rig equipment and people’s salaries were reasonably fixed – or move in a slow band.
12. Of course, this was a great opportunity – and Mukesh didn’t use it just screw the government-owned NTPC here, he screwed over his own brother too. He followed in his dad’s footsteps of “fixing” government to change all the norms once he had won the contract – and went and worked hard to break the contract in 2009.
13. They asked Jaipal Reddy, the then concerned minister, to raise the price to $4.20 per mBTU and he told them to sod off. Their ostensible reason was increased cost of production – but, interestingly, at the same time, Reliance said in writing (that note here:http://articles.economictimes.indiatimes.com/2009-06-18/news/27646349_1_mmbtu-block-kg-d6-fertiliser-and-power-units : that their actual cost of extracting the gas and bringing it onshore was $0.8945 per mBTU – i.e. not even 90 cents – so while they were earlier making a profit of $1.44 per mBTU, they wanted to screw over the Government and Anil by making a profit of $3.30 per mBTU – more than double as much)
14. Undeterred by the minister asking them to bugger off, Mukesh did the classic Reliance gambit – he got Jaipal thrown out of the Ministry and shunted elsewhere and replaced by South Bombay buddy Murli Deora. This dude in turn got Pranab Mukherjee – yes, our current President – to call some meeting of some temporary committee called the Empowered Group – to rubber-stamp Mukesh’s demand to charge $4.20 per mBTU – remember this is for gas produced on our land not Reliance’s – from now on.
15. So Anilbhai and NTPC went to court about this. The case is still dragging through courts – and the Government isn’t backing its own company NTPC in the fight. Anil was likely neutralised elsewhere and hasn’t moaned too much about it lately.
16. That’s what Mukesh is being paid now. And that price, for our gas produced from our land and our seas, is what we pay from our taxes – and that impacts the prices of the inputs to our fertiliser plants, and impacts the price of our foods, our transport systems – and our monthly expenditure. But, hey, that’s not enough. Senior Ambani found a way to screw us over again.
17. Remember, there was a clause which allowed the operator to first take back the money equivalent to their set-up costs, and then deliver profits to the government after that? When Mani Shankar Aiyer was Minister, in 2004, Reliance had asked for and got approval to spend Capex of $2.39 billion to produce 40 million metric standard cubic meters of gas per day. (That’s MMSCMD for you, if you’re a fan of abbreviations.). This basically meant that Reliance was first allowed to claim this $2.39 billion – some Rs. 10,000 crores – before it paid a paisa of revenue share to the government.
18. In just two years, however, they managed to find friend Murli Deora in the seat of Oil and Gas power in 2006 after poor Mani Shankar Aiyar was shunted out – and magically got him to approve almost 4 times the earlier approved amount of Capex – US$8.80 billion – or Rs. 50,000 crores for just twice the capacity. One would expect that the relative cost of Capex would go down and efficiency would go up as you simply double the capacity on existing wells – as happens everywhere else in the world. Especially in a fanatically-cost-efficient organisation like Reliance (we all know how they never pay their suppliers on time.)
19. But no – Reliance apparently wanted to eat more money for itself – maybe Antilla was being built – before we got our own money back from our own oil fields. This basically means that we the people see nothing from our own property till Mukesbhai gets his Rs. 50,000 crores first. When asked about this wonderful generous gift of Rs. 40,000 additional crores to Reliance, Murli Deora claims no memory – see the interview at 09.00 onwards here https://www.youtube.com/w... if you want to see his apparent innocence where he says “You don’t expect Ministers to remember small details” (like 40,000 crores here or there I suppose)
20. Further proof of padding or “gold-plating” came in the CAG report – and in an investigation done by the Indian Embassy in Singapore, about a mysterious organisation called Bio Metrix which was a beneficiary of Reliance’s inflated costs which suddenly invested Rs. 6,500 crores into Reliance from Singapore based on loans given to it by an Indian back on no declared collateral. Imagine that – walking into an Indian bank as an unknown company in Singapore and asking for Rs. 6,500 crores in loans to invest in equity of Indian companies. And getting it Of course, the company was controlled by known Reliance network figures – and seems to be a clear case of over-billing in India, having your own benami company as a vendor, paying it overseas and then circling the money back into India, into your own companies. Sweet, na?
21. And you know what happened after that – the investigation by India’s own embassy goes nowhere and the CAG Vinod Rai was shunted out and replaced by Shashi Kant Sharma – the prior defence secretary, well-known in arms circles for routing kickbacks. Our man’s ability to fix governments is amazing.
22. Oh, but it doesn’t end there either. The Ambani greed and ability to fix the Congress government continued. Reliance jockeys for a higher price than the $4.20 – from our own wells, mind you. And to show it means business, it suddenly claims a huge drop in production – in other words, it’s a threat. “Give us a higher price, or we’ll go on strike, on your wells”.
23. The government, as always, is very accommodating – it dusts off a well-meaning bureaucrat, Rangarajan – and he does some laughable calculations and determines that the new price should be $8.40 per mBTU – an exact 100% hike. Imagine this – paying 4 times more for gas from our own fields – when the capex was long-invested and gone and opex hasn’t gone up anywhere near this much. In fact, in the only gas market in the world, the US, the price is even currently well below $5 per mBTU, including all profits from owned wells. But we want to pay our man more than twice that for gas he is getting out of our wells. (You can see how much more we are paying by looking at all historical prices here:http://www.eia.gov/dnav/ng/hist/rngwhhdd.htm )
24. Once this is lined up, Reliance magically discovers and announces that its capacity will go back up in the future – its stock price nudges up. By now our man has BJP and Congress on his side. But when the AAP problem happens and the unspeakable occurs – all these people and Monseiur Ambani included have FIRs registered against them for gross theft and corruption, he pulls the strings and both the BJP and Congress collude to make the AAP government fall in 72 hours after the FIR.

All along, there has been the talk about "crony capitalism', where the state favours some chosen capitalists. But, if all of what is stated above is true, it then amounts to what I would term as "crony statism", where the state kow-tows to every wish of an industrialist (This in fact is listed at 'q' here as one of my own fears about privatisation; actually not privatisation, but unbridled capitalism).

Are we headed there? I certainly hope not.

Muralidhar Rao