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Can’t afford models that put high risk on developer: Chaturvedi

Planning Commission’s B.K. Chaturvedi talks in an interview about India’s energy security, spending programme
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First Published: Sun, Dec 23 2012. 09 39 PM IST
B.K. Chaturvedi, member of the Planning Commission. Photo: Pradeep Gaur/Mint
B.K. Chaturvedi, member of the Planning Commission. Photo: Pradeep Gaur/Mint
Updated: Sun, Dec 23 2012. 10 57 PM IST
New Delhi: B.K. Chaturvedi, a member of the Planning Commission, has been the government’s troubleshooter and the architect of several reports on vexed issues such as fuel subsidies and the financial restructuring of electricity distribution companies. Chaturvedi was India’s cabinet secretary in the United Progressive Alliance government between 2004 and 2007.
He currently chairs an inter-ministerial panel looking into dams on the Ganga and is a member of a committee led by C. Rangarajan, chairman of the Prime Minister’s economic advisory council, on production-sharing contracts (PSCs) with oil and gas explorers. He spoke in an interview on several pressing issues such as India’s energy security, the government’s spending programme and the country’s disappointing gas and power scenario. Edited excerpts.
The Rangarajan committee report on PSCs was to be submitted. Some say it is going to suggest a production-linked payment (PLP) model. What is the view that has been taken?
The Rangarajan report has so far gone to the Prime Minister, so I cannot disclose its recommendations. One of the concerns before the committee has been that the cost-sharing method is not a very transparent method. It is possible for the developer to put in costs and it may not be very easy for the government to identify and verify the costs, which can lead to problems because costs have to be detected before profit can be assessed.
There is a counter view that you can always appoint a committee of technical experts to identify the costs and there is a large view that says that it is important to have a cost-sharing formula because it leads to reduction in risk for the developer. Because, after all, if you are an investor in the oil and gas sector, it is not that the first well you drill will give you oil and gas. You have to drill six to 10 wells and only then you will get the oil or gas. So if you feel that some extent of your cost will be taken out then to that extent your risk is shared. In high-risk areas, it is important that we have these methods. If you are working in Qatar, Iran or Iraq, where the possibility that you will hit oil or gas with the first well is high, methods such as PLPs are used.
So, these were the two debates that the committee had to consider and balance: India is not a very oil and gas rich area, at least not a proven one, so we cannot afford models which put a very high risk on the developer, but, on the other hand, we cannot afford a very non-transparent method or less transparent method that invites criticism. There was criticism of auditors and others. The committee has considered both these views for forming its recommendations, which are going to be put out before the country very soon. The recommendations will be valid as far as the new PSAs (production-sharing agreements) are concerned. For the old PSAs, the government has already signed and sealed certain commitments which it can’t renege (on).
What has been the response and progress as far as the financial restructuring of power distribution companies is concerned?
The state distribution companies had huge losses, which they can now restructure.
The banking segment was basically ever-greening its losses and was worried about giving more money to these utilities. What this plan has done is to show a way for state governments to share the burden of the utilities—they are now sharing 50% of short term loans and interest. But now the utilities will have to adopt methods to revise tariffs every year. They will have to file their revenue numbers and the regulator will be requested to put in new regulations to ensure tariffs are revised automatically as costs of inputs go up. So we have a long term arrangement for the power sector to not get sick, unless there is some meddling and unless the regulators and others don’t play their role. I have been to states like Andhra Pradesh and some others to monitor progress. They are all working out how this can be done and in the process of obtaining their cabinets’ approval and so on.
The plan talks about the need to acquire energy assets abroad. Are there any special measures being taken for facilitating the same?
Till now, the two major energy asset categories have been oil and gas and coal assets. Today the contention is that we must have more and more assets we can lay our hands on for energy security. The costs are not that high and these assets can pay for themselves. The strategy is good but it is not going to form a very major chunk of our requirements. If you take the existing assets, this is hardly 3-4% of our total requirements. But when there is a shortage overseas energy assets will help us.
We have seen the example of acquisition of Imperial Energy by ONGC Videsh Ltd, which hasn’t worked very well for us. Given the large investments by other companies, is the government looking at a dispensation to give them cheap funding or support where they can go out because they have to compete against Chinese companies. Is the government planning a special dispensation for firms for acquiring energy assets overseas?
International position is lots of oil and gas is owned by nationalized companies. So, therefore, there the negotiations through diplomatic channels help a lot. Government does use this diplomacy.
But, in case of Myanmar, we were the ones that helped them develop the gas fields. And when the time came for the gas to be brought to India, it was given to China with the Indian firms participating in the pipelines being constructed for gas transportation. The logic which was being propounded was the need to secure our investments. If we are looking from an investment point of view, shouldn’t we look at investing in financial markets?
I will not agree with that. It has worked out well for us. You see China is also a very major player in the market and they have their own investment strategies, so you cannot really say that if somewhere India lost out to China, then it’s not really worked out. ...considering China’s energy needs are much more than us, you can’t say that’s a very unreasonable investment which has been made.
The issue of merchant power has been debated for some time now. With these captive coal blocks given away for free, a lot of companies made a lot of money using that coal to generate power for the merchant market. Given that India is a power-deficit country, does concessional fuel for merchant power make sense?
Well, in a country where we’re facing shortages of fuel, it will be useful to have merchant power. The concessional fuel is only being given for the regulated power because it’s one thing to give it as part of an incentive, and I can understand certain proportion so that people do it better, but, as far as the substantive part of it is concerned, I think it will be better if we have it on a regulated power basis. But the fact is that you should compare policies when they were made and not what the market is now.
If you start comparing the two, quite often you find that you land up with absolutely absurd results.
And you may say, this policy was made then. It was wrong. Question is that unless you compare the situation then, whether it is telecom or coal. When in 1993 policies were made, India was not a power rich country. It’s not that people were rushing to India to invest in the coal blocks. That’s when the policies were made. It only highlights the need to revise and review the policies in accordance with market, as market changes. But we shouldn’t, in my opinion, start smelling scams in all policies which are there to promote investments and growth.
The government’s disinvestment exercise didn’t work out well. The reserve price for spectrum was also brought down. Your views.
The PSU (public-sector units) divestment will work out as well as the market allows. You see the American market, the European market, the Japanese market; these markets haven’t earned all that good. Government has the responsibility for raising resources. So government really can’t wait, and say look, market is not good and I will only disinvest when market will be good and till then I will not make any investment in the economy.
Government can’t really take that stand. Government has to meet its requirements for development, growth, for roads, for schools, for hospitals, for the gross budgetary support which is required for the plans. All it can do is to say that we will do to the extent which is required minimum, but, as and when the market conditions arrive, we will do that and that is what they are doing.
In the case of gas from KG D6 block, if the allottee doesn’t take the gas from the developer there is a ‘take or pay’ clause. However, the same rule doesn’t apply if the gas is not supplied. Does this not call for concern on part of the government?
You can’t really have people having a one-sided contract where they take or pay. Generally international contracts are take or pay on both sides. So I think it’s only fair, that when next time they discuss it around, they also have a provision that if it is not there then to that extent, they will also be liable.
Whatever is the liability, that’s a different thing. You may have unequal liability, depending on the risk would have been assessed.
But, in case you don’t perform part of the contract, then you suffer and if he doesn’t perform part of the contract, he suffers. It should be both ways.
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First Published: Sun, Dec 23 2012. 09 39 PM IST