A small big idea for reform

Had I been asked such a sweeping question, my response would have been deliberately ‘small’. This is because ‘big’ ideas beg the very question that is the despair of all public-spirited Indians. Why is it that despite widespread understanding of what is wrong with our political economy and the solutions required, the postscripts on reform inevitably contain the same message?

I believe we must now look beyond the systemic blockers that have been so often discussed to finding the incremental opportunities for value generation. We must, in short, avoid the avoidable cost. This would have been my ‘idea’ and I would have drawn on the current discussions on the price of natural gas and whether or not the recently discovered gas reserves offshore East India should be sold at a market price or a discounted regulated price. I would have argued that if indeed the government decided to regulate, it would be akin to an avoidable shot in the public foot.

Three reasons underpin my argument against price regulation: One, the Production Sharing Contract (PSC) that defines the financial relationship between the petroleum companies and the government is so structured that beyond a certain level of profits earned by the companies, the incremental revenues from increased production and/ or value is split disproportionately in favour of the government. Thus, if the profit split between the government and the Oil company were 50:50 at a gas price of $3/mmbtu, then more likely than not, the government’s take on incremental earnings would increase to 70 per cent if the prices increased to $4 and to 90 per cent at prices beyond that.

I would hazard the calculation that if indeed the domestic production from the East Coast fields increases, as has been reported, from 20 mmscmd in 2008 to 40 mmscmd in 2009 to a plateau production of 80 mmscmd by 2010, then the revenue gain for the government from an increase in the price from $2.50/mmbtu (which is the price that the fertiliser and power companies are reportedly looking for) to $4.33/mmbtu (which is what the producers have reportedly asked for) could be somewhere between US $8-10 bn over the life of the project. Contrarily, this would be the loss to the public exchequer if the demand of the fertiliser/power companies were accepted. Incidentally, the international price of gas is around $6/mmbtu; several producers of domestic gas from fields in western India are currently charging more than $4.33/mmbtu.

... contd.