GAS WARS: CRONY CAPITALISM AND THE AMBANIS

by Paranjoy Guha Thakurta

  Further, he claimed that free imports would also ensure that domestic manufacturers remained “honest” and did not fleece consumers.

  The effective level of protection the government has provided to imports of petrochemical products is currently at the peak tariff level, varying between 30 per cent and 50 per cent.

  Given the clout wielded by the Ambanis in the corridors of power in New Delhi, it does not seem likely that customs duties on imported petrochemicals would be brought down in a hurry.

  The relatively high import tariffs also help the group encounter consumer resistance to higher product prices at home.

  IPCL will prove to be a veritable gold mine for the Reliance group. IPCL’s free reserves in the region of Rs 2,700 crore (Rs 27 billion) were more than what the Reliance group had to shell out and the replacement cost of its existing assets would exceed Rs 10,000 crore (Rs 100 billion).

  The divestment commission headed by G V Ramakrishna had categorically observed that “care should be taken while pre-qualifying bidders to ensure that the strategic sale does not lead to market dominance.”

  All such arguments clearly did not cut any ice with Shourie and Vajpayee. The government also ignored the opposition to the divestment from Keshavbhai Thakkar, president of the IPCL Employees’ Association, which is affiliated to the Bharatiya Mazdoor Sangh (the trade union body that owes its allegiance to the RSS).

  Thakkar had pointed out that it was inexplicable why the government did not appoint a proper chief executive of IPCL for almost two years before it was privatised.

  The last full-fledged chairman and managing director of IPCL, K G Ramanathan, had left his job and the Indian Administrative Service to join the Reliance group together with a number of key executives.

  The trade union leader had claimed that the employees’ association at IPCL was “deliberately” kept out of the bidding process.

  Shourie surely believes the decision to allow the Reliance group to acquire control over IPCL was in the interests of the nation. But not everyone agrees with him.

  As M K Venu wrote in the Economic Times: “ many basic raw materials continue to attract peak tariffs. The government has not heeded the unorganized user industry’s plea in this regard. (Friedrich von) Hayek may have had something to say on that!”

  The doyen of free enterprise, Hayek had pointed out in his book The Roadto Serfdom that a clear distinction needs to be drawn between the “rule of law” and “arbitrary government,” Venu has pointed out, adding that the Austrian economist believed that the government should create a level playing field for all players.

  Shourie says there can only be one cobbler in a village. It is, however, questionable whether this analogy is applicable to the giant petrochemicals manufacturing industry.

  Be that as it may, Shourie in his speech on July 6 did acknowledge that Dhirubhai had taught him an important lesson.

  Recounting a conversation between the late textiles tycoon and the media moghul Rupert Murdoch, Shourie quoted Dhirubhai telling Murdoch that he should not only have met all the “right” people during his visit to India but that he should also have met the “wrong” people.

  Shourie quipped towards the end of his speech: “A guru mantra! And I can testify from personal knowledge, that one must follow it (Dhirubhai’s advice to Murdoch). I face the cost of not following it every day as I try to implement the government’s decisions on divestment.”

  The minister would indeed have encountered less opposition if he had bothered to listen to some of his political and ideological opponents on the government’s privatisation policies.

  Such consultations would surely have made the process of privatisation much smoother.

  But then, I guess, one lives and learns.

  One only regrets the fact that Shourie has been quite selective in telling the world how he turned ‘180 degrees’ in his relationship with the late Dhirubhai Ambani.

  For that, would we have to wait for the minister’s biography?

  APPENDIX 2

  Disinvestment in Danger

  By Paranjoy Guha Thakurta

  This is a slightly edited version of an article that was published in the Hindu Business Line on 14 October 2003.

  The controversy surrounding Disinvestment Minister Arun Shourie’s intransigent position on privatizing public sector petroleum companies, especially Indian Oil Corporation and Hindustan Petroleum Corporation Ltd, threatens to snowball into a major crisis within the National Democratic Alliance government. What seems worse for Shourie and his mentors, including Prime Minister Atal Bihari Vajpayee and Deputy Prime Minister L. K. Advani, is that the imbroglio over the attempts to privatize these two companies could actually jeopardize the entire divestment programme of the Union government.

  In other words, Shourie may well end up cutting his nose to spite his face. By his actions, he has not merely antagonized his political opponents but also sharpened the criticism of those within the Bharatiya Janata Party-led NDA Government who had strong reservations about the methodology deployed by him to privatize some of the largest, best-managed, and most-profitable public sector undertakings. One would not be exaggerating if one argued that the one individual who contends that he is among the biggest votaries of privatization has willy-nilly become its single biggest enemy.

  After the 16 September (2003) judgement of the Supreme Court restraining the Union government from privatizing HPCL without obtaining Parliament’s approval, the Disinvestment Minister disingenuously claimed the entire privatization programme had been derailed. His own ministerial colleague, Petroleum and Natural Gas Minister Ram Naik, however, hailed the judgement as a ‘historic’ one. Thereafter, on 3 October, following a meeting of the Cabinet Committee on Disinvestment (CCD), Shourie contended that the government would seriously consider a proposal to split the country’s largest company, Indian Oil Corporation, into smaller entities before privatizing its marketing arm. Newspapers quoted Naik as saying that something quite different had transpired during the CCD meeting.

  It is hardly a secret that the Petroleum Minister had been opposed to the privatization of HPCL but had been overruled by his Cabinet colleagues at the 9 December 2002 meeting of the CCD. Shourie had wanted both HPCL and Bharat Petroleum Corporation Ltd to be privatized. However, at that meeting, it was decided that while the larger HPCL would be privatized, the shares of the smaller BPCL would be divested to the public. If the Cabinet eventually decides to privatize IOC, and there is no guarantee that it will, it would be going back on its own decision not to privatize IOC as well as two other navratnas (or ‘nine jewels’) among the oil PSUs (public sector undertakings), Oil and Natural Gas Corporation and GAIL Limited.

  IOC is India’s largest petroleum refining and marketing company with a daily turnover in excess of Rs 320 crore. The management had last year lodged a strong protest when it was disallowed by the government from bidding for the shares of its smaller sisters, HPCL and BPCL. The former IOC Chairman and Managing Director M. A. Pathan had argued that it would be clearly discriminatory on the part of the government if a private corporate group like Reliance was allowed to bid for Indian Petrochemicals Corporation Ltd while denying IOC the opportunity to bid for HPCL and BPCL. The government allowed IOC to bid for IPCL, managerial control over which was acquired by the Reliance group in May 2002, but subsequently barred one PSU from bidding for the shares of another on the ground this did not result in ‘genuine’ privatization. (IOC had earlier successfully bid for managerial control over IBP Lt, formerly Indo-Burma Petroleum.)

  After the government allowed the Reliance group to control IPCL, thereby enabling the combine to hog an over three-fourths share of the country’s market for a wide variety of petrochemical products, Shourie’s privatization methodology began encountering concerted opposition from within the BJP and the NDA. It was not merely Naik (whose vast empire as Petroleum Minister was sought to be shrunk) who opposed him but the Defence Minister and NDA convenor George Fernandes as well
who wrote to the Prime Minister in protest. What is especially curious is that an attempt should now be made to split IOC, the only Indian company in the Fortune 500 list, at a time when petroleum companies all over the world over are coming together to become bigger and bigger.

  Unlike HPCL and BPCL, both of which were nationalized in the 1970s after taking over the assets of foreign oil companies, there is no legal bar on the government privatizing all but a handful of the 236 Central PSUs in India (including the 130 profit-making ones such as IOC, ONGC, and GAIL). Even so, the reactions of Advani and Shourie make it amply clear that the government did not believe it would be able to muster the support of a majority of the members of both Houses of Parliament to change the law of the land. This not only indicated that there were sharp differences of opinion on the subject within the NDA but also that there was no political consensus cutting across party lines on the modalities of privatizing profit-making PSUs.

  Rather than rushing headlong into a confrontation with the judiciary, the government decided that it would merely ask the Supreme Court bench that passed the order on HPCL to clarify its judgement. The apex court made it clear that it was not commenting on the government’s policy of privatization but merely asking the executive to go to the legislature to change the statute before privatizing HPCL.

  The former Disinvestment Commission Chairman G. V. Ramakrishna has commented that Shourie should not have acted in ‘unseemly haste’ by asking private groups such as Reliance and Shell to proceed with due diligence of HPCL even as the Supreme Court had reserved its judgement after hearing arguments on both sides.

  It is not merely this correspondent but many others who have argued that Shourie has wrongly chosen to focus his attention and energies on a few high-profile, well-performing PSUs to the neglect of others that cry out for immediate attention: particularly chronic loss-making companies such as National Textiles Corporation. As T. T. Ram Mohan, professor at the Indian Institute of Management, Ahmedabad, aptly remarked: ‘Mr Shourie has erred not merely in his choice of firms but in his insistence on a particular method, strategic sale (that entails handing over managerial control of a public sector company to private promoters) as the norm for disinvestment.’

  IOC and HPCL share around three-fourths of the country’s market for petroleum products. The IOC management recently offered to pick up the government’s stake in HPCL for roughly Rs 10,000 crore, to make up the shortfall in the budgeted receipts from divestment this financial year (2003-4), adding a new twist to the episode.

  The Reliance and Shell groups, among others, are keen on acquiring the marketing and distribution network of either HPCL or IOC. While Reliance has set up one of the largest petroleum refineries in India and Asia, it so far does not possess commensurate marketing and distribution facilities. On the other hand, the multinational Shell is hopeful of distributing imported petroleum products. It would be expensive for both these groups to set up a marketing infrastructure on their own. Also, as Ramakrishna points out, given that many retail outlets of IOC and HPCL are at prime locations, a private group may not be able to purchase such property for love or for money. That is why controlling HPCL or a part of IOC would make all the difference for Reliance or Shell. That is also the real reason why Shourie’s policies are as contentious as they are.

  APPENDIX 3

  A Muddied Tarmac

  By Paranjoy Guha Thakurta

  Published in Outlook, 23 January 2006

  It’s rare that the Reliance group doesn’t succeed in bulldozing its way through the capital’s labyrinthine corridors of power. But the manner in which the bidding process for the contracts to modernize and partially privatize the country’s two largest airports in Delhi and Mumbai was sought to be manipulated, unsuccessfully, indicates there could be some hope yet for a country where crony capitalism hardly raises too many eyebrows.

  Influential corporates can fail to convince a pliant political leadership and bureaucracy that is ever willing to bend over backwards to bend rules. Opacity in governance can raise the hackles of not just losers but the public at large.

  To be fair, this is not the same Reliance group we once knew. Last week, the bid for the consortium, led by Reliance Airport Developers (which had tied up with the airport operator of Mexico City), a part of the new Anil Dhirubhai Ambani Enterprises group, was downgraded by a panel headed by E. Sreedharan, the Delhi Metro Rail Corporation chief, which had been asked to inquire into the evaluation of the bidders. If accepted by the government, it may oust the Ambanis from bidding for the Delhi airport. However, the Reliance group is still hoping to manage the crisis. Of the five possible options being talked about, four will enable Reliance Airport to remain in the race.

  But there was much more to the murky episode. The first flaw was an attempt to hand over large tracts of prime land to the bidders for the airport modernization programme. This anomaly had to be rectified. Then came the brazen attempt to rig a bidding process that was intrinsically flawed. It took many months for the Empowered Group of Ministers (EGoM), headed by Pranab Mukherjee, to realize that the bid parameters laid down by the ministry of civil aviation had ‘poor design’, which in turn resulted in subjective criteria for evaluation of the technical bids and lack of accountability on the part of the consultants appointed by the ministry.

  India’s two largest airports, accounting for half the total air traffic in the country, badly need modernization. Nobody questions that. The important issue is how the airports can be modernized in a cost-effective manner.

  Let us for the time being assume that since the government is strapped for funds, the public - private partnership route is the best way to revamp the airports—each involving an expenditure of around Rs 7,000 crore. Let’s also be charitable to Reliance and assume there was no truth in the allegation regarding a conflict of interest between the private consultants—Amarchand Mangaldas & Suresh A. Shroff and ABN Amro—and the two shortlisted bidders (Reliance and the Hyderabad-based GMR group). It’s true that Amarchand Mangaldas is advising the Ambani brothers on how to divide the Reliance empire. The law firm’s managing partner served on the board of directors of Reliance Energy, and both Reliance and GMR are among ABN Amro’s biggest clients. But Reliance says these consultants were appointed before the bidders were shortlisted.

  The bigger question is why the civil aviation ministry designed the bid parameters in such a shoddy manner that left room for an evaluation scheme that was highly subjective, at best, when not downright arbitrary. The EGoM wrote in a note to the Committee of Secretaries (COS) headed by cabinet secretary B.K. Chaturvedi that while India has been attracting world class investors in various sectors, ‘... we have managed to land ourselves in a situation where the consultants have chosen the bidders who should get one airport each ... this is compounded by the fact that of all the airport operators in the world, we have chosen Mexico through technical evaluation, and not by competition.

  The note added that an analysis of the financial structure of the proposed deal indicated that there was ‘an overwhelming incentive’ to maximize [the] non-aeronautical revenues of the airport instead of developing its aeronautical assets. Further, the ‘cost-plus’ tariff structure ‘would inevitably lead to ”gold- plating” (or excessive expenditure on non-essential or cosmetic items) and high user charges’. In conclusion, it caustically commented, ‘We have missed out on top-class players; the incentive structure does not promote aeronautical development that constitutes the core of airport infrastructure; and ”cost-plus” tariff setting would imply a high cost airport.’

  The fact is that the report prepared by the consultants was considered by no less than five panels comprising senior bureaucrats and politicians and still found wanting. Certain obviously-planted media reports made it out as if one disgruntled official, Gajendra Haldea, advisor, Planning Commission, had criticized the bid evaluation in his ‘personal capacity’. It subsequently transpired that as many as five out of seven officials in an inter-minist
erial group ‘were unable to endorse the consultants’ recommendations’.

  The familiar line of criticism from affected parties of what transpired was that re-bidding or re-evaluation of existing bids would delay the airports modernization programme. But, as the mandate given by the EGoM to the COS pointed out, a delay of a few months ‘should not matter if it helps in awarding a 60-year concession for India’s most important airports on a sound footing’.

  We all want India to have modern airports. But if the government goofs up in ensuring a transparent system to attract investments, it will inevitably lead to charges of nepotism and corruption. This time round, the situation seems to have been salvaged—just about.

  APPENDIX 4

  Biggest tax break for richest Indian

  Published in Current (20 June - 6 July 2009) with a subtitle: ‘Rs 20,000 crore off for Mukesh Ambani’ and an introduction: ‘The Ambanis and Reliance have always benefited from favourable government rules. The latest is a tax break that the government has quietly included in its Union Budget 2009 which could end up making Mukesh Ambani richer by Rs 20,000 crore.’

  Even as the Ambani brothers fight a bitter battle on the pricing and supply of natural gas from the Krishna- Godavari basin, the government has handed out a bonanza to a particular company headed by the older of the two siblings, Mukesh Ambani, by providing it a tax break. The income tax benefit that has been provided in the Union Budget could benefit the firm by as much as Rs 20,000 crore, claim sources close to Mukesh’s estranged brother, Anil Ambani.

  First, a bit of background information is provided to contextualize the dispute between Reliance Industries Limited (RIL) controlled by Mukesh Ambani and Reliance Natural Resources Limited (RNRL) headed by Anil Ambani over natural gas extracted from the Krishna Godavari (KG) basin off the coast of Andhra Pradesh. In 1999, the Ministry of Petroleum & Natural Gas (MoPNG) announced the New Exploration Licensing Policy (NELP) under which a consortium comprising RIL and its partner Niko Resources Limited became the successful bidder (and thereafter, the contractor) for exploration of block D-6 in the KG basin.