Don’t let private cos override public interest in KG Basin: EAS Sarma

In the wake of the recent SC ruling, the Union government cannot abandon its own obligation to exercise due diligence and prudence in fixing the price of gas & determine the sectoral and regional allocations, a former secretary to the government of India has said in a letter to the prime minister

EAS Sarma, a former secretary to the government of India, has requested the prime minister not to allow the government to be pressurised by a private company to overlook the public interest involved in the KG Basin gas development.

In a letter dated 7th May, Mr Sarma wrote to prime minister Dr Manmohan Singh saying that in the wake of the recent court ruling, the Union government cannot abandon its own obligation to exercise due diligence and prudence in fixing the price of gas, determine the sectoral and regional allocations and take all such measures necessary to prevent the supplier from exercising monopolistic leverage to the detriment of public interest.

Here is the letter written by Mr Sarma...

To

Dr Manmohan Singh
The Prime Minister
New Delhi.
 
Dear Dr Manmohan Singh,
 
Subject: Natural Gas Pricing—Latest orders of the Hon'ble Supreme Court
 
I am happy that the Hon'ble Supreme Court has ruled unambiguously that the Production Sharing Contract (PSC) with private parties cannot override the inalienable right of the State and the people of the country to the natural gas resources that belong to them.
 
As reported in the press, it is significant that the Hon'ble Supreme Court has also made the following landmark observation.
 
"It is the duty of the Union to make sure that these resources are used for the benefit of the citizens of this country. Due to shortage of funds and technical knowhow, the government has privatised such activities through the mechanism provided under the production sharing contract. It would have been ideal for the Public Sector Undertakings (PSUs) to handle such projects exclusively."

Against this background, I wish to impress upon the government that the Central government cannot, in the wake of the latest Court ruling, abandon its own obligation to exercise due diligence and prudence in fixing the price of gas, determine the sectoral and regional allocations and take all such measures necessary to prevent the supplier from exercising monopolistic leverage to the detriment of the public interest.

In this connection, I enclose here a copy of the detailed letter dated 22 August 2009 I had written to you on these very same issues that continued to be relevant even after the latest Court order.

The price fixed by the Empowered Group of Ministers (EGoM) is based on a contrived bidding format that was more beneficial to RIL than the public. The present arrangement of the EGoM administratively fixing the price goes against all canons of competitive price fixation. The EGoM had, before it, the details of the price quoted by the supplier in a global competitive bid floated by NTPC. It was around $2.34 per million metric British thermal unit (mmBtu). Ignoring that price in favour of the price obtained by RIL through a procedure that would fail to stand the test of good competition, the EGoM adopted a non-transparent process to accept the price indicated by RIL, raising questions of propriety.

When I requested both the ministry of petroleum and the Cabinet secretariat to provide me copies of the EGoM proceedings under the RTI Act, the government chose to cite "confidentiality" as an excuse and deny me the same. (Perhaps, the latest move on the part of the government to amend the RTI Act to preclude Cabinet proceedings from the public is a sequel to this, to keep such crucial decisions from public knowledge!)

I request the government to review the price fixed for the Krishna Godavari (KG) Basin natural gas in such a manner that the price is in the public interest. The mechanism of pricing should not be politicised. Instead, it should be entrusted to a statutory authority like the petroleum regulator, as already envisaged in the PSC itself. The government should also carry out an economic evaluation to arrive at the sectoral allocation priorities for natural gas, as suggested in my earlier letter.

I may mention in this connection that gas development is known to cause land subsidence. In the case of KG Basin gas, the ministry of environment had conveniently bypassed evaluating this aspect while according environment clearance to RIL. Some concerned citizens had to approach the Hon'ble Andhra Pradesh (AP) High Court to intervene and order a fresh environment appraisal of the project. The KG Basin comprises the heartland of agriculture of Andhra Pradesh and if there is land subsidence in that basin, it will break the backbone of the state's economy. The state and the Central governments are oblivious, indifferent and perhaps insensitive to this impending calamity that is waiting to happen.

I hope that the government does not allow itself to be pressurised by the private company to overlook the public interest involved in KG Basin gas development.

Regards,
 
Yours sincerely,
 
EAS Sarma
Former Secretary to GoI

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Sukuk derivatives modified

In theory, derivatives are supposed to hedge risks in developed markets. Often, they have the reverse effect and they can create a disaster far larger than the problem that they were supposed to cure

Derivatives are all the rage these days. Presently, the US Senate is debating a Bill that would establish a better regulatory framework for derivatives. Meanwhile, the eurozone is struggling with the effects of skyrocketing derivatives for the sovereign debt of Greece and other members of the EU. A new derivatives market has just opened in China and both the trading and prices have been rising at a spectacular rate. Not to be outdone, the International Islamic Financial Market (IIFM), a Bahrain-based Islamic capital markets body, and the International Swaps and Derivatives Association (ISDA) have come up with standardised documentation for derivatives instruments that comply with Sharia, or Islamic law.

In theory, derivatives are supposed to hedge risks in developed markets. Often, they have the reverse effect and they can create a disaster far larger than the problem that they were supposed to cure. There are several reasons.

The first has to do with counter-parties. Derivatives on their simplest level are nothing more than contracts. A contract is simply an agreement between two parties to do something in the future. In the case of a derivative, that often requires the payment of money by one party to another upon the occurrence of a specific event—usually a loss or a default.

When the triggering event occurs, the party who experienced the loss asks the other party to the contract, the counter-party, to pay up. But what happens if they don’t? What happens if they can’t or won’t? In the United States, this is exactly what happened. Many of the big Wall Street banks like Goldman had AIG as a counter-party. When the collapse occurred it became clear that AIG couldn’t fulfil its side of the bargain. As a counter-party, it was a failure and the derivatives contract would have been worthless, except that the US government stepped in and guaranteed the deal.

This is still an especially difficult problem or for the eurozone and Islamic finance, because of the extra layer of cross-border guarantees and enforcement. The issue is having dramatic consequences in the EU, where European banks are so worried about counter-party risk that interbank lending is limited to overnight and spreads over three-month rates have soared. All of this is due to counter-party risk across borders.

The next question is how is the contract to be enforced? It may be possible to enforce these contracts in the US and EU. Emerging markets are a totally different story. The Chinese financial system is replete with massive toxic assets, because it is basically impossible to collect a debt. Any problems with their new derivatives markets will most likely not be resolved. Other emerging markets are hardly better.

The cross-border issue is also a problem for regulators. Which regulators are responsible for policing these transactions? We also have to assume that there are regulators, that they have jurisdiction and that they both will and can enforce the regulations on their respective country’s books. Legal disincentives without enforcement by regulators or courts are worthless. So would be the value of derivatives as insurance.

The real problem with counter-parties often is asymmetry of information. The contract or derivative—whether standardised or not—is a private transaction. These derivatives are not yet traded on any exchange. One of the main causes of the 2008 financial collapse and the present strains in Europe is the lack of information. No one knows the extent of the interconnections, so without information markets can collapse. Derivatives increase the interconnections and decrease the information. One of the main aspects of the new US reform would be to require derivatives to be traded through a clearing house. This would provide both transparency and the potential to both provide and monitor collateral.

The end result may not be hedging risk, but creating more. The illusion that a specific investment is protected from loss may result in investors taking risks that they would not otherwise have taken. If they feel protected by the derivatives contract, there is less of an incentive to do more due diligence. This was proved recently when the holders of unrated illiquid “asset-based” sukuks (Islamic bonds) realised that their investments were in fact not collateralised.

No doubt derivatives if properly regulated might actually do some good, but we have to wonder why they are so important. After all, this market is quite new both in terms of the scope and size. Markets did pretty well for most of their history without these new instruments. The answer came at the end Financial Times article about sukuk derivates. According to a banker at a Western bank, “In theory, the potential market size is several billion dollars per annum of structured investment products and hedging instruments, but we’re barely scratching the surface today.” So the real reason has nothing to do with risk management, but a lot to do with profit management for Western investment banks.

(The writer, William Gamble, is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected]).
.

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COMMENTS

Adil MSATFA

7 years ago

I am afraid wrangling among scholars and wiggle room in interpretation of Shariah principles threaten to derail any attempt to arrive at global standards in Islamic finance
:(

LMN: Desperate methods

There are just too many soft drink brands in the market and the window to build the brand AND rake in returns is quite short. While viewers may recall the ad, they could connect it with another brand

Don’t be surprised if you find too many cold drink ads being reviewed of late on this site. It’s that scalding time of the year when makers of chillers make serious hay while the sun shines. There’s near domination of the TV channels by cold drink ads this summer.
 
The latest to jump into the heated fray is a lemon drink called LMN (guess they are hoping consumers will connect that abbreviation with ‘lemon’). And they have flown as far away as the Kalahari Desert to make the point of acute dehydration and the torture thereof. Currently there are as many as five commercials on air featuring a couple of African lads (Bushmen). The idea is this: The commercials revolve around the trials and tribulations the boys go through in the hot, hot desert land to be able to get their hands on one drop of water. Of course, they’ve tried to be funny in the execution… they had to… acute water shortage and malnutrition in that part of the world is no laughing matter, so the creative had to be ‘cooled down’.
 
And so the dudes chase un-ending water hoses, mistake taps for digging tools in their desperation, try to kill each other for water. They even attempt to suckle a she-cheetah to quench their thirst! Yup, totally whacko stuff, but works on the principle that raising the temperature bar on thirst to phenomenal levels can help position LMN as the ultimate liquidifier. Also, using African kids helps them differentiate the brand from other Indian rivals, which is a sound idea. Of course, they run the risk of upsetting some sensitive folks for parasiting on the miseries of impoverished nations, but when you do mad things, you don’t ponder over such minor details.
 
And madness is the order of the day. The LMN ads must have cost them a bomb, but these are desperate times for soft drink makers. There are just too many brands in the market and the window to build the brand AND rake in returns is quite short. Come June, the monsoons will arrive in many parts of India and then consumer interest will begin to taper off. However, if there’s one issue I have with the campaign, it’s this—the branding is very poor. Somewhere along the way, the team went overboard trying to be whacky and lost sight of the fact that while viewers may recall the ad, they could connect it with another soft drink brand. They forgot the most important piece of advertising gyaan: The seed of the idea must always emanate from within the brand’s genetics, not out of it.

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COMMENTS

neeraj

7 years ago

Dear Sir,
Though the comments about LMN marketing strategies has been described in detail by this piece but i think it lack in-depth knowledge as there was not a single time use of neither Parle Agro (the manufacturer) nor the marketing strategy being followed by Parle for branding of Hippo or as a matter of fact about Appy Fizz.
I think you would appreciate if this piece would have been a comparison of Appy Fizz and effort of Parle to establish LMN.

Thanks

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