In order to maintain and support agriculture, it is imperative that gas is made available to this industry, thus reducing its subsidy for urea. However, such a move will correspondingly affect other consumers such as power generators, which will have a rippling effect on industry and trade. So, the question is how, when, why and who will finally decide the price structure for the gas?
Only a couple of weeks ago, Reliance Industries (RIL) announced the discovery of gas in a new find in an area identified as MJ1 in the D-6 block, where exploratory activities started some eight weeks ago, after a 15-month lull.
Further tests are underway but it is generally believed, on the initial assessment, that MJ1 may hold significant amount of gas. It has been further reported, as mentioned in these very columns of Moneylife that should all the four satellite fields discovered in D-6 area go on stream, Reliance can produce an estimated 30 million metric standard cubic metres per day (mmscmd) additionally. () No doubt, this increased production will bring a great relief to the power-starved country.
Naturally, these procedures will take a few months to achieve a production commencement status, after commercial viability tests are proved to be positive.
However, new contracts for gas supplies to commence from 1 April 2014 are to be finalized in terms of price, quantity and delivery. The domestic gas is currently priced at $4.2 per million metric British thermal unit (mmBtu).
The Rangarajan Committee had called for freeing of gas pricing which would have pegged it between $8 and $8.50 per mmBtu. To start with, this is double of what is being charged today.
Unfortunately, however, for RIL, the finance ministry does not see eye to eye with the Rangarajan Committee’s recommendations. It has, in fact, rejected the pricing formula proposed by the Committee and has instead suggested an alternative formula based on wellhead prices, charged by suppliers from Oman, Qatar, Abu Dhabi and Malaysia for long-term contracts. Wellhead prices do not take into account the transportation costs, which are substantial.
Currently, the international price for gas is $12.5 per mmBtu as against what Reliance charges at $4.2 per mmBtu.
It may be recalled, recently, apparently after the gas discovery in D-6 and to ensure that a ‘fair’ price is fixed for the new contracts from April 2014, both Mukesh Ambani and Bob Dudley of BP, had called on the prime minister, deputy chairman of the Planning Commission, Montek Singh Ahluwalia and the petroleum secretary to impress upon them the urgent need to fix realistic prices.
The fertilizer industry is also up in arms, demanding its right to have full access to gas produced in the country. In fact, India has not made any new investment in this sector for establishing new units or for expanding the existing ones because of non-availability of guaranteed supplies of the feeder stock.
India's requirement of urea is around 30 million tonnes, out of which, 8 million tonnes are imported every year, with the last year's import cost @ Rs24,564 per tonne. Based on the mix of both imported and domestic gas, the cost of production of urea is Rs11,000 per tonne with the government subsidizing supplies to farmers by Rs5,640 per tonne. Why can’t the government review the issue of fertilizer subsidy and let the market conditions dictate the price level? Farmers do not pay taxes and profits are made by the intermediaries on which there is very little control?
Based on the present production capacity, our urea industry requires 7 mmscmd of gas. The fertilizer industry has demanded that indigenous gas be supplied rather than being forced to depend upon the use of more expensive method of LNG imports.
The government has a difficult choice to make. In order to maintain and support agriculture, it is imperative that gas is made available to this industry, thus reducing its subsidy for urea. Such a move will correspondingly affect other consumers, such as power generators, which will have a rippling effect on industry and trade.
So, the question is how, when, why and who will finally decide the price structure for the gas that may be available for supplies from April 2014 onwards? If it is purely based on domestic supplies only, and not taking into account any international gas price formula, it will establish a precedent on self-pricing policy based on local conditions. Also, it is incorrect to price it on well-head because, transportation costs are unavoidable.
Since gas will be supplied mostly through pipelines, a cost effective method has to be devised. Why not ask the fertilizer industry to join and form a consortium of sorts with the producer, pipe producer, layer (contractor) to an agreed hub point that may be nominated by Reliance (or another gas explorer like ONGC/Cairn) and amortise the expense involved?
National progress is more important than the individual corporate body making substantial profits? The final price should be in line with the replacement cost of the gas, which includes transportation and landing expenses that the importer would incur, if indigenous gas was not available?
(AK Ramdas has worked with the Engineering Export Promotion Council of the ministry of commerce and was associated with various committees of the Council. His international career took him to places like Beirut, Kuwait and Dubai at a time when these were small trading outposts; and later to the US.)
Delhi Jal Board assured the CIC that water tankers would deliver water near electric poles or temples, mosques or community centres in Delhi instead of parking the tanker near anyone's home. This is the 82nd in a series of important judgements given by former Central Information Commissioner Shailesh Gandhi that can be used or quoted in an RTI application
The Central Information Commission (CIC) disposed a complaint after assurance from the Public Information Officer (PIO) of Delhi Jal Board that the public authority would henceforth distribute water by parking their tankers at public places instead of parking it in front of any person's home.
While giving this judgement on 25 September 2009, Shailesh Gandhi, the then Central Information Commissioner said, “...the main issue was Delhi Jal Board sending tankers in some places next to the houses of particular people who are then appropriating the right to take water for themselves.”
New Delhi resident Yashpal Rawat, on 15 June 2009, sought information under the Right to Information (RTI) Act from the Public Information Officer (PIO) of Delhi Jal Board. Here is the information he sought and the reply provided by the PIO...
1. Details of work of Sanjay Ram, JE for which he was being paid by DJB.
PIO's Reply:. Sanjay Singh was being paid for the work. He did not do any kind of politics.
2. Details of working hours of the above said employee on the Karala Water Tank and details of amount paid to him as salary.
PIO's Reply: Mr. Sanjay Singh was working on the Karala water tank according to the responsibilities. His monthly salary was Rs23,877.
3. Details of action taken on the complaints which the appellant had given to the said employee.
PIO's Reply: The appellant could draw water from near Pole No3 in Gali no3 of Pratap Vihar Part - II as the water tanker goes to that site.
Not satisfied with the PIO's reply, Rawat filed his first appeal. In his order, the First Appellate Authority (FAA) said that the dispute was regarding location where the tankers deliver water in the area which was 50-60 feet away from the house of the appellant. The FAA further stated that water was already being delivered at a point near the appellant's house so no further action was necessary. The FAA clarified that logistically it was not possible to deliver water at the doorstep of each person.
Rawat, still not satisfied with the reply of FAA, then approached the Commission with his second appeal.
During the hearing, Mr Gandhi, the then CIC, noted that the main issues in the present case was that the Delhi Jal Board was sending tankers in some places next to the houses of particular people who are then appropriating the right to take water for themselves.
The PIO acknowledged this issue and told the Commission the they will ensure that tankers would deliver water near electric poles or temples, mosques or community centres in that area instead of parking the tanker near anyone's home. The PIO also assured Rawat that by 15 October 2009, all water tankers would deliver water at such places.
After the assurance, the Commission then dismissed the appeal stating that the PIO had provided the information sought under the RTI application.
CENTRAL INFORMATION COMMISSION
Decision No. CIC/SG/A/2009/001875/4878
Appeal No. CIC/SG/A/2009/001875
Appellant : Yashpal Rawat
Delhi - 110086
Respondent : Lalit Mohan
Public Information Officer
Delhi Jal Board
O/o the Chief Engineer (West)
Karol Bagh, New Delhi - 110005.
As China slows, the loan defaults will increase as will unhappy customers. In an era of social media, it will be more difficult for the government to prevent people from removing their money from the system
Zhang Ke, the vice-chairman of China’s accounting association, is worried. He and his firm audit the books of Chinese local governments. According to Mr Zhang the debts of the local governments are is “out of control” and could spark a bigger financial crisis than the US housing market crash. In a way this is not news. The only thing that is news is that a senior Chinese figure is talking about it. But if China’s debts are so big, why doesn’t it spark a panic?
Mr Zhang’s assessment of the Chinese debt situation has a lot of company. The International Monetary Fund (IMF) and the rating agencies have all flagged the issue. Recently Fitch cut China’s sovereign debt rating, the first such cut since 1999. A rare downgrade in a world where many emerging markets are seeing more optimistic outlooks.
China’s debt problems have been around since the recession of 1999. To avoid a recession in 2009, the Chinese government opened the monetary floodgates by forcing the banks to make loans and lend they did. Most of the money went to provinces, cities, counties and villages for various projects. The problem with financing projects with bank loans rather than taxes is that the projects have to generate sufficient income to service the loans. According to Mr Zhang this is not happening. The local governments were not paying back the loans, just rolling them over. “The only thing you can do is issue new debt to repay the old,” he said.
Like the US Federal Reserve, this type of stimulus has been going on for the past four years. The pile of debt is now quite high. It is estimated to be between Rmb10 trillion and Rmb20 trillion ($1.6 trillion and $3.2 trillion), equivalent to 20%-40% of the size of the Chinese economy. It hasn’t stopped. Despite questions over solvency, the hunt for yield has allowed the local governments to issue Rmb283 billion of bonds in the first quarter of 2013. This is more than double the total for the same period last year. In theory local governments are prohibited from issuing bonds. But thanks to investment companies, a financial innovation designed to get around the restrictions, they have been flooding the market.
Sadly, like the Fed’s efforts, the massive stimulus in all forms is having a limited effect. China’s growth has slowed to 7.7%. The mercantilist money machine has been stopped by falling demand in China’s main export markets. The structure of the stimulus is aimed at the wrong segment of the Chinese economy, local governments and state-owned business rather than private businesses. The structure of the Chinese system makes it exceptionally difficult for it to rebalance. Even the economist prime minister, Li Keqiang, has admitted that the economy will have to “climb hills and cross ridges”. So China might be rolling down a hill, but will it fall off a cliff? Will China’s problem morph into a panic? To determine the answer we must look at the causes of a panic.
At their very core, business cycles are about the tension between greed and fear. Excessive optimism about the future creates greater risk taking. This can be exacerbated by extended periods of accommodative monetary policy. The expansion of credit coupled with assumed government guarantees of easy money allows fear to recede. Growth appears to be a one-way bet. With access to easy credit, investors increase their bets. This drives asset prices away from fundamentals. The combinations of imperfect information, asymmetries and ever optimistic forecasts seem to justify the inflated asset prices. After several years of this, the markets are in the middle of a full-blown credit bubble that inflates an asset bubble. Financial innovation or financial reform can change the financial system in ways that obscure the risk.
The classic example is the US collapse. Alan Greenspan and his successor Ben Bernanke convinced the markets that low interest rates would help to rejuvenate the American economy. The housing bubble was considered an accurate valuation by the market. The financial innovation of collateralized debt was seen as an efficient way to spread the risk throughout the market. Since the assumption was that collateralized debt was perfectly safe, the financial system could use huge amounts of leverage, but the exact amount was unclear and could only be estimated. The demand for collateralized debt created a market for any collateralized debt regardless of the ability of the borrower to repay the loan. The result was, of course, the Great Recession.
How does China fit into this description? As I noted above the Chinese government has been flooding the economy with money for years. Money to state-owned enterprises (SOEs) and local governments is lent at subsidized rates basically without restrictions. So there is a vast potential for leverage. Since both the locals and the SOEs are branches of the Chinese government, investors and banks have assumed that they cannot default. The Chinese government has the enviable reputation of being able to engineer one of the most successful development stories in history. So the assumption is that the country will continue to grow its way out of any temporary pull back. Recently more money was funnelled into the system through financial liberalization. The so-called shadow banking system has provided investors ways to get far better interest rates than are on offer at the state-owned banks.
Still the Chinese economy is different. It is heavily state controlled. Just because it seems to fit into the template does not mean that there will be a horrific meltdown. The estimable Financial Times Beijing bureau chief, Jamil Anderlini, doesn’t think that a panic is possible. Slow growth definitely, but no panic.
His analysis divides recent panics into three categories: interbank freeze, or foreign capital outflows, and depositor bank runs. An example of an interbank freeze would be the collapse of Lehman Brothers. The Lehman collapse was particularly horrific because the problem had to do with counterparty exposure. Large leveraged trades were made between banks. If one side defaulted the other would also lose money. When Lehman went under, no one knew who was exposed or how much. So all lending stopped. Mr Anderlini doesn’t think this is a problem in China. China’s regular financial system is composed of state-owned banks. In a crisis the Federal Reserve or the European Central Bank can only provide liquidity and hope. In China the government can actually order the lending to continue.
Foreign capital outflows were the cause of the Asian financial crisis. Many of the Tiger countries like Thailand had borrowed in dollars. When the crisis hit, foreign investors pulled out, putting the economies into a tailspin. There is a similar issue in the Eurozone. Countries like Greece sold euro bonds to foreigners who assumed a credit rating equal to Germany. When the crunch came the foreigners left.
China does not have a convertible currency. Its exposure to international investors is quite limited. Besides it has $3.44 trillion in foreign exchange reserves. So it has the firepower to avoid a meltdown.
So far I agree. China cannot have a liquidity or a currency crisis, however, a depositor bank run in my view is possible. Mr Anderlini believes that the state-owned banks including the big three Industrial and Commercial Bank of China, China Construction Bank and Bank of China “are effectively backed by the full weight of the Communist party” and the Chinese state. This is certainly true. Chinese banks are all state-owned and too big to fail, but there has been a major change.
What is not too big to fail are the local government bonds, trust vehicles, Wealth Management Products (WMPs), real estate and other private company bonds, in short the Chinese shadow banking system. These are credit flows that have been transferred off bank books or securitized loans. The shadow banking system has increased four-fold in size since 2008 to about Rmb20 trillion ($3.2 trillion), or 40% of gross domestic product. It could be as much as Rmb24.4 trillion, or nearly 50% of GDP. Recently it has been metastasizing at an incredible rate. Conventional bank loans from the state banks made up 95% of loans in 2002. This has decreased to 58 % last year. Total financing has increased almost eight-fold during that time. Trust loans surged 679% in last December alone to 264 billion yuan from a year earlier. The recent growth of the Chinese economy would have been impossible without these loans.
But these loans suffer from two major problems. Although the purchasers assume they are as safe as bank deposits, they are not backed up by banks or anyone else. Second, there is the classic bank issue: an enormous asymmetry between the assets and liabilities. The most popular WMPs have durations of one to three months. But the funds provide financing for much longer terms, often multi-year loans.
WMPs and bonds are considered safe, because firms, especially firms connected to the government, do not default. Private firms go under. Usually the owner disappears at night. But state firms or large firms partially owned by the state are kept afloat either by mergers or by rolling over loans, until now. Recently two solar firms—Suntech and LKD’s bonds went into default. Also banks are having problems with WMPs. Customers at a China Construction Bank branch in the north-eastern province of Jilin complained to regulators that they lost more than 30%. One of CITIC’s, a large financial conglomerate, products was at risk because of an overdue loan worth more than Rmb70 million ($11 million). Losses from a product sold by Huaxia Bank, could reach up to Rmb100 million ($16 million). These losses are small, but the surprising thing is that they are happening at all.
So all the elements are in place: Financial innovation, an extended period of easy money, credit expansion, assumption of government guarantees, poor risk assessment, and worst of all, poor information. As China slows, no doubt the defaults will increase as will unhappy customers. In an era of social media, it will be more difficult for the government to prevent people from removing their money from the system. As faith in the financial system declines, no doubt so will the faith in the Communist party, which, according to a quickly terminated online survey, has an 80% disapproval rating. Like Mr Anderlini, I have no doubt that China will slow, but it could be in for something much worse as Mr Zhang noted.
(William Gamble is president of Emerging Market Strategies. An international lawyer and economist, he developed his theories beginning with his first hand experience and business dealings in the Russia starting in 1993. Mr Gamble holds two graduate law degrees. He was educated at Institute D'Etudes Politique, Trinity College, University of Miami School of Law, and University of Virginia Darden Graduate School of Business Administration. He was a member of the bar in three states, over four different federal courts and has spoken four languages.)