An FAQ analysis of the complexities behind the FIR that alleges a sweetheart deal between congress ministers and a businessman
By Alam Srinivas
It was a strategic masterstroke. On February 12, 2014, Delhi’s Anti-Corruption Branch (ACB) filed an FIR against a former petroleum minister, Murli Deora, the current petroleum minister, Veerappa Moily, and the richest Indian and the promoter of Reliance Industries Ltd (RIL), Mukesh Ambani. The FIR alleged that the trio hatched a conspiracy to twice raise the prices of natural gas produced by RIL by 260 percent in seven years (2007-14). In return, Ambani promised help to fight the national elections in 2009 and 2014.
The next day, the then Delhi Chief Minister Arvind Kejriwal, who ordered the FIR, introduced the Jan Lokpal Bill in the state assembly. The two opposition parties, Congress and BJP, did not allow it to be tabled. On Valentine’s Day (February 14, 2014), Kejriwal announced the resignation of his government and urged Lieutenant Governor Najeeb Jung to opt for re-elections, but the later imposed president’s rule. The Aam Admi Party (AAP)’s regime lasted 49 days.
From the open window pane of AAP’s headquarters at the capital’s Hanuman Road, Kejriwal explained why he quit. “Three days ago, we registered an FIR against Mukesh Ambani. Ambani is that man who runs our government. He said ‘Congress is my shop, I can buy it all.’ For the past year, he has also funded Narendra Modi (BJP’s PM candidate).” It was Ambani, according to Kejriwal, who got the Congress and BJP to oppose his government’s Jan Lokpal Bill. It was a classic argument, which was aimed at garnering votes in the forthcoming national elections scheduled in April -May 2014.
As political events in Delhi churned within those 72 hours, everyone forgot the genesis of these developments:the FIR filed against the Congress ministers and a businessman. What was the brouhaha about? Why is the central government being criticized for the hike in natural gas prices and doling out benefits to Ambani? What are the politics and economics behind the gas pricing issue?
Why does the government fix gas prices?
The prices of most products are not regulated by the government.The supply-demand trends determine their prices. But there are a few products, such as diesel, fertilizers, liquefied petroleum gas and natural gas, whose prices are decided by the policy makers. The reason: these items are subsidized in a bid to boost economic growth, or help certain user industries or sections of the society.
In the case of natural gas, the government was also asked to fix the prices by the Supreme Court. In a May 2010 judgment, the apex court stated that natural resources (gas, oil and minerals) belonged to the people of the country.
“Natural resources are vested with the government as a matter of trust in the name of the people of India…,” it read. Thus, the “Government in the capacity as an Executive of the Union can regulate and distribute the manner of sale of Natural Gas through allotments and allocations.…
According to Arvind Kejriwal, the former petroleum minister, Murli Deora, hiked RIL’s gas price from $2.34 to $4.2, or 80 percent. In January 2014, the current petroleum minister, Veerappa Moily, announced a new price, $8.4, or double the existing one.
Therefore, for legal purposes, the Government owns the gas till it reaches the final consumer.” As the owner, the government had the right to fix gas prices.
There was a third reason why the government was involved in the pricing of gas. Over the past several years, India had leased out oil and gas fields to private exploration firms, including foreigners, through a bidding process. Under the contract signed between the government and private firms, a formula allowed both parties to share profits .The estimated and recoverable oil or gas reserve in any field was divided into costpetroleum and profit-petroleum.
Cost-petroleum allowed the private firms to initially recover their costs, which could run into billions of dollars ,through the sale of the fuel. Once most of the expenses were accounted for, the remaining portion of the reserve was dubbed as profit-petroleum, whose revenues were shared between the explorer and government. The price at which the fuel was sold was critical in the calculation of profit-petroleum.
If the price was low, the private explorer would need to sell more quantities of gas to recover its costs, and the portion of profit petroleum would come down drastically. If the price was high, a larger slice of the pie would be left to be shared with the government. This was why the contract insisted that the government would be the final judge to decide the price at which the fuel was sold.
How does the government fix prices?
For the past several years, an empowered Group of Ministers (eGoM), which included representatives from user ministries like power and fertilizers, received various inputs from gas exploration firms and announced a price that was closer to the market rate. For example, in September 2007, an eGoM decided that RIL could sell gas at $4.2 per mmBTU (million metric British Thermal Units).
However, this was an arbitrary process, as ministries lobbied for a higher or lower price. The government appointed a committee, headed by C Rangarajan, the chairman of PM’s Economic Advisory Council, to finalize a formula to calculate the gas price. Rangarajan proposed a weighted average of two sets of prices — the average that India paid to import gas, and the average that ruled in three global user markets, Japan, UK and the US. In December 2013, the cabinet accepted the formula, and agreed that although the price would be valid for five years, it would be reviewed every quarter.
Did the government benefit Ambani?
According to Kejriwal, the former petroleum minister, Murli Deora, hiked RIL’s gas prices from $2.34 to $4.2, or 80 percent, which enabled the Ambani-promoted company to rake in huge profits. In January 2014, the current petroleum minister, Veerappa Moily, announced a new price, $8.4, or double the existing one. The higher price was applicable from April 1, 2014, and based on the Rangarajan formula.
During Jaipal Reddy’s tenure as the petroleum minister in 2011-12, RIL sought a higher increase in gas price from $4.2 to $14.2. Reddy rejected it on the ground that the eGoM’s price of $4.2 was applicable until March 2014.
In his note to the eGoM, Reddy wrote that a higher price of $14.2 would translate into “an additional profit of Rs 43,000 cr (in two years) to RIL at current levels of… production.” In October 2012, Kejriwal charged that this was why Reddy was replaced by Moily.
Kejriwal’s estimates showed that the forthcoming hike in gas price, from $4.2 to $8.4, would cost the country an additional Rs 54,000 cr, and allow RIL alone to make a windfall profit of Rs 1,20,000 cr.
In several notes prepared for the Cabinet Committee on Economic Affairs, the government admitted that every dollar increase in gas price would add Rs 2 per unit to the price of power, and Rs 6,000 per ton to that of fertilizers. If the government wished that the hikes were not passed on to the consumers, it would need to increase the annual subsidy bill.
The logic was that the government had helped RIL at the expense of the user sectors, or the taxpayers, who would finance the higher subsidy.
Experts questioned the Rangarajan formula and concluded that it was designed to help Ambani. They criticized the inclusion of Japan’s gas price, which was among the highest in the world, in the calculation. They contended that the price of domestic gas, or for that matter any other fuel, should not be linked to the global prices.The former had to be lower to boost economic growth in certain sectors.
The government’s counter was that the oil ministers could not be blamed for the decisions to hike gas prices,Ambani was not the only beneficiary of the increases, and Indian prices were lower than the global benchmarks. It was not Deora, but an eGoM that had hiked the gas price from $2.34 to $4.2 in 2007. It was not Moily, but the cabinet, which decided to double it to $8.4.
Both the price hikes applied, not just to RIL, but to every exploration firm, and included the state-owned ONGC, the largest domestic producer. The biggest beneficiary was ONGC, whose prices went up from $1.8 to $4.2, or more than double, in 2007. The advantage to RIL was miniscule, as its gas production plummeted from 70 mmscmd (million metric standard cubic meters per day) to 15 mmscmd. The price that India paid for imported gas was over $10, or higher than $8.4.
Has Ambani indirectly received benefits of gas prices?
In October 2012, Kejriwal mentioned two issues that hinted at how the government looked the other way when Ambani’s RIL raked in additional profits. For instance, in 2011, the company sold a 30 percent stake in its gas fields to oil conglomerate British Petroleum (BP) for a whopping $7.2 billion.
The former Delhi CM felt that the center, which leased the fields to Ambani to explore them for as long as the reserves lasted, should have disallowed the equity sale. He said this was akin to a driver he hired to drive a car, but who “sells off my car after a few days”.
The government’s counter was that the oil ministers could not be blamed for the decisions to hike gas prices, Ambani was not the only beneficiary of the increases, and Indian prices were lower than the global benchmarks.
The second issue pertained to goldplating of RIL’s investments in the gas fields. Kejriwal said that the government “signed a contract that was dictated by RIL”, and “was meant to favor RIL right from the beginning”. The so-called production sharing contract (PSC) allowed RIL’s profits to go up by 220 percent for every one rupee increase in investments. “Isn’t it strange?” he asked.
As a CAG report concluded, the PSC did encourage private firms to goldplate costs or deliberately show higher investments. This was because of the differentiation between cost-petroleum and profit-petroleum.Since the latter’s portion was decided only after the explorer had recovered most of its investments through sale of gas (cost-petroleum), there was an inbuilt incentive to show higher investments and, therefore, leave less gas (profit-petroleum) that could be shared with the government.
In 2004, RIL stated that it would invest $2.39 billion to produce 40 mmscmd of gas. By 2006, it estimated the production to double to 80 mmscmd, but the investments jumped to $8.8 billion, or an increase of 270 percent. “To double production, you increase your investments by four times? Having put the initial infrastructure in place, it should have cost lesser…,” said Kejriwal in October 2012.
Ambani had fixed answers for both these allegations. RIL’s managers said that the sale of the stake in the gas fields was similar to the sale of property that one purchased on a 99-year lease from the city’s development authority.
“If we could sell the leased property, why not the gas fields, as long as the buyer was aware of the nature of the ownership of the assets,” says one of them.
In response to the car-and-driver example, RIL stated it was wrong to compare it with the gas fields. In the former case, the owner purchased the car and hired the driver. In the case of a gas field, the owner provided a design blueprint; it did not know how much gas was there and how much could be produced. It was the lessee, or RIL, which invested billions of dollars to explore and produce the gas, and that too in difficult offshore, deep-sea areas.
Since RIL took the operational, technological and financial risks, it had the right to sell a portion of the equity it held in the gas fields to an interested party.
It was because of these gambles, which could have gone wrong and led to unproductive expenditure, that RIL had to almost quadruple its investments. Between 2004 and 2006, some of the costs, like the hiring of the rigs, did shoot up by 5-10 times. These too needed to be accounted for in the calculations.
This was the reason why RIL dismissed ACB’s FIR as “shocking”, “baseless” and “devoid of any merit or substance”. Others in the Indian business community too criticized Kejriwal. Many of them agreed that the law should take its own course, and there was a need to inculcate transparency in government’s decision-making process. But they added that if every state government followed Kejriwal’s example, every official, including the honest one, would be scared to take a decision.
As Deepak Parikh, chairman, HDFC Bank, told a newspaper, “Why would any bureaucrat or minister take a decision? Why should anyone want to go through the legal processes and suspicion because of a decision they have taken? This will slow down decision-making, slow down growth and development.”
However, the narrative that Kejriwal has woven about the deep nexus between big businesses (including Ambani), ruling regime (Moily) and the main opposition party (Narendra Modi) might woo the hearts and minds of the voters, especially in urban constituencies.
|It was the Anti-Corruption Branch
(ACB) of the Delhi government which
filed the FIR against a former minister
and a present minister, besides
the richest Indian. What is the jurisdiction of this organization?
According to Delhi government’s
website, the ACB is part of the
Directorate of Vigilance,
headed by director (vigilance). The
directorate is under the overall
supervision of the chief secretary.
Quarterly reports from all vigilance
officers are obtained in a businesslike
|The ACB not only investigates the
cases of corruption against public
servants for offences punishable
under Chapter IX of IPC and various
other provisions of Prevention of
Corruption Act, 1988, but also conducts
vigilance enquiries against
them. ACB has also been declared as
a ‘police station’, having jurisdiction
over National Capital Territory (NCT)
of Delhi. It is empowered to lay traps
against the employees of the Delhi
government, local bodies, other state
and central government departments
and their undertakings located in the
entire extent of the NCT.