Q&A Ashok Chawla Former Finance Secretary and Chairman, the Committee on Allocation of Natural Resources
Why did it take the government 20 years after liberalisation to reformulate its overall economic policy vis-à-vis natural resources? And is this delay the main reason for policy paralysis, corruption, crony capitalism and private profiteering?
This is obviously a question I can’t answer, but from whatever I know, in the past, every sector evolved its own set of policies and procedures. For example, with the oil exploration sector, it was in the mid-1990s that the new exploration licensing policy was adopted, which gave out blocks on the basis of inviting bids. In mining, there was a policy that we are told, is followed in different parts of the world, where companies are allowed to explore and then exploit it.
So basically, every sector was evolving its own thing, but the issue took centrestage after the auction of the 3G spectrum, which generated a lot of revenue for the government and served as a pointer to the fact that, perhaps, what was being done earlier was not the most optimum way.
So one can say that the overall approach was trial and error.
The overall approach was learning by doing and evolving policy, and everybody, who was part of the governance architecture, admits this.
Why is your report still under lock and key?
(Laughs) I don’t know. You’ll have to ask the government.
It still remains top secret as far as the government is concerned.
It’s not been put in the public domain, but they have answered questions about it in Parliament.
Coming to the Parliamentary questions, recently the government went back on its reply to Parliament. They told Parliament that it had accepted 69 recommendations, but later filed an affidavit in the Supreme Court that the PM never said that ministries were asked to implement the recommendations, but only pursue them, and that there is a difference between the two. What do you make of this shift in the government’s stand?
You are asking me something that I’m not qualified to answer, but what I’ve been told is that the acceptance by a GOM is not acceptance by government, unless approved by the Cabinet. If it is an empowered group of ministers (EGOM), it may exercise the authority of the Cabinet, but a GOM’s recommendations go to the Cabinet, and only when the Cabinet approves it does it become final.
Is the gulf between the existing policy framework and what you have proposed too wide to bridge?
I don’t think the gap is wide, because in some sectors, the auction policy has been successfully adopted, while others are working in that direction. What we have suggested is that the overarching principle should be transparency. Even if auctions are not possible, the principle of transparency should continue to be the bedrock on which the policy is built.
ASHOK CHAWLA RECOMMENDATIONS
• BRING TRANSPARENCY in the management of the contracts and associated considerable financial implications by making regulatory mechanism independent and fair.
• THE EXISTING BID parameters of production sharing contracts provide possibilities for gaming during the pendency of the contract. Remove the opacity in the post-award process and bring the decision- making process into the open.
• THE POLICYMAKER, regulator and the operator should function at an arm’s length from each other
This brings us to a very crucial question. There is a public debate between discretionary powers of the government versus competitive bidding. Is it safe to assume that your committee has recommended competitive bidding as the default option?
As I said, that is the preferred option. But we’ve said that in some cases, it might not be possible. For instance, in certain areas where you have to look for minerals, it may not be possible to give it by competitive bidding. Wherever auctions are unviable, the process should be transparent and the rationale should be in the public domain.
Your report carries a very exhaustive chapter on coal. On coal, the logic of various state governments and some people at the Centre still remains that if captive coal blocks had been given by competitive bidding, the prices of power, steel, etc would have gone up and this might have hampered industrial development as well. Do you see any merit in this argument?
This is something that can be conceptually raised not only for coal, but other resources as well. Our approach was that if the price of the inputs raises the cost of the endproduct based on competitive bidding, we should let it be, because then we know the real commercial value of that input. If the price has to be subsidised, it should be done at the stage of the end-product.
One can then easily say that their logic has no merit and is not backed up by empirical data?
It is not backed up by any study. Our assessment is that when you price the inputs based on the market price, they will be used judiciously. For instance, today gas is cheap, so it is being used for baseload power projects instead of coal. It’s like using cream where you can do with milk.
ASHOK CHAWLA RECOMMENDATIONS
• BRING A COMPREHENSIVE national legislation on water. This can either be done through bringing water under the Concurrent List and then framing the appropriate legislation or by obtaining consensus from a majority of the states.
• THE NATIONAL LEGISLATION should clarify a common position on issues like the need to consider all water resources as a conjunctive, unified whole; water as a common property resource; principles of allocation and pricing and so on.
Your report has basically disapproved of the current Mines and Minerals (Development and Regulation) (MMDR) draft Bill. Why is it so?
I haven’t seen the Bill, but we were told that there are vast tracts where the government is not sure of the extent of mineralisation, and therefore there has to be categorisation. There will be areas that are known mineralisation areas, where competitive bidding will be possible. There may be areas where you do not know the extent of mineralisation, where you may or may not go for it, while there will be areas where you do not know at all. So we asked the government how long it would take to map the detailed mineral wealth of the country, and they said it is beyond the ability of the Geological Survey of India (GSI) to do it. Our suggestion was that either you fund the GSI so they can do it, or you outsource the process. In other words, move as quickly as you can to a stage where more and more areas, where minerals can be found, can go for competitive bidding. I think that is the broad approach of the MMDR Act.
I find it very curious that your committee was supposed to do the seminal work and yet you haven’t seen the draft Bill.
No, I saw the Bill at that time, but I’m not sure whether it remains or if there have been any changes.
Well, your report says that your committee wasn’t given the latest version of the Bill. Why this secrecy?
(Laughs) I wouldn’t know that. You’ll have to ask the mines ministry, because they were taking it confidentially to the GOM. Since we had to finish our job in two or three months, we saw what we could.
What is your assessment of the performance of regulators like the Director General of Hydrocarbons (DGH) and the Petroleum and Natural Gas Regulatory Board? Have they been carrying out their mandate?
We looked at the role of the DGH and suggested that it is not an independent upstream regulator. It shares an incestuous relationship with the petroleum ministry. It is an attached office of the Petroleum Ministry and it also gets into the issue of deciding commercial matters based on inputs and figures that private exploration companies provide. Therefore, what is required is that if the ministry needs any technical or input assistance, they have a body like the DGH to service the requirements of the petroleum industry, but there should be an independent upstream regulator that looks at issues after the award of a contract.
Basically, there are two sets of models that operate across the world: revenue sharing and production sharing. The arrangement of production sharing is not bad, but there is a scope for a lot of fudging after the contract is awarded. But this has been going on since the mid-1990s. If anything changes post-award, the rules of the game change completely. Maybe, in that aspect, the revenue sharing model is better, but either way, what we need is an independent regulator. But the petroleum ministry opposed this and wrote a dissent note. These are the crucial recommendations that they say are still under examination.
But how do you forestall this kind of fudging? You already forecast a certain percentage of elasticity that there might be in your cost but can’t that percentage be locked in at the bidding process itself, rather than leaving it open and renegotiating it endlessly later?
The forecasting of a figure is taken care of, but what happens later is that they say that unforeseen circumstances have caused expenses to go up. There should be a fixed range of fluctuations in the cost and anything beyond that is unacceptable.
Did you find grave anomalies in the way the NLP has been implemented so far?
We found that the process of awarding contracts was all right, but there was scope for manipulation in implementing the contract and the post-award changes.
‘The government says it is beyond the ability of the GSI to map the mineral wealth of the country’
Do you think that the coal sector should be completely privatised or should private participation be restricted just to captive coal blocks?
The ideal solution would be opening up the sector to mining by private companies, which means repealing the Coal Mine Nationalisation Act. This issue has been stalled in Parliament for almost 12 years. We saw that as the possible ideal solution, but realising that it is not going to work, we recommended that the government open up coal mining to private companies, but sell only to the identified and approved end users, approved under the Coal Mine Nationalisation Act. Captive mining is alright but it doesn’t solve the main problem because most competing companies are not competent at mining. They are power producers or steel producers or maybe just cement producers. Private people should come in, because they operate with pure commercial purposes and mine efficiently. It will put some pressure on Coal India, which is now a kind of single entity or monopoly. The Nationalisation Act has outlived its utility.
There has been a lot of debate on competitive bidding versus discretion-based bidding. But there has not been much focus on regulation. For instance, in the iron ore scam in Karnataka, it was shown in the books that the ore was sold at Rs 600 per tonne, but it was actually being sold in China for Rs 6,000. So, even if we move on the path of competitive bidding, how will we ensure that the government’s interests are safeguarded?
When you auction anything, generally, the only parameter is the maximum price of the product. There should not be conditions that need to be monitored over time after the auction, but if there are, then the government architecture and regulation mechanism become very important. And that needs to improve as a whole.
Like in the petroleum sector, where you have imposed a independent and powerful regulator, have you proposed a similar regulator in the coal sector?
In the coal sector, we were told that there will be some regulator, but the appointment of a regulator and what it would do is still under consideration by the government.
With the political debate, there is anxiety about the inability of the government to regulate. You gave these allocations and captive blocks to people saying that the country desperately needs amplified coal production, and then if companies have the discretion to say that it is not prudent for them to mine this, then the objective of having given those blocks is lost in any case. How does the fairness of that work?
That is why there are those clauses asking companies to operationalise within a couple of years.
There’s a new road map in the form of your report. So, now there will be a paradigm shift in minerals and coal. This puts the old companies at a great advantage over new entrants, by virtue of the fact that they have got these resources at a fraction of the market price. How do you tap those windfall gains?
Issues of legacy are very difficult and complicated to get into. There are both advantages and disadvantages for old players, and you can never quantify the positives and negatives. In the whole history of business and commerce, there have always been newcomers, latecomers, advantages and disadvantages, and I don’t think you can rationally even attempt to start on a clean slate.
What about having something like a windfall gains tax for companies whose valuation goes up by virtue of the fact that the government has changed its policy?
The government can always, in its wisdom, impose a windfall gains tax if the gains are different from what was expected earlier. But then, there is always the moral hazard of people not knowing that something will fall on their shoulders at a later stage. To that extent, it is not a good concept.
Ashish Khetan is Editor, Investigations with Tehelka.