Opinion Where the CAG presumes too much
A number was always going to trigger loss generating political reactions
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A number was always going to trigger loss generating political reactions
The law of unintended consequence. I am sure the CAG did not intend for the country to suffer the presumptive loss that its report on coal mining has generated. An estimate of the loss caused by the disruption in Parliament,the delays in the legislation of important economic reform bills,a further volley of international bad press and the deepened loss of investor confidence in political and economic governance,is clearly not possible but it will be significant. The CAG has inter alia the responsibility to audit the accounts of the exchequer and to evaluate whether the collection and allocation of revenue has been optimised. Towards that objective,it has the right to subject policy to audit scrutiny. The CAG does not however have the mandate to make policy and/ or to supervene in its implementation. It has therefore done right by bringing to the notice of Parliament the likelihood that the delays in the implementation of the recommended policy to allocate coal blocks through competitive bidding have led to potentially a revenue loss. It has done wrong by putting a number to this loss. The reason is that it is not sensible to try and fix the value of natural resources. Also by citing the headline grabbing number of Rs 1,86,000 crore,which by its own admission is an estimate based on averages,it has opened a Pandoras box.
Exploration and production of oil,gas and coal confront three uncertainties and one twist. The uncertainty that a particular geology contains hydrocarbons; the uncertainty that the resources can be located and the uncertainty that once located the resources can be sustainably and commercially produced. The twist is the price. Coal confronts less uncertainty than oil or gas because it is more easily identifiable and the production process is less complex. It faces,however,a comparable price twist. This is because,like oil or gas,it is an essential fuel and its price is determined by the government. Thus,for instance,the price of coal sold by Coal India to merchant power plants is set below market levels because the State Electricity Boards are financially distressed and cannot afford market-based power tariffs. On the other hand,the price to manufacturers like steel is based on market forces. Similarly,the price of gas currently produced from the KG D6 basin by the Reliance-BP consortium is fixed at US$4.20/ mmBtu. This is well below the import parity price of around US$12/ mmBtu. The reason is to provide affordable fuel for power generation and fertiliser production.
The consequence of such price decisions may well result in a revenue loss for the national exchequer. This could be partly because of the price discount and partly the negative ripple effects. The production of gas from the KG D6 basin has for instance slumped from the projected 60 mmscmd to the current 30 mmscmd. The reasons given are technical. But it could be speculated that the producers have slowed production because the administered price has pushed the operation below the threshold of commerciality and/ or created an incentive to keep the molecules underground. After all,why produce when the value of the resource in the reservoir is twice that of bringing it to the surface,especially if it is expected that in time the government will align the prices to the market? The loss from the KG basin production decline will be borne disproportionately by the government as,under the terms of the production-sharing contract,the government is the greatest beneficiary of the incremental revenues.
The CAG would,of course,be well within its mandate to inform Parliament of this potential revenue loss. But it would be stepping outside its domain of expertise if it sought to fix a number to this loss. The calculation would be complex and there would be risk of misinterpretation and misrepresentation. This,because,first,the value of a natural resource depends on its end use; second,there would be presumptive gains accruing to the beneficiaries of the discounted price that would also have to be calculated and,third,the nuance that production delays do not necessarily lead to a loss in value would have to be captured. The finance minister made a similar point when he argued that losses (or gains) occur as and when the resource is monetised. The CAG would also be diluting its contribution if,in preparing its reports,it totally ignored the political reality. The fact that a number,rather than the methodology of its calculation,was always going to trigger potentially loss generating political reactions.
On this latter point,it is instructive to note that last week the CAG slammed ONGC for sluggish exploration activity and slow growth in reserves accretion. It did not however endeavour to calculate the presumptive loss. Had it done so,I dare say it would have provided further grist to the political mill. Given that there has been no accompanying hue and cry,the outcome of this report should be positive. If only the CAG had adopted a similar approach for the coal blocks.
There is the suggestion that the coal blocks were handed over in return for backhanders. The CBI is looking into this charge and if indeed it is established that the process was corrupted the parties should be prosecuted. But such an investigation must not blur the larger issue. The government has the prerogative to determine how and when Indias natural resource will be developed. The CAG can inform Parliament if the rules and procedures fail to secure an effective check of the assessment,collection and proper allocation of revenue (Section 16 of the CAG Act,1971). But as a constitutional body it has a responsibility to ensure that its actions do not have the unintended effect of causing further losses.
The writer is chairman,Shell Group of Companies in India. Views are personal
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