Conflict of interest

Government as a regulator, producer and user benefits neither the shareholders of the seller nor those of the consumer

By Mohan Sule
The countdown has begun for a decision on pricing of natural gas. The UPA II government had almost doubled the price to US$ 8 per million British thermal unit effective April. The Lok Sabha election in May delayed the implementation. The NDA government end June decided to put off the matter by three months. The outcome will affect the shareholders of Reliance Industries, ONGC and Cairn India as well as those of user industries including power generators, fertilizer producers and refiners making cooking gas. An upward revision could fuel a rally in RIL and, effectively, light up the equity market as the heavyweight has been a laggard compared with other constituents of the benchmark. In the three months to 5 September 2014, the broad market gained nearly 8% compared with RIL’s loss of more than 5%. Importantly, the government is readying to issue shares of ONGC. A favourable verdict can fetch attractive valuation for the PSU. The picture will be opposite for end users. Increase in prices will drive up costs. Inflation is an overriding theme for the electorate, which has generally been satisfied with the performance of the Narendra Modi government after 100 days in office. Yet any reluctance to bump up prices could restrict supplies and slow down GDP growth. No wonder there is anxiety on how the drama unfolds in the next few days. There is certainty that prices will be hiked. The question is by how much and what will be the formula for future.

Pricing of natural gas is one of the many instances that have brought to the fore the divergence of interest of the sellers and the buyers. The coal-scam drama, which refuses to fade out, is a prominent case of cross-connection. The government is the largest producer (Coal India) and also a major consumer (NTPC and Sail, for instance) of coal. It could afford to keep prices low as long as CIL was not listed. The largest foreign portfolio investor resorted to legal action against the government for not allowing prices to reflect demand. Revision in power tariff due to increase in prices of coal is resisted by bankrupt state-owned discoms. The entry of private sector to boost supply has created more problems than being a solution due to the arbitrary allocation of coal blocks. The ensuing fallout was policy paralysis, affecting the producers as well as the users. The result is that neither CIL nor power generators are getting the discounting that companies in an industry with vast untapped potential should be attracting. Sugar is another example. The minimum support prices to sugarcane farmers, a crucial segment of the electorate, is relentlessly increased despite protests from sugar producers, who have to sell a portion of the output at controlled prices. Moreover, exports are controlled. On the other side, government-owned banks routinely complain about piling debts of sugar mills. As a via media, mixing of ethanol, a byproduct of sugar, in petrol has been encouraged to ease the cash-flow problem of sugar producers and reduce the influence of crude oil on fuel prices. This arrangement will ease some of the pain of sugar manufacturers but is not a substitute for withdrawal of government presence from the sector. As such, sugar stocks languish on the trading floor despite India being one of the largest consumers.

The norm is for interested parties to recuse from situations involving conflict of interest. For example, the Telecom Regulatory Authority of India, an autonomous body, oversees the industry, despite having two PSU operators, with the entry of private services providers. Similarly, the Central Electricity Regulatory Commission regulates power tariff. However, going by the valuation of BSNL and MTNL, loosening of control by the government does not necessarily benefit the shareholders of PSUs that had been monopolies when they were listed. Smaller private banks by assets enjoy better discounting than some of the biggest PSU banks due to more flexibility. In that sense, the government failed to mention reforms as a risk factor. Perhaps the belief was that the private sector would remain fringe players in view of the depth of coverage of the government-owned entities. Later events have shown that the margin counts more than volumes. The need for a third-party arbitrator, therefore, is to ensure the economy grows not due to higher pricing but because of consumption, which calls for cost-effective operations, thereby, benefiting the shareholders of both the producer and the users. Institutional investors have to become active to nudge the government to stop disturbing the pricing equilibrium. Otherwise, there will be only IPOs and FPOs from e-malls, food chains, theme parks and multiplexes.