Contracts like Reliance’s KG-D6 are designed to benefit private players:
After the CAG, the high-level Ashok Chawla Committee has criticised the system of Production Sharing Contracts like the one Reliance Industries signed for the gas-rich KG-D6 block, saying these contracts are designed to benefit private players at the government’s expense.
Reliance bagged the KG-DWN-98/3 block in the first round of NELP, which was pioneered by the NDA government, and signed the PSC for the block in 2000.
The PSCs provides for the operator to recover all capital and operating expenditure become the government’s share of profit from a field rises to as high as 85 per cent. This system gives “incentive to (an operator to) increase his investment, or front-end his work plan” in order to see that the threshold where government’s profit take rises rapidly is not reached, the Chawla panel said in its report.
At the heart of the PSC lies the ‘investment multiple’, the ratio of net cash income to exploration and development costs. The investment multiple defines the share of profits that go to the government. The higher the expenditure, the lower the IM and hence, the government’s share of profit. Citing the example of KG-D6, the Chawla panel said, “The relationship between the pre-tax investment multiple (PTIM) and the share of contractor profit petroleum changes dramatically once the PTIM crosses 2.5, with the government’s share increasing from 28 per cent to 85 per cent.” “It is useful to remember that this schedule is bid by the operator and not determined by the government,” it said. “A high share of some PTIM will help to win the bid, depending on the financial model of evaluation used, but it does raise concerns that such a radical change would provide very strong incentives for any operator to adopt all investment and strategies possible to ensure that the PTIM stays within the 2.5 limit,” the panel report said. The CAG, in a draft report on its audit of the KG-D6 accounts, had also criticised the current PSC structure saying it was “unsuitable for protecting the government of India’s financial interests.
CAG saleuthes after prolonged examination could not find anything to substantiate their claim of Gold Plating of cost by Reliance Industries in the flag ship project of the Company.
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