FE Editorial : KG-D6 solutions
The Financial Express: Oct 19 2012, 20:53 IST
While the dispute between the government and Reliance Industries Limited (RIL) has deepened with the government threatening to hold back approvals for RIL’s KG Basin development plans if the latter didn’t agree to an audit by the CAG, the oil regulator has come up with some good solutions on ensuring we don’t have a repeat of this in future oil contracts. Since, in the RIL case, the original dispute is over the allegations that RIL has gold-plated its costs (and this lowers the profit-share of the government), the Directorate General of Hydrocarbon’s chief has suggested that the government move to revenue-share contracts in future as opposed to the current ones where operators like RIL are first allowed to recover their costs and then share the profits with the government. If the sharing is based on easy-to-monitor topline revenues, this means the government (or the CAG for that matter) won’t be worried about what an RIL spends on capex or opex—in other words, firms will be free to run their business without undue interference from the government. It’s not clear if the government will accept the DGH solution, but the Prime Minister’s Economic Advisory Council is also studying the matter and its report is expected in the next few weeks. Changing from the current model to a revenue-share one is simple maths. If a firm offers to share 30% of profits with the government while bidding and the firm has a 10% profit margin, under the new model, it will bid
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