Budget 2021

Govt must share financial risks of natural resources exploration

Our Bureau New Delhi | Updated on July 09, 2014

Reward-sharing too: Risk-sharing can protect the Government’s interests in case of a windfall arising from a price surge

Could spell higher revenues for Centre

Pricing of natural resources has become a contentious issue in the recent past and continues to bog down policy-makers even today.

The Economic Survey 2013-14, while pitching for parity in costs between domestically produced natural resources and world prices, talks about making the Government a partner in exploration risk-sharing.

“In the field of natural resources, where there is global trading, appropriate incentives for exploration and extraction in India are obtained when there is pricing parity with the world price, excluding transport costs or taxes,” said the Survey, which is seen as an indicator of the Government’s outlook on various policy issues.

“If firms obtain lower revenue per unit of mineral extracted in India, there will be under-investment in exploration and extraction.”

Revenue share mechanism

It added the auction-based procurement or fixed-price procurement has run into many difficulties, which can be avoided by using a percentage revenue share for the Government, under which the Government becomes a partner in sharing the risks of exploration, extraction and world price fluctuations, alongside private firms.

India’s oil and gas sector has been witness to a debate on whether the Government should continue with the current production sharing contracts that allowed the cost recovery concept — where a contractor first recovers its expenditure before sharing profit with the Government — or a production-linked system — which is said to be more transparent and involves less intervention in routine oil exploration activities.

A regime shift may not directly result in more revenues for the Government but will ensure that, as the contractor earns more, the Government gets progressively higher revenue.

Besides, it will also safeguard Government interests in case of a windfall arising from a price surge or a surprise geological find.

The Survey also makes a strong case for removing pricing distortions perceived by consumers, such as administered pricing for coal.

These fixed prices are dulling the market response, which is reduced consumption in response to higher prices, and reducing the flexibility of the market economy, it says.

Published on July 09, 2014

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