15th September 2011

Prabir Purkayastha

The CAG Report on the audit of the Production Sharing Contracts for the on-shore and off-shore oil and gas blocks once again shows the unholy nexus between the UPA and big capital in the country. The CAG has shown how the Directorate General of Hydrocarbons (DGH) and the Ministry of Petroleum and Natural Gas (MoPNG) connived with Reliance Industries and other private operators against the interests of the people. Some of the salient issues brought out by CAG are:

• Private operators grossly inflating the capital costs for equipment to claim a much higher share of the profit petroleum

• In procurement of equipment, a number of one party financial bids, major revision of scope/quantities/specifications, substantial variation in order quantities, post bid modifications in major high value contracts

• Allowing the whole 7645 sq km exploration area to be retained by Reliance instead of of their entitlement of retaining only 5% of this area after 2009 in complete violation of the Production Sharing Contract.

There has been some criticism that CAG's draft report has been diluted in the final report. This is not borne out by facts. CAG's language might become a little softer, but its conclusions remain essentially unchanged.

A major part of the report is devoted to the KG Basin – KG-DWN-98/3 deep-water Block, also known as KG D-6 Block. Reliance has argued that the increase of capital cost from $2.4 billion to $8.8 billion was for augmenting gas field output from 40 mmscmd to 80 mmscmd. The CAG Report now makes clear that the increase from $2.4 billion to $5.2 billion took place for the first phase itself, where no augmentation of capacity was involved.

It is important to note that the evaluation of bids that were made for the award of of the exploration blocks is linked to the financial packages that the bidders offered. As the profit share and other measures promised by the bidders in the financial package are linked to capital costs, this huge change in capital costs makes nonsense of the bidding procedure for awarding of blocks.

Worse is the timing of the approvals. The original cost estimates of $2.4 billion was a part of the Initial Development Plan (IDP) submitted by Reliance in May 2004. In October 2006, Reliance submitted an Addendum to the IDP for an upward revision of the costs to $ 5.2 billion for the 1^st phase and another $ 3.6 billion for the second phase – a whopping increase of $6.2 billion over the original estimate. The Management Committee which had 50% representation from the Government cleared this increase by December 12^th 2006 – in a period of less than 2 months!

In a single party financial bid, a contract of $ 1.1 billion was given to Aker Floating Production, a part of the Aker group for a 10-year lease on a Floating Production and Storage and Offloading (FPSO) Vessel Another contract of $200 million for O&M services was also given to Aker for the same FPSO. This was originally budgeted for $300 million. All other bidders were disqualified and only Aker's financial bid was opened.

CAG has also pointed out the following with respect to the Aker's above contract:

• Aker did not meet the requirements of the specifications with respect to its experience in such contracts

• Its financial bid was not signed and should not have been considered

• It was allowed to make post technical bid modifications – an opportunity not given to the other bidders

• Aker had brought to two oil tankers for $55 million and the conversion cost of the two tankers to FPSO by Jurong Shipyard was $ 88 million.

The CAG Report has pointed out 8 contracts were given to Aker group out of 10 single party bids on what appears prima facie to be sweet-heart deals. CAG has rejected Reliance's claims that its procurement procedures cannot be subjected to CAG audit and stated that it is going to examine these issues in greater detail in a subsequent audit.

The issue of high capital cost is not merely that of skimming off the top by incurring fictitious or inflated capital expenditure. It changes the revenue share between the private party and the Government completely. The Investment Multiple to which profits of GoI and private parties are indexed, is the ratio of the cumulative net cash income to the cumulative exploration and development costs – it is a measure of the capital intensive nature of the project. CAG has pointed out, “The slabs for profit sharing are so designed that more capital expensive the project (i.e. lower IM), the lower the GoI's share of the “profit petroleum” (which could be as low as 5-10%). Contrarily, the higher the IM (i.e. less capital intensive vis-a-vis the income) higher the GOI's share of the profit petroleum (which could be as high as 85%).”

Recent press reports indicate that Reliance's basis of capital cost increase – augmenting gas flow from 40 mmscmd to 80 mmscmd has fallen far short of its promise – the gas output is now well below 60 mmscmd. The Solicitor General has given his opinion – as per news reports – that GoI's profit share should not be reduced due to this capital expenditure as prima facie this is not a valid expenditure.

The CAG report has also given a chart of the receipts of the GoI from royalties and Profit Petroleum from 2005-06 to 2010-2011. It shows that while royalties have been rising steadily showing an increase in oil production from the Production Sharing Contracts, the receipt from profit petroleum falls abruptly from Rs. 5,926 crore in 2009-2010 to Rs. 3,610 in 2010-2011. This is in spite of an increase of royalties showing clearly that output in this period has physically increased. While CAG has given no explanation for this, it is clear that all is not well with the NELP and the Production Sharing Contracts with private parties.

In November 2009, preliminary investigations by the CBI had found evidence of “gross abuse and misuse of public office” by V K Sibal, the then Director General of DGH. This had been informed to the Petroleum Ministry and to CVC. Numerous links had been found between Sibal and Reliance. The CBI enquiry remains stalled, very much in the telecom 2G mode, showing that Reliance tentacles in the Government go far beyond Sibal.

Apart from the major scam of gold-plating of contracts, the other major issue is that DGH and Ministry connived with Reliance so that it could “hoard” the entire exploration area as discovery area. As per the Production Sharing Contract, Reliance was supposed to vacate 25% of the exploration area in the first phase, 50% in the second phase and all areas in which it had not sunk wells or developed oil wells in the third phase. Instead, Reliance never relinquished any of the areas and has been allowed to keep all 100% of the 7645 sq km of the exploration area in complete violation of the contract.

If any company takes a particular area for exploration, it must finish the exploration within a certain time period or release it back to Government for awarding it to others. It cannot sit on top of an exploration area and hoard it indefinitely for the future. That is why the clause of progressive release of exploration areas back to the Government.

Normally, when gas or oil is struck in an area, its nearby areas are also likely to have hydrocarbon deposits. The value of such areas would therefore go up for any subsequent auction. Hoarding such areas means that though the party considered has not spent the money it was required for exploration, it is still allowed to retain this area and explore it at leisure. The entire purpose of NELP of time bound and expeditious development of India's hydrocarbon resources gets defeated if private parties are allowed to retain exploration areas indefinitely without doing any development work.

The Panna Mukta oilfield and the one held by Cairn Energy shows similar features to the KG DWN 98/3 Block issues. This brings into question the entire New Exploration Policy and the way it is being implemented by MoPNG and DGH. CAG report has also brought how Reliance and other contractors have flouted various contract terms and conditions, how it has incurred expenditure without approvals, did not submit required plans and documents, etc. The major issues it has raised is the way that the Government has supervised the production sharing contracts. It has also suggested that a far simpler scheme would be to peg Government's take simply on the output – this way no complex mechanism needs to be put in place for monitoring the contracts and the purchases. For existing contracts, where a profit sharing arrangement is in place, the Government has to exercise far greater vigilance than it has shown till now to protects its revenues.

Both DGH and PoNG have clearly connived with Reliance and the private operators. CAG has also made an observation that DGH has to separate its two roles – one as a technical advisor to the MoPNG the other is its regulatory role. The key issue is however not that of separation of roles as much as playing the role it was designed to do – safeguard the interests of the people in the production sharing contracts. This, it has clearly failed to do.

Various other criticisms have been mounted against CAG – one by Congress MP's in Parliament and echoed by others outside – that CAG is going beyond its role of audit into policies. In this case, CAG has examined only those which pertain to GoI's revenues share being reduced. Unfortunately, today policies are being crafted in a way to suit private interests and against public good. Both 2G spectrum allocation and the NELP are policies which have benefited private parties to the detriment of public good.

There are two sets of issues that need to be addressed urgently. One is that immediate measures need to be taken to vis-a-vis Reliance and other private parties. These include:

• Taking back 95% of the exploration area retained by Reliance in gross violation of the Production Sharing Contract

• Imposing penalties on Reliance and other private parties for gold-plating contracts

• Ensuring that such increase is considered invalid expenditure such that GoI's share of the profit petroleum is not reduced

For the Government, the following steps need to be taken so that a repeat of this does not take place again:

• Immediate prosecution of Sibal and other concerned officials

• Investigation of the role of Ministry of Petroleum and the erstwhile Petroleum Minister in this

• Strengthening the role of the Government in the Management Committee for the existing contracts

• Change in Production Sharing Contracts to prevent such misuse

• Review of the NELP

18th August 2011

Amit Sengupta

WHILE considerable attention has been focused on the World Trade Organisation (WTO), and the binding trade rules that it imposes on member countries, there is a shift towards much of trade negotiations being conducted bilaterally and with regional blocks. These regional and bilateral trade agreements are an increasingly important part of the governance of global trade, and consequently have large impacts on the health sector across the world. From 1990 to 2007, the number of such agreements notified to the GATT or the WTO increased from 20 to 159. At present, over 250 regional and bilateral trade agreements govern more than 30 per cent of world trade.

A major driver of the proliferations of regional and bilateral trade agreements has been the perceived failure of the WTO to govern global trade. This, in large measure, has been a consequence of the intransigence of the powerful trading blocs (the US, EU, Japan, etc) to accommodate the legitimate concerns of developing nations and also because of differences between the EU and the US in some major areas (especially related to agricultural subsidies). As a result, ever since the WTO ministerial meeting in 1999 in Seattle, virtually every WTO ministerial meeting has concluded without a clear road map. The other driver of the new bilateral and regional agreements is the perception in developed countries that they need to go beyond the WTO agreement and ratchet up the demand for binding commitments from developing countries.

HOW THE US & THE EU VIEW FTAs

The history of the negotiations in GATT (General Agreement on Trade and Tariff – the precursor to the WTO), which led to the formation of the WTO, shows how the US has always combined negotiations in multilateral and bilateral fora, in order to ensure that their writ finally prevails.  For example, during the 1980s the US set the scene for the inclusion of an agreement on intellectual property in the Uruguay Round of GATT negotiations (1986 – 1994) through a series of strategic bilateral negotiations on intellectual property with countries like Brazil, Singapore and South Korea.  The purpose of these was to break the resistance of those developing countries that were leading the opposition to the US agenda on intellectual property within the Uruguay Round of negotiations, as well as to set precedents for the kind of standards that the US wanted to see included in a multilateral agreement (in the WTO) on intellectual property.

In the US, the Trade Promotion Authority Act of 2002 directs the USTR (US trade representative) to seek to ensure “that the provisions of any  multilateral or bilateral trade agreement governing  intellectual property rights that is entered into by the  United States reflect[s] a standard of protection  similar to that found in United States law”. Clearly, thus, what is demanded of by the US in FTAs as regards IPR is informed by the domestic laws of the US and not by the internationally negotiated TRIPS Agreement.

The EU has been no less explicit regarding its intentions. In October 2006 the EU commission launched its new trade policy called “Global Europe – competing in the world”. The policy is designed to increase competitiveness of European corporations, with an evocative slogan coined by then EU trade commissioner, Peter Mandelson: ‘Big in Europe, big in the world’.

As part of this strategy the EU’s trade policy plans to aggressively advance issues which they have not been able to pursue adequately in the multilateral forum of the WTO. The new policy foregrounds five major areas :

• Market access for European business through elimination of tariff and non-tariff barriers;
• he so-called Singapore issues (investment, government procurement, competition and trade facilitation) which were rejected in the Cancun WTO ministerial meeting of the WTO in 2003 by a combined front put up by governments of developing countries;
• intellectual property rights (IPR),
• the service sector which is a stronghold of the EU economy;
• reference to sustainable development including rhetoric about social and environmental standards, core labour rights and decent work (which are euphemisms used to put at a disadvantage enterprises located in developing countries).

CO-EXISTENCE OF FTA & WTO

There is a curious story which explains how FTAs and the WTO exist side by side. The cornerstone of the WTO is the most-favoured-nation (MFN) treatment among the member-countries. This clause means that member countries of the WTO cannot discriminate in their treatment of other member countries, ie, in any WTO member country, all WTO member countries (operating through corporations, etc located within their territories) would be provided with the same facilities and be subject to the same rules. Logically, this should bar all FTAs, because these agreements can have provisions that are different from the WTO and thus do discriminate between countries who are part of an FTA and those who are not (even if both sets are members of the WTO). The catch lies in the fact that when the WTO agreement was signed in 1994, many countries were already bound by bilateral agreements that eliminated customs related regulations between contracting parties. Thus the WTO agreement issued a waiver on “custom unions’, taking recourse to Article 24 (8b) of GATT), which says: “A free-trade area shall be understood to mean a group of two or more customs territories in which the duties and other restrictive regulations of commerce (…) are eliminated on substantially all the trade between the constituent territories in products originating in such territories.”

While FTAs today use the cover of this waiver, substantive parts of almost all FTAs have very little to do with customs regulations, but deal with other aspects of global trade (for example Intellectual Property Rights are not part of customs related issues).

IMPACT ON HEALTH

The TRIPS agreement, under the WTO, sets minimum standards for IP protection that all member states are required to adhere to. There were however partial waivers for developing and least developed countries. Developing countries (such as India, Brazil, Thailand, etc) were allowed a transition period of 10 years and they were required to comply with the TRIPS agreement only by 2005. LDCs had a further grace period and are required to comply only by 2013 (2016 in the case of pharmaceuticals). However the FTAs incorporate provisions that demand higher standards of IP protection, not contained in the TRIPS agreement. Thus developing countries stand to lose the limited public health safeguards (also called flexibilities) that are contained in the TRIPS agreement. Some of the key areas of concern in FTAs, in this regard are as follows:

The TRIPS agreement requires that a 20 year term be provided for a patent that is granted on any product (viz, a new medicine). Many FTAs contain provisions that provide for extension of the patent term beyond the 20 years mandated by TRIPS, in cases of what are called “delays” in granting a patent. Operationally, such provisions extend patent terms (even when TRIPS does not require this) beyond 20 years and delay the introduction of cheaper generic medicines.

LIMITATIONS ON COMPULSORY LICENSING:

The compulsory licensing provision is a key safeguard in the TRIPS agreement. It allows countries to draft laws that allow generic manufacturers to manufacture and sell medicines, even if the medicines are under patent protection. Countries have the freedom to choose the grounds for such licenses (for generic manufacture of patented drugs) to be issued. This freedom available to countries was specifically reiterated in the Doha Declaration in 2001, after the WTO ministerial meeting. Many countries have now started using this provision to make available cheaper generic versions of patented medicines. However, provisions in many FTAs restrict the grounds and the situations in which a compulsory license can be issued.

Many FTAs include data exclusivity, though it is not a TRIPS requirement. Data exclusivity refers to a practice whereby, for a fixed period of time (usually 5-10 years), drug regulatory authorities do not allow the data that the originator company files to get marketing approval, to be used to register a generic version of the same medicine. It means that if a patent holder gets marketing approval for a drug based on data of clinical trials, the same data cannot be used to register a drug by an Indian company. In practice this provides a patent like monopoly, as the alternative available to generic companies is to duplicate expensive clinical trials in order to get marketing approval. Data exclusivity allows monopoly powers to companies even in situations where a country is not required to provide patent protection.

OTHER AREAS OF  CONCERN

Government procurement: The EU has been prominent in pushing for an agreement on ‘government procurement’ in FTAs. This was one of the ‘Singapore issues’ that were rejected by developing countries in the Cancun ministerial meeting of the WTO in 2003. In a Government Procurement Agreement (GPA) whatever the government of a member country of a FTA procures, all other members have equal right to bid for tenders. So, for example, in a FTA with the EU and a developing country where a GPA is signed, the latter will have to allow companies to bid for contracts for all government procurements. This could mean that when tenders are floated to procure medicines for public health facilities, companies based in the EU would have the right to bid for such contracts. Such a situation can also affect the ability of governments to determine how food for public distribution systems (PDS) would be procured.

Appropriation Clause in Investment Chapters: The devil, as they say, lies in the detail. Health activists often miss out on a key area of concern in FTAs that are buried in the ‘investment chapter’ (FTAs have different chapters dealing with different areas, such as IP, manufacturing, services, investment, agriculture, etc.) A major area of concern related to investment chapters in most FTAs is that they allow private companies to file cases against governments. So they subject countries to the risk of litigation by corporations from or based in another country. This might be based on a company’s objections to the host government’s environmental, health, social or economic policies, if these are seen to interfere with the company’s ‘right’ to profit. The biggest issues relate to the provisions for compensation for “expropriation”, which can be direct (as in cases of nationalisation) or indirect (policies or actions that impinge on the profitability of the company concerned).

These are not imagined consequences. For example, in November 2000 the multinational water infrastructure company AdT filed for arbitration and sought $25 million from the Bolivian government as compensation for its lost investment including expected profits, after the government was forced to reverse a disastrous water privatisation attempt in Cochabamba. Similarly, in 2010 Philip Morris International -- the world’s second largest cigarette company and manufacturer of brands such as Marlboro and Red & White sued the Uruguayan government for its regulation that requires tobacco companies to cover 80 per cent of their cigarette packs with pictorial tobacco-warning labels.

Liberalisation of Health Services: The General Agreement on Trade in Services GATS) under the WTO is negotiated through a system where countries have the option to open areas of their service sector (water services, education, health, banking, insurance, tourism, etc) based on their own requirements. So, countries can choose not to open up certain areas as well. In this, the GATS agreement is different from other agreements in the WTO that require similar degrees of compliance from all member countries. However, FTAs can try to get around this by providing for opening up the service sector.

For developing countries with failing health systems, foreign investment may seem an attractive source of capital and medical technology. Yet involvement of the foreign private sector in health care has the potential to marginalise the poor even further. Companies seek markets in which they can be assured sufficient returns, and this typically concentrates investment in more affluent areas. This practice of ‘cream skimming’ by the private sector is already familiar in the case of private health insurance, where insurance companies typically favour the healthy and wealthy over high-risk customers, excluding the latter by means of prohibitive premiums.

What we have discussed above is the proverbial tip of the iceberg. Many other sectors, including agriculture, manufacturing and financial sectors are affected by onerous clauses in various FTAs. The FTAs, like the WTO, unjustly impact important public interest laws, regulations, policies and our import duty structure in ways that virtually touch all aspects of our lives.  However, FTAs are worse than the WTO because they demand much more. They create legally binding obligations that impact on peoples’ livelihoods. They impact our ability to access affordable healthcare, medicines, education, and municipal services such as water and sanitation, etc.

Clearly, FTAs today constitute perhaps an even larger threat than the WTO agreement of 1994. Unfortunately all FTAs are negotiated in absolute secrecy. Opponents of FTAs have scant opportunity to examine negotiating texts before FTAs are signed. The situation is, thus, worse than when the WTO agreement was being signed – when the gaze of the entire world was on what was being negotiated. Now, brick by brick, developing countries are being forced to sign away even the limited safeguards that they could secure through the WTO agreement. Recollect the way the India-ASEAN FTA was signed without even state governments being consulted (the FTA will have special impact on Kerala’s economy, but the Kerala government was kept totally in the dark, till the end). We see the unfolding of a similar situation in case of the negotiations leading up to the Indo-EU FTA. While the negotiations, it is understood, are to be concluded this year, the nation and the country’s parliament have little information about what exactly the government of the day proposes to negotiate away. Further, the government is in the process of either negotiating, expanding or developing at least 24 different FTAs, including one with Japan, negotiations for which are at an advanced stage.

Prabir Purkayastha

16th May 2011

THE 2G scam has shown how scarce national resources like the spectrum have been given at throw away prices to big capital. In this game, there are not only older players such as Reliance, Unitech and Tatas, but also newer players closely linked to certain political parties and figures. DB Realty and the close proximity of Shahid Balwa with Kanimozhi and Sharad Pawar has been doing the rounds for quite some time and is now becoming public.

The 2G scam did not end with just the allotment of the spectrum. SWAN, Reliance and others had very little desire to invest in infrastructure. It is now confirmed by CAG that the investment in infrastructure by either SWAN or Unitech before selling their shares was minimal. So how did they manage to get subscribers and start services?

This is where Raja came in again to help the 'friendly' companies to whom he had awarded licenses illegally. He issued BSNL, the state owned telecom utility, to provide 'roaming' services to these companies who had no infrastructure. This roaming is not the usual one of extending services to customers of other companies when they are outside their licensed area, but providing such roaming service even within the licensed area of the company. This meant that without putting up any cells or towers, these companies could provide services by riding on BSNL's infrastructure and pretending it is some kind of roaming service. This was the result of a direct order to BSNL from the Department of Telecom under Raja's aegis. No other telecom company was asked to provide such services to the new entrants.

USING BSNL'S RESOURCES TO ITS DETRIMENT

It is unheard of in any infrastructure services for one company to provide infrastructure to another. There has been talk of sharing towers – common towers can be provided on which each company could mount its own cells, but even here this has been more in the realm of discussions than actual practice. However, providing all infrastructure for a competitor and pretend that it is some kind of roaming service is obviously using one company's resources to help a competitor company. Obviously, this was using BSNL's resources to its detriment to help subsidise the operations of companies such as Reliance, SWAN and others.

One of the reasons that Unitech and SWAN could sell their shares at such high prices was because they could also claim they had started services and acquired subscribers, all piggy backing on BSNL. The BSNL employees' unions had raised these issues a number of times earlier with the prime minister and the minister, but to no avail. Hopefully, the CBI will take cognisance of such additional measures that Raja took to help companies such as SWAN and others to make the 2G license even more valuable. While selling spectrum cheap was transferring peoples' resources to big capital, using BSNL to subsidise other telecom companies is to make BSNL increasingly less profitable and ultimately sick. In this way, BSNL, which at one time had a valuation of lakhs of crores will soon be seen as loss making and to be sold at a pittance. This is the trajectory the current government was following under Raja. It remains to be seen whether Kapil Sibal would be any different on this score.

Raja did not only ask BSNL to give its infrastructure to other telecom companies. Over the last few years, he ensured that BSNL could not place orders for new equipment and get new customers. In 2006, Airtel and BSNL were running neck and neck with a subscriber base of around 20 million lines each. After Raja took over, he first threatened to cancel the tender for additional 45.5 million lines floated by BSNL under the previous minister, Dayanidhi Maran. After the BSNL employees took to the streets and the Left took this issue up, he reluctantly cleared the order but by slashing it to 50 per cent. Not surprisingly, BSNL could add only 30 million lines from 2007 to 2010 while Airtel added another 90 million in the same period. In the most lucrative circles – Andhra Pradesh, Tamilnadu, Gujarat, Maharashtra, etc, in the country, BSNL could not add any new subscriber as it had no additional GSM equipment. Today, BSNL is falling behind in competition not because it lacks the capability but because of a deliberate policy followed by the department of telecom and the UPA government.

EXTENSIVE LOOT OF PUBLIC EXCHEQUER

There have been other restrictions on BSNL for procuring equipment. While BSNL has been barred from procuring Chinese equipment for security reasons, other private operators have not been so barred. A further security instruction issued by the home ministry and the department of telecom was that all source code for telecom equipment should be given to BSNL, again for security reasons. The only equipment manufacturers willing to abide by this condition were the Chinese. The result – BSNL cannot procure equipment from any party and yet satisfy the two 'security' requirements laid down by the government. These restrictions apply only to BSNL and no other telecom player.

One can go into great details of how many additional measures have been taken over the last decade to convert BSNL from a company that could fund its entire expansion from virtually its internal resources to today, where BSNL is likely to be a loss making company.

While the mobile story has been one of denying BSNL equipment so that they could not expand at the rate required, the fixed line business is even worse. Here, the private players are not willing to go into rural and loss making areas, offering services to only commercial and high revenue areas. The private operators were legally bound under their license terms to give service on demand to anybody in their licensed areas and also provide rural telephony. People may have forgotten but the induction of private players in fixed line services was supposedly for providing rural connectivity. Even today, the private players routinely pay token fines and do not provide services to loss making and rural areas. BSNL is the only telecom company that provides services to such areas and customers.

Initially, the TRAI had considered that BSNL should get an Access Deficit Charge as it is the only company servicing such customers. Over a period of time, this was whittled down and finally merged with Universal Service Obligation fund. Since this levy is paid by all telecom companies, this did not help BSNL. Effectively, BSNL was providing rural services and also paying from their own USO levy for the same. Worse, with cellular operators also being entitled to draw from USO fund, BSNL is in fact now paying out more than its receiving, while being the only fixed line company providing services to rural and low paying areas. Incidentally, I am not aware of any country where USO fund is being also given to cellular operators.

The question before the people is this. If BSNL is allowed to become loss-making and finally privatised, will the rural and low paying subscribers get any service or new connection? If the long-term future of telecom is in Internet connectivity, will not the physical fixed lines be the backbone of such an Internet infrastructure? Allowing BSNL to be run down in this way, is not the government frittering away valuable public resource?

The mode of operations where a state owned company subsidises its competition is not restricted to BSNL alone. The same modus operandi is visible in the case of Indian Airlines/Air India. Here also, the pilots have charged that Air India management and the civil  aviation ministry has worked in the interest of private carriers by Air India giving away lucrative routes, reducing number of flights on major trunk routes, taking up loss making routes. Initially, they were also asked to 'share' their resources with other private parties in the same BSNL mode. The Radia tapes indicate that Praful Patel could have major stakes in one of the private airlines, which has also been favoured in various ways by the ministry of civil aviation.

The loot of public exchequer today is far more extensive than what has come out in public. While Raja may have got caught with his hand in the till on the 2G issue, there are numerous other cases where he has got way free.

For the Manmohan Singh government, all this is a public relations issue. It is not that scarce national resources are being transfered to the capitalist class. For him and his ministers, it is how to dress all this up in a way that its image is not hurt in spite of the continuing loot. That is why, we have a senior group of ministers carrying out a public relations exercise each day, while no effort is made to stop the loot. The image, not the reality, is what concerns this government. This is the tragedy for the people and the country.

15th July 2010

D. Raghunandan

The UPA government is once again attempting to completely open up the retail sector to foreign direct investment including, possibly, 100 percent FDI in organized multi-brand retail or supermarket chains. The Department of Industrial Policy and Promotion has issued a discussion paper on this subject, significantly without suggesting any upper limit on FDI. Currently, FDI is permitted up to 26 percent under the automatic route in wholesale so-called cash-and-carry operations and up to 51 percent with government approval in single-brand stores such as Nike shoes, Levi jeans or Calvin Klein readymades. These measures have been welcomed by industry, and seen by critics as the thin end of the wedge. Opening up the retail sector in India to foreign players has been a gradual process but the end-goal has always been clear, namely the unfettered entry into India of global supermarket chain stores such as Wal-Mart of the US, Carrefour of France, Marks & Spencer and Tesco of UK, Shoprite of South Africa and so on, all of whom have already established a substantial presence in India. The Indian retail market, with its burgeoning middle-class with growing purchasing power has, after the opening up of China, long been considered the last major frontier of globalized retail.

From the beginning these moves have been totally opposed by the Left and other progressive sections. Opposition has also come, albeit somewhat two-facedly, from the BJP with one eye on corporate interests and another on its major constituency of small traders who are deeply apprehensive. Arguments against have mostly centered around the potential adverse impact on the mostly unorganized small retail sector of so-called mom-and-pop stores (in India more often father-and-son stores) and the likely large-scale loss of employment in this sector. These arguments have been dismissed by proponents as being purely ideological and as going against modern trends and the opinions of experts. Arguments advanced in support of this policy by corporate houses including Indian retail chains, business associations, consultancy firms and government officials have revolved around two major propositions which, this article would show, are complete myths.

First, huge wastage in the agri-produce supply chain in India will be avoided because MNC retail giants would make the huge investments required in storage, cold-chain and transportation infrastructure and also bring in new technologies. Second, the farmer in particular would benefit from this improved efficiency and by the elimination of middle-men, the customer too ultimately benefiting through better quality produce and lower prices. A win-win scenario advanced as the gospel truth.

On the contrary, international experience has shown that, except for the huge profits raked in by the supermarket chains, organized retail has been a lose-lose scenario for farmers, small traders and wholesalers, consumers, and the environment and therefore society as a whole.

Food waste in Supermarkets    India is the world’s second largest producer of fruits and vegetables in the world after China, producing around 180 million tonnes. Official estimates are that about 25-30 percent of this produce goes waste between harvest and consumption. In theory, if fresh produce is collected efficiently at the farm-gate, and end-to-end cold-chain is maintained in storage and transportation till it reaches supermarket shelves as in developed countries, this wastage can be eliminated, translating into better prices for the farmer and lower prices for the consumer besides greater availability of the produce for processing, export and other value-addition. In practice, a very different story emerges from the West.

In the US, official data show 27-33 percent of food being wasted between farm and consumer during collection, storage, distribution and consumption! Of course, this also includes the horrendous amount of food waste generated in households and restaurants, but the amount of wastes within the distribution system is not much less.

Supermarkets themselves in the US are estimated to throw away $20 billion (Rs.95,000 crores) worth of food every year, more than twice as much as in the EU. Huge quantities of fresh fruit, vegetables and meats are routinely thrown away by supermarkets every day partly from fear of spoilage but also simply because they appear unappealing to consumers. Food products constitute 63 percent of a supermarket’s waste, according to a study by the California Integrated Waste Management Board. The logic of supermarkets dictates that they stock and display huge quantities of fresh produce, unsold stocks being simply thrown away. Supermarkets also compete with each other on the quality of their produce. This requires bulk suppliers to conduct ruthless sorting, throwing away otherwise edible but unappealing produce. In fact in the EU, prior to 2009 when a new policy came into effect, supermarkets were required by law to discard misshaped fruit and vegetables!

Supermarkets in the EU and USA are now being motivated to dispose of their wastes in an environment-friendly way in sanitary landfills or even through gasification or converting to manure, which can also generate some revenues although, of course, it would have been far better if food had not been allowed to become trash in the first place. And all this is only with respect to fresh produce. The supermarket culture of course also encourages packaged, pre-cooked or semi-cooked foods with expiry dates, huge quantities of which again get thrown away by supermarkets each year because of over-stocking. Pre-packaging of groceries and other food items also leads to huge accumulation of packaging material which has to be discarded posing a huge waste disposal and environmental problem, amounting to 5.3 million tonnes in the UK alone!  So much for the saving wastage argument!

Farmers and small traders lose    The other myth about organized retail is that it would benefit farmers and also not harm small traders who could simply shift from the traditional supply chain to the modern one linked to supermarkets. Again the facts are exactly the opposite.

The authoritative UK Competition Commission found in a 2000 study of major retail chains including Marks & Spencer, Sainsbury and Tesco that supermarkets had a poor record on treatment of all categories of suppliers, specifically that “the burden of cost increases in the supply chain has fallen disproportionately heavily on small suppliers such as farmers” (http://www.competition-commission.org.uk/rep_pub/reports/2000/446super.htm#full). Apart from prices, smaller farmers came under severe pressure from supermarkets due to the latter’s requirement for large volumes of each product, pushing farmers to grow single crops rather than the multiple produce they would usually grow to minimize risk. Similarly, insistence on or good prices only for similarly sized produce again works to reduce bio-diversity, pushes prices down and drives suppliers towards more input-intensive factory-farming. The Commission called for greater regulation and enforcement of the UK Fair Trading Code of Practice which it said itself needed to be strengthened to protect smaller suppliers from exploitation engendered by the immense power exercised by large buyers.

Numerous other supermarket practices too worked against the interests of almost all other stakeholders. Supermarket chains routinely sell some products at lower than market prices, which appears to benefit to consumers, but this puts pressure on small local stores in turn having adverse impact especially on low-income and elderly consumers who rely on local shops. Supermarkets also tend to alter prices in different branches adjusting to local rivals, “price-flexing” as the Commission termed it, again working to the disadvantage of local mom-and-pop stores. All in all, the Report said, “27 [such] practices by… major buyers operate against the public interest.”

In its January 2010 report, the UK Competition Commission concluded that the situation had not changed in over a decade, and that the practices of big retail chains continued to cause losses for farmers and small stores. The near-monopoly of supermarket chains, which procure over 70 percent of food products in the UK, enables them to “dictate prices and force farmers into trading for less and less.”  The UKCC found evidence that some chains including Tesco were bullying producers into lowering prices, a charge also leveled by the National Farmers’ Union, with dairy farmers receiving 20 percent less for milk than they did 19 years ago, and over 1,000 dairy farmers having gone out of business in 2009 alone.

FAO in its “Spotlight 2005” Report (http://www.fao.org/ag/magazine/0505sp1.htm) concluded that these trends are witnessed in other countries and regions too, showing once again that these patterns are inherent to the very logic of supermarket chains, not to some peculiarities of Western cultures. Organized retail increases pressure on farmers to produce standardized produce, pushes down prices and margins, and over time weeds out larger numbers of smaller suppliers in favour of fewer and larger “preferred suppliers”. In Malaysia, one chain that had started with 200 suppliers had whittled them down to just 30 within 2 years. Despite the famous sharp preference of Asian consumers for fresh produce from local so-called “wet markets”, big cities of Malaysia saw the share of supermarkets in fresh produce retail rise to 60 percent in fruit and 35 percent in vegetables. Similarly in Bangkok, supermarkets were selling 40 percent of fruit and 30 percent of vegetables by 2002. The FAO Report predicts that, following trends in Europe and the US, Asian markets too will witness gradual marginalization of traditional wholesalers in favour of increasingly consolidated “preferred suppliers” and “dedicated wholesalers” who would be brought into joint ventures or tied-up in long-term contracts.

The Washington-based International Food Policy Research Institute says that the heightened penetration of supermarket chains into Asia, Africa and Latin America is locking small farmers out of the supply chain and driving millions of farmers into poverty. Latin America has been the worst hit with the fastest growth in supermarkets, achieving in 10 years diffusion rates that took 50 years in the US! In Brazil, the share of supermarkets in fresh food sales went up from 30 percent to 75 percent in just 10 years between 1990 and 2000.

Supermarket culture and need for Regulation     Colossal waste and inordinate pressure on suppliers are part of supermarket culture. In Singapore, studies have found that close to 30 percent of fresh produce is thrown away in wholesalers’ sorting yards or supermarkets even before they appear on shop shelves because of ostensible defects or being otherwise deemed non-saleable. Within supermarkets themselves, food wastage in Singapore is estimated at 20 percent compared to 30 percent in the US or UK.

Indeed, supermarket waste has reached such proportions that the UK has an active Waste & Resources Action Programme (WRAP) aimed at reducing all forms of wastage in supermarkets. WRAP studies have found that many factors drive such wastage, chief among them being the very character of supermarkets and the type of shopping practices they engender. People shop more and buy far more than they actually consume simply because they can! In major urban centres, where supermarkets are often open round the clock, shoppers end up buying many other items than what they may have come in for, and more than they need. Promotional offers such as buy-one-get-one-free and other so-called multi-buy promotions means that more groceries get pushed than are consumed.

Yet the pressure exerted by the powerful retail chains is such, and the ideology of de-regulation is so strong, that of course one can barely talk of regulation in the US while efforts at regulation in the Eurozone and UK have not made much headway.

The influential UK Sustainable Development Commission (UK-SDC) in its study of policies relating to supermarkets strongly criticized the British government for allowing WRAP to leave it to the supermarkets themselves to formulate a voluntary self-regulatory set of practices to reduce waste termed the Courtald Agreement. UK-SDC stated that “too many supermarket practices are… unhealthy, unjust and unsustainable.” Needless to say, the UK-SDC report covered many other areas of supermarket operations too besides the issue of food and other waste.

An even broader ambit was covered by the UK Competition Commission whose 2000 Report cited earlier led to the proclamation of a Supermarkets Code of Practice which was later amended in 2009 to the Groceries Supply Code of Practice (GSCOP) that lays down standards and procedures for procurement, fair trade, inventories and sales, and so on.

It is indeed significant that in all the debate in India around organized retail, no industry or government body has said a word about regulation or the need for it. For all their weaknesses, it is the presence and functioning of regulatory bodies in the UK and EU, in contrast to the situation prevalent in the US, that has at least thrown up a substantial amount of data and analytical information, and brought supermarkets under public scrutiny and the possibility of at least some social control.