January 19, 2020
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Reinventing A Big Bad Deal

After hanging fire for six years, a flawed, Rs 4,360-crore Indo- Oman fertiliser project is steamrolled through in undue haste

Reinventing A Big Bad Deal

Italian multinational Snamprogetti’s proposed comeback vehicle, the $1 billion (Rs 4,360 crore) Indo-Oman project, is a flawed deal which has been cleared under mysterious circumstances. Hurriedly approved on the very eve of Prime Minister Atal Behari Vajpayee’s visit to Italy, the long-pending Indo-Oman fertiliser project gained cabinet clearance in the teeth of strong opposition from the Planning Commission, the finance ministry, the Public Investment Board (PIB) and even the Prime Minister’s Office.

When the deal was at last finalised, Suresh Prabhu, minister of state for fertilisers, kept away from the meeting. The usually-accessible Prabhu is reluctant to comment on the clearance of the project. Sources close to him, however, say the minister was "apprehensive about the lack of transparency" in the deal. According to sources, the deal could have only been cleared with the help of someone with influence at the highest level.

Notes a Planning Commission official: "Urea is a volatile commodity. Global prices crashed four years ago, in 1997, long after the project had been conceived, and the MoU signed in 1994. If it has been cleared now, it is for political reasons."

The Planning Commission and the PIB had appraised the deal and found it financially unviable by all prevailing yardsticks for assessing projects. Likewise, the finance ministry expressed doubts about the way the deal was structured. In essence, they pointed out that the Indian government could well end up paying more for the fertiliser produced by the proposed firm-which the government would be obliged to purchase under a buy-back arrangement-than prevailing international rates.

All the agencies have found the capital costs of the project too high. But the cabinet note on the subject justifies it on the grounds that "the project has a strong external affairs angle". The fixed long-term price, independent of market rates, is justified on the plea that the government had agreed to the pricing model "in 1994 itself, when the MoU was signed". Besides "most fertiliser projects in this country do not fulfill viability norms", it says.

The PM himself appears to have had a change of heart regarding the mega-venture. As leader of the Opposition, he had written to the then chemicals and fertilisers minister, Sis Ram Ola, picking holes in the project (in particular, the bidding process). So had his cabinet colleague Murli Manohar Joshi, then chairman of the Public Accounts Committee, who had studied the proposal in detail. Finance minister Yashwant Sinha, who had strong reservations about the deal, was reportedly won over by the prime minister at a meeting also attended by chemicals and fertilisers minister Prabhu.

In March this year, a Group of Secretaries (GoS) headed by N.K. Singh, secretary to the prime minister, had suggested that the whole deal be scrapped. The GoS made no bones about the fact that it believed the deal would not benefit the country and could see no reason for going ahead with it. It agreed with the Planning Commission that it made more sense for the Indian government to go ahead with domestic projects in Nellore, Hazira, Gorakhpur and Thal. Or even to revamp ailing units like those at Sindri, Barauni and Durgapur rather than take "open-ended risks" by getting involved in the billion-dollar adventure.

Perhaps the main point of disagreement was the insistence on the fixation of a long-term price for the urea, at production costs plus 10 per cent, whereas the finance ministry felt it should be linked to the prevailing international rate-since the government had committed itself to a compulsory offtake arrangement. Another objection is that the natural gas which was to have been committed to the project by Oman is not available. Basing the project on "residual availability" of gas is not on, the project’s detractors say. So far, there has been no talk of any compensation by Oman for not being able to provide the requisite gas for the proposed installation.

Given the size of the venture, thanks to which every chemicals and fertilisers minister since Ram Lakhan Singh Yadav has made a trip to Oman, the fact that the current incumbent chose not to attend the meeting at which it was given the go-ahead has raised eyebrows. Prabhu has thus far been quite keen on the project-in fact, on a visit to Muscat earlier this year, he hailed it as a symbol of the country’s long-standing friendship with Oman-but ministry sources say he had not expected the subject to come up at that particular meeting.

The timing of the approval and the fact that it came in the wake of strong objections from every quarter has raised suspicions regarding a possible political motive, namely soft-soaping Rome after the series of countrywide attacks on Christian institutions by suspected Bajrang Dal activists. But for the volte face by the prime minister and the finance minister, the project was on the verge of being shelved.

While Snamprogetti, under a cloud because of Bofors-suspect Ottavio Quattrochi’s involvement with the company, has not yet formally clinched the deal, a senior official in the ministry of chemicals and fertilisers confirmed that it was the preferred bidder, over Uhde of Germany. The difference in the bids is marginal and it is not yet clear whether rebidding will be called for in the light of the fact that the cost of the project was scaled down from $1.1 billion to $969 million. Snamprogetti is cagey about the project, pleading company policy.

Another curious aspect of the deal is that hours before the cabinet meeting which cleared it took place, wire agencies were told that Oman had decided to pull out, in disgust at the numerous delays in getting the project off the ground. A day later, a government spokesperson clarified that this was not the case and that Oman had expressed its appreciation of the decision of the Cabinet Committee on Economic Affairs to go ahead with it. The proposed Oman India Fertiliser Company (Omifco) is a 50-50 joint venture between two Indian firms (IFFCO and KRIBHCO) and the Oman Oil Company. IFFCO was recently inducted, after Rashtriya Chemicals and Fertilisers backed out, saying it found the mega-project financially non-viable.

Another complication has arisen in the form of the draft fertiliser policy, publicised last week-it appears to have mixed feelings about the proposed joint venture. On the one hand, the new policy envisages decontrol of pricing and distribution of urea and other fertilisers within six years. Subsidies to farmers would end and urea prices would then be subject to the vagaries of the market. The RPS or "retention pricing and subsidy" scheme for urea would be phased out. This means that unless the terms of the Omifco agreement are drastically altered, an anomalous situation would be created, with two different sets of standards in operation. The main objection to the Omifco deal was that fixing the buy-back price of urea would in effect mean extending the RPS scheme for the benefit of the joint venture. Anyhow, the plea used to justify the high capital cost and long-term price that "subsidy implications of this project are much lower as compared to projects in India" doesn’t hold water.

On the other hand, the proposed fertiliser policy encourages the setting up of joint venture projects (like Omifco) abroad, say, in West Asian countries which are rich in natural gas. It does not envisage the setting up of new units within the country, at least in the next three or four years.

Political observers see shades of Enron in the Indo-Oman project. As in the case of the mega-power venture, the BJP government-which had opposed the deal when in the opposition-did a volte face when it came to power. Similarly, a buy-back arrangement with Enron has committed the government of Maharashtra to purchasing expensive power which it really doesn’t need and can’t sell. Those opposed to the Indo-Oman project now have another question: will India be running up losses buying expensive fertiliser?

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