In a hard-hitting reply, Reliance Industries Ltd has rebutted the comments made by the Government auditor regarding cost-inflation in the KG-D6 gas fields. The company says that the production sharing contract (PSC) itself incentivises cost-reduction and disincentives cost-increase.
“The point which the Comptroller and Auditor General (CAG) has singularly failed to grasp is that the commercial terms of the PSC in relation to cost-recovery and production sharing are designed to incentivise the contractor to restrict the amount of contract costs…,” RIL said in its reply.
Seeking to substantiate its point, the company has illustrated how cost reduction goes directly into increasing the profits from the fields which are shared among the stakeholders including the Government, while a cost increase eats into the profits to be shared among all.
For example, the contractor spending Re 1 more than required would reduce the profit to be shared by a corresponding amount, as the contractor recovers the cost.
This would result in the contractor losing Rs 0.90 in profit, given that initial entitlement of the contractor according to the D6 PSC is 90 per cent of the profit petroleum. A reduction in cost would have the opposite effect.
Following the interim report by the CAG, Reliance has again been drawing flak on allegations of gold plating. This issue was first raised by the Anil Ambani Group during the slugfest between the Ambani brothers. The CAG audit was for 2006-07 and 2007-08.
Inadequate understanding
The company said, “The commercial terms of the PSC together with the contractor's own economic interest protect the interests of the Government.” RIL states that the CAG's observations are based on an inadequate understanding of the working of the hydrocarbon sector, and overlook how cost-recovery and production-sharing provisions operate. With cost-recoverability being a reimbursement of costs actually incurred, RIL says that it could have derived a benefit from increasing costs only if it had falsified them, or dishonestly colluded with suppliers or contractors to artificially inflate prices, and received a kickback from such suppliers.
It emphasises that no such findings are contained in the CAG draft audit report, since such a situation does not exist. Going on the offensive, the company states “RIL is therefore entitled to a finding in clear terms from CAG that the contract costs have not been dishonestly inflated.”
Serious error
Drawing a distinction between authenticity of expenses and their desirability, RIL has said that the CAG audit has committed a serious error in confusing the two.
Even on the question of desirability of expenses, RIL states the CAG audit fails to notice that in an environment of rapidly escalating costs, the overall costs of development of KG-D6 compare favourably to similar projects during the period.