Friday, July 16, 2010

The Ambani’s Fiasco

After six years, the dust has finally settled between the warring multi-billion dollar Ambani brothers. Owing to their differences, the empire had been split into two with a scheme of demerger. Agreements were drawn between both the brothers that elder Mukesh Ambani could take control of the gas sector provided the younger Anil Ambani was given a fixed quantity of gas produced from the Krishna Godavari basin on previously agreed rates.

Everything seemed to go as planned until a committee led by the Finance Minister nullified the contract between the brothers since the price of hydrocarbons had shot up. The justification advanced by everybody supporting the move including the Indian Supreme Court is that natural resources belong to the people of the country and therefore the State has the right to regulate the price at which the gas would be sold.

Much debate has centered on the scheme of demerger between the brothers and a million other factors but the one percept deemed blasphemous to question in public policy debates is the notion that natural resources somehow belong to the people. Even critics of the government policy debate only how much government intervention is permissible but the governments' right to offshore property is considered self-evident. As Murli Deora, the Petroleum Minister commented, "I am appalled and disgusted at how these two brothers are fighting over something that belongs to the government and the people of India."

But does it?

Any natural resource belongs to individuals who have put in the necessary thought and effort to harness the otherwise unusable material lying in remote, inaccessible corners of the sea. Without the complex technical know-how of scientists or innovators and the courage of entrepreneurs to risk large sums of money in exploration and extraction, there is no potential resource itself, let alone the gas which we use to enrich our own lives. Consider oil. Before men understood how to process oil, oil fields far from being perceived as a boon, were looked upon as menace where one could neither inhabit nor cultivate. However, the ingenuity and labor of pioneers transformed a seemingly annoying liquid and a menacing natural "resource" to products that are used for human benefit.

Recognizing such facts, innovators should straightaway own the lands off shore where they have taken the pains to unlock a resources' potential with the help of astounding technical achievements and effort. As John Locke noted, it is only one's labor in a thing that "excludes the common right of other Men". However, such Lockean notions of property and ownership are lost out on today's socialist mentality.

Consider Production Sharing Contracts.

Production Sharing Contracts are contracts whereby the State reduces producers to mere contractors who invest their own funds into exploration, extraction and processing of any mineral or gas. If such an investment turns out to be a good one, the State acquires a substantial part of the end product (hence the name Production Sharing Contract) and compensates the producer by allotting him a part of the end product he made possible. Even from the minor share allotted to the producer, the government dictates to what sectors and at what price the gas may be sold. In other words, the right of ownership of the usable product is retained by the customer (the government) and the contractor is compensated by taking a part of the end product.

Morally, such horrible policies are based on the assumption that a businessman has a "duty" to give back to the society what he has taken in terms of natural resources. However, resources don't belong to any collection of individuals since none of them have put in an iota of effort to make it usable for human purposes. More importantly, one does not merely discover his wealth readymade at the bottom of the sea; one has to make it by investing decades of thought backed up by action to develop enough knowhow to tap the otherwise useless material resource.

Legally, such policies are based on the assumption that the government holds all natural resources in trust and that they should reach the "ultimate consumer" in each sector of the economy deemed important by the government. However, if consumers can claim a right over the products created – not merely discovered -- by entrepreneurs, it means that the entrepreneurs are deprived of rights and condemned to slave labor. Ironically, the beneficiaries of the trust don't include producers because it doesn't recognize their right to rightfully trade the resources they have toiled to tap.

Although Courts can legitimately decide how to manage private property issues arising from off-shore land, policies such as the PSC's must be opposed since they are -- on principle -- hostile to the institution of private property itself.