Credible clarification of business model will help build trust in a company
All over the world, energy companies constantly assert that the reason that they raise prices is either due to the wholesale price going up or increase in the cost of exploration.
The US natural gas commodity market is among the most transparent of all the commodity markets in the world. On the other hand, a controversy is raging over current gas pricing in various parts of the country.
Credible clarification of the business model and how a company creates value will help in building trust and avoid unnecessary controversies.
Success in commodity markets often comes from maintaining an information edge on supply and demand. However, there is a consensus that transparency is the key issue. Physical commodity trading, which had been an enclave of secrecy, has got severely affected post-2008. Opaque business models will be facing increasing public scrutiny – the discussion around commodity pricing, where confusion around the value creation of a market participant has fuelled social concerns, leading to escalation into some political drama.
For companies, the benefits of transparency are not always straight forward. Some of the requirements are perceived to be expensive with no return on investment.
There is sometimes a fear that being more transparent could mean facing more troubles as adhering to the self-declared ethical standards would make them liable to a wider public scrutiny.
Ironically sometime ago, the CEO of Cargill had warned that companies must embrace ethical and transparent business practices or they may risk being vilified by the public and regulators as banks have been.
In Nigeria, the State sells over one million barrels of crude oil every day, bringing almost 50 per cent of the Government’s total budget revenue.The Government cleverly allocates export licenses to so-called “briefcase companies”. Since there is no reporting on sales, the actual buyers remain unknown.
Without transparency, there is no way to prove or disprove rumours. Improved transparency is important not only for the market participants but also for regulators, who can only intervene if they know what is happening in the market. Although a variety of sources of information currently exist, there is uncertainty in terms of data quality and timeliness, particularly with respect to inventories.
No doubt, it needs to be appreciated that, however big one may be in terms of networking and financial prowess, working on transparency has some clear advantages for companies and management.
Whether the allegations prove right or not, there is a lack of confidence about pricing in India’s energy sector – people just don’t trust it any more.
Published in Business Line on February 27, 2014
