Import Dependency of Commodity Supply a Cause for Concern

India is an important consumer of commodities, ranking fifth in overall energy use, and third largest consumer of coal. In agriculture, it has a much greater presence by being the largest consumer of sugar and tea and the second largest consumer of wheat, rice, palm oil and cotton. India has sharply increased its edible oil consumption. However, India’s commodity consumption has grown at a slower rates than China.

The import dependency of commodity supply remains a cause of concern. Using indicators, like the country concentration, import dependence and supply risks for high economic importance commodities, it is apparent that not only the price but also physical availability and counter party suppliers are some of the potential areas of concerns.

Country concentration risks for agricultural products and energy resources are relatively high in India. The entity concentration risk (dependence on a few companies for sourcing) is growing as well. Other counties like Korea too are dependent on four trading companies for its import of grains. China inspite of its huge international political clout is dependent on only three companies, like Vale, BHP and Rio, for its iron ore imports.

While China had been acquiring rights of commodities (through acquisition of mines and farm lands) around the world to mitigate concentration risk in sourcing, the Indian acquisition in the natural resources have not followed any commodity-based structured approach. Barring a few private sector acquisitions, the investments in commodity resource pooling have been very insignificant compared to projected surge in demand.

On the other hand, negotiated price settlement has been the order of the day in China but in India driven by the fear of CVC and RTI —the same has been sacrificed in favour of global tendering. This has resulted in India often having failed to get favourable prices. Unfortunately, the PSU trading houses & Oil PSUs have been relegated to mere channelising agency as sales facilitator rather than vehicles for strategic sourcing.China’s overseas investments in natural resources assets had focused on oil and minerals.

The price of food commodities such as rice, wheat and soyabeans had surged in 2008. Thereafter, state owned China Investment Corporation’s (CIC) purchase of an $856m stake in Noble Group (the commodities trading company) is the clearest indication that Beijing wants to secure agricultural commodities supplies. Since then, countries including Saudi Arabia and South Korea have invested in overseas farm plots to increase their food security.

India has also an import dependent model for Energy (Coal from Indonesia & Crude from West Asia). India’s low self-sufficiency rates for pulses (imported from Burma & Canada) and edible oil (imported from Indonesia, Malaysia and Argentina) can do little to blunt the commodity pressure. In fact, the nation’s already fragile self-sufficiency in food and grains is likely to decline steadily with the new food security bill despite its good intentions. While there is nothing wrong in being an import dependent commodity consuming nation but subjecting the economy to import mismanagement, whims & fancies of savvier suppliers and arm-twisting by countries (recent coal policy of Indonesia) is a matter of growing concern. Failure of the government in economic diplomacy as well as failure to leverage India’s position as a large consuming nation will be paid by millions of domestic consumers. Government in the past had remained mute spectators with long term policy starvation often reactively resorting to non- sustainable price control mechanism.

Published in The Economic Times

It’s Time for Reality Check on Malls Before Allowing FDI in Retail Sector

As India continues to debate on the pros and cons of foreign direct investment (FDI) investment in the retail sector, it would be interesting to understand the interplay of politics, corporate influence, intrigues of supermarket chains and greed governing the trade treaties with the fourth largest staple diet of human consumption, banana, in focus. 

Supermarkets are now the only players in the banana chain to consistently make profits from bananas. It is estimated that bananas represent 2% of the total turnover of North American and EU grocery retailers. Bananas are the single most profitable item passing through the check-outs with more than 33 thousand product category in stores. While retail chains may appear as warriors on behalf of poor consumers getting the best possible deals for products, workers who produce them are paid rock-bottom wages and their local environment is destroyed. 

It is important to note that the world banana market is geographically fragmented mainly due to transport costs and diverging import policies in the consuming countries. Around one fifth of globally produced bananas are exported from the developing countries to developed nations as an example of unidirectional South-North trade. The dominant banana importers are EU countries (29.2%), US (27.5%), Japan (8.2%), Russia (7.9%) and Canada (3.5%). Only the Dwarf Cavendish variety is traded while there are hundreds of varieties. The main banana producing countries, such as India or Brazil, are hardly involved in international trade. About 20% of the 70 million tonne of bananas produced each year enter global market. Just five companies—Dole, Del Monte, Chiquita, Fyffes and Noboa—control some 80% of the international banana trade.

The descriptor “banana republic” actually originated when a few of the companies in Central America having business interest in banana ensured changes of government in Honduras and then went on to convince the administrations of Truman & Eisenhower to order the CIA’s action in Guatemala. Colonial histories influence trade agreements and partly determine who exports to whom. In the ’90s, five Latin American countries (Costa Rica, Venezuela, Colombia, Guatemala and Nicaragua) backed by the US (on the instigation of an almost bankrupt company with a large banana interest) a filed formal trade complaint at the World Trade Organization and fought a series of trade disputes with EU.

From the beginning, commercial enterprises in banana trade in collusion with the friendlier governments derived profits from the private exploitation of public lands while the debts incurred became public responsibility. The companies, by manipulation of national land use laws, could cheaply buy large tracts of agricultural land for plantations whilst employing the native as cheap manual labourers after having rendered them landless. The biggest problem with banana trade is that the competition for the lowest prices is led by supermarkets which are constantly looking to buy the cheapest bananas. This comes at a great cost to plantation workers because they in turn are paid lower wages.

It is important to do some reality check with experience of other nations before allowing FDI investment in retail. 

Defer not till tomorrow to be wise, tomorrow’s sun to thee may never rise

– William Congreve

Published in The Economic Times

Beware! Corporates Are Out to Control Scarce Water Resource

“I am the Alpha and the Omega, the beginning and the end.

To the thirsty I will give water without price”

The Bible - Revelation 21:6.

The farmer flare-up at Maval near Mumbai (during the pipe laying for industrial belt of Pimpri-Chinchwad) should not be dismissed as politically motivated. Water stress is just beginning to show in India. With increasing scarcity of water, the competition for water between agriculture, industrial and municipal users is set to intensify. The global market for water as a commodity is estimated to be over $500 billion and $2 billion in India. India uses approximately 829 billion cubic metres of water every year. By 2050, the demand is expected to double and consequently exceed 1.4 trillion cubic metres of supply.

India’s agricultural sector currently uses about 90% of total water resources. Farmers are expected to meet the rapidly increasing demand for food, feed, fuel and fibre crops even though most land and water resources have already been committed.

Water markets are new and evolving. The values of licences traded are in billions of dollars. World Trade Organisation and North American Free Trade Agreement consider water to be a tradeable good, subject to the same rules as any other good. Corporations through other multilateral world bodies are also trying to influence national governments to push privatisation and commodification of water as “the chosen” alternative to manage the growth in water consumption and severe water scarcity. Water trading involves the temporary or permanent transfer of a water licence. A temporary or term trade involves the transfer of an allocation of water for a set period of time.

The companies argue that privatising water is the best way to deliver it safely to the world. It is true that governments have done an abysmal job of protecting water within their boundaries. However, the answer is not to hand over this precious resource over to corporations who have escaped nationstate laws and live by no international law other than businessfriendly trade agreements. The answer is to demand that governments begin to take their role seriously and establish full water protection regimes based on watershed management and conservation.

Just as governments are backing away from their regulatory responsibilities, corporations are acquiring controls of water resources. Bottling companies in different parts of India pay very little towards water mining and have practiced unsustainable water mining in these areas to the detriment of farmers in the vicinity. Some of these corporations are gaining control over the burgeoning bottled water industry, the development of new technologies such as water desalination & purification, the privatisation of municipal and regional water services, including sewage & water delivery and the construction of water infrastructure.

India seems to be progressing towards privatisation of water, which will ensure that decisions regarding allocation of water will focus almost exclusively on commercial considerations. Naturally, corporates will seek maximum profitability and not sustainability or equitable access to water resources. It is important that “Blue Gold” (water) be guarded as a common property resource at all levels of government and no one should be given the right to appropriate it at other’s expense for profit.

Published in The Economic Times

How Shipping Industry Circumvents Regulations & High Operating Costs

The Indian Navy and Coast Guard rescued sailors from the cargo ship MV RAK Carrier that sank about 20 nautical miles away from South Mumbai. The incident came within five days of another oil tanker MT Pavit running aground near Juhu beach. Both are Panama-flagged vessels and the humanitarian rescue was carried out at Indian taxpayer’s cost. It is noteworthy that sometime ago the two ships that had collided near JNPT -- MSC Chitra and MV Khallija -- also happened to be Panama-flagged vessels. The Republic of Panama is the largest ship registry in the world, with more than 8,600 ships flying the Panamanian flag. This entire setup is a great business for the tiny Republic of Panama which makes millions of dollars every year from the fees it charges ship owners.

A ship is said to be flying a flag of convenience (FOC), if it is registered in a foreign country for the purposes of reducing operating costs or avoiding government regulations. Even 17% of Indian ships are registered under FOC. In many cases, the flag state cannot identify a ship owner; much less hold the owner civilly or criminally responsible for a ship’s actions. The country of registration determines the laws under which the ship is required to operate and that are to be applied in relevant admiralty cases. If major money laundering countries (such as Bermuda, British Virgin Islands and Cayman Islands) have been targeted by governments for insufficient regulations and poor enforcement, there is no reason why flag states (such as Panama, Liberia, Marshall Islands) should not be targeted on grounds of providing an environment to shipping companies for conducting criminal activities (illegal and unregulated fishing) and adverse effect on environment (oil spillage) through the conduit of global trade. Policymakers around the world should work to protect and enhance the conditions of international maritime industry and for the elimination of FOC system through the establishment of a regulatory framework for the shipping industry.

The modern practice of flagging ships in foreign countries began in the 1920s in the US when ship owners frustrated by increased regulations and rising labour costs began to register their ships in Panama. Today, more than half of the world’s merchant ships are registered using FOC, more commonly referred to as open registries. The top ten FOC counties have registered 55% of the world’s deadweight tonnage (DWT) including 61% of bulk carriers and 56% of oil tankers. Even, a country like Mongolia that is landlocked is offering open registries for ships. Around 74% of Japanese ships are flying a foreign flag and over 50% of the ships registered in Panama have a Japanese owner. It appears that the so-called self acquired diplomatic immunity is assumed by many of these FOCs. The open register offices are already issuing certificates, collecting payments and doing other documentation in India. Many of the people who have spent time at various levels in the regulatory and other government bodies have the ability of issuing equivalent certifications of all sorts on a pricelist.

Published in The Economic Times 

Creative Accounting May Help Miners Avoid Sharing of Profits

Commodity markets seem to periodically throw up controversies beyond the simple realm of price rise. A few months ago, it was the Central Vigilance Commission (CVC) chief ’s alleged involvement in palm oil tender and now the Karnataka chief minister’s alleged involvement in iron mining contracts. In the midst of commodity curse, reforms in several sectors continue.

The Mines and Minerals Development and Regulatory (MMDR) Bill 2010, which would be ready for ratification in the monsoon session of Parliament, would make it compulsory for all coal miners to share 26% of profits with affected communities. Companies operating in mineral sectors other than coal would have to share with the local population an amount equal to the yearly royalty payable by the mining companies to governments. Not all the details of the draft mining bill have been released.

A third of Indian coal mines cause pollution. No land taken for mining has been returned to state governments in the last 45 years and there is no systematic time-bound reclamation plan of mined out areas either. The MMDR Bill 2010 has several provisions for curbing illegal mining, including stricter penalties, debarring an entity found involved in illegal mining from future allocations, penal actions and trial of officials.

Mining is an extractive industry and differs in some ways from other types of enterprises. These differences occur in four main areas which affect accounting: Capital structure of mining enterprises, preproduction costs of a new venture, profit determination in final accounts and reports and royalty payment.

Big corporations always try to convince that high profits are good for everyone. The argument goes that the more they make, the more they will share. But as mining giants have shown, the more they make, the more they line the money to their own pockets. Creative accounting is part of corporate culture and this is likely to be extended to mining companies as well.

Creative accounting and earnings management are euphemisms referring to accounting practices that may follow the letter of the rules of standard accounting practices but certainly deviate from the spirit of those rules. The structure of the draft mining bill is wrong. Profits can be easily manipulated, especially by private players. The private sector often uses coal and iron ore to produce power or steel and it would be very easy for them to understate their mining profits through transfer pricing.

Should one could call it greed? Or dishonesty? With a crisis of confidence involving the fiscal probity of corporations, it might seem that things could get dirtier. To add to the chronicle of greed and dishonesty, there will be also matters of hypocrisy. The draft law proposes the profit sharing formula in a bid to smoothen land acquisition. The well-intentioned draft of MMDR is likely to get entrenched in the accounting and transfer pricing web in future.

Published in The Economic Times

Commodity Supply Chains Need Protection Against Terror Attacks

Terrorists in recent times have focussed their attention on soft targets. Site-specific vulnerabilities (such as airport) and person-specific vulnerabilities (such as political leaders) have drawn the attention of most terrorists. It is important to understand a few vulnerabilities in the commodity supply chain as well and take preemptive actions to mitigate them.

A particular concern is that of transport of food and energy products, whose vulnerability to terrorist attacks has the potential to disrupt a nation’s food supply and energy requirement. The impact of terrorism on commodity trade may vary across time and place. The threat of terrorism generally implies additional costs for transactions. An increase in transaction cost might affect the flow of commodity trade.

Certain foodstuffs and agricultural products such as grains provide greater possibilities for terrorist interference than others. Grains are generally stored in government warehouses which are protected by few security personnel. Warehouses and terminals ostensibly provide more visibility to terrorists. These locations are particularly vulnerable and security to these installations needs to be enhanced. Perhaps, it would be prudent to provide security cover through a more professional force such as CISF in India.

Also the enormousness of India’s agricultural system poses a significant challenge to protect against agro-terrorism or bioterrorism (the deliberate release of biological pathogens or other harmful agents). Observers and intelligence analysts consider the occurrence of agro-terrorism to be a “low probability - high consequence” event, largely because terrorists act against their primary targets (such as transport hubs) directly creating anxiety, fear and disruption. However, there is a growing concern that terrorists may utilise agroterrorism as other types of terrorist attacks are becoming more difficult due to increased controls.

In the energy sector, many of the tank farms of petroleum and petro-chemical products are adjacent to moderate to densely populated areas that could be impacted by a terrorist attack. Road tankers that queue near the delivery and dispatch terminals are vulnerable to attacks by even a lone terrorist. The detonation of a weapon in a sabotaged truck or firing from an elevated wooded terrain adjacent to the depot could cause fatal destructions. Though large oil depots are supposed to be well protected, the current surveillance systems are more intended to prevent vandalism and theft of goods rather than a high intensity terrorist attack. Personnel issues such as the selection of drivers represent a major security concern to all modes of transportation. To understand how food and petroleum product transporters deal with the hiring of drivers along with scrutiny is particularly important. A nationwide computerised network of the commodity transport drivers and programs to educate and train drivers could provide a quick and positive return on investment.

Cargo contamination and hijacking are two of the top concerns of carriers for several years, albeit for different root causes: accidental contamination and hijacking for theft purposes. In the wake of recent terrorist events, there has clearly been a heightened spectre of a terrorist attack on food storages and energy production sites.

A precautionary measure could be to work with the local anti-terrorist squads and local police to improve and create security policies, programs and facilities for commodity supply chains. On a more fundamental level, if poorer citizens can be assured that they have access to the resources needed to live, they are less likely to adopt combative ideologies that lead to terrorism.

Published in The Economic Times

Modern Storages Are a Must for Ensuring India’s Grain Security

Investment in storage infrastructure belonged traditionally to state agencies as investment of this type was viewed as economically unattractive and too complicated for the private sector.

In recent times, subsidies have been used as financial instruments to attract private investment into storage infrastructure by effectively de-risking the investment. It is a moot point that in spite of modern silos like the one put up at Moga, why others have not taken off.

The Centre has already announced a scheme for construction of godowns through private investors under a 7-10 year guarantee scheme.

Due to political and sometimes constitutional reasons, making outright privatisation of storage infrastructure is difficult and therefore concessions have been extremely popular.

A concession provides its holder the right to operate a service for a limited period of time (usually 20 years) at the end of which all the assets go back to the government. The concessionaire is responsible for all investments as well as other eventual targets specified in the contract in exchange for the right to the cashflow of the users’ payments. However, there is a growing disenchantment with concessions in particular.

Public investment in storage infrastructure has been declining as a proportion of both total government expenditures and GDP. Government agencies provide 61% (60 MT) of India’s total agri storage capacity which also includes a hired capacity of 23 MT. Dominant producers of food grain and related agriculture products are the major users of godowns and storage capacity. The cost of building silos to store a million tonne of food grains may be about Rs 600 crore considering that the required land is made available by state governments. State warehousing corporations under Government of India like FCI have already planned galvanised silo storage systems.

Replacing bags of jute with any other material will not solve the problem of wastage. If we are planning to store food grains in galvanised silos in bulk, we should also plan for the distribution system through bulk containers. This could be planned with the help and expertise of authorities connected with the Indian Railways.

Grain safety is as important as grain saving. Each region in India has evolved storage methods to preserve grains. In villages, we have grain gola (silos); made from wood or local material that protects the grain from moisture and rodents. In most cases, villagers use neem leaves or plantbased pest resistant methods to repel pests and fungus.

However, these silos-like structures are small and they are suitable for storing village produce for a year or two. These time-tested methods are being abandoned in recent times as they are replaced with concrete godowns, with support from central and state government under various schemes. Akin to many areas of government expenditure, government subsidy programmes are often at risk of corruption and fraud at the cost of taxpayer. The extent to which these two factors affect the subsidy policy is difficult to fully estimate because it is not commonly detected or reported to official sources. Precise figures are difficult to obtain and governments are also often unwilling to publicise occurrences of fraud and corruption out of fear of bad publicity or public concern at their lack of oversight.

 *all figures in the table are in million metric tonne

Published in The Economic Times