Why marketing margins in gas?

Soma Banerjee Tuesday December 29, 2009, 09:35 AM
School textbooks define ‘markets” as a place where people sell their products and wares. This assumes three basic elements, buyers, sellers and a price at which the product is sold. Simple economics tells us that the price of the product would depend on demand and supply and a perfect market can function only if there is competition among suppliers and choice for the consumer. The question today is whether such markets exist at all? If not, is there any scope for marketing costs? Are consumers in India getting to buy at the right price or are they also paying for notional costs like marketing margins which should have no play in perfect markets? There cannot be a simple answer to this.

India imports more than 70% of its crude oil requirement even as domestic gas producers, until recently, met only 50% of the demand for gas. Producers and marketers of oil and gas, just like electricity, can sell effortlessly as starved consumers wait for this crucial requirement. Charges like marketing margin, that relates to the cost incurred for marketing a good or service thus becomes irrelevant in such industries.

Gas transporters like GAIL India have charged marketing margins on the gas they sell despite the skewed gas market that allows natural monopolies like GAIL to exist. This becomes even more glaring as consumers are restricted to those located along the pipeline, making the market even more imperfect. The government has never objected to these costs being charged to consumers despite the fact that companies like GAIL had very little to do as far as marketing or market development was concerned.

It thus is not surprising that new entrant Reliance Industries too is charging a marketing margin on its gas which it sells along the East West Pipeline or through GAIL to consumers along the HBJ pipeline. But can the government object now? Unlikely, as it has allowed such practices before. Consumers in the energy market are thus paying charges for notional expenses incurred by producers and marketers, a levy that is completely avoidable and unjustified given the lack of choice resulting in a captive market.

An air traveller can walk up to a ticket counter and select his preferred airline just like a mobile consumer can decide on which operator to opt for. But such choice is limited only to a few segments. Take the case of energy, a daily basic requirement for every stakeholder of the economy. Demand for energy in this country — be it electricity, transport fuel or cooking gas far outstrips supply and consumers are left with no or limited choice.

So while airline and telecom operators bend over backwards to woo customers with aggressive pricing and discounts, oil companies can afford to sit back as their sales go up every year effortlessly. The imperfect energy market in the country leaves the seller with an inherent advantage of a ready, starved market.

Unfortunately, this has led to the government taking over as regulator even in markets where its own public sector companies are dominant players raising questions over conflict of interest. The government’s intervention has been justified as it is ostensibly to protect consumer interest, but it has, on many occasions, become a major hurdle in the normal evolution of a market. The energy sector in India is a classic example of a skewed market which has failed to evolve even after two decades since the government allowed private participation in vital segments of the industry like power generation, distribution, refinery and exploration.

Liberalisation of the Indian economy in 1991 signalled the transition from a mixed economy, dominated by socialistic principles, to a market economy which would see multiplicity of players bringing in competition and choice. The government, which till then was solely responsible for the development of most of the industrial activity in the country invited private entrepreneurs to set up factories and offer services to meet the growing demand of the economy. One major objective behind this policy shift was to unleash private entrepreneurship and capital for capacity building, particularly infrastructure.

Two decades down the line, even as new production units come up every year, so do crucial policy questions over price and costs. Clearly, there cannot be a single formula for all products, as each industry develops its market at its own pace, and each market has its own logic.

Banking, the next big thing for Telecom Service Providers.

Opportunity in adversity is an old maxim. Probably Bharti should find banking in its failure to acquire South African telecom major MTN. Just as Bharti stands to gain by acquiring a banking licence in India, India’s unbanked masses stand to gain by India’s largest mobile telecom player extending to banking the fine art it has mastered of making big money from millions of small transactions.

India is a badly under-banked country. Bank lending as a proportion of GDP is less than half of what a decent market economy without hyper-inflation should have. Only a small percentage of households have bank accounts. And even those who have bank accounts do not find it easy to access credit from banks — physical distance of the bank branch, procedural complexity in filling forms and perhaps mobilising a guarantor, delays in getting a loan sanctioned, etc, come in the way. Thanks to such hassles, private moneylenders and a host of non-banking finance companies thrive in the country.

Things did not change dramatically when the government ordered banks to open ‘no-frills’ accounts for India’s hoi polloi and exempted these accounts from the stringent ‘know-your-client’ norms that make it difficult for the poor, in general, and migrants, in particular, to open bank accounts. A spurt in the number of bank and post office savings accounts happened when the National Rural Employment Guarantee Scheme sought to transfer wage payments directly to the bank accounts of the beneficiaries.

But the reality is that banks do not really know how to operate a large number of tiny accounts without losing money. They open these accounts only because the government wants them to.

This is in direct contrast to how our mobile telecom operators function. India has some of the cheapest call rates. The average revenue per user is tiny. Yet, a company like Bharti makes huge profits by acquiring more and more rural customers. Why should a mobile service provider get into banking? For three reasons. One, it is already taking deposits from people, storing the amount in a card and running it down over time for the depositor’s use and, besides , has the capacity to move these deposits around the country. Two, a mobile phone operator has the technological capability and the commercial acumen needed to handle small ticket credits and debits by the million; and, three, commercial banks lack precisely this ability badly needed to extend banking to the entire populace.

Most new phone connections in India are pre-paid mobile connections. A prepaid SIM (subscriber information module) is a stored value card, apart from being a technological marvel that uniquely receives the signals meant for it and sends out signals to other Sims over wireless and wireline networks. The value stored in the Sim card is run down when the subscriber uses the phone. It is only a regulatory limitation that prevents this stored value in a Sim card from being used for any transaction other than telecom transactions. If this regulatory bar is removed, Sim cards could be used for making all kinds of payments and for transferring money across regions.

In Kenya, Uganda and South Africa, such use of mobile phones for elementary banking is widespread. So is the case in the Philippines as well.

Just imagine the convenience interstate transfer of money using mobile phones would bring to our migrant workers . The latest UN Human Development Report puts the number of internal migrants in India at 42 million. According to another estimate, 307 million people work in a place different from where they were born. A sizeable proportion of these migrants would require to send money home. The Post Office is the most reliable form of sending money. But the money order costs a bomb: 5% of the amount sent, not taking into account the postman’s baksheesh at the delivery end.

Let’s see how Airtel could do the same thing for next to nothing. It has a huge network of airtime vendors around the country. Currently, they take deposits from consumers and store them on cards. If allowed, they could do the reverse as well. A migrant worker Lallan in Surat could charge his wife Laxmi’s phone back home in Purnea (this is already possible) and the vendor in Purnea could deduct the charge from Laxmi’s Sim and hand over cash. All it takes is Bharti’s existing payment infrastructure, a few short messages and the regulator’s approval.

Why does the banking regulator, RBI, prevent such transactions? Suppose Lallan in Surat charges Rs 1,500 on Laxmi’s phone in Purnea and the vendor is willing to give Laxmi Rs 2,000 provided she pays back Rs 2,250 three months later. Credit would have been crated. Credit creation is tightly controlled by the RBI and it doesn’t want anyone without a banking licence to do this. (The newspaper vendor or friendly neighbourhood grocer who gives you credit for a month — you pay the bill after a month’s supply has been consumed — is outside the RBI’s control but the RBI has learnt to live with them).

The solution is for the RBI to give a telecom company a banking licence. This will work, but for a bank to acquire the capability to interface with and make money from millions of small customers the way a telecom company does would be next to impossible. Given our demographic profile and fast economic growth, the number of people who will enter the workforce and need a banking account is huge. Our existing banks just won’t be able to handle the load. We need more banks. The RBI must shed its inhibitions on granting new banking licences.

Phone connections are growing faster than anything else in India. Phones will also lead the way to rural India’s access to the internet. It makes sense to tap the full social utility their technology permits. Banking is one. Airtel is as good a candidate as any, and better than most. If Airetl’s example succeeds, others could be given banking licences as well.

Airtel could be given, to begin with, the licence to do a truncated range of banking services. Or it could be allowed to acquire an efficient private sector bank, or create a joint venture with a trusted public sector bank. All these actions depend on the RBI’s consent. Many options are open. What is not is the status quo.