India's experience with revenue-share model is not good. How to fix it?

The Centre is only just learning how to draft workable contracts with the private sector

The Railways have asked for bids from private entities to offer passenger services on a revenue-share basis. Public-private partnerships (PPPs) are not rare in India — in fact, the World Bank data base shows that India is the global leader where PPP is concerned. But railway passenger travel is for many Indians the most visible expression of government ownership.
 

Yet to spur investment, the Narendra Modi government has had to offer private sector participation in this business. The scope for raising revenue from taxes and non-tax sources has been crimped by Covid-19 and the pre-pandemic slowdown. Revenue-share arrangements between the state and the private sector should be profitable for both, especially when India plans to ramp up infrastructure availability.
 

But India’s experience with revenue-share arrangements for telecom services, oil exploration and aviation from the first decade of this century has not been happy. Over the past two years, as the government has expanded the list of revenue-share sectors — Railways, coal, gas supply networks , oil and gas exploration — it is worth tracking what is working and what is still quicksand.
 

The mistakes that successive governments made in revenue-share contracts hurt both the Atal Bihari Vajpayee and the Manmohan Singh regimes with prolonged court battles and political one-upmanship. In both cases, the contracts chased the wrong metrics. Surprisingly, the contracts did not help the private promoter of these projects to make good either, after the initial burst of profit.
 

Take the petroleum sector. The Centre was supposed to get non-tax revenue from the profits from production of crude oil and natural gas from fields awarded under production-sharing contracts. The government was, however, entitled to a share in the profit only after commercial production began. The contractor had the first right to the revenue stream till the costs of discovery and other costs were recovered. So what went wrong?
 

Essentially, Reliance Industries Limited (RIL) was supposed to get prior approval for its field development programmes — which means once the gas was discovered it had to obtain government permission for the costs it would incur to make the fields ready for commercial exploitation. RIL, however, went ahead and incurred the costs, as the Comptroller and Auditor General pointed out, and provided the details later, which left the government with no option but to disallow those costs. For instance, the Work Programme and Budget for 2007-08 was delayed and submitted after incurring an expenditure of $808 million. Since RIL was allowed to deduct these costs from the revenue it would share with the government, this meant it could potentially have padded the costs. The government was unable to redress the cost padding issue since the provisions of pre-examining costs were not clarified adequately in the production-sharing contracts. This anomaly led to a furious political slugfest and subsided only because the fields ran dry. From the two years when it was in dispute, the government earned only $100 million while RIL got $900 million.
 

The opposite happened in the telecom sector. Telecom density has expanded vastly but at the expense of at least two of the telecom service providers almost going bankrupt. In 1999, the government switched from a fixed-cost share to a revenue-share model. The department of telecom wrote in a definition of aggregate gross revenue that included everything under the sun, including rent and real estate transactions, profit on sale of fixed assets, sale of scrap, corporate deposits and so on.
 

For nearly two decades the companies fought court battles to wriggle out of their devastating liabilities. Even if the companies had hived off the other businesses, they were still liable to pay a share of those revenues. After the Supreme Court upheld the draconian government position in October last year, Bharti Airtel and Vodafone are supposed to shell out Rs 94,000 crore. Both companies have ten years to pay but few can bet whether Vodafone will survive as a going concern to make good the sum.

For the two airports at Delhi and Mumbai, the operators were supposed to share their revenue at 45.99 per cent and 38.70 per cent each year, with the Airports Authority of India. In Delhi, the winning bidder, GMR Group, stripped away most of the airport operations into separate companies. The airport operator DIAL was, therefore, left holding a thin line of revenue, with even duty free shops and restaurants becoming a service that it bought from these companies.
 

The Railway Board seems to have followed this route. The gross revenue the train operators will share with the government is based on the ticket fare plus additional services the private operator provides, such as catering, Wi-Fi, bedrolls or even seat options. There is no provision that specifies whether the operator will provide those add-on services in-house or buy them from bidders. Is it possible that the bidders and providers of additional services could be related companies, in which case the revenue stream could become pretty thin. This is an issue on which the Railway Board has maintained a studious silence.
 

A more realistic model is the one for the coal sector. The government has offered a revenue-share model on the basis of price quoted in an auction. The revenue share for this purpose will include the final offer plus a monthly revenue based on the coal mined every month. The price is linked to a market-linked coal index. This model explains why when most of the world is moving away from coal, the latest auctions showed there was a demand for the domestic fuel at the right price.
 

The learning curve has vastly improved for both oil exploration contracts and those for city gas networks. The revenue shares have enhanced the weight for the minimum amount of work a contractor has to put in, setting of revenue sharing ceiling to 50 per cent for category I basins. The timelines for doing so have also been compressed and costs have got linked exclusively to what is spent on exploration. At the other end, city gas contracts have been tied to market-linked prices. Overall, revenue share has been a long, hard lesson for Indian politics.