June 4, 2005 ☼ Economy ☼ Public Policy
This is an archived blog post from The Acorn.
Dear Mr Aiyar,
Your energetic quest for sources to power India’s growing economy is one bright spark of United Progressive Alliance government in New Delhi. Serious thought and urgent action in the area of energy security were long overdue. Your personal initiative has given a much needed shot in the arm for India’s hunt for petroleum.
However, your enthusiasm for pipeline projects that traverse Pakistan before reaching India is ill-advised both on economic and strategic grounds. While ushering in peace with Pakistan is a desirable goal, it is important not to allow the atmospherics of the current peace-process to become a crucial determinant of India’s long-term investments in energy. Let me outline an alternative approach that will achieve your energy security objectives, without necessarily having to put India’s hydrocarbon jugular in Pakistan’s unreliable hands.
Compared to other options, the capital cost of a pipeline running through Pakistan may be the lowest. Thanks to the representations made by the Pakistani government, the annual operating costs and transit fees may also seem competitive. But the biggest unknown is risk. Inability to calculate its risk premium makes the overland pipeline appear attractive, especially in these happy days of India-Pakistan detente. Thus from a purely commercial business case perspective, it is the quantum of risk premium added on to the known costs that will make all the difference to this project.
What is more, most of the collateral economic benefits will accrue to Pakistan and Iran. India’s investment will create jobs and infrastructure there. This is not a bad thing in itself — but why not use Indian investment to create jobs and infrastructure that are badly needed in India?
I invite you to consider building a state-of-the-art port with an integrated oil & gas processing terminal along India’s west coast, which is connected to major Indian cities with modern highways and/or domestic pipelines. Such a port will allow India to import oil & gas not only from Iran, but also from any other exporting country. The technology to carry oil & compressed gas on ships is mature, and if Indian ports are able to efficiently handle the seaborne traffic, such a project will provide all the capabilities of the overland pipeline, and more.
The Iran-Pakistan-India pipeline restricts India to a monopoly supplier and a monopoly transit provider. This is not a very good scenario for any purchaser. My proposal, on the other hand, takes a free market approach. India will be able to purchase oil & gas from competitive international markets, from multiple vendors and through multiple shipping lines. No single supplier or government will be able to squeeze India commercially. The Indian navy can be relied upon to take care of those who try rougher methods of persuasion.
Your cabinet colleagues and parliamentary supporters from the Left parties have unleashed strong rhetoric on employment generation. Let me assure you that by investing in a major infrastructure project in India you will be creating hundreds of thousands of jobs, and allow your government to redeem its pledge. India’s public investment in this port infrastructure will also attract private investment, both foreign and domestic. The best part is that the benefits of almost every single rupee your government spends will accrue to your own voters.
From a geopolitical point of view, I can understand why Pakistan is so excited about creating ‘mutual dependencies’. For the first time in its history, it will have good bargaining chips for its negotiations with India. While that is all very well as far as the Pakistanis go, I cannot understand why India has to pay for those chips. How about keeping India’s energy security independent of the whims, fancies, preoccupations and delusions of our neighbour to the west? China, a country you personally admire, is building road links across South East Asia, Myanmar and Pakistan, giving India a miss. It appears that there are few takers in Beijing for the ‘mutual dependency’ theory.
In conclusion, I wish you every success in your quest to find the oil to keep India’s lights on. But you must replace your faith in the Pakistani government’s promises with faith in the promise of free markets. You must replace the desire to create mutual economic dependencies with a desire to create substantial economic growth at home. If in doubt, please remember this word of advice from a person we both admire.
Sincerely
Nitin Pai
Related Link: Atanu Dey on the Iran-India pipe bomb
Update: The email I sent to Mr Aiyar’s email address just bounced back. Well, thanks anyway.
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