International BusinessSunil Jain: Golden and other rules
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According to the Production Sharing Contract (PSC) between the government, RIL and its partner Niko Resources Limited, till such time that RIL recovers 1.5 times its total costs, the government gets just 10 per cent of profits — the first thing that is recovered is the costs. After RIL recovers 2.5 times its costs, the government gets to keep 85 per cent of profits. So, if RIL inflates costs, Sibal is right, it will get a lower level of profits. But since the company also gets to recover the inflated costs, it makes a net gain. Whether RIL is inflating costs is a different matter, but the incentive to do so exists.
Oily economics
(RIL’s cost-recovery versus capital costs)
Investment
Multiple
Govt Share
of profit
%
RIL Share
of profit
%
Less than 1.5
10
90
1.5 to 2
16
84
2 to 2.5
28
72
2.5 to 3
85
15
3 and above
85
15
Investment Multiple: RIL revenues from KG Basin divided by costs
Source: RIL-Niko PSC with Government of India