Do we need a sovereign fund?

India’s policy wonks seem to believe that we must follow China in buying up oilfields abroad. Among other things, there is talk of creating a sovereign fund to finance the acquisition of energy assets abroad, including oil, gas, coal, and liquefied natural gas, among other things.

The idea of a sovereign fund is that the assets will be owned by the country. The underlying assumption is that if you “own” the assets abroad, you increase your energy security.

We are more or less wrong on both counts. While it is normal for companies to integrate vertically by buying assets abroad — if you are an oil company, you try and own gas or oil fields at home and abroad so that you have a seamless pipeline from field to pump — the same idea is not good enough when it is the country that is doing the buying.

Reason: a sovereign fund is “sovereign” only in the country of origin; it is not sovereign in the country it is acquiring assets. Whatever it owns in another country is subject to that country’s laws. If the idea of owning, say, an oilfield in Russia or Africa is that you get to use cheap assets when oil becomes costly, you are wrong. No country will allow you to sell yourself cheap oil. You can check it out in our own backyard. The Ambani brothers are fighting over “cheap” Krishna-Godavari oil. The petroleum ministry has told them and the Supreme Court that it has a say in deciding how the oil is priced or sold.

Lesson 1 is clear: countries are sovereign only in their own geographies, not anywhere else. There is almost no difference between allowing say, Reliance, to acquire assets abroad and the sovereign fund doing so.

A sovereign fund’s sovereignty depends on the degree of political clout you wield in the country you are investing in. Now, how many countries in the world does India have sovereign leverage? Not one, unless you count Bhutan and Maldives among them.

The Gulf countries, with whom we have fairly good relationships and long-term oil contracts, are not exactly eager to give you discounted oil. In fact, a better way to get Gulf oil is to give them controlling stakes in our refineries. This way they at least have a vested interest in supplying us with oil. Even so, we won’t get cheap oil, but we can always decide on what is a reasonable retail price for them to sell at petrol pumps in India.

The second objection to the idea of a sovereign fund is that it comes with huge political risks — unless you are buying assets in stable democracies like the US or UK. Unfortunately, these are not the places with the maximum opportunities. The cheapest oil is in politically unstable places like Africa or in inhospitable areas like Siberia. Investing in these places is expensive, and may often need collateral support.

China is successful in buying assets in Africa because it is committing huge aid and military resources to supporting unstable regimes. But it only needs one coup to up-end relationships in any of these territories. China is capable of projecting and using its military power to secure its economic assets in Africa. Are we ready to create an East India Company with the idea of buying and protecting our assets in Africa or elsewhere?

The third reason why sovereign funds will not work is cost. You need enormous sums of money to create a minimum amount of energy security.

According to a BusinessWeek report, “Chinese companies spent a record $32 billion last year buying oil, coal and metals assets abroad, while a $2.1 billion investment by ONGC was India’s sole energy acquisition.” Now, a sovereign fund could obviously be more ambitious and cobble together $10-15 billion of firepower every year from our considerable forex hoard. But is this enough?

The real cost of buying energy security is not the money invested in it, but the opportunity cost of what else you could have done with the same cash. At $10-15 billion a year, India could be at the cutting edge of the solar or wind energy in the next 10 years. These are the resources we should tap, not African oil. In the short-term, we can always buy oil from the international market.

At the bottom of it all is a philosophical question: why invest money in countries run by tinpot dictators and fundamentalist fanatics when we can invest it here, in our own people, our own resources?

If we believe in the India story, our sovereign fund should be investing in India, not abroad. It is for companies to invest abroad, since their interests are not co-terminus with the country’s. India’s government should investing in India.