Letter # 28

If the stroke of pen can take away billions, it can make billions too. Today, we contrast how changes in legislation have cost almost USD10bn to a few Canadian companies versus how Indian state governments are learning from each other to make their billions.

Depending on which side of the political spectrum one is, this story can look either like Erin Brockovich – part two at one end, to total oppression of capitalism at the other. Politics aside, it surely makes for a fascinating story. So, here it is:

Sometime in 2008, a Canadian energy giant TC Energy (formerly TransCanda) decided to transport the planet’s dirtiest fossil fuel to the market. To do so, it had to build a pipeline of about 1,700 kms from Hardisty (Alberta) in Canada to Steele City (Nebraska) in the US. This pipeline was phase IV of an existing Keystone pipeline and was named Keystone XL (or KXL, with XL standing for export limited). Canada was already sending close to 500k barrels of oil per day to the US; with KXL, that would have increased by another 800k. Thousands of kilometers of pipeline runs across Canada and the US, but you see, this was different–this one would have carried the tar sands.

Beneath the forests of northern Alberta in Canada lies a sludge like, sticky deposit called tar sands. These contain bitumen, a gooey-type petroleum, that can be converted into fuel. Well, it’s not easy to convert these into oil, but you do remember the days when oil was above USD100 per barrel, right? These investments were planned around that time. Anyhow, the idea was to transport these remote, land-locked tar sands to Mid-West and Gulf coast refineries in the US.

Given that tar sands are thicker, more acidic and corrosive than lighter versions of crude, the protests to the project (emanating from fears of spills) started almost as soon as the plan was set in motion. In August 2011, silent protests outside the White House resulted in the arrest of more than 1,200 people. That peaked in 2014 with more than 2mn comments urging the rejection of the KXL pipeline was submitted to the US State Department during the 30-day public comment period.

That was probably just enough for the outgoing US President in his second term. So, in 2015, President Obama temporarily delayed the permits for KXL approval. “America is now a global leader when it comes to taking serious action to fight climate change,” President Obama said. “And, frankly, approving this project would have undercut that global leadership.”

The new president wouldn’t have any of that. On the fourth day in office, President Trump signed an executive order to allow Keystone XL to move forward. On March 28, 2017, his administration approved a cross-border permit for the pipeline. And, construction began in full swing. TC Energy and the Alberta county had invested close to USD8bn so far in the run-up to the US presidential election.

And then, comes the new president –President Biden. Having run the campaign on vowing to curtail fracking and stop the permit for the “environmentally unfriendly” KXL pipeline, it did not come as a surprise that he reversed the approval for on January 20, 2021–his day 1 in office.

Biden delivered on day 1 what the Obama administration had started. Yes, we can (but after re-election!). While environment groups in Canada have applauded the decision ⁽¹⁾, Alberta’s premiere Jason Kenny called the decision a ‘gut punch’. In the process, USD10bn were lost, but in the overall scheme of things, it “no biggie”!

Onto greener pastures now. Not all political stories end in billions of losses. Some leave us with gains and a high (you will get my drift in the next few paragraphs).

The Indian state of Uttar Pradesh has a few unique characteristics. It is not only India’s most-populous state, but also the most populous country sub-divisions in the world. The assembly elections in 2017 threw an interesting winner, the ruling incumbent at the center, the Bhartiya Janata Party (or BJP) who won 78% seats (just five years ago, it had won 12% of the seats). Stranger still was the choice of Chief Minister; the BJP decided to appoint Yogi Adityanath, still in his 40s when he took office.

The Wikipedia bio of Yogi Adityanath lists him as an Indian Hindu monk and politician ⁽²⁾. As soon as he took office, some old and seasoned hands ⁽³⁾ suggested that India would embark on a national prohibition drive that is easily understood by the public and which can be painted as a major reform. And boy, would they be surprised if they saw what has transpired since!

In order to break the liquor bootleg cartels and large trades in the organized liquor retail markets, Yogi government aggressively cut excise duty on liquor ⁽⁴⁾. This brought liquor smuggling to historic low levels, leading to the unorganized market moving to organized. The results were stark–excise collection on liquor grew 21% in 2018, 38% in 2019 and 25% in 2020.

And he is not stopping here. Liquor in UP is now available in tetra packs, even as the entire supply chain, including the state government’s departments, is being digitized. Cheaper “official” liquor is reducing the number deaths due to spurious liquor and generating employment within the state. In absolute terms, excise collection from liquor in Uttar Pradesh is slated to jump from USD1.9bn in 2017 to a staggering USD4.6bn in 2022, while slashing costs for the end consumer.

Finance ministries of other state governments are studying the model with great interest. If the taxation around alcohol comes down and to more predictable levels, the valuation multiple for a lot of liquor stocks in India can dramatically increase. From being a business with huge government interference, they could transform to truly consumer discretionary businesses and valuation rerating would follow.

Notes:
(1) Alberta leader says Biden’s move to cancel Keystone pipeline a ‘gut punch’ | Environment | The Guardian
(2) Yogi Adityanath – Wikipedia
(3) Stanley Pignal on Twitter: “Nationwide prohibition in India is the next demonetisation (ie big, surprise policy move that is easily understood by public, painted as major reform). https://t.co/uJhax0HIOS” / Twitter
(4) Yogi government to cut excise duty to curb liquor smuggling | Business Standard News (business-standard.com)

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