Down The Rabbit Hole

The Piped Pipers

Pranjali Bandhu

This report, available in *book format as well as online, sets out to answer some questions regarding the behaviour of public sector banks in India. Why are big corporations sanctioned loans worth hundreds of crores, even while topping the defaulters list, when simultaneously small farmers, small-scale industry and students find it difficult to get loan; of even a few lakhs at affordable interest rates? Why are these banks pushed to fund projects that greatly damage the environment and displace a large number of people with impunity? Why are not these banks held liable for the bad loans sanctioned, which have reached extraordinary figures, if restructured or refinanced bad loans are also included? The purpose of this study is to get at the root of this particular method of loot of public finances in addition to many other conduits that keep a large majority of the people in penury.

For the last many years, the All India Bank Employees Association (AIBEA) has been demanding, to no avail, that people's money be used for people's welfare, that national savings be used for national development, and not become largesse for private corporates. Collapses of banks necessitating bailouts, and hitting hard the people whose savings are involved, had become a common phenomenon in the West in the course of the latest financial crisis starting around 2008. If this trend in the public banking sector of India continues, to throw money into the projects that are often interminably delayed or abandoned due to social and environmental conflicts, then "our economic dreams will become nightmares and the growth balloon will burst." (p.9)

India's current economic growth trajectory requires long-term funding of large-scale infrastructure, and industrial projects, such as highways, airports, ports, power plants and mines, which in the era of LPG (liberalisation, privatisation, globalisation) are mainly being implemented by private sector corporations. These mega projects are not being financed by the corporates' own money or with money raised in the market through shares, but by floating so-called Special Purpose Vehicles (SPVs) with the purpose of executing single projects. Funds are raised through equity from multiple sponsors and large amounts of debt from a consortium of banks. According to the International Project Finance Association (IPFA) the financing of such long-term projects and public services is based upon a non-recourse or limited recourse financial structure where project debt and equity are paid back from the cash flow generated by the project. The borrower is not liable in the case of default or bankruptcy; only the collateral can be seized by the lender, not company assets. This mode of financing came up in the 1990s, but gained traction in India only in the last decade or so. In the year 2009 India ranked on top in the global project finance market with SBI Capital Markets. IDBI, Axis Bank and HDFC being acknowledged as leading financiers in the Asia-Pacific region.

This report, with Lakshmi Prem-kumar as primary author, attempts to understand the lending framework for financial institutions in the country particularly with regard to the financing of mega 'development' and infrastructure projects by compiling a set of six case studies. Eleven public sector financial institutions were requested general information on their loan policies through RTI applications. Their responses by and large revealed their reluctance to part with information that exposed their vulnerability while lending to corporate run projects. (The list of questions to banks and their responses are given in Annexure 2 of the report).

The following six projects have been painstakingly researched and analysed: GMR Kamalanga Energy Limited (GKEL), Athena Demwe Lower Hydro Electric Power, Sasan Ultra Mega Power Project, Lavasa Hill City, Lafarge Surma and Krishnapatnam Ultra Mega Power Project. These cases have been chosen because in each of them social and environmental norms are severely violated and they have been 'stayed', delayed or stopped because of mass resistance by affected communities or court cases. All the cases involve illegal land grab from Dalit, Adivasi, BC and other indigenous communities violating the government's own laws such as the Forest Rights Act (2006).

Three of the six projects are coal fired thermal power projects. India's growing power requirements are planned to be met largely through the process of carbon emitting, global warming increasing, air and water polluting, livelihood destroying burning coal. There are a number of ongoing and planned ultra mega power projects in the private sector depending on allotted captive coal mines and requiring forest clearances, as 90% of coal reserves are under forests inhabited by Adivasi communities. So are in fact 50% of minerals and existing and potential hydro power sites. Coal mining is also a corruption and scam ridden terrain with a thriving black market run by a coal mafia in cahoots with politicians looking for pickings for themselves and their parties.

Land grabs are taking place not only by Indian companies but also by international financial institutions, as in the case of Lafarge Surma. This is an international company, registered in Bangladesh, manufacturing cement and drawing its raw material of limestone from quarries in Meghalaya. Mining is carried out by two of its subsidiaries which have acquired land protected against acquisition by non-tribals under the 6th schedule of the Indian Constitution. The Meghalaya Land Transfer Regulation Act 1971 also prohibits such transfers which can be sanctioned by the competent authority only under conditions that include the welfare and development of tribals. One of the subsidiaries—LMMPL—owning the mining rights transferred the rights of the land purchased by it as mortgage to international financial institutions for loan money. Considering this land acquisition and mortgage to be illegal the local people of one of the affected villages formed an action committee and filed a PIL in the Guwahati High Court, which issued notices to the Union Ministries of Home, Finance and Forests, Chief Inspector of Mines, National Commission for STs and the RBI among others for "dereliction of their constitutional duly to protect tribal lands and environment from local and foreign incursions."

Opposition is legion to livelihood destroying infrastructure and development projects laced with illegalities and corruption, which is often the factor delaying their commissioning. In the face of enforced and displacing land acquisitions people's movements erupt and even the provisions of the recently (in 2013) enacted law, "Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act" (LAAR Act) that replaced the 1894 colonial Land Acquisition Act fail to adequately protect their rights. Already the 1984 amendment to the colonial Act had broadened the definition of 'public purpose' allowing the state to acquire land for private profit oriented projects. The 2013 Act similarly puts strategic purposes, infrastructure and industry under 'public purpose.' It does not apply to cases where the government needs to acquire land for its own use. Several State governments have used the urgency clauses applying to national defence and emergencies arising out of natural calamities to acquire fertile land and pass it on to big real estate companies. Thirteen earlier laws relating to land acquisition are as yet exempt from the LAAR Act, such as the Coal Bearing Areas Acquisition and Development Act 1957, and the Land Acquisition (Mines) Act 1885, and they will need Parliament's approval to bring them under the new Act. This is in addition to the complete failure of the Indian government to carry out a thoroughgoing land reform post-1947.

The LAAR Act allows the executive to take decisions with the help of 'experts' rather than the people and their local organs. Its aim is to facilitate the urbanisation process in which the rural poor and dispossessed continue to stream into urban slums as cheap and unskilled labour for construction and other infrastructure work. Any cash compensation tends to get blown up fast by people as the tribals whose entire set of values and outlook is still pre-modern. The corporate sector is against the higher compensation awarded and the R&R measures for land acquisitions because these hike up project costs. There is an aggressive lobby campaigning for the repeal of this law. Corporates like the Tatas are already some of the biggest landlords in the count y. It happens that in the name of projects more land than required is acquired, which is later used for speculative profit-making in real estate and resorts.

The provisions of this Act are very much along the lines of World Bank recommendations (See World Bank report no. 38298-IN, July 9, 2007) with regard to transfer of land to investors. Government acquisition is regarded to be a transitory phenomenon; as disinvest-ment and privatisation proceed apace, outright purchases or leases negotiated directly between the parties concerned are envisaged. This is also in the interests of national and international agribusinesses as they get even more entrenched in Indian agriculture and food production and processing.

About the World Bank, which has been a guiding light for the trajectory of the Indian economy right from the time of Indian 'independence', the report has the following to say: "The World Bank's expertise in formulating policies for protection of environmental, social and corporate governance has not necessarily translated into good practices." Globally, it has been amongst the most criticised for involvement in projects which entail massive human rights and environmental violations. Simultaneously to formulating Sustainability Frameworks, it has also innovated newer means to finance projects in violation of its own policies and safeguards (p. 158). The Lafarge Surma and GKEL projects are cases in which the IFC (the private sector lending arm of the World Bank group) has subverted its own safeguards by canalising funds through a subsidiary or clandestinely through a financial intermediary, which on their part do not adhere to sustainability norms. It is able to do this in the absence of lending regulations in India.

The report (pp. 125-27) lists a plethora of international guidelines such as the UN Global Compact, the PRI (Principles for Responsible Investment), the UNEPFI (UN Environment Programme Finance Initiative), the Equator Principles (EPs), which have international banks, Indian and international companies and financial sector businesses as signatories. Yet one finds these guidelines often being breached because of their voluntary nature and the expectation of self-regulation. Curiously, in the case of Lafarge Surma, during its inability to service long-term loans with international financial institutions due to court cases in India it was bailed out by Indian banks, which provided short-term loans. This when the company neither had valid environmental nor forest clearance! Unfortunately, it is often the case that loans are sanctioned by financial institutions prior to the granting of statutory clearances by ministries, says the author, citing the case of tie Athena Den we Lower HEP too.

Not only do the public banks and financial institutions lend to projects without the necessary environmental clearances and assessment of social impacts; these very assessment reports compiled by private consultants are fraudulent, shoddy copy-paste jobs seeking only easy clearance for projects. And instead of requesting loans after getting necessary clearances banks are being requested to save the deteriorating quality of loans hastily granted. To hasten the process of clearances the UPA government set up a Cabinet Committee on Investment (CCI), which set deadlines for the clearing of projects. Companies also resort to the refinancing of loans in case of delays and this further affects the lending bank's sustainability.

The report suggests that Indian banks, especially the public sector ones, should legislatively be made to monitor environmental and social impact of projects independently of submissions made by project proponents prior to lending, and that there should be a mechanism to evaluate compliance by financial institutions with the legislation. It is important that community organisations, human rights organisations, mass struggles, people's movements, trade unions, solidarity groups, activists and other civil society groups come together to demand accountability and transparency from the banks and other financial institutions.

*DOWN THE RABBIT HOLE: What the Bankers Aren't Telling You—An Analysis of Lending Practices Adopted by Banks to Finance 'Developmertal Projects in India"

The Research Collective, PSA (Programme for Social Action) Delhi), February 2014

Vol. 47, No.7, Aug 24 - 30, 2014