~ Maju Varghese
Every year, India pays an enormous amount of money as commitment charges to the multilateral institutions for not utilising the loans sanctioned by them. Investopedia defines commitment charges as the fee charged by the lender to a borrower for an unused or un-disbursed loan since it has set aside the funds for the borrower and cannot yet charge interest.
According to the CAG, between 2009-2015 India paid commitment charges up to 602 crores to the external lenders. In 2014-15 itself, India was holding Rs. 2,10,099 crores of unutilised funds thus inviting a commitment charge of Rs. 110 crores. Finance Ministry had found that between 1991 and 2009, the government had paid approximately Rs 1,400 crores as the commitment charges for loans not utilised.
The commitment charges are coupled with interest while reporting by the ministry of finance which makes it difficult to understand the charges paid to different agencies in a fiscal year. The CAG observed that putting commitment charges under the head “interest obligation” is misleading as it does not reflect the nature of expenses.
Arun Jaitley, the Indian Finance Minister minister of India, has been raising the issue of commitment charges. In the 94th development committee of the World Bank, he raised the issue of commitment charges which is highest among multilateral development Banks and demanded its withdrawal. This was again repeated when the demand when the CEO of World Bank visited the country and met the Finance Minister. India is among the countries which are graduating from a low-income country to lower middle-income country resulting in loss of concessional finance from IDA loans.
World Bank charges a commitment charge of 0.25 per cent per annum on un-disbursed loans even if they are committed to be drawn in subsequent years. This is in addition to a front-end fee, a fee paid by the borrower to the lender before the loan offtakes, of 0.25 per cent on loan agreement amount (applicable on current loans). These commitment charges begin accruing 60 days after the loan agreement is signed. Despite resistance from the countries, the World Bank has stated that it will not be able to remove commitment charges due to its cost recovery guidelines.
According to the CAG, India had a total outstanding debt of 51,04,675 crores as on March 31, 2015. This increased to around 57,021,582 crores on August 15, 2016, which means a per capita debt of Rs 44,032. This comes to around 41 per cent of the GDP. To service this massive debt, India pays about 36,318 crores as interest payment every year. CAG further reports that in 2014-15, 77 per cent of the long-term internal borrowings and 73 per cent of the external borrowings were utilised for debt servicing, implying that a larger percentage of debt was being used for paying the existing debts. This, in turn, meant the lower percentage of debt was available for meeting developmental expenditure to promote growth.
Swatch Bharat and commitment charges
The World Bank had approved a US$1.5 billion loan for Swachh Bharat Mission-Gramin (SBM-G), Modi government’s much-hyped flag-ship campaign on Sanitation to support the government’s efforts to ensure all citizens in rural areas have access to improved sanitation. The loan sanctioned in 2015 is the Bank’s biggest lending in the social sector.
The mission has provision for incentivizing states on their performance in the Swachh Bharat Mission. The performance of the States will be gauged through an independent survey based measurement of certain performance indicators, called the Disbursement-Linked Indicators (DLIs). However, due to lack of independent verification of results, India missed the first disbursement of the loan. According to the media reports, India is likely to miss the second tranche too. Despite not receiving a single paisa, India has paid the commitment charge, interest, and front-end fees of USD 15.40 million so far.
The payment of commitment charges to the multilateral agencies because of governmental inability to plan and implement shows a lack of seriousness in using public money. CAG has mapped and pointed out the inefficiency of governments in utilising funds. The money that we pay as fine and commitment charges are a waste of public resources as pointed out by CAG in the reports from time to time. The proposal to set up a public debt and management agency for proper planning of external debt is still pending in spite of various statements by the finance minister.
Multiple CAG reports on debt need to be taken on a priority basis, and an oversight mechanism should be created within the parliament of India through a standing committee to look into external debt and also its investments abroad and making it transparent and accountable to the citizens of the country.
The Asian Development Bank was conceived in the early 1960s as a financial institution that would foster economic growth and cooperation in Asia. India was a founding member of the Asian Development Bank (ADB) and is now the fourth-largest shareholder. ADB commenced operations in India in 1986 and has approved 240 loans totalling $36.8 billion.
Asian Development Bank (ADB) has grown to be the third largest source of development finance in the Asia-Pacific region, next to the World Bank Group and the Japanese Government. Documents published in 2017 reveals that from a lending portfolio of just over $3 billion during the first decade, ADB has expanded its lending to $123 billion during the last 10 years.
However, the Mid-term Review (MTR) of ADB’s strategy for 2015 and 2020 have acknowledged that the Asia-Pacific region faces widening inequalities in income and access to economic and social opportunities. Increased investment in infrastructure has failed to provide inclusive growth and social protection to the vulnerable sections of the populations including the workers and women.
India had about 84 ongoing sovereign loans from ADB amounting to $11.9 billion at the end of 2015. Currently, we have about 170 active projects in the country of ADB alone. The massive Vizag-Chennai corridor, the numerous urban development projects across the country, the ReNew clean energy projects in Andhra Pradesh, Gujarat, Jharkhand, Madhya Pradesh, Telangana and Karnataka, are only a few of the 50 odd active and approved projects. Further 23 projects have been proposed to the ADB waiting for approval. These are just projects covered by ADB, adding them to the projects funded by all IFIs shows the extent of their influence in almost every sector – energy, infrastructure, health, etc. The scale of land grab, loss of livelihood, environmental destruction has been completely overlooked by both the IFIs and the government. The rampant privatisation of all the sectors, including health care, is going to affect all those who would not be able to afford health care. In such a time, holding the development banks accountable has become imperative for one’s survival with some modicum of dignity.
ADB Investments in India. Source: Answer by the government to the parliament of India
ADB 50 campaign in India
The first week of May 2017 was marked by actions across the country against ADB and other IFIs. It coincided with ADB’s 50 years celebrations in Manila. The massive protest actions were intended to send a strong message to the ADB and other IFIs of the havoc their investments have caused. Thousands of people, in over 140 locations spread in over 21 states in India and over 80 organisations, came together to make this campaign a massive success. These protest actions are both a reminder of the reckless lending of ADB and hope to continue the struggle against the IFIs and their inequitable development model.
The coming together of so many organisations resulted in a wide range of programmes, including the public meeting, lectures, demonstrations, and human chains. Activists also made short video clips highlighting the impacts of the investments by IFIs. The protests actions raised concerns about investments of IFIs like World Bank; International Finance Corporation; Japan Bank of International Corporation (JBIC); Asia Infrastructure Investment Bank; New Development Bank; Exim Banks of Korea, United States, China among others. Many of these agencies are co-financiers, with increasing investments in the infrastructure and cross border projects, thus causing irreversible damage to the people and environment, while their policies to safeguard the harm caused by their investments are made opaque and watered down.
The actions mentioned above on the occasion of 50 years of ADB are a part of the continuous struggle of the people from all the regions that have been affected by the projects.
After a Judge declared World Bank immunity cases “wrongly decided,” the communities affected by the Tata Mundra project approach US court to review “absolute immunity” doctrine
Communities harmed by Tata Mundra coal power plant in India continue to seek justice from World Bank Group’s International Finance Corporation
July 26, 2017, Washington, D.C., and Mundra: After a federal judge in US declared that the cases giving the World Bank Group an “absolute immunity” from lawsuits were “wrongly decided,” the communities affected by private-lending arm of the World Bank Group have filed a petition asking the full D.C. Circuit Court of Appeals to revisit its immunity doctrine.
In June, a three-judge panel of the D.C. Circuit, in the case Budha Ismail Jam v. IFC, had ruled that the International Finance Corporation (IFC), the private-lending arm of the World Bank Group, could not be sued for its role in the controversial Tata Mundra coal-fired power plant, which has devastated fishing and farming communities in Gujarat.
In its June ruling, the panel, citing the legal precedents, concluded that the IFC is immune from suit in this case. Justice Nina Pillard, however, wrote a dissenting opinion criticising those decisions as “wrongly decided” and suggested that the full D.C. Circuit, which has the authority to change the law of the Circuit, should revisit those cases.
“The panel’s ruling gives international organisations like the IFC an unparalleled immunity, insulating them from legal accountability regardless of how much harm they cause,” said Richard Herz, senior litigation attorney at ERI, who argued the case for the plaintiffs. “Such sweeping immunity, which is far greater than the privileges enjoyed by sovereign foreign governments, is inconsistent with multiple Supreme Court precedents, and is contrary to the IFC’s development mission,” added Herz.
“We will not give up our struggle for justice,” said Budha Jam, a plaintiff in the case, after the verdict.
“This decision tells the world that the doors of justice are not open to the poor and marginalised when it comes to powerful institutions like IFC,” added Gajendrasinh Jadeja, the head of Navinal Panchayat, a local village involved in the case. “But no one should be above the law.”
It is noteworthy that the plaintiffs filed suit against the IFC in April 2015 over the destruction of their livelihoods and property and threats to their health caused by the IFC-funded plant. The IFC recognised from the start that the Tata Mundra plant was a high-risk project that could have “significant” and “irreversible” adverse impacts on local communities and their environment. Despite knowing the risks, the IFC provided a critical $450 million (Rs 1800 crore) loan in 2008, enabling the project’s construction and giving the IFC immense influence over project design and operation. It failed to take reasonable steps to prevent harm to the local communities and to ensure that the project abides by the required environmental and social conditions for IFC involvement.
The plant has destroyed the local marine environment and the fish populations that fishermen like Jam rely on to support their families, and vital sources of water used for drinking and irrigation. Coal ash contaminates crops and fish laid out to dry and has led to an increase in respiratory problems.
The IFC’s compliance mechanism, the Compliance Advisor Ombudsman, issued a scathing report in 2013 confirming that the IFC had failed to ensure the Tata Mundra project complied with the conditions of the IFC’s loan. Rather than follow CAO’s recommendation for remedial action, rejected most of its findings, and ignored others. Plaintiffs had no other recourse but to sue IFC. In its ruling last month, the panel recognised the “dismal” situation of the affected communities, noting IFC did not deny that the plant had caused substantial damage and yet found IFC could not be sued.
The harms suffered by the communities are all the more regrettable because the project made no economic sense from the beginning. In fact, in the past month, Tata Power, which owns the plant, has begun trying to unload a majority of its shares in the project for 1 Rupee because of the losses it has suffered and will suffer going forward.
On appeal, the plaintiffs argued that IFC has waived immunity because this suit promoted the IFC’s mission, which includes the goals of reducing poverty without harming its projects’ neighbours. The IFC interestingly argued that it is not bound by its own mission.
“The court’s judgment supports the arrogance of lenders like IFC, who disregard the law, their own safeguard policies, and even the findings of their accountability mechanisms,” said Dr. Bharat Patel of Machimar Adhikar Sangharsh Sangathan (Association for the Struggle for Fisherworkers’ Rights), which is a plaintiff in the case. “This sends the wrong message to institutions like IFC – that you can continue to lend money to bad projects, causing irreversible damage to people and environment and no law will hold you accountable.”
The plaintiffs are optimistic that the full D.C. Circuit will reconsider the case.
~ Joe Athialy
With Subhash Chandra Garg assuming charge as secretary of the Department of Economic Affairs (DEA) in the Finance Ministry, the position of the Indian Executive Director (ED) at the World Bank has fallen vacant. The 1983-batch IAS officer of Rajasthan cadre, Garg was the ED at the World Bank from Nov 2014 until June 2017.
Appointments Committee of Cabinet decides appointment of important posts under the Government of India, including ED at the World Bank. While in the past the Appointments Committee had the Prime Minister as its Chair and the Ministers for Home and in-charge of the concerned ministry, with a notification in mid-2016, the Appointments Committee is reduced to only the Prime Minister and Home Minister.
There are currently 25 EDs on the board, one each for the seven largest shareholders at the Bank – US, Japan, Germany, France, UK, China and Saudi Arabia. Other countries are grouped into constituencies, each represented by an executive director. Indian ED is in charge of Bangladesh, Bhutan and Sri Lanka, apart from India.
The EDs are based at the World Bank Group’s headquarters in Washington DC. It is responsible for policy decisions affecting the World Bank Group’s operation, and approval of the International Bank for Reconstruction and Development (IBRD) loan and guarantee proposals and International Development Association (IDA) credit, grant and guarantee proposals.
There are a few pertinent questions surrounding the appointment and functioning of positions like that of World Bank ED:
Shouldn’t the elected representatives of people have a say in the appointment of an ED at any of the multilateral institutions, who represents the interests and positions of the country?
Shouldn’t s/he be guided by the wise counsel of the Parliament, for the positions s/he takes at the Board, given that the positions could have far reaching impact for the country for a long time to come? (In US, Congress provide “legislated instructions” to the ED representing the US at the Bank).
Shouldn’t s/he be transparent and accountable to the Parliament for the positions s/he takes at the Board?
It is the time that we start asking some hard questions.
By Joe Athialy
Like India once had a Ministry of Disinvestment, it’s time she has a Ministry of Loss Making. How else can one understand government’s eagerness to buy out all loss-making projects, whether in coal, hydro or steel sectors, collectively a few lakhs of crores of rupees worth?
Thermal power projects of about 25,000 MW are on sale, a report says, while there are not many buyers in the market. The government jumps in and offer to buy some of them. Last month after a meeting with leading bankers Power Minister Piyush Goel said that the Centre is designing a new plan where public sector banks will buy off stressed assets or projects which are running on losses, and the state-owned National Thermal Power Corporation (NTPC) will operate it.
What magic could turn these loss-making projects profitable by buying them off from private corporations who, despite subsidies and other incentives given by the centre and state governments, failed to make their projects economically viable? If one looks at the fate of Air India today, one wonders if the government could convert loss-making sectors to profit-making ones, why did they fail in saving Air India!
This buy off undermines the effort Reserve Bank of India (RBI) is doing to recover nearly 25% of non-performing assets (NPAs), listing down 12 stressed accounts through the Insolvency and Bankruptcy Code and cast a shadow on the tall claims of curbing the menace of NPAs.
The other day, nine thermal power projects (TPP), run by private corporations were shortlisted for bank takeover. Three of the major ones are said to be Jindal’s Derang project in Odisha; RattanIndia Power (erstwhile Indiabulls Power) plant in Nashik, Maharashtra; and Lanco Infratech’s Babandh power project in Odisha, with a combined capacity of 6660 MW.
A study, which looked into TPPs which are 1000 MW and up, and which secured environmental clearance between 2005 and 2015, said that over Rs. 6 lakh crore was lent out by national and international financial institutions, banking and non-banking, for 125 projects, with a capacity of 2.4 lakh MW. Of which, 89%, or Rs 4 lakh crore was lent by national institutions. The above three projects are part of the 125 projects considered for the study, and they borrowed from national banks as well as non-banking institutions like Rural Electrification Corporation and Power Finance Corporation, for a combined cost of Rs. 27,255 crores.
But where did all this start? The coal sector is reeling under heavy financial stress with more and more companies trying to shed their liabilities off. Expansion of coal-based power sector a decade back was devoid of any sense or reasoning. How else would one justify approvals of over 700 GW of power projects by 2011, with nearly 85% of the coal-based projects, when the Integrated Energy Policy of the Planning Commission was projecting a power requirement of only 230 GW by the year 2032? One could trace back today’s financial stress of the sector to that mindless expansion, into which companies which hitherto was only making/dealing with compact disks, electronic items and running newspapers jumped into to make quick bucks.
Coastal Gujarat Power Ltd (Tata Mundra) and Adani Mundra plants are other two projects, which sought government bailout in the recent past due to mounting losses.
One of the first Ultra Mega Power Projects, Tata Mundra has been the poster-boy of TPP in India. A 4000 MW, $4 bn project, financed by every major financier one can things of – World Bank private sector arm, International Finance Corporation, Asian Development Bank, Korean Exim Bank, BNP Paribas, India Infrastructure Finance Corporation Ltd, HUDCO, State Banks of India, Bikaner and Jaipur, Hyderabad, Travancore, Indore, Vijaya Bank and Oriental Bank of Commerce.
Claiming to be using supercritical technology, and hence less pollutant, they procured coal from Indonesia, prices of which trebled within a few years making the project more non-viable.
The colossal environmental damages, loss of livelihood and a host of social and environmental issues recognised as serious impacts by accountability mechanisms of IFC and ADB – the Compliance Advisor Ombudsman and Compliance Review Panel – were never counted in the costs, nor tried to compensate or mitigate.
Since the time of its commissioning, the Mundra project has been a drag on the financials of Tata Power.
Adani’s 4260 MW coal based power project in Mundra, a neighbour to the Tata project, has been reeling under growing stress the past many months. Adani Power recently reported a consolidated net loss of ₹4,960 crore in Q4 of FY17 compared to a net profit of ₹1,085 crore in Q4 of FY16. Last month, Adani Power had discontinued 1,250 MW power supply to Gujarat Urja Vikas Nigam Ltd. (GUVNL), a Govt of Gujarat entity, mainly due to the inviability of imported coal to run its power plant at Mundra.
In April, Supreme Court had disallowed any relief to Adani Mundra plant (and Tata’s Mundra plant, both located at Mundra) in a five-year-old contentious issue of compensation due to the unforeseen increase in imported coal prices for their power plant.
Economic and Political Weekly, in a recent investigation, found out how the NDA government amended rules related to Special Economic Zones to favour one company – Adani’s Mundra Power, benefiting the company with Rs. 500 crores by giving it an opportunity to claim refunds on customs duty, which it never paid. It says:
In August 2016, the Special Economic Zones Rules, 2016, were amended by the department of commerce, to insert a provision on claims for refund under the Special Economic Zones Act, 2005. The SEZ Act under which the SEZ Rules are framed did not initially provide any provision for refunds of any kind before this amendment was introduced. According to reliable information received by the authors of this article, the amendment was made to specifically provide Adani Power Limited (APL) an opportunity to claim refunds on customs duty to the tune of ₹500 crore. The APL has claimed that it has paid customs duty on raw materials and consumables—that is, coal imported for the generation of electricity. However, documents leaked to the EPW indicate that the APL had not, in fact, paid the duty on raw materials and consumables amounting to approximately ₹1,000 crore that had fallen due at the end of March 2015. It appears at face value that by amending the SEZ Rules to insert a provision for companies to claim refunds on customs duty, the department of commerce is allowing the APL to claim refunds on the duty that has never been paid by it in the first place!
How will a project plagued with controversies, with possible legal and certainly financial liabilities, be of any good for a public sector undertaking?
NPAs stand at a staggering Rs. 7.6 lakh crore at the end of March, or 9.3% of the gross advances by the banks – a rise of 135% in last two years. Public sector banks account for almost 88% of these loans, which have now exceeded these banks’ combined market value.
It’s a double blow to the public – first their deposits in the banks have been turned to NPAs, and then their tax paying money is used to bail out the ones who turned their assets to NPAs.
The bailout of corporations by the government sends a wrong message to the banks and regulators and takes away the confidence in the public that the government is serious about tackling this issue. It’s a simple case of privatisation of profits and nationalisation of losses.
Without putting bold and long-term measures to tackle the issue of NPAs, piece-meal measures of bailing out selective corporations will only lead to the ripping off of the banking system. The long-term measures could include a moratorium on corporate debt restructuring and non-transparent debt write-offs, blacklisting willful defaulters and preventing them from further borrowings, and stringent measures to recover from defaulters.
By Anuradha Munshi
Asia Infrastructure Investment Bank (AIIB) recently concluded its Second Annual Board of Governors’ meeting in Jeju, South Korea. The three-day-long meeting, during June 16-18, 2017, saw the participation of Board of Governors, representatives from the finance ministry of various countries, banking industry, corporates, and civil society organisations.
The three days also provided an opportunity for the CSOs to have a discussion with the Jin Liqun, Bank’s President in one of the sessions. In this session, Liqun’s address was followed by a discussion in which about 120 CSOs were present. Liqun said that AIIB is ready to listen, open to criticism, and willing to correct itself. He stated that the Bank ensures that three basic criteria are met before making any investment—financial sustainability, environmentally friendliness, and acceptance by the locals. He further said that the Bank would follow Paris Agreement to support low carbon projects.
However, in spite this being an open session, not much time was provided to the CSOs to adequately keep their points as a few questions were reserved for the representatives of the industries. This left very little time for the CSOs to interact with Liqun, who had to leave early.
The primary concern put forward by CSOs was about the deficiencies in the environmental and social framework, especially regarding the projects funded by financial intermediaries. There were questions on the manner in which consultations have been planned for the AIIB’s complaints handling mechanism. Also, questions were raised on AIIB’s support for the hydropower plant in Georgia despite facing local resistance, which is a violation of a core value Liqun had just enunciated. There were also serious concerns about the recklessness with which AIIB is clearing projects without even having most of its systems in place. It was observed that the answers to most of the questions asked in this session were evasive.
India at AIIB
The meeting saw the participation of Indian Finance Minister Arun Jaitley, senior representatives of the Ministry of Finance, financial institutions, and industry, during the India Seminar on June 16. Jaitley in a seminar on Indian Policy, Progress and Prospect in Infrastructure Development spoke about the infrastructure deficit in the country and the need to focus on it before investing in the manufacturing industry. He mentioned India’s national highway program as a successful model of infrastructure building in the country and based its success on easy exit policy, flexibility, and hybrid policy for revenue. The minister termed success of national highway program as a success of Public Private Partnership (PPP) model in India.
Jaitley also insisted upon the need for additional resources for the functioning of 71 airports and building 32 to 35 airports in new cities to promote regional connectivity. He advocated the provision of tax concessions and subsidies as an incentive to the airlines to fly to these cities.
While referring to the railways, the minister said that much investment is required for the upgradations. He emphasised the need of privatisation of some of its services by citing an example of the redevelopment of 400 railway stations by private companies.
On the infrastructure front, he said that the creation of smart cities and industrial corridors have an enormous potential to generate infrastructure, which he saw as a quintessential factor to bring in investment for the manufacturing industry in the country. He also spoke about the problem of surplus capacity in the power sector; and electrification as a focus area for the Modi government. He emphasised the need to invest in the improvement of distribution systems and electrification and mentioned AIIB’s approval of Transmission System Strengthening Project as an example to highlight the government’s focus on electrification.
The Modi government’s current priority is to invest in the infrastructure sector for which the government is also looking at PPPs as a successful model. Towards achieving this goal National Investment and Infrastructure Fund (NIIF) will be the mother fund under which sub-funds are located. Sujoy Bose, CEO, NIIF, who was also present at the AIIB meetings, spoke on setting up of NIIF to raise debt to invest in the equity funds of infrastructure finance companies in India. He emphasised on the need to focus on the infrastructure development to attract international capital as it is mostly interested in investing in constructed assets, and not on infrastructure development. AIIB will consider its USD200 million investment to NIIF as a financial intermediary in the fourth quarter of 2017.
Apart from this, the AIIB is also funding India Infrastructure Fund, which was cleared by the AIIB Board a day ahead of the Annual Board of Governors Meeting. Likewise, the controversial Amaravati Sustainable Capital City Development Project will be soon considered up by the Board.
These investments indicate the direction in which AIIB is heading on the three core values reiterated by the Bank’s president. If one looks alone at India Investment portfolio of AIIB, two of the projects, IIF (approved) and NIIF (under consideration for approval), will be implemented by financial intermediaries. There is no transparency on who will get these funds for infrastructure development and for what projects in particular. Amravati Project which is up for consideration has been marred by large social and environmental issues like displacement and diversion of forest land in India. From hydropower project in Georgia to the Amaravati Capital City Project, the Bank has neither shown much respect for the environmental and social concerns. The core values mentioned in front of the CSOs are far away from what is being pushed in the country investment open discussions, where the investment is speedy and profitable as the respective governments take care of the land and environmental issues. There are serious concerns about the manner and speed at which both India and AIIB are heading on their investments with priorities centred on the projects and not on environment and people.