Sleaze-ridden capitalism

The way in which public funds have been channelled to the defaulting private promoter of the Maheshwar dam project belies the ruling establishment's claim that neo-liberal market reforms have brought greater transparency and accountability into the system.

THESE are scandalous times, so much so that the very frequency of scams and swindles has tended to inure us and make us less shocked at each new revelation. We have now grown used to stories of crime in high places, of financial skulduggery by corporate groups aided and abetted by their political cronies, not only in our country but even internationally.

Nevertheless, the latest episode in India of blatant financial wrongdoing still comes as something of an unwelcome surprise. This is because it provides further evidence that the powers that be in our country are not just engaging in corrupt practices but also have no qualms about subverting crucial public institutions. Our rulers today appear to be so short-sighted in their quest for dubious immediate gain that they have lost sight of the basic requirements for market functioning and minimally efficient capitalism.

The case in point is the Maheshwar Dam project in Madhya Pradesh, to be constructed on the Narmada river - upstream of the Sardar Sarovar Project. This project has already been the subject of much controversy and protest, largely because of its effect in terms of submergence and displacement, and local groups have been involved in agitating against it for some years. While the official rehabilitation policy requires that affected people be resettled with agricultural land and allows cash compensation only in very exceptional cases, so far not a single affected family has been given agricultural land. Instead, several people have been more or less forced to accept cash compensation, as the promoters have apparently dumped large quantities of stones on their land.

These continue to be major issues. In addition, the project has been beset by difficulties of various sorts almost from the outset and has now been halted for some time. In fact, there are real questions about the viability and sustainability of this project. For example, because the project is situated in the plains of the Narmada valley with a low rim, there is a technical and design bar to higher production of power. Four-fifths of the power is to be produced during the four monsoon months. Since the actual extent of firm power in a hydel project is based on the available water flows, it is likely to be only a fraction of the proposed installed capacity. If there is a drought and power is required, hydel power will not suffice because of inadequate flows of water.

Since 1994, when the project value was only Rs.465 crores, the estimated outlay has increased to over Rs.2000 crores. In addition, the Power Purchase Agreement (PPA), which is valid for 35 years, requires compulsory payments at deemed generation levels, irrespective of actual production, and guaranteed rates of return on equity ranging from 16 per cent to 32 per cent. As a result, the power tariff, as a proportion of project costs, has gone up enormously. Based on the tariff formula in the PPA, it may be conservatively estimated that the average cost of power from the Maheshwar project will be around Rs.4 to Rs.5 per kWh at busbar and the cost of peaking power will be much higher.

This points to what may emerge as the fundamental flaw in the project - the power it will generate will be so expensive that the cost of power production cannot be recovered through sale of power either by the Madhya Pradesh State Electricity Board (MPEB) or by the project promoters. Needless to say, the experience of the State of Maharashtra with Enron should provide obvious warning signals in this regard.

But all these issues, important as they are, are still not the major concerns at this moment. The issue that has now come up relates to the misuse of public money by those anxious to restart this project and continue to reward the private promoters. Clearly, this project is extremely vulnerable to and crucially dependent on the overall financial position and other sources of revenue of the MPEB, which is itself in severe financial difficulties.

The project is being run by the Shree Maheshwar Hydel Power Corporation Limited (SMHPCL), a company set up by the S. Kumars group. The financial dealings of the S. Kumars group and its holding companies so far are under a cloud. There are ongoing legal proceedings against the group companies Induj Enertech Limited and SMHPCL and the movable and immovable properties of the Maheshwar project have been under attachment since December 2002. This is because Induj Enertech defaulted on a loan of nearly Rs.45 crores taken for the Maheshwar project.

In any case, it has been clear for some time that this whole project, while ostensibly in the hands of the private sector under the control of the S. Kumars group, is being dominantly financed by public financial institutions. The Industrial Finance Corporation of India (IFCI) is the lead agency responsible for the continuing appraisal and monitoring of the project on behalf of all the other public financial institutions and banks involved in financing the Maheshwar project.

According to the IFCI Reappraisal Report of March 2000, by the end of 1999 SMHPCL had borrowed around Rs.122 crores of public money from various banks and institutions including the IFCI, Industrial Development Bank of India (IDBI), State Bank of India (SBI), Life Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC), Bank of India and Dena Bank. It had also put in around Rs.136 crores of its own money as promoter's contribution that was a requirement for the public financing. Together this money constituted the project funds and the expenditure from these funds can be undertaken only with prior approval from the financial institutions.

The IFCI report indicated that out of this money, Rs.106.4 crores was given to agencies that neither did any of the assignments on the project nor had any approved contracts for the project. Clearly, therefore, these public monies were not used for the purpose for which the loan was taken, that is the construction of the project. The IFCI report also noted that Rs.19.3 crores of this money was given to SMHPCL's holding company Induj, although Induj had no contracts or any experience to work in the project.

It can certainly be argued that all this constitutes diversion and siphoning off of funds as defined by the Reserve Bank of India. The IFCI report stated: "The company has also not taken any approval from the Institutions in this respect before appointing them." It stipulated the return of the entire sum of Rs.106.4 crores along with interest as an important pre-disbursement condition for any more public funds to be infused into the project.

So Rs.106.4 crores of project funds, including public funds, were diverted to entities without contracts, who did no work on the project. Despite such money being available to those not involved in the project, even the telephone and electricity connections of SMHPCL have been severed owing to non-payment.

In addition, the S. Kumars group has a track record of wilful default. The S. Kumars Power Corporation Limited (now known as the Induj Enertech Limited) was declared a "wilful defaulter" by the Madhya Pradesh State Industrial Development Corporation (MPSIDC) through a public notice in The Economic Times of September 13, 2002 for defaulting on a loan taken from the MPSIDC in 1997-98. By the public notice of September 13, 2002, another S. Kumars company - Modak Rubber and Textile Industry Private Limited - was also declared a wilful defaulter.

Another IFCI report of June 10, 2002 noted that the flagship company - S.Kumars Nationwide Limited (SKNL) - wilfully defaulted on its loans despite being able to pay. "Even after restructuring, it (SKNL) is defaulting to IFCI as well as to other institutions despite having cash accruals of Rs.63 crores for the year ending September 2001." SKNL has defaulted in the repayment of the principal and interest to IFCI even after the restructuring of the loan.

Given all this, by no stretch of imagination could SMHPCL, or indeed any other S. Kumars group company, currently be considered a desirable borrower, especially from public financial institutions that have already suffered because of its earlier default. Most people would immediately assume that there can be no question of the IFCI giving public money or supporting a bonds issue for the S. Kumars group under the circumstances.

This is what makes a special meeting , called on March 4 this year, to try and arrange further public financing for the Maheshwar project so remarkable. The meeting, organised by the Ministry of Power, was chaired by the Union Power Minister and attended by top politicians (including the Chief Minister of Madhya Pradesh and the Union Minister of State for Finance) as well as the chairmen of the major public financial institutions involved. The purpose of the meeting was to tie up the finances of the Maheshwar project to the extent of Rs.2,233 crores through loans and debentures to be financed by the Indian financial institutions. This included subscriptions for the debentures to be issued by SMHPCL - an amount between Rs.330 crores and Rs.400 crores.

Obviously there was some pressure on the financial institutions, and many of them complied to an extent. SBI said that it had formally cancelled a foreign currency loan of Rs.110 crores that it had committed to earlier (to be given by SBI Frankfurt) but was prepared to renew it. IFCI was directed to firm up the subscription agreement for equity from others and to tie up or reconfirm the balance debt/equity from the financial institutions.

The Power Finance Corporation (PFC) stated that even though it is the largest lender to the project beyond its normal exposure limits and SMHPCL is the PFC's third largest defaulter, it would still consider providing the credit enhancement guarantee to facilitate the raising of funds through optionally fully convertible debentures (OFCDs) provided the SMHPCL defaults on the PFC loans are paid. The Managing Director of LIC stated that his company had agreed to contribute to the subscription of Rs.100 crores to the debentures that will be issued by SMHPCL on the conditions that: (1) the OFCDs are rated by the Credit Rating Information Services of India Limited (CRISIL) at AAA(SO); (2) the PFC provides credit enhancement guarantee to the project; and (3) if the lenders confirm their support to the project.

Of course, the crucial prior requirement for all these conditions is that the defaulted debt to these institutions be actually repaid, without which these public financial institutions would be legally constrained in providing fresh funds. But there was no insistence that the defaults of public money must be paid back by S. Kumars immediately. Instead, the Union Ministers actually proposed that the public financial institutions should go against all basic financial norms and provide fresh finances anyway.

The basic pressure was on LIC. The minutes of this meeting read as follows: "Hon'ble Minister of State for Finance , Government of India, felt that pro-active participation of LIC, by way of advance subscription to OFCD to the tune of Rs.100 crores, is a crucial trigger for the project to move forward and desired that the proposal be reconsidered by the LIC Board so that PFC could be paid, construction restarted and PFC could also issue guarantee for OFCD to back up GOM (Government of Madhya Pradesh) guarantee."

It should be noted that the LIC Board had earlier refused to make any such advance payment. According to the minutes, the Secretary, Power, in his summing up of the discussion, also reiterated: "Considering the fact that PFC cannot issue the credit enhancement guarantee without the clearance of default dues, LIC to reconsider payment of Rs.100 crores in advance for clearing the dues and to mobilise site for resumption of work." The honourable Power Minister then "emphasised that decisions be implemented effectively and without delay".

What all this amounts to is that a major public financial institution - indeed, one that is the repository of a significant amount of savings of the people of India - is being asked provide money to a company that is a known defaulter and has even defaulted on loans provided by that institution itself. This money is then to serve as the basis for allowing even more public money from other financial institutions to be transferred to this company, whose track record does not suggest any reason for reposing such trust.

All this is not just contrary to basic financial norms, it is also probably illegal. Note that all this is occurring in a context in which we are daily informed that neo-liberal market reforms have brought about greater transparency and accountability into the system. This is, of course, the opposite of the truth. In addition, those responsible for such decisions make a further error. Unfortunately, those running the country today do not seem to be aware that even the kind of sleaze-ridden capitalism they are promoting requires the viable functioning of certain institutions, especially public financial institutions.