Themes > Current Issues
15.05.2003
Misuse of Public Money
Jayati
Ghosh
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 own 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 functioning of the market and minimally efficient capitalism.
The case in point relates to 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 the 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 its viability and sustainability. 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 crore, the estimated outlay has increased to Rs 2,233 crore this year. In addition, the Power Purchase Agreement or 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 4–5 per kWh at bus bar, and the cost of peaking power will be much higher.
This points to what may emerge as the fundamental flaw in the project-that the power it will generate is so expensive that the cost of production cannot be recovered through sale of power either by the MPEB (Madhya Pradesh State Electricity Board) 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 concern at this moment. The issue that has come up now relates to the misuse of public money by those anxious to restart this project and continue to reward the private promoters. Clearly, the project is extremely vulnerable to and crucially dependent on the overall financial position and other sources of revenue of the Madhya Pradesh Electricity Board, which is itself in severe financial difficulty.
The project is being run by Shree Maheshwar Hydel Power Corporation Limited (SMHPCL), a company set up by the S. Kumars Group. The S. Kumars Group and its holding companies have a rather dubious record in terms of financial dealings thus far. There are ongoing legal proceedings against the Group companies Induj Enertech Limited and SMHPCL, such that the movable and immoveable properties of the Maheshwar project have been under attachment since December 2002. This is because of default on a loan of nearly Rs 45 crore taken by Induj Enertech 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 Maheshwar project on behalf of all the other public financial institutions and banks involved in financing the Project.
According to the IFCI Reappraisal Report of March 2000, by the end of 1999, the SMHPCL had borrowed around Rs 122 crore of public money from various banks and institutions, including the IFCI, IDBI, SBI, LIC, GIC, Bank of India and Dena Bank. It had also put in around Rs 136 crore of its own money as the promoter's contribution that is required for public financing. Together this money constituted the project funds, expenditure from which has to be with prior approval from the financial institutions.
The IFCI Reappraisal Report indicated that out of this money, Rs 106.4 crore 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 purposes of the loan, that is, the construction of the project. The IFCI Report also noted that out of the money Rs 19.3 crore was given to SMHPCL's holding company Induj, although Induj had no contracts or any experience to work on 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 that 'the company has also not taken any approval from the institutions in this respect before appointing them', and stipulated the return of the entire sum of Rs 106.4 crore along with interest as an important pre-disbursement condition for any more public funds to be infused into the project.
So, Rs 106.4 crore of project funds, including public funds, were diverted to entities without contracts, who did no work on the project. Despite such money being available, even the telephone and electricity connections of SMHPCL have been severed due to non-payment.
In addition, the S. Kumars Group have a track record of wilful default. The S. Kumars Power Corporation Limited (now known as Induj Enertech Limited) was declared 'wilful defaulter' by the MPSIDC through a public notice in the Economic Times of 13 September 2002, for defaulting on a loan taken in 1997–98. By the same public notice, another S. Kumars company-M/s Modak Rubber and Textile Industry Private Limited-was also declared a wilful defaulter.
Another IFCI Report, of 10 June 2002, noted that the flagship company-S.Kumars Nationwide Limited-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 crore for the year ending September 2001.' The SKNL has defaulted on the repayment of principal and interest to IFCI even after restructuring of the loan.
Given all this, by no stretch of imagination can SMHPCL-or indeed any other S. Kumar 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 giving public money or supporting a bonds issue for the S. Kumars Group in the circumstances.
This is what makes it so remarkable that a special meeting was called on 4 March this year, to try and arrange further public financing for the Maheshwar project. The meeting, organized 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 crore through loans and debentures to be financed by the Indian financial institutions. This included subscriptions for the debentures to be issued by the SMHPCL-between Rs 330 to 400 crore.
Obviously there was some pressure on the financial institutions, and many of them complied to an extent. The State Bank of India (SBI) said that it had formally cancelled a foreign currency loan of Rs 110 crore that it had committed to earlier (which to be given by SBI Frankfurt), but were prepared to renew it. The IFCI was directed to firm up 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 even though it is the largest lender to the project, beyond its normal exposure limits, and although SMHPCL is the its third largest defaulter, it would still consider providing the credit enhancement guarantee to facilitate the raising of funds through OFCDs, provided the SMHPCL defaults on PFC are paid. The managing director of Life Isurance Corporation (LIC) stated that LIC had agreed to contribute to the subscription of Rs 100 crore to the debentures proposed to be issued by the SMHPCL on the condition that (a) the OFCDs are rated by CRISIL at AAA(SO); (b) provided the PFC provides credit enhancement guarantee to the project; and (c) the lenders confirm their support to the project.
Of course, the crucial prior requirement for all these is for the defaulted debt to these institutions to be actually repaid, without which these public financial institutions would be legally constrained in providing fresh funds. But there was no such 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 finance anyway.
The basic pressure was on the LIC. The minutes of this meeting read as follows: 'Hon'ble MOS (Fin.), GOI, felt that pro-active participation of LIC by way of advance subscription to OFCD to the tune of Rs 100 crore 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 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 that, 'Considering the fact that PFC cannot issue the credit enhancement guarantee without the clearance of default dues, LIC is to reconsider payment of Rs 100 crore in advance for clearing the dues and to mobilize site for resumption of work.' The Honourable Power Minister then 'emphasized 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.
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 neoliberal marketist reforms have brought greater transparency and accountability into the system. This is of course the opposite of the truth.
But, 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.
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 functioning of the market and minimally efficient capitalism.
The case in point relates to 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 the 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 its viability and sustainability. 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 crore, the estimated outlay has increased to Rs 2,233 crore this year. In addition, the Power Purchase Agreement or 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 4–5 per kWh at bus bar, and the cost of peaking power will be much higher.
This points to what may emerge as the fundamental flaw in the project-that the power it will generate is so expensive that the cost of production cannot be recovered through sale of power either by the MPEB (Madhya Pradesh State Electricity Board) 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 concern at this moment. The issue that has come up now relates to the misuse of public money by those anxious to restart this project and continue to reward the private promoters. Clearly, the project is extremely vulnerable to and crucially dependent on the overall financial position and other sources of revenue of the Madhya Pradesh Electricity Board, which is itself in severe financial difficulty.
The project is being run by Shree Maheshwar Hydel Power Corporation Limited (SMHPCL), a company set up by the S. Kumars Group. The S. Kumars Group and its holding companies have a rather dubious record in terms of financial dealings thus far. There are ongoing legal proceedings against the Group companies Induj Enertech Limited and SMHPCL, such that the movable and immoveable properties of the Maheshwar project have been under attachment since December 2002. This is because of default on a loan of nearly Rs 45 crore taken by Induj Enertech 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 Maheshwar project on behalf of all the other public financial institutions and banks involved in financing the Project.
According to the IFCI Reappraisal Report of March 2000, by the end of 1999, the SMHPCL had borrowed around Rs 122 crore of public money from various banks and institutions, including the IFCI, IDBI, SBI, LIC, GIC, Bank of India and Dena Bank. It had also put in around Rs 136 crore of its own money as the promoter's contribution that is required for public financing. Together this money constituted the project funds, expenditure from which has to be with prior approval from the financial institutions.
The IFCI Reappraisal Report indicated that out of this money, Rs 106.4 crore 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 purposes of the loan, that is, the construction of the project. The IFCI Report also noted that out of the money Rs 19.3 crore was given to SMHPCL's holding company Induj, although Induj had no contracts or any experience to work on 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 that 'the company has also not taken any approval from the institutions in this respect before appointing them', and stipulated the return of the entire sum of Rs 106.4 crore along with interest as an important pre-disbursement condition for any more public funds to be infused into the project.
So, Rs 106.4 crore of project funds, including public funds, were diverted to entities without contracts, who did no work on the project. Despite such money being available, even the telephone and electricity connections of SMHPCL have been severed due to non-payment.
In addition, the S. Kumars Group have a track record of wilful default. The S. Kumars Power Corporation Limited (now known as Induj Enertech Limited) was declared 'wilful defaulter' by the MPSIDC through a public notice in the Economic Times of 13 September 2002, for defaulting on a loan taken in 1997–98. By the same public notice, another S. Kumars company-M/s Modak Rubber and Textile Industry Private Limited-was also declared a wilful defaulter.
Another IFCI Report, of 10 June 2002, noted that the flagship company-S.Kumars Nationwide Limited-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 crore for the year ending September 2001.' The SKNL has defaulted on the repayment of principal and interest to IFCI even after restructuring of the loan.
Given all this, by no stretch of imagination can SMHPCL-or indeed any other S. Kumar 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 giving public money or supporting a bonds issue for the S. Kumars Group in the circumstances.
This is what makes it so remarkable that a special meeting was called on 4 March this year, to try and arrange further public financing for the Maheshwar project. The meeting, organized 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 crore through loans and debentures to be financed by the Indian financial institutions. This included subscriptions for the debentures to be issued by the SMHPCL-between Rs 330 to 400 crore.
Obviously there was some pressure on the financial institutions, and many of them complied to an extent. The State Bank of India (SBI) said that it had formally cancelled a foreign currency loan of Rs 110 crore that it had committed to earlier (which to be given by SBI Frankfurt), but were prepared to renew it. The IFCI was directed to firm up 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 even though it is the largest lender to the project, beyond its normal exposure limits, and although SMHPCL is the its third largest defaulter, it would still consider providing the credit enhancement guarantee to facilitate the raising of funds through OFCDs, provided the SMHPCL defaults on PFC are paid. The managing director of Life Isurance Corporation (LIC) stated that LIC had agreed to contribute to the subscription of Rs 100 crore to the debentures proposed to be issued by the SMHPCL on the condition that (a) the OFCDs are rated by CRISIL at AAA(SO); (b) provided the PFC provides credit enhancement guarantee to the project; and (c) the lenders confirm their support to the project.
Of course, the crucial prior requirement for all these is for the defaulted debt to these institutions to be actually repaid, without which these public financial institutions would be legally constrained in providing fresh funds. But there was no such 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 finance anyway.
The basic pressure was on the LIC. The minutes of this meeting read as follows: 'Hon'ble MOS (Fin.), GOI, felt that pro-active participation of LIC by way of advance subscription to OFCD to the tune of Rs 100 crore 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 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 that, 'Considering the fact that PFC cannot issue the credit enhancement guarantee without the clearance of default dues, LIC is to reconsider payment of Rs 100 crore in advance for clearing the dues and to mobilize site for resumption of work.' The Honourable Power Minister then 'emphasized 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.
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 neoliberal marketist reforms have brought greater transparency and accountability into the system. This is of course the opposite of the truth.
But, 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.
© MACROSCAN 2003