THE STATES

A new phase of resistance

The attempts of S. Kumars, the promoter of the Maheshwar hydroelectric power project, to raise funds for the project from Indian financial institutions meet with resistance from the project-affected people and the Narmada Bachao Andolan.

LYLA BAVADAM

SPURNED by several foreign lending agencies, S. Kumars, the promoter of the Shree Maheshwar Hydroelectric Power Corporation Limited (SMHPCL) since 1994, has turned to Indian financial institutions. However, this move is being actively resisted by the Narmada Bachao Andolan (NBA).

SASHI ASHIWAL
Protesting against the Maheshwar project, in Mumbai.

Located near Mandleshwar town in Khargone district of Madhya Pradesh, the Maheshwar project is meant to generate 400 MW of firm power and is to be completed by 2000-2001. A dam measuring 36 metres in height and 3,400 m in length is being constructed and it will be one of the 30 big dams on the Narmada river system.

Owing to shortage of funds, S. Kumars, for which the project is the first venture in the power sector, approached various foreign lending agencies. In each case the lenders agreed initially but withdrew any offer after they discovered lacunae in the Resettlement and Rehabilitation (R&R) programme, environmental clearances, safety aspects and so on.

In 1997 the United States-based Bechtel Corporation withdrew from the project; in 1998 PacGen, another U.S.-based company which had planned to pick up a 49 per cent stake, moved out; in December 2000, Ogden Energy, which was considering a strategic partnership, backed out. After the withdrawal of PacGen, two German utility companies, VEW Energie and Bayernwek, agreed to pick up a 49 per cent stake but withdrew their offers in 1999. Later, based on the recommendations of an independent study done by the German Ministry of Economic and Social Welfare, the German government decided not to support the project. The Ministry's report cited reasons of insufficient R&R measures as a reason for the decision.

After this, Siemens AG backed out of the suppliers' contract, which was to receive the German government's support. In January 2001, the Portuguese government turned down an application by equipment suppliers ABB Ltd for the COSEC guarantee for Rs.2 billion, which was to have been guaranteed by the Industrial Finance Corporation of India (IFCI).

Now S. Kumars has turned to Indian FIs. It is reported that the company, even without a strategic partner, has already received and invested about Rs.5 billion in the project.

S. Kumars is seeking finances for the project from a consortium of Indian public financial institutions comprising the Industrial Development Bank of India (IDBI), IFCI, the Unit Trust of India (UTI), the State Bank of India (SBI), the Life Insurance Corporation of India (LIC), and the General Insurance Corporation (GIC). It also expects to get loans from commercial banks and other financial institutions. There is also a proposal concerning non-convertible debentures from the UTI. S. Kumars has approached the public FIs for financing up to 90 per cent of the total project outlay - about Rs.2,000 crores out of a total cost of Rs.2,254 crores.

On May 31, over 200 project-affected people - peasants, workers and fisherpeople - demonstrated in front of the offices of the IDBI, UTI and Dena Bank at the World Trade Centre premises at Cuffe Parade in Mumbai. Other small groups of project-affected people demonstrated in front of the offices of the SBI, the Bank of India, the LIC, the GIC and the IFCI. Carrying banners with slogans such as "Do not fund the Maheshwar project - the Enron of Madhya Pradesh" and "FIs hosh me ao, public ka paisa mat dubao" (FIs, come to your senses, don't invest public money in a losing project), the demonstrators called on the FIs to desist from funding what Chittaroopa Palit of the NBA described as an "economically non-viable, financially disastrous and socially destructive project". Citing the Enron imbroglio as an example of misguided investment, the NBA urged the FIs to declare a moratorium on all further lending to independent power producers (IPPs) pending a case-by-case re-examination.

In response to the demonstration, IDBI officials agreed to meet the project-affected people and NBA representatives. NBA representatives said that at the meeting, IDBI officials admitted that in 2000 they had disbursed Rs.30 crores out of a total of Rs.100 crores as rupee term loan and Rs.50 crores as equity pledged to the project. NBA members said that such disbursement was against the conditions of the IFCI Reappraisal of March 2000, which stated that "before any additional disbursement out of present or proposed assistance [from the financial institutions] SMHPCL would present a letter from Ogden [the strategic investor] that all conditions precedent have been complied with by the SMHPCL".

However, the fact is that despite this condition, the IDBI went ahead and gave Rs.30 crores to the SMHPCL. Hence the charge against the IDBI is that it committed a mistake on three counts. One, it disbursed a loan when the strategic investor was still undertaking the due diligence process; two, it ignored the fact that the statutory techno-economic clearance of the Central Electricity Authority (CEA) for the increased outlay of Rs.2,254 crores was not cleared; and three, it disbursed a loan prior to the financial closure of the project. Interestingly, the strategic investor, Ogden Energy, withdrew from the project at the end of its year-long due diligence. The CEA has refused to clear the project. Palit said: "Neither have the necessary reports of the concurrent auditors of the project been received. Yet the promoters themselves (that is, S. Kumars) claim they have spent upwards of Rs.517 crores, over Rs.350 crores of which is public finance."

Moreover, the project has not received clearance from the Ministry of Environment. It had received a clearance from the CEA in 1996, which is no longer valid since the project cost has risen substantially after 1996. Section 29 of the Indian Electricity Act says that if there is a substantial increase in project cost, then the promoters have to invite objections from the public. "This was not done," says Alok Agarwal of the NBA, "and even though the increase was one of approximately 40 per cent, bringing the project cost to Rs.22.54 billion from the earlier approved cost of Rs.4.64 billion, the CEA seemed to bypass the requirement of the Act. So we sent the CEA a legal notice in March 2000 and that halted the work."

What is unclear is why the FIs are not investigating all aspects of lending to the Maheshwar project. Says Agarwal: "In March 2000, Rs.30 crores was given to S. Kumars for the project. IFCI, the lead bank, in their reappraisal said that till Ogden completes its review there will be no disbursement. Ogden withdrew from the project and yet IDBI went ahead and gave the loan and even justified it by saying that the S. Kumars claim sounded serious and the project seemed promising." (It is learnt that the IFCI is expected to send in a team for an on-site review.)

THE decision of the financial institutions to invest in the project is inexplicable for several reasons: These include the high cost of the power to be produced by the project; the financial difficulties faced by the Madhya Pradesh government and the Madhya Pradesh Electricity Board (MPEB) and the latter's inability to honour repayments; the absence of techno-economic and environmental clearances at the proposed level of investment; and the huge social and human costs in terms of the submergence of several thousand acres of fertile and irrigated lands and the livelihoods of over 50,000 people in the area. At the proposed level of Rs.2,254 crores of outlay, the cost of power will be Rs.6.52 a kWh as the levelised tariff for the next 35 years and Rs.9.65 a kWh as the cost of peaking power. Moreover, about 76 per cent of the total outlay is denominated in dollars, and the power purchase agreement (PPA) promises large and compulsory payments of nearly Rs.600 crores per annum, irrespective of whether power is produced or sold. The PPA also provides for 16 per cent to 30 per cent guaranteed rates of return on equity.

The current cost of power produced by the MPEB is Rs.1.25 a unit while that of the National Thermal Power Corporation (NTPC) is Rs.1.67 a unit. Hence, the cost of power generated by the Maheshwar project, at Rs.7 to Rs.9 a unit, will be prohibitively high and it cannot be bought by any consumer - agricultural, industrial, domestic or commercial. This is so despite the fact that hydel power is known to be the cheapest.

Investigations conducted by the credit rating agency CRISIL in June 1998 and October 1999 as also the recently submitted M.R. Sivaraman Committee report have confirmed that the MPEB had no escrowable capacity and was not in a position to pay Rs.600 crores per annum for the next 35 years. The Sivaraman Committee also said that the MPEB was in default on other bonds and leases and that it was bankrupt. Moreover, the escrow cover was given at high costs. Agarwal says: "Every month the Regional Accounts Offices (RAO) in Mandsaur, Ratlam, Ambikapur and Vilaspur gather about Rs.50 crores. If the MPEB was in a situation where it would be unable to pay S. Kumars then S. Kumars has the right to go to these RAOs and take this cash. Eighty per cent of the contribution came from the Ambikapur and Bilaspur RAOs and now since both of these have gone to Chattisgarh, S. Kumars has virtually no escrow cover. It is facts like this that make us to believe that the Rs.200-crore FI investment will go the NPA (non-performing assets) way."

The generating capacity of the project is also a matter of concern. Although the project has a proposed installed capacity of 400 MW, firm power production will not be more than about 82 MW. Agarwal says: "78 per cent of the power will be produced in the four monsoon months when the demand for peaking power goes down because the kharif crops are rain-fed and will not need power for irrigation. In fact, in the eight non-monsoon months, when there is a peaking deficit, the daily power production from the project will not be for more than one and a half to two hours."

The NBA is also critical of what it calls the "irregular and illegal practices of the FIs" and points to the Madhav Godbole Committee's report on the Enron power project, which indicts FIs for insufficient appraisal of the workability of IPPs. The NBA has called for a moratorium on all further FI lending to IPPs pending a case-by-case review. It also requested the Reserve Bank of India (RBI) to "use its powers and discharge its responsibilities to regulate the indiscriminate and irresponsible lending of public funds". In a press release, the NBA said: "The RBI has been very negligent in this matter despite periodic expressions of concern about the mounting NPAs of the FIs from time to time, and despite successive inspection reports of the RBI that have criticised the FIs for lending to promoters where there has been large scale diversion of funds... There is no doubt that to ensure the safety of public funds it is imperative that the RBI regulates FI practices about the appraisal, monitoring and funding of private projects, especially IPPs."