Energy Projects Subject to Murky Funding, Study Shows

by Ranjit Devraj

The report, "Power Finance: Financial Institutions in India's Power Sector," banks on the Indian experience to examine the latest trends in the financing of development projects and in the process untangles what its publishers call "the complicated web" through which large dam projects are funded through financial intermediaries.

"Power Finance," published by the International Rivers Network, Urgewald and the South Asia Network on Dams, Rivers and People, also documents resistance to uneconomical and destructive projects in India.

"Finally, we have a single document that outlines all our struggles over all these years," Vimal Bhai, campaigner for the umbrella National Alliance of People's Movements (NAPM), says of the report, authored by Peter Bosshard, former secretary of the Berne Declaration and a long-time researcher of financial institutions and the power sector.

Bhai is particularly appreciative of the path laid out by Bosshard for civil society resistance in taking up the challenge posed by export credit agencies, commercial banks and financial institutions seeking to take advantage of India's liberalization process, which began with power sector reform in the early 1990s.

"Our campaigns have had success against direct funding of undesirable projects, but like Bosshard says we need to focus on indirect funding of projects when bilateral and multilateral funders support financial intermediaries and private developers including the state electricity boards," Bhai said.

Campaigners like Chittaroopa Palit, who contributed to the report, say it records their discovery of how international financial institutions can publicly withdraw from lending for controversial dams and then go ahead and support the same projects indirectly.

For example, the World Bank withdrew from the Narmada Valley project in 1993, but the Bank approved support for India's Power Finance Corporation (PFC) -- the most important funder of the privately-run Maheshwar dam project in the valley.

An official of the Manila-based Asian Development Bank (AsDB) summed up for Bosshard the situation of Multilateral Development Banks attempting to finance power projects in India thus: "The risks are great, the visibility is high, and the vulnerability is a constant concern."

But Palit, who as a leader of the Narmada Bachao Andolan (NBA) or Save the Narmada Movement has squatted in protest with hundreds of displaced peasants on the lawns of the German embassy, says Bonn still finds ways to support financial institutions that fund hydropower projects such as Maheshwar.

Hypovereinsbank, a commercial German bank, was dissuaded by the NBA campaign from extending loans to the sponsors of the Maheshwar project but not deterred enough from participating in three general purpose loans to Indian institutions which in turn fund the project.

What is important, contends Bosshard, is that the Maheshwar experience illustrates an international trend.

Globally, multilateral and bilateral financial institutions have steadily reduced their direct funding for new hydropower projects, and commercial banks are becoming wary of the risks to their reputations from involvement in controversial projects.

On the other hand, official funders are increasingly lending support or extending program loans to public utilities that promote hydropower projects no matter what their records are.

As a consequence, financial flows for hydropower and other energy projects have turned into a maze which Bosshard's report has tried to present in a chart showing 17 groups of funders and power operators and almost 90 types of financial flows between them.

Many international and domestic financial institutions interact, using a variety of different financial instruments so that it has become unclear to what extent such resources are public or private, and who is responsible for how they are invested.

"In some cases, this fuzziness is clearly intentional, for example when commercial banks funded the giant Three Gorges dam on China's Yangtze river through a state development bank rather than directly," notes Bosshard, also acknowledges the close support of Himanshu Thakkar, a hydrological engineer with the South Asia Network on Dams, Rivers and People, in the report.

Bosshard recommends that non-governmental organizations (NGOs), as a first step, strengthen their knowledge about the extent of intermediary lending for infrastructure development by different public financial institutions and about the policies which they apply.

Apart from financial intermediary lending, NGO networks should also become more aware of the issues at stake when official funders support infrastructure utilities such as India's state electricity boards.

In India, where public institutions like the Power Ministry, the Planning Commission and the state governments still shape the course of the country's power sector development, civil society movements need to monitor and to remain involved in this political process.

After the World Bank declined to fund Enron's project at Dabhol in western Maharashtra state, a group of prominent commercial banks and official export credit agencies did not hesitate to fund a project which obviously made no economic sense and has now been shut down. But the foreign lenders are protected by massive Indian counter-guarantees.

Analyzing options and potential alternatives, exposing vested interests, doing research on particular investments and opposing projects which only add to the country's debt burden or which destroy the livelihoods of affected communities and the environment continue to be important tasks for Indian NGOs.

But Bosshard concedes that, internationally, Indian social movements and NGOs have gained a reputation for using such approaches well and vigorously.