This Week's Essay: Tata Mundra's massive example of what should never have happened

Published by MAC on 2020-01-20
Source: Centre for Financial Accountability (Delhi)

Too many costs for too little

Centre for Financial Acoountability (Delhi)

13 January 202

Mundra, Gujarat: TATA power has announced to the Union Ministry of Power
that it may be forced to stop operating its imported coal-based Mundra
ultra-mega power project after February, 2020. Experts have contended that
irreversible damage has been caused to the ecosystem of Mundra coast for a
project that will have a running life of only seven years. Experts have
also said that the project has destroyed the environment and caused
economic displacement of the communities affected which includes the
farmers, fish workers, salt pan workers, cattle grazers who have suffered
irreversible damage to their lives and livelihoods. It’s argued that the
outdated open cycle technology used in the plant has destroyed the marine
ecology resulting in decline in fish catch due to which thousands of fish
workers are struggling to make ends meet. In addition to this the
agricultural land has become saline to ingress of sea water from the
intake channel and the grazing land has been acquired for the project.

Even after all these apprehensions, the project didn’t even make any
financial sense.

The Mundra project has led to displacement of population, impacted
livelihoods and has failed to carry out any genuine consultations. In
addition to these crises the plant from the very beginning has been
operating at a financial loss following rise in the prices of imported
coal and now, the company might be looking at selling the plant to the
government. This situation points out many failures on part of the
government, financing agencies and company that has failed to conduct due
diligence, assess the financial viability of the project and the damage
that the project would cause to the people and environment.

The Union Power Ministry’s orders to consumer states Haryana, Rajasthan,
Punjab and Maharashtra, (states that consume power from Mundra plant) to
decide on the matter latest by January 15, or deal with power shortage
without Centre’s support are said to be pressure tactics to force
consumers states to bear with the losses of the company. These costs would
eventually come to the consumer. In case the five consumer states allow
pass-through of additional fuel cost to consumers, this would mean
allowing relief beyond the PPA terms and conditions which would imply
passing on to the consumers, commercial risks that were voluntarily
assumed by the project developer to win the contract.

Reports that the government might take over the project are of serious
concern, for this Project is a stressed asset. By the end of FY2018-19,
Coastal Gujarat Power had incurred total retained losses in excess of
US$-1.5bn. This is when to combat continual, significant losses the plant,
the company imported a higher proportion of lower energy coal in an
attempt to reduce fuel costs. The proportion of lower energy coal used at
Mundra increased from 20% in 2018 to 42% in 2019.

Governments’ record of running companies profitably has taken a beating in
the last many years. It’s said that that these companies are deliberately
made to underperform, to pave way for privatization. Examples of BSNL, Air
India, MTNL, SAIL and many such flagship companies are well known. The
story of Gujarat is not any different. In Gujarat, state run entities
(PSUs) incurred losses of Rs 3,813.93 crore in 2017-18 according to a CAG
report. The major loss-making state PSUs were GSPC (Rs 1,564 64 crore),
Sardar Sarovar Narmada Nigam Ltd (Rs 1,075.8 crore), Bhavnagar Energy
Company Ltd (Rs 617.31 crore) Gujarat State Road Transport Corporation (Rs
264.81 crore) and Gujarat Water Infrastructure Ltd (Rs 137.53 crore. At a
time when the government is unable to run the PSUs properly, it doesn’t
make any sense to acquire a loss making private company with taxpayers’
money, especially when the prospects of turning it into a profit making
one is nearly impossible.

In the worst case scenario, even if the government decides to take up and
run the project, it is essential that the technology is changed from open
cycle to a closed cycle cooling system for the outlet channel. This step
is critical to save the marine life, which in the years of operation of
the plant has been destroyed due to discharge hot water into the sea.

The initiative launched by government of India for facilitating the
development of coal-based Ultra Mega Power Plants (UMPPs), each of minimum
4000 MW capacity has proven to be a failure. The first UMPP of India,
Mundra UMPP was awarded to Tata Power through a competitive tariff-based
bidding process. Of the sixteen proposed UMPP projects 8 have been
cancelled, 4 have been shelved, one is at a pre-permit development sage.

Only two projects have been operational, one being TATA Mundra UMPP and
other Sasan UMPP. Both projects are under financial distress and have been
marred with serious environment and social concerns. With the scale and
design of the Ultra Mega Power Projects they are designed for failures. It
is important that the energy security is met in a sustainable manner. It
also raises questions about the aggressive development paradigm and
inequality in energy access and consumption.

This project also highlights the ineffectiveness of Multilateral
Development Banks, which claim commitment to reducing poverty and
promoting sustainable development. Both IFC and ADB, who have financed
this project failed to conduct due diligence. According to set procedures
and rules the financial viability of a project needs to be factored in
before a project is sanctioned. This should have included not only the
building and operational costs of the project, but also displacement and
loss of livelihood and environmental damage. Government subsidies also
needed to be factored in.

Negative environmental and social impacts of this project were recognized
by audit reports of the Compliance Advisor Ombudsman (CAO) – the
independent recourse mechanism for the World Bank’s IFC – and the ADB’s
Compliance Review Panel (CRP), following complaints from the communities.

Despite scathing reports from their accountability mechanisms recognizing
the non-compliance of environmental and social policies of these
institutions, the response of the management was of denial and there was
little or no relief for the affected community. The affected community
rejected remedial Action Plans that were prepared as a part of the
compliance processes as they were mere bandage work. This is also a
reminder of the little or no power these accountability mechanisms of MDBs
have, reducing them to merely toothless observers. Even after nine years
of complaint being filed by the affected community to CAO, and the IFC
loan being paid off; in the last monitoring report of the remedial action
plan of IFC for the project remains incomplete.

The complete apathy of the funding institutions led to the fish workers
adversely affected by the project file suit against the International
Finance Corporation in federal court in Washington, D.C in April 2015.
After a long battle a historic decision in February, 2019 the U.S. Supreme
Court decided that international organizations like the World Bank Group
can be sued in U.S. courts, they “don’t enjoy absolute immunity”. The case
will again go back to the lower court for the arguments to establish that
in this particular case IFC can be held responsible in the US Courts for
the destruction of livelihood of the fishing community of Mundra by
lending finance to Tata Mundra Power Project as, now they are stripped of
their absolute immunity.

TATA Mundra UMPP has proven to be a complete failure. From the violation
of national laws to the failure to apply the environmental and social
safeguards, from environmental and social destruction to financial
disaster, to failed policies of energy security, this project is a case
study of what should not be done. But, it is the people of Mundra who
have suffered the brunt for series of wrong decisions of the Government.
Whether the government decides to buy the plant or company abandons the
project the people continue to suffer and which needs to be addressed.