By financing environmentally damaging projects, can Indian funders be held liable?


Early in February, hundreds of residents of Himachal’s Kullu district blocked highways to protest against the Luhri Hydro Electric project run by the public sector Satluj Jal Vidyut Nigam Limited. They wanted to draw attention to the unsettling cracks snaking through their homes, the dust pollution that is devastating their crops and inadequate compensation they have been given for their loss of land and crops.

The State Bank of India is the lead financier for stage one of the 210-megawatt project. The fact that the bank has not been visible in the discussions about the effects of the project highlights the unwillingness of Indian financial institutions to take responsibility for the human and ecological consequences of their investments.

The Luhri Hydro Electric plan had met with vociferous opposition in Himachal Pradesh from local communities since 2010 when the project was granted received environmental clearance. Residents were wary of the potential impacts of the project, such as agricultural land being submerged upstream, water sources and springs drying up, the low compensation rates for land being acquired and the flaws in the clearances granted by the government.

One of the main anxieties related to a planned 38-km-long tunnel. Tunnelling in the mountains had previously resulted in soil on the slopes loosening, houses developing damage and natural springs going dry.

In 2014, the World Bank dropped its plan to extend a $650 million loan to the project. It made this decision after a visit to the site by a team of the United States Agency for International Development, which acknowledged the concerns of residents. USAID had been commissioned by the World Bank to conduct an appraisal of the project’s potential impacts.

After this, the Himachal Pradesh government reconceptualised the plan, seeking to minimise the impact by reducing the scale of construction. Instead of the original proposal of a single dam with a capacity of 755 MW, the new plan involved building three hydroelectric dams on the same section of the Satlej river.

Significantly, the revised plan abandoned the idea of constructing of the 38-km tunnel, allaying some of the concerns of the protestors. But as construction began in 2021, protests continued about the lack of compensation for crop losses, the pollution caused by construction activity and the refusal of the authorities to recognise that more villages were affected by the project than the administration was willing to acknowledge: they only accepted compensation claims for crop losses due to construction activity for villages falling within a 900-metre radius of the project.

Public sector financiers

In 2020, the Indian government approved a $18.1 billion proposal for the project. In March 2022, a loan agreement of $15.37 billion was signed with the State Bank of India. The remaining funds were to be generated with budget support from the Union government and capital from the Satluj Jal Vidyut Nigam Limited.

This was another example of a public sector Indian commercial bank and union or state government emerging as willing investors where international funders had hesitated due to environmental and social concerns.

This has happened before too. In 1993, the Indian government was forced to cancel funding from the World Bank for the Sardar Sarovar Project in Gujarat because the project did not meet the Bank’s environmental and resettlement standards. At that time, the Gujarat government and the Union government financed the project through budgetary support.

In 2007, too, when the Asian Development Bank decided not to proceed with financing the Tapovan-Vishnugad in Uttarakhand, being constructed by the National Thermal Power Corporation, a host of domestic banks such as State Bank of India, Bank of Baroda, HDFC Bank and others stepped in.

Indian banks and non-banking finance institutions, such as the Power Finance Corporation and Rural Electrification Corporation Limited, are able to invest in projects that can take a huge toll on the environment, communities and climate because they lack internal investment standards, accountability procedures or safeguard mechanisms to prevent their investments from extracting high environmental and social costs. This also explains their silence when disaster unfolds.

In Joshimath in January 2023. Credit: PTI.

For instance, the largely Indian financiers of the Teesta stage 3 dam in Sikkim hardly faced any questions for investing in the hydroelectric project that was washed away during a glacial lake outburst flood in October that washing away large sections of the North Sikkim Highway, bridges and claiming over a hundred lives. This disaster had been predicted by residents and independent evaluators for years.

This does not mean that multilateral banks such as the Asian Development Bank or World Bank are not investing in sectors and projects that cause harm or that their social and environmental safeguards necessarily work. Yet, the fact that they define investment standards and have accountability and grievance redressal procedures means that they recognise their responsibility to the consequences of their investments.

In addition, communities and civil society organisations on the ground are able to invoke these procedures to hold the financiers accountable.

Internationally, banks such as the Netherlands-based ASN Bank and the pan-African Ecobank are increasingly moving towards taking lending decisions based on clear goals and objectives about sustainability, human rights, biodiversity and climate change.

Indian financial institutions will do well to frame investment standards and mechanisms of their own to prevent environmental, social and climate harm.

Green Energy, communities

Hydroelectric projects are often projected as a “sustainable” alternative that is said to be imperative given the climate crisis. Hydroelectric power is claimed to produce far lower carbon emissions than coal-based electricity and is encouraged as a major renewable source of energy.

Yet, these projects require building dams, altering the flow of rivers and tunnelling through mountains. The Indian experience shows that constructing hydroelectric projects in the Himalayas has led to the destabilising of mountain slopes, which makes them more vulnerable to floods and landslides, the displacement of communities, pollution-related to construction activity and more.

Protests such as that of the Lepchas in Sikkim in the context of damming the Teesta, or by the villagers in Luhri are viewed as obstacles to so-called green investments. But can there be a sustainable future by insisting on a form of development that is actually destructive?

The consequences of hydroelectric projects unfolding in Joshimath, Luhri and Teesta emphasise the need for Indian financial institutions to develop not just investment standards for projects but also mitigation frameworks to address climate concerns arising from investments already made.

This is of course easier said than done and poses significant policy, legal and governance challenges. But Indian institutions must go beyond the non-committal talk of exploring “green” investment and start the discussion.

They should adopt safeguards that prioritise the voices and well-being of affected communities through free, informed consent. Independent assessments and grievance mechanisms should be accessible at both the project developer and financing institution levels. Regular social audits should track and measure the impact of the project on communities. Finally, clear thresholds should be established, beyond which projects are deemed too risky for funding.

Even as financiers make ever louder claims of their commitment to addressing the climate crisis, incorporating safeguard and accountability mechanisms will demonstrate their will to walk the talk.

Amitanshu Verma and Nancy Pathak work with the National Finance Team at Centre for Financial Accountability, New Delhi.

Also read:

‘Ticking time bombs’: Sikkim floods a reminder of why locals opposed dams in the Himalayas for years

Crores for construction, crores for disaster relief: India’s expensive Himalayan hydropower projects

Greed sank Joshimath. I saw it happen



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