Highlighting the demand for due-diligence and ethical banking from international and national banks, Centre for Financial Accountability in a recent briefing paper, pointed out how the government is paying back multilateral development banks including the World Bank and Asian Development Bank among others which have provided technical and financial assistance to the collapsed Infrastructure Leasing and Financial Services (IL&FS) for decades.
The IL&FS scam came to light in September last year when the group entities began defaulting on its debt obligations. With IL&FS, a non-banking financial company being at the centre of financial irregularities committed by the IL&FS management, has pushed the country’s shadow banking sector into crisis.
As of October 2018, IL&FS Group had total outstanding debt of Rs 94,215 crore. Of this, debt wirth Rs 57,000 crore is from public sector banks, essentially public money. As a damage control attempt, the government has replaced the IL&FS board with a new one under Uday Kotak chairmanship, which is currently working towards a resolution plan for the Group. Earlier, NewsClick had reported that 82 domestic entities of IL&FS Group with combined outstanding debt of Rs 61,375 crore, are not in a position to service their debts.
Farcical Public Private Partnership
In 1996, the World Bank had approved financial support for Delhi-Noida Toll Bridge Project, of IL&FS, touted as a first of its kind of Public Private Partnership (PPP) project for private infrastructure finance in India. The project, closed in 2001, had incurred a cost of USD 1600 million, of which, the World Bank committed USD 205 million. However, the World Bank’s own Operations Evaluation Department pointed out the failure of the project stating “the project fell well short of its ambitions regarding entry of the private sector in the targeted infrastructure sectors and more efficient delivery and use of infrastructure services and that it succeeded in piloting contractual arrangements and in assisting the institutional development of IL&FS,” while admitting that the PPP model as a failure. The CFA report highlighted that the IL&FS borrowed too much and incurred unnecessary commitment charges, which the government is still paying back.
Asia nDevelopment Bank
Asian Development Bank (ADB) has been the official partner for several of the IL&FS Group’s road projects in PPP model. The CFA report pointed out how government continued to pay back ADB and the German Development Bank KfW. According to a Moneylife report in May : “Two payments (by the government) have been made to the two multilateral institutions in the past couple of months. Reliable sources have confirmed at least one payment of USD 2 million in the past two months to ADB for installments that fell due, and about USD 793632 to KfW, a German state-owned bank. USD 100 - million loan was originally sanctioned to IL&FS around 2001, but half of it was cancelled sometime in 2007 due to “lack of a subproject pipeline” as part of a revised loan agreement. Finally, a loan of USD 50.4 million was disbursed.”
Furthermore, the report highlighted the risk for government exchequer by pointing out the nexus of Asian Infrastructure Investment Bank (AIIB), National Infrastructure Investment Fund (NIIF), Abu Dhabi Investment Authority and IL&FS. While NIIF is a financial intermediary (50% owned by the central government), is aiming to take up ‘stalled’ projects of IL&FS in the energy and road portfolio of the IL&FS. While AIIB has invested USD 100 million in NIIF and considering another USD 100 million investment, and ADIA, which has increased its investment activity in India over recent years is shareholder of NIIF and an important shareholder of IL&FS (12.56% stake). ADIA has invested USD 1 billion in NIIF’s master fund.
CFA, through various research reports, had raised concerns over the dubious nature of funding by AIIB and NIIF.
Also read: Frauds and Friends: How Auditors Are Enabling Crony Capitalism