Saturday, July 23, 2011

The Relevance of Corporate Sustainability for Indian Enterprises

Corporate sustainability is a paradigm that has been evolving rapidly and continuously. It never has a fixed definition; rather there is fluidity in its limits, and keeps expanding in all directions just like the universe does. The definition of sustainability, which was earlier defined by the Triple Bottom Line of John Elkington of environment, economics and society has been broadened and translated into other critical areas such as respect for human rights, corporate governance, fair trade ethics and stakeholder engagement, all of which do not in any way take away anything from the original components; instead, they can be considered to be a revised definition of the triple bottom line to match the need of the hour, as subsets of the original three sets laid out by Mr. Elkington about two decades ago. Today, corporate sustainability is an engagement process. It is a dialogue between companies and corporations with their customers, with their shareholders, with their employees, and with the governmental and non-governmental agencies. It is a continuous demonstration of commitment towards the wellbeing of all, be it the natural, ambient or human environment that constitutes ‘our home’, and in this day and age of increasing cynicism of people at large over the actions of companies, corporations and even governments, it is a window for one and all to demonstrate transparency in functions and actions of organizations.
India has had a tradition of its business classes engaging in social causes and philanthropic measures. The Tatas, Birlas and Bajajs of our country can be said to have a glorious past behind them when it comes to not only contributing to India’s development economically, but also socially by setting up schools, colleges, hospitals and many charitable institutions. In this age of the flattening world, it is even more important for companies, especially the medium scale enterprises that are the real chunk of the Indian industrial set up, to be engaged with their stakeholders more than ever, as people, even if appreciative of the rapid growth of the Indian economy, are skeptical about the attitudes of businessmen towards society at large. Indian industrial sectors have been plagued by scandals, which sectors such as textile are all too familiar with. The allegations of child labour have time and again caused considerable losses to this sector along with loss of credibility in the international market.
Corruption scandals hitting headlines has only made the trust deficit wider, and even old-time employees find it difficult to associate with their employers, trying to understand what their company really stands for. This in turn has resulted in a massive churning of employees, with attrition rates in India on the rise. Moreover, industries are unable to tap into the quality productivity potential of Indian employees, which could have immense bearings on the quality of our goods and services, especially those meant for exports as well as increasingly for quality-conscious Indian customers. Even if one were to look at the rise in foreign direct investment in India from Multinational corporations (MNCs) coming in from abroad, lack of transparency results in lack of confidence in Indian industries and corporations, a strong negative that hurts the Indian interests in the long run.
In recent times, Indian corporate sector has also been accused of discrimination on the basis of caste and gender. While the Indian corporate set-up vehemently denies the same, the lack of action to demonstrate otherwise over these allegations has only dented the image further, with people believing that ‘affirmative action are just two more fancy words being bandied about by these industrialists whose only motive is to fill their pockets as much as possible’. The Ministry of Corporate Affairs is bringing in an amendment in the Companies Act 1954 which shall make it mandatory for all companies to spend at least 2% of their book record profits on CSR activities and report on the same as well. Moreover, in this amendment, it is proposed that every company having net worth of ` 5 billion or more (close to US$ 110 million), or turnover of ` 10 billion (close to US$ 220 million) or more, or a net profit of ` 50 million (close to US$ 1 million) or more during a year shall be required to formulate a CSR Policy. Consequently, the Government of India also has its own voluntary reporting guidelines on corporate social responsibility (CSR) measures (it is mandatory to all public sector enterprises and government owned companies and banks) that came out in 2009.
In a world where trust deficit seems to be increasing with each passing day, all of us have to take the step together for increasing confidence amongst each other over our words and our deeds. While the leading big companies, which are in every sense global leaders too, actively engage in this process, and report on it, up and coming medium level enterprises are only just beginning to understand the importance of this composite dialogue. The textiles industry has enough examples from their contemporaries in Sri Lanka and Bangladesh on the multiple advantages that engaging in corporate sustainability brings in, with increasing employee productivity, lower attrition rates and also inviting foreign investment and preferred vendor status from leading apparel chains. Other sectors like banking too can see global examples of such institutions like Standard Chartered, HSBC and ANZ Bank to see the goodwill that they have been generating globally in the financial world for using their resources for sustainable development. All leading companies across the world are also conveying this information through the Global Reporting Initiative’s (GRI) standards of disclosure that rate you according to the level of disclosure that the company engages in and these are globally recognized as well.
Corporate sustainability is an exercise in continuity. It is a dialogue, as I have repeatedly stated, between various parties involved, and it is just another step towards the evolution of a company for tomorrow. If one were to rephrase John F. Kennedy’s famous words, it is time to not ask what this earth can do for us; rather it is time to ask of ourselves what we can do to make this world a better place to live in for each one of us.

Monday, July 11, 2011

Land Acquisition in India and the Debate Going On

In the hoopla associated with the land acquisition, including attempted padyatras thaat have been capturing more than necessary headlines, considering the ruling disposition's double standards over the same (people forget that it was Jawaharlal Nehru who had revoked the Fundamental Right to Property when the tribal people had started to invoke it in courts against mining projects) a closer scrutiny is certainly required over the oh-so-controversial Land Acquistion Act of 1894 and the subsequent amendment that governments have been searching for more than a decade now.

A major flaw associated with the Land Acquisition Act has been the lack of any proper rehabilitation package being promised under the original Act. Under the Act, there were provisions for compensation, but this was not linked to the market price of land, and is to be distributed through the local district magistrate's office in the form of actual handouts, a perfect system of this money disappearing. Moreover, the provision of royalty from these projects is not at all present unlike the mining projects, which in itself is a joke considering iron ore royalty is INR 26/tonne when it is sold at at least USD 1000/tonne. Considering the kind of freehand the government has given these companies, a step back would not be problematic for anyone in spite of all the grumbling one may hear from the industrial sectors. Moreover, the government can certainly design specific compensation packages based on market rates of land that do not lead to money being given all at once - rather stagger the flow of money in the form of a monthly stipend through the banks using direct cash transfers.

A flaw of gigantic proportions has been involving the wording used for the grounds on which land is to be acquired. In the Act, the term 'public purpose' is used liberally, though the same is defined nowhere. Even in the new Act, the term's definition eludes the reader's eyes, and makes the new version of the Act just as draconian as the old one. This leaves the Act and the people to be affected subject to the ruling disposition's mercy who can at any time notify land use and displace people. The Act also does not give any provisions for public hearings on the matter, eventually taking the matter completely out of the people who originally owned the land. Unless this provision comes out, there is no point in even amending the Act. Land acquisition has to be made a conciliatory process and not the disruptive process that it is in its current avatar. People need to be asked the terms and conditions on which they will part with their land, and they should also be made stakeholders in the industry not only through jobs but through shareholding in the project so that they do not feel alienated from the project.

Monday, July 4, 2011

REC Mechanism in India - What is Wrong With It

I had attended a workshop on REC mechanism on June 17, 2011 in Delhi organized by the National Load Despatch Centre, which is supposed to be the nodal agency for this mechanism. Having started in 2010, it was indeed a unique learning experience to hear first hand from people involved in the process including people AB Power Infrastructure, Central Electricity Regulatory Commission and National Board of Irrigation and Power as well as the representatives of Indian Power Exchanges (yes, we have two of those as well!) talk about the policy, the teething issues and listening to people clear their doubts and give their suggestions, which were duly noted.

Any typical trade mechanism in the world is based on Coasian economics, about which I had discussed briefly here. In the case of the REC mechanism, the tradeable property or externality identified is the environmental credential associated with green energy, and it is a trade in this benefit which is surplus in some states while non-existent in others that is being encouraged to overcome issues of glut power, non-availability of resources in some states as well as meeting Renewable Purchase of distribution agencies and power generators. The difference that we have seen so far in this mechanism from those in the world, especially in UK, Australia and many states in USA are two-fold

1. There is no secondary trading allowed in the mechanism so far.
2. Solar energy certificated are treated differently from other renewable energy certificates in terms of price, but they are counted the same.

Among suggestions and loud thinking, two proposals seemed to be coming out very strongly - allow secondary trading on the lines of carbon credits and value certificates for solar energy on an equivalency basis (i.e. one solar REC > one non-solar REC). These voices were particularly strong from the end of power trading companies as well as power producing companies who as of now found both the floor and forbearance prices set for the two kinds of mechanism to be unfavourable. One thought that I had all along was the fact that this mechanism needs to account for the future as well, since India is aggressively trying to move towards Smart Grids where energy demands would be met through spot generation as well as rely on banked energy, and seeing the absence of that link is a bit worrisome, since the government has put in so much money into the Accelerated Power Reforms Development Program (APDRP), the second phase of power reforms that are subsequently seeing the third stage of evolution coming in as well, with Bengaluru (BESCOM) and Delhi (NDPL) shifting towards two way metering and greater grid visibility, right down to the household level (this visibility stands at 33 kV line only, and that too is present in very few places). Another thing that I wondered about was how there was not only no secondary trading but there was no power supply guarantee assured for REC in the light of what was happening in Tamil Nadu and Maharashtra (deliberate load shedding to avoid payments to power producers). Moreover, for solar power, there is not much incentive except for the price, especially if you look at the fact that it costs INR 10-12 crore/MW to establish plants, and that electricity generation is not throughout the day like wind resources.

All is not lost, as the mechanism is still being worked upon, and hopefully things will improve. But as of now, as it stands, based on my discussions with many people at a personal level at the conference, this mechanism may be reduced to just another white elephant of the government.

The Economic Slowdown Needs Immediate Address

The Buck Stops With the Duo (Courtesy: Bloombergquint) The fracas in Maharashtra notwithstanding, things are at a critical juncture ...