Those setting up lucrative operations in India are being told to put their money where their outposts are
In India, resource nationalism and the constant demand for more energy are spurring on a social conflict. The clash is epitomised by a proposed South Korea-backed $12bn steel refinery project – the largest foreign investment India has ever seen.
The project is important for boosting India’s investment-friendly credentials, and India also desperately needs the refinery to shore up its domestic steel industry.
But more than 20,000 coastal villagers in the east-Indian state of Orissa have opposed the project, which has so far been six years in the making, saying it would displace them from their homelands and ruin their betel leaf farms.
Korean steelmaker Posco offered a compensation package and jobs but, according to the Indian environment ministry, “connived” to violate the Forest Rights Act by concealing the true impact on tribal forest communities.
Nevertheless, in May 2011 the environment ministry – under intense pressure from business interests – granted the go-ahead in the form of operating licences, saying it was swayed by the project’s economic value, and by assurances from the company about assistance to local people and environmental impact mitigation.
That the deal included earmarking 2% of the Korean company’s net profit as corporate responsibility budget did not seem to assuage community opposition.
“If [the government and Posco] have not acquired even an inch of land in the last six years, how do they think the green nod will help them to set up the plant now?” asked an emboldened community representative.
Increasingly, the environment ministry has used mandatory corporate responsibility payouts as a negotiating tool. The tactic of mandating corporate responsibility even made it into proposed legislation when, early this year, the Indian government pushed to extend the mandate to all companies earning annual net profits of €1m or more.
Critics view the tactic with scepticism: legal enforcement remains weak, they charge, while cosy relations with government officials continue to breed corruption in land acquisition deals.
Community response
But the climate is changing. “What is different this time is the way communities have been responding to extractives,” says Shankar Venkateswaran, a director with SustainAbility, a UK-based consultancy.
Venkateswaran says the tipping point came in 2008, when plans for a Tata Motors car factory in West Bengal sparked huge protests by farmers who claimed their lands were forcibly taken.
At the same time the Vedanta bauxite mine and Posco steel plant operations were also coming under fire. There were protests around the country, and land acquisition and community displacement became huge political issues.
“What is beginning to be recognised,” Venkateswaran says, “is that ‘if we don’t find a way to share benefits with communities, it’s going to cost us an election.’”
In late March 2011 the Indian prime minister, Manmohan Singh, focused on the issue in an address to industry leaders, telling them to see direct investment in communities as an investment in their own long-term interest.
“Companies undertaking greenfield projects cannot see their factories and units as oases, cut off from the needs and interests of the community around them,” he said. “We need to work out more effective mechanisms and principles for the use of land and other resources that reconcile different interests.”
Counterproductive obligations?
Seema Arora, executive director of sustainable development at the Confederation of Indian Industry, acknowledges business reluctance to go beyond the minimum payment system required in the event of community displacement, but says mandating an obligatory corporate responsibility policy would be counterproductive.
“Enforcement is already poor in our country,” Arora says. The key, she says, is to show companies the business case of doing corporate responsibility while upgrading metrics that define and measure outcomes in areas such as education and skills training.
Last year we had a company tell us they funded the Commonwealth Games from their CSR budget. Tell me,” she asks, “how does that help communities?”
Arora says government would make better progress if it continued forward with nascent public-private partnership models, citing recent work on affirmative action and a vocational skills training programme launched through the National Skill Development Corporation.
“We need to show how people on the ground are benefiting,” she says.
After intense lobbying, the 2% CSR mandate will, in all likelihood, get scaled back, though it appears certain that companies will now have to make specific disclosures of their social expenditure in their annual reports. And for the first time, government has imposed a corporate environment disclosure mandate for major extractive firms. Boards now have to convey the risks involved in violating environmental norms to the board or to stakeholders.
As for legislation specifically targeting the extractives industry, analysts say passage of an amended national mineral policy in 2008 reassured major western companies seeking to enter the market. In December 2009, mining giant Rio Tinto made its first sales of iron ore to India, while Anglo-American is said to be hoping to establish a long-term relationship.
Added transparency regulations are expected to be passed in the pending Indian Mines and Minerals Act, including the requirement that licences only be given to companies that fully disclose their mine closure plans and show that they have implemented corporate responsibility activities.
The draft act also attempts to tackle the thorny issue of community displacement. It stipulates that companies must “allot free shares equal to 26% of a project’s equity to the local population affected by the mining project”.
A legal success?
First proposed in 2009, the suggestion for earmarking a part of a company’s profit for corporate responsibility has been considerably scaled back but may nevertheless achieve its intended goal.
“Although we do not plan to make implementation of the provisions mandatory, companies will have to mention in the footnote of their annual reports how much and where they have spent the money kept for CSR,” said a senior corporate affairs ministry official widely quoted in early May in the Indian press.
The original language put forward by the corporate affairs ministry proposed that “every company having net worth of Rs 500 crore ($110m) or more, or turnover of Rs 1,000 crore ($220m) or more or a net profit of Rs 5 crore ($1.1m) or more during a year shall be required to formulate a CSR policy ... as may be approved and specified by the company.”
It continues: “In case any such company does not have adequate profits or is not in a position to spend prescribed amount on CSR activities, the directors would be required to give suitable disclosure/reasons in their report to the members.”
The corporate affairs ministry official said: “Transparency is important for us [the ministry] to keep a check that money is not routed somewhere else. It will also help in ensuring that companies do not take up just anything in the name of corporate social responsibility