It’s Time for Reality Check on Malls Before Allowing FDI in Retail Sector

As India continues to debate on the pros and cons of foreign direct investment (FDI) investment in the retail sector, it would be interesting to understand the interplay of politics, corporate influence, intrigues of supermarket chains and greed governing the trade treaties with the fourth largest staple diet of human consumption, banana, in focus. 

Supermarkets are now the only players in the banana chain to consistently make profits from bananas. It is estimated that bananas represent 2% of the total turnover of North American and EU grocery retailers. Bananas are the single most profitable item passing through the check-outs with more than 33 thousand product category in stores. While retail chains may appear as warriors on behalf of poor consumers getting the best possible deals for products, workers who produce them are paid rock-bottom wages and their local environment is destroyed. 

It is important to note that the world banana market is geographically fragmented mainly due to transport costs and diverging import policies in the consuming countries. Around one fifth of globally produced bananas are exported from the developing countries to developed nations as an example of unidirectional South-North trade. The dominant banana importers are EU countries (29.2%), US (27.5%), Japan (8.2%), Russia (7.9%) and Canada (3.5%). Only the Dwarf Cavendish variety is traded while there are hundreds of varieties. The main banana producing countries, such as India or Brazil, are hardly involved in international trade. About 20% of the 70 million tonne of bananas produced each year enter global market. Just five companies—Dole, Del Monte, Chiquita, Fyffes and Noboa—control some 80% of the international banana trade.

The descriptor “banana republic” actually originated when a few of the companies in Central America having business interest in banana ensured changes of government in Honduras and then went on to convince the administrations of Truman & Eisenhower to order the CIA’s action in Guatemala. Colonial histories influence trade agreements and partly determine who exports to whom. In the ’90s, five Latin American countries (Costa Rica, Venezuela, Colombia, Guatemala and Nicaragua) backed by the US (on the instigation of an almost bankrupt company with a large banana interest) a filed formal trade complaint at the World Trade Organization and fought a series of trade disputes with EU.

From the beginning, commercial enterprises in banana trade in collusion with the friendlier governments derived profits from the private exploitation of public lands while the debts incurred became public responsibility. The companies, by manipulation of national land use laws, could cheaply buy large tracts of agricultural land for plantations whilst employing the native as cheap manual labourers after having rendered them landless. The biggest problem with banana trade is that the competition for the lowest prices is led by supermarkets which are constantly looking to buy the cheapest bananas. This comes at a great cost to plantation workers because they in turn are paid lower wages.

It is important to do some reality check with experience of other nations before allowing FDI investment in retail. 

Defer not till tomorrow to be wise, tomorrow’s sun to thee may never rise

– William Congreve

Published in The Economic Times

Beware! Corporates Are Out to Control Scarce Water Resource

“I am the Alpha and the Omega, the beginning and the end.

To the thirsty I will give water without price”

The Bible - Revelation 21:6.

The farmer flare-up at Maval near Mumbai (during the pipe laying for industrial belt of Pimpri-Chinchwad) should not be dismissed as politically motivated. Water stress is just beginning to show in India. With increasing scarcity of water, the competition for water between agriculture, industrial and municipal users is set to intensify. The global market for water as a commodity is estimated to be over $500 billion and $2 billion in India. India uses approximately 829 billion cubic metres of water every year. By 2050, the demand is expected to double and consequently exceed 1.4 trillion cubic metres of supply.

India’s agricultural sector currently uses about 90% of total water resources. Farmers are expected to meet the rapidly increasing demand for food, feed, fuel and fibre crops even though most land and water resources have already been committed.

Water markets are new and evolving. The values of licences traded are in billions of dollars. World Trade Organisation and North American Free Trade Agreement consider water to be a tradeable good, subject to the same rules as any other good. Corporations through other multilateral world bodies are also trying to influence national governments to push privatisation and commodification of water as “the chosen” alternative to manage the growth in water consumption and severe water scarcity. Water trading involves the temporary or permanent transfer of a water licence. A temporary or term trade involves the transfer of an allocation of water for a set period of time.

The companies argue that privatising water is the best way to deliver it safely to the world. It is true that governments have done an abysmal job of protecting water within their boundaries. However, the answer is not to hand over this precious resource over to corporations who have escaped nationstate laws and live by no international law other than businessfriendly trade agreements. The answer is to demand that governments begin to take their role seriously and establish full water protection regimes based on watershed management and conservation.

Just as governments are backing away from their regulatory responsibilities, corporations are acquiring controls of water resources. Bottling companies in different parts of India pay very little towards water mining and have practiced unsustainable water mining in these areas to the detriment of farmers in the vicinity. Some of these corporations are gaining control over the burgeoning bottled water industry, the development of new technologies such as water desalination & purification, the privatisation of municipal and regional water services, including sewage & water delivery and the construction of water infrastructure.

India seems to be progressing towards privatisation of water, which will ensure that decisions regarding allocation of water will focus almost exclusively on commercial considerations. Naturally, corporates will seek maximum profitability and not sustainability or equitable access to water resources. It is important that “Blue Gold” (water) be guarded as a common property resource at all levels of government and no one should be given the right to appropriate it at other’s expense for profit.

Published in The Economic Times

How Shipping Industry Circumvents Regulations & High Operating Costs

The Indian Navy and Coast Guard rescued sailors from the cargo ship MV RAK Carrier that sank about 20 nautical miles away from South Mumbai. The incident came within five days of another oil tanker MT Pavit running aground near Juhu beach. Both are Panama-flagged vessels and the humanitarian rescue was carried out at Indian taxpayer’s cost. It is noteworthy that sometime ago the two ships that had collided near JNPT -- MSC Chitra and MV Khallija -- also happened to be Panama-flagged vessels. The Republic of Panama is the largest ship registry in the world, with more than 8,600 ships flying the Panamanian flag. This entire setup is a great business for the tiny Republic of Panama which makes millions of dollars every year from the fees it charges ship owners.

A ship is said to be flying a flag of convenience (FOC), if it is registered in a foreign country for the purposes of reducing operating costs or avoiding government regulations. Even 17% of Indian ships are registered under FOC. In many cases, the flag state cannot identify a ship owner; much less hold the owner civilly or criminally responsible for a ship’s actions. The country of registration determines the laws under which the ship is required to operate and that are to be applied in relevant admiralty cases. If major money laundering countries (such as Bermuda, British Virgin Islands and Cayman Islands) have been targeted by governments for insufficient regulations and poor enforcement, there is no reason why flag states (such as Panama, Liberia, Marshall Islands) should not be targeted on grounds of providing an environment to shipping companies for conducting criminal activities (illegal and unregulated fishing) and adverse effect on environment (oil spillage) through the conduit of global trade. Policymakers around the world should work to protect and enhance the conditions of international maritime industry and for the elimination of FOC system through the establishment of a regulatory framework for the shipping industry.

The modern practice of flagging ships in foreign countries began in the 1920s in the US when ship owners frustrated by increased regulations and rising labour costs began to register their ships in Panama. Today, more than half of the world’s merchant ships are registered using FOC, more commonly referred to as open registries. The top ten FOC counties have registered 55% of the world’s deadweight tonnage (DWT) including 61% of bulk carriers and 56% of oil tankers. Even, a country like Mongolia that is landlocked is offering open registries for ships. Around 74% of Japanese ships are flying a foreign flag and over 50% of the ships registered in Panama have a Japanese owner. It appears that the so-called self acquired diplomatic immunity is assumed by many of these FOCs. The open register offices are already issuing certificates, collecting payments and doing other documentation in India. Many of the people who have spent time at various levels in the regulatory and other government bodies have the ability of issuing equivalent certifications of all sorts on a pricelist.

Published in The Economic Times 

Creative Accounting May Help Miners Avoid Sharing of Profits

Commodity markets seem to periodically throw up controversies beyond the simple realm of price rise. A few months ago, it was the Central Vigilance Commission (CVC) chief ’s alleged involvement in palm oil tender and now the Karnataka chief minister’s alleged involvement in iron mining contracts. In the midst of commodity curse, reforms in several sectors continue.

The Mines and Minerals Development and Regulatory (MMDR) Bill 2010, which would be ready for ratification in the monsoon session of Parliament, would make it compulsory for all coal miners to share 26% of profits with affected communities. Companies operating in mineral sectors other than coal would have to share with the local population an amount equal to the yearly royalty payable by the mining companies to governments. Not all the details of the draft mining bill have been released.

A third of Indian coal mines cause pollution. No land taken for mining has been returned to state governments in the last 45 years and there is no systematic time-bound reclamation plan of mined out areas either. The MMDR Bill 2010 has several provisions for curbing illegal mining, including stricter penalties, debarring an entity found involved in illegal mining from future allocations, penal actions and trial of officials.

Mining is an extractive industry and differs in some ways from other types of enterprises. These differences occur in four main areas which affect accounting: Capital structure of mining enterprises, preproduction costs of a new venture, profit determination in final accounts and reports and royalty payment.

Big corporations always try to convince that high profits are good for everyone. The argument goes that the more they make, the more they will share. But as mining giants have shown, the more they make, the more they line the money to their own pockets. Creative accounting is part of corporate culture and this is likely to be extended to mining companies as well.

Creative accounting and earnings management are euphemisms referring to accounting practices that may follow the letter of the rules of standard accounting practices but certainly deviate from the spirit of those rules. The structure of the draft mining bill is wrong. Profits can be easily manipulated, especially by private players. The private sector often uses coal and iron ore to produce power or steel and it would be very easy for them to understate their mining profits through transfer pricing.

Should one could call it greed? Or dishonesty? With a crisis of confidence involving the fiscal probity of corporations, it might seem that things could get dirtier. To add to the chronicle of greed and dishonesty, there will be also matters of hypocrisy. The draft law proposes the profit sharing formula in a bid to smoothen land acquisition. The well-intentioned draft of MMDR is likely to get entrenched in the accounting and transfer pricing web in future.

Published in The Economic Times