Missing the wood for the trees

First year of mandated implementation shows worrying trends but there is scope to learn and improve

Pradeep Patra and Amitabh Behar | October 29, 2015




India’s 2% CSR mandate has had a rather bumpy start, if recent media reports are to be believed. Two-thirds of the companies falling under the mandate failed to meet the target expenditure in 2014-15. However, this is least of the concerns. Given the fact that this is the first year of the enactment of the mandate, many more companies shall be able to reach the target in coming years. What is more concerning is the fact that we have not been able to move the discussion from “how much” to “into what” and “how”!

This seemingly well intended mandate (one of the first such initiatives in the world) is just one of the many critical decisions taken by the government in recent times that has far-reaching implications on the functioning of the state and its relationship with its citizenry, the private sector and civil society. Thus, the discussion around CSR needs to be far more nuanced than what we have seen so far.

Since the opening up of the economy, the last two decades have been rather a rollercoaster ride for India and the government. While it has delivered on the economic front, its performance on the much-hyped inclusive growth front has been more or less disappointing. In the face of its continuing failures to convert economic growth into developmental outcomes, the government seems to be banking on two avenues: first, transfer a portion of its welfare responsibilities to the corporate sector, on which it must increasingly rely for growth and employment, and second, an image makeover to appear more socially responsible by enforcing CSR on corporates. While sections of the corporate world may not be happy with the provision, this is a win-win for both the government and the corporate sector. There is no denying the fact that this mandate does provide some sort of legitimacy to the corporate sector that has been suffering from scams, corruption, and crony capitalism in recent years.

Unfortunately, the first year of CSR implementation has not brought much enthusiasm and questions are slowly being asked by various sections including by veteran business leaders, pointing to the inefficiencies in the implementation mechanism. This is increasingly becoming a case of missing the woods for the trees. The following are some of the critical issues we must discuss while discussing CSR:
 
Role of the government in CSR

After the initial enactment of the CSR mandate, several state governments were only too willing to establish state development funds for collecting CSR money. For example, the Chhattisgarh government had proposed a CSR fund in which corporates could put their mandated contribution. After vigorous protests by several stakeholders, the rules were tightened to discourage any such initiative. However, subsequently an addition was made to the list of eligible activities for CSR expenditure, “supplementing government schemes”, but without specifying the process of supplementation.

Possibly taking a cue from such ambiguity in the rule, the Gujarat government recently established a Gujarat CSR Authority to “create a CSR fund with contribution of PSUs and private sector companies and channelise the CSR fund”. Thus, we are back to square one. Given the fact that the state has the same ruling party as the one in the centre, this might be allowed to create a precedent. This would only encourage other states to come up with state-specific funds to corner CSR resources, in which case companies willingly or unwillingly have to give in. 

The centre itself has to take a lot of blame for this seeming revival of the state’s interest to utilise CSR money. The Modi government has been very active in inviting CSR participation in some of its flagship schemes such as Swachh Bharat. While there is nothing wrong in supplementing government schemes, such engagements become vulnerable to misuse as tools to win direct or indirect goodwill from the government. They also use up valuable resources that could have been invested in areas of need beyond government focus. Continuation of such a scenario would necessitate the question if CSR is becoming less of a philanthropic activity by the private sector and more of a welfare tool for governments to deliver its services. And if so, would direct taxation to that effect be more effective?
 
Limiting nature of CSR investment

Following the lead provided by Schedule VII of the CSR Rules, most qualifying companies have invested in a handful of areas listed in it. The areas listed are not only restrictive in nature, they also leave out critical building blocks of a democratic society such as human rights, governance and accountability. Not surprisingly, many studies have found that the CSR investments are not only concentrated in a handful of areas, but focus only on the easier infrastructural part of it. A study by McKinsey, for example, confirms similar findings. Of the 50 development sectors it considered, the study found over 90% of present-day donor contribution flowing into just about seven to 10 sub-sectors and even within the well endowed education sector, much of the money is allocated for primary education and higher education, leaving much less for pre-primary, secondary and special-needs education.

At the central government level, after the prime minister’s call to build school toilet blocks as part of Swachh Bharat, it has become one of the most popular areas for CSR expenditure. Many corporate leaders acknowledge that this government priority has resulted in a very large chunk of CSR money being invested building toilets. However, the fact that school toilets are mandated within Sarva Shiksha Abhiyan (SSA), one of the largest centrally sponsored scheme with a budget of '22,000 crore for 2015-16 (which is incidentally more than the entire estimated CSR contribution under the Companies Act). A whopping 20% of the money under SSA remained unspent from 2014-15 and more than 1,62,000 schools toilets remaining dysfunctional (according to the minister’s reply in parliament), does raise a few questions. While there is need for school toilets, is this an attempt to cover up the government’s own inefficiencies? As per media reports, corporates have built around 20,000 toilets under the scheme in 2014-15. However, could we have invested this money in providing water supply to toilets or training students and authorities, without which far more toilets are becoming dysfunctional every year?
 
Business responsibility vs CSR in India

CSR in the global context has a far wider meaning and encompasses a wider range of activities than merely spending 2% of the net profit on a list of activities as is under the Indian law. Given the frequency with which instances of illegal mining, environmental degradation, human rights violation and corporate scams have featured in our media during the last few years, it would be just common sense to conclude that if we need any responsibility from corporates then it should be more responsible behaviour, more than spending 2% on CSR.
A few years back the ministry of corporate affairs issued ‘National Voluntary Guidelines for Responsible Business’, which recommended a set of nine principles covering most aspects of business for companies to adhere to. However, it was purely voluntary in nature and hence, there was very little enthusiasm from the business community. Subsequently, the market regulator SEBI has taken it up and has mandated the top 100 companies to report their performance on those nine principles. Here again, while reporting is compulsory, performance is not. The loud discussions around CSR has somehow shifted the focus from issues of broader business responsibility and we need to bring that back, for the fact that health camps or ambulance services cannot compensate for illegal mining or violation of tribal rights.
 
CSR to strengthen regional disparities

The mandate also raises the possibility that the CSR expenditures may not reach those who need them the most and may actually exacerbate regional inequalities. The CSR rules allow companies to spend their CSR funds where the bulk of their operations and markets are based, and not where they’re most needed. Given the fact that a handful of already prosperous states dominate industrialisation in India, most of the CSR might be directed into those states, leaving out the poorer states – a classic case of the poor getting a poorer deal in a poor state.
 
Need for stricter monitoring

Yet another danger is that the law’s vague, opaque compliance norms may allow unscrupulous officials to direct CSR funding to cronies or siphon it off. Recently, none other than Ratan Tata called for stronger monitoring of CSR by stating that, “There would be some companies which would be either wasting the money or siphoning [it] in some form.” And he is not just rhetorical either. In 2012, The Indian Express unearthed a rather preferential multi-crore CSR contribution by state-owned National Aluminum Company to a private university from its CSR and periphery development fund meant to be spent in Koraput, one of the poorest districts in the country.

The high-level committee constituted by the ministry of corporate affairs to suggest a monitoring mechanism for CSR submitted its report in September, recommending against any action towards monitoring CSR activities. The committee has mentioned unavailability of data to arrive at a decision in this regard and has suggested a three-year “learning period” to review the need of such a monitoring mechanism. In India most companies file their annual reports by end of September and if availability of data was such a crucial factor for the committee whose primary role was to suggest a monitoring mechanism, the date of constitution and duration of the committee is questionable. Or else, the committee should ideally have waited for another month or so to have a better understanding of the data, rather than submitting its report in September itself. Given the history of pace of policy reviews in India, this would count as a golden opportunity missed which could have played a critical role in making CSR contributions more effective in realising the goal of ‘inclusive growth’.  

Focus on process and outcome

One of the most emphasised yet least acted upon aspects of the CSR mandate has been its implementation in partnership with civil society/NGOs. At the moment, much of the CSR work is a mix between implementation by the corporate’s own foundations, employee engagement, contribution to funds and to a lesser extent by partnerships with NGOs. Civil society in India given its years of experience possesses the unique understanding and skills to bring in social change. Corporates will do a lot of good if they partner with it in issue-specific interventions, rather than creating their own implementing foundations and try to reinvent the wheel. Some of the longstanding foundations of mature philanthropy function on this principle, rather than trying to do everything of their own.

Such partnerships shall also help corporates in investing in areas that require long-term engagement, for example, behavioural change for health and sanitation or capacity building of village-level institutions. This would not only help them better understand complex societal problems but also to better design and engage with communities.  

These comments are based on some of the early trends in CSR implementation. Given its relative newness, these apprehensions are not a complete rejection of the potential for collaborative space, but an attempt to improve and further strengthen it. We still have a long way to go.

Patra and Behar are with the National Foundation for India.



(The column appears in the October 16-31, 2015 issue)


 

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