Orissa in India: An Economic Scam brewing?

While the Government of Orissa (India) ostensibly fights opposition to the POSCO project from human rights activists and environmentalists, is there a gargantuan economic scam playing out?

The second statement in the Memorandum of Understanding (MoU) signed between POSCO and Orissa state government states:

"The Government of Orissa, desirous of utilizing its natural resources and rapidly industrializing the State, so as to bring prosperity and wellbeing to its people, has been making determined efforts to establish new industries in different locations. In this context, the Government of Orissa have been seeking to identify suitable promoters to establish new Integrated Steel Plants in view of the rich iron ore and coal deposits in the State."

We must look at the impact of this economic venture on Orissa from a social and environmental perspective but most importantly from an economic perspective.

In the MoU, POSCO plans investment of approximately USD 12 Billion or Rs 48,000 crores. The numbers are awesome. Rs 48,000 crores could do much for a state that is faced with one of the poorest social and economic indices in the nation – in terms of literacy, health care, nutrition and mortality, earning power, etc. As part of Phase I, POSCO plans on setting up projects worth Rs 21,900 crores by 2012 and projects worth 21,500 crores as part of Phase II by 2016.

POSCO will set up an Indian subsidiary headquartered in Bhubaneswar for this effort based on 20-25 acres of land. In addition, POSCO will require 6000 acres of land for the steel project and associated facilities as well as for township development. In addition, other land may be acquired for infrastructure to transport goods between plants and to the port, for water treatment, etc.The Government of Orissa has undertaken to provide this land to the company.

In a show of good intentions, the MoU also notes that:

"TheGovernment of Orissa appreciates that the Company will be a responsible corporate house with a high involvement in employees' welfare and social development."

The Oriya community is thus thrilled at the prospect of a major multinational investing in setting up the biggest iron and steel project in Orissa which will not only bring in an unheard amount of investment into the state but also provide for jobs and townships to help develop the people of the state. The Government of Orissa must be proud for having pulled this off.

And yet, there has been significant hue and cry on this deal. Environmentalist crying about a waterfall that could die – who cares about it when people are dying from starvation! Hills and scenic beauty will disappear – who cares if it provides stable livelihoods to a significant fraction or Orissa's people. Even the discussion on the Ridley turtles seems ridiculous from this perspective. The people of Orissa seem justified in arguing that similar penalties were paid in the development of Maharashtra, Karnataka or other more developed parts of India or the world – so why complain now that we are doing the same. And that is a fair argument.

It is also fair to truly understand the details of this economic benefit that Government of Orissa believes will come to Orissa.

The Direct Economic Component

As part of the initial deal, POSCO has promised a flat rate of royalty at Rs 27/tonne of iron ore to the Government of Orissa (for ore with at least 62% iron content). This results in less than Rs 1620 crores to Government of Orissa over time of the contract of 600 Million Tonnes.

The current global market rate of iron ore is over USD100/tonne. In December 2007, the market was at USD 120/tonne. By this rate, 600 million tonnes of iron ore (that POSCO would mine) at greater than 62% iron content would result in Rs 240,000 crores. Wow! We suddenly realize that POSCO has effectively been given this ore free. Accounting for mining costs and the total investment package (less than 10% of the costs) the people and the state of Orissa are getting less than 1% of open market price of iron ore.

This is not a special deal for POSCO – similar (though smaller) deals are in the works with Tatas, Vedanta, Jindal, etc. Why is the Government of Orissa (and the Central Government) pursuing such deals? People in the business point to the strength of special interest groups and the mining lobby and that all political parties have received their dues from the lobby. Processes are encumbered with corruption – every truck load mined needs to pay the local MLA Rs 500 and a similar amount goes to the party coffers.

For all the excitement among the Oriya community, there have been few demanding accountability from Government of Orissa - why is the Government of Orissa is selling the ores at less than 1% of the global price. Surely, more money coming into the state coffer will be more helpful for people, will lead to more development?

After detailed analysis, some groups have demanded that the Government of Orissa set the royalty at 50% of market price, and that if the iron ore were to be converted to steel outside the state, the royalty be 80%. Even at this high a royalty, POSCO will be profitable. While Government of Orissa argued that this would allow other states to undercut Orissa and get a better deal, critics have suggested that these states form a coalition, like Organization of the Petroleum Exporting Countries (OPEC), to set prices. Such a coalition including the 5 states of Chattisgarh, Jharkhand, Orissa, Karnataka and Rajasthan is underway. Chief Ministers from these states met with the Prime Minister of India, on 19th of December and demanded a 20% royalty down from public demand of 50%. The Central Government of India haggled and is considering a royalty of 7.5-10%. The Government of Orissa seems too readily satisfied with this suggestion.

Such pressure does make the state respond. Now the state of Orissa will receive Rs 18,000 to 24,000 Crore in royalty (if this is made binding) as opposed to 1620 crores as per the earlier plan.

What reasons force these governments to undersell minerals at >90% below market prices? The state government has been very unwilling to provide details of the transactions, with the Government of Orissa initially claiming that disclosing such details of public funds went against confidentiality agreements (unless there are security threats, democratic governments globally have provided details of deals with private agencies). Why should Government of Orissa, with an annual budget of 4500 crores, let go 108,000 crores or 3600 crores per year for next 30 years and be satisfied with 600 crores/ year? (50% of 216,000 crores the price of 600 MT of Iron Ore at last year's prices)

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