Though much has been written about the POSCO deal with the Government of Orissa (GOO), this article attempts to provide a holistic analysis of the deal. While the GOO ostensibly fights opposition to this project from human rights activists and environmentalists, is there a gargantuan economic scam playing out? Parts of this published in Seoul Times

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Specifically, this article notes the serious opposition to this project from human rights activists and environmentalists and wonders whether the GOO is attempting to use this opposition to actually divert from the biggest economic scam in the history of Orissa.

Introducing the MoU

The context of this article is perhaps laid down in the second statement in the MoU¹ signed between POSCO and GOO which 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.

In laying down its intention, the GOO invites citizens at large to analyze whether its plans are aligned to meeting the goals stated above to the best of its abilities. In this analysis then 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 48000 crores. That is a significant amount of money invested in Orissa – and it is not speculative funds that float into the stock markets and disappear as suddenly. Rs 48000 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. The numbers are awesome. POSCO plans on setting up, as part of Phase I), a plant of 3 million tonnes capacity by 2010 with a project cost of Rs. 10100 crores and a second plant of similar capacity by 2012 at a cost of Rs. 11800 crores. As part of Phase II, two other 3 million tonne units will be set up by 2016 with a total cost of 21500 cores.

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 4000 acres of land for the steel project and associated facilities including storage yards, port facilities, etc. POSCO will also require 2000 acres of land for its township development, recreational activities and related social infrastructure. In addition, other land may be acquired for infrastructure to transport goods between plants and to the port, for water treatment, etc. The GOO has undertaken to provide this land to the company.

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

The Government 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 GOO 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.

In the same vein we should then analyze more deeply what the people of Orissa gain from this deal. How will it impact the people who live in Orissa from an economic and social perspective?

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 GOO (for ore with at least 62% iron content). This results in less than Rs 1620 crores to GOO 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 – which today are 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 deals are in the works (though smaller in size) with Tatas, Vedanta, Jindal, for example. Why is the GOO (and the GOI) pursuing such a deal? 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. Daily 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. It would be a very upright and powerful political representative who would raise questions.

The almost complete silence from the media is also disconcerting. Rumors suggest that senior journalists received a paid junket to Korea. That, however, cannot be the only reason that the Oriya media has not analyzed this in any detail?

Even if these are rumors, it behooves the larger society to ask why the GOO 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?

Such watchfulness has indeed been helpful. Led by a few critics who have analyzed this deal, some groups have demanded that the GOO set the royalty at 50% of market price. In addition, GOO demand that if the iron ore will be converted to steel outside the state, the royalty will be 80%. Even at this high a royalty, the company will be profitable². While GOO argued that this would allow other states to undercut Orissa and get a better deal, critics have argued that these states form a coalition, like OPEC, to set prices. With such pressure and watchfulness, such organizing underway, 5 states, Chattisgarh, Jharkhand, Orissa as well as Karnataka and Rajasthan have formed such a coalition. CMs from these states met with the PM, on 19th of December and delegates from these states demanded a 20% royalty down from public demand of 50%. The GOI haggled and is considering a royalty of 7.5% to 10%⁷ . The GOO unduly seems to be satisfied with this suggestion.

One learning is that such pressure does make the state respond. Now the state of Orissa will receive Rs 18000 to 24,000 Crore in royalty (if this is made binding) as opposed to 1620 crores that it would have received as per the earlier plan. Second, it is astounding that the GOI and the state governments do not want to make more for the nation and the states through proceeds of sale of minerals. Why? 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 CM of GOO initially claiming that disclosing such details of public funds went against confidentiality agreements (which is strange; unless there are security threats, all democratic governments have historically provided details of funds going to private agencies).  Why should a GOO, 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 or Iron Ore at last year's prices ) Suggestions of corruption seem to be the only feasible answer. And as new scams and scandals reveal themselves³ (with respect to the GOO) every month, kickbacks having played a role in setting such a give-away price seems even more likely.

At the very least then, GOO must be questioned about setting of such ridiculously low prices.  All transactions concerning public funds and with public resources, must be transparent. There is no other way to hold a tainted body of people  accountable.

The Indirect Economic Impact

Analysis of a direct economic impact – or the opportunity cost – shows the immense loss that Orissa takes on with this deal. But are there other benefits that Orissa gains – jobs for people? Infrastructure perhaps? At the same time, are there other indirect opportunity costs with this deal? Is there secondary effects of this deal on the broader economics of the state? As with any economic enterprise, economic plans of GOO must account for secondary gains and lost opportunities. It is all right for such an analysis to conclude that other activities have very little impact and can be accounted for through the profits of this large effort. However, to neglect to do such an analysis is incompetence and when such negligence is with public funds, it is criminal.

POSCO promises to invest $12 billion (48000 crores at Rs. 40/$ exchange rate) in setting up the plants and running them. Even assuming it employees 10000 people (and this is a very large number since modern automated processes do not require as many people) at Rs. 10000 per month (again this is a high number since most of the employees will be miners and workers at lower pay scales), this accounts for 3600 crores for life of the project. This is the portion of the investment that goes into the local economy over a 30 year cycle – this is the portion that could potentially trickle into other economic efforts to sustain schools, services, small businesses around the townships where employees will live. 120 crores per year is a large number – however, it only forms 7.5% of the total investment. Some of the investment will also help build infrastructure for mining which may affect local communities – roads, schools, electricity – and that will be 5% if one is magnanimous about ones numbers. The rest of the investment is mostly on equipment and services to support production – investment that does not necessarily trickle into the local economy.

Even accounting for such indirect benefits, the state of Orissa gets less than 5% of the price of iron ore that it would get in the global market. Why such criminal neglect of state's self-interest by state's captains?

On the other hand, activists from Orissa and other parts of the country have said that thousands of people will be displaced from >6000 acres of land⁴ that is being sequestered for this project. Given that people from past projects have not been rehabilitated (whether it is from the Hirakud project or the Rourkela Steel Plant project), where will the new displaced go?  This is an important component – thousands of people are suffering inhumane conditions through such displacement. In addition, the economic activities of these thousands is also significant. While they may not have been creating thousands of crores of capital, they were sustaining themselves through access to the land that they have lived in for over generations. Now, if pushed out without rehabilitation, not only is this lost economic activity but also an increased cost on cities where they will migrate. The GOO has not addressed this issue publicly in any meaningful manner – this is not included in its economic calculations either.

While activists have been protesting the displacement of thousands of families, and while the GOO has moved the state machinery to take over the land and push people out through all possible means, the earlier analysis suggests that this may in fact be a tactics of diversionary nature.

Given the scale of profits from this venture and the criminal underselling of resources to POSCO, we think the state continues with this policy to keep attention away from the loot that is being played out. In 2007 alone, private companies exported 47.6 million tonnes of ores but paid GOO Rs27/tonne for ores and Rs 11/tonne for fines – we have already lost greater than Rupees 10000 crore (the budget of Orissa is Rs. 4500 crore). For given the scale of the loot, it seems likely that the GOO and POSCO will 'give in' to human needs and pay the oustees large amounts as rehabilitation. Even paying the oustees 10s of lakhs of Rs hardly causes a dent in the profit margins. This comment is not to belittle the plight of the displaced – it is to point out that perhaps they are being used as pawns in an even bigger scam.

It is also important to ask, given such humongous profits, why are those whose lands are being snatched away without giving them market prices? And how will the people whose land is being snatched away so that the state can gain thousands of crores benefit. How will the people of Orissa ensure this? In fact, it is important (given GOOs credibility and its inability to resist the temptation of corruption) that transparent processes be set up so that the people of Orissa can be sure that all the money coming into the state can be accounted for. And it is the people of Orissa who must push for such processes.

That process of indirect accounting must also include the impact on supply of water. In a review of water withdrawal, Himanshu Thakar cites POSCO website that mentions it will withdraw over 250 million⁵ liters of water per day. How does this affect the water table of that region? Clearly, agriculturalists in the neighborhood will suffer. What is the economic value of the loss in agricultural produce and in disruption in livelihoods of lakhs of farming families? Clearly the industry will not provide jobs to all these lakhs. We can estimate these numbers – there will be agricultural losses in the range of 100 crores per year, almost equal to gain in salary/wages from the plant each year. That is a significant amount. And it raises questions that the government needs to answer – and the Oriya society must ensure that the government answers these questions:

·What are the government's estimates on agricultural losses for surely the GOO must have accounted for this (unless it is truly incompetent)? 

·What are the GOO estimates on the hydrological impact of such high rates of withdrawal and processing.

· What does the GOO plan to do about this? It might plan to use the profits from POSCO to subsidize these agricultural losses or compensate these communities with better health care facilities and schools. Or it might use profits from POSCO to help start small industries in these communities. But we need to see that plan – what does GOO plan to do?

In addition GOO and GOI has granted SEZ status for the steel plant and the POSCO owned port, which is unprecedented. SEZ are for high value low volume products, meant totally for export, as originally conceived in China.  China has some total 6 zones, all owned by Chinese Govt. SEZs are exempt of the sales and import taxes. It is estimated that GOI will lose Rs.  89000 crores and GOO 22500 crores for SEZ alone, per report. POSCO would have paid import tax on approx $6 billion of machinery with a loss to GOI and GOO of 10 to 15%. This is another 2400 crores to 3600 crores subsidy, without any justification, as the competitors of POSCO, TATA and Mittals are paying that amount. There is no explanation of this action anywhere in the documents. This also does not account for duty to be paid on 12 million tonnes of steel every year for the 1st few years.

GOO has also promised to help POSCO acquire coal either from a Public Sector Unit or elsewhere. While the coal prices have shot up from $20 in 2003 to $40 in 2007 to $120 in 2008, there is no change in the nominal royalty that POSCO will pay GOO or GOI for acquiring coal⁶.

In the MoU, the GOO makes explicit claims on facilitating the rapid progress of the project but has nothing to say about the impact of the activities on the local communities. What is the impact of massive withdrawal of water on local communities? Arguably, this water will be used for cleaning ores and processing for steel – how will the water be cleaned and what will be the state of its discharge? How will it be discharged and what is the impact of that on local communities? Both of these are important questions that make economic impact on the enterprise of the state – and at the very least should have been accounted for in Orissa's economic plans. But they do not seem to be and the GOO is unwilling to discuss them.

In effect, the state of Orissa may have indirect benefits of up to 120 crores per year in salaries (for new jobs created) and strengthen that local economy. On the other hand, it loses 180 crores in the price of land leased to POSCO, 75 crores/year in cost of water, 100 crores per year to the agricultural economy, and 2400-3600 crores in taxes over the life time of the project. In addition, Orissa also loses out on market based royalty on coal, and on taxes related to 12 MT/year of steel. These are all estimates based on carefully piecing together the little data that has filtered out about the financial details of the MoU (GOO has hardly been transparent about this) – but the trend is clear. As per the current MoU, the people of Orissa bear a massive loss in the sale of important mineral resources (through inappropriate levels of royalty) while at the same time burdened with indirect costs that significantly outweigh indirect benefits. So would the GOO please explain why this deal is good for Orissa?

The dimensions become clear, when one takes into account that India's total known reserves are 18 billion tonnes, of which 4.5 billion Tonnes are in Orissa and GOO plans to give 1 billion Tonnes to POSCO of which 400 MT will be exported to Korea. 

The GOO is only willing to showcase 48000 crores. It will not talk about the amount that is being scammed nor is it willing to talk about the opportunity costs or the indirect costs. Questions are being framed as being anti-Orissa and it has set up the state machinery of bureaucrats and politicians to intimidate those who dare to question. The underlying thread that emerges is that the GOO has set this up as a win-win-lose deal. POSCO wins. GOO politicians and bureaucrats win. And the people of Orissa lose. Nothing else explains the lack of transparency and accountability, the underselling of minerals and the structure of the deal. However, it is not done yet, and as we have seen, a strong, watchful community can get the government to act in a manner that is more accountable and make economic sense. 

We sincerely believe that the issue of R & R is diversionary and the real issue is to keep eyes of public away from the 250, 000 crore give away to POSCO in form of subsidy in Iron Ore prices.  This may be the reason why competetors, Tatas, Mittals and Jindals are also silent, as their deals also include such give aways, albeit of smaller. This must be the central issue, in our opinion.

The question is – will the people of Orissa hold GOO and CM of the day, accountable?

1Memorandum of Understanding: http://orissagov.nic.in/posco/POSCO-MoU.htm

2These figures are 50% for instate plants, 60% for Steel Plants in other states and 80% for export. Their competitors like Nippon steel are buying from miners at 100% of International Market price.

3In Feb 2008, the WB revealed that the health minister of GOO had been bribed with >Rs 5lakhs to make a favourable decision. In the second half of 2007, reports of significant corruption with NREGA funds in Orissa have come to light.

4Oustees are asking for about 25 lakhs/acre for agricultural land and 40 lakhs/acre for homestead land. With POSCO reducing its land needs to 4004 acres, land being given to POSCO could be estimated at about 1000 crores – compare this to the royalties POSCO plans on paying to GOO.

5At Rs 0.01/liter (which is below the market price of water), GOO is providing POSCO with more than 75crores worth of water every year – money that should be flowing into the state treasury which belongs to the people of Orissa.

6http://rrrights.blogspot.com/2008/02/coal-prices-surge-20-in-2003-to-120-in.html

7http://www.thehindubusinessline.com/2008/02/21/stories/2008022152211201.htm