Orissa: An Economic Scam Coming?
Sandip Dasverma and Sanat Mohanty
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:
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 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)
Sandip Dasverma and Sanat Mohanty
POSCO Project is not an unquestionable boon for Orissa
Sandip Dasverma and Dr Sanat Mohanty
To read this article in Hindi language , click here
[This is the second article in three-article series on POSCO Steel project in Orissa by Sandip and Sanat. To read the first article ( Orissa: An economic scam coming? ), click here (to read this first article in hindi , click here )] ..........................
The government of Orissa in India will be getting less than 5% of the price of iron ore from the much-hyped POSCO steel project than it would get from the global market. Why such criminal neglect of state's self-interest by state's captains? 
As with any economic enterprise, economic plans of Government of Orissa in India must account for secondary gains and lost opportunities while negotiating the much-hyped POSCO steel project. Negligence to do such an analysis suggests incompetence and when such negligence is with public funds, it is criminal.
Analysis of a direct economic impact highlights the immense loss to Orissa with this deal. But are there other benefits that Orissa gains jobs for people? Infrastructure? Are there other indirect opportunity costs with this deal?
The Indirect Economic Impact
POSCO promises to invest $12 billion (Rs 48,000 crores) in setting up the steel plants and running them. Even assuming it employees 10,000 people (a large number given modern automation) at Rs. 10,000 per month (a high number since most of the employees wil 
l be at lower pay scales), this accounts for Rs 3,600 crores for the 30 years of life of this project. Other economic efforts to sustain schools, services, small businesses etc are other benefits. 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 more than 5000 acres of land that is being sequestered for this project. Given that people from past projects have not been rehabilitated, where will the new displaced go?
In addition, the economic activity of these thousands is significant - 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 Orissa government has not included this in its economic calculations.
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 iron ores but paid the Orissa government only Rs27/tonne for ores and Rs 11/tonne for fines we have already lost greater than Rs 10,000 crore (the annual state budget of Orissa is Rs. 4,500 crore).
Thus, it seems likely that the Orissa government and POSCO will 'give in' to human needs and pay the oustees large amounts as rehabilitation. Even paying the oustees tens of lakhs of rupees 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? How will the people whose land is being snatched away benefit from this deal?
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 million liters of water per day . How does this affect the water table of that region? 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.
Orissa government has also promised to help POSCO acquire coal either from a Public Sector Unit or elsewhere at a very nominal royalty.
Central and Orissa state Governments of India have granted Special Economic Zone ( SEZ ) status for the steel plant and the POSCO owned port, which is unprecedented.
SEZs are exempt of the sales and import taxes . It is estimated that Indian government will lose Rs 89,000 crores and state government of Orissa will lose Rs 22,500 crores for SEZ alone. POSCO would have paid import tax on approx $6 billion of machinery with a loss to Indian central and state governments of 10 to 15%. This is another Rs 2,400 crores to Rs 3,600 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.
An analysis of both the direct and indirect economic impact of this project leads us to conclude:
* Orissa state government is clearly under-representing the interests of the people of the state. Even at global market conditions, it would have been able to get orders of magnitude greater benefits for the people than it is today as part of this deal
* Orissa state government has actually set up the deal where it is questionable whether the people of Orissa actually gain from this project or whether the opportunity cost of implementing this project outweighs the benefits. The project is certainly not an unquestionable boon as it is being made out to be.
Sandip Dasverma and Dr Sanat Mohanty
Who will gain from the POSCO Project in Orissa?
Dr Sanat Mohanty and Sandip Dasverma
(To read this article in Hindi language, click here )
[This article is the last part of a three-article series by Sanat and Sandip providing an in-depth analysis of 
issues around POSCO Steel project in India . The first part-article, Orissa: An Economic Scam Coming? , can be read online at: English , Hindi , and the second part-article, POSCO Project is not an unquestionable boon for Orissa , can be read online at: English , Hindi ]
With an analysis of direct and indirect economic analysis suggesting that the POSCO project has not been negotiated with the primary interest of the state of Orissa in India and its people, we are forced to ask who will gain, and how people will be impacted.
Perhaps, the only silver lining is that vigilant citizen's groups and participative democracy can force to act accountably for example one that pushed it to participate in a consortium of states leading to increased (yet measly) royalties for the state of Orissa. In the memorandum of understanding ( MoU ), the Orissa state government 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. 
Holding Orissa state government accountable
Citizens of Orissa need to demand more transparency from the Orissa state government in the project plan details. Has the opportunity cost been analyzed? What is the economic cost of water usage by POSCO? What is the cost of displacement? 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 Rupees 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 Orissa state government must have accounted for this (unless it is truly incompetent)?
* What are the Orissa state government estimates on the hydrological impact of such high rates of withdrawal and processing?
* What does the Orissa state government 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 healthcare 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 Orissa state government plan to do?
In effect, the state of Orissa may have indirect benefits of up to Rupees 120 crores per year in salaries (for new jobs created) and strengthen that local economy. On the other hand, it loses Rupees 180 crores in the price of land leased to POSCO, Rupees 75 crores/ year in cost of water, Rupees 100 crores per year to the agricultural economy, and Rupees 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 (Orissa government 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 Orissa government 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 the state government plans to give 1 billion Tonnes to POSCO of which 400 MT will be exported to Korea .
The Orissa government is only willing to showcase Rupees 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 Orissa state government has set this up as a win-win-lose deal. POSCO wins. Orissa state Government 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 rehabilitation and resettlement is diversionary and the real issue is to keep eyes of public away from the Rupees 250,000 crores give away to POSCO in form of subsidy in Iron Ore prices.
This may be the reason why competitors such as Tatas, Mittals and Jindals are also silent, as their deals also include such give aways, albeit of smaller.
This economic issue must be the central issue, in our opinion and the government must be held accountable for the details of the project, its decision making and the impact of these decisions on all sections of people of Orissa not just the representatives and the bureaucrats.
How will the people of Orissa ensure this? In fact, it is important (given the credibility of Orissa state government 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 .
Dr Sanat Mohanty and Sandip Dasverma
[This article is the last part of a three-article series by Sanat and Sandip providing an in-depth analysis of issues around POSCO Steel project in India . The first part-article, Orissa: An Economic Scam Coming? , can be read online at: English , Hindi , and the second part-article, POSCO Project is not an unquestionable boon for Orissa , can be read online at: English , Hindi ]
WITH PERMISSION FROM SANDIP DASVERMA
