Selling India’s natural resources

I was watching an interesting television debate on Naxalism on a leading news channel last night. One of the Naxal sympathiser on the discussion panel argued that poor tribals have taken weapons in their hands to fight against the government’s attempt to sell their lands to imperialist multinational companies.

Till a few months away even I was of the view that the tribals should support the government’s attempt to develop the remote areas. The argument that the government is selling the country’s valuable natural resources for peanuts to big companies seemed unconvincing till I came across some really shocking details regarding the so-called developmental projects the government is claiming to undertake.

To understand the point, here are some of the facts from the Memorandum of Understanding (MoU) that was signed between the South Korean steel giant Posco and the Orissa Government. Some school level arithmetic on the figures mentioned in the MoU is mentioned below.

• Posco needs 600 million tonnes of iron ore (Para 6-ii of the MoU). The current price of iron ore is Rs 5000 per tonne and it is likely to go much higher over the next thirty to fifty years. So, 600 million tonne multiplied by Rs 5000 comes to Rs 300,000 crore or $60 billion at Rs 50 (approx) a dollar.

• The total cost of mining, transport, cess, duties and royalty adds up to about Rs 800 per tonne. According to the Karnataka Lokayukta Justice Santosh Hegde’s report, it is actually around Rs 400 per tonne. Even if we take the cost of Rs 800 per tonne, the cost comes to roughly Rs 48,000 crores (Rs 800 multiplied to 600 million) or around $10 billion.

• The profit on the ore alone — after all costs, taxes, and royalty etc are met — would be around $50 billion.

• The MoU is for producing 12 million tonnes of steel per annum for thirty years with an option to renew for another 20 years (Clause 6-xii of the MoU for iron ore). Steel (hot rolled coil) sells for Rs 30,000 per tonne and has a margin of around Rs 10,000 (likely to go higher) per tonne which doubles the profit.

• In the present case, the foreign capital “attracted” is Rs 51,000 crores ($10.2 billion at Rs 50 a dollar) spread over a nine year period — Clause 4(1) of the MoU.

Now who would not invest $10 billion to get back $50 to $100 billion? The justification for handing over the valuable mines belonging to the people of the country is to attract foreign capital.

The issues before us are elementary: Isn’t domestic savings (Rs 18,00,000 crores or $360 billion per annum) channelised through the banking sector and the stock market not adequate to meet the capital demand of $10.2 billion over a period of nine years?

And what about the huge amount of foreign investment through debt and equity flowing into the economy of the country? Is there any justification to hand over our valuable natural resources to foreign and private interest on such demeaning and humiliating terms?

Lack of capital is a bogey that is used by the politicians and the bureaucrats with great regularity to enable them to line their pockets with bribes which may be substantial for them but a mere pittance in the context of the benefits passed on to the bribe giver.

What’s worse is that all the infrastructure including thousands of acres of land  — 6000 acres (Clause 5ii and 5iii) — and another 25 acres in the State Capital (Clause 5i of the MoU) belonging to the government and the poor will be acquired and handed to the company at subsidized rate. This does not include the mining land.

Handing over the mining area will result in additional displacement of people from tens of thousand of acres (actual figure not stated in MoU). The economic cost incurred by the people who are displaced along with  the cost to the government in fighting the ultra Left will be far greater than the Rs 51,000 crore that Posco will invest.

Our iron ore is finite, unlike the venality of our politicians and kleptocrats. And so, according to conservative estimates, it will last for another 60 years. Under the circumstances, should we start exporting it to China at a throwaway price (compared to what it will fetch when the commodity gets scarce) to  the detriment of the future generations? Or should we be conserving the resource and exploiting only that which is needed for the development of the country? Are we not stealing from the future generations?

Can corrupt politicians who get elected on mine mafia money (applies to every state government which is rich in minerals) and is in power for a limited period (five to one year) be allowed to collect bribes by entering into MoUs for fifty years?

An example from the past will suffice to prove the point that successive Indian governments have not learnt anything from its past mistakes.  A Minister of Petroleum and Gas from the Congress gave away the discovered oil fields of ONGC to RIL in 1994 for a pittance. All royalties, cess etc were frozen at $16 to a barrel and the oil reserves were deliberately understated. As a result the government gets about a dollar on every barrel that RIL sells for $80.

Is there any solution:

Both the private and the public sector of India is competent to exploit the natural resources of the country. Steel Authority of India Limited (SAIL) and Corus are case in point. We do not need Posco or any other foreign company.

Further, the economics of the mining industry has changed drastically in the last six years. The industry was not so profitable when iron ore was selling for Rs 400 a tonne. But at Rs 5000 a tonne now, there is absolutely no justification to hand over the mines for free.

PSUs like  National Mineral Development Corporation (NMDC) and SAIL have the means to exploit the national resources without relying on the government for money.

In case national companies cannot exploit natural resources for national good and private sector has to be brought in then the resources (land, iron ore, coal etc ) should be valued correctly. In the Posco case the value of the mines, as explained above, is $50 billion while the investment is around $10 billion. Is it too much to demand 60 percent equity in the venture for free when the contribution of iron ore alone is 84 percent of the total project cost?

The private companies should be made to compete through competitive bids on the project (not bribe based MoUs) on how much equity they are willing to offer to the government in lieu of the mines with a minimum at 50 percent. For example, Mittal may offer 50 percent of the shares for free, Esssar 55 percent, and Tata 60 percent. Half of this free equity should be reserved for the development of the local people and held in trust for them. The private company can earn its profit after making the investment from the remainder of the shareholding. By this method the government would be able to capture the future value of the mineral resources which are going to get scarce with each passing year.

But sadly, this is not the logic with which the government operates when it gives away the land of the poor for the benefit of the Poscos of the world.