Trying to understand issues raised by Mr. Jena & my recommendations 

(work in progress)

(orissa mining, orissalinks

[0] Mining links

[1] OMC Profit-Loss

[2] Audit report on OMC

[2b] Public enterprises

[3] IPICOL units

[4] Orissa mines

[5] Mining lease document (7 MB file)

[6] Mining lease list

[7] News item on TISCO

[8] Orissa Chief ministers


[10] Economic times news item

[11] Steel world article

[12] Mining News article

[13] OMC Press release on Vedanta

[14] Council of Minister's document on Vedanta

[15] Mr. Srkant Jena's allegations

[16] Mr. Srkant Jena' s comments

[17] Hindu, news item

Trying to understand issues raised by Mr. Jena and my recomendations  (work in progress)

Chitta Baral  12th August 2006

About ten days back Mr. Srikant Jena, ex union minister raised several issues regarding Orissa's mining industry and recent MOU spree based on the mines. His mails were posted in various forums such as Sachi Satpathy's list, ornet, agamiorissa@yahoogroups, and orissatoday@googlegroups.

Since then I have tried to dig various data and documents that I  could find in the Internet with an aim to verify and understandvarious numbers that Mr. Jena mentioned. Following is my initial analysis.  I would appreciate any suggestions/corrections to the data I collected and the analysis that I make below. Most of the data I collected are linked from the page [0] that I created.

A. Orissa has a mining company called Orissa mining corporation (OMC) that mines ores and sells them. As per [1] this company had a profit of 34.6 crores in 2003-04, a profit of 20.2 crores in 2002-03 and a loss of 4 crores in 2001-02. According to the accountant general's report [2] OMC had a revenue loss of 75.79 crores during December 2001-03 due to an injudicious decision regarding a crusher,
a revenue loss of 45.37 crore due to shortfall in production of calibrated lump ore, and 22 crores of revenue loss for several other reasons. (Conclusion A: Orissa can not just do all its mining operations through OMC. Orissa may not have the capital, capabaility and technology to do all the mining that may be needed and its too rosky in that this compnay can make and has made losses too.)

B. Orissa has several PSUs [2b] administered by various departments. Many of the PSUs are defunct. IPICOL [3], one of the PSU, loans money to various industries, many of which process ores and minerals. (Conclusion B: Orissa does not have the capital or the technology to create its own PSU steel plants for value addition. However it should consider joint ventures.)

C. It is well known that Orissa has large mining deposits of iron ore, manganese, bauxite, graphite etc. [4] (Que. C: Why are we still poor and backward?)

D. Until a year back Orissa govt was in the red for several years. It used to beg the central government for overdrafts and borrow money at commercial rates to be able to pay salary to its employees. With the next pay commission coming up it will again have to match  central govt salaries and thus deal with much higher salary payments.

E. The Naveen Patnaik government has been in power since 5th March 2000. (Today is 12th August 2006.)

F. Mr. Jena mentioned in [16] the following: "TISCO - This Company has mined about 20 million ton of iron ore in the last four years. It has minted at least Rs.3000 crore only from the iron ore it mined. The calculation has been made on the basis of average ex-mine market price of iron ore at Rs.2000 per ton. Just take away the royalty of Rs.26 per ton + mining cost of Rs.300 per ton. Adding other expenses, the cost of iron ore at ex-mine will be at best Rs.500 per
ton. That means the company made a minimum profit of Rs.1500 per ton of iron ore."

Lets think and analyze why Orissa did not make more out of this operation and how it could have made more. First, Rs. 26 per ton rate for iron ore is set by the central government [5]. Second, the current leases given to TISCO seems to be given in 13.8.70 (20yrs; RN SinghDeo was chief minister), 27.1.84 (20 yrs; JB Patnaik was chief minister), 15.5.84 (20 yrs; JB Patnaik was chief minister), 16.3.85 (20yrs; JB
Patnaik was chief minister), 6.3.93 (20 yrs; Biju Patnaik was chief minister), 18.12.97 (20 yrs; JB Patnaik was chief minister), 18.5.98 (for 15 yrs; JB Patnaik was chief minister) and 7.7.98 (20 yrs; JB Patnaik was chief minister) (see items 155, 295-298, 346, 363, 364,473, 576 of reference [6] and [8]).

From E and [7] it seems that no mine leases have been given to TISCO  since the Naveen Patnaik government came to power. The news item [7] also states the current Orissa government requires TISCO to spend 20% of the money in a new steel plant before getting any new leases.

Based on the above facts, the central government who has set the price so low and the past Orissa governments [8] which gave the leases to TISCO without requiring much from them are to blame for Orissa not getting a part of the huge windfall that TISCO is making because of high steel prices in recent years.

On the other hand the current government has taken several initiatives that will counter such loss to Orissa.

(i) According to [11] the government's new policy states that: "any company that intends to carry out iron ore mining in the state will have to buy land for setting up a steel plant, achieve financial closure for the project and invest 25 per cent of the project cost. The leases will be finally allotted only after 50 per cent of the project cost is incurred."  I could not find an official policy document where this is mentioned, but this policy is almost reflected in the MOU signed with POSCO [9] and is mentioned in [7]. In [12] it is mentioned that Jharkhand is trying to borrow this policy from Orissa.

(ii) The Orissa government has been asking the central govt to change [10] the way the royalty is calculated.

G. In case of Orissa government's MOUs with Vedanta on the mine lease and on the alumina plants the documents [13] and [14] answer most of Mr. Jena's questions. One may read those and the exchange between Mr. Jena and others in [15,16] to make up their own mind.

One thing that seems to be in the right direction is that the OMC (a GOO PSU) will have a 26% stake in one of those operations.

H. In summary, Orissa has a lot of mineral resources. On the other hand Orissa is poor, has terrible infrastructure, is backward in most social indices and until few months back was borrowing money to pay salaries. The question is how can Orissa get out of the debt trap and become a developed state in social as well as economic indices. One component of the solution is to judiciously convert its mineral resources to human resources, as mineral resources are non-renewable resources. Other components include use of Orissa's coast-line, tourism, IT etc.

Focusing on the mineral resources, past policies of leasing out mines with value addition done outside Orissa (such as TATAs mining in Orissa but using the ore in Tatanagar and developing that city and state) really does not give much to Orissa. Orissa government could mine its ores through OMC (or a similar company) and sell it in open market. It is doing that through OMC to some extent and as [1] show its been making profit in recent years, but it has made losses in the past and as [2] shows it has made mistakes that have
cost it huge sums. OMC may not have the capability, technology or the capital to mine a lot or timely sell what it mines. Moreover, just selling ores would mean that the companies that buy the ores need not do value addition in Orissa. We definitely need more townships like Rourkela and Tatanagars in Orissa and not having value-addition companie s means less jobs, less opportunity for infrastructure developement (rail, roads, ports, etc.), less opportunity for anciliaries, etc. 

One way to achieve them is to set up mega-plants like SAIL Rourkela, NALCO, POSCO, proposed plants by Mittal, etc. as a bunch of small plants do not really create significant townships or the associated infrastructure developement.

The need for value addition is further supported in the document [17], where it is mentioned that the R.K. Dang Committee on Iron Ore exports contends, "From 30 years of iron ore exports, we have earned $25 billion. We have exported 78 million tonnes of iron ore in 2004-05. If we had exported the steel equivalent of what that ore could produce (about 48 million tonnes) we could have got $25 billion in one year; that is why value addition is needed".

So value addition (i.e., steel plants; not just mines) is important. The next question is can Orissa do value addition itself. From its record in [2b] not many PSUs have been that profitable. Plus Orissa does not have the capital and nor the expertise. So the best it can do is to try to get into a joint venture. The joint venture between OMC and Sterlite/Vedanta where OMC will have a 26% stake is a good step; but it is in the mining part not in the value addition part. 

... more to come ...

I: Additional recomendations: One thing Orissa must to do is to additionally require that each industry, that is interested in mining in Orissa and setting up plants, must invest certain percentage of its total expenditure in Human resource developement and infrastructure building. In particular,  they must set up 1 or preferablyu 2 big educational institutes, one of which must be in the area near its mining operations, which are among the most backward areas of Orissa. Examples of institutions include a medical college, a top-notch institute or deemed university (like BITS Pilani), an IT institute (like Dhirubhai Ambani Institute of Communication and IT), etc. The company should spend at least 2.5% of its total budget in this.

On R & R I would like Orissa government to add one more aspect. For each kid of a displaced family as part of R & R   Rs 300 p.m (for tution) and Rs 1000/year for supplies, school dress & books should be set aside. This is until the kids are 18, or 12 years, or until they pass +2 which ever comes earlier. This will go a long way towards ensuring that these kids will have a good education; plus it will encourage private schools to open in the relocation settlement area thus reducing the dispersion caused by relocation. (Note that wife of one of the Kalinga Nagar shooting vicitm refused to return to Kalinganagar as she was happy with the education prospects of her kids in the new place she is living now. So good education for kids is a very important thing to all parents.)

To be continued .... (environment rules must be followed; proper R & R must be done so that people welcome industries rather than obstruct them ...)