Posco reveals weak-kneed state

The Centre has cleared the Pohang Iron and Steel Company (or Posco) project to set up a 12-million tonne plant near Paradip in Orissa. The South Korean company entered into an MoU with the state government in June 2005.
The deal is flawed for its poor business sense; as in the case of the Dabhol power plant and the aborted Bailadila mining project, the state has exceeded all limits of propriety and logic to please an investor.Supporters of the deal say that Posco will invest $12 billion, about thrice the foreign direct investment India gets annually.
Is that enough reason to suspend a basic sense of judgment? The MoU permits Posco to export a certain portion of its captive iron ore reserves. Posco says it needs to send out the iron ore to its steel works in South Korea to rid it of its high alumina content.
The state government says that this will be allowed subject to an equal import of iron ore with low-grade alumina. Why should Posco send out its iron ore when it can be treated, or beneficiated, here? And will it pay market rates for the iron ore? The fact is that India's iron ore is in high demand for its low phosphorus content.
The Bailadila deal raised a furore because of the government's promise to supply captive iron ore to Nippon Denro Ispat at below-market rates. If Posco's experience in Brazil is any indication, it would not have entered into the deal were it not for the Orissa government's promise to supply ore at attractive rates.
Brazil refused to include the mine as part of the joint venture, instead asking Posco to pick up the ore at market prices. The deal fell through. Investor-friendly China turned down Posco's proposal on policy grounds, refusing to open up its mineral reserves to foreign players.
India's mineral policy allows for 100 per cent FDI in all minerals except gold and diamonds. Should our quest for foreign capital have pushed us so far? India's iron ore reserves, at 18 billion tonnes, are not super-abundant for a population of one billion with growing requirements.
Our per capita steel consumption is 30 kg as against the world average of 150 kg. When government sources say India's ore reserves will last two centuries, they are underestimating future per capita needs. That India is willing to prostrate itself to obtain FDI is disturbing.
FDI projects should operate on the same terms and conditions as domestic projects and bring fresh technology. The superiority of Posco's technology is not in evidence. India, with its evolved financial markets and comfortable reserves, is not so starved of capital and know-how as to accept FDI on patently unreasonable terms.
It should develop a long-term view of where it needs foreign capital, prioritising industries plagued by sickness. The Indian state must show sense and spine in negotiating foreign deals. The manner in which it negotiated the turnaround of the Dabhol project is a case in point.
The Centre, aided by Industrial Development Bank of India and ICICI Bank, was firm, yet persuasive, in settling the claims of creditors and shareholders. Dabhol was a financial and legal mess ��� yet the group sorted it out in four years, displaying considerable skills in negotiation and finance.
The same state negotiated the Enron power purchase agreement then, and Posco now. Posco, Bailadila and Enron raise a question mark over the integrity of the bureaucracy and political class. Too often, the bogey of 'investor- sentiment' is cited to push any big-ticket FDI proposal.
Such proposals prove disastrously expensive if flawed at the outset, as the Dabhol experience informs us. It has cost various parties more than Rs 10,000 crore to get the project back on track.
India is no 'soft' state; it is soft towards those who wield money and influence, but is ruthless with those displaced as a result of industrial projects. Whatever the terms of rehabilitation on paper, the state resorts to corruption and coercion to deny the displaced their due in terms of land and jobs.
Orissa's record on this count, from Hirakud to NALCO, is poor. There's no reason to believe that Posco in Jagatsinghpur district or the Alcan alumina project in Rayagada district will be any different.