POSCO Proposed Project in Orissa – Case Study & Analysis
Disclaimer
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While studying & analysing the case supplementary reading materials have been referred to (source: the Internet) & also quoted in this text. Figures, images & other exhibits used in answering the questions of the case have been sourced from the internet. The name of the state of Orissa has been changed to Odisha. However, for the sake of consistency & in line with the case the state has been referred to as Orissa throughout in the answers. All dates & timelines mentioned in the answers are with reference to the time frame of the case.

1. What are the socio-economic and environmental costs of proposed POSCO Projects?
Before proceeding to identify the socio-economic and environmental costs of proposed POSCO Projects lets quickly look into the broad aspects of the project first from the state’s, the company’s & the steel industry’s perspectives in general:  The Pohang Iron and Steel Company, or POSCO based in Pohang, South Korea, is the world's fourthlargest steel maker by market value and Asia’s most profitable steelmaker.  Korea is the world leader in shipbuilding & gradually becoming a leading automobile manufacturer in the world. Both these industries depend heavily on steel & this is where the role & importance of POSCO for supplying steel becomes paramount. POSCO has been seen as the bedrock of Korea's industrial development over the past 40 years.  The steel market, growing at an annual rate of more than 4%, just before the recent meltdown, had been witnessing a global boom since the beginning of this decade. This was what enticed POSCO to this eastern state to lead the revolution apart from the global race for cheap labour and raw materials (iron ore and coal).  National and multinational corporations have been making a beeline to resource-rich developing countries to set up mega integrated steel projects and capture mineral resources (like iron ore and coal).  The POSCO steel project in Orissa is one of many coming up in the Indian state of Orissa, which is going through a ‘steel revolution’ of sorts.  Over the past five years, the Orissa state government has signed more than 40 MoUs 1 (worth Rs.1,60,132 crores with iron and steel companies, both domestic and foreign, mortgaging the 20 billion tonnes of iron ore reserves that it’s supposed to be sitting on.  POSCO has managed to grab a big chunk of these iron ore reserves – nearly 400 million tonnes of high grade iron ore deposits - which it expects to exploit over the next 30 years. Under the agreement, POSCO plans to invest US$12 billion.  POSCO’s offer was rejected by Brazil earlier on the grounds that the company was not ready to pick up ore at market prices. Even investor friendly China had given the POSCO deal the thumbs down, refusing to open up its vital ore reserves to foreign investment.

1

A memorandum of understanding (MOU) is a document describing a bilateral or multilateral agreement between parties. It expresses a convergence of will between the parties, indicating an intended common line of action. It is often used in cases where parties either do not imply a legal commitment or in situations where the parties cannot create a legally enforceable agreement.
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POSCO Proposed Project in Orissa

•

Case Study & Analysis

Course: CEDNER DMSE11

 The government of the state of Orissa is in favour of execution of this project in order to project an image of “favoured investment destination” of India, & also to appear at the top of all states in India in terms of the amount of FDI.

Components of the POSCO Orissa project
The MoU essentially promises to facilitate the establishment of the project with the following components:

The POSCO Orissa project

Steel Plant and Captive Port

Captive Mining facilities

Infrastructure road, rail & port

Integrated township

Water supply infrastructure

Grant of ‘SEZ’ status

Figure 1 - Project components

a. 12 Million Tonne Steel Plant and Captive 2 Port at Jagatsingpur district spread over an area of 4004 acres. b. Captive Mining facilities for iron ore and coal in the areas allocated by Government of Orissa / Government of India (the “Mining Project”). Proposal for prospecting the Khandadhar mines (Sundergarh) for iron ore spread over an area of 13000 acres. 600 million tonnes of ore to be sold at ` 24/- per tonne (Royalty Rate) along with permission for swapping of low grade ore by exporting and replacing with imported ore. c. Infrastructure - road, rail and port infrastructure (the “Transportation Project”), including the dedicated railway line from the mine-belt to Paradeep

d. Integrated township spread over an area of 2000 acres apart from 25 acres for office at Bhubaneshwar. e. Water supply infrastructure (the “Water Project”) - 12000 to 15000 crore liters from Jobra barrage river Mahanadi. f. Grant of ‘SEZ (Special Economic Zone)’ status for access to subsidies and tax holidays. The following page provides visual depiction of the project sites.

2 A captive project means facilities or services controlled by & reserved for a particular organisation. They are established by a company to meet its own requirements.

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POSCO Proposed Project in Orissa

•

Case Study & Analysis

Course: CEDNER DMSE11

Figure 2 - Site map

Figure 3 - Satellite view

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POSCO Proposed Project in Orissa

•

Case Study & Analysis

Course: CEDNER DMSE11

The various socio-economic & environmental impacts of the proposed POSCO projects have been tabulated below:

Element Issue

Impact & Cost
POSCO (henceforth referred to as the company) has been granted to swap the rich ore that has high alumina content (by exporting out of Orissa) with iron ore of low alumina content (by importing from Australia). This clause is kept in the MoU for blending to produce superior steel & conserve energy. This would cost the state’s superior natural mineral reserves to be replaced with less quality reserves & will impact the economy adversely in the long run  A major attraction for the private and foreign investors apart from cheap labour is the favourable fiscal regime. By keeping the royalty rates and taxes on mining and related industries low compared to other countries, India has tried to be a favoured destination for investment. For this project, the iron ore royalty is ` 24/tonne as compared to the global rate of ` 1500/tonne. This is a huge direct economic loss. Even the tax and excise duties for these companies are 44% lower than China and Latin America, the other mineral producing states. By giving SEZ status to the project the central government is predicted to lose ` 89,000 crores and the state of Orissa an additional ` 22,000 crores in revenue over the next 30 years because of the SEZ tax sops to POSCO.

Swapping ore

SO CIO- ECONO MI C

Low royalty, granting of SEZ status – fiscal loss

 

Unrest in the affected population – lawlessness & chaos

The archaic and draconian Land Acquisition Act 1894 continues to acquire private lands forcibly in the name of public purpose even for private mining activities. There is virtually no protection for those who lose their lands and livelihoods. The only legal and functional mechanism by which public opinion is sought on industrial and mining projects is the ‘Environment Clearance Public Hearing’, which has been reduced to a stage managed charade by the main protagonists - company henchmen and corrupt officials of the local administration and the Pollution Control Board. There has been huge number of massive scale protests against the POSCO project both in the affected sites in Orissa as well as at the national & international levels to thwart the intrusion of the company. The mineral-rich regions of Orissa are severely affected by the Naxalite movement. The conflict situation in Orissa as well as the neighbouring mineral rich states has led to displacement of more than 80,000 people from their homes into refugee camps or migration to neighbouring states. Several people have lost lives & many others crippled due to these conflicts.

Violence & corruption

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POSCO Proposed Project in Orissa

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Case Study & Analysis

Course: CEDNER DMSE11



During the last three decades, cumulative exports of iron ore were over 1 billion tonnes of mostly high grade ore. In Orissa the current steel production of 2 MTPA is expected to rise 56 MTPA in the next five years. This will require 2250 MT of iron ore – an additional 527 MTPA. The National Council for Applied Economic Research (NCAER) cautioned that “reserves of high and medium grade iron ore in the country would last for a mere 19 years even if exports are capped at the present level.” The iron and steel industry with its forward and backward linkages is considered to be a resource guzzling one requiring large amounts of land and water apart from the raw materials like iron and coal. A large part of the mining land is under forests especially in Orissa. From 1998 to 2005, more than 881 mining projects led to diversion of forestlands over thousands of hectares. More than one lakh hectares of forest has been diverted for non-forest uses in the three mineral rich states of Orissa, Jharkhand and Chhattisgarh alone. This is almost 11% of the total forest area diverted in the entire country since 1980. Most of this is for mining & related industrial and development purposes.

Depleting of natural resources





Land acquisition – displacement of communities

Official statistics show that only 438 acres of the 4,000 acres required for the POSCO site are private land. From historical facts it is evident that these 438 acres of lands will be forcibly acquired by the government without giving anything in return to the inhabitants of the land. This perception has caused extreme anxiety & panic amongst those land dwellers. They are protesting to the maximum extent possible to prevent govt. to forcibly acquire their land without adequate compensation & rehabilitation measures.  The people living in the areas proposed as the project site land are very dependent on “Paan, dhan, macch” (beetle, paddy and fish) for the sustainability of their livelihood. Starting of the project & excavation of the land, diversion of water & disturbing the flow of water will affect the irrigation & agriculture in the region & will also deplete the fishes in the rivers. The changes will have a direct impact on the livelihood of the poor farmers & fishermen living in those regions resulting in a huge socio-economic loss. While POSCO has promised the creation of 45,000 jobs, directly or indirectly, through its activities in the region, those opposed to the project calculate that the steel plant, port and mines put together will affect many lakhs of people Further, the drawing of millions of litres of water from the Mahanadi River is expected to affect the irrigation and drinking water requirements of five districts, apart from Cuttack city.

Loss of livelihood

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

“Chain effect” of protest

Unless adequate corrective actions are undertaken by the local administration & the state govt. the protests will continue giving rise to more unrest. This behaviour will be borrowed by other local communities in adjoining or other states to resist any industrialisation in their areas because of the perceived exploitation & loss of their livelihoods. Examples of unrest & deaths due to such industrial initiatives are Nandigram & Singur in West Bengal where eventually the company had to shelve the project. Political opinion is split over the issue – the ruling party favouring the project whilst mostly others being against it. This has created as serious political divide which has been responsible for atrocious incidents, illegal exchange of money & endeavour to exploit the situation politically to gain mileage out of here.

Political leveraging & exploitation

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POSCO Proposed Project in Orissa

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Case Study & Analysis

Course: CEDNER DMSE11



E N VIR ONM ENT AL

Vast majority of the 438 acres of land are the forest lands. These have been used traditionally for betel, cashew and other cultivation for generations. In addition, there is an instance of afforestation done by local community to provide a natural barrier to protect the villages against cyclonic storms and to provide the basic needs of firewood and stalk for betel vine cultivation. Providing such rich flora to the project will have severe biodiversity impact & deteriorate the environment seriously. The proposed port to be built at Jatadhari has environmental concerns. Conservationists have pointed out that any damage to the coastline by the construction of the port could pose a threat to the nesting habitat of the endangered Olive Ridley turtles. Especially at risk are the turtle-nesting beaches in the Gahirmatha Marine Sanctuary, where nearly 400,000 turtles come to nest every year. The proposed port poses an environmental threat. If built, the port would affect the spawning and breeding ground for several species of fish because the port will block the river &, the area will get waterlogged. This will affect the aqua biodiversity in addition to directly affecting the livelihood of the fishing communities. The project will affect the two enormous waterfalls in Khandadhar Hill Range emerge from a perennial stream, Karapani Nala. The Saal (Shorea Robusta) forests do a good job of providing cover to the rock face along which the waters of the Karapani descend.

 Biodiversity impact 



2. Evaluate the sustainability aspects of the POSCO project.
The sustainability aspects of the POSCO project are tabulated below:

Sustainability aspect

Evaluation
Swap of the rich ore that has high alumina content (by exporting) with iron ore of low alumina content (by importing) will misbalance the natural equilibrium of the surroundings having long term impact on the sustainability of the region & the population.  The National Council for Applied Economic Research (NCAER) cautioned that “reserves of high and medium grade iron ore in the country would last for a mere 19 years even if exports are capped at the present level.” The iron and steel industry with its forward and backward linkages is considered to be a resource guzzling one requiring large amounts of land and water apart from the raw materials like iron and coal. From 1998 to 2005, more than 881 mining projects led to diversion of forestlands over thousands of hectares. More than one lakh hectares of forest has been diverted for non-forest uses in the three mineral rich states of Orissa, Jharkhand and Chhattisgarh alone. This is almost 11% of the total forest area diverted in the entire country since 1980. Most of this is for mining & related industrial and development purposes. This is a shocking environment degradation!

Swapping ore

 Depleting of natural resources



Land acquisition – displacement of communities

Official statistics show that only 438 acres of the 4,000 acres required for the POSCO site are private land. From historical facts it is evident that these 438 acres of lands will be forcibly acquired by the government without giving anything in return to the inhabitants of the land. This perception has caused extreme anxiety & panic amongst those land dwellers. They are protesting to the maximum extent possible to prevent govt. to forcibly acquire their land without adequate compensation & rehabilitation measures.

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POSCO Proposed Project in Orissa

•

Case Study & Analysis

Course: CEDNER DMSE11



Loss of livelihood

The people living in the areas proposed as the project site land are very dependent on “Paan, dhan, macch” (beetle, paddy and fish) for the sustainability of their livelihood. Starting of the project & excavation of the land, diversion of water & disturbing the flow of water will affect the irrigation & agriculture in the region & will also deplete the fishes in the rivers. The changes will have a direct impact on the livelihood of the poor farmers & fishermen living in those regions resulting in a huge socio-economic loss. While POSCO has promised the creation of 45,000 jobs, directly or indirectly, through its activities in the region, those opposed to the project calculate that the steel plant, port and mines put together will affect many lakhs of people Further, the drawing of millions of litres of water from the Mahanadi River is expected to affect the irrigation and drinking water requirements of five districts, apart from Cuttack city. Vast majority of the 438 acres of land are the forest lands. These have been used traditionally for betel, cashew and other cultivation for generations. In addition, there is an instance of afforestation done by local community to provide a natural barrier to protect the villages against cyclonic storms and to provide the basic needs of firewood and stalk for betel vine cultivation. Providing such rich flora to the project will have severe biodiversity impact & deteriorate the environment seriously. The proposed port to be built at Jatadhari has environmental concerns. Conservationists have pointed out that any damage to the coastline by the construction of the port could pose a threat to the nesting habitat of the endangered Olive Ridley turtles. Especially at risk are the turtle-nesting beaches in the Gahirmatha Marine Sanctuary, where nearly 400,000 turtles come to nest every year. The proposed port poses an environmental threat. If built, the port would affect the spawning and breeding ground for several species of fish because the port will block the river &, the area will get waterlogged. This will affect the aqua biodiversity in addition to directly affecting the livelihood of the fishing communities. The project will affect the two enormous waterfalls in Khandadhar Hill Range emerge from a perennial stream, Karapani Nala. The Saal (Shorea Robusta) forests do a good job of providing cover to the rock face along which the waters of the Karapani descend.









Biodiversity impact 



3. Whom do you feel responsible for the present state of affairs of the said project and what strategy you would have suggested for the Orissa Govt.?
The Government of Orissa itself is responsible for the present state affairs of the POSCO project. The MoU that has been signed by the Orissa Government was done in much hurry without paying adequate heed to the voices of the experts in the field & environmentalists. Orissa government has, in the bid to project itself as the most favoured FDI state in India has overlooked the wide impacts of the project. It has also turned a blind eye conveniently to the fact that other BRIC nations (Brazil & China) have already rejected the POSCO project. It is apparent that the govt. is bending its back to the will & whims of the company & going all out to favour them at the expense of the extreme direct financial losses, socio-economic losses & environmental damages. The cost vs. benefit analysis clearly tilts the balance in favour of the company which will be gaining out of this deal at the cost of the land, labour, water & environment of the state. The strategy that the Orissa Government should have implemented to control the situation are as follows:
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POSCO Proposed Project in Orissa

•

Case Study & Analysis

Course: CEDNER DMSE11

1. Immediate withdrawal of the police force from the proposed sites, as there was peacefully protesting against the proposed integrated steel plant in their area for the last five years. They strongly feel that the proposed plant will destroy their livelihoods and will have a detrimental effect on the environment in the area Withdraw all the false charges against the local villagers. 2. Restoration of civic rights & democratic environment of operation in the affected areas. 3. In depth review of the POSCO project proposal by competent authorities who do not have vested interests in the outcome of the review findings & recommendations. 4. Work on mission mode to plan & enact sustainable initiatives for social and environmental development in the area 5. Increase the royalty fees to the appropriate competitive levels 6. Review the SEZ status benefits & losses & implement appropriate measures to safeguard the economy of the state and the nation. 7. Rehabilitation & economic assistance for the displaced population to maintain social harmony & work towards social welfare of the displaced population.

Key takeaway
With the growth of the Chinese and Indian economies the Steel industry has been radically reshaped around the globe. India’s high quality ore, growing domestic demand and more liberal attitude toward foreign investments has brought it within the sights of the global steel majors, including POSCO of Korea. The social cost benefit analysis approach needs to be applied for undertaking an assessment of the impact of the project on the national economy unlike financial analysis, which looks at the impact of the project only from the finances perspective. For this project to be viable, it must be financially sustainable, apart from being economically efficient. If a commercial project is not financially sustainable, economic benefits would not accrue. Therefore, essentially, the two complement each other. Alternatives should be considered: producing steel within the state of Orissa versus mining the iron ore and exporting it. Output and employment multipliers need to be factored in.

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