February 14, 2021

Why Vizag Steel Should Not Be Privatised?

K Nageshwar

THE centre's decision to privatise the Visakhapatnam Steel Plant invited sharp opposition from people and political parties across Andhra Pradesh. RashtriyaIspat Nigam Limited (RINL), the corporate entity of Visakhapatnam Steel Plant (VSP) is the largest public-sector industrial unit in the state creating employment opportunity for close to around 20,000 people directly and many other indirect employment opportunities.

The presence of the steel plant led to the massive economic development of the city. This is evident from the fact that Gajuwaka Mandal where the plant is located has the highest mandal domestic product in the state. Visakhapatnam stands first in the state in terms of gross district domestic product in the present Andhra Pradesh and was next only to Hyderabad in the united state.

The plant was set up with an initial central outlay of Rs 5000 crores. The government of India which has 100 percent stake in the plant has not invested a single rupee in the last 25 years. Therefore, the steel plant was managing its finances and was never a burden on the central government to justify disinvestment. In return, the steel plant paid over Rs 40,000 crores in the form of dividends and taxes since its inception.

The steel plant would have never incurred losses if the government had ploughed back even a fraction of fiscal resources accrued from the steel plant. Instead, the steel plant was forced to borrow to finance its expansion. This resulted in a huge interest burden crippling the plant financially, especially at a time when the steel industry was facing headwinds.

As opposition to the proposed privatisation of the Visakhapatnam Steel Plant intensifies, to sail with the mood of the people, chief minister YS Jaganmohan Reddy wrote to prime minister Narendra Modi suggesting several alternatives instead of an outright sale of this Andhra jewel. As mentioned by the CM in the letter, the plant had a good performance between 2002 and 2015 earning profits with a positive net worth. Owing to the unfavourable steel cycle globally the company was making losses since 2014-15.

Despite fiscal adversities due to the government refusing to invest and the cyclic character of the steel market, the Visakhapatnam steel plant has a massive asset base. As per the chief minister's letter, the company has around 19,700 acres of land currently and the valuation of these lands alone could exceed one lakh crore rupees due to the location of the plant in the urban area and rapidly expanding urban sprawl.

The absence of a captive mine led to a high cost of production thereby adversely affecting the profitability of the plant. Private players in the steel sector like Tata, Mittal, Adani were allotted captive iron ore mines. But, despite being a public sector company under the ministry of steel and mines, the central government refused to allot captive iron ore mines. Even the recommendations to this effect by Parliamentary standing committees fell on deaf ears. The Visakha Steel Plant paid over Rs 360 crores to the Odisha Mining Development Corporation over ten years ago to acquire mines. But, no iron could be extracted so far.

A private company that could get a captive mine produces the chief raw material, iron ore at Rs 500 to 600 per tonne. On the contrary Visakhapatnam Steel Plant has been incurring a cost of Rs 3500 to 4500 per tonne. Thus, the steel plant has to spend Rs 1500 to Rs 2000 crores more annually on raw material itself due to the non-availability of captive mines. 

As the centre failed to check the reckless export of iron ore, mainly to China, the price of this raw material has skyrocketed in the recent past making the domestic steel industry unviable.  At present, the Visakhapatnam Steel Plant is spending                   Rs 7000 to 8000 per tonne on iron ore. The plant has incurred an additional burden of over Rs 2002 crores annually due to an abnormal rise in iron ore prices. Besides, Indian steel plants are facing the burden of high power tariffs and freight charges compared to their counterparts in the advanced nations.

Meanwhile, the cheap steel imports permitted from China, Japan, Korea, etc have also adversely hit the domestic steel industry. While the United States and European nations are disallowing Indian steel through high tariff barriers, the central government refuses to check cheap steel imports.   

Thus, the policies of the government of India are greatly responsible for the fiscal woes of the Visakhapatnam Steel Plant.

Surprisingly the centre wants to privatise at a time when the RINL has achieved the highest ever capacity utilisation of 6.3 MTPA against the 7.3 MTPA from December 2020 and started making a monthly profit of close to Rs 200 crore.

Thus, the so-called disinvestment of the Visakhapatnam Steel Plant is nothing but privatisation of profits and nationalisation of losses.