Centre to disinvest 10pc of Vizag Steel Plant: Private players to benefit at public cost?

The Central government plans to sell 10% of its stake in the plant to private players to ensure efficiency and to aid in overcoming the losses being incurred.
Centre to disinvest 10pc of Vizag Steel Plant: Private players to benefit at public cost?
Centre to disinvest 10pc of Vizag Steel Plant: Private players to benefit at public cost?
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Elections for the recognised union of the Visakhapatnam Steel Plant (VSP) are scheduled to be conducted on February 5. A total of 11,585 registered employees will vote in the elections, which are being conducted under the supervision of the Central Labour Department. With the Central government announcing its plan to disinvest 10% of its stake in the plant, this seems to be the key issue upon which much of the future of the plant and its employees depends. 

“The VSP was achieved after much struggle in the ‘60s and ‘70s. The agitational cry was ‘Visaka Ukku Andhurla Hakku’ (‘A steel plant in Visakhapatnam is the right of the Andhraites). Since it is one of the last biggest PSUs in the country, the union elections have been very important over the years. But this election is happening under the shadow of privatisation, which makes it even more crucial,” said M Sarat, a VSP employee.

That massive privatisation is on the anvil was evident when Union Finance Minister Arun Jaitely said in his budget speech a few days ago that the newly revamped Department of Investment and Public Asset Management (DIPAM) is set to overshoot, for the first time ever, the ambitious Rs 72,500 crore disinvestment target for 2017-18. This by aiming to garner Rs 1 trillion during the year ending March 31, aided by completion of the acquisition of Hindustan Petroleum Corp Ltd by Oil and Natural Gas Corp Ltd for around Rs 37,000 crore.

With privatisation of Air India on track, apart from approval for the listing of 14 Central Public Sector Enterprises (CPSEs) and strategic disinvestment of 24 CPSEs, Jaitley has set a disinvestment target of Rs 80,000 crore for 2018-19.

As part of this drive, the Central government has announced plans to sell 10% of its stake in VSP to private players. The rationale being offered is an old one – privatisation will ensure efficiency and will aid in overcoming the losses being incurred at present.

But then, why would any private company be ready to invest in a steel plant reeling in losses with no scope for profits? To find an answer to this question, answers to two others basic questions need to be investigated. One: why is the 10% stake being sold? And two: how exactly is it being sold?

Why is the 10% being sold?

It is true that VSP did report losses over the previous two years. Losses to the tune of Rs 1,421 crore and Rs 1,236 crore were reported for the financial years 2015-16 and 2016-17 respectively. Were those losses due to the inefficiency of VSP and its employees or were they due to bad policies of the Central government?

One major reason for the losses is because VSP has not been allocated any captive mines. 

“When Tata, Jindal, Essar and other private steel companies are allocated captive mines, why isn’t the government allocating any to VSP? Projects like South Korea’s POSCO and Brahmani in Kadapa, which had not taken off, were sanctioned captive mines by the governments concerned in Odisha and undivided AP, respectively. There is no justification over denial to VSP,” said CITU State President Ch. Narsinga Rao.

Political analyst and two-time former MLC, Prof K Nageshwar, opined that if VSP is allocated its own captive mines, it would automatically wipe out the entire losses.

“Conservative estimates reveal that VSP has to incur an additional expenditure of Rs 1,500 crore per year on procuring raw material from the market as it does not have any captive mines. Surprisingly, the steel plant and the iron ore mines are under the same Ministry of Steel and Mines. But the government refuses to allocate a captive mine to VSP. This also reveals that the losses of this plant are induced by wrong government policies,” he added.

During the second phase of its expansion, an estimated cost of Rs 12,300 crore was incurred to increase the capacity from 3.2 million to 6.3 million tonnes. The management plans to expand the capacity to 7.3 million with an additional cost of Rs 4,000 crore.

“The government did not give a single rupee towards the expansion plan. We had to depend on our funds and external borrowings from banks. As a result, we are reeling under heavy interest burden and depreciation cost every year to the tune of Rs 600 and Rs 900 crore respectively. If the government had infused necessary equity into the plant for expansion, the company wouldn’t have incurred losses,” said CITU-affiliated Steel Plant Employees’ Union (SPEU) President J Ayodhyaram.

Another reason for these losses is the uncompetitive input costs and other factors on which VSP has no control whatsoever.

“The domestic steel industry is becoming uncompetitive due to higher freight costs, higher credit costs, industrial power tariffs, high iron ore costs, import duties and cess on coking coal, a NITI Aayog member explained. For example, freight costs from Jamshedpur to Mumbai can be as high as $50 per tonne in comparison with $34 a tonne from Rotterdam to Mumbai.

“When VSP is forced to face the burden of all these factors that make it uncompetitive, then why blame the steel plant for the losses? Is it not to prepare a ground for blatant privatisation aimed at ushering huge financial benefit for private players? This is how the crony capitalism works in India,” said Prof Nageshwar.

How is the 10% stake being sold?

The job of estimating the net worth of VSP so as to determine the 10% stake was given to the Securities and Exchanges Board of India (SEBI). They estimated the value at Rs 4,889 crore.

VSP acquired 22,000 acres of land in the 1970s at Rs 12,500 per acre. Now, SEBI has taken this 1970s cost per acre into arriving at the net worth of the plant. But the current cost of this land ranges between Rs 4-5 crore. According to this, the actual net worth of the plant is as high as Rs 2 lakh crore. And 10% of Rs 4,889 crore amounts to Rs 489 crore. In other words, assets worth Rs 20,000 crore (10% of Rs 2 lakh crore) are being given away at the throwaway price of Rs 489 crore.

“Back in the day, people out of great sentiment and pride voluntarily gave their lands for the plant. Now the Central government is giving these away at a pittance. This is nothing but cheating and disrespecting the sentiments and aspirations of those people and the employees who have sacrificed so much in ‘building’ the country,” Narsinga Rao alleged.

“Thus, the indiscriminate expansion of the Steel Plant without expanding the market and addressing the factors that make it uncompetitive are the reasons for its fiscal woes. Instead of addressing these factors that cause fiscal strain on the steel plant, the Central government seems to be hell-bent on outright privatisation to benefit private players. The story of the political economy of disinvestment and privatisation in India is the story of the attempts to undervalue the assets of the public sector units (PSUs),” Prof Nageshwar lamented. 

Maybe this is why any private company would be willing to invest in a steel plant reeling in losses with no scope for profits.

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