Why Jagan could pay the price if Modi govt plan to privatise Vizag Steel Plant goes through

Centre announced in early February that it’ll sell Visakha Steel, but employees & all political parties including ruling YSRCP have hit the streets in protest.

Andhra Pradesh Chief Minister Jagan Mohan Reddy | Photo: ANI

Hyderabad: The Narendra Modi government’s decision to privatise the Visakhapatnam Steel Plant has put Andhra Pradesh’s ruling YSR Congress and CM Jagan Mohan Reddy in a tight spot.

Thousands of employees have taken to the streets to demand a rollback of the decision, with the slogan ‘Visakha ukku, Andhrula hakku (Visakha steel, the right of the people of Andhra Pradesh)’, and members of all political parties including the ruling YSRCP, the BJP, the Telugu Desam Party, actor-turned-politician Pawan Kalyan’s Jana Sena and the Left parties have joined the protest.

The CM interacted with the plant’s employee union leaders Wednesday, and assured them that the state government is “willing” to pass a resolution in the assembly, and that it will stand by the protesting employees until the idea of privatisation is scrapped, according to a note from the Chief Minister’s Office.

It indicated that this potential fight against the Centre has become a real test for Jagan, in the face of criticism that he has aligned with PM Modi and Home Minister Amit Shah due to an ongoing disproportionate assets case against him, filed by central agencies CBI and the Enforcement Directorate.

Political analyst K. Nageshwar Rao said: “YSRCP has already left the fight for a special status for Andhra Pradesh. It also left the fight for promises made under the AP Reorganisation Act… If Jagan is not able to stop the privatisation of the Visakhapatnam Steel Plant, he will have to pay the price in his political career.”

Why Centre decided to privatise Visakha plant

The Visakha Steel Plant employs about 20,000 workers and is spread over 19,000 acres, and the land alone is valued at Rs 1 lakh crore. However, the plant is considered a symbol of Telugu pride. In the late 1960s, Andhra had witnessed a violent agitation demanding the establishment of a steel plant after a recommendation from an Anglo-American consortium. At least 32 people were killed in the agitation, following which 64 villages were cleared out and 22,000 acres of land was acquired to build the plant over 10 years.

It is the country’s first shore-based plant, with a current production capacity of 7.3 million tonnes per annum.

However, the central government, in early February, announced the privatisation of Rashtriya Ispat Nigam Ltd (RINL) — the corporate entity of the Visakha Steel Plant — which is a Navratna public sector enterprise under the Ministry of Steel.

CCEA on 27th Jan 2021 has given in principle approval for 100% strategic disinvestment of GOI shareholding in RINL along with management control by way of privatization. pic.twitter.com/hvNtidKABs

— Secretary, DIPAM (@SecyDIPAM) February 3, 2021

The RINL/VSP had resorted to borrowing from banks for plant modernisation and capacity expansion. Unfavourable debt prices made it difficult for the plant to service the debt, resulting in heavy interest payments taking up a greater share of its earnings. The plant’s high cost debt (primarily taken for expansion) is at Rs 22,000 crore, which is being serviced at 14 per cent.

Another key reason attributed to the plant’s growing losses was the high cost of raw materials such as iron ore, because it doesn’t have its own ‘captive’ mine. Currently, RINL purchases iron ore from the National Mineral Development Corporations mines in Bailadila mines in Chhattisgarh at market price.

“Due to lack of its own captive mine, the plant is forced to procure iron ore supplies at market prices, which is resulting in a loss of Rs 5000 per tonne. VSP is spending at least 20 per cent more than what other plants (Tata, SAIL) with captive mines are spending on their raw materials. How will the plant make profit like this? And with no funds from the Centre, the plant had to resort to such heavy borrowings,” said Mantri Rajasekhar, union leader at the VSP and national secretary of the Indian National Trade Union Congress (INTUC). Though the union is an arm of the Congress, Rajasekhar is a YSRCP leader.

RINL suffered losses for the first 12 years of its operations before it started reporting profits from 2002-03. However, it again became a loss making business for three years beginning 2015-16. It reported a loss of Rs 1,604 crore in 2015-16, Rs 1,263 crore in 2016-17 and Rs 1,369 crore in 2017-18.

It reported a small profit of Rs 96.7 crore in 2018-19 before it again started incurring losses. It reported a loss of Rs 3,319 crore in the April-December quarter of 2019-20, its highest ever.

However, with steel prices touching record highs in 2020, the company’s financial performance is expected to improve in the current fiscal.

Uproar from employees, Jagan writes to PM

Soon after the central government announced the privatisation of RINL/VSP, there was an uproar from employee unions. This forced CM Jagan to write to PM Modi just three days after the announcement.

In the letter, Jagan said the Centre’s decision has become a “point of discussion among the public of Andhra Pradesh and cause of concern to us (his government)”. He suggested a few “turnaround measures” for the plant to become a profitable venture with some support from the Government of India, instead of the disinvestment route. The measures included allotting captive mines to bring down input costs, swapping high-cost debt with low-cost debt, and converting debt into equity through equity conversion.

“If you look at the letter he wrote, he (Jagan) is not completely against privatisation. He, in fact, showed a new route to privatisation by suggesting that the bank loans should be converted into stakes and can be sold in stock markets. It is like an alternate route of privatisation. Jagan has not made his commitment towards the issue clear, which he must do immediately,” said analyst Nageshwar Rao.

‘Third folly’

Another political analyst, Telakapalli Ravi, told ThePrint that if Jagan fails to stop the privatisation of the VSP, this will be his “third folly” — after abandoning the demand for special status and putting plans for capital city Amaravati on hold.

Jagan and the YSRCP had repeatedly lashed out at the previous CM, Chandrababu Naidu, for failing to fight for ‘special status’ to Andhra Pradesh, as promised by the UPA government at the time Telangana was carved out of it in 2014. The NDA government, however, denied any such status to Andhra Pradesh, citing the recommendations of the 14th Finance Commission. Jagan also faced criticism for turning ‘soft’ on the issue after becoming the chief minister.

On the Amaravati/three capitals issue, Rao pointed out that Jagan wanted to establish Visakhapatnam as the executive capital of Andhra Pradesh, so he is bound to face criticism if he doesn’t take a firm stand against privatisation. This would compound Jagan’s problems, since his move to stall work in Amaravati, which Naidu had pitched as a new world-class smart city and the sole capital of Andhra Pradesh, has already earned him backlash from people of that region, especially farmers whose lands were pooled to develop the area.

Opposition sees an opportunity

Last week, Union Minister of Steel Dharmendra Pradhan gave a statement in the Rajya Sabha about a non-binding memorandum of understanding signed with South Korean steel major POSCO in October 2019.

Responding to YSRCP MP Vemireddy Prabhakar Reddy’s question on whether it is a fact that the central government was in discussions with Japanese and Korean firms to set up a 5 million tonnes per annum (MTPA) capacity steel plant through a joint venture with RINL, Pradhan said discussions were held in August 2018 to explore possibilities of facilitating domestic manufacturing of high grade steel with the help of Japanese/Korean firms.

Thereafter, in October 2019, a non-binding MoU was signed between RINL and POSCO for exploring the establishment of an integrated steel plant in Andhra Pradesh with the approval of the RINL board, the minister said.

Opposition party TDP is alleging that CM Jagan knew about the privatisation plans beforehand. “We suspect that Jagan knew about it before, and that is why he proposed to shift the capital to Visakhapatnam — to jack up the land prices,” said TDP leader Pattabhi Ram.

However, a meeting between POSCO and the Ministry of Steel was held in 2018, when Naidu was the CM. Ram acknowledged the meeting, but said: “Discussions happened during our time, but it was nowhere related to privatisation. VSP has a lot of subsidiaries, so POSCO could have been interested in business with one of them.”

The ruling YSRCP too denied any knowledge of the move to privatise the plant back in 2019. According to party leader Mantri Rajasekhar, the non-binding MoU was signed between the Ministry of Steel and the company without the state government’s knowledge after it objected to business on VSP land. He said the state government asked it to invest elsewhere, preferably in an area of the state which needs development.

However, when Jagan addressed the issue Wednesday, he said: “People are spreading all sorts of things about POSCO as well. It is true that representatives of the company came to the state and met me. I asked them to set up a factory in Krishnapatnam, Bhavanapadu or Kadapa and not Visakhapatnam. They even visited Krishnapatnam today. Another company coming to our state will only be beneficial for us, considering the number of jobs this will create.”