Column : Mining for a solution

Written by Sunil Jain | Updated: Aug 6 2011, 09:03am hrs
Two things strike you on even the first reading of the voluminous Lokayukta report on illegal mining in Bellary in Karnataka. The first is the sheer brazennessbribe rates were fixed for all manner of officials, forest and mining department officials issued fake certificates/permits at will, and theres even a hologram scam where the holograms meant to prevent fake certificates were misused. The second is how widespread the scam was, even cooperatives like Nafed which are involved in agriculture marketing started exporting iron ore, much of which it turns out was illegalFE has a cute story today on how Nafeds office is now full of Hussains as one of the persons involved in the ore scam defaulted and Nafed took over part of his collection of 100 paintings (remember the businessman who booked 100 Hussains for R100 crore).

Its hardly surprising then that firms like JSW, Indias largest private-sector steel firm, find themselves embroiled in the scam. JSW has been accused of, by and large, buying iron ore from firms that didnt have permits to mine the ore or buying them from firms who had permits but no orethe latters permits were then used to cover up the purchase of illegal ore from the former. The Lokayukta report also documents the money trail from JSW to a trust run by the then chief ministers son and also says it bought land from Yeddyurappas family at many times its actual price. JSWs shares have crashed, partly because of the accusations made in the report, and partly because of the ban on mining in the area.

For the record, JSW denies all the charges. It says that it has certificates from the mining department and the forests department for every kilogramme of ore it has boughtin other words, if the certificates are fake, they have been faked by those who sold ore to JSW. Whether that holds when theres a full investigation is to be seen, but the company does seem on weaker grounds when it comes to the other chargesJSW says the money given to the Yeddyurappa trust which runs schools and colleges was part of the CSR activities, but cant explain why all the money was given upfront without work even starting on the promised auditorium (to be named after the JSW owners father). As for the land purchase, JSW says the Lokayukta report is going by the official price which is always a fraction of the market price, which is what JSW paidthats easy to verify once theres an investigation.

The larger issue, however, goes beyond whether JSW is guilty. The Lokayukta says JSW got around 1.3 million tonnes of illegal ore and so, at the prevailing price of R2,500 per tonne, it caused a loss of R324 crore to Karnataka between April 2009 and July 2010. That, however, is missing the point. For one, if JSW is right in what it says, the loss has been caused by the illegal miners. Two, given that the duty structure on ore and finished steel is very differentR250 or so per tonne for ore and R5,600 for steelJSW probably ended up paying more to the government in taxes. 1.3 million tonnes of ore means about 0.81 mn tonnes of finished steelat R5,600 per tonne, thats a tax of R455 crore.

The real issue is that the way things were structured, all steel producers were at the mercy of the government, and that applies not just to Yeddyurappas government. If a JSW needs 16 million tonnes of iron ore per year to run its 10 million tonne steel plant, it needs to be on the right side of the government since there are a million ways in which a hostile government can starve it of vital iron ore supplies. I suspect this is where the payments to the trust come in, even though JSWs management vehemently denies making any payoff. Indeed, given just how vulnerable JSW is, the amounts mentioned in the Lokayukta report seem quite modest. According to the report, while 6.5 million tonnes of the ore JSW got was kosher, another 1.3 million was notso less than a fifth of the ore was illegal. In monetary terms, since the Lokayukta says the total loss to the exchequer was R12,228 crore over 60 months, JSWs R325 crore over 15 months is modest.

Assuming JSW is wrong, and all the allegations in the Lokayukta report can be proved, the firm has to pay the priceif a buyer of stolen property is punished, it ensures everyone behaves more responsibly in the future. But unless the final solution involves giving captive mines to end-users, as the Lokayukta report has suggested, the solution is likely to failwith no captive mines, even if a firm like JSW knew about the illegal mining, it would have no option but to turn a blind eye to it. Urgent revision of royalty rates on mining is also required as the large margins in mining are an equally large part of the problemas FE reported in March, while Vedantas Sesa Goa mining netted R2,118 crore (46% margin) in 2009-10, the groups metals firm Sterlite netted just R831 crore (6% margin); similar orders of magnitude apply to most other mining and metals firms belonging to other groups. The government owns the minesit makes sense to give them to firms who give back the most to the exchequer.