India: Despite Shah, Prabhakaran cheats on regardlessPublished by MAC on 2015-11-09
Source: Scroll.In (2015-11-06)
You'd have to be extremely naive to think that any mining in India can be free of corrupt practices.
In an exhaustive study of the extent to which India companies engaged in illegal iron ore mining and sales in Orissa and Goa, during the years up until the end of 2013, Justice Shah indicted several "big names" - including London-listed Vedanta Resources plc. See: London Calling asks: "Will it all come out in the Walsh?"
However, dig beneath the surface, and more complex, arguably equally insidious, scams were being engineered by persons who are hardly household names, at least in the years immediately following the pretended iron ore boom of 2000.
Now, the top-flight online Indian news-service, Scroll.In has uncovered the inner workings of one mining contractor in Orissa (Odisha), implicating him in a huge network of self-serving transactions with both mine owners and politicans. And he himself isn't even a miner.
Scroll.In accuses him of engaging in a form of transfer-pricing, albeit of a peculiar Indian variety, as well as cheating the citizens of Orissa - above all its poorer inhabitatns of millikons of pounds of tax revenue.
It's a tale which (almost) beggars belief. How could this happen - and why have these shocking details not been exposed before?
Only in India...?
[Note: A crore is 10 million Indian rupees, equal to around £100,000 - One lakh is 100,000 rupees]
How a contractor from Tamil Nadu carved out an enormous mining empire in Odisha
The turnover of the mining contract company owned by B Prabhakaran rose by 1300% in a decade and half. What does it tell us about Odisha?
5 November 2015
It was the year 2000. B Prabhakaran was in deep trouble.
A project for which the young equipment contractor's trucks and earthmovers were employed had been denied an extension. Another project – a dam on Arunachal Pradesh's Subansiri river – where he could have redeployed his machines and employees had been bagged by a rival company.
Desperate to find work for his 500 employees and 100 earthmoving machines, he had bid for an iron ore mining project in Odisha. The state government’s mining firm, Odisha Mining Corporation, was looking for a contractor to dig out the mineral from a mine in Keonjhar.
Prabhakaran, who was about 30 years old at that time, won the contract. But when he moved to Keonjhar with his equipment, he found he could not start work – the mine did not have a forest clearance.
“The Odisha Mining Corporation kept saying it will come, it will come," he said. "But I had moved my equipment here. I had moved my family. We did not have surplus to sit on. How to navigate this through? How to survive?”
Fifteen years later, Prabhakaran recounted the story to Scroll.in, seated in the plush coffee shop of the Oberoi hotel in Bhubaneswar. A towering man, six feet tall, the soft-spoken Tamilian from Salem district is now the alpha male of mining in Odisha. His company, Thriveni Earthmovers, is the largest raising contractor in the state. Its turnover, around Rs 90 crore in 2000, now stands at Rs 1,300 crore – a rise of over 1344% in a decade and half.
Thriveni’s subsidiary controls a coal mine in Indonesia. Prabhakaran is also said to have large land-holdings in Tamil Nadu. Said an iron ore transporter in Barbil, one of the mining hotspots in Keonjhar: “Dus saal pehle kuch bhi nahin tha uske paas. Aur abhi, 2,000 kya, 10,000 crore hain." He had nothing 10 years ago. Now, forget Rs 2,000 crore, he has Rs 10,000 crore.
Illegal iron ore mining
Prabhakaran’s meteoric rise has taken place against the backdrop of an iron ore boom in Odisha. Fuelled by the demand from China’s construction industry, the state led India's exports of the mineral. Between 2004 and 2012, the volume of iron ore mined in the state stood at 524 million tonnes – and this was just the amount that was declared to the authorities.
As the Justice MB Shah-led commission on illegal mining found, a large quantity of ore was mined and sold but never declared. This meant the state was deprived of the revenue that would have come by way of taxes and royalties.
In both the Shah Commission’s report on illegal mining, as well as in the report of the Supreme Court’s Centrally Empowered Committee, Thriveni Earthmovers finds many mentions.
The Shah Commission concluded that Prabhakaran’s company was not simply a mining contractor, digging out minerals on behalf of the holder of the mining lease – Thriveni controlled most of those mines by proxy, and by default appropriated a large chunk of the earnings from both legal and illegal mining.
A former finance minister of Odisha, Prafulla Ghadei, went one step further to allege in an interview that Prabhakaran was one of the four people who controlled the state government. After he gave the interview, Ghadei was expelled from the ruling Biju Janata Dal.
Prabhakaran flatly denies these charges. “All Thriveni does is mining,” he said. “All other aspects of the trade, like marketing and dispatch, are done by the lease-owners.”
So what explains his astonishing rise? And what does it tell us about Odisha, a state where as a senior member of the Shah Commission said, most people have “no flesh on their bodies”?
“In Odisha, you have the very rich and the very poor,” he said. "There is no in-between."
According to him, no more than 75-80 families benefited from the iron ore boom in Odisha. Among the beneficiaries, the story of Prabhakaran, the small-time contractor from Tamil Nadu, is arguably the most striking.
The road to Keonjhar
When Prabhakaran moved to Keonjhar, Thriveni Earthmovers was seven years old.
Attracted to the earthmoving equipment boom in his hometown of Salem in Tamil Nadu, he had entered the business after a degree in computer science from Coimbatore. Borrowing money from family, he had bought one excavator, intending to rent it to the state public works department.
Then 23 years old, Prabhakaran seems to have prepared assiduously for life in the heavy equipment rental business. In those days, he said, excavators took 6-7 months for delivery. And so, he joined a six month training programme for operators and mechanics. He travelled to worksites where these machines were working.
Once the company started in 1994, it learnt – and grew – fast. Quickly realising that businesses renting out machines are at the mercy of whoever is overseeing the project, it began handling entire mining assignments. A big break came in 1995 when it joined Larsen and Toubro as a contractor and began working on large engineering projects like breakwaters.
As its projects expanded, it added to its fleet. Most of what it bought was used mining equipment – large dumpers and shovels – that it maintained well. If a brand new truck costs Rs 50 lakh, a used one can be had for just Rs 10 lakh. Prabhakaran claims this gave Thriveni one of the best asset turnover ratios in the industry – the money spent on a machine versus the revenues it generated.
By 1999, Thriveni was close to Rs 100 crore in turnover.
And then, the crisis hit. L&T lost its project. Prabhakaran, around 30 years of age, in reasonable command over the economics and operations of mining, moved to Keonjhar but found himself marooned there.
What happened in Keonjhar
Keonjhar, circa 2000, was still a sleepy place. The iron ore boom was just beginning.
It had, however, a fairly well-developed mining ecosystem. In this landscape, Prabhakaran got his first break from RP Sao, a local businessman who owned a local mining lease producing 0.7 million tonnes of iron lumps.
Narratives on how Prabhakaran met Sao vary. According to a veteran employee of a mining company in Barbil, the town where Prabhakaran has his base in Keonjhar, he obtained a list of people with mining leases but without the permissions and environmental clearances required to mine. “He told them he would get them the clearances and do the mining,” said the employee. “Most of these people had obtained their leases a long time ago and did not have the connections required to get these clearances.”
This narrative imputes links between Prabhakaran and the Dravida Munnetra Kazagham, the party from Tamil Nadu that was an ally of the United Progressive Alliance government at the Centre. DMK leader TR Baalu was at the helm of the Environment Ministry at the time.
According to the head of a steel-making company with its own mines, shortly after reaching Keonjhar, Prabhakaran worked with the son of DMK leader TR Baalu in a mining contract given by the Odisha government.
This brought him in touch with both Baalu, and then A Raja, who succeeded him at the Environment Ministry.
In his conversation with Scroll, Prabhakaran denied having any link with the DMK leaders.
According to him, environmental clearances were obtained by consultants appointed by the miners – not Thriveni. The meeting with Sao was the outcome of another process, he claimed. “At that time, there were many private contractors and miners in the area. We went and knocked on every door saying we have equipment, we can deploy. They all said no, we have largely small-scale mining, we cannot accommodate.”
And then, he found Sao, who had a large mine. Prabhakaran offered to expand production in the mine to 4 million tonnes of ore – only Tata Steel was mining as much from one mine at that time. Prabhakaran also offered to operate a mill to crush the ore before shipping it out.
The two signed an agreement that is distinctly unorthodox. Mining contractors are usually paid a fixed rate as mining charges. However, Sao agreed to pay Thriveni 40% of the sale price of the ore. This agreement subsequently became the template for all future deals between Prabhakaran and other mine owners in Keonjhar.
When the Shah Commission visited Odisha, it was appalled by this model. The contract, said its report, resulted in Thriveni earning “much above the industry bench mark or normal ore raising charges”.
As a senior official in the Shah Commission said, “The miners have to pay a royalty of 10%, income tax of 30%, VAT of 5%. If they have to pay Prabhakaran 37%, what is left for them?”
Around 2008, as the Shah Commission report states, at 37% of the sale price of iron ore, Thriveni was making around Rs 674.50 for every tonne of iron ore mined. A senior official in one of the biggest raising contractors in Barbil said companies like his were charging nearly half that amount – a flat rate of about Rs 350 per tonne.
Defending the contract, Prabhakaran said the idea for the profit-sharing arrangement came from Sao. Unsure how ore prices would move, Sao did not want to pay Thriveni Rs 450 per tonne. The price of ore at this time, said Prabhakaran, was around Rs 1,000 per tonne. According to him, “Sao said: 'What if the price of this ore comes down to Rs 600?'”
At one level, the agreement with Sao is easy to explain.
Prabhakaran had reached Keonjhar just as the boom was starting. The old-timers had lived through days when a tonne of ore fetched not more than Rs 95 and, hence, were wary of making large investments. But young and brash Prabhakaran had never seen a bear phase in the market. A profit-sharing model was a better way of splitting risk and reward.
However, the subsequent agreements are harder to understand. Unlike Sao who, according to Prabhakaran, was unsure about the incipient boom in ore prices, other miners signed up with Thriveni after the boom had picked up and ore prices were touching Rs 7,000 per tonne.
Why did they agree to give away 35% to 42% of the eventual sale price to Prabhakaran?
This is one of the most puzzling aspects of the Prabhakaran story.
Take the government-owned National Mineral Development Corporation's financials in 2009-'10. Ore prices were so high that the company's costs for mining, transport, salaries and depreciation accounted for just 16% of its turnover – the rest was profit.
In contrast, the mining lease-holders were paying Prabhakaran 35% to 42% of the ore’s eventual price just for mining.
Astonishingly, despite taking such a hefty share of profits, Prabhakaran’s portfolio of mines grew: KJS Ahluwalia signed up in 2005-'06, followed by Indrani Patnaik in 2007-'08 and Serajuddin & Co.
As these mines began producing, Thriveni Earthmovers’ turnover nearly doubled in two years – from Rs 760 crore in 2012 to Rs 1,336 crore in 2014.
There are competing narratives for Thriveni’s supernormal profits.
The first traces his rise to high-level political connections. That mining lease-owners without the political capital or administrative knowhow for getting clearances outsource mining to Prabhakaran who manages their mines for them – starting from the paperwork to the eventual dispatch of ore – in return for supernormal returns.
Speaking on the condition of anonymity, a former minister in Chief Minister Naveen Patnaik's cabinet said: “To mine, you need a lot of clearances – from the Indian Bureau of Mines, Environment Ministry, [state] mining department... In this [Odisha] government, there is no one else who can get a mining lease done.”
According to the raising contractor based in Barbil, 17 clearances are needed to start a mine. “In Odisha, if you don't have any political background, your file won't move," he said. "Look at any big business owners in Odisha – they are either politicians [MPs or MLAs] or outsiders with some connections. You will need to bend down. Who can do this! And so, you try and find an answer. And that is where people like Prabhakaran can help.”
Contractors and politicians also point to Prabhakaran’s control of local politics through his proximity with the local MLA, Sanatan Mahakud.
Mahakud started out as a union leader who, according to local businessmen and state politicians, used to extort money by forcing industries to shut down through gheraos (protests) by unemployed villagers.
In the last decade, Mahakud has grown rapidly, getting elected as the MLA as an independent candidate.
In some ways, his rise mirrors that of Prabhakaran.
The subsequent story in this series will look at Mahakud in more detail. For now, what's pertinent are the allegations linking Prabhakaran and Mahakud.
In 2011, two Congress MLAs, Nihar Ranjan Mahananda and Jogesh Kumar Singh, wrote a letter to Odisha Chief Minister Naveen Patnaik alleging a “mining mafia led by Sanatana Mahakud... has taken control of more than 10 mines in Joda mining circle in collusion with raising contractor Triveni (sic) Earth Movers”.
In their letter, the MLAs claimed the mafia had disrupted the public hearings of more than ten mining projects over the previous two years in a bid to take over their mines.
A local transport contractor who spoke to Scroll on the condition of anonymity repeated the same charge. “If Sanatan Mahakud tells people to go sit at a mine, and make sure no work gets done, 5,000 people will go and sit there,” he said.
This clout, he said, was being tapped by Prabhakaran to make the mine owners outsource their mines to him. “Prabhakaran creates problems through Sanatan Mahakud so that the mine owners will give him their mines. This is his main policy. By putting Sanatan in front, Prabhakaran is reaping the benefits,”
What the company says
That morning in the coffee shop, Prabhakaran rejected these assertions.
Mine owners, said Prabhakaran, outsource mining to Thriveni because the company has “a fleet of equipment it doesn't make sense for them [the mine owners] to buy”.
He traces the company's rise back to two factors: a proficiency in mining and the ability to get what he calls a “social licence” from the local community, essentially, winning them over through jobs and contracts.
Denying that Thriveni operated the mines by proxy, he said, “If we had taken over the mine, the mine owner would have become a pauper."
DR Patnaik, the husband of Indrani Patnaik, who owns the lease for the iron ore mines at Unchabali, echoed what Prabhakaran said. “Mining is his main job. It is all as per the contract,” Patnaik said. “We gave him the production targets. The clearances too were obtained by consultants hired by us.”
As for the public hearings, Prabhakaran said: “In the last five years, I have never taken on any new work where Sanatan Mahakud operates.”
But none of this explains why the lease owners did not subcontract to other raising contractors in Keonjhar. Nor does it explain why, if Prabhakaran is only doing what other raising contractors do, he gets such a large premium?
In his interview with Scroll, Prabhakaran sought to underplay the issue. “We feel this is a different way of making payments. It is not on fixed terms, it is on revenue sharing terms. We may have taken Rs 700/800 from Tata Steel. But that Rs 700 is again 35% or 40% of the eventual value of the sale price.”
But that answer holds true only if the ore price is around Rs 2,100 or so. When it spikes to Rs 5,000 and beyond, Thriveni makes supernormal profits.
According to the rival raising contractor, Prabhakaran enjoys far better economies of scale. “We use 25-30 tonners of Indian make," this man said. "They use 40 tonners made by companies like Caterpillar and Komatsu. This makes a difference. They get economies of scale.” While his company's cost is between Rs 60-Rs 70 per tonne, Thriveni’s will be around Rs 47 a tonne, he said, which gives it a margin of 20%.
It is likely that better equipment results in better mining. But economies of scale should result in Prabhakaran out-competing his rivals by undercutting them. Instead what you see here is a company that has scale, but charges far more, but still somehow manages to get clients.
As the head of a steel fabrication plant in Rourkela said, “He [Prabhakaran] cannot charge such a premium if he is not offering other services.”
Resolving the contradictions
An answer to this persistent dilemma lies in the Shah Commission report.
It flags a transaction which suggests another reason why miners are appointing Thriveni even though it charges more than other raising contractors.
A part of the money charged by Thriveni seems to have flowed back to the miners. The report said: “It appears that considerable payment has been made by it [Thriveni Earthmovers] to other mining contractors including to the associated group companies of Serajuddin & Co [one of the mine owners in Odisha].”
In 2010-'11, for instance, payments to Serajuddin's subsidiaries ranging from Rs 98 lakh to Rs 575 lakh flowed back to multiple subsidiaries of the lease owner. According to the Shah Commission official, this suggests income tax evasion. Serajuddin was “inflating expenditure in order to save income tax”, he said.
Other findings in the report challenge the claim that the mines were not managed by Prabhakaran. “It is pertinent to note that Indrani Patnaik is one of the purchasers for export of a quantity of 2,82,354.740 MT in the year 2010–11 and that of 1,40,902.9630 MT for the next year. The sale of ore, in favour of Smt. Indrani Patnaik who herself is a lessee, can only be done in the circumstance that the lease is being operated and administered financially by other than the lessee,” it said.
In another instance, the report alludes to three FIRs filed by the deputy director of mines in Joda. The official found that companies that were not lease owners were transporting iron ore. One of them was Thriveni.
Scroll emailed a questionnaire to Prabhakaran after the meeting in Bhubaneshwar, asking for clarifications to these questions. The email went unanswered.
According to its critics, the company’s supernormal returns have distorted the iron ore mining sector in the state. The Shah Commission’s report concludes that companies like Thriveni have deepened corruption among government employees, ranging from those granting clearances for mining to environmental management to transport.
But the strictures of the Shah Commission have had little impact on the company and Prabhakaran’s clout shows no sign of diminishing.
Jitu Patnaik, a former MLA from Champua constituency in Keonjhar, has no love lost for Prabhakaran. Some years ago, the two fell out over what Prabhakaran says was a dispute over railway sidings or the yards where ore is loaded to trains. And yet, Patnaik is planning to get Thriveni to operate his mines. When asked why, he said: “Government kis ko chahta hain? Hum lafda mein nahin padhna chahta. Right now, the government is in his favour. And I do not want to get into complications.”
Asked to elaborate, he chose not to, simply saying, "Please ask Prabhakaran."
This is the first of a three-part series on Odisha's mining sector.
Meet the Odisha MLA whose assets grew by 1,700% in five years
Sanatan Mahakud is an Independent MLA from Champua in Odisha's iron ore-rich Keonjhar district. Unlike him, a majority of people have gained little from the mining projects in the region.
6 November 2015
Travel around the district of Keonjhar and you hear stories of the MLA who distributes money among his constituents every month. Elected as an independent candidate in 2014 from Champua constituency in the heart of Odisha’s richest iron ore-rich belt, Sanatan Mahakud distributes anywhere between Rs 1,000 to Rs 2,000 to more than half the families in his constituency.
Just as strikingly, Mahakud funded the election campaigns of a clutch of other independent MLAs contesting elsewhere in Keonjhar. According to press reports, these candidates – who spent a lot on their campaigns – were presenting themselves as Sanatan Mahakudna Samarthita Prarthi, or Sanatan Mahakud-backed candidates.
Mahakud can evidently afford the largesse. According to his election affidavits, his assets have grown from Rs 3 crore in 2009 to Rs 51 crore in 2014 – a growth of 1,700% in five years.
Today, Mahakud is the unquestioned king of Keonjhar. But it wasn’t always so.
The road to the top
In the year 2000, when B Prabhakaran, a contractor from Tamil Nadu, arrived in Keonjhar, it was an amalgam of fiefdoms, with four satraps holding sway over the mineral rich areas.
Kusha Apat, a local leader who started out as a truck driver, controlled the villages near Guali.
Jitu Patnaik, a miner who became the chairman of Joda municipality, dominated the areas around Joda. Barbil was with Murli Sharma, a local Bharatiya Janata Party leader. And the liltingly-named village of Unchabali was with Sanatan Mahakud, a union leader who later moved into the business of transporting ore.
As the previous story in this series reported, over the last decade, Prabhakaran rose to become the largest contract miner in Keonjhar. In 15 years, the turnover of his company, Thriveni Earthmovers, torqued from Rs 90 crore to more than Rs 1,300 crore.
Simultaneously, Mahakud overtook all the other satraps in the race to become the area’s MLA.
Many see the parallel rise of Prabhakaran and Mahakud as more than just a coincidence.
According to a contractor who spoke on the condition of anonymity, Mahakud is Prabhakaran's creation, and little more than a henchman who carries out his orders. “Usko Prabhakaran ne hi aadmi banaya. Us se pehle woh kuch nahin tha,” he said. Prabhakaran made him what he is today. He was nothing before all this.
He claimed the money that Mahakud pays out every month comes from Prabhakaran. “Deta Prabhakaran hi hain. Lekin Sanatan ke dwara.”
The cash dole allows Prabhakaran to exert control over the area. “As people get Rs 2,000, they start considering Sanatan their God,” alleged the contractor. “They do what he tells them to do. If he says go sit at a mine, do not let them work, they will go sit at a mine.”
As the earlier story reported, there are allegations that Mahakud engineers the disruption of the public hearings of mining projects until the owners sign up Prabhakaran as the contractor.
In 2011, two Congress MLAs, Nihar Ranjan Mahananda and Jogesh Kumar Singh, wrote a letter to Odisha Chief Minister Naveen Patnaik alleging “a mining mafia led by Sanatan Mahakud... has taken control of more than 10 mines in Joda mining circle in collusion with raising contractor Triveni (sic) Earth Movers”.
Prabhakaran denied the allegation. “In the last five years, I have never taken on any new work where Sanatan Mahakud operates,” he said.
Scroll.in tried contacting Mahakud in several ways. Visiting cards were left with employees at his homes in Unchabali and Bhubaneswar asking them to pass them on to the MLA. Several phone calls were made and emails sent to the address provided in his election affidavit. Finally, an questionnaire was left at his house in Bhubaneswar. But there was no response.
Sharing the spoils
While Prabhakaran denies any partnership with Mahakud, he had much to say about local satraps.
The first private mine that Prabhakaran operated was located in Guali. This was Kusha Apat’s area. Prabhakaran claims Apat asked him for a Rs 50 premium on the market price for trucks transporting ore. Too high, he said, rejecting Apat’s offer. Later that evening, around one hundred villagers came and beat up Prabhakaran’s employees.
This is why, he said, the satraps cannot be ignored. “The only way to handle them is to align them to your business model. To make them a vendor rather than a parasite. Put them inside the system.”
This takes the form of transport concessions – where the contract for transport, labour, etc, might be handed over to the satraps. This is what everyone does, he said.
He agreed it was an imperfect solution. “The transport of minerals is being done by people who are locally more influential,” he said. “This is happening across all minerals. Whether is it coal or iron ore. There is the strong leader and the weak leader. The strong benefits more, the weak leader benefits less.”
However, he insisted that Thriveni had no say in the appointment of transport contractors.
“He [Mahakud] is not my transport contractor,” he said. “He has been hired by the mine owners.”
DR Patnaik, whose wife Indrani Patnaik owns mines in and around Unchabali village, agreed. “Transport was paid for by us,” he said. “We appointed transporters on the basis of lowest bid.”
Another local contractor, however, disputed this claim. In places like Keonjhar, he said, contracts are not awarded on the basis of bid price, but on the basis of local clout.
In his meeting with Scroll.in, Prabhakaran took pains to emphasise the outreach work done by Thriveni. According to him, while Thriveni handled the main mining work, it outsourced all ancillary functions, including petty construction, to local villagers. It trained village youth as security guards and helped others buy trucks.
This gives the company “social licence”, he said, by which he meant public support for operating in Keonjhar.
Prabhakaran claims he helped local youth buy trucks and create new livelihoods in the ore transport business.
Go down to the villages abutting the mines, however, and you see how this distribution of wealth is skewed.
Mahakud's house, still under construction, is so large it occupies the top of a ridge. Continue down the ridge and you will reach Unchabali. Here, some houses are large bungalows with trucks parked outside. Most others, however, continue to be earthern structures with mud tiles.
On the road towards Nayagarh, in another village, people complained that their sarpanch, who is a subcontractor with Thriveni, pays stipend to some villagers, not all.
When asked about this, Prabhakaran said: “Whether we pay stipend or not, we reach out [and address] the common problems. Good roads, electricity, hospitals, schools, etc. This work continues to get done.”
He claimed that before he arrived in the area, “nothing was reaching these villages”. “In these ten years, I can see local people have benefited. The facilities have reached everyone,” he said.
But go to the villages and you see more mixed outcomes. At the government primary school at Unchabali, Thriveni’s staff was helping with the construction of a borewell. But in two other villages that Scroll.in visited, common infrastructure like the water tanks was in bad shape.
School children in Keonjhar.
The shopkeeper, whose identity is being protected, said: “The company has set up a water tank here. But it gets water for 15 minutes in the morning and another 15 minutes in the evening. If we complain, we get beaten up.”
A man sitting with him said he had been beaten up on occasion. “We have been put under pressure,” he said. “We cannot even speak.”
In a village near Nayagarh, a middle-aged woman said the mining in the area has put their livelihoods under threat. “There is a crust of red dust that has formed on our fields with all these trucks moving around,” she said. “Elephants are also coming into our fields more often.”
“Earlier, we used to get enough grain from our fields for six months,” she added. “About 16-17 sacks. Now that is down to just six or seven sacks.”
Overburden hills made up of excavated soil loom over a mine workers' colony in Keonjhar.
It's a predictable story. Visit most mining landscapes and you see a similar calculus of loss and gain.
Embedded here is the question of which side does the state government take.
To get an answer, you do not have to look beyond the 2014 assembly elections. As Mahakud stood as an independent candidate in Champua, one of the high cash-generating districts in the country, the ruling Biju Janata Dal put up a local comedian called Tatwa Prakash Satapathy aka Papu Pom Pom against him.
Mahakud won handily, defeating Satapathy by about 14,000 votes.
Why did the BJD want Mahakud to win?
How Odisha squandered valuable mineral resources without any gains for its people
In the final part of the series on Odisha's mining sector, Scroll examines what the state could have done to redirect mining profits to its people.
6 November 2015
In Unchabali village in Odisha's Keonjhar district, a massive house is under construction atop the ridge that looms over the village. It belongs to the local MLA, Sanatan Mahakud. Given his zealous security guards, you cannot give the sprawling complex the close attention it deserves, but as you drive by, you see a temple coming up inside the complex, stonemasons chiselling away at idols in the shade of a tarpaulin, and a three-metre-high boundary wall with large statues of gods and goddesses plastered onto it.
Mahakud is a rich man. As the previous story in this series reported, his assets have grown by 1,700% between 2009 and 2014.
Drive down the hill and you are in Unchabali. The village is an odd amalgam of large, brightly painted mansions with trucks parked outside and broken-down earthen houses with tiled roofs and muddy courtyards. The government middle school has 144 students but just four teachers – two of whom are matriculates. Here, and in two neighbouring villages, people complain of grinding poverty, lack of work, and the threat of violence towards anyone who speaks out against the local MLA.
This pattern – islands of affluence in an ocean of penury – is something that you see across Keonjhar. As Damodar Raut, a senior leader in the Biju Janata Dal, said: “The district with the highest poverty – Keonjhar – is also the one with the highest income tax payers.”
This skewed distribution of gains is one of the most striking legacies of Odisha's iron ore boom. According to a senior member of the Justice MB Shah Commission which submitted a report on illegal mining in the state, no more than 75-80 families were in charge of these reserves, while other people in the state have “no flesh on their bodies".
"In Odisha, you have the very rich and the very poor," he said. "There is no in-between."
What explains this outcome? The previous two stories in this series – on the rise of B Prabhakaran and Sanatan Mahakud – have thrown light on how some benefited from the boom. This story will examine the failure of the state government in harnessing the boom for the larger public good.
For a state that led the iron ore boom in India, Odisha captured very little value from it.
This is partly due to illegal mining – ore was mined and sold but not declared to the state government. However, take a closer look and you will realise the state failed to capture value even from legal mining.
Here is how. One source of revenue for the state government from mining was taxes. However, as the Prabhakaran story showed, companies inflated their operating costs, resulting in lower profits and lower taxes for the state government.
Take Serajuddin & Co, one of the leading mining families in Odisha. According to the Shah Commission's report, the company declared total revenues of Rs 98.56 crore in 2009-'10. The Commission found the number too low. Data from the state government's mining department shows that the company dispatched 667,000 million tonnes of lumps and approximately 500,000 million tonnes of fines, totalling around 1,167,000 million tonnes. Considering even a “modest average of Rs 2,000 per MT for lumps and Rs 1,000 per MT for fines”, it said the company's sales turnover should have been at least Rs 180 crore – almost twice what the company reported as its annual income.
Next, after declaring a gross receipt of just Rs 98.56 crore, the firm pegged operating expenses at almost Rs 70 crore, and after accounting for other expenses, a profit before tax of just Rs 3.75 crore, or 4% of its declared turnover. Of this, the tax it paid the state government was Rs 1.5 crore.
The Shah Commission report pointed out that this was too low. “Mining activity normally has very high profitability because of the low cost/expense involved in mechanised ore–raising," it said. "[Profit Before Tax], as a percentage of turnover, reaches as high as 75% for even Government Company like NMDC [National Mineral Development Corporation].”
One explanation for the low profit, as the story on Prabhakaran reported, could lie in what the Shah Commission found: the mining contractor hired by Serajuddin was making payments back to its subsidiary companies, raising the possibility that he was getting a large margin, in part to help Serajuddin evade taxes by inflating its expenses.
There were other aberrations. The Shah Commission found Serajuddin & Co had “not filed Income Tax returns for the years from 2002–03 to 2007–08”.
A second source of revenue for the state government from mining was the royalty that companies paid for the ore they mined. But this too was a joke. Between 2004 and 2012, a total of 524.14 million tonnes of ore were mined in Odisha. The Commission pegged the value of that ore at Rs 199,847.5 crore.
How much of that came to the state government? For most of this period, till 2009, as the member of the Shah Commission told Scroll, royalty rates ranged from Rs 8 to Rs 27 per metric tonne, even though the price of ore rose to Rs 7,000. To put that in perspective, if the Odisha government had charged Rs 27 on every tonne of ore mined till 2012, it would have made Rs 1,415 crore over the eight year period, which is just 0.7% of the mineral's value.
Mercifully, after 2009, royalty rates were raised to 10% of the sale price as published by the Indian Bureau of Mines.
Even this is low, said the Shah Commission official, calling it "an eyewash".
Gainers and losers
So who gained from the mining boom?
The Shah Commission found that in Keonjhar and Sundargarh, a total of 79 mining leases had been given out by successive state governments. Apart from the lease-holders, the boom benefited their employees, vendors and business partners, along with the government officials and politicians who supplied clearances and permissions.
The rest of the state hardly got anything. Those living close to the mines became poorer than before.
Said the Shah Commission official, “I do not understand why the state had to go through this mining boom. For the little royalties they got, state ka satyanash kar rahein hain (they are ruining the state).”
A lost opportunity
In the process, the central and state governments squandered a transformational opportunity.
In one of its more unimpassioned parts, the Shah Commission report does some number-crunching. It divides the value of the mineral produced in one year in Keonjhar and Sundargarh with the number of tribal families living in the two districts. If the value of the mineral had been evenly distributed, each family would have been richer by Rs 9.42 lakh, it pointed out.
See this another way: 10% of the mining companies' annual earnings from Keonjhar and Sundargarh for the eight years between 2004-'05 and 2011-'12 works out to Rs 2,498 crore. If this amount had been used for the development of the two districts, the report said they would be "equal to well-developed districts of any developed states”.
Instead of extracting value for its people from mining, Odisha squandered away the gains. At the height of the boom, the Environment Ministry granted environmental clearances to 90 iron ore mining leases in the state, which produced 154.263 million tonnes annually, according to the Shah Commission report.
Now, Odisha's reserves are 4,704 million tonnes. At an annual production of 154.263 million tons, Odisha would finish off her iron ore in 30 years.
In other words, the state will exhaust her non-renewable natural resource without much to show in terms of improvements in how her people live.
Making things better
All of which brings us to the inevitable question: what is a better way to manage these resources?
In its report, the Shah Commission recommends the creation of a Mineral Resource Rent Tax which should accrue to the state for investment in infrastructure and creating jobs for the communities impacted by mining. According to its report, 50% of the value of the ore should flow to the state, of which half should be used for “the welfare of the area from where the minerals are extracted”.
A more aggressively egalitarian idea comes from the environmental non-profit Goa Foundation. After analysing the last eight years of mining in Goa, Rahul Basu, a volunteer with Goa Foundation, found the state had captured less than 5% of the value of its iron ore. It exported ore worth Rs 53,833 crore but earned just Rs 2,387 crore as royalty.
In an email to Scroll, Basu pegged the resulting damage as something greater than a monetary loss. “Studies show that too great a reliance on mineral revenues reduces the extent to which a state remains responsive to its people,” he said.
Accordingly, the foundation has proposed that miners should not be allowed to extract minerals worth “more than 15% of the state budget”.
Further, mining should be managed in a manner which ensures most of the gains flow to the state government – the ideal is 100% recovery. For instance, in Odisha, mining leases were given to a small number of business families and companies who did not even mine on their own. Instead, they outsourced mining to raising contractors but continued to make a lot of money due to their ownership of the lease.
By outsourcing mining through, say, competitive bids, while retaining control over the marketing of the ore, the government could have ensured most of the value was captured by it. “There's so much profit from mining that it seems to justify any human rights violation," said Basu. "So we are trying to suck the easy profit out of the system.”
However, he doesn't think the money should go to the state government either. Instead, the Goa Foundation proposes that all this money should go into a Permanent Fund from where a Universal Basic Income is distributed directly to the people.
This is similar to Norway’s Sovereign Wealth Fund, said Basu, which has built up an enormous corpus of $800-plus billion from North Sea oil revenues for a population of only five million.
Needless to say, that is not the direction we are moving in right now. Our governments continue to favour the mine owners.
In 2011, a bill drafted by the United Progressive Alliance proposed the setting up of District Mineral Foundations. Mining companies would be asked to pay an amount equal to the royalty to these foundations, which were supposed to use this money “for the benefit of people and areas affected by mining activities”.
The royalty for iron ore is just 15%.
But even this limited stipulation was further diluted by the National Democratic Alliance government. The amended law now says new lease-holders will contribute an amount “not exceeding a third of the royalty” to the foundations. Existing lease-holders will contribute an amount “not exceeding the royalty”. Effectively, there is a ceiling. But no floor.