Tata's Kalinganagar Steel Plant: A poor ambassador of doing business in India

Last week, Tata Steel began partial operations at its ambitious Kalinganagar Steel plant in Odisha, touted as India's largest single-location greenfield steel plant. Spread over 3,741 acres of land in the state's Jajpur district in one of the most underdeveloped pockets of the country, it has an installed capacity of 3 million tonnes per annum. This would be ramped up to 6 mt by 2020 and 12 mt by 2025. At that stage it will overtake Jamshedpur, Tata Steel's mother plant, as the company's biggest facility in India.

Yet, if any prospective investor is looking at this project as a template on how to do business in India, it sets a very bad example. Plagued by multiple time and cost over-runs, it is symbolic about everything that is not right about getting a project off the ground in the country.

The factory was initially planned at a cost of Rs 15,000 crore and slated to start production by 2010. Instead, it got bogged down in land acquisition hurdles and the ire of tribals who claimed they owned part of the land parcel that was handed over to the company by the state government. Following a day of madness on January 2, 2005, 13 agitators were killed by local police trying to wrest control. It only escalated matters and the viability of the project itself came under question. Everything came to a standstill for the next five years.  

It also took the company by surprise. Tata is a household name in the country and held in much esteem by most. It has helped establish Jamshedpur - one of the most modern cities in India that has laid the marker on what a model township ought to be like. Surely, it was in Kalinganagar's interest to have the steel behemoth's second plant in the vicinity. The sense of injustice among the local population who had been offered just Rs 37,000 per acre by the government back in 1993, however, outweighed everything.

"As of January 1, 2005 we thought the land was ours because we had made payments to the government for it," says Rajiv Kumar, Vice President, Operations - Kalinganagar Project, Tata Steel in Tata Group's in-house magazine Tata Review. "We did not foresee any problems getting it. We had the Tata name to back it, we had been in Odisha for 100 years, and we believed we had built social equity with the community. But there were some stakeholders who did not see it that way, there were others fiercely opposed to us, there was the local politics. We were just not aware of the factors at play."

The House of Tatas was being fed this bitter medicine two at a time. Around the same time its small car Nano's project was facing similar resistance in neighbouring West Bengal. Unlike Kalinganagar, though, that project was doomed and resurrected itself only on the other side of the country in Gujarat. Critics had said Kalinganagar would meet the same fate.

"Our early troubles in Kalinganagar saw a lot of people writing us off on the project. We ignored the naysayers, went to work on the ground and slowly, bit by bit, got the project back on track," says T.V. Narendran, Chief Executive Officer, Tata Steel.

Tata persevered in Odisha and started work in right earnest in 2010. It all came at a cost. A hefty one. A more than generous relief and rehabilitation package that included higher compensation for the land, job guarantees, money for building houses and a monthly maintenance allowance, won over the agitation. But the extra payout and time overrun saw the cost of project go up nearly 75 per cent to Rs 26,000 crore. In 2025, if and when the project reaches its terminal capacity of 12 mtpa, the cost will swell to Rs 50,000 crore.

Few companies have the bandwidth to take that kind of risk. One needs to only look at Korean steel major Posco's 12 mtpa steel project at Jagatsinghpur - a mere 120 km away - to get a sense of that. After trying in vain for 10 years, the company shelved what was India's biggest FDI project four months ago.

Kalinganagar reiterates what we already know about India. If you are prepared to dig in, there is always light at the end of the tunnel. Foreign investors, though, will not be enthused by that.