Under the protocol signed in Moscow on November 28, a part of the Rs 30,000-crore escrow account will also be used to buy equipment needed for the modernisation of the ailing subsidiary of government-owned Steel Authority of India Ltd. The protocol paves the way for an agreement between the two governments, which is expected to be signed by December 31 this year, Basu told The Financial Express on Tuesday. The commission has proposed that a part of the escrow funds should be given to the proposed joint venture between TPE and SAIL as equity contribution of the Russian steel major.

The joint venture will take up Rs 2107-crore modernisation programme for Iisco's Burnpur and Kulti plants located in West Bengal. SAIL will have a majoritystake of 51 per cent, while TPE will have 49 per cent. Basu has just returned from Moscow as a member of Indian delegation led by finance minister Yashwant Sinha that participated in the Indo-Russian Joint Commission's meeting. The Russian side was headed by its first deputy prime minister Yuri Muslyakov. The joint venture will have an equity base of Rs 1473 crore, out of which TPE's contribution will be Rs 722 crore, to be funded from the escrow account.

INSIGHT - only way out of the mess

The basic problem facing SAIL is the huge expenditure on mordernisation. The total mordernisation expenses for Bokaro, Rourkela and Durgapur plants works out to Rs 12,000 crore, for which SAIL was not dependent on the government. However, downward prices affected the internal resource generation of the company, leading to higher borrowings and consequent higher interest burden, which has restricted the scope of mordernisation.

The venture with the Russian firm is the most viable way out to rescue the ailingsubsidary of SAIL, without having any significant affect on books of SAIL. With finances tied up now, the problem would be whether the unit would be able to compete with its international peers.

After modernisation, the company will be burderned by high fixed cost of depreciation and interest. Hence, even with the natural advantage of having its own coke ovens and iron ore, unless labour productivity goes up, the company will continue to be in red.