Source: The Daily Star Web Edition Vol. 5 Num 719
Date: Tue. June 06, 2006
Assessing Tata's investment proposal
Justice Golam Rabbani, Nuruddin Mahmud Kamal, S.K.M. Abdullah, Sheikh Mohammad Shahidullah, Prof. Shamsul Alam, Prof. Anu Mohammad, Prof. M.M. Akash and Prof Hossain Mansoor
IN October 2004 an expression of interest of a 2 billion dollar investment proposal in Bangladesh was signed between the Indian industrial conglomerate Tata and the Board of Investment (BOI) Bangladesh. Much enthusiasm was shown in the media. There was no urgency to begin negotiations. Yet, discussions began on the investment package that was secretly kept away from the people of Bangladesh. From time to time, some bits and pieces of the two billion dollar proposal were leaked through the media for public consumption, as if the enormity of investment proposal from the house of Tata was the most important factor for consideration. The people were baffled. There were many omissions in the proposal. Apparently these were deliberate. There had been a behind-the-scene battle between those who favoured speaking in terms of realities and those who felt it would be politically unwise to invite controversy on the iniquitous proposal.
Soon many people became irate and started accusing the government for not exposing the 'black box' of Tata. We soon heard more about the Tata proposal than we wanted to know. We found ourselves awash in a tidal wave of conflicting opinions. The discussions-cum-negotiations broke off over natural gas pricing. At least that is what the BOI spokesman revealed through media. On the other hand, Tata showed the event as a tactical retreat. Meanwhile, news came out to people that Tata offered only US$ 1 for one Mcf of Bangladesh gas, but demanded gas supply assurance for 20-25 years as well as all privileges offered to export oriented projects. People became suspicious on the Tata investment package that would need three trillion cubic feet (Tcf) of gas over the life of the three proposed projects. It was also unclear whether they were export oriented projects. The story was partly unveiled and partly remained undisclosed even today. To some, the proposal was not an investment package rather a prospectus (like one of our housing projects).
The proposal
The initial Tata proposal comprised of three gas based projects that envisaged a 2.4 million ton capacity steel plant (sponge iron) at Ishurdi, a 1 million ton per annum capacity fertiliser plant at Chittagong (near Sangu), and a 1000 MW power plant. Later, a 6 million ton coal project (through open cast mining method) was included. According to the latest amendment by Tata on 30th April 2006 the proposed projects would now require 2.14 Tcf of gas and 6 million ton of coal with a guaranteed supply for 20 years (revised downwards to 10 years now!).
Time of submission
Curiously, Tata made the proposal at a time when the law and order situation in the country was deteriorating fast. The government has so far been hesitant to pressurise Tata on many issues, particularly on gas pricing and guarantee, fiscal incentives, tax holiday and Barapukuria coal mine lease etc. Many development partners including the World Bank, ADB are strongly supporting the Tata's proposal although the often repeated driving motive of Tata's investment, among others, is the availability of cheap gas. The likely negative impact of subsidy on gas price has not been raised by BOI. Gas price below the international market price cannot be acceptable for Bangladesh. The international market price for one unit of gas (one thousand cubic feet of gas or 1 Mcf) ranges from US$ 5 to 8 now, whether it is Canadian, Algerian, Dutch, Indonesian, Malaysian or Australian gas sold to USA, EU countries, Korea, Taiwan or Japan. The most recent gas supply contract from Myanmar to China is about US$ 5 per Mcf.
What is the gas price offer?
Compared to their initial offer, Tata group now proposes three new prices for natural gas, one for steel plant, another for its fertilizer project. From the available reports, it appears that Tata assumes that the gas price shall vary from US$ 2 to 4 per Mcf, which is a plain eyewash. According to their revised proposal in April 2006, the floor price (third price) will be US$ 1.5 per Mcf at the initial period (first 5 to 6 years), US$ 2.6 per Mcf for steel and US$ 3.1 per Mcf for fertilizer production respectively. What a preposterous proposal! This way Tata has adequately confused the Bangladeshi authorities, perhaps at their asking. Terming the revised proposal 'the deal of a century' Tata group has asked Bangladesh to approve the said proposal by the end of June 2006, an unbearable arrogance expressed by a company. Some of us seem to have been overwhelmed with the three billion dollar investment proposal in four projects. What precise benefit the much talked about Tata investment will bring for our people and for our economy has not been assessed. This is precisely the point which must be examined as thoroughly as possible.
An economist's views
Tata's earlier investment proposal including gas price and spin off benefits has been examined by an economist, Professor Wahiduddin Mahmud. He expressed doubts about the Tata sponsored Economic Intelligence Unit's (EIU's) study on the benefits to be accrued as a result of the proposed investment by Tata. Dr Mahmud could not find many benefits as claimed by Tata in economic terms. Indeed, EIU's indication that Tata's investment will contribute to the enhancement of GDP by 1.9 per cent (approx) is a mere guess -- because it has not been substantiated. What is intriguing in the four-part article by Dr Mahmud published in The Daily Star is that it shows an ambiguity as to whether he has taken gas as an input to the final product or just what should be the gas price considering the prevailing gas price in the domestic market. There is however a general view that local company will face stiff competition due to government decision to provide gas at a subsidised rate to Tata.
Gas price
KAFCO, for instance, has tied the gas price with the international export price of fertilizer (at US$ 0.75 in 2001), but effectively pays US$ 2.55 in 2006. Petrobangla buys gas from Chevron (Unocal) or Cairn Energy at approximately US$ 2.70 per unit (Mcf) and it pays corporate tax on behalf of IOCs. When corporate tax plus transportation cost is added, per unit price of gas becomes US$ 3.50. The international market price (benchmark price with escalation clause) for gas ranges between US$ 5 and 8 per Mcf (highest in USA). Assuming even a US$ 5 per Mcf, the value of 2.14 Tcf gas (to be dedicated to Tata) would be US$10.7 billion. It would be foolish to expect that for a 3 billion dollar investment, the country is expected to dedicate US$ 10.7 billion worth natural gas at the prevailing international market price. As a second opinion, it may be considered that the pricing of gas may be based on overall benefit the nation may derive out of Tata's investment, based on total transparency.
If KAFCO is a baseline example, one cannot ignore that it is 43 per cent owned by the Government of Bangladesh and KAFCO is obliged to provide attractive dividends to the government for its investments. What is perhaps more important is the guarantee Tata sought for uninterrupted supply of gas for at least 20 years since the country's ability to produce and supply of gas is quite doubtful and the manufacturing units in Bangladesh are already suffering due to the supply of gas. How can Petrobangla ensure supply of the desired volume of gas (between 180 and 200 million cubic feet per day) for 20 years up to say 2030 (assuming the proposed plants will come into operation by 2010).
Reserves of gas and coal
Since 2001, a number of gas reserve studies and long term forecasts of gas use have been made in Bangladesh. Petrobangla forecast for a 50-year demand in 2001 is around 62.9 Tcf compared to the proven and probable reserve of 11 Tcf .
In 2002, the government sponsored National Gas Reserve Study and utilisation plan indicates that by 2015 the existing reserve of about 15 Tcf would exhaust. Consequently, by 2016 import of gas would become necessary. The latest study by Messers Wood and Macanzie as 'Gas Sector Master Plan' 2005 is based on a proven and probable reserve of approximately 13 Tcf. From their assessment, the existing reserve of gas would start to decline fast from 2012 and perhaps by 2018 it will deplete completely, if new fields are not discovered. Incidentally, the present reserve is entirely dedicated to home consumption, mostly for power generation. If an arrangement is made now to set aside about 2.2 Tcf of gas for Tata's use, the decision will be suicidal for the nation. The country can ill afford such a plan to be executed by Tata. If the government still insists to provide gas to Tata, the amount of subsidy would be approximately Taka 27,000 crore at the present price in the country.
Should Bangladesh opt for an imprudent decision?
Providing long term guarantee on gas supply depends on reserve estimation of gas. The official recoverable reserve of gas is expected to be exhausted within 2015 even without Tata plants. Consequently, there is a strong argument that the country does not have abundant gas to spare for a large consumer like Tata. Another argument that logically arises is that why the government should allow 90 per cent ownership of an asset like Barapukuria coal mine to Tata after 2011 for a petty 6 per cent royalty? Moreover, the residents of the prospective coal mining area are against open cast mining method. Above all, the people fear that if the Tata proposal is accepted, it would create a huge scope for plundering country's natural resources threatening the energy security.
What is the driving force?
Tata like any other international conglomerate has no special love for Bangladesh except that it happens to be a country close to their home base. But that does not influence the business decision generally made by a group like Tata. It is the availability of natural gas at a cheap price that has formed the crux of the issue. It goes without saying that Tata will not be able to set up a gas based sponge iron plant in India nor can it ship huge volume of heavy iron ore to another nearby country where they can get access to a large reserve of cheaper gas. Tata is also interested in securing alternative fuel like the availability of coal for the energy security of their proposed steel plant. Bangladesh with its gas and coal is offering an ideal place of investment, having low demand of steel. And with investors-friendly fiscal regime Tata feels that it is assured of unhindered export of steel and helping Tata for earning huge benefits therefrom.
If the investment proposal is examined closely, it will be seen that all income and expenditures are related to steel and fertiliser exports. The proposed infrastructure development in rail, road, port and other areas will be exclusively dedicated for Tata's export facilities. Bangladesh's share of the benefit will need to be seen with a magnifying glass or under a microscope. Compared to the propaganda of large employment opportunities of 24,000 persons, a few local labourers may be appointed at the construction phases because the steel plant is likely to be a modern and sophisticated one and turbaned skilled labours would probably fill in the plant locations during the operational period.
Golam Rabbani is retired justice of the Supreme Court, Nuruddin Mahmud Kamal is former Chairman, Power Development Board, SKM Abdullah is former Chairman, Petrobangla, Engr. Sheikh Mohammad Shahidullah is Convener, Oil Gas Coal and Port Protection Committee, Shamsul Alam is Professor, BIT Chittagong, Anu Mohammad is Professor, Jahangirnagar University, MM Akash is Professor, Dhaka University and Hossain Mansoor is Professor, Dhaka University.
