Sunday, October 17, 2004

Bangladesh: TATA - A "Deal" not worth the paper it was signed on

It would be a misnomer to call it a 'deal' because no deal has been concluded. India's Tata group signed an Expression of Interest (EOI) which is lower in importance than a declaration of intent, not to speak of a memorandum of understanding. The adrenaline can still be expected to run fast, quickening its pace. The issue that will become moot is the price at which gas will be sold to Tata group. With KAFCO at the back of their minds, Bangladeshis will be anxious to know whether another sell-out of their national asset is going to be repeated. Already concerns have been expressed on this account. The popularity and acceptance of the whole venture will depend on the terms and conditions under which gas will be sold.


The Tata 'Deal'


It would be a misnomer to call it a 'deal' because no deal has been concluded. India's Tata group signed an Expression of Interest (EOI) which is lower in importance than a declaration of intent, not to speak of a memorandum of understanding. But the significance of the visit by the head of India's second biggest industrial conglomerate and the EOI signed cannot be missed or minimised. On several counts, it has been a milestone in the development efforts made by the country, particularly in attracting foreign capital.

The Tata group's $2 billion investment proposal is the single biggest overture made by a single foreign investor in Bangladesh in the DFI sector. The proposal includes setting up a $700 million basic steel industry to produce 2.4 million tons of hot rolled coil and other basic steel products, setting up a 1000 MW power station in two phases and a million ton capacity fertilizer factory. The Indian Industrial heavy weight's expression of interest in direct investment is a number of enterprises all at a time and as part of a package should send a favourable signal to potential foreign investors about investment climate in Bangladesh. For much too long, critics and cynics alike, both Bangladeshis and foreigners, have pooh poohed the prospect of Bangladesh as an attractive haven for foreign capital, particularly for long-term investment. A litany of unfavorable factor comprising the investment climate has been repeated by them add nauseum, denigrating the status and performance of the country in its
industrializing efforts to scare away foreign investors. Of course, the prevailing climate is not the best available in the world, but neither it is the worst. Many of the problems are well known and constant pressure is being brought to bear on their resolution or attenuation. The obstacles that hobble investment in Bangladesh are not intractable nor inevitable. With political will and commitment these can be addressed successfully. When a government invites and welcomes a world renowned industrial group, it means business. It can be expected that the needful will be done by way of improving infrastructures, law and order, provision of utilities and minimizing red-tape. The oft quoted issue of 'transaction cost' can also be expected to be met head on. The fallout from these measures are likely to have a favourable impact on a wide front. So the significance of Tata's EOI is not only that they are satisfied with the prevailing investment investment climate but also its impact on the climate through subsequent interactions with various Bangladeshi regulators and services providers.

The second important significance of investment proposal by Tata group is fmding a way out of the impasse reached over export of gas. The sentiment against export of our only valuable mineral resource has been strong and public in general are very much opposed to export either to India or elsewhere. The previous government added the caveat that gas export could be considered after meeting the requirements of the country for the next 50 years. The present government set up two committees one of which came up with the recommendations that gas could be exported if new reserves were found. While both governments found themselves in a delicate situation, the pressure for export mounted from the side of donors and countries whose oil companies were involved as lOCs in Bangladesh. The Tata proposal has turned the debate on its head. Gas will not be required to be exported through pipe line or as LNG. It will be used domestically as raw materials to produce goods and power that will be used in Bangladesh first and after meeting local demand, exported abroad. The argument and rationale appear unassailable. The xenophobic feelings can now be set at rest, more or less.

The adrenaline can still be expected to run fast, quickening its pace. The issue that will become moot is the price at which gas will be sold to Tata group. With KAFCO at the back of their minds, Bangladeshis will be anxious to know whether another sell-out of their national asset is going to be repeated. Already concerns have been expressed on this account. The popularity and acceptance of the whole venture will depend on the terms and conditions under which gas will be sold.

The projects proposed by the Tata group will reportedly consume 200 mmcfd gas as raw materials in the first phase of operations. When the entire project is in full swing they will require about a third of the daily production of Bibiyana gas field which will run at full capacity of 600 mmcfd by 2008. The 450 MW gas fired power plant alone will consume about 62 mmcfd of fossil fuel. The demand and supply for gas has to be carefully analyzed and this has to be made in a dynamic setting. The future requirement of Bangladeshi industries and households should have priority in respect of meeting demand. Projection of this demand has to be done with all seriousness and availing of all technical data and expertise. If a mistake is made and local industries and households have to suffer, the repercussion will be severe. Not only the governments popularity will be threatened, the bilateral relations between the two countries may suffer a serious set back.

It is reported that in the EOI the Indian conglomerate submitted a wish list which included guarantee for smooth supply of gas for 20 years and a competitive price for gas. it is obvious that their investment proposal largely, perhaps exclusively, hinges higher on these two issues. The Finance Minister has reportedly said that smooth supply of gas for 20 years as sought by Tata will not be a problem as similar commitment was made to French Cement Company Lafarge. The requirement of gas for the Tata group being much more and over a longer period, the cases are very different and as such the implications should be worked out meticulously with the best of technical rigour. It should be remember that in the case of KAFCO gas had to be supplied to it as a contractual obligation even reducing gas to our own industries. According to recent reports gas supply to export-oriented ceramic industries has dwindled so much that their foreign exchange earnings will be drastically reduced. The issue of gas supply is an intricate one and very technical in nature. There is little room for making facile statements. A hardheaded negotiation should be on the cards.

Like supply, the price of gas is also a sensitive issue. But it is not, at least it should pot, be a complex issue if the prevailing international price, and the trend in future is kept into account. In no case a fixed price valid for the entire project period can be agreed upop. The Tata officials reportedly enquired about gas price rates at which gas is supplied to independent and state-run power plants and also to fertilizer plants including KAFCO. The government told them that the matter would be decided by the Energy Regulatory Commission and in the light of the government's gas policy. Whatever the criteria and consideration ~knit precedents, the international price and its future trend as projected shoul4 projected should be given utmost consideration.

Meanwhile, questions have been raised by local re-rolling mills and steel mill owners about marketing of steel and iron products and melted scrap products (excluding sponge iron) in the local market. They are particularly opposed to allowing Tata group to produce HR (hot rolled) coil from the first stage of iron ore as the steel industry manufactures in Bangladesh are making rod and steel products covering the four stages, starting from iron ore stage to steel casting stage. If Tata is allowed to make the products on the basis of the same process, local mills may not survive competition because of economies of scale enjoyed by Tata. The issue raised should be given serious consideration during negotiation. As a result of faster trade liberalization than India in mid Nineties a good number of industries have already suffered. There is every reason to be cautious before commitments are made about product range for which there is local capacity.

Ratan Tata reportedly said 'we want to play an important role in the development of the country and we are not here to exploit resources.' Bangladeshis would like to take him at his words. But deeds will also matter.

New Age 17/10/2004