Indian industrial conglomerate Tata has recently submitted its revised proposal for the much talked about multibillion dollar mega projects to the Government of Bangladesh. This has been done to further advance the ongoing discussions and negotiations for narrowing the differences of opinion and help achieve meeting of minds towards logical conclusion of the largest ever foreign direct investment in Bangladesh.

Whether or not the parties can reach win-win agreements soon is a matter to be seen but various aspects of the investment proposal in entirety and the far reaching overall impacts of such an investment in an investment hungry fragile economy is to be viewed in proper perspective. National interests must be safeguarded at all cost. Long-term energy security must be seriously viewed. However, FDI of such a magnitude cannot also remain unresolved or cannot be subjected to protracted discussions.

International community is closely monitoring how Bangladesh is handling the signed agreements with AEC for open pit coal mining at Phulbari and negotiating the Tata proposal. Time is the essence. Any wrong step may give wrong signal and future probable investment may change direction towards Vietnam, Laos and Cambodia. We must be judicious in thoughts and statements to survive in the world of free market economy. Malaysia, Thailand, Singapore outpaced us from behind. Vietnam, Laos and Cambodia may overtake soon. Those countries possibly do not have so many non-performing cooks as we have.

It may be reiterated that Tata proposal comprises of setting up of
• 2.4 MTPA steel plant at Ishwardi, Pabna
• 1 MTPA urea fertilizer plant at Chittagong
• 475 MW power plant for captive generation for steel plant with a provision for evacuation of surplus power to National Power Grid.
• 6 MTPA open pit coal mining at Barapukuria, Dinajpur along with a 250-300 MW coal based power plant at mine mouth.

The proposed plants would require about 2.14 TCF of natural gas over the economic life. Guarantee for gas supply is however one of the major agenda of discussion and key to the success or other wise of negotiation.

Tata completed pre-feasibility studies engaging leading consultants and submitted comprehensive proposals to Board of Investment (BOI) early last year. The proposal primarily indicated among others;

• Make the largest FDI in Bangladesh ever at $3 billion US dollar.
• Make a major contribution to the industrialization of the country.
• Help achieve energy basket diversification through exploitation of coal resource.
• Embark on industrial development on a world scale in previously disadvantaged districts.
• Signal to the international investment community that Bangladesh is a serious emerging investment destination.

It may mentioned here that Tata made the proposal at a time when the law and order situation was dwindling and foreign investors were increasingly getting concerned and cautions for protecting their investment as well as new ventures. Bangladesh nevertheless responded positively and set up a high-powered national committee to examine review the proposal. Another negotiation committee and several subcommittees were set up to examine and negotiate the various aspects of the proposal.

Bangladesh economy is on the cross road due to highly uncertain energy supply situation. It does not have capacity to keep on subsidizing the energy supply to the agriculture and industrial sector in the wake of souring oil prices. The mono-fuel based energy generation is almost exclusively dependent on natural gas. Bangladesh does not have huge natural gas reserve to even support its own energy requirement for a long time. Moreover it does not have own capacity (financial and technical) to embark on aggressive exploration and development to expand its resource base.

On the backdrop of above, Bangladesh had to give serious view about dedicating 2.14 TCF of natural gas for proposed industries and had to seriously ponder over its long-term energy security. Economic pricing of gas in the context of volatile world energy market was another issue of concern.

Tata and GOB commenced negotiation in May 2005. The initial targets for achieving various milestones towards signing of agreements and launching the projects was highly ambitious in the context of all aspects of prevailing realities and implications of the mega projects. The changes of some key members of Bangladesh committee and various other preoccupations, difference of opinion on critical issues prolonged negotiations. However, after several rounds of discussions up to February 2006 the following issues were mutually agreed in principle.

• Gas quantum, tenure, broad take or pay terms.
• Site identification and land acquisition process.
• Infrastructure needs (railway communication) gas pipelines
• Urea sale to BCIC in US$ denominated IPP on ex-factory basis.

However, two sides could not come to any agreements about some of the major issues like
• Gas pricing and guarantee
• Fiscal incentives
• Coal mine lease

All development partners including World Bank, ADB are insisting on increase of gas price, which is heavily subsidized in Bangladesh for power and fertilizer. On the other hand the driving motive of Tata’s investment among others is the availability of cheap gas. In the above situation any gas price below economic price cannot be acceptable for Bangladesh. Providing long-term guarantee also requires deep thoughts as reserve estimation has not yet been properly done. The official recoverable reserve is widely believed to be exhausted within 2015 even without Tata plants. Common masses of Bangladesh including a section of civil society tend to believe that we do not have abundant reserve to spare for large gas consumers for longer period. Reservoirs Engineering is a highly technical and complex issue, which cannot be explained to common masses. However, one must appreciate Bangladesh still have large unexplored frontiers both onshore and offshore. Even the discovered structures have not been systematically appraised. As such the reserve figures that are being discussed is an educated guess. Due to small domestic gas market IOCs operating in Bangladesh are also not encouraged for aggressive exploration. Given the prevailing situation Bangladesh may not agree to dedicate 2.14 TCF of gas for proposed Tata plants over 15 years if it does not get the economic price of the same.

Any project anywhere has to have several risk elements for implementation and operation. In case of projects developed by foreign investors the risks requires to be shared between the investor and host country. In case of Tata projects the investor will absorb implementation risks, political risk, marketing risks and financing risks while host country has to bear the burden of fuel supply risks. Otherwise even the financing institutions will not take the lending risk of such mega projects. Financial closure without guaranteed supply of raw materials and fuel will not be done. From above it is obvious that gas pricing and guarantee of supply became the hotly discussed and debated issues.
Long-term lease of GOB owned Barapukuria coal mine is another element of debate.

The government has spent its fortune in Barapukuria coal mine and mine mouth power plant. The projects implemented on suppliers credit have now become a burden for the nation. Now GOB cannot let Tata or any other developer to own the asset on the basis of unsolicited offer without judging its economic value through international competitive bidding or any other appropriate method.

Fiscal incentives may be agreed in accordance with the same provided to IOCs and IPPs. Here the government can relax to some extent considering the magnitude of investment. As GOB and Tata differed on above issues Tata proposed to reassess and review its proposal and submit revised proposal reflecting and addressing the concerns and positions of Bangladesh.

It won't be out of place to mention that Bangladesh could not attract the same level of foreign direct investment as the other South, South East Asian countries. Thailand, Malaysia, Singapore have leaped forward. Even countries like Vietnam, Cambodia are also marching ahead. The proposed Tata plant, AEC's Phulbari coal mine development project can be milestones and can be the trendsetters. If we are too fussy and too conservative we cannot break the ice and remain stranded. In the age of free economy we will lag behind, as we do not have indigenous capacity to set up mega projects. Very weak public sector is about to crumble. But we must protect our national interest and should look before we leap. We must strike a delicate balance between our national interest and investors comfort.
The revised proposal of Tata, apart from addressing some of the above concerns, has included some additional benefits to Bangladesh and its citizen.

Subject to contract, board approval and subject to all requested fiscal incentives Tata proposal stated the following;
• Joint venture with Petrobangla company for Barapukuria coal mine.
• Revisions to power generation proposal.
• Corporate social responsibility commitment.
• Multilateral agencies participation.
• Equity participation.
• IPO intent.
• Gas security revision
• Gas Pricing revision.

Open Pit Mining Proposal Of Petrobangla Owned Barapukuria Coal Mine
For coal mining Tata offered joint venture (JV) with Petrobangla (90:10). Tata will arrange 10 percent financing of Petrobangla also. Tata has proposed to develop 6 MTPA open cast mine at Barapukuria. It has proposed not to disturb existing underground works during the tenure of the existing contract (up to 2011).

Now the question will logically arise why Petrobangla and GOB would allow 90% ownership of an asset exclusively owned by Bangladesh. It is a discovered mine. It is being exploited utilizing all together a different technology of mining and government is bearing a huge investment for coal mine and mine mouth power plant. The costs in any case won't be recovered within 2011. Tata proposal is not also explicit as to how the sunk costs will be taken care of. Various other mining companies may come up with more attractive proposals if arrangement for competitive bidding can be made.

The government is hesitant to give go-ahead signal for open pit mining to Asia Energy for the adjacent Phulbari mine, which has properly signed agreement with government. How and why GOB will entertain unsolicited offer of Tata for coal mining at Barapukuria. The real economic value of the mine must be ascertained through ICB or Swiss Channel before venturing for entering into any such agreement with Tata. Coal mining propel may be dealt with separately as Tata has no major risk and stakes in the mine.

Tata has proposed to set up basically captive power plant utilizing natural gas within the premises of steel plant. The plant will have redundancy, which can be utilized by BPDB either as base load or peak shaver. Tata also proposed for setting up the coal fired power plant to 250-300 MW (depending on plant configuration). However, there will be provision to increase capacity to 500 MW.

Unbundling of Coal Mining
We strongly opine that coal mining has to be considered in isolation as setting up of fertilizer plant, steel plant and development of a already discovered and under operation coal mine can not be considered in the same package. BHP and later on AEC has been working in the vicinity for the last few years under an agreement with GOB. If they build coal fired power plant there won’t be further requirement of additional power in this region. Coal based power is relatively expensive. The government should be extremely careful about fuel mix for power generation. Can this power be evacuated to national grid? Any way as we are not convinced in principle to award a Government owned asset to Tata without any competitive bidding. We would prefer not to elaborate the coal mining or coal based power generation at this stage.

Equity Participation
The most striking feature of the revised proposal is to offer up to 10 percent of equity of each project company to GOB at par and to provide for placing of equity on the Dhaka / Chittagong stock exchange subject to market conditions. The extent of equity to be made available on the stock exchange can be up to 10 percent of each project. These offerings are definitely welcome shift of strategy. There can be further discussion on the limit of equity offered. But the equity participation of GOB and people of Bangladesh would give sense of ownership and participation in the mega projects. Tata would arrange financing of 10 percent equity offered to GOB in every project. However, the modality of equity participation, risks and liabilities need to be carefully examined by competent professionals and economists. We recommend that 25 percent equity should be offered to GOB and in phases another 20 percent should be let out to stock exchanges if they have capacity.

Supply Security
Revised proposal includes revision of period of gas supply security. GOB now has to guarantee uninterrupted gas supply for 15 years for fertilizer and steel plant. One must realize that any financing institutions while assessing any project for long-term loan will evaluate the risks and mitigation modalities. Tata will bear the investment risk, implementation risks marketing risk, political risk, country risk etc. Bangladesh as a host county logically has to bear fuel supply risk. But one must also realize given the present level of recoverable reserve of natural gas and limited indigenous capacity for new exploration Bangladesh is hesitant to give long term supply guarantee. But when demand will increase significantly with the commissioning of Tata plants IOCs will be encouraged to embark on aggressive exploration campaign which in all probabilities will enhance reserve base. Providing gas security supply should not bother Bangladesh.

Gas Pricing
Another important point of discussion is the gas pricing. There has been lot of discussion regarding international price of gas, economic price of gas etc. The existing gas price is highly subsidized for power generation and fertilizer production in Bangladesh while worldwide gas price is indexed with liquid petroleum. In market economy gas pricing is deregulated. In USA, Canada, Europe and South America gas price varies day to day and even during the day as gas is considered a merchandised commodity. It’s true that Bangladesh has not arrived at that matured stage. But Bangladesh has advanced to some extent in one aspect related to neighboring countries. We have an Energy Regulatory commission (ERC), which among others is mandated to determine energy pricing. We wonder why GOB should not leave the matter of determining gas and power pricing of Tata projects to ERC as this is their exclusive domain. This can be considered a double standard.

Tata revised gas pricing proposal has a product linked two part gas pricing formula (based on Urea and HR coil), floor and ceiling pricing levels. Gas pricing will vary in the range of $2-$4 / MMBTU. However, for initial period (years 1-6) floor price according to the proposal of Tata is $ 1.50 / MMBTU on careful scrutiny of present urea and steel market prices it appears that gas for fertilizer may have a price of $3.10 / MMBTU and for steel may be $2.60 / MMBTU. The revised pricing proposal is definitely more attractive than original proposal. But the floor price as low as $1.50 / MMBTU merits review in consideration of international price.

The GOB cannot subsidize gas supply to Tata plants. One has to take into consideration the wellhead price of Chevron and Cairn supplied gas, depletion premium, transmission cost for determining the end users price to Tata plants. Millions of dollars will be required to spend to develop gas supply infrastructures for Tata plants. While GOB will provide gas supply security for a long term it must get the economic price of gas. The floor price of gas must not be less than $2.50 / MMBTU and must the revisited every three years depending on gas price. Ceiling price can be $6 / MMBTU. Tata will be exporting fertilizer and steel products and earn dollars or Euro. As it has proposed to link gas price with product it must pay gas price in dollars. Gas for captive power should be priced as applicable for other captive power while gas for power generation for PDB must be priced as applicable to IPP.

Commitment to corporate
Social Responsibility (CSR)
The revised proposal has elaborated a defined CSR strategy focused on a particular need
• Set up a Tk 4 crore Chemical Fertilizer Technical Training institute and Farmers Training Center in proposed fertilizer plant complex.

This institute will help develop human resource and should be welcome by any sensible Bangladeshi. This will ensure sustained effective human resources for agricultural development and operational efficiency of fertilizer plants. Tata has also proposed to set up a Technical Training institute to train about 100 apprentices every year in steel technology. The trained technicians will be come assets and wage earners. Tata has also proposed to set up 100 bed modern tertiary hospital in steel project and 50-bed hospital near their proposed coalmine. Tata township facilities will be available to surrounding community.

Multilateral Financing
Tata proposal indicated that ADB in principle is willing to finance infrastructural upgrade (Gas Pipeline, Railway) while the World Bank considering IDA credit under development policy lending program. IFC expressed interest in participation in financing.

The mega investment proposal of Tata has several bright aspects. The world community is closely monitoring the development. Continued delay in decision-making may act as deterrent for other probable foreign direct investment. Development of mega project involves multiple risks. In a country like Bangladesh any major investor undertakes detail homework prior to tabling proposal. Political uncertainty, law and order situation, governance issues, raw materials and fuel supply, communication infrastructure, fiscal incentives, market (host country & abroad) play vital role. Finger print industries of Tata proposal if implemented can have multidimensional impacts. It may in directly play role in improving law and order situation. Bangladesh does not have iron ore .It will have access to world quality steel products. Export basket will be enriched; balance of trade with several countries will tilt towards Bangladesh. Following the footprint more investors may follow. Bangladesh will enter into new phase of trading.

Gas pricing appears better than before Tata may be asked to further revise floor and ceiling price to US $ 2.5 and US$5.00 respectively. Gas price must be in US dollar as it is linked with export price of end products, which will be traded in dollars. Bangladesh domestic market must get preferential price. Barapukuria discovered mine should be isolated and dealt separately. It may either be let out for open tender or through Swiss channel the real economic value should be assessed and Tata may be asked to match that. The question of recovering the huge investment already made must be resolved prior to any possibility of letting out on lease.

However the revised position of Tata is much more positive and may be aggressively negotiated to arrive at logical conclusion of win- win position of both parities. One must not forget that Bangladesh must have large scale FDI to compete in free market economy. We should not be over conservation and fussy. Such mega projects are to be viewed in entirety in the context of over all economic social and political impacts.

Tata investment will open up further investment and the country may frog leap to survive in the open market economy. However it depend how it is finally shaped. Whether Tata investment culminates into sweet or sour or hot curry for the promoters.