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Bangladesh and the TATA Investment: Playing Politics with Economics

Smruti S. Pattanaik is Research Fellow (SS) at the Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile
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  • May 11, 2006

    The TATA investment of US$3 billion in Bangladesh, by far the largest foreign investment in the country, has run into rough weather over the pricing of gas. Dhaka rejected Tata's initial 2004 offer of $1.10 per unit of gas to be supplied over a twenty-year period, seemingly favouring the price to be at par with international prices. As per the new proposal submitted in April 2006, the price that Tata has offered is $3.10 for thousand cubic feet (MCF) of gas for its fertiliser plant and $2.60 per MCF for its proposed steel plant. Bangladesh had agreed in principle in 2004 to guarantee a 20-year supply of natural gas for the Tata projects, which include: a 1,000 megawatt gas fired power plant and a 500 megawatt coal fired power plant, a one million-tonne per year fertiliser plant and a 2.4 million-tonne steel mill in Ishwardi to produce Hot Rolled Coil and other basic steel items. Though Bangladesh has steel mills worth Rs. 2000 crores, none produces basic steel. The steel plant to be established by the Tatas would have an initial capacity of 1.2 million tonnes, and it is likely to double in the subsequent two years.

    The total foreign investment in Bangladesh between 1971 and 2004 amounts to just $3 billion. Yet, Bangladesh has been extra cautious about the Tata investment. The issue has generated greater interest in the country not just because it is the largest foreign investment to be proposed but also because the investment is coming from an Indian Industrial giant. To forestall any politicisation, the Indian government has clearly mentioned that it does not have any role in Tata's investment plans and that it is for the industrial house and the government of Bangladesh to agree between themselves.

    The Tata investment proposal has also become linked to the estimated gas reserves in Bangladesh. Dhaka has been extremely reluctant to trade gas with India and one reason it has in the past articulated for this is that it does not have enough for itself. Now the decision to supply gas to the Tatas over a twenty-year period at a fixed price is leading to unnecessary apprehensions. Given this being an election year; the government does not want to run into any major controversy.

    In the current proposal the Tatas have offered $3.10 per MCF for the fertilizer project and $2.60 per MCF for the proposed steel plant. To run all three plants, including a power plant, the Tatas would require up to 600 million cubic feet of gas per day. At the same time it has also promised a 10 per cent equity stake for the Bangladesh government in its proposed investment. These shares would be available in the local stock market. The company is also examining the possibility of producing electricity from a coal-fired plant. Bangladesh has proven reserves of 64 million tonnes of high quality coal at Barapukuria. The proposed steel plant would consume 400 MW, which would be fed by the Tata's coal-fed electricity plant, while the rest of the electricity would be transmitted to the national grid. The Tatas have also revised their previous stance on the issue of gas supplies, and are now seeking assured supply of gas till such time they pay back the loans obtained for setting up these plants.

    Initially, the Bangladesh government had sought the help of donor agencies to set up a gas pipeline and power transmission line. The Tata group has also held talks with the donor agencies regarding its investment in Bangladesh. There has been significant pressure exerted on the Bangladesh government by donor agencies as well as by multinational corporations involved in gas exploration to export gas since there are not enough domestic consumers in the country. By building gas-based plants like those proposed by the Tatas, Bangladesh hopes to deflect such pressure from the donor agencies. At the same time, the donors are urging Bangladesh to generate its own resources for developmental purposes and selling gas is one way of raising resources.

    Because of the politicisation of the gas export issue, the BNP, which has been inclined to deal with the issue in a positive manner, has not taken any measures regarding gas exports. Two prominent steel industry associations - Bangladesh Steel mill owners and Bangladesh re-rolling Mills association - have threatened to go on strike from May 31 if the Tatas are given long-term guaranteed gas supply. These mills produce cold rolled steel and feel threatened by the Tata's prospective presence. They have already been assured that Tata will produce hot-rolled steel, which these companies are at present importing from the international market.

    There are indications that the government is having second thoughts on the Tata investment proposal and the tone and tenor of recent government proclamations do not suggest a spirit of accommodation. It is, however, important to note that the Tata investment proposal sends a positive signal about the investment climate in the country in the wake of the series of bomb blasts on August 17, 2005. According to a World Bank report, Bangladesh badly needs foreign investment to attain a reasonable rate of growth. Though the government of Bangladesh has always taken a 'political' decision on economic matters concerning India, the Tata proposals should be perceived as a private sector investment in which commercial concerns are dominant. Therefore a 'political' decision by Dhaka on the issue would not be prudent.

    The enthusiastic spirit with which the government had welcomed the Tata proposals has gradually acquired a political tenor. This is not to argue that the government of Bangladesh should not protect its own interest. But at the same time it needs to leave room for further negotiations in the spirit of give and take. If the BNP government does not sign the deal for political reasons it would raise the ante and prevent other political parties from taking up the issue in future. And this would be a repetition of the approach both major parties have adopted towards gas exports and the issue of transit to India. The familiar line of "sell out" is suicidal for the survival of political parties that feed on anti-India rhetoric. The logic that seems to be working against the Tatas is the Indian tag and not so much the issue of gas pricing.