Reviewing two facts about the KAFCO project will illustrate the serious mistakes made by the Ershad government in negotiating deals with the foreign companies involved.

Fact #1: Irregularities made the KAFCO project set-up extremely expensive for the Bangladesh Government but lucrative for foreign shareholders

The KAFCO project was intended to produce fertilizer from natural gas and export it for a profit. These profits were to be divided between the shareholders, the largest of whom were the Government of Bangladesh (which owned 43.4%) and Kafco Japan Investment Co. Ltd. (KJICL, which owned 31.3%). KJICL was owned by two large Japanese companies, Marubeni and Chiyoda. The project was originally supposed to cost $500 million.

Chiyoda and Marubeni were appointed as contractors to supply equipment for the KAFCO plant. These contracts were awarded without a competitive tendering process. As the largest shareholder, the Government of Bangladesh should have insisted on a competitive tendering process to ensure acceptable quality at a reasonable price. It was irresponsible of the Ershad government to allow the equipment purchase to proceed in the absence of such a process.

It is a matter of record that Marubeni and Chiyoda did not supply acceptable equipment. Equipment was imported from Romania and Italy and allegedly was so substandard that the plant did not function properly when it commenced production in 1994. It actually failed its performance test in 2005. Chiyoda (as contractor) was obliged to pay KAFCO $30 million in compensation for production losses. However, it should be noted that KAFCO's estimate of production losses caused by failure of substandard equipment was $78 million.

The fact that the plant was both substandard and overbudget makes us suspect that perhaps Marubeni and Chiyoda knowingly supplied substandard equipment at an inflated price. The plant finally cost $632 million, far more than the original budget of $500 million. Even $500 million is considered high compared to the cost of the comparable Jamuna plant. Hence there are ample grounds to suspect that the equipment was significantly over-invoiced.

We often think of foreign investors as saviours who will create jobs and transfer technology to Bangladesh. However, the KAFCO set-up fiasco suggests that some foreign investors come to Bangladesh in search of a deal which will allow them to loot public funds. Perhaps the Ershad government, in its desperation to attract foreign investment, agreed to such a deal.

Fact #2: Though we are still subidising KAFCO we are not getting a fair share of the sales revenue.

The Ershad government committed us to selling gas to KAFCO at a price that was lower than the price paid by any other consumer in Bangladesh. The annual subsidy to KAFCO in the form of underpriced gas is estimated at about US$18.5 million every year. In January 2003 it was estimated that $120 million had already been paid by the government to KAFCO in the form of gas subsidy.

The original idea was that the government would be compensated for the subsidy by its share of KAFCO profits. Unfortunately, these profits have never materialised. KAFCO made losses continuously for the first few years of operation (not surprising for a company forced to live with sub-standard equipment). In 2000-2001 and 2001-2002 KAFCO made profits of about $5 million. This is far less than the value of the gas subsidy ($18.5 million every year).

There is, however, another significant reason why KAFCO is not profitable. The off-take agreements signed by the Ershad government force KAFCO to sell all its fertilizer through two companies: Marubeni (again) and Transammonia, an American company. The sales are made at international market prices, but KAFCO is required to pay Marubeni and Transammonia a commission of 2 to 5 percent on every sale (even on fertilizer sold to the Government of Bangladesh).

Chemicals like urea are commodities which have a ready market. It was completely irresponsible of the Ershad government to give permanent sales agent status to any company. Instead, KAFCO's products should have been sold to the highest bidder though a transparent periodic auction process. The commission of 2 to 5 percent to Marubeni and Transammonia could have been avoided. That would have made a huge difference to KAFCO's profitability.

The sales arrangement created a fundamentally unfair way of sharing out the sales revenue. Marubeni (a minority investor) gets a commission on the sales revenue whether or not KAFCO makes a profit, and is also entitled to its share of any profits. On the other hand, the Government of Bangladesh (the majority investor) gets nothing unless KAFCO makes a profit. The gas subsidy given by the Government of Bangladesh to KAFCO is in fact ending up in the bank accounts of Marubeni and Transammonia through the mechanism of the sales commission. After deducting this commission it is unlikely that KAFCO will ever make enough profit to compensate the Government (through dividends) for its gas subsidy.

The Government of Bangladesh should never again commit itself to subsidising gas for any project (whether foreign owned, locally owned, state owned or privately owned) for an indefinite period of time. If a subsidy must be offered to any foreign investor, it should be a subsidy of a specified amount to be paid over a specified period. The Ershad government should have stipulated that subsidised gas would be offered for (say) five years or until a total subsidy of (say) $100 million dollars had been paid. However, as no such stipulation was made, KAFCO will continue to run (fattening Marubeni and Transammonia at the expense of our valuable gas reserves) for the foreseeable future.

Conclusion
Prospective investors, whether Bangladeshi or foreign, see Bangladesh is a country with three things going for it: Cheap labour; A population of over 120 million potential customers; Cheap natural gas.

Genuine business houses like Grameen Phone and Unilever feel that these factors are good enough to justify large investments in Bangladesh. They have proven that it is possible to do business here without subsidies. Why, then, should it be necessary for our government to offer subsidised gas to any foreign investor?

We all want big companies like Tata to invest in Bangladesh. But the precedent of KAFCO proves that it would be irresponsible of any government to guarantee perpetually subsidised gas to any project. If a carrot must be offered to Tata to close a deal, why not offer a free gift of land instead?

Most of the facts about KAFCO in this writeup are from the paper: "Corruption and the UK Export Credit Guarantee Department" by Dr. Susan Hawley, June 2003, published by The Corner House, a UK based research and advocacy group, and can be found at the website: http://www.thecornerhouse.org.uk