What can we say about a gas supply contract with Tata on the basis of the above analysis? Overall, the present price of gas for industrial use ($2.35 per mcf) does not seem to be highly misaligned from its true economic price; but it will need to be continuously adjusted upward if the estimates of gas reserves and the projected demand-supply scenario for gas remain unchanged. If the government commits to a gas price policy in which the price of gas will be revised from time to time keeping in view the gas reserve position and the projected cost of importing alternative energy, Tata may be offered gas at the prevailing price for industrial use. Or, such a price policy may be formulated for FDIs only (since the benefit of subsidy to local producers stays home) or for industries in which the use of gas as a proportion of value-added is higher than a certain level. There will then be no need for making special price deals with Tata for gas sale.

Tata wants some kind of guarantee for assured gas supply during the life of the project. This is problematic in many respects. What happens if the country runs out of gas? For understandable reasons, Tata would like to ensure that it is not discriminated against at times of temporary gas shortages or supply disruptions. The rationale behind Tata's proposal lies in the belief that new gas reserves will be discovered (or coal will be available as an alternative energy source) so that no genuine gas shortage will appear during the lifetime of its proposed projects. To the extent that there is a risk of that belief not proving correct, that risk should be fairly shared by both Tata and Bangladesh. One possible formula for that may be to estimate the proportion of the country's total gas supply to be used by Tata at the beginning of its going into full production and ensure that Tata will continue to have a claim of that share at the minimum. In that way, as long as gas production does not decline, Tata will have nothing to worry. But there may be other workable formulas as well.

To create investor confidence under gas pricing and sale arrangements as discussed above, the gas exploration efforts must be strengthened. There is a problem in depending on the IOCs entirely for gas exploration. There is a large gap between high and low projections of domestic gas demand. The IOCs will tend to plan their exploration and gas-field development activities keeping in view the low demand projection, since they would like to be sure about getting quick returns from their investments through full-capacity production from the discovered fields. For this reason, it is important to strengthen the domestic capacity for gas exploration.

The implication of coal mining
There now seems to be a possibility that domestically mined coal may provide an alternative to gas as a source of energy. The availability of coal can lower the economic price of gas by deferring the projected date of gas exhaustion and also by providing an alternative to gas even before that date. Much will depend on coal production projections, the pattern of use of coal and the estimates of recoverable reserves. There will be a need for a comprehensive energy policy for making decisions regarding the use of gas and coal as competing sources of energy. A discussion on this would be premature for the time-being, given the many uncertainties regarding the economic feasibility of coal mining and the likely volume of production.

Indirect benefits and costs
As indicated earlier, the investments may generate indirect or economy-wide benefits by providing balance of payments support and by boosting production in other sectors through the mechanism of forward and backward linkages. Some likely caveats in estimating these benefits were also mentioned earlier. Unfortunately, by ignoring these caveats and lacking any credible analytical framework, the EIU report ends up making exaggerated and unsubstantiated claims about these benefits. This diminishes the value of the report, since it is these indirect macroeconomic benefits that are mainly dealt with by the report. This is not to ignore some substantial indirect benefits (as well as some costs) that may genuinely arise as a result of these investments.

The EIU report estimates that the additional electricity generating capacity of 500MW (in addition to captive power for the steel mill) will translate into 0.1-0.2 percentage point higher GDP growth. In addition, the direct contribution to GDP would be equivalent of 1.9 percent of nominal GDP annually, which in turn would lead to even higher GDP through an estimated "multiplier" of around 1.5. The multiplier of 1.5 is meant to imply that the expected annual gross sales of about $1.8 billion from Tata's operations will lead to additional production worth about $800 million per year through the purchase of inputs.

Attributing the above benefits to Tata's operations is based on rather naïve assumptions. The "multiplier" effect (that is the spill-over effects of the investments working through demand linkage) is estimated in the report by a simple-minded application of the so-called input-output analysis. As mentioned before, much of this multiplier effect cannot be attributed as additional contribution of Tata's investments towards GDP growth, since the expansion of production activities in an economy like Bangladesh is generally constrained by lack of inadequate production capacity rather than by demand deficiency. As regards the direct impact on the economy, the report refers to GDP instead of GNP or GNI, and thus ignores the all important issue regarding how much of the value-added generated will be repatriated as profits. Curiously, this is also ignored while assessing the impact on the balance of payments.

There will be of course some demand-driven expansion of activities in sectors where employment can be created with very little investment in fixed capital. Such employment will be mainly in service sectors such as the employment created in and around the township that will grow around the steel mill. The quantification of employment and incomes generated in this way will require a much more discriminating application of the input-output analysis than is attempted in the EIU report.

Tata's operations will create demand for infrastructure provision than can in fact lead to costs to be incurred by the government instead of being a source of large indirect benefits as claimed by the EIU report. In particular, there will be an increased demand on railway transportation for the import of iron ore and the export of steel and coal. This will need substantial investment in railway infrastructure, along with improvement in management efficiency to ensure that such transportation does not incur losses for the government. The viability of the investments will also depend on the tariffs charged, given the fact that the public transport system, including railways, are heavily subsidised in Bangladesh.

The benefit from steel production will in fact come more from forward than backward linkages. Tata's project will produce about $1 billion worth of steel annually, 75 percent of which will be exported after meeting the country's entire domestic demand. Because of the shift from the current import regime to an export regime, the domestic price of steel will be lower; since it will be related to the export price rather than the import price. There are a whole range of industries and construction activities that will get a boost directly or indirectly from the cheaper supply of steel, and the benefit will increase with the growth of steel-based industries in the country. Although some existing facilities for steel production, mostly from scraps, may be adversely affected, this will be much more than compensated by the benefit.

A major benefit from Tata's operations will be the balance of payments support provided through net exports (estimated at $628 million annually) and import substitution of ($300 million annually). The extent of net contribution to the balance of payments will of course be much lower because of the repatriation of profits; and it will also depend on whether the proposed investment package is fully implemented or some components are left out.

Land acquisition
The implementation of Tata's proposed projects will need land acquisition and resettlement of residents and the construction of road links to the plants. Agreement will be needed about how Tata proposes to pay for the costs involved. While Tata has proposed to buy the land at market prices, an alternative would be for the government to incur the entire costs and to recover it through renting or leasing the infrastructure to Tata. Land being the scarcest resource in Bangladesh and as it becomes even scarcer with the growth of economic activities, land prices tend to increase quite rapidly in real terms. Thus, buying land and even keeping it idle may prove a profitable investment. The sale of land to foreign investors could thus lead to windfall gains to them at the time of winding up the investment project.

Conclusion
Detailed data on the project profile are required for a more rigorous evaluation of the project, component by component. On the face of it, the steel-power complex appears promising, since it combines the advantage of the availability of iron ore and energy resources in India and Bangladesh respectively; however, many strategic issues need to be resolved, particularly regarding infrastructure provision, land acquisition and the feasibility of coal mining. The issue of gas pricing is the key to the determination of Bangladesh's net economic benefit from the investments. In fact, the economic viability of the fertiliser project may depend largely on subsidised gas supply, particularly when the investment returns need to cover the country-risk factor as perceived by the foreign investor. In making a decision, any subsidy in gas pricing must be compared with the estimated benefits from the investments. [Concluded.]

Wahiduddin Mahmud is a renowned economist.