Further, considering the size of the steel mill, 480,000 tons per annum, it is not a strategic investment. No country in the world will extend sovereign guarantees for energy supplies to such a project with most of the products to be exported, as there are few downstream industries in the country to consume it. The size of the plant is too small and the gas based route is inherently costly making it globally uncompetitive.

As a steel industry professional, my interest is on the route selection Tata has adopted in its investment proposal. From the size of the power plant, 250 MW, and the small steel-making capacity, it is probably a sponge iron or Directly Reduced Iron (DRI) plant linked to an Electric Arc Furnace (EAF). This is known as DRI-EAF route where the cost of production is inherently high.

On the other hand, around seventy percent of global steel production is through the coal based Blast Furnace (BF) and Basic Oxygen Furnace (BOF) known as the BF-BOF route. The rest is through recycling of ferrous scrap, using high-powered Electric Arc Furnaces (EAF) coupled with casting machine. Investment-wise this is the cheapest route. The drawback is ferrous or steel scrap is a scarce commodity and tends to be consumed in regions where it is generated. It is natural that the industrialized nations generate and consume most steel scrap. Only about 5% of global steel production is through the DRI-EAF route, which TATA seems to have opted for.

The investment in a BF-BOF route is 3 to 5 times higher for the same capacity DRI-EAF plant and the economies of scale dictate that such plants have a capacity of at least 1 million tons per annum (tpa). By contrast, the economies of scale for a DRI-EAF based plant is somewhat lower, but the cost of production is nearly twice that of a coal based plant.

In fact, Tata's Indian steel plant uses the coal-based BF-BOF route. Tata does not have a single gas-based plant anywhere in the world. Gas-based DRI plants are concentrated in regions of the globe where there is plenty of natural gas as an off-shoot from oil production, mainly in the Caribbean region, Venezuela, and in the Gulf countries. In India, Essar in Gujarat has a gas-based DRI plant and downstream steel plant as well. The gas is piped from the off-shore oilfield of Mumbai to the iron ore mines.

Pumping gas to an iron ore mine is inherently less costly and more efficient then bringing iron ore to the gas source. The arithmetic is simple. Three tons of iron ore yield one ton of finished steel.

Therefore, there are 3 inherent disadvantages in the steel plant proposed by Tata: 1) The small capacity of the plant. 2) Inherent high cost of production in a gas-based over a coal-based plant. 3) The high cost of transporting the ore instead of piping the gas. All these diseconomies have to be compensated by lower gas price to make the investment viable.

In a hypothetical scenario, if we had huge proven reserves of gas and bad politics was out of the way, the proposed plant could have been somewhere near Tata's iron ore source, in India, and we could have charged a better price for the gas and earned foreign currency as well. This is plain good business sense. This is how Russia has successfully modeled its gas industry by exporting gas to Europe.

Even if our gas reserves are as large as the most optimistic projections; for a nation of 150 million people which needs to feed itself by intensive farming, nitrogenous fertilizer production, not steel production, will always be a strategic industry. As global energy prices are set to rise inexorably in the long term, it is obvious that we will have to use gas for fertilizer and as a substitute for imported crude oil. Any other use will be suicidal for this nation. Even power production should have a secondary consideration as we have good proven reserves of coal. Further gas, like crude oil is a finite natural resource.

In the absence of any market forces in the nation's petroleum sector where the price of gasoline and diesel is kept ridiculously low, gas as a substitute fuel is also priced below its cost of production. With market forces in play, gas would have displaced imported petroleum fuel and prices would have rationalized along purely demand, supply and cost considerations. Current pricing and subsidy has encouraged a roaring trade in petroleum smuggling across the border.

Markets, not esoteric economic theories, should determine energy prices. Had the energy market been free of any state intervention, Tata would have never broached the issue of gas pricing. In attracting FDI, governments from Cambodia to Ireland publicize: Tax breaks, low taxation regime, good governance, low wages, trained and educated manpower, ease of doing business, good infrastructure, English speaking population etc. etc. but never, never any promise of guaranteeing energy or raw material supplies.

The very concept of settled and fixed prices smacks of a socialist planned economy era rather then a free market one.

The $2.5 billion investment is a mirage, as most of the money will be used up importing plant and equipment. Steel is a capital-intensive industry and the skilled work force will be expatriates, paid in hard currency, with Bangladeshis filling a few entry-level and menial jobs.

The product, hot rolled steel coils, will be exported, probably to countries in Europe and North America where as a Bangladeshi company Tata will enjoy unfettered duty free and quota free access. In the past, Tata had to face punitive anti-dumping tariffs in the US market for its exports from India. The benefits to the country will be few, if any.

M. Firoze is a general manager in the country's largest steel company, BSRM.