The Tata-Bangla combine
In April this year, India's corporate powerhouse, the Tata Group, submitted a proposal to the Bangladeshi government for the commissioning of four projects: a steel plant, a fertiliser factory, a power generation unit, and a coalmine. All told, the investment would amount to roughly USD 3 billion, a figure that sent out regionwide ripples for its significance. The negotiations process had included two rounds of talks between the group and the Dhaka government, as well as the signing of an 'expression of interest' note in September 2004 in the presence of Tata boss Ratan N Tata and Dhaka's Minister for Finance and Planning M Saifur Rahman (see picture). The major hurdles had seemingly been cleared for what would be the largest-ever one-time investment by an Indian multinational – not only in Bangladesh, but in all of Southasia.
For some time, Dhaka's Board of Investment (BoI) had been urging 'rata to invest in Bangladesh under the liberalised 'foreign direct investment' (FDI) programme that it had developed, encouraging the conglomerate to look into areas as diverse as power, IT services, bicycles, ceramics and garments. For Dhaka's energetic business community, Tata's willingness to come across the border was a major show of confidence in the nation's economic prospects, and an obvious departure point that would deliver multiple 'downstream' benefits. Most importantly, the presence in Bangladesh of what many consider to be India's most respected multinational – with 91 companies under its wings and an expanding worldwide presence – might also lead to an opening of the unfairly protected Indian market, which has been hurting Bangladeshi business expansion. For those working in the 'track two' sphere of geopolitical security and economic alliances, the promised investment was an opportunity to prove that trade, FDI and profit-sharing were favoured means to more stable bilateral and regional relationships in Southasia as a whole.
But perhaps such hopes and expectations had been allowed to mature a bit too early. The two parties are currently in the midst of their third round of discussions in Dhaka, with both the Tata Group and the government putting up brave fronts. But difficulties have arisen. Both sides now concede that matters are at a make-or-break phase, requiring significant compromise in order to avert a deadlock. The hope had been that groundbreaking ceremonies would be held this year and that the projects would all be commissioned by December 2009. Now, all bets are off. Observers expect the deal to proceed or collapse by the end of November 2005.
It has not been easy for Tata to get this far. The group, with a USD 17 billion annual turnover and accounting for six percent of India's total exports, first had to overcome the reservations of the Indian Foreign Ministry when it sought to deal directly with Dhaka. Sources now say that it is Dhaka that has suddenly gone into back-gear, declaring that it cannot compromise with existing laws to give Tata what it wants. The multinational also may not have been sufficiently sensitive to the concessions the government can and cannot provide, due to national interest as well as domestic political pressures.
Big money
Things looked rosy back in October 2004, when the expression of interest was signed. The deal had been facilitated by Dhaka's Bol and its chief, Mahmudur Rahman, with Tata initially seeking to invest USD 2 billion in natural gas-based industries. The very fact that the signing ceremony was attended by the finance and foreign ministers demonstrated the government's considerable interest. When Tata came out with its formal proposal, the investment size stood at USD 2.5 billion, which has since ballooned to USD 3 billion. If negotiations succeed, such an amount would exceed the entire USD 2.7 billion in investments that the country has attracted since its independence in 1971.
The Indian multinational's major enterprise in Bangladesh would be Tata Steel's plans to set up a USD 1.8 billion plant in northwestern Bangladesh (in Pabna or Kushtia districts) – the approximate price of which would also include the development of a nearby coalmine. The plant would have an annual production capacity of around 2.4 million tonnes of what is known as basic steel, for which there is a booming market in both South and Southeast Asia. Half of the plant's production, however, is expected to be consumed within Bangladesh, where the projected demand for steel by 2010 is around 1.3 million tonnes per year. Tata's plan is to produce hot roll steel, from which secondary products are made. The company had to put aside its plans to produce cold roll steel, due to strong opposition by the Bangladesh's domestic steel industry.
Tata's proposed USD 700 million power plant would have a 1000 megawatt capacity, 50 percent of which would be supplied to the steel plant. The coalmine, in the adjacent northern district of Dinajpur, would also have to be made available as part of the deal, as its output would be required to feed the power plant. Tata foresees extracting up to six million tonnes of coal per year, about 3.2 million of which would be used by the power plant, while the rest would be exported to India.
In addition to Bangladesh's coal reserves, Tata has expressed significant interest in the country's natural gas resource. The three plants together would require 600 million cubic feet of gas per day; Dhaka has agreed in principle to guarantee a 20-year supply. Some of this gas would be essential as raw stock for a USD 600 million fertiliser plant, which is planned for Chittagong District in the southeast. The facility would produce a million tonnes of urea per year, which would go a long way to cover the current national annual urea shortfall of 800,000 tonnes.
The impact of the proposed investment would obviously go far beyond the steel, power and fertiliser sectors. Tata's willingness to hold a substantial stake in the Bangladeshi economy would be a vote of confidence for a country that could stand to better its image and rub away the label of 'international basket-case'. Indeed, Tata's arrival would add to Bangladesh's international creditworthiness and help to attract additional international investment. Although the proposed capital-intensive projects would only create around 6500 jobs, Tata estimates that in their 25-year life-span, they could infuse the country with USD 18 billion in the form of export and import substitution. Annual exports are expected to total about a billion dollars per year.
Cold feet
So has the Bangladeshi government gotten cold feet in signing a deal with an Indian company? Or, is the multinational driving too hard a bargain? The Tata deal brings along with it inherently sensitive matters. Five critical issues are on the table, including security of natural gas supply for the proposed projects; the pricing of the gas supplied; purchase tariffs for electricity from the power plant; access to coalfields; and, most importantly, fiscal incentives for Tata's investments.
Tata has also issued several demands: a decade-long tax holiday for its proposed units; guarantees from dedicated gas fields, ensuring an uninterrupted natural gas supply for 30 years; and specific formulae for gas pricing according to industry and product. Although the third demand has yet to be discussed, Dhaka has already rejected the first two, deeming them impossible under the country's current laws. (However, it has agreed to give gas supply guarantees for 25 and 20 years for particular plants.)
One top bureaucrat involved in the negotiations, wishing anonymity, provides the reason for governmental resistance: "We do not need foreign investment of the kind that will cause a loss to the exchequer, instead of overall gains." Another potential stumbling block is the Baropukuria coalfield, which Tata wants to access in order to save years of development in starting a new coal-fired plant. A powerful lobby inside the government is against such a lease, offering instead any other nearby undeveloped field, which Tata would have to prospect on its own.
Tata's Chief Executive Alan Rosling, who has made several trips to Dhaka over the three rounds of negotiations, has reached a point where he is willing to be quoted in his exasperation: "If the government finds it too difficult to make a trade-off, they should tell us. We can go somewhere else – Iran, Egypt or Kuwait." As negotiations have progressed, however, Tata has toned down its rhetoric. The government, too, has decided to provide 'special facilities' to Tata – though not 'arbitrary facilities', which might create an uneven investment climate.
Which way forward?
Those who see the Tata investments as important both for Bangladesh's economy and for the possibilities of building linkages with the Indian economy, worry that the negotiations might become mired in the larger geopolitical issues that regularly get in the way of Dhaka-New Delhi relations. The ever-present backdrop to the Tata negotiations has been Dhaka's reluctance to export its natural gas to India, citing limited reserves. A certain section in Bangladesh believes that the Indian government would not 'welcome' a deal between Tata and the Bangladeshi government, unless Dhaka agrees to meet New Delhi's demands for the implementation of the planned tri-nation gas pipeline from Burma to India through Bangladeshi territory.
Bol chief Mahmudur Rahman, who is also Energy Advisor to Begum Khaleda Zia's government, emphasises that for all their intensity, the negotiations are being held as transparently as possible. "It is being explained why the investment is good for the country," he says. "If the negotiations are successful, the people will know why and how it happened. And even if it fails, the people will know the reasons."
Rahman is swimming in troubled waters. Lobbies within the government are vehemently divided. Backers of the Tata project say that it would be a crowning economic success for the Bangladesh Nationalist Party government and for Begum Zia, known for her anti-India rhetoric when in the opposition. Critics, meanwhile, fear electoral repercussions, with current opposition leader Sheikh Hasina Wajed (of the Awami League) set to pounce on any opportunity to 'expose' Begum Zia. That Tata is a private sector entity may not wash when the time comes to stoke the electorate's anti-India sentiments. For its part, the Indian corporation has sought to quell some of the opposition by putting a non-Indian, multinational face on its activities, in the personage of Chief Executive Rosling – an Englishman, with an Order of the British Empire to boot.
To gain some traction, Dhaka has now engaged an Asian Development Bank consultant to carry out an economic impact assessment on the overall proposal. Tata, meanwhile, has also appointed an economic intelligence consultancy to calculate the costs and benefits of the four projects. Coupled with additional pending issues, concerned officials have said that these reports will probably extend negotiations beyond the current third round, originally slated to have been the last. With both studies due around the middle of November, the two sides will most likely hold off from further bargaining until then.
Either way, negotiations have reached a point where both sides now need to show flexibility if a deal is to emerge. Even though Tata has maintained a take-it-or-leave-it public posture, the fact is that the Bangladeshi economy is bullish and Tata knows that it is on the inside track. Bangladeshi authorities need to understand that it is not for nothing that Tata's projected investment in Bangladesh would be second only to its expenditures in Singapore. For Dhaka, however, the deal involves not only some radical fiscal policy departures; it also bring along high-wire political risks, at a time when the BNP-led alliance has stepped into its fifth year in office and elections loom for early-2007. A dispassionate observer, however, would look to see which force will win this round, by the banks of the Buriganga: parochial politics or multinational economics.