The direct benefits from Tata operations will be equal to the amount of total subsidy if given at $1 per mcf of gas to the Indian giant, he observed in a report prepared for the Board of Investment (BoI) which he submitted yesterday,.

He also saw no reason to offer any tax-breaks or other incentives to Tata beyond what are allowed under existing system.

Prof Mahmud was also critical of the Economist Intelligence Unit (EIU) report on Tata investment proposal for making highly exaggerated claims of the indirect benefits of Tata investment in Bangladesh.

"The benefit from the direct investment impact will be highly sensitive to the pricing of gas," Prof Mahmud wrote in the report.

"A subsidy of US$ 1 per unit (i.e. per mcf) of gas sold to Tata will imply a subsidy of US$ 68 million annually -- or US$ 83 million if captive power for the steel plant were to be generated from gas instead of coal. Against this, the direct benefit from Tata's operations will consist of an estimated US$ 20 to US$ 30 annually in terms of salaries and another US$ 38 million in tax revenue estimated as the annual equivalent of the tax payments to be made by Tata with a ten-year tax holiday," the report handed to BoI Executive Chairman Mahmudur Rahman says.

The indirect benefits from Tata's projects will come from the balance of payments support and from the positive spillover effects on other sectors created through outsourcing and the purchase of inputs.

"While these benefits are important, the report produced by the Economic Intelligence Unit (EIU) of the Economist makes highly exaggerated claims in these respects," he said. In estimating the indirect impact on other sectors, it ignores the fact that the expansion of production activities in an economy like Bangladesh is generally constrained by lack of inadequate production capacity rather than by demand deficiency.

He estimated that Tata's operations will provide balance of payments support of $628 annually through net exports and $323 through import substitution.

"The actual balance of payments support will be of course much lower because of the repatriation of profits -- a fact that has been curiously overlooked in the EIU report," Prof Mahmud said.

On the face of it, Prof Mahmud observed, the proposed 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," he added.

Tata's projected profits from the investments seem to be large enough, particularly for the steel-power complex, so as to provide ample scopes for bargaining in order to arrive at a fair win-win deal, the report said.

There does not seem to be any strong case for allowing tax-breaks or other incentives beyond what are allowed under the existing structure of incentives for such investments. Special incentives beyond the existing rules also create precedence for giving such incentives to other prospective investors, Prof Mahmud observed.

He noted that more detailed information on the each component of the Tata project is needed for further negotiations.

"From what one can see from Tata's documentation, there seems to be discrepancies in the estimated value-added, the annual tax payments and the implied profits to be retained by Tata," the report said.

"Bangladesh has a history of subsidised gas supply. Whatever may be the rationale for such subsidy, the use of gas should be guided by its true economic price," Prof Mahmud argued.

The report suggests economic pricing mechanisms for gas, based on the predictions regarding how long the gas reserves will last and what will be the cost of importing alternative fuel when the country will run out of gas. While the current gas price of $2.35 per unit (mcf) for industrial use may not be highly misaligned, it will need to be flexibly adjusted in future, Prof Mahmud wrote in the report.

The report suggests that the government commits to a flexible gas price policy reflecting at least in part the true economic pricing of gas. Tata may be then offered gas at the prevailing price for industrial use without any favour or discrimination. The report also suggests an arrangement for ensuring gas supply to Tata that involves a fair sharing of risk.

"The negotiations with Tata regarding gas supply arrangements demonstrate a fundamental weakness in our energy policy," Prof Mahmud said.

The lack of knowledge regarding gas reserves poses a severe constraint in formulating a gas utilisation policy and making commitment for any long-run use of gas.

Tata's investment proposal is a complex one with several components, Prof Mahmud observed.

"The proposed urea plant is an entirely separate project with no link with the rest of the investment proposal; as such, its merit is better judged separately," the report reads. "The other part of the investment project is an integrated one involving steel production, power generation and coal mining. Even for this integrated project, the possibility of generating power by gas and thus leaving out the coal mining component may be kept open as an alternative, given the many unresolved issues regarding coal mining."

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 a foreign investor, he maintained.

Detailing some benefits of the Tata investment, he said 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 mainly be in service sectors -- such as the employment created in and around the township that will grow around the proposed steel mill.

Tata's project will produce about $ 1 billion worth of steel annually, 75 percent of which will be initially exported after meeting the country's entire domestic demand. The domestic price of steel will perhaps be lower than if steel were to be imported.

"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," Prof Mahmud said.

Although some existing facilities for steel production, mostly from scraps, may be adversely affected, this will be much more than compensated by the benefit.

Tata's operations will lead to increased demand on railway transportation for the import of iron ore and the export of steel and coal, he also noted. This will need substantial investment in railway infrastructure, along with improvement in management efficiency to ensure that the government does not incur losses from such investment. 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 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 involves.

"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," Prof Mahmud suggested. "Land being the scarcest resource in Bangladesh and 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."

He also made a case for more gas exploration using domestic capability rather than relying on international companies.