Thank you for the opportunity to react to your paper "Comments on the Proposed Investment by Tata Group in Bangladesh" dated March 2006. We found much common ground in your note and believe it is a constructive and balanced contribution to the discussion on our major projects.

You rightly identify the level of real gas reserves of the country as a central issue, not just in pricing the gas to be sold to Tatas but in assessing the attractions of our projects to Bangladesh, financial lenders and to Tatas. It is the belief of almost all informed observers that the gas reserves are far larger than the official published numbers of some 15 TCF (P1 plus P2).

You yourself conclude that "in all probability, Bangladesh has gas reserves to last a much longer time than is indicated by the currently available estimates of proven reserves." The constraint has been the level of investment in exploration and development (E&D) of the reserves, which in turn has been limited by the paucity of large, credible customers.

It has been the experience of many other countries that proven reserves tend to increase as the gas supply industry develops, so that there is a dynamic relationship between supply and demand. You point strongly to the "crucial importance of strengthening gas exploration efforts," and we believe that our projects can contribute to this by acting as significantly large anchor customers to PetroBangla and providing an assured cash flow which can be used to finance the investment in E&D.

Countries that have adopted a similar strategy to increase upstream exploration include Pakistan, Vietnam, Egypt, Iran, Qatar, Oman where large downstream purchasers in the form of LNG liquefaction plants, petrochemical installations and power generation companies have entered into secure long term take or pay contracts with the gas producers (NOCs or IOCs).

Were it true that gas reserves will start to run out in just ten or so years, it would clearly not be right for Tatas to be building major gas-based plants in Bangladesh. Our projects would not be financially viable, and it would not be a proper use of limited gas supply to dedicate such a large proportion of remaining reserves to one buyer. Tatas have proposed these projects in the belief that they represent a very exciting win-win for Bangladesh, Tata Group and indeed India. We would not want to proceed if any deal were perceived as unfair or one-sided.

That said, the project lenders will form their view on risks in relation to the official published numbers from the GoB. You correctly point out that many foreign lenders and investors will have a cautious view of country and political risk in Bangladesh. Lenders will just not be prepared to take gas supply risk in addition to other project. Hence, as GoB and PetroBangla understand and we believe in principle accept, our projects cannot come up other than based on secure gas supply contracts. Our projects are posited on the offer of GoB to supply gas at competitive rates for the projects (refer to the Expression of Interest document from October 2004).

We are particularly concerned with a specific remedy for the issue of gas reserves uncertainty that you have suggested, a suggestion for which there is no parallel in practice anywhere in the world. You suggest that a revision of gas price from time to time be made in line with the changes in gas reserve estimates and the projected cost of importing alternative energy. Any such provision may lead to an unworkable situation whereby Tata's gas price may be adjusted with the upward or downward adjustment of gas reserves in Bangladesh or with country's perception of reserve exhaustion time frame and likely replacement source. Such uncertainty could severely limit large gas-based investments in any country.

Turning to pricing of gas, you correctly point out that there is no international market in gas as it is not a traded commodity and further that gas pricing will depend on country-specific circumstances. Since there is no international market for gas, as you have stated, we believe that domestic gas pricing comparisons with oil and LNG may not be relevant for these projects. We found your calculations about possible gas pricing based on the timing of possible exhaustion and the potential substitute costs interesting, but our analysis suggests that this approach is not how gas is valued and priced internationally. We note, however, that using your own methodology, if exhaustion occurs at or after 25 years (which we must assume to construct a steel mill in Bangladesh), the PV of $6 (itself a big assumption) falls to less than $1/ MMBTU at 8% discount rate (and much less at a more commercial discount rate).

You refer several times to a possible "subsidy" on gas price. A subsidy normally implies selling something below its cost. It is very clear that all the numbers we have discussed with PetroBangla are well above cost of acquisition of gas, including transport and a fair return. This cost is of course a blend of PetroBangla's own costs, acquisition cost from the IOCs and the profit gas PetroBangla enjoys. We think it more helpful to think about differential pricing according to sector and we note that this is the approach that GoB has taken with prices varying by industry usage.

Our approach to gas pricing is to offer PetroBangla as high a price as the projects can afford to pay, given their economics and risk characteristics. We have been constrained by two issues. First, both steel and urea are highly cyclical industries so it would be foolish to assume a consistent high price of either. Second, we need to remain competitive against other plants internationally. We have demonstrated to GoB based on data from some 40 countries that competitive plants in similar sectors are currently enjoying gas prices in the range of $0.40 to $1.20/MMBTU. Governments throughout the world have taken a differential approach to pricing for "strategic" and process industries than for general industrial or retail consumption.

Our suggestion to resolve these issues has been to propose a fair floor for the gas at which we can be competitive and sustain our debt service obligations based on sensible and bankable scenarios for output prices, with additional payments linked to ability to pay based on higher output prices. This will realise a much higher average price of gas than we could afford to offer otherwise. We believe that GoB is increasingly appreciating this approach.

Turning to the question of the wider economic benefits of our proposed projects for the country, we are pleased that you recognize the undoubted contribution that the projects would make to the country. Our proposals are unprecedented in South Asia for their scale and scope and would undoubtedly make major contributions to economic development, employment, public finances and the Balance of Payments.

You are somewhat critical on some of the detailed calculations in the report by the Economist Intelligence Unit. This was an economic impact assessment commissioned by us from a high reputed international economic consultancy. EIU's brief was not to perform a cost benefit analysis from a public finance point of view, as this would have required thousands of assumptions on the opportunity costs of using each economic resource related to Tata Group activity, which are best made by the government itself We were pleased to learn that the parallel study completed by the ADB consultant to the Government of Bangladesh broadly endorsed the conclusions of the EIU report.

You suggest that EIU might have exaggerated the positive BoP impact by ignoring the repatriation of profits. Your conclusion seems to be based on the Trade Account benefit of $951 m pa (see Table 3), but you do not go on to discuss the full BoP impact as set out by EIU in Table 6 and associated text which very clearly includes repatriation of debt service and profits in reaching a net BoP benefit of $484m pa, or $17.6 bn net over the project lifetimes. We would suggest that you seem to have overlooked this and have therefore been unfairly critical of the EIU report.

In assessing the direct and indirect value addition of the projects you focus on the salaries and taxes paid only (and mention some indirect benefits). You do not touch on the other significant direct benefits: the creation of a coal industry in the country adding the equivalent of 4 TCF of gas, the increased provision of power to the grid, the demand generated for Bangladeshi suppliers to provide goods and services to the projects, and the viability of public infrastructure up-gradation funded by the multilaterals as a direct contribution arising from the Tata projects. We appreciate your points on the criticality of infrastructure to the projects, especially railways. You may not have seen the report on railway up-gradation commissioned jointly by Bangladesh and Indian Railways which identifies what additional investments are required. Fortunately these are not enormous, and the Railways are now in dialogue with ADB to secure funding for the necessary track and signaling works.

You tend to discount the wider economic impacts which will flow indirectly from the projects on the grounds that the multiplier effects in an emerging market are constrained by inadequate productive capacity. EIU also were not able to estimate these benefits systematically due to paucity of data (they relied on the GoB's own Input-Output tables), but it must be true that the multipliers will be significant and far-reaching. Industry locations of select Tata projects in western Bangladesh will increase balanced regional growth. In addition, large investments such as these are expected to have a strong "signaling effect" to attract additional investment into Bangladesh.

Given these considerable benefits to the country, which are linked to the large size and industrial nature of our group proposal, we are surprised that you conclude that the fiscal incentives that should be offered should be similar to that of other FDI projects, which typically have far lower multiplier impacts on the economy. As you will be very aware, Governments throughout the world construct fiscal incentives to attract large, complex and capital intensive projects whose returns are either higher risk or longer term than most commercial projects. This type of incentivisation is particularly important in emerging markets where risks are perceived to be higher. GoB has done exactly this with its IPP power policy. Our projects would clearly qualify for this type of additional fiscal support. However, we should make clear that we are not asking for any special treatment, but instead that a package of incentives should be made available to all investors in certain types of large, strategic infrastructure projects.

We remain committed to reaching agreement with GoB to bring these exciting projects to Bangladesh. To succeed, we will need the understanding and support of those like yourself with a perspective of the projects and their benefits overall. We would be delighted to discuss further with you.

The writer is Chief Executive Officer, Tata.