How To Get More Of It

Removing the impediments crucial

Zaid Bakht

A country's economic wellbeing depends on its ability to produce goods and service. This ability is determined primarily by three factors: the size of the country's physical capital, the level of human capital available and the technology that combines the two.

The stock of equipment and structures that are used to produce goods and service is called physical capital. The knowledge and skills that workers acquire through education, training and experience is the human capital, and technology is the understanding of the best ways of producing goods and services using physical and human capital.

The pace at which physical and human capital is augmented and technological advancements achieved in an economy depend critically on the level of investment undertaken. For appraising the growth prospect of an economy, one will therefore, have to measure the flow of investment in the economy and also examine the factors that affect this flow.

Measuring investment in Bangladesh
Despite its critical importance, the statistical base underlying the estimation of investment in Bangladesh is rather weak. Investment in physical capital is estimated by the Bangladesh Bureau of Statistics (BBS) using commodity flow approach under three main heads - construction, plant and machinery, and transport and equipment.

The construction component is estimated by measuring the flow of cement, iron and steel, while the estimate of investment in plant and machinery, transport and equipment is based on information pertaining to import and domestic production of these capital goods. Estimate of public investment is obtained on the basis of budgetary provisions and project implementation related information. Private investment is estimated residually by taking the difference between the estimated aggregate investment and public investment. Estimation of private manufacturing investment by BBS is also carried out in similar manner.

Some estimate of private manufacturing investment is also prepared by the Board of Investment (BOI) based on investment proposals registered with it and follow up sample surveys. The BOI also provides estimate of Foreign Direct Investment (FDI) using the same procedure. In addition, estimate of FDI is also available from the Bangladesh Bank on the basis of information on capital inflow.

Thus, the estimate of investment in Bangladesh suffers from the absence of a direct and comprehensive method of estimating sectoral investments, particularly manufacturing investment. This lacuna needs to be addressed on an urgent basis for facilitating better monitoring of the country's investment situation and allowing informed policy making to take place.

Recent growth in investment and GDP
According to the available official estimates, the decade of the 1980s was a lost decade for Bangladesh in terms of both investment and growth. Aggregate investment stagnated at around 12% of GDP causing GDP growth to remain at a modest level of 4% during this period. Things began to improve with the emergence of democratic government in the 1990s. Investment as a proportion of GDP steadily rose and reached 20% by 1995-96. By the year 2000-01 the economy was investing nearly 23% of its GDP. In 2004-05, investment-GDP ratio was estimated to be 24.4%. What is noteworthy is that the increased investment has been mainly at the behest of the private sector with the share of public investment in GDP contained at around 6% throughout this period. Policy reforms, particularly with regard to private investment facilitated greater inflow of foreign investment. FDI currently in the pipe line also gives an optimistic picture.

The improvements in the investment scene has also been reflected in the growth performance of the economy. The economy crossed the 4% mark to which it was stuck during 1980s and achieved more than 5% growth during 1990s, and is now well poised for achieving growth above 6%.

The critical need for enhanced investments
Despite the achievements of the past decade, there is little room for self-complacency. The developmental challenges faced by Bangladesh are formidable. With a population density of 928 per square kilometer, it is the most densely populated country leaving aside a number of city-states. Per capita GDP of US$ 440 remains low compared to both South Asian and Low-income country average. About 42 per cent of the population still lives on the wrong side of the poverty line. Agriculture accounts for nearly a quarter of the GDP employing more than half of the labor force. About 77 per cent of the population currently resides in the rural areas. Although population growth rate has come down to 1.47 per cent, annual growth of labor force is estimated to be 4.3 per cent. With the absorptive capacity of the agricultural sector limited to at most one third of the new entrants to the labor force, the country is faced with the pressing need of creating employment opportunities outside agriculture. The imperatives of higher investment growth can hardly be overlooked in these circumstances.

Constraints to investment growth
There are a wide ranging structural, policy induced and governance related constraints that inhibit growth of investment in Bangladesh. Amongst these, the following seem to constitute the most critical ones.

Lack of freehold land
A stumbling difficulty faced by investors in setting up new enterprises is paucity of freehold land. The existing system of maintaining records of land transactions is highly deficient and it becomes extremely difficult to ascertain the legal status of any land. Because of these reasons land purchases often results in prolonged litigation creating serious problems for the investor. Industrial estates set up at public initiative have addressed only a tiny part of this need. In some cases, inappropriate location of these estates has resulted in gross under-utilization of the industrial estate land. Although, there has been a lot of private investment in the housing sector and in setting up of shopping malls and commercial space, industrial estate at the behest of the private sector is yet to emerge and may require strong fiscal incentives and support from the government.

Breaking free

Inadequate infrastructure and utility services
Deficient physical infrastructure constitutes one of the major impediments to investment growth in Bangladesh. It is widely acknowledged that greater investment and/or better performance from existing infrastructure facilities would have high returns in terms of reduced costs of doing business. In a recent perception survey of a sample of exporters, it was found that exporters considered electricity and port facilities to be the most serious infrastructure related bottlenecks encountered by them. Lack of access to gas and electricity constitute the binding constraint to decentralized growth of private investment.

The opening of the power generation activities to the private sector has been a positive development and has facilitated inflow of considerable foreign investment into the sector. But pouring more power into the system is not the only way of coming to grips

with problems in this sector. Much more needs to be done with regard to outdated transmission and distribution lines, load management, huge system, transmission and distribution losses, and reforms of the pertinent parastatal bodies.

Chittagong port, which is the country's only deepwater port, is technically outdated and inefficiently managed. The handling productivity is below five containers per vessel-hour, and total turnaround time is more than 5 days, which is amongst the longest in the region. The port operations suffer from too many vested interests, including politicised unions that effectively block reform efforts. Apart from high monetary costs inflicted by such dysfunctional operation of the port, it has also earned Bangladesh a poor reputation for delivery in the time-sensitive and highly competitive markets for garments, shrimp and other exports. Modernisation of both the physical facility and the management of the port thus is an urgent necessity.

Deficient legal and regulatory framework
Major weaknesses in the legal framework are with regard to contract enforcement, dispute settlement, bankruptcy laws, copyright protection, land titling and labor laws. Current legal procedure has loopholes that allow one to adopt delaying tactics and as a result the court faces a big backlog of cases. Bankruptcy law has recently been enacted but its implementation is yet to be tested. With regard to copyright protection Bangladesh is covered by the TRIPS agreement, but local firms lack the knowledge of their rights and obligations. Existing labor laws are inadequate to discourage politicisation of labor relations, which has been a major deterrent to investment. Labor laws also need to conform to the emerging labor standard issues. Land titling and transfer procedures have remained very cumbersome and corruption prone. Streamlining of red tape, improvements in law and order situation and legal environment are essential to assure prospective investor that there is adequate legal protection to legitimate business.

Policy reforms of the past decade have brought about substantial relaxation of the regulatory environment. Investment sanctioning requirement has long been abolished and registration of enterprises made voluntary. But investors still complain about a lot of regulatory requirements, which they need to fulfill before an enterprise can be set up. These include, trade license to be obtained from local municipal authorities, environment safety clearance to be obtained from the department of environment, registration with the Inspector of Factories, export registration with the Export Promotion Bureau, import registration with the Controller of Import, VAT registration with the revenue department etc. While the case for enterprise registration for the purpose of safety and public health, environmental concerns, fiscal purposes and monitoring etc is well taken, in the absence of coordination between different authorities, the entrepreneurs have to obtain these clearances separately from each agency, involving duplication of efforts, time loss, harassment and unofficial payments. There is, thus, the critical need for simplifying and streamlining all these regulatory measures under one unified arrangement. The burden on the investor could also be eased somewhat by delegating some of these authorities to the Chamber bodies.

Access to finance
The Development Finance Institutions (DFIs) have become virtually defunct due to high burden of defaulted loan. Replacement of DFIs by commercial banks as a source of term finance has also proved to be nonviable. Clearly, there is need for new institutional initiative to resolve the problem of term finance in Bangladesh. A new investment finance company needs to be set up as a joint venture under the sponsorship of the government. It will need to generate funds from a wide range of local and foreign sources and will have to be run in line with best practice methods of investment financing, which will require highly competent professional staff devoted to identifying investment opportunities and following them through marketing of outputs of supported enterprises. The government must guarantee the full autonomy of the institution and its purely professional operation at all stages. A new agency also needs to be created for loan recovery for reducing cost of borrowing. Special incentives may also be considered for further expansion of lease financing.

Development of the capital market is one obvious way of mobilizing resources and addressing the needs of term finance for private sector development. Past performance of the capital market has aptly demonstrated that poor resource mobilization rather than resource paucity is the binding constraint towards capital market development in Bangladesh. Since the boom and bust of 1996 significant improvements have taken place in the working of the capital market. But investor's confidence is yet to be restored and the market suffers from acute shortage of good shares. Restoring investor confidence through greater transparency and accountability of the working of the Exchanges and other supportive measures should be placed high on the agenda.

Investors need a hassle free tax system
Current fiscal incentives for private investment need to be strengthened further and made less discriminatory. The corporate tax structure needs to be rationalized to bring it in line with other countries of the region and to reduce the bias against domestic market oriented enterprises. Fiscal incentives to export industries, particularly those relating to duty free access to imported raw materials, should also be applied symmetrically across all export categories. Tax administration needs to be drastically improved to make custom procedure and VAT payment simple and free from rent seeking behavior. The outstanding problems relating to Pre-shipment Inspection (PSI) should be resolved and effective implementation of the system should be ensured.

Human resource development
Deficient entrepreneurial, managerial and technical skill is a major supply-side bottleneck in Bangladesh that has constrained growth and diversification of the industrial base in general and the export sector in particular. The major problem with human resource development arrangement in Bangladesh is the gross miss-match between the type and quality of skill required by the investors and the skill that is being imparted by the relevant institutions. Curriculum of educational and training programs needs to be improved to reflect felt needs of the private sector and include internship program to provide hands on training. There is also low incidence of in-house skill development.

There is need for significant private sector initiative through the chamber and other trade bodies for planning and implementing trade specific skill development program. Fiscal incentives should also be provided for in-house training provided by individual enterprises.

Business support services
Public institutions mandated to provide business support services are usually ill-equipped and ill-staffed and the programs they implement are not found very useful by the business community. Product development, technological improvements, market promotions, and quality controls are the especially deficient areas of business support measures. The other major area of deficiency is the lack of reliable and up to date information on the sector. There is no single agency with which private investment is recorded. Different agencies maintain different sets of information but these are neither complete nor consistent and there is no coordination amongst these agencies for bringing out a collective picture of the sector. There is urgent need for putting in place a centralized reliable system of business statistics.

If business support services are to be effective, the chamber and other trade bodies will have to be given a lead role in the design and implementation of such support program. The first responsibility of the trade bodies will be to spell out the felt needs of the private sector with regard to skill and technology requirements, quality up-gradation and market linkages. The financial involvement of the trade bodies in these programs will ensure both practical relevance and efficient implementation of the program. Matching grants from public and donor sources will help such programs get off the ground and be self-sustainable eventually

Slow pace of privatisation
For implementing the declared private sector led development strategy, the government is committed to privatize public sector enterprises so that state resources can be freed from these business undertakings and concentrated on the core public functions of providing key infrastructural facilities, investment friendly law and order, efficient judicial systems, reliable business support services etc. But the pace of such withdrawal of public resource from business enterprises has been quite slow. Official statistics show that the decline in the level of yearly loss of the public manufacturing enterprises has been extremely gradual during the past decade. The yearly rate of decline in the loss figure between 1990/91 and 2002/03 is less than four per cent. This along with the evidence on the number and value of the mills privatized during past decade suggest that the pace of privatization and public sector reform has been rather slow during the decade despite the fact that successive Industrial Policies declared privatization of public sector enterprises as a prime objective.

The main reason behind the slow pace of privatization in Bangladesh has been the lack of adoption of a coherent privatization strategy, faulty rules and regulations, bureaucratic impediments and lack of firm political commitment. A national commission needs to be set up for working out comprehensive strategy for privatization and public enterprise reform. The commission will assess the lessons learnt from past measures towards privatization and public enterprise reform and shall delineate detailed strategy for implementation of the programs allowing for varying degree of private ownership through sale, restructuring and liquidation of state owned enterprises. The commission will also suggest social safety net measures to protect vulnerable groups and those adversely affected by the reform program. In addition, the government needs to declare a timetable for the implementation of the privatization program and resolve existing problems relating to valuation of the assets and transparent and competitive bidding and delays incurred at the ministry level in actual hand over of the enterprise. Also, fresh public investment should be kept out of those areas, which are suitable for private investment.

Engaging in bilateral and regional free trade agreements
Bilateral and regional free trade arrangements as opposed to global free trade regime are sub-optimal solutions as they are mere extensions of domestic import substitution policy at regional level. Unfortunately, the process of negotiation towards multilateral based global free trade regime has proved to be long drawn and arduous. In the meantime, some countries in support of speedier integration have proceeded with the formation of regional free trade area while others saw this as a threat to their own economic interest and sought to form their own regional groupings. As a result there has been proliferation and strengthening of regional blocks around the world in recent periods. Bangladesh needs to join the club as otherwise it will be sidelined by its neighbors through their own free trade arrangements. There is also the imperative of gaining greater access to the markets of the neighbors to bring about some balance in the current lopsided pattern of intra-regional trade flows. However, Bangladesh must invoke its LDC status and get favorable deal with respect to rules of origin and deferred implementation time to protect, in a time bound manner, those industries in which it is likely to have dynamic comparative advantage.

Illustration : Sabyasachi Mistry

.....................................................
The author is Director Research, BIDS