The Present State

Conversation with the man in charge

Mahmudur Rahman, Chairman of the Board of Investment and Energy Advisor to the Government of Bangladesh speaks to Associate Editor Shah Husain Imam focusing on the latest trends in investment, FDI in particular, thereby providing an authentic update on how the engine of growth is moving.

The Daily Star: The first obvious question is: what is the mandate of BOI?
Mahmudur Rahman: BOI was formed in 1989 by an Act of Parliament. Its mandate is three-fold: facilitation, promotion and advocacy. My job as its chairman is to facilitate investment, promote Bangladesh as an investment destination and do advocacy for investors when needed. Advocacy, because an investor might have a certain problem with a ministry, for instance, relating to duties. And, if the demand is justified we would recommend his case to the ministry concerned for consideration.

DS: Is negotiation a part of the mandate?
MR: No, it's not mandated, but we are always a part of the process. We sometimes provide arbitration services to investors. Let's say there are two investors, one foreign and the other local. They form a company, and at a later stage start fighting. They can come to BOI with their dispute and we can be an arbitrator for them. I remember there was a conflict between Marubeni and its local partner it was a long drawn dispute and we mediated to solve it.

DS: Who then negotiates on investment proposals?
MR: It is the government. There is as such no organisation, no institution which is specifically mandated by the government to negotiate. In the case of Tata, government constituted a committee to do it.

DS: Do you have a clearing house role?
MR: No, we don't.

DS: This one-stop service, what about it?
MR: Well, it is not clearing service. Clearing house service is more related to financial sanction. One-stop service is related to providing utility connections under one umbrella.

DS: Land allotment?
MR: Yes. We can even declare a certain part of the country as an industrial zone and then we can allot land from it; that is mandated.

DS: Is there any evaluation of national benefit and cost when dealing with a project proposal? If there is no standard for evaluating national profit and loss, how then could you possibly bargain meaningfully with a prospective investor?
MR: We have a system, but the BOI has got no desk with experts who can do this national accounting, make national impact assessment. What we do is hire experts. As for the negotiation with Tata, we have instituted a national study, we have hired a foreign consultant to do it and this is financed by ADB on our request. They have even helped us find an international expert who is now doing the economic impact assessment on Tata proposals. Secondly, we have hired Dr Wahiduddin Mahmud to do a different job. You see, Tata themselves have had an economic impact assessment study done by Economist, London. They have submitted a report. Dr Mahmud will study that report and give us his views on it.

Mahmudur Rahman

So, to answer your question, we do it but normally we outsource because the capability is not available inside the institution.

DS: But are there any set standards for negotiation, or we deal on case-by-case basis?
MR: You have never had before 2004 anybody interested in investing a billion dollar in Bangladesh. This is absolutely a new experience and we are learning, and in this learning process we are taking as much input from the stakeholders and experts as we possibly can. This we are doing in the case of Tata. As for Asia Energy, it came forward with a coal development project worth $1.5b and we have formed a committee with top experts and stakeholders of the country to study its proposals.

Everyday we are learning about the art of negotiation and maybe it is still case by case but as a result of this negotiating with Tata, Asia Energy and other large prospective investors, I would expect that within a year or two we will have a set procedure to do it.

DS: The UNCTAD world investment report has stated that FDI flow into Bangladesh increased by 72 per cent last year over the level of 2003. And your own survey puts the increase at 50 per cent. On the other hand, the global competitiveness report shows a decline in the level of Bangladesh's competitiveness, or it has only nominally improved lately. How do you explain the inconsistency?
MR: Competitiveness study is based on perception, but investment is a reality -- it is a reflection of the actual dollar flow into the country. It is common knowledge that Bangladesh has been suffering from a perception crisis for a long time for whatever reasons, but investment is increasing because of three reasons: First, the macro-economic management has been quite prudent for a long time; we have grown at more than five percent for the last 16 years irrespective of government in power. Secondly, look at the market of Bangladesh it is country of 142 million people and the growth in the mobile telephony has been stupendous: from 1.2 million subscribers in 2003, the number is 7million today. This means purchasing capacity of the people is increasing.

DS: Has there been any study on growth in our purchasing capacity?
MR: Per capita income is increasing but that is not the whole story; per capita income can give you very skewed information. In the last 10 years our per capita income has increased from $250 to more than $450. Now, the thing is, the per capita income of a section of the people, probably 10 percent, has increased by more than $2000 to $3000. If you assume that 10 percent of Bangladeshis have that level of purchasing power then we have an upper-end market of 14 million people. How many countries in Europe have 14 million people? So, there is a huge domestic market; it is a nascent but growing market.

Besides as an LDC, we have excellent market access to most of the world which is an investment plus point.

DS: But don't you see the need for vigourous marketing of investment?
MR: It is extremely important we do it. It is our responsibility to promote investment. In fact, one of the reasons for our success is the promotional activity we have undertaken for the last one and a half years.

DS: Can you please catalogue some?
MR: Yes. Last evening I was in a discussion meeting with Hilary Benn, the UK Minister for International Development. Hilary made two comments: one, BOI has been most effective in attracting FDI; and two, the e-governance in BOI is sort of a role model for proper governance of the country.

On the marketing side, I took personal initiatives I decided to visit India and met with Tata personally to convince him to come to Bangladesh. So it is a type of targeted marketing.

DS: So, where does the negotiation with Tata stand now -- in specific terms?
MR: It is a very complex, massive project, we have successfully completed 60 percent of the negotiation, 40 percent is left.

DS: Could you just give me a sense of what this 40 percent is like?
MR: Let me first tell you what we have achieved. We have resolved the land issue. We have resolved the gas supply issue, a very sensitive issue. We have agreed to supply the required quantity of gas during a certain period of time. We have sorted out the gas security issue e.g. how we are going to give them a sense of security in regard to gas supply-- that we have also covered. In the power sector, on the technology side, how can we absorb their power -- this also has more or less been resolved.

The 40 percent that is left is incentive, the incentive they are asking for, and let me tell you that in the two rounds of negotiation they have already reduced their list of incentives to about 40 percent. So, that is the major of success in negotiation.

DS: You are also the energy advisor. Have you been able to make any dent in the power supply area?
MR: Not power, they (Tata) will be producing their own power.

The Tata factor in the making

DS: No, not so far as Tata is concerned; investment overall is critically reliant on steady supply of electrical power. What about it?
MR: The World Bank is now developing a fund to support Bangladesh initiative for infrastructure building in the private sector. Now the problem with financial institutions in Bangladesh is that they want very quick return on their investment; they will not give you money for more than five years; but on long term infrastructural projects you cannot pay back the money in five years, ten years or even fifteen years. Now, the World Bank project I am talking about is specifically targeted at those infrastructure projects where the money will have to be repaid in fifteen years.

DS: With infrastructure financing the advantage lies in the fact that you could tide over the image issue; you don't have to take into account political vagaries; it is such a solid investment in future that you could put in money and wait for the results.
MR: Coming back to power, for large investment it's not a problem. Tata will have their captive power system. They will require 250MW of power for their steel project but they will not buy this from the national grid, they will set up their own power station and supply it to their plant. All large investors have their own power stations. For them, their concern is whether they are going to get the supply of gas.

But it is a different matter for the SMEs, the power situation is going to affect them. It is not the adequacy of power that matters, quality does, too. If you need 440volts you should not get 220volts; I have to ensure 440volts. And if you have to run an industry for 16 hours a day then I must ensure that you are getting power for 16 hours. It is not good that I give you for two hours, and then you have an hour's loadshedding before you receive another small dose. That is bad quality power and this would certainly affect the SME development of the country.

DS: I have a comment from an expert: corruption in Bangladesh is like a 'tax on investment; in other countries it is a levy on profitability'. Your reactions?
MR: It is definitely a deterrent for investment; but let me tell you, not as the chairman of BOI, but as a private sector professional as well, if you are in business with private sector then corruption is not going to hurt you. Sometimes you have to pay speed money, but it is not going to be a big dent on your pocket. But if your customer is a government agency then corruption is going to hurt you.

The good thing about Bangladesh is that the private sector is getting more and more dominant. Irrespective of the government in power, the private sector can thrive as they have the entrepreneurial capabilities. Twenty years back there were first generation entrepreneurs, today their sons and daughters are coming up. They are much more educated and their exposure is very wide and I believe they are more efficient than their parents.

DS: About the incidence of bombing you said that if it continued buyers will stop visiting us as frequently as before and with that investors too will shy away. Do you like to add to this?
MR: Those who are already in the business will continue unless the situation becomes absolutely untenable. They are the committed type, not to be deterred by bombings normally. But the potential investors we might lose out on, if the situation continues.

A large Korean investor told me that one of his highly respected buyers who came as far as Thailand to visit Bangladesh cancelled his trip on hearing about the bombing.

A bonanza waiting in pharmaceuticals

DS: The parties with whom the government has signed MoUs, what about them?
MR: Luckily they have not yet been scared enough. One example I can cite is that of Abu Dhabi group with whom we signed an MoU. They have got their licence and I have registered their proposal for an investment worth $1.1 billion in two years. According to the licence clauses they would be paying Bangladesh $50m as licence fee, the heftiest fee received todate.

DS: Can you catalogue the investments that are operational and those that are in the pipeline?
MR: Let me give you some big names. On the operational side, the French company Lafarge is continuing, it is coming into production in March 2006. They are investing $256m to set up the first integrated cement factory in the country, by far the largest French investment in the history of Bangladesh. The second is the Abu Dhabi group, which is sending their first tranche of investment worth $50m.They will come with their mobile telephony set by the end of 2006 targeting an investment of $1.1b. The third is Banglalink or Orascom, an Egyptian company, they started their business last year and invested more than $300m.

On the textiles side, a large number of Taiwanese, Korean and Malaysian projects are in the offing in and outside of the EPZs, thirty of them, with investment ranging from five to ten million US dollar.

Then Microsoft has just started their business with Bill Gates visiting Dhaka and opening an office here.

DS: Could you please shed light on countries wishing to relocate some of their so-called 'sunset industries' in Bangladesh?
MR: Frankly, I don't like the word 'sunset'. Bangladesh is not a country where such industries should come. This implies a negative picture. But there will be some relocation. For example textiles. Even Pakistanis are now telling Bangladesh is a good, competitive investment location for primary textiles. Chairman of Gul Ahmed Textiles Mr Bashir visited BOI recently and has more or less decided to invest in Bangladesh. They are now planning to invest, I suppose, $1b in the next 24 months. We have duty-free market access to the EU but Europeans are imposing anti-dumping duty on some exports from Pakistan.

DS: There are examples of countries developing rapidly by one item-centred industrialisation. Like Taiwan...
MR: Even Malaysia, through electronics.

DS: Can you identify any such item for Bangladesh where we could make a killing?
MR: Bangladesh is more or less one item--apparels. I would say actually three sectors: one is consumer electronics--home appliances which constitute 70 percent of Malaysia's total export. But cost of labour in Malaysia, a developed country, has gone up. At the same time, it has shortage of labour, its population being small; so, the country is relocating industries in China and Vietnam. I am trying to promote Bangladesh as their third location.

DS: What are the prospects in ICT?
MR: India is the major player in software business. She is getting outsource orders from the US, and you will be happy to know they are sub-contracting to Bangladesh companies. So, the process has started.

Thirdly, of course, it is agro-processing. These are the three sectors with huge potential for Bangladesh.

DS: In life-saving pharmaceuticals we can benefit from contract manufacturing system under relaxed WTO rules. Isn't a bonanza waiting for us there?
MR: Among all the LDCs Bangladesh has perhaps one of the strongest backgrounds in pharmaceuticals. There is the big benefit for Bangladesh waiting to be reaped under the WTO regulations; until 2015 the LDCs will not be subjected to implementation of Intellectual Property Rights. So, we are left with 11 years in which to manufacture pharmaceuticals that are in high demand overseas at a low cost and export them to the developed world.

DS: How many people have been employed by virtue of the new investments?
MR: In the last four years, 1.3m new jobs have been created because of domestic and foreign investments.

DS: How can Bangladesh missions abroad increase inflow of FDI?
MR: Under the present administrative set up of foreign missions, it is hardly possible, because there is nobody specifically assigned or responsible for attracting FDI. Commercial counsellor is responsible for everything-- trade, investment and what have you. Unless you have specific persons responsible to attract FDI and employed probably from the private sector or professional groups with a specific target, you can't be effective.

DS: What is the profitability rating of Bangladesh?
MR: It is extremely high; the growth profile of Unilever is a case in point. One more thing, whenever foreigners are coming to Bangladesh they are not only eyeing on the South Asian market they feel that if they invest in Bangladesh, after two-three years at the most, they will be able to penetrate the ASEAN market, too. This is a very big pull for the investors.

DS: What gives us the edge? Is it the access factor alone?
MR: It is also our women labour. The garments sector alone is employing 2.5m women. That's why, on a slightly different note, I maintain fundamentalism or extremism in Bangladesh will never survive?

DS: What takes hours to do in Singapore will take weeks in Bangladeshi ports. Are we not losing there?
MR: There you need reforms but you have to also give them some credit, because in 1991 the total trade of Bangladesh, export and import put together, was around $4b worth, but today it is $21b. We should have private sector-run terminals alongside the public sector ones to make them compete with each other. Improvement will be automatic.

DS: Which of the offers -- Build, Operate and Transfer (BOT) and Build, Operate and Own (BOO) -- is more preferable to prospective investors?
MR: Both. We have the BOT policy through which we are targeting both domestic and foreign investors for infrastructure building project.

DS: If one were to say our investors are not so much into productive sector as they are keen on building up mercantile capital, what would you say?
MR: That's not true, money is mostly coming into industry which is contributing more than 26 percent to the economy compared with 14 percent in 1995.

The foreign investors have got three concerns: they always start with hartal -- the first question they ask me, Mr Rahman how can I go to your country when there is hartal? There is no country in the world which has hartal.

Their second concern is corruption and the third the recent one is law and order.

DS: It is difficult to answer these question, isn't it?
MR: Difficult. But I have to respond, I am the salesman for the country and I try to give my side of the story as palatably as I can.

But the interesting thing is that all three issues are political and they can be solved.

DS: I believe politicians need a little bit of economic orientation.
Thank you for your time.
MR: Thank you.

Illustration: Sabyasachi Mistry