The Present State

In lost investments

S.I.Laskar

A recent study found that Bangladesh's growth could have been 2 to 5 percentage points higher 'if its performance of key policies had equalled that of some comparable countries (World Bank, May 8-10, 2004)'. It also emphasised that “a huge 'growth dividend' could come from better policies and institutions, with the highest payoffs from: (1) better rule of law and order; (2) reducing the cost of doing business due to administrative corruption, regulatory bottlenecks, confrontational politics, hartals etc; (3) a more competitive financial sector; and (4) improving health, education and the quality of infrastructure, so that the economy could benefit more from FDI”. It implies that a better investment climate has a high “growth dividend”.

Bangladesh has been placed 110th among 117 countries that were surveyed under the Global Competitiveness Report 2005-06, indicating no major change in its situation in terms of business competitiveness compared to that of the previous year. Persistent corruption, poor infrastructure and indecisiveness on the part of officialdom have been attributed as reasons for the poor ranking of Bangladesh in the Global Competitive Index (GCI).

Corruption, the exploitation of public office for private gain, can harm the investment climate. When it infects the highest levels of government, it can distort policymaking on a foundation level and undermine the credibility of government. Even when played out through officials at lower echelons, corruption can be a tax on entrepreneurial activity, divert resources from the public coffers, and create a constituency for erecting or maintaining unnecessary red tape for favours.

Corruption within public institutions not only distorts the budget but also results in a significant loss of public funds. The diversion of funds reduces the amount of resources available to the agency administering the public service, thus lowering the quality of public service. At a macro level, the diversion of public funds into private pockets inevitably reduces the state's ability to provide public goods, such as education, environmental protection, and research and development. At a micro level, corruption does not increase the certainty that service will be rendered. Making unofficial payments actually does not guarantee a service or resolve a problem in many cases. Corruption undoubtedly reduces the effectiveness of public sector organisations.

It is also to be recognised that business is often the source of corruption or participant in the misuse of public authority for private gain. We know that bad elements in society tend to drive out good elements as the bad money drives out good money out of market. Firms that refuse to participate in corrupt transactions may find themselves forced out of certain markets or countries. This is specially the case when corruption is systemic. Multinational companies can leave the country but domestic firms, in this situation, are much more vulnerable. Corruption has become one of the leading causes for the lack of foreign investment in many countries.

The investors might miss time schedules for reasons not always under their control. There has to be a valid reason for the delay in the implementation of projects in the private sector, which is generally better managed than in the public sector: The Korean Export Promotion Zone (KEPZ) in Chittagong is a case in point which has been caught in the quagmire of bureaucratic arguments and counter-arguments. The project was adopted in the mid-1990s after the Prime Minister's visit to South Korea. The government showing its seriousness about the project, made the necessary amendments to the law permitting the Korean investors to develop an EPZ to promote foreign investment. To this end, the government provided the promoter with about 2500 acres of land in Chittagong and an agreement was made incorporating some conditions. Later, a committee report recommended that license should be given to the KEPZ to commence business on the fulfillment of 12 conditions most of which were compiled with as per the agreement on land. After the elapse of so many years, two more committees were created afresh to review the government's earlier decisions, instead of giving the KEPZ the license to operate. The committees would review why the KEPZ authority's licensing period should not be reduced to 15 years instead of earlier recommended 30 years and be renewed for another 15 years, instead of 30 years and the final verdict is to come in the near future.

KEPZ company is prepared to invest $200m for infrastructure development -- about US $50 m has already been invested and this venture could attract investment from prospective investors to the tune of US $ 1.0 billion.

Gas infrastructure with respect to exploration, production, development and distribution is in trouble. The construction works of new pipeline suffered from irregularities and nepotism.

Maddhyapara Hard Rock and Barapukria Coal mines are behind schedule by seven years.

A basic precondition to good investment is the presence of appropriate infrastructures. Ports are at the heart of export-oriented industries. Ports in Bangladesh are among the costliest in the region for their outmoded equipment handling procedures and trade union practices. Apart from local investments, foreign investments could be greater in Bangladesh if the ports were efficient and the existing facilities could be upgraded, restructured or expanded.

There is a very pressing need to accelerate investments in infrastructure, especially in the all too important power sector. Public sector activities in power projects are stagnating from corruption and lethargy. Private sector involvement in such activities is suffering from bureaucratic impediments and the tussle between different lobby groups. But these issues need to be addressed decisively and fast for new power generation units to be established rapidly throughout the country to help bolster economic activities and economic growth.

Apart from power, there are needs of substantial investment in information technology supporting facilities, telecommunications, transportation and other areas. But infrastructure building in such areas is being put on hold by lack of clear-cut policies. In addition to the government initiative as a major builder of infrastructure, facilities should be extended to private sector investment in infrastructure building. The private sector relies on public sector infrastructures to make their investment decisions, but there is ample scope for private investment in infrastructures.

The Columbus Declaration recommends that “Governments should consider, as appropriate, setting minimum standards for shipping agents, freight forwarders and customs clearing agents/brokers or encourage these professions to set their own standards and monitor performance, since the factors causing delays in the release of goods include inefficiency and lack of professionalism on the part of some members of these professions”.

Complicated regulatory systems often prevent small businesses from expanding into the formal economy, and adding more jobs, and can create more opportunities for graft. Where regulations are costly and burdensome, businesses often operate in the informal economy-and remain small, creating few jobs. Simpler rules are compatible with labour protection and some government oversight. Reforms should be in the light of this point.

Various studies indicate that high corruption and crime rates stand in the way of attracting, retaining and expanding private investment (or even disinvestment). Crime is a multi-dimensional phenomenon, but crime tackling strategies often focus on particular dimensions, primarily seeking to increase penalties. Experience shows that a more effective strategy combines this approach with a positive strategy to tackle the underlying causes of crime, such as undertaking broader institutional reforms and reducing poverty. Some of the institutional reforms could include maintaining efficient data collection systems, law enforcement capacity, and social programs for at-risk groups.

The government maintains that it is striving hard to improve the country's business environment. Even though the PRSP pointed out that bureaucratic red-tape, corruption, political disturbances, unsatisfactory law and order, etc. impact negatively on the inflow of FDI, no concrete strategies have been suggested in the paper.

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The author is Director (Research), TIB