The Way Forward

A long-term strategy for FDI

Farooq Sobhan

Over the past two years, foreign direct investment (FDI) in Bangladesh has been marked by a steadily upward movement, spurred by large investments in the telecommunications sector. In fact, in 2004, out of the total $660.8 million foreign direct investment, $237 million was invested in the telecommunications sector a share of 35.93% of the total FDI in Bangladesh. Over the past two years, the FDI in Bangladesh has grown commensurately, complemented by a growth in investment in the telecom sector.

However, it is time for Bangladesh to move away from telecom as the primary sector for FDI and focus on stimulating foreign investment in a wider range of sectors. This should be the heart of any long-term strategy that is developed to attract increased FDI in Bangladesh.

A sector that has done quite well in recent years is energy and power. With over $133 million FDI in 2004, the energy and power sector holds bright prospects for Bangladesh, due in part to our substantial oil, gas and coal reserves. Efficient extraction and processing of these natural fuels can assist in making Bangladesh an energy-surplus country in a few years, and can further fuel economic growth, allowing Bangladesh to serve as a base for industries with high energy consumption. To further accomplish this goal, there is a need to ensure that the third bidding round for oil and gas reserves proceeds in a smooth and expeditious manner, thus raising investor confidence in Bangladesh.

The first and foremost step in developing a successful FDI strategy for Bangladesh should be the further strengthening and building of the capacity of the Board of Investment (BOI). During negotiations with multinationals, BOI is compelled to hire external experts, and therefore there is a clear necessity to build a team of technical, financial and legal experts in-house to tackle the issues and concerns of any proposed investment plan.

At the same time, another key primary measure that must be taken is the development and improvement of the provision of infrastructure in Bangladesh. There is an urgent need to improve power supply, port operations and railway systems as soon as possible. The inefficient and unreliable provision of infrastructure to investors serves as a crucial deterrent to increased FDI in Bangladesh. All efforts should be made to convert the Chittagong port into a regional hub, thus enabling land-locked areas like North-East India and Southern China to have access to global shipping routes.

There is also a need to develop and promote a key pattern of success stories early on. For this purpose, the successful and early conclusion of talks on the proposed investments of TATA, Asia Energy and Dhabi Group is important to allow the investments to begin, thus adding further to our existing FDI levels. In addition, it is important for the government to grant a license to the proposed Korean EPZ, as such a move can further spur increased foreign investment in Bangladesh.

At the same time, it is necessary for Bangladesh to focus on other long-term goals, to ensure that the strategy for increasing FDI in Bangladesh is comprehensive and effective. One such measure should be the improvement of higher education institutions in the country, specifically the business management institutions, and the improvement of English language skills. It is also necessary to address the needs of industry at every level. More vocational training institutes may be established to further train young workers so that they are more prepared to work in the factories. Bangladesh also needs to take advantage of our LDC status, which gives us duty-free access to many countries, including the US, Canada, Japan, Australia, New Zealand and the European union.

Port efficiency is vital

There is also a need to improve and enhance the use of e-governance in Bangladesh. Increased e-governance can allow investors to interface efficiently with the bureaucracy, and can also promote greater transparency while lowering corruption and inefficiency at all levels. At the same time, the government must focus on improving the law and order situation in Bangladesh, and must eliminate all forms of extortion. Security is one of the major concerns of all investors in Bangladesh, both domestic and foreign, and in the current state of affairs careful attention must be paid to improving the security situation to further stimulate growth and development.

Finally, there is a definite need for Bangladesh to promote regional cooperation and integration, in order to transform South Asia into a single market. This will allow Bangladesh to be the base of operations of many industries, in order to reach consumers in both South and South-East Asia. Bangladesh is conveniently located between these two major consumer bases, and a single Asian market can boost investment in Bangladesh. Simultaneously, Bangladesh must strive to integrate its communication systems with South and South-East Asia.

The Asian Highway is an opportunity that Bangladesh cannot afford to miss, and therefore every measure should be taken to ensure that Bangladesh is a key part of this major communications network.

In addition, Bangladesh should, in the interest of increased competition in air travel, aim to follow an "open sky" policy, instead of the existing system, which was established to protect Biman. Instead, the government should explore options for privatising or corporatising Biman at the earliest possible opportunity, as this will lower losses and boost competition and efficiency.

The critical prerequisite of an efficient and effective long-term investment strategy, however, is cooperation and consensus among the major political parties. Bangladesh politicians need to join hands and work together for the future development of Bangladesh. It is necessary for all parties to respect contracts concluded by preceding governments, and avoid abrupt changes in policy. Continuity and predictability in government policies and decisions is necessary for improving the investment climate and stimulating growth and development.

However, it is important to note that the government of Bangladesh is already taking several positive steps towards increasing FDI in Bangladesh. The BOI is being restructured, and will undergo capacity building initiatives to raise their ability to serve their role efficiently. In addition, the upcoming Private Sector Development Support Project (PSDSP), which is currently in the Design Phase, will be a crucial element in the long term FDI strategy of Bangla-desh, as it will boost the development of the private sector through the removal of administrative barriers, efficient regulatory reforms, the capacity building of key government agencies related to the private sector, and the setting up of special economic zones. While the removal of administrative barriers and regulatory reforms are necessary prerequisites for increased investment and growth, capacity building is key to ensuring that investors needs and concerns are met in a timely and efficient manner, and that the government functions more efficiently as a facilitator, rather than a regulator, to the private sector. The concept of special economic zones, and indeed an integrated strategy to economic zones in Bangladesh, covering the existing EPZs and Industrial Parks, can serve as an efficient vehicle for increased FDI, as they can be used to attract foreign investors in a more efficient atmosphere than in the rest of the country in general.

In conclusion, it is important to keep in mind the positive effects of increased FDI in our economy. More foreign investment can lead to more jobs in Bangladesh, reducing unemployment, decreasing the level of poverty in the country, and increasing the per capita GDP of Bangladesh. It can also be used to increase competition in the economy, and can serve as a vehicle through which global best practices and technology are transferred to domestic firms, leading to wider acceptance and practice of principles like Corporate Governance and Corporate Social Responsibility. Finally, increased foreign investment can help Bangladesh successfully meet the major challenge of the post-MFA era: how to diversify our export basket and move away from exporting mostly RMG. This is a necessary precondition to Bangla-desh's survival in today's new globalising world.

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The writer, a former Foreign Secretary, is currently President, Bangladesh Enterprise Institute.