Investment in BD

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1 Challenges of investment in Bangladesh. M.G. Mostafa, MBA student, NUB

Course Title: Managerial Economics

Course Code: MBA 5208, Section: 1A

Semester: Spring 2012

Submitted To:Khan Mehedi Hasan

Adjunct Faculty

Business Administration

Northern University, Khulna Campus

Submitted By:Mohd. Golam Mostafa

Student ID: 120161534

28 April, 2012




Challenges of Investment in BangladeshMohd. Golam Mostafa

MBA studentNorthern University, Khulna campus

Introduction

Investment has become major challenging issue for any country as investment hasbecome a main key to development and growth. Investors and fund managers seeksthe best place and appropriate long-term facilities for investment. Countries that cangive those facilities and many more become the center of investment. Bangladesh is acountry of immense potential for investment. It has all the natural endowments whichare considered essential elements for a particular region to thrive up as a verycovetous trade and investment center. Over the past decade Bangladesh performed

well on many macroeconomic indicators, became more integrated with the worldeconomy, and achieved impressive social gains. Considering all issues Bangladeshcan be a good destination for both domestic and foreign investment. In spite of allthese potentials there are some challenges too, some of them are considered serioushindrance to the investment in Bangladesh.

Key economic facts

GDP/PPP (2011 est.): $100 billion; per capita $664

Real growth rate: 6%

Inflation: 11.3% Industries: Textiles, jute, garments, tea processing, paper, newsprint, cement,

chemical fertilizer, light engineering, sugar, ceramics and pharmaceuticals.

Natural resources: Natural Gas, Arable Land, Timber and Coal.

Exports: $1447 million (September 2011.): Bangladesh exports mainly ReadyMade Garments including knit wear (75% of exports revenue). Others include:Shrimps, Jute Goods (including Carpet), Leather Goods and Tea.

Imports: $6938 million (July 2011): Bangladesh imports mostly PetroleumProduct and Oil, Machinery and Parts, Soybean and Palm Oil, Raw Cotton,Iron, Steel and Wheat.

Economic Overview

Although the transition process from an agrarian economy to a manufacturing andservice based economy has only begun, the common consensus between all politicalparties is that the market-oriented economic policy must be promoted. The privatesector is now the major source of investment in the country and this is furtheraccentuated by Bangladesh’s liberal economic approach. Policies of liberalization,deregulation and reforms have been combined together to bring about changes inalmost all sectors of the economy in tune with globalization challenges. By removing

all barriers to investment and business, Bangladesh has opened up its economy.Bangladesh is currently one of the top exporters of Readymade garments (RMG) to




the USA and Europe. Fisheries (shrimp mainly) and leather products are also beingexported at an increasing rate.

The population reaching nearly164 million, Bangladesh is one of the most populouscountries of the world and potentially a sizeable market due to relatively high growthrates and an expanding middle class with increasing purchasing power.

Types of investments and potential sectors for investment

Investment is widely categories as Domestic Investment and Foreign Investment.Foreign investment can be Foreign Direct Investment (FDI), Foreign PortfolioInvestment and long term loan basis. Foreign Private investments are lucrative for anyhost economy. All these investments goes to Business Sectors (equipment structures),Residential Sectors and in Inventory.

Based on our natural resources galore, strategic geographic location, distinctcompetitive edge and comparative advantages - sectors like petrochemicals & itsdependent industries, oilrefineries, pulp & paper industries, tourism & amusement industries, cement clinker,ship building & repairing industries, chemicals, pharmaceuticals and its ancillaryindustries, electrical & electronic industries, light engineering, leather & jute,melamine & ceramic industries, power generation, water treatment industry, deepdraft port, telecommunication, composite textile & garments backward linkageindustries, timber, agro processing and gas based industries have huge prospects togrow in Bangladesh to cater to the vast domestic market as well as to capitalize the

privileged market access being enjoyed by Bangladesh from developed countriesthrough export.

Figure 1: Showing Investment Situation Up to 2008




Recent (2011) trends for investing in BangladeshSaudi Arabia trying to secure public and private investment in oil and gas, power andtransportation projects, United Arab Emirates (UAE) is keen to invest in growingshipbuilding industry in Bangladesh encouraged by comparative cost advantage, Tata,

an India-based leading industrial multinational to invest Taka 1500 crore to set up anautomobile industry in Bangladesh, World Bank to invest in rural roads improvingquality of live, the Rwandan entrepreneurs are keen to invest in Bangladesh'spharmaceuticals sector considering its potentiality in international market, Samsungsought to lease 500 industrial plots from the export zones authority to set up anelectronics hub in Bangladesh with an investment of US$1.25 billion, National Boardof Revenue (NBR) is set to withdraw tax rebate facilities on investment in the capitalmarket by individual taxpayers from the fiscal 2011-12.

Investment climate needed for investment

Defining investment climate precisely is difficult. But one useful definition is the―policy, institutional, and behavioral environment, present and expected, thatinfluences the returns, and risks, associated with investment‖ (Stern 2002b). Thisenvironment is generally seen as having three main features: macroeconomicconditions, governance, and infrastructure. Macroeconomic (or country-level)factors include such issues as fiscal, monetary, and exchange rate policies and politicalstability. Governance relates to government interactions with business, whichtypically mean regulation and corruption, both of which affect the costs of starting andrunning a business. Infrastructure refers to the quality and quantity of physicalinfrastructure (such as power, transport, and telecommunications). More broadly, it

can also refer to financial infrastructure (such as banking) — or access to finance.

Investment challengesFrom the facts, it is evident that Bangladesh has all the prospects, potentials anddistinct cutting edges to grow as a very lucrative and attractive epi-center of investment, if nurtured with forward looking vision and necessary policy supports.But ironically lack of vision & mission on part of the successive Governments, dearthof prudence & statesmanship, lackadaisical effort, inconsistent & unpredictable policymeasures, slow decision making process, lackluster & protracted implementation

process, lack of proactiveness and leadership acuity have colossally contributed tounder-exploitation of the ample potentials of Bangladesh. The following factors areaffecting the desired level of economic development and inflow of domestic andforeign investment in Bangladesh.

Inadequate infrastructure facilities (power, water & gas): In infrastructure, acritical feature of a country’s investment climate, the quality of services appears tobe relatively poor in Bangladesh. Infrastructure is always a big headache for theurban and rural businesses. Evidence from the firm-level investment climatesurveys confirms that the quality of infrastructure services is a significant problemin Bangladesh, with electricity the biggest concern. With generating capacity short

of needs, supply notoriously unreliable, and power outages common, access toreliable power is a prime concern for most manufacturing firms in Bangladesh. To




fuel her ambition of maintaining a growth rate of 7%, Bangladesh will need to add2000 MW additional energy each year. In 2007 the peak demand for electricitystood at 4500 MW whereas generation was stagnated at 3,717 MW. The result isservice disruptions and blackouts on almost every single day of the year. At 147KWH Bangladesh has one of the lowest per capita electricity consumption in theSouth-East Asia. Only Nepal has lower consumption than Bangladesh

Water and gas is also in the same poor condition. This has caused the businesses tolook for alternative and back-up services to support their businesses which in turnincrease their operating cost significantly. With rising fuel cost the expense isputting real dent in their profit figures. The service disruption due to theseshortages also causes severe problems.

Financial sector related problems: Economic theory holds that businesses willinvest in projects where the expected benefits exceed the cost of investment. But

this efficient outcome can be achieved only when entrepreneurs face no creditconstraints unrelated to their own performance. Credit constraints are less likely incountries with well-developed and well-functioning financial systems.

One prerequisite of having a healthy investment climate in an economy isthe availability of financing facility for the existing and potential borrowers.The two major sources of financing are the banks and capital market.However, the proportion of bank financing and equity financing differsfrom country to country. Historically, Bangladesh economy heavily depends on bank dominated financial system. Equity financing from

capital markets through issuing new shares is lenient whereas debtfinancing through issuing corporate bonds is almost nonexistent.

Depth of Bangladeshi domestic finance sector is not so good that it can givesufficient support to the upcoming investors. Lack of proper regulations,regulatory authorities or powerless regulatory bodies cannot support properly thelocal financial institutes and their instruments. Crowding out effect can be possiblefor the local investors if foreign counterparts are taking loan from the domesticmoney market. Domestic banks and NBFIs do not have sufficient capital structureto finance long term huge investment. More over state-run NCBs dominate the

banking sector which is very much corrupted. Domestic capital market is not soestablished that it can be an alternative to the long term debt financing of moneymarket.

Access to finance: Access to finance in Bangladesh, though is not a greatproblem, but the cost of getting it is huge. Lending rate for industry is very highwhich still over 12% is. But the lending rate is 3% - 7% in neighboring andcomparable countries like India, Pakistan, Sri Lanka and Thailand. Moreover,whenever a businessman is to get loan from bank, he is to spend a certainpercentage of loan as kickbacks to dishonest bank officials. Due to this, the cost of

getting fund for industry from bank is simply enormous which does not support




sustainable business development. Political influence and pressure from vestedquarter is also rampant in banking system.

Policy Initiatives: Government policies, which are related to governmentinteraction and dealing with business by means of regulatory affairs, are rathergreat problem for the sustainable business development in Bangladesh. The rulesand regulations, enacted with the benign view of facilitating and helping business,rather acts as a regulatory and problem creating mechanism. In most cases, thesepolicies are unpredictable, visionless, discriminatory, biased and devoid of reality.These non-transparent and ambiguous policies help the corrupt governmentofficials to ensnare the businessmen for undue personal advantages and gains.

Frequent policy changes: Policies formulated get changed with the government.As there is serious antagonism between the main two parties, they tend to undo the

work done by their predecessors. This causes pain to the business community asthe high investment projects require serious policy consideration and longer payback period and such changes can create havoc for the project.

Centralized and slow decision making process: One of the most formidablechallenges to business in Bangladesh is centralized and slow decision makingprocess. As a result, the geographical dispersion of business and productiondepending on comparative prospects and resources base does not grow. Due tolack of decentralization of administration, the businessmen have to frequently visitto or establish permanent office in Dhaka, increasing the cost of business. The

problem becomes colossal for SMEs.

Bureaucratic hassle: Bureaucracy and red-tapism has taken its toll forBangladesh business environment. Opening a business on an average takes 74days. Getting a license takes a staggering 252 days.

Customs, VAT and IT: Customs has been widely recognized as the mostconspicuous barrier for the growth of business in Bangladesh. The corrupt customsofficials are responsible for the drainage of large chunk of money of thebusinessmen without any receipt. The willful delay and harassment by the officials

in clearing document for personal gains sometimes appear as a great blow tobusiness and production. Paying VAT and Income Tax and getting refund orrebate of it when becomes due is highly embarrassing for the businessmen.Sometimes he is to spend 50% of his rebatable/refundable tax amount. Moreover,the capacity of the department is very weak.

Corruption: There is very little to add in this point since there is so much uproarfrom every kind of media about how corrupt the country is. Political andadministrative corruptions are probably one of the biggest problems faced by theorganizations. The recent drive against corruption is encouraging but unfortunately

this is focused around the urban centers whereas the rural corruption is stillrampant. Corruption is pervasive. Getting any approval, giving speed money is




must. Discriminatory power of the Govt. officials encourages them to be corruptand whimsical.

Table 1: Doing Business Indicators 2010 for Bangladesh

Political instability: According to a UNDP research strike has led to 3-4% GDPlosses during the 1990s. There were about 611 strikes during 1995 to 2002. Thiscreates immense burden on the business firms as the shops often get vandalizedduring strike violence.

Poor law and order situation: Having a sound law and order situation helpflourish business. But the situation has deteriorated over the years. Recent drive toimprove the situation has helped but it has done damage to the businesscommunities’ confidence.

Natural Disasters: Sheer density of the country’s population- 2,639 people persquare mile- makes any natural disaster a crisis. Among the time magazine's list of top 10 natural disasters of 2007 Bangladesh was the only country to be featuredtwice. These disasters disrupt supply chain, damage business and create untoldsuffering for the consumers.







Lack of efficient distribution channels: Bangladesh has one of the flattest landstructures in the world. The lack of obstacles (hills, desert etc.) and presence of cheaper transportation option (waterway) makes the country any supply channelmanager’s dream. But unfortunately the real picture is somewhat different. The

businesses lose near 40% of the perishable items due to lack of efficientdistribution channel. Lack of supply chain management knowledge, a weak transportation system, and corrupt road authorities are some factors that contributeto make the system inefficient.

Imperfect market: Market imperfection bleeds the businesses specially the smallplayers the most. Dominance of the middlemen in the value chain often cost pricedistortion. It is a common scenario for the product to be sold at a significantpremium while the producers take on a huge loss. Lack of information and thecontrol exercised by these forces cause severe problem for the local producers.

Influence of Terrorism: Terrorism can negatively impact growth, investment andtrade flows. Moreover, it also leads to retrenchment on specific industries mostnotably airlines, travel, tourism, insurance, lodging, restaurants, recreation andrelated activities, and thus the localities where these industries are concentratedbecome more vulnerable. In the long run terrorism increased the costs of security,a crowding out impact due to anti-terrorism expenditures, and other long-run costs.Among these effects the impact of increased uncertainty and apprehension infinancial markets which increases volatility and boosting risk premiums is verymuch critical for the investment climate. This is likely to induce investors to get

out of riskier spots.

Terrorism also deteriorates investor’s confidence in terrorism infected countries.For all these reasons terrorism have a significant negative impact particularly onforeign direct investments (FDI) inflows.

The present government has been trying to uproot the elements of terrorism formthe country. But the damages that had been done by the series of terrorist attacks inthe past are still a serious consideration in the minds of foreign investors inparticular.

Skilled labor: Bangladesh may be the land of cheap labor but they are alsounskilled. The training institutions are not sufficient to provide the quality laborforce the businesses need.

Quality of raw-materials: The material used to make a product lacks consistentquality. The country has to go miles to achieve the structured type of business thatwe find common in the developed world. Modern quality techniques foundwanting in the manufacturing sector of the country. But as the businesses get moresophisticated they will need quality materials. As the recent quality scare in China

proves business has lot more to lose (e.g. quick execution) than their business.




Lack of connectivity: The world has moved on to connect itself to the WorldWide Web whereas Bangladesh is lagging far behind. Across the world innovativebusiness are emerging using a clicks and mortar business model. They areleveraging the full potential of the World Wide Web. As the access to high-speedinternet connection becoming cheaper by the day around the world the story isquite different for Bangladesh. Businesses have to pay a handsome amount in factone of the world steepest fees to get access to the web. But the scenario ischanging in the consumer front. Consumers now have access to the web throughtheir cell. There is a huge opportunity to cater to the foreign customers bydisplaying the product in the web. But the high-speed internet connectivity is yet toreach the acceptable standard.

Lack of proper business knowledge: Most of the entrepreneurs of Bangladeshapply the traditional hit and miss approach with their businesses. They have little

institutional knowledge and have little access to training as very few organizationsoffer quality facility. In absence of know-how relating to general accounting,branding, taxation, law etc. the businesses tend to miss the opportunity that theregulatory environment offers. Internet can play a vital role here for knowledgedissemination but the access to the net is not that easy.

RecommendationsTo woo investment in the real sector as well as financial sector a lot of measuresshould be taken in the field of infrastructure development, policy and regulatoryreform. Political consensus should be reached for the greater interest of trade,

commerce and investment of the country. Easing bottlenecks in infrastructure: For the sake of manufacturing related

investment for both local and overseas investors; infrastructure like EPZ andindustrial park should be developed with sufficient communication and utilityfacilities like energy resources, waste management. Sea port management forChittagong and Mongla port should be world class. These two ports & capital cityshould be made as the major business hub of the country. Highways withnecessary lanes, express, elevated or rope ways and inland water & railwaytransport facilities should be built to make proper communication for thosebusiness hub and other relevant business areas. A plan has to be made to setupsome more power generation plant(s) of 7000-10000 mw capacity in next 5-7years. Private sector can be encouraged in this regard. This type of public sectorled project should not be financed by Annual Development Projects (ADP) only.For financial facilities capital market can be involved. Policy like public – privatepartnership (PPP), incentives to private sectors can be used. It feels that successfulimplementation of the PPP concept will open opportunities for higher flows of local and foreign investment in infrastructure, particularly in transport and power.

Financial sector related measure: Local financial sector including capital marketshould be made healthy. Domination of NCBs in the banking system should bereduced by increasing the capacity of private sector. FOREX (Foreign Exchange)




reserve should be use carefully so that foreign investors get sufficient faith. Takingproper plan domestic capital market can be made healthy. International standardand feasible techniques for financial sector management should be adoptedimmediately.

Governance strengthening related measure: Improving governance is crucial inevery sector and to achieve for that requires a clear long-term vision as well aspragmatism in exploiting opportunities to strengthen the overall framework of public accountability.

To attract the domestic and foreign investors, long term and sustainable policyshould be made. Facilities and incentives that are offered for investor (foreign,NRB and residential) should be effectively made known. Procedure for startingbusiness and approval related issues by any government/semi government/privatebody should be made simple and easy and e-governance should be incorporated inthis system. Corruptions by the Government functionaries that is more injuriousfor the business has to be separated from the executive and made speedy. A senseof security should be installed in the mind of prospective investors by improvingthe law and order situation.

FDI related measures: Significantly higher FDI inflows would be needed tosupport a higher growth environment in Bangladesh to compensate for domesticresource constraints and to enable Bangladesh to benefit from associatedknowledge and technological spillover effects. The current ban on FDI inflows

into the RMG sector also needs to be removed in order to bolster Bangladesh'sprospect for the post-ATC quota era.

Foreign investment or ownership related measures: Surrounded by increasinglycompetitive countries, Bangladesh must avoid discriminating against foreigninvestment or ownership. In this context, the investment environment wouldbecome more attractive by reducing restrictions on foreign ownership both inmanufacturing and service sector.

Conclusion

In a country like Bangladesh where private sectors are not so aggressive governmentshould come forward to create the proper investment climate. Policy measure as wellas infrastructural development should be the key issue to address for investment. Onthe other hand the competing countries for sharing the global FDI inflows are takingmany steps including offerings of lucrative incentives. Government should be themain facilitator and it can use the potentialities of private sector as a tool to developproper investment climate. Long term policy should be taken to make investmentsustainable. Domestic investors and nonresidential Bangladeshis should beencouraged to invest in the country through offerings of different incentives. Politicalinstability, declining law and order situation, critically insufficient energy supply and

infrastructural bottlenecks are the critical issues to address immediately to facilitateand motivate domestic and foreign investors to invest in Bangladesh. Finally, with all




the limitations and potentials Bangladesh should be a very good investment hub in theworld if she tries to keep her investment climate up to the expectations of theinvestors.

References1. Improving the Investment Climate in Bangladesh. An Investment Climate

Assessment Based on an Enterprise Survey, Carried Out by the BangladeshEnterprise Institute and the World Bank. June 2003. Washington, D.C

2. Bangladesh Economic Growth Assessment. USAID, June 2010.

3. A Guide to Doing Business in Bangladesh. Amir & Amir Law Associates.December 2011.

4. Investment Prospects in Bangladesh vis-à-vis imperatives for exploitation.Saifuzzaman Chowdhury, President, Chittagong Chamber of Commerce &Industry.

5. Different articles and blogs from the internet.

Documents

Investment in BD