Why FDI is not flowing into Bangladesh?

Salient features of this regime will help us understand the regulatory issues concerning the inflow and operation of FDI.

Favourable policies and incentive schemes

* FDI is allowed in every sector of the economy except in 5 industries reserved for the public sector (i.e., defence equipment, nuclear energy, forest plantation, security printing, and railways).

* Tax holiday for 5 to 7 years from the month of commencement of production.

* Private sector power companies enjoy income tax exemption for 15 years from the date of commercial production

* Foreign enterprises and/or experts get tax exemption on their royalties and technical fees.

* For tax paying foreign enterprises there are bilateral arrangements with major trading partners which protects the foreign firms from double taxation

* 100 per cent export-oriented units do not have to pay any duty for importing machinery and spare parts.

* Foreign technicians or experts are exempt from income tax during the first three years of their employment.

* Full repatriation of profit and dividend by the foreign companies is permitted.

* Re-investment of repatriable dividend is treated as new investment.

* Foreign investors or companies are free to apply for full working capital loans from the local banks in which case no restrictions apply as the terms of loans are determined on the basis of bank-client relationship.

* 100 per cent foreign firms or joint ventures are NOT required to sell their shares through public issues and they are eligible to buy shares through the stock exchange.

* Apart from the above, Foreign Investment Promotion and Protection Act, 1980 of Bangladesh provides for:

* Non-discriminatory treatment between foreign and local investment

* Protection of foreign investment from expropriation by the state and ensures repatriation of proceeds from sale or shares and profit.

Bangladesh is also a signatory of the Multilateral Investment Guarantee Agency insuring investors against political risk. As a member of World Intellectual Property Organisation (WIPO) and World Association of Investment Promotion Agencies (WAIPA) the country further safeguards the interest of foreign investment.

Standard dispute settlement procedures are followed in case there is any dispute with the government or with any private party. If the foreign investors feel that their rights have been violated, they can file writs with the High Courts.

Regulatory and legal issues

*At least on papers Bangladesh offers an investor-friendly environment. The entry and exit provisions for both large and small foreign investors are well defined and the interests of the investors are also well protected.

* All FDI needs to be registered either with BEPZA, BSCIC, or BOI. FDI in EPZ or in any industrial estate should register with BEPZA or BSCIC. Business elsewhere should be registered with BOI.

* Firms employing ten or more people are also required to be registered with the Chief Inspector of Factories and Establishments.

* Pre-registration clearance is required for investment in RMG, banks, insurance companies and other financial institutions.

* Industrial projects need to take clearance from the Environment Department after conducting environment assessment.

* An industrial unit is required to limit the number of foreign employees to a maximum of 15 per cent of its total work force including its senior management.

In general registration of the firms is a simple procedure. Registration is required to acquire legal status and to access the facilities provided to foreign investment. The Board of Investment (BOI) now provides one-step support services which includes, inter alia, free investment counseling, utility service connections, handling such problems as clearing imported machinery under concessional rate of import duty.

Preconditions with regard to employment of foreign people have not been stringent. This is because labour is cheap in Bangladesh and therefore foreign firms have the incentive to hire local people when available.

The existing regulatory framework provides several other incentives to foreign investors. These are:

* There is no restriction on the acquisition of local enterprises by foreign firms. This means the foreign firms can freely buy any enterprises in the private sector. Foreign investors may also buy public sector enterprises earmarked for privatisation.

* There is no general local-content requirement for FDI in Bangladesh. This means foreign firms can freely decide whether to use domestic or imported raw materials when both of them are available. (However, only in the pharmaceutical industry raw materials of some drugs will have to be procured locally. The government also encourages the use of local raw materials in the production of RMG by providing attractive financial incentives).

* There is also no general requirement of technology transfer. However, contracts assigned with foreign oil companies stipulate the transfer of technology to the national Oil Company.

* For industrial workers there is also no law mandating a minimum wage. The EPZ has some minimum wage requirements but the minimum wage is quite low compared to international standard.

Despite those generous incentive regimes FDI flow into Bangladesh has not been very encouraging. Although there are controversies over actual amount of FDI inflow into the country, there is no denying that such inflow is not significant. (It is difficult to quantify the flow of FDI because of non-reporting problem. Usually the balance of payments statistics are used to determine the inflow but such measures fail to give a complete picture. For 1999-2000 estimates on the basis of the balance of payments show an FDI inflow of US$174 million, while compilation of information from various sectors (by the World Bank) suggest an amount of US$ 629 million. Despite considerable difference between the two estimates it goes without saying that the relative importance of FDI in Bangladesh's economy is low by an absolute standard. During the second half of the 1990s developing countries on the whole received an FDI inflow close to 2 per cent of their GDP, while for Bangladesh the corresponding figure is only between 0.2 - 0.5 percent. For the whole South Asia the comparable figure is 0.5-0.7 per cent of which India's share is about 75 per cent.

Several issues might be held responsible for low FDI inflow into Bangladesh.

* Although on paper the investment regime looks impressive, there are actually many problems in accessing some of those attractive incentives. Lengthy and corrupt bureaucratic procedures result in high cost of doing business in Bangladesh. For example, in a World Bank study it has been reported that:

-On an average it took 12 days for exporters to get their imported inputs released from the ports/airport;

-On an average 9 days to get customs clearance for exporting a shipment;

-7 days to complete all documents for exports; and

-On an average a firm spends more than half a person-year to deal with government agencies such as customs, port authority, tax department, etc.

* Despite having a straightforward exit policy, in recent times it has been alleged that repatriation settlement is not always easy for a firm that discontinues business or divests.

* A significant proportion of recent FDI inflow to Bangladesh is concentrated in the development of natural gas sector. Big multinationals are in favour of selling gas to foreign markets, while many in Bangladesh believe that in the best interest of the nation gas resources should be utilised domestically. This has resulted in an uncomfortable relationship between the Government of Bangladesh and foreign investors in this sector.

* Poor law and order situation along with political unrest generates a felling of uncertainty among the investors

* The closure of ETV that had a substantial FDI, particularly from the U.S., had a negative impact on the potential foreign investors.

* Bangladesh has always had an image problem and in the post September 11 period the problem has been worse. News reports citing Bangladesh as a potential threat have damaged foreign investors' confidence on Bangladesh. To make things even worse Bangladesh has been shown to be the world's most corrupt countries.

* The adversarial politics and war of words have been working against smooth flow of FDI into the country.

* The lack of continuity of policy regime as soon as a government changes also constraints flow of FDI.

Despite all the above constraints, the importance of FDI cannot be overstated. Currently Bangladesh provides an attractive investment regime but the response from the investor has not been very encouraging. The regulatory provisions as they appear on paper are indeed generous. Development friendly FDI regime in Bangladesh is largely about restoring confidence in the minds of the investors by improving the law and order situation, by tackling the problem of increased costs of doing business, and by building a good image of the country. These are, no doubt, big tasks for Bangladesh -- only success in them will ensure Bangladesh does not become marginalised in an increasingly globalised world economy. Private sector in Bangladesh enjoys more freedom, mobility and flexibility. But much more needs to be done to keep the wheel moving. Yet its performance in manufacturing investment compared to training has indeed been very unsatisfactory. The extent of join venture investment has not been impressive either.

Given this context many things can be done so as to create a more conducive FDI regime:

* Reduction of government restrictions in the field of investment.

* Simplifying industrial sanctioning procedure.

* Introduction of sanctions for infringement of well-defined rules.

* Efficient dispute settlement procedures.

* Examination of discriminations, if any, against foreign investors.

* Streamlining foreign exchange controls.

* Reforming banking sectors.

* Overhauling bureaucracy to provide speedy utility and other regulatory services.

* Effective independent judiciary services.

* A permanent Business Regulatory Commission with appropriate representation from the private sector to monitor developments in the business sector to facilitate investment, both local and foreign.

* Avoid all activities, which increase the cost of doing business in Bangladesh.

* Continuation of economic policies despite changes in government.

* Do everything to bolster the image of Bangladesh.

* Encourage participatory and effective governance.

Dr Atiur Rahman is a Senior Research Fellow, Bangladesh Institute of Development Studies (BIDS), Dhaka, Bangladesh.