Foreign investment in Bangladesh
Prospects for the Bangladesh conomy are bright, but FDI is badly needed to expand and diversify the manufacturing sector for export. If Government
systematically works to manage the existing problems, investment will come
Forrest Cookson
One surprising aspect of the current Bangladesh economy is the low level of investment by foreign companies and foreign persons. The rapid growth of the economy and the attractive investment laws suggest that interest by foreign investors would by buoyant. There is endless discussion of these issues in seminars and meetings; Government has announced many programs aimed at promoting foreign investment. However, none of these efforts have been successful. The volume of investment remains low compared to other countries.
First, lets look at foreign investment in the capital market. For an economy growing rapidly, with a strong balance of payments position, and a stable exchange rate there has been remarkably little interest in investing in the stock exchange. Over the years I have spoken often with mangers of investment funds in the United States on the question of investing in Bangladesh. I have received one response most of the time that I paraphrase: We think the markets are promising and there are attractive prospects, but we do not trust the audit reports. We are not convinced that the authorities are willing to insure audit reports correctly reflect the financial condition of the company. Get that fixed and we will be very interested in Bangladesh. Unfortunately, the authorities have not been successful in solving this problem. But if foreign investors in the share market are wanted this is what is needed. Increased foreign participation in the share market would be a powerful positive impact on financing enterprise.
More important is the quest for Foreign Direct Investment. One might expect investments in two major areas infrastructure and light manufacturing.
Infrastructure: The first sector to consider is infrastructure. Results in this sector are shaped by the Governments ambivalence as to how much of the infrastructure should be owned by the Government and how much by the private sector. The telecommunications sector is very successful in attracting foreign investment: a telephone system is
now available to Bangladeshis that is cheap, efficient, and provides the services that the population wants. In this case the technology was not available through Bangladesh companies so there was no choice but to turn to foreign companies. In the gas sector the Government has not been willing to offer terms for investment that attracts major oil companies. The result is little exploration effort and a growing shortage gas. There has been little effort to look for gas so why is anyone surprised that there is a shortage! The gas authorities remain very suspicious of foreign oil companies, creating conditions that would discourage investment.
The coal resources that foreign investors were prepared to develop would have supported 4,000 MWs of electricity capacity and reduce the cost of power by at least a factor of two. But the production and use of coal has much opposition. Greed, idealism, political ambition combined to block any serious exploitation of Bangladeshs coal resources. Too bad, now the energy economy is moving towards total dependence on imports of high cost fuels. Energy security is lost.
The Government has abandoned development of major private sector investments in power generation. After the great success in 1998 of the two AES plants years have gone by with only one major plant operating under private sector ownership. None of the private sector coal fired power plants have been completed. More progress is made in publicly owned power projects. These have historically been poorly managed and never able to produce the electricity promised. Instead the power sector has become dependent on small plants with high fuel costs.
Government has never been comfortable with infrastructure investments by private companies. There is some room here for domestic investors but little for foreign investors, unless a new technology is required. I think the energy sector is now more or less out of bounds for foreign private investment. Twenty years ago every major power company and oil company was very excited about investing in Bangladeshs energy economy. Now there are none.
Labor Intensive Manufacturing: The inflow of investment for labor intensive manufacturing continues at a slow pace. There are many successful investors. But momentum has slowed. The investment is largely concentrated in the export processing zones. The prime location is in Chittagong, but now the zones located there are essentially full.
A decision some years ago to stop the expansion of land acquired for the export processing zones has kept this key location from expanding. The intention was to develop Special Economic Zones and indeed the Government is making progress in so doing, it has just taken a very long time to take off. A reasonable expectation is that investors will go into the Special Economic Zones but foreign participation in these zones will be limited in early years.
What are the concerns of the foreign investors in manufacturing?
1. Security: The terrorist attack on the Holey Artisan Bakery has frightened many investors; stationing foreign managers and technicians in Bangladesh has become much more difficult. The Government is doing all that it can to improve the security situation and return confidence to foreigners working in Bangladesh, but the security situation remains a major concern.
2. Follow the laws and contract agreements: Bangladesh has excellent laws for foreign investors. However, the international community believes that these laws will be ignored by the Government when they wish. BIDA must be a vigorous voice insisting to the Government that the laws must be followed. This is the single most important problem in bringing greater foreign investment. One example is the 5% profit sharing requirement under the National Labor Law 2006. There is a conflict over Chevrons payment of this. One can call this profit sharing whatever one wants, but it is in fact an increase in the cost of labor. Companies that operate under normal business rules have to pay this profit sharing, accepting an increase in costs. However, Chevron is different, it operates under a Production Sharing Contract. Once can look at the profit sharing as a cost of doing business and include it in the cost recovery pool so that it is paid by Petrobangla. If Petrobangla refuses to recognize this as a cost to be put into the cost recovery pool then Chevron may argue that this is a violation of the PSC. Ultimately such a dispute goes to some sort of arbitration. The fundamental principles of the PSC limit the Governments rights to change contract terms.
3. Energy availability: Assurance of quality energy is essential for the foreign investor. At present factories receive electrical energy of moderate quality and with occasional outages. Even with standby generating capacity outages disrupt production, raising costs. Availability of gas is now very limited resulting in inability to install captive power generating capacity that can operate at low cost. This makes availability of quality, reliability energy even more important. Quality is of particular importance, as industrial machines are vulnerable to the voltage fluctuations typical of the electricity delivered in Bangladesh. All industry craves good quality electricity.
4. Labor: Labor problems are far less serious than in the past. Twenty-five years ago in a study done for the World Bank I interviewed many of the MDs of the foreign companies operating in Bangladesh. One of the most important concerns was the actions of the labor unions. These organizations behaved outside any regulations or laws. The leaders were described as racketeers who had no concern for the workers, only for their own pocketbooks. The one recommendation that was universal was to get rid of labor unions. Things are much better now. Labor unions are being established. Labor leaders are more mature and focused on their role as organizers and defenders of the workers. It is essential now that the Government allow labor unions to form and to behave responsibility: No wildcat strikes, understanding that there is a contract between the workers and the company, and responsible collective bargaining. Most major foreign investors understand the need for labor unions; but the unions must accept their responsibilities along with the rights of the workers. Recent unrest in the garment sector was a step backwards. Locking up labor leaders and mass firings are serious negative actions for foreign investors. Bangladesh should want the type of foreign investor that understanding the importance of labor rights.
5. Land and Transportation: The foreign investor who is focused on labor intensive manufacturing wants to be in Chittagong where management of transportation is simplest and there are many literate workers. Unfortunately, availability of land in Chittagong has been held back in recent years for two reasons: The decision to stop adding land to BEPZAs projects and the conflict over the Korea Export Processing Zone. The situation is improving in that there is a development of a SEZ for the Chinese investors underway. The local business community attack on the KEPZ has resulted in the loss of hundreds of million dollars of investment; hopefully this conflict can be resolved so that the Korean companies lined up for the KEPZ can make their investments. Opening up the left bank of the Karnaphuli River with the building of the tunnel and acquiring land by BEZA will provide the excellent location for new investors. Prospects are good for the Chittagong area.
6. Courting the investor: Bangladesh makes no serious effort to court major potential foreign investors. This is the task of BIDA but it requires the assistance of the PMO and a much more focused approach. If one sits and waits for the investor to walk in the door the current situation of limited investment will continue. Courting foreign investment also means overcoming the negative attitudes of Bangladesh private businessmen towards FDI.
Prospects for the Bangladesh economy are bright, but FDI is badly needed to expand and diversify the manufacturing sector for export. If Government systematically works to manage the above six problems investment will come. Without such resolution the leading companies of the world will not invest in Bangladesh.
The writer is an economist
