The Way Forward

Measures to make FDI work

Dr. Atiur Rahman

Bangladesh has adopted a number of policies and provided generous incentives to attract foreign direct investment (FDI) into the country and the country seems to offer perhaps the most liberal FDI regime in South Asia (Cookson, 2002).

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

Favourable policies
FDI is allowed in every sector of the economy except in five 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 protect 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 are 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.

Political unrest no help

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 Court.

Regulatory issues
The entry and exit provisions for both large and small foreign investors are well-defined and the interest of the investors are 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 project 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 by the government to foreign investment.

The Board of Investment (BOI) now provides one step support services which includes, inter alia, free investment counselling, 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.

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 inflow in Bangladesh has not been commensurately as encouraging. 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 a 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 percent of their GDP, while for Bangladesh the corresponding figure is only from 0.2 to 0.5 percent. [For the whole South Asia the comparable figure is 0-5-0.7 percent of which India's share is about 75 percent].

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 discontinue business or divest.

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 feeling of uncertainty among the investors which needs to be overcome.

Conclusion
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, tackling the problem of increased cost of doing business, and building a good image of the country. These are no doubt big tasks for Bangladesh -- only success in them will ensure that 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. Many things can be done:

--Reduction of government restrictions in the field of investment
--Simplifying industrial sanctioning procedure
--Efficient dispute settlement procedures
--Examination of discriminations, if any, against foreign investors
--Streamlining foreign exchange controls
--Reforming banking/financial sectors
--Overhauling bureaucracy to provide speedy utility and other regulatory services
--Effective and 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
--Continuation of economic policies despite changes in government
--Do everything to bolster the image of Bangladesh
--Encourage participatory and effective governance

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The author is Chairman, Unnyan Shamanya and former Chairman, Janata Bank.