Need to tackle key challenges in wooing FDI

Investment policy based on colonial legacy, poor infrastructure, bureaucratic tangles, shortage of gas and electricity are some of the key challenges to attracting foreign direct investment (FDI) in Bangladesh. There are some regulatory barriers as well. Corruption, red tape and a lack of coordination among the ministries are also keeping the foreign investors at bay. Many say the country is suffering from image crisis at the international level which is also seen as an impediment.
FDI flow into the country declined last year for the first time in five years. The country received $1.53 billion in FDI last year, down 4.57 per cent year-on-year, according to the World Investment Report 2015 of the United Nations Conference on Trade and Development (Unctad), released last week.
 Worldwide, FDI inflows declined 16 per cent year-on-year to $1.2 trillion last year because of the fragility of the global economy, policy uncertainty for investors and elevated geopolitical risk. However, recovery of the economy is in sight in 2015 and beyond. FDI flows now account for more than 40 per cent of external development finance to developing and transitional economies. China replaced the US as the recipient of the most FDI in the world.
In South Asia, apart from Bangladesh, FDI flow to Afghanistan, Bhutan, Nepal and Iran have gone down. In contrast, India, Pakistan and Sri Lanka saw their FDI inflows rise. India attracted the most FDI, with $34 billion during the calendar year. Pakistan's receipt increased 31 per cent to $1.7 billion.
In Bangladesh, the manufacturing sector received the highest FDI of $722.88 million, followed by trade and commerce at $366 million, and transport, storage and communications at $235 million. The net inflow to the power, gas and petroleum sector was $49.84 million.
Country-wise, however, the UK sent the highest amount of FDI of $180.98 million to Bangladesh, followed by South Korea at $134.70 million and Pakistan $130.74 million.
However, the government has reportedly contested Unctad's World Investment Report 2015 saying that that a huge amount of FDI had flowed into many sectors last year. But such investments were not reported. The authorities say the gross FDI inflow of $2.058 billion should have been the real external investment that flowed into the country last year. The gross inflow was calculated for the first time after a central bank committee counted all the investment flowing into the country from abroad as FDI.
The government claimed that many companies take the money out as cost recovery as per the rules of the central bank. So, they do not report them as FDI at the end of the year. This normally happens in case of international oil companies. The case of US energy giant Chevron can be cited in this respect. It invested $500 million in the country but took out $450 million as cost recovery.
Meantime, according to the US Investment Climate Statement 2015, corruption continues to impede investment in Bangladesh seriously as the government commitments to combat corruption are inconsistent with actual enforcement. The US statement, released recently, lauded the country's economic progress but highlighted inadequate infrastructure, financial constraints, political unrest, bureaucratic delays, and corruption that continued to hinder foreign investment.
By some estimates, off-the-record payments by firms may result in an annual reduction of 2.0-3.0 per cent of GDP, the statement said, adding that corruption deterred investment, stifled economic growth and development, distorted prices, and undermined the rule of law. It also identified weak and slow legal system, poor labour rights, steep rise in non-performing loans and loss making state-owned enterprises as other factors that hindered the good governance and investment climate.
In fact, Bangladesh should be more strict in regulating FDI. Many foreign investors came to Bangladesh and went back after making profits as the country's investment strategy is highly biased towards FDI. Time has now come to consider how much the country will get by providing them with so many facilities.
Despite having provision for full repatriation of profit and liquidated investment, liberal fiscal incentives and other benefits, national treatment at post-establishment phase, protection of foreign investment under the bilateral investment treaty with 29 countries and the extension of the facility to avoid double taxation under the double taxation treaty with 28 countries, why the much-sought-after FDI is not flowing into Bangladesh in a big way remains a big question. The country has, however, been identified as one of the next frontier (pre-emerging) markets on Goldman Sachs's list of 'next 11 countries'.
What is true about Bangladesh is that the soaring land prices and hassles in land acquisition impact adversely the inflow of foreign investment and the expansion of local businesses as well. The land issue has made the country's development challenges more critical as Bangladesh faces two other major ones -- upgrading its infrastructure and ensuring the availability of a large but skilled workforce.
In order to attract more FDIs, Bangladesh needs to tackle several growth-related factors like poor governance, large-scale tax-evasion, and the associated scarcity of land and natural resources.  Issues like unskilled and semi-skilled labour force and the country's vulnerability to natural disasters need also to be properly considered. Indeed, Bangladesh needs to overcome infrastructure-related bottlenecks, especially gas and electricity crisis, in attracting investments to its industrial sector.
The government has improved the efficiency of the main seaport in Chittagong but the construction of a four-lane highway to connect Chittagong with the capital is 'making only slow progress.' As such, the issue of prioritising improvement areas, infrastructure development should be given the highest priority along with advancement of bureaucratic system.
In fact, there is a pressing need for systematic reforms of the domestic and global investment agreement regime. The reforms should address the main challenges: safeguarding the nations' right to regulate agreements' in public interest, reforming investment dispute settlement system, ensuring meaningful investment to maximise positive impact of foreign investment, and minimise its potential negative effects.                 szkhanfe@gmail.com