Needed: Enabling regulations and enforcement

The high transaction costs in key areas of policy making affecting business decision even after significant deregulation since the 1990s are indicative of an important aspect of the weakness of the private sector regulatory environment that has not received adequate attention. Much of the effort so far has focused on deregulating and simplifying bureaucratic interventions in private investment decisions. But there are a number of areas where investment facilitation requires enabling regulations and enforcement.  The inadequacy of legal framework for contract enforcement and resolving insolvency are two primary examples of the absence of appropriate enabling regulations.  Another important area is labour protection laws.   However, the low DB (doing business) ranking is also indicative of the fact that most other countries have moved much faster than Bangladesh in improving the investment climate.  
The relative stagnation in the private investment rate despite very favourable macroeconomic performance and robust economic growth are indicative of the investor concern with the business environment that has made progress but falls short considerably in relation to other countries. The highest priority is to address the three binding constraints: contract enforcement; getting electricity; and property registration.  Additionally, policy focus is required in the matter of resolving insolvency and lowering the cost of trading across border.
It is helpful to classify these five regulatory constraints into two groups:  One consists of contract enforcement and resolving insolvency; the other consists of getting electricity, property registration and trading across border. While both require further simplification of procedures and improving public administrative capacities, the latter group also involves substantial public investments.
Contract enforcement and resolution of insolvency are indicative of weak procedures and inadequate implementation capacity and or lack of responsiveness in the concerned public agencies.  The satisfactory resolution of these two substantive constraints through proper policy actions is imperative in order to modernise the regulatory framework for private investment in Bangladesh.  There is an urgent need for the government to first review the legal framework to check adequacy of these two important enabling regulations in light of international good practice.  Based on that review, appropriate steps have to be taken to streamline and strengthen the related regulations. This is a first step. The other important reform is to ensure that adequate administrative and legal procedures are in place to enforce the sound implementation of these regulations. Once again, the Government can learn from the experience of good practice examples how business disputes are resolved and how bankruptcy proceedings are implemented in other countries.  This review can then inform what actions are needed to enforce proper implementation, including whether there is a need for separate legal entities to resolve business disputes.
Regarding access to electricity, the high transaction costs reflect mainly the inadequate supply of electricity relative to demand. Despite considerable new investments in power generation, getting electricity connections for new investments is a challenging exercise as reflected in the responses to business surveys.  This problem cannot be solved by a simple deregulation drive. While the regulatory procedures needs to be further simplified by reducing the number of procedures and response time to applications, the ability to actually respond to new requests for electricity connection in the required volume and with lower financial cost will depend critically on enhancing supply capabilities.  It is now clear that the supply of energy, both electricity and gas, has become a binding constraint on private investment and GDP growth. The resolution of this constraint requires both substantial public investment as well as implementation of a well-thought-out primary energy supply strategy.    
Concerning property registration, the long delays and high cost are reflective of another binding constraint to private investment: the availability of land for manufacturing enterprises.  The land market is very inefficient in view of weak land ownership data, lack of computerisation of land records, poor zoning laws, and high transaction cost.  On top, population pressure and rapid urbanisation have contributed to a growing scarcity of urban land.  As land prices have sky rocketed so have land disputes and various forms of corruption including land grabbing. The challenge for policy is acute and a resolution will take a long time. A range of policy actions are needed here including regulatory reforms to simplify land transactions and registration; institutional reforms to improve land administration and record keeping; investment in economic zones to provide land for domestic and foreign private investors; and enforcement mechanisms to enforce land use zoning laws.  
Finally, regarding trading across border, since the 1980s there has been substantial simplification of international trade-related regulatory policies and procedures.  The quantitative restrictions have given way to customs duties-based restrictions, which, in turn, have been considerably lowered although there is still a long way to go.  The lower ranking on this count reflects the considerably longer delays in trade transactions and associated costs related to weakness of trade logistics.  Much of the problem lies in internal transport between factory gate and the port. The Chittagong port's handling capacity has improved and port handling charges are less of a concern.  But the inadequacies of the railway connection from Chittagong Port to factory destinations across the country and the road congestions on the major highways are of serious concern. The transport problem is a third binding constraint to the acceleration of private investment that needs urgent resolution.  The Government has taken a number of initiatives to ease the problems, but progress with implementation of railway reforms and completion of road projects are lagging behind substantially.     

Dr Sadiq Ahmed is Vice Chairman of the Policy Research Institute of Bangladesh (PRI).
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