Placing Bangladesh on the global investor map
Tuesday, 14 December 2010
Although Bangla-desh's economy has made significant strides in recent years, a negative image of the country persists throughout the world. In the popular imagination, Bangladesh conjures terms such as poverty, overpopulation, donor aid, natural disaster, political instability, failed state, and corruption.
Some of these characterizations are accurate; others reflect the country's past, but none gives Bangladesh credit for the major social, economic, and political improvements that have taken place in recent years.
The country's poor reputation has been an ongoing problem since independence. Over the past 10 years, however, the situation in Bangladesh has changed, even though world opinion has not. It will take time to change the world's perceptions of Bangladesh, and meaningful change must be accomplished through concrete actions, not simply hollow words from government officials.
Bangladesh has been slow to integrate economically with the rest of the world because for most of its history, the country has been dependent on donor aid. Multilateral and bilateral assistance to Bangladesh has been much appreciated and generally utilized in an appropriate manner, but this has lead to a sense of aid dependency that the government now is trying to change. "Trade not aid" is the new mantra of the Bangladesh government, but the transition will not be easy, and it certainly will take time to implement both domestically and internationally.
Recent country ratings given by the two international credit rating agencies, Moody's and Standard & Poor's, have placed Bangladesh on par with some Southeast Asian countries. This is a significant milestone and a first for Bangladesh. Without a doubt, earning a rating gives the country a certain legitimacy in the eyes of global investors.
The next step should be for the government to issue a sovereign bond, which would generate further ratings, published rating reports, a global investor following, as well as follow-up research reports written by international investment banks. Already, Goldman Sachs has included Bangladesh in its list of the "Next Eleven," as has J.P. Morgan in its "Frontier Five" investment reports. These are positive steps, but much more needs to be done to maintain the momentum. In particular, investors will not continue reading investment reports unless they have something to invest in, whether it is a sovereign bond or stocks on the Dhaka Stock Exchange. For this reason, it is critical that Bangladesh find a way to attract more foreign portfolio investment.
Much more also needs to be done on the global economic integration front, including support for, and adherence to, formal trade agreements, increased access to international financial markets, and liberalization of the country's capital markets.
Increased garment exports to developed countries in Europe and North America have drawn attention to Bangladesh's economic opportunities. The rise of India has resulted in much greater interest in Bangladesh, especially among Indian companies, but also a greater awareness of investment and trade opportunities among other foreign companies that are looking at the Indian market.
Nevertheless, Bangladesh needs to do a better job of reaching out to international corporations and financial institutions in order to promote the country's opportunities and to global investors who are looking for a manufacturing platform located in the heart of Asia. The good news is that government and business leaders in Bangladesh now realize that perceptions of the country can make a significant difference in the success of its business, trade, investment, and tourism activities, as well as its overall economic relations with other nations. The government is on the right track in this area, but it must sharply accelerate the pace.
Reversing decades of negative opinion and ignorance will be a long-term effort. However, communication efforts must be undertaken to educate the global audience about the changes that Bangladesh is making. A multifaceted but coordinated low-cost initiative should be developed to start the process. This probably should be done with assistance from an international communications firm that has offices in London, New York, Washington and Hong Kong, which are all major financial centers, as well as important markets for Bangladesh.
Ambivalent feelings about foreign investment: A concern that must be addressed is the ambivalent attitude toward foreign investment in Bangladesh.
While there is strong support for increased foreign investment from Prime Minister Sheikh Hasina, her advisors, and cabinet ministers, the same cannot be said for many members of the bureaucracy, Parliament, the media, and nongovernmental organizations.
l Some of the resistance may be philosophical, but overall, there is a lack of appreciation of the substantial economic benefits that increased foreign direct investment (FDI) could bring to Bangladesh, and of the beneficial role that FDI has played in neighboring Asian countries.
l Existing FDI in Bangladesh has brought additional capital, introduced improved technology and management expertise, created employment, and improved access to international markets. It also has led to improved standards and changes in the local business culture, in addition to a great deal of social welfare philanthropy, such as support for training programs, schools, and health projects.
l Many people are not aware that in addition to the foregoing benefits, foreign investors are among the largest taxpayers in Bangladesh, when individual, corporate, and value-added taxes are combined with customs duties paid on imports and exports.
l Despite all of these benefits, one of the reasons that FDI in Bangladesh has been lower than that in neighboring countries is that there is little understanding of the benefits of FDI to the Bangladesh economy.
l Some government officials believe that the rate of FDI inflows is simply exogenous, and that nothing can be done to generate or increase it in Bangladesh in the near future. Others have even proposed that FDI be restricted in some sectors, like the garment industry.
Impediments to investment: Although Bangladesh offers many production advantages, the country's investment climate is plagued by a variety of problems and issues. As a result, the investment process remains challenging and unnecessarily lengthy, especially for first-time investors.
l According to the World Bank, the major structural problems seen by investors include power outages, access to land, limited access to finance, political instability, and bureaucracy and corruption.l In reality, a range of issues are having a negative affect on the country's investment climate: bureaucracy and corruption; infrastructure constraints in the areas of power, energy, transportation, and telecommunications; revenue administration; taxation; employment and labor issues; the legal framework; and access to financing.
l In reality, a range of issues are having a negative affect on the country's investment climate: bureaucracy and corruption; infrastructure constraints in the areas of power, energy, transportation, and telecommunications; revenue administration; taxation; employment and labor issues; the legal framework; and access to financing.
l Even after an investment is finally approved and a company is ready to begin operations, multiple decision makers in the bureaucracy take an inordinately long time to provide documents and signatures needed for the provision of things such as water, power and telephone lines, resulting in unnecessary, and frustrating operational delays.
l As in most countries, the bureaucracy in Bangladesh suffers from political interference, including the repudiation of decisions made under previous governments and the sacking or removal of key bureaucrats for unspecified reasons. In a few cases, civil servants have been targeted for criminal action, which has appeared to some observers to be politically motivated. This has led to a crisis of confidence and a reluctance among civil servants to make decisions for which they later could be penalized.
Corruption: Corruption has long been recognized as a severe problem in Bangladesh. Hence, the country's consistent ranking as one of the most corrupt nations according to Transparency International's Corruption Perceptions Index comes as no surprise.
l Bangladesh ranked among the lowest countries in Transparency International's corruption surveys from 2001 to 2007-lower than Nigeria, Somalia, Myanmar, Afghanistan, and Sudan.
l However, some progress has been made over last two years, and Bangladesh's ranking has improved somewhat: 147 out of 180 countries in 2008, 139 in 2009, and 134 in 2010. By comparison, Vietnam ranked 116; Indonesia, 110; Sri Lanka, 96; India, 87; China, 78; and Malaysia, 56.
l Despite this improvement, the country remains riddled with corruption throughout the bureaucracy. At the higher levels, there often have been large payments for project tenders and approvals, and at the lower levels, smaller amounts in the form of speed money required for expedited processing and approval of applications.
l To reduce corruption in public procurement and contracting and in major foreign investments, the government is trying to ensure greater transparency and accountability from the ministries and agencies involved, but to date, it has achieved only partial success as indicated in the chart below.
l The Bangladesh government has been trying to address these structural corruption problems, but the country's poorly paid civil servants have long regarded businessmen, especially foreign companies, as an opportunity to use their administrative power to make money.
l Consequently, firms typically are expected to provide gifts when meeting tax inspectors, and to make unofficial payments to obtain government services such as post office boxes, telephone lines, licenses, customs clearances, and the like.
l Given this environment, it is difficult for multinational corporations, especially those from the United States and other Organisation for Economic Co-operation and Development countries, to carry on business without breaking anticorruption laws imposed by their home countries.
As a result, it typically takes these companies much longer to establish their foreign investment operations in Bangladesh, sometimes as long as two to three years.
l In 2007, Bangladesh's Anti-Corruption Commission (ACC) implemented institutional and legal reforms for good governance to fight corruption. It also has attempted to comply with international standards, including the United Nations Convention Against Corruption. However, most foreign observers believe that the ACC has been only partially successful, and is not completely free of political interference.
l Going forward, the ACC should be given operational and financial independence, as well as the freedom to work without government interference. This should increase the ACC's effectiveness and creditability, while at the same time improving the country's business environment.
l Some non-government organisations (NGOs) in Bangladesh might even want to follow an example from India and set up a website like IpaidABribe.com, which is a unique initiative to tackle corruption by allowing citizens the opportunity to report on the nature, location, frequency and value of corrupt acts.
Infrastructure Constraints: According to the World Economic Forum's 2009-2010 Global Competitiveness Report, corporate investors identified infrastructure as the most problematic issue in Bangladesh. In particular, they cited an inadequate power and energy supply, as well as congested ports and underdeveloped transport networks connecting the ports with the hinterland without a doubt. These constraints impose significant operational surcharges on foreign and local investors and can be a major drag on a company's economic performance.
Power: Over the past few years, Bangladesh has suffered from a serious national power crisis as a result of the government's failure to develop Bangladeshi natural gas and coal resources and to establish an efficient gas pipeline network-all of which are essential for supplying the country's power sector.
l Power shortages and blackouts of up to eight hours a day are common in Bangladesh. This is by far the most serious problem facing the government, industry, and the urban population. Power cuts and blackouts have a serious impact not only on business operations, but also on public services, especially hospitals and water pumping stations.
l Bangladesh ranks last among its Asian competitors in terms of power outages. The situation in 2010 was even worse than that in 2007.
l As of April 2010, demand for electricity in Bangladesh was estimated at 5,500-6,000 megawatts (MW) per day. However, the country currently generates only 3,800 MW, thereby creating a shortage of approximately 1,700 MW.4
l This situation is expected to become more difficult, as it is estimated that demand for electricity will grow at an annual rate of about 8.0% over the next 10 years.
l Currently, 87% of the country's power plants are run using domestic natural gas, and almost all plants operate at less than capacity because of a shortage of gas. An inadequate gas distribution system and leakage of electricity in the form of illegal connections and meter tampering only exacerbates the country's power shortage problem.
l Frequent power shortages are costly to business operations in Bangladesh and represent a major deterrent to new private investment. Industry representatives estimate that the power crisis is responsible for annual manufacturing production losses of US$1.3 billion, reflecting a 2.0% loss in annual gross domestic product.
l Companies operating in Bangladesh must install and operate their own captive power generators, has become a problem.
l Power outages are particularly problematic in the apparel sector, as they reduce productivity, disrupt production and necessitate the use of higher-cost generators. This is one reason why manufacturing productivity in Bangladesh remains much lower than in countries such as Vietnam and China.
l Compared to Bangladesh's productivity level of 35%, its competitors in Southeast Asia average around 70% and China achieves 80%.
l As a result of power outages, a number of garment factories have lost sales because they have not been able to meet their contract delivery schedule, and some factories have had to outsource work to other countries.
l New investors cannot get electrical connections for at least three months after starting operations. Obviously, this adds significantly to their startup costs.
l The government is committed to tackling the power problem in both the short term and the medium term.
l During the past six months, the government has scheduled daily power cuts, restricted the use of air-conditioning during the peak hours of 6:00 p.m. and 11:00 p.m., and even shut down five fertilizer factories in order to divert gas to power plants.
l Over the past six months, the government also has approved the establishment and operation of eight oil-fueled rental power plants, which will increase the country's power supply by 530 MW.7 At least 10 more plants are expected to be approved in the coming months, increasing the power supply by a total of 1,360 MW.
These plants, though they will help alleviate the problem in the short term, are costly and do not address the country's long-term problem. Therefore, the government is expediting the approval of a number of large power plants that will be supplied by dedicated gas pipelines; however, these will not come on stream for a few years.
l The new government's highest priority is to alleviate the power shortage, but given the depth of the problem and political opposition to any serious long-term reforms, the power problem is likely to take three to five years to rectify.
Energy: The shortage of power in Bangladesh results from a complexity of factors, the foremost being that for the last ten years, previous governments have not allowed sufficient energy exploration and investment, even though there has been strong interest in gas and coal investments from a number of world class foreign companies.
Although Bangladesh has rich gas resources and high quality coal deposits, government authorities have until recently, been unwilling to accelerate the exploration of gas and have delayed all efforts to develop its coal resources. As a result of this, Bangladesh's energy supply has not been able to meet country's increasing electricity demand.
There is no doubt that significant energy investments in Bangladesh are required for both production and exploration. The government recently expedited approval procedures for both activities, but much needs to be done within a short time frame. Currently, natural gas remains the only significant source of commercial energy in Bangladesh, and the country's reserves are sufficient to supply power stations in the medium term. Although they have not been developed, the country's coal reserves are more than adequate to ensure electricity generation for 30 years, and it is estimated that more than 80% of the reserves could be extracted through open-pit mining that adheres to international standards.
Bangladesh Natural Gas Resources: Over the past three decades, Bangladesh has witnessed an increase in the use of various fuel sources to generate electricity. However, at present, 90% of the country's energy demand is met through domestically produced gas.
l For a number of years, the government has used an unofficial estimate of 9.0 trillion cubic feet (TCF) of capacity, which was used as a reason to restrict development of the country's gas reserves by foreign companies. However, a study carried out by the U.S. Geological Service estimated that Bangladesh possesses 32-40 TCF of additional natural gas resources that have yet to be identified. A Norwegian Petroleum Directorate analysis commissioned by the Bangladesh government determined that proven gas reserves are even higher at 56 TCF. It is now estimated that Bangladesh has roughly 32-56 TCF, which is ample to meet the country's energy needs over the medium term.
l The current official estimate of Bangladesh's proven and probable natural gas reserves is about 28.4 TCF, out of which 20.5 TCF is recoverable. To date, approximately 9.2 TCF of the country's natural gas reserves have been utilized.
l Government-owned Petrobangla is the principal buyer of natural gas produced in the country, and it is the main entity that defines usage, pricing, and distribution of revenue. Gas distribution is controlled by Petrobangla under the administration of the Ministry of Power, Energy, and Mineral Resources.
l Onshore gas exploration and development is undertaken by Petrobangla and a few foreign firms; Chevron is by far the largest among them.
l The country's gas production is currently around 1.9 billion cubic feet per day (bcfd), while demand is more than 2.15 bcfd, creating a supply shortage of approximately 250 mcfd.
l Total gas production has stagnated in recent years, primarily because of restrictions on development by foreign companies, poor maintenance of existing fields, and a lack of investment funds for increased exploration by Petrobangla.
l Chevron's production from its three gas fields-Bibiyana, Moulvibazar, and Jalalabad -- has increased steadily. Chevron's fields now supply almost 50% of Bangladesh's gas production, or 832 million cubic feet of gas per day.
l The government realizes that investments in energy exploration have been woefully inadequate to meet today's demands. In particular, there has been a lack of appreciation within the government regarding the eight to ten-year timeline required to bring gas on stream, while it is even longer for offshore locations.
l As a result, the government recently expedited the approval of exploration of a new gas block by Chevron in southwest Bangladesh, as well as the company's development plan, which includes adding a compressor to one gas pipeline that will boost gas production to about 1,200 million cubic feet per day.
l In order to improve gas distribution and utilization from current fields, Chevron has advised that the three compressor stations planned will help boost gas flow. Most important is a new pipeline that the government plans to construct, as well as other dedicated pipelines for large power plants, that will make the entire distribution system much more efficient.11
l Bangladesh also has 25 offshore natural gas blocks, but only one has been explored successfully over the past two decades. However, because of the acute power shortage, the
government also recently removed the ban on providing onshore and offshore production-sharing contracts for the country's gas fields in order to attract more foreign investment to the lagging energy sector.
l ConocoPhillips was the lowest bidder in the latest government bidding for eight offshore national blocks for oil and gas exploration, but the company was awarded only two blocks because of competing claims on the other six by Myanmar and India. Bangladesh has referred this issue to the United Nations for resolution, and it is expected to be resolved within the next two years. Conoco- Phillips is moving ahead to develop the first two offshore blocks, and plans to start development of the disputed six blocks once the territorial issues are resolved and the blocks are officially awarded.
l Multilateral institutions such as the World Bank and the Asian Development Bank (ADB) are providing assistance to the energy sector. The ADB is extending loans totaling US$261 million to help Bangladesh address its natural gas supply constraints, and its board of directors approved a further US$5.0 million from its concessional Asian Development Fund for the Bangladesh Natural Gas Access Improvement Project.
Bangladesh Coal Reserves
l It is ironic that Bangladesh suffers from an acute shortage of energy when it is sitting on large reserves of high-quality coal that, if mined, would ensure the country's electricity supply for the next 30 years. Although the price of coal-fired plants has risen in recent years, coal has proved cheaper than natural gas or nuclear power.
l Coal was discovered at Phulbari in northwest Bangladesh between 1994 and 1997 by the Australian mining company BHP, and it is estimated that more than 80% of the country's reserves could be extracted through open-pit mining. However, this project has been opposed by farmers and nongovernmental organizations, and protests resulted in violence a few years ago.
l As a result of this opposition, the country's long-pending coal policy has not been instituted, and thus Bangladesh cannot utilize its huge reserves of coal to generate low-cost electricity. Even worse, the country currently has to import about 60,000 tons of coal from China, India, and Indonesia.
l Despite climate change concerns, numerous coal-fired plants continue to be built around the world, including more than 30 in the United States, where such plants provide more than 50% of America's electricity.
l A number of joint ventures between public- and private-sector enterprises have been proposed to develop the coal resources, but these have failed to materialize in the past because of government inaction on its coal policy. In contrast, the Indian government sold shares in its state-owned company, Coal India, and raised US$3.4 billion through a public offering.
l The government's delay in instituting a coal policy has frustrated foreign investors, who are now unwilling to build large, efficient coal-fired power plants, as all coal would have to be imported at a higher cost.
l Given the country's abundant coal resources and increasing power demand, there is an urgent need for the government to institute a coal policy to expedite the development of the country's coal resources. However, given the political opposition, Prime Minister Sheikh Hasina has been cautious in pushing forward this subject. At a meeting of the National Science and Technology Council held in June 2010, she said, "We will not take any decision whimsically; we will examine pros and cons of any proposal before implementing it."
l Nevertheless, it is critical for the government to actively promote the development of coal in order to ease its reliance on natural gas and provide power generation over the next 30 years.
If this happens, a large number of international coal companies, power producers, and foreign investors will become very interested in investing in Bangladesh.
Alternative Energy Options
l Because of the current energy crisis, numerous alternative energy proposals have been considered, including imported Liquefied Natural Gas (LNG) and domestic nuclear, hydro, wind, and solar energy. At the present time, these are all extremely expensive alternatives, especially considering the availability of natural gas and coal.
l In the longer term, it is possible that cost-effective hydro energy could be imported from Nepal, Bhutan, and northeast India. But in order for this to occur, significant investments would have to be made in these countries to greatly expand their existing capacity.
Transportation
The World Bank's Logistic Performance Index found Bangladesh's transportation infrastructure and services to be of poor quality, seriously impairing the efficient flow of freight both within the country and overseas. According to the World Economic Forum's 2010 Global Enabling Trade Report, Bangladesh is at a competitive disadvantage in terms of: airport density; paved roads; the quality of air transport, railroads, and port infrastructure; logistics industry competence as well as postal service efficiency.
If Bangladesh is serious about becoming a regional transport hub, it will need to undertake massive improvements to its roads, railways, ports, and airports. Obviously, the Bangladesh government will not be able to fund all of the required infrastructure improvements, and will have to reply on foreign investments through its Public-Private Partnership (PPP) program.
Roads
l The country's transportation links are predominantly by road, as railways are inefficient, and waterways and barge container transport are underutilized.
l By far, the most important link for transporting goods from factories to ports and vice versa is the connection from Dhaka to Chittagong, which needs to be improved in order to meet future freight demand. Other key links to Tripura in India and Myanmar in the east and to India in the west need to be upgraded significantly.
l Given the riverine nature of the country, bridges are a key, but also an expensive part of Bangladesh's highway network. A major improvement is the 4.8-kilometer Bangabandhu Bridge, which connects the eastern and western parts of Bangladesh. Its completion has made an important contribution to the development of the country's transportation network.
l A proposal to construct a bridge over the Feni River to connect Tripura in India with Khagrachhari in Bangladesh also will facilitate the easy movement of labor and materials between the two countries and provide access to Chittagong's port.
l Over the long term, if Bangladesh is connected with the planned Asian Highway, the country could act as a transit point for freight transport from India, China, and Southeast Asia. Integration with the Asian Highway is also critical for any new investment in improved sea ports to be viable.
l The upgrading of the Bangladeshi highway network will be an ongoing effort for a number of years, and it is critical that the country attract investors to its Private-Public Partnership program.
Railways
l The Bangladesh railway system is in need of a major upgrade, as it does not serve manufacturers well. For example, there is only one freight train a day that connects Dhaka to the country's major port in Chittagong, requiring all goods to be sent by road.
l In 2008, Bangladesh and India reestablished train service between Dhaka and Kolkata. During Prime Minister Sheikh Hasina's recent visit to India, both governments agreed on expanding the Dhaka-Kolkata rail line to connect to Agartala, the capital of the Indian state of Tripura. The expansion and improvement of both railway lines will bring major trade benefits to Bangladesh.
Ports and Waterways
l There are two major ports in Bangladesh, both of which are shallow-water ports:
l Chittagong is the principal seaport, handling about 92% of the country's export/import
l Mongla in the Khulna region serves the western part of Bangladesh; however, this port faces problems during low tides and must be dredged frequently. Mongla has substantial potential, but its revitalization as the country's second port will depend on increased investment in its operations and complementary infrastructure.
l Bangladesh urgently needs a deep-sea port if it is serious about becoming a global manufacturing center. A deep-sea port in the Bay of Bengal would open up numerous investment opportunities. Bangladesh can provide an alternative for shipping lines doing business in the region. The deep-sea port could act as a transit port, with vessels offloading containers for other ships to pick up. Bangladesh also could earn significant revenues from a deep-water port such as those in Singapore and Malaysia.
l Although there has been a considerable improvement in recent years, the performance of Chittagong port is still far behind its potential. The average container dwell time is 18 days, compared with 10-12 days for other ports in the Asian region. Container handling costs are estimated to be four times higher than those in Colombo, and twice as much as in Bangkok.
l Holdups at the Chittagong port are attributable to complex customs procedures, informal payments to custom officers, and inefficient dockworkers who lack incentives (especially competition) to improve their performance.
l Bangladesh export/import trade is increasing by more than 20% every year, but the capacity of Chittagong port remains stagnant. Investment is required to construct more jetties and to build private ports. The combination of new investments in Chittagong port to set up an adjacent private port along with a deep-sea port in the Bay of Bengal would help make Chittagong a global commercial hub.
l Ports in Bangladesh currently are classified as public-sector entities and managed by the Ministry of Shipping. However, in order to increase investment and efficiency, private-sector investments are needed, either through management contracts or a Public-Private Partnership, both of which are commonly used by governments in a number of Asian ports.
l Bangladesh's waterways are not used efficiently for moving domestic cargo; however, they offer tremendous potential. On May 29, 2010, Bangladesh and India agreed on measures to improve the country's waterway communications and port facilities. As part of this agreement, Bangladesh has agreed in principle to allow India to use its waterways, employing Ashuganj seaport to transport heavy machines for the Oil and Natural Gas Corporation's upcoming 740 MW power project being built in the landlocked Indian state of Tripura.
Airports
Airports are critical to the Bangladesh economy. Currently, there are 11 operational airports in Bangladesh, but of these, only the airports at Dhaka, Chittagong, and Sylhet serve international
l Hazrat Shahjalal International Airport (formerly Zia International Airport) in Dhaka is the principal airport and the base of Biman Bangladesh, the national airline. Biman operates international flights from Dhaka, connecting with 27 world cities. The airline is in the process of rebuilding its fleet, and has purchased 10 new regional and long-range aircraft from Boeing, which will significantly enhance its operational efficiency.
l Hazrat Shahjalal Airport, built in 1980, is incapable of handling the large and growing flow of passengers and cargo traffic that Bangladesh generates. In addition, its cargo handling and warehouse facilities are woefully inadequate-so much so that some garment exporters must leave their goods on pallets outdoors because of a lack of storage space in the warehouse.
l Feasibility studies have determined that the existing airport could not be expanded because of lack of land. Consequently, in April 2010, the government approved a plan to build a new international airport. The airport will be located outside Dhaka in order to cope with the growing air traffic and to reduce the pressure on the existing airport. The new airport will allow for further growth in cargo, and Biman Bangladesh can position itself to capture some of this cargo market share as it expands its fleet over the next 5-10 years.
l Civil aviation officials estimate that the proposed airport will be approximately the size of Bangkok's Suvarnabhumi airport, which has a capacity to serve 45 million passengers a year, 76 flights an hour, and 3.0 million tons of cargo annually. This will be a major improvement for foreign investors manufacturing in and exporting from Bangladesh, and certainly will enhance the investment climate in Bangladesh.
Telecommunications
l Over the past decade, Bangladesh's telecommunications sector has witnessed significant market penetration of cell phones, computers, and mobile banking. These developments have been welcomed by foreign investors looking to enhance market connectivity.
l The use of information and communications technology (ICT) is now an imperative worldwide, and it is a rapidly growing sector in Bangladesh. ICT in Bangladesh is now one of the fastest-growing sectors in the economy. The government of Bangladesh views ICT as immensely important for development. It has launched a program called "Digital Bangladesh," which includes among other things, setting up six information technology villages throughout the country.
This surge in ICT activities in Bangladesh has generated numerous investment activities in the areas of digital government, e-business, e-commerce, IT training, and education.
l To support its ICT efforts, the government has made significant reforms in the mobile telecommunications sector. For example, the state-owned telecommunications provider, Bangladesh Telegraph and Telephone Board, was converted into a limited public company, and the telecom market was opened to the private sector. The government's policy of increased competition in the cellular market, with six mobile operators, has led to significant growth in connectivity quality and lower tariffs. It also has led to a major increase in multiple phone use throughout Bangladesh.
l Underlying all of Bangladesh's ICT activities is a sole fiber-optic submarine cable that connects the main international cable to Cox's Bazar, from which data are transmitted by landline to Chittagong and Dhaka. This line is critical, as it carries high-speed Internet and telecommunications data for both mobile and landline operators. However, on occasion, because of a lack of regular maintenance as well as vandalism, the land link from Cox's Bazar to Chittagong and Dhaka gets disrupted, shutting down the country's entire communications and Internet
l When this happens, the problem is compounded by the fact that satellite services act only as a backup measure and provide limited bandwidth.
Without a doubt, telecommunications is critically important to modern business operations and if Bangladesh hopes to attract more foreign investment, especially ICT investment, a second fiber-optic submarine cable is needed to connect to Cox's Bazar, as well as an alternate land line in Dhaka, in order to meet the country's rapidly increasing telecommunications demand.
Revenue Administration
l The National Board of Revenue (NBR) is the central authority overseeing tax administration under the Ministry of Finance. The NBR is in charge of the following taxes, which affect most foreign investments and foreign investors:
l Personal and business income tax
l Valued-added tax (15%), which is levied on all imports and domestically produced goods and services. with some exceptions
l Customs and import duties
Although these three departments all are housed under the NBR, there appears to be little coordination among them, and the available tax data reflect this fact.
l Bangladesh's revenue and administrative structure under the NBR is in need of an urgent overhaul if the country wants to attract more foreign investors. Although the tax incentives for foreign investors are adequate, companies believe that both tax policy and tax administration in the country are complex and, in too many cases, arbitrary. Bangladesh's unnecessarily complicated taxation system remains a major concern among foreign investors.
l Over the years, the country's tax code has been modified to give tax relief or subsidies to a variety of interest groups, and, as a result, there are now too many tax rates and categories.
Compounding this problem is a lengthy and often uncertain application of the tax code that lacks transparency.
For these reasons foreign investors believe that the tax regime in Bangladesh is fair but complicated.
There is often confusion over tax rates, and tax officials have substantial discretion in deciding which rate to apply. This situation often leads to negotiations for tax payment settlements.
l Foreign individuals and companies are liable for taxes, although investors are eligible for tax holidays and lower tax rates under specific conditions, as well as under the framework of free trade agreements signed by Bangladesh with other parties. Bangladesh has signed Avoidance of Double Taxation Agreements with 28 countries, including the United States. Therefore, foreign investors from those countries are not liable for multiple taxation on their income.
l Foreign investors can avail themselves of a number of tax incentives.
l In spite of a number of generous tax benefits, foreign investors are still among the top taxpayers in Bangladesh in almost every category. Thus, individual, corporate, and value-added taxes, combined with customs duties paid by foreign companies on imported goods and exported products, represent a major revenue source for the government.
l It is estimated that the 832 foreign enterprises located in Bangladesh generate a significant amount of tax revenue for the country. It is difficult to determine the exact amount, as the NBR does not have a comprehensive database.
l According to the World Economic Forum's 2010 Global Enabling Trade Report, the country's high average tariff rates, additional taxes and customs duties, and inefficient tax administration procedures are significant barriers to doing business in Bangladesh. In fact, in terms of the "burden of customs procedures", the country ranks 119 out of 121 countries, far behind its competitors in the Asian region.
Employment and Labor Issues
Productivity: As Bangladesh tries to attract a more foreign investors to establish manufacturing facilities in the country, labor productivity will be a key factor in the assessment of Bangladesh's desirability as an investment location. Coupled with that are considerations regarding the educational quality and skill level of Bangladeshi workers.
One of the key factors leading Bangladesh's manufacturing competitiveness is the country's ample supply of labor. Currently, Bangladesh has approximately 80 million people in its labor force and its workers are perceived as hardworking, reliable, and enterprising.
One of the key factors leading Bangladesh's manufacturing competitiveness is the country's ample supply of labor. Currently, Bangladesh has approximately 80 million people in its labor force and its workers are perceived as hardworking, reliable, and enterprising.
Labor Relations: Labor unrest and strikes in some factories have had an impact on foreign investors, dampening the overall business investment environment. Nevertheless, Bangladesh is one of the world's lowest cost manufacturing locations, with a minimum wage of approximately US$43 per month, after the recent wage increase. The new minimum wage also includes an additional allowance of approximately US$3.0 per month for medical expenses and US$11.50 per month for housing. Previously, the wage rate was only US$25 per month.
Because of low wages and wage increases in China, on April 29, 2010, more than 1,000 Bangladeshi garment workers attacked factories with stones and blocked streets in Dhaka to demand a higher minimum wage. The wave of strikes soon spread to locations around the country. This was not without cause, as wages had not been adjusted in four years despite a period of rising food and fuel costs.
l As a result of the labor unrest, the government increased the minimum wage for garment workers to US$43 per month, although the garment workers' union had requested an increase to US$75 per month.
Labor leaders were not happy with the increase, and after continued protests, three prominent labor rights leaders were arrested and charged with inciting unrest. They were released a few weeks later after concerns were raised by the international community, most notably the United States.
Though the recent wage increase is in line with the demands from both the major Western retailers and the Bangladesh Garment and Manufacturers Export Association (BGMEA), the pay for workers in Bangladesh is low in comparison to China and other apparel production centers such as Cambodia, Indonesia, and Vietnam, all of which have faced similar labor unrest over the past nine months.
It is important to note that most garment factory owners were not opposed to the wage increases; however, they were opposed to a large increase all at once, which could hurt their competitiveness. Going forward, they believe that the government should increase the minimum wage incrementally, every year or every two years.
l The Bangladesh government faces the challenge of finding the right balance between worker compensation and benefits and the maintenance of its export competitiveness. This is an issue that will continue to confront government officials in the years ahead.
Legal Framework: The legal framework in Bangladesh is an impediment for foreign investors in a number of areas, particularly land acquisition, dispute settlement, and, to some extent, intellectual property rights. A broad issue is the need for Bangladesh to modernize a number of its existing laws, such as the Company Law, which should be brought up to date with global business practices. Another pressing issue is that a number of new laws need to be enacted in order to cover many new business and financial activities, especially in the fast-changing financial and telecommunication fields.
Land Acquisition and Property Rights: Access to land is regarded by foreign investors as one of the major impediments to establishing manufacturing operations in Bangladesh. Although foreign investors are allowed to own land, availability is severely limited, as large unused tracts are unavailable, either owned by state-owned enterprises or the government, or used for agriculture.
l A large share of property in Bangladesh is not properly registered, which makes it more difficult and costly to transfer property to foreign buyers. The property registration process also takes an inordinately long time to complete.
l According to the World Bank's 2011 Doing Business Report, Bangladesh ranks lowest among Asian countries in this area. Property registration typically takes 245 days in Bangladesh, compared with 44 days in India, 57 days in Vietnam, 22 days in Indonesia, and only two days in Thailand. Certainly, this process can be improved.
l With the recent passage of the Special Economic Zone legislation and the public-private partnership program, the government is seeking out ways to provide land for investment, either by recatorgorizing government-owned land or by allocating unused land held by state-owned enterprises.
l A recent success story is the establishment of a new Export Processing Zone at a closed state-owned jute mill at Adamjee. At its height, the mill employed 25,000 people, but at its closure, the employees numbered only 2,500. The new Export Processing Zone opened in March 2006, covering 294 acres of land. As of September 2010, about US$100,000 had been invested by private companies employing approximately 13,000 people and exporting approximately US$100 million a year. The government expects a fully operational Adamjee EPZ to employee 100,000 Bangladeshi workers.
l There are a number of other closed-down state-owned mills with hundreds of acres of land that could be converted into industrial parks located around the country in places such as Chittagong, Khulna, and other cities.
Investment Protection and Arbitration: The existence of an institutional mechanism to protect the rights of foreign investors is essential. There is currently no accepted established dispute process that is transparent and carried out in a timely manner in Bangladesh. Dispute Settlement
l According to foreign investors, a fundamental impediment to increased investment in Bangladesh is the weak and slow legal system, with no penalty for delaying proceedings and uncertainty of contract enforcement.
l Bangladesh is a signatory to the International Convention for Settlement of Investment Disputes (ICSID), and acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards on May 16, 1992. A provision of the U.S.-Bangladesh Bilateral Investment Treaty permits the submission of investment disputes to the ICSID for third-party settlements.
l The World Bank's 2011 Doing Business Report tracks the efficiency of Bangladesh's judicial system in resolving commercial disputes compared to other countries in the Asian region. Bangladesh ranks among the lowest of the countries surveyed.
l With the exception of those conducted by internationally affiliated accounting firms, audits in Bangladesh generally fail to conform to international accounting standards. Consequently, dispute settlements are hampered by shoddy accounting practices and the inappropriate registration of retail property.
l To help address this problem, in March 2010, the Bangladesh Investment Climate Fund partnered with the Bangladesh International Arbitration Centre to develop a center to resolve commercial disputes out of court. The new center is expected to help businesses and investors save time and money by giving them an alternative venue to deal with disputes outside the courts. Intellectual Property Rights
l Although Bangladesh primarily manufactures low-end products, there have been complaints about intellectual property rights from some foreign companies. In particular, some international garment manufacturers have complained that their clothing designs have been copied without their permission.
l Bangladesh is a member of the World Intellectual Property Organization, and acceded to the Paris Convention for the Protection of Industrial Property of 1991. However, the government is proceeding slowly in bringing its intellectual property laws into compliance with the World Trade Organization's Trade-Related Intellectual Property Rights.
l The government enacted a copyright law in 2000, updating its copyright system, and an amendment to the Trademark Act of 1940 currently is being studied.
Investment Financing Availability of Financing: To make investing in Bangladesh more attractive to foreign companies, more coordination is needed between the government and domestic lending institutions to provide loans to potential investors. This is beginning to happen, particularly with the growth of private-sector financial institutions.
l Most large international investors can arrange their own project financing. However, for other foreign firms, project financing from local sources is not always possible because of the unavailability of long-term funds. Currently, the maximum domestic loan is available for five years at an interest rate of around 15%.
l To increase project investment levels, there needs to be a smoother mechanism that will enable entrepreneurs to have ready access to cheaper and long-term capital within the country.
l Government bureaucracy is also another impediment, as obtaining a loan from overseas sources with a repayment period of greater than one year requires authorization from the government of Bangladesh. This process can be quite time-consuming.
l The system of foreign loan approval applies to all loans, small or large, regardless of whether the loan is for export purposes, long-term infrastructure projects, or consumption spending.
l The processing of foreign loan applications by the government is not time bound, and the time required to complete the process averages around six and half months, unnecessarily delaying investment projects.
l Despite a huge increase in exports in recent years, trade financing remains a major problem, and Bangladesh letters of credit still are not readily accepted in other countries. However, this situation recently has improved, as Bangladesh now has country ratings from Moody's and Standard & Poor's, and foreign banks are more willing to enter into financial transactions with banks in Bangladesh.
Increasing Number of Financial Institutions: In the past, state banks have completely dominated the country's financial sector. However, in recent years, the share of financial sector assets owned by a growing number of private sector banks has increased considerably.
l Despite this large increase in financial institutions, there is still a limited number of financial instruments available to investors in Bangladesh as a result of several factors:
l Limited capital market financing is available.
l No corporate bond market is established.
l No secured transactions are available.
l No international factoring is available.
Foreign Exchange Risk/Convertibility: Despite the government's liberalization policies, financial policies in Bangladesh remain restrictive. However, in recent years, capital account liberalization policies in Bangladesh have eased restrictions on the capital and money markets, derivatives and other instruments, credit operations, direct investments, real estate transactions, personal capital movements, provisions specific to commercial banks, and provisions specific to institutional investors.
l The Bangladesh Foreign Investment Act of 1980 guarantees the right of full repatriation of invested capital, profits, capital gains, post tax dividends, and approved royalties and fees.
l The central banks' exchange control regulations and the U.S.-Bangladesh Bilateral Investment Treaty (enacted in 1980) provide similar investment transfer guarantees. In practice, foreign firms can repatriate funds without much difficulty in Bangladesh.
l The value of the Bangladesh taka has been very steady against the U.S. dollar, averaging 67-71 take per dollar. This is good for business, as a great deal of Bangladeshi foreign trade is denominated in U.S. dollars. The currency is fully convertible on current account transactions such as import, trade, and travel needs, but not for capital account transactions such as investing or currency speculation.
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Courtesy: Enhancing Trade and Investment between the United States and Bangladesh, a Trade and Investment Report by the Asia Society in Washington D.C. The report was presented by Mr. Jack Garrity, Executive Director, Asia Society in Washington at a luncheon meeting of American Chamber of Commerce in Bangladesh (AmCham), held in Dhaka on December 08, 2010
Some of these characterizations are accurate; others reflect the country's past, but none gives Bangladesh credit for the major social, economic, and political improvements that have taken place in recent years.
The country's poor reputation has been an ongoing problem since independence. Over the past 10 years, however, the situation in Bangladesh has changed, even though world opinion has not. It will take time to change the world's perceptions of Bangladesh, and meaningful change must be accomplished through concrete actions, not simply hollow words from government officials.
Bangladesh has been slow to integrate economically with the rest of the world because for most of its history, the country has been dependent on donor aid. Multilateral and bilateral assistance to Bangladesh has been much appreciated and generally utilized in an appropriate manner, but this has lead to a sense of aid dependency that the government now is trying to change. "Trade not aid" is the new mantra of the Bangladesh government, but the transition will not be easy, and it certainly will take time to implement both domestically and internationally.
Recent country ratings given by the two international credit rating agencies, Moody's and Standard & Poor's, have placed Bangladesh on par with some Southeast Asian countries. This is a significant milestone and a first for Bangladesh. Without a doubt, earning a rating gives the country a certain legitimacy in the eyes of global investors.
The next step should be for the government to issue a sovereign bond, which would generate further ratings, published rating reports, a global investor following, as well as follow-up research reports written by international investment banks. Already, Goldman Sachs has included Bangladesh in its list of the "Next Eleven," as has J.P. Morgan in its "Frontier Five" investment reports. These are positive steps, but much more needs to be done to maintain the momentum. In particular, investors will not continue reading investment reports unless they have something to invest in, whether it is a sovereign bond or stocks on the Dhaka Stock Exchange. For this reason, it is critical that Bangladesh find a way to attract more foreign portfolio investment.
Much more also needs to be done on the global economic integration front, including support for, and adherence to, formal trade agreements, increased access to international financial markets, and liberalization of the country's capital markets.
Increased garment exports to developed countries in Europe and North America have drawn attention to Bangladesh's economic opportunities. The rise of India has resulted in much greater interest in Bangladesh, especially among Indian companies, but also a greater awareness of investment and trade opportunities among other foreign companies that are looking at the Indian market.
Nevertheless, Bangladesh needs to do a better job of reaching out to international corporations and financial institutions in order to promote the country's opportunities and to global investors who are looking for a manufacturing platform located in the heart of Asia. The good news is that government and business leaders in Bangladesh now realize that perceptions of the country can make a significant difference in the success of its business, trade, investment, and tourism activities, as well as its overall economic relations with other nations. The government is on the right track in this area, but it must sharply accelerate the pace.
Reversing decades of negative opinion and ignorance will be a long-term effort. However, communication efforts must be undertaken to educate the global audience about the changes that Bangladesh is making. A multifaceted but coordinated low-cost initiative should be developed to start the process. This probably should be done with assistance from an international communications firm that has offices in London, New York, Washington and Hong Kong, which are all major financial centers, as well as important markets for Bangladesh.
Ambivalent feelings about foreign investment: A concern that must be addressed is the ambivalent attitude toward foreign investment in Bangladesh.
While there is strong support for increased foreign investment from Prime Minister Sheikh Hasina, her advisors, and cabinet ministers, the same cannot be said for many members of the bureaucracy, Parliament, the media, and nongovernmental organizations.
l Some of the resistance may be philosophical, but overall, there is a lack of appreciation of the substantial economic benefits that increased foreign direct investment (FDI) could bring to Bangladesh, and of the beneficial role that FDI has played in neighboring Asian countries.
l Existing FDI in Bangladesh has brought additional capital, introduced improved technology and management expertise, created employment, and improved access to international markets. It also has led to improved standards and changes in the local business culture, in addition to a great deal of social welfare philanthropy, such as support for training programs, schools, and health projects.
l Many people are not aware that in addition to the foregoing benefits, foreign investors are among the largest taxpayers in Bangladesh, when individual, corporate, and value-added taxes are combined with customs duties paid on imports and exports.
l Despite all of these benefits, one of the reasons that FDI in Bangladesh has been lower than that in neighboring countries is that there is little understanding of the benefits of FDI to the Bangladesh economy.
l Some government officials believe that the rate of FDI inflows is simply exogenous, and that nothing can be done to generate or increase it in Bangladesh in the near future. Others have even proposed that FDI be restricted in some sectors, like the garment industry.
Impediments to investment: Although Bangladesh offers many production advantages, the country's investment climate is plagued by a variety of problems and issues. As a result, the investment process remains challenging and unnecessarily lengthy, especially for first-time investors.
l According to the World Bank, the major structural problems seen by investors include power outages, access to land, limited access to finance, political instability, and bureaucracy and corruption.l In reality, a range of issues are having a negative affect on the country's investment climate: bureaucracy and corruption; infrastructure constraints in the areas of power, energy, transportation, and telecommunications; revenue administration; taxation; employment and labor issues; the legal framework; and access to financing.
l In reality, a range of issues are having a negative affect on the country's investment climate: bureaucracy and corruption; infrastructure constraints in the areas of power, energy, transportation, and telecommunications; revenue administration; taxation; employment and labor issues; the legal framework; and access to financing.
l Even after an investment is finally approved and a company is ready to begin operations, multiple decision makers in the bureaucracy take an inordinately long time to provide documents and signatures needed for the provision of things such as water, power and telephone lines, resulting in unnecessary, and frustrating operational delays.
l As in most countries, the bureaucracy in Bangladesh suffers from political interference, including the repudiation of decisions made under previous governments and the sacking or removal of key bureaucrats for unspecified reasons. In a few cases, civil servants have been targeted for criminal action, which has appeared to some observers to be politically motivated. This has led to a crisis of confidence and a reluctance among civil servants to make decisions for which they later could be penalized.
Corruption: Corruption has long been recognized as a severe problem in Bangladesh. Hence, the country's consistent ranking as one of the most corrupt nations according to Transparency International's Corruption Perceptions Index comes as no surprise.
l Bangladesh ranked among the lowest countries in Transparency International's corruption surveys from 2001 to 2007-lower than Nigeria, Somalia, Myanmar, Afghanistan, and Sudan.
l However, some progress has been made over last two years, and Bangladesh's ranking has improved somewhat: 147 out of 180 countries in 2008, 139 in 2009, and 134 in 2010. By comparison, Vietnam ranked 116; Indonesia, 110; Sri Lanka, 96; India, 87; China, 78; and Malaysia, 56.
l Despite this improvement, the country remains riddled with corruption throughout the bureaucracy. At the higher levels, there often have been large payments for project tenders and approvals, and at the lower levels, smaller amounts in the form of speed money required for expedited processing and approval of applications.
l To reduce corruption in public procurement and contracting and in major foreign investments, the government is trying to ensure greater transparency and accountability from the ministries and agencies involved, but to date, it has achieved only partial success as indicated in the chart below.
l The Bangladesh government has been trying to address these structural corruption problems, but the country's poorly paid civil servants have long regarded businessmen, especially foreign companies, as an opportunity to use their administrative power to make money.
l Consequently, firms typically are expected to provide gifts when meeting tax inspectors, and to make unofficial payments to obtain government services such as post office boxes, telephone lines, licenses, customs clearances, and the like.
l Given this environment, it is difficult for multinational corporations, especially those from the United States and other Organisation for Economic Co-operation and Development countries, to carry on business without breaking anticorruption laws imposed by their home countries.
As a result, it typically takes these companies much longer to establish their foreign investment operations in Bangladesh, sometimes as long as two to three years.
l In 2007, Bangladesh's Anti-Corruption Commission (ACC) implemented institutional and legal reforms for good governance to fight corruption. It also has attempted to comply with international standards, including the United Nations Convention Against Corruption. However, most foreign observers believe that the ACC has been only partially successful, and is not completely free of political interference.
l Going forward, the ACC should be given operational and financial independence, as well as the freedom to work without government interference. This should increase the ACC's effectiveness and creditability, while at the same time improving the country's business environment.
l Some non-government organisations (NGOs) in Bangladesh might even want to follow an example from India and set up a website like IpaidABribe.com, which is a unique initiative to tackle corruption by allowing citizens the opportunity to report on the nature, location, frequency and value of corrupt acts.
Infrastructure Constraints: According to the World Economic Forum's 2009-2010 Global Competitiveness Report, corporate investors identified infrastructure as the most problematic issue in Bangladesh. In particular, they cited an inadequate power and energy supply, as well as congested ports and underdeveloped transport networks connecting the ports with the hinterland without a doubt. These constraints impose significant operational surcharges on foreign and local investors and can be a major drag on a company's economic performance.
Power: Over the past few years, Bangladesh has suffered from a serious national power crisis as a result of the government's failure to develop Bangladeshi natural gas and coal resources and to establish an efficient gas pipeline network-all of which are essential for supplying the country's power sector.
l Power shortages and blackouts of up to eight hours a day are common in Bangladesh. This is by far the most serious problem facing the government, industry, and the urban population. Power cuts and blackouts have a serious impact not only on business operations, but also on public services, especially hospitals and water pumping stations.
l Bangladesh ranks last among its Asian competitors in terms of power outages. The situation in 2010 was even worse than that in 2007.
l As of April 2010, demand for electricity in Bangladesh was estimated at 5,500-6,000 megawatts (MW) per day. However, the country currently generates only 3,800 MW, thereby creating a shortage of approximately 1,700 MW.4
l This situation is expected to become more difficult, as it is estimated that demand for electricity will grow at an annual rate of about 8.0% over the next 10 years.
l Currently, 87% of the country's power plants are run using domestic natural gas, and almost all plants operate at less than capacity because of a shortage of gas. An inadequate gas distribution system and leakage of electricity in the form of illegal connections and meter tampering only exacerbates the country's power shortage problem.
l Frequent power shortages are costly to business operations in Bangladesh and represent a major deterrent to new private investment. Industry representatives estimate that the power crisis is responsible for annual manufacturing production losses of US$1.3 billion, reflecting a 2.0% loss in annual gross domestic product.
l Companies operating in Bangladesh must install and operate their own captive power generators, has become a problem.
l Power outages are particularly problematic in the apparel sector, as they reduce productivity, disrupt production and necessitate the use of higher-cost generators. This is one reason why manufacturing productivity in Bangladesh remains much lower than in countries such as Vietnam and China.
l Compared to Bangladesh's productivity level of 35%, its competitors in Southeast Asia average around 70% and China achieves 80%.
l As a result of power outages, a number of garment factories have lost sales because they have not been able to meet their contract delivery schedule, and some factories have had to outsource work to other countries.
l New investors cannot get electrical connections for at least three months after starting operations. Obviously, this adds significantly to their startup costs.
l The government is committed to tackling the power problem in both the short term and the medium term.
l During the past six months, the government has scheduled daily power cuts, restricted the use of air-conditioning during the peak hours of 6:00 p.m. and 11:00 p.m., and even shut down five fertilizer factories in order to divert gas to power plants.
l Over the past six months, the government also has approved the establishment and operation of eight oil-fueled rental power plants, which will increase the country's power supply by 530 MW.7 At least 10 more plants are expected to be approved in the coming months, increasing the power supply by a total of 1,360 MW.
These plants, though they will help alleviate the problem in the short term, are costly and do not address the country's long-term problem. Therefore, the government is expediting the approval of a number of large power plants that will be supplied by dedicated gas pipelines; however, these will not come on stream for a few years.
l The new government's highest priority is to alleviate the power shortage, but given the depth of the problem and political opposition to any serious long-term reforms, the power problem is likely to take three to five years to rectify.
Energy: The shortage of power in Bangladesh results from a complexity of factors, the foremost being that for the last ten years, previous governments have not allowed sufficient energy exploration and investment, even though there has been strong interest in gas and coal investments from a number of world class foreign companies.
Although Bangladesh has rich gas resources and high quality coal deposits, government authorities have until recently, been unwilling to accelerate the exploration of gas and have delayed all efforts to develop its coal resources. As a result of this, Bangladesh's energy supply has not been able to meet country's increasing electricity demand.
There is no doubt that significant energy investments in Bangladesh are required for both production and exploration. The government recently expedited approval procedures for both activities, but much needs to be done within a short time frame. Currently, natural gas remains the only significant source of commercial energy in Bangladesh, and the country's reserves are sufficient to supply power stations in the medium term. Although they have not been developed, the country's coal reserves are more than adequate to ensure electricity generation for 30 years, and it is estimated that more than 80% of the reserves could be extracted through open-pit mining that adheres to international standards.
Bangladesh Natural Gas Resources: Over the past three decades, Bangladesh has witnessed an increase in the use of various fuel sources to generate electricity. However, at present, 90% of the country's energy demand is met through domestically produced gas.
l For a number of years, the government has used an unofficial estimate of 9.0 trillion cubic feet (TCF) of capacity, which was used as a reason to restrict development of the country's gas reserves by foreign companies. However, a study carried out by the U.S. Geological Service estimated that Bangladesh possesses 32-40 TCF of additional natural gas resources that have yet to be identified. A Norwegian Petroleum Directorate analysis commissioned by the Bangladesh government determined that proven gas reserves are even higher at 56 TCF. It is now estimated that Bangladesh has roughly 32-56 TCF, which is ample to meet the country's energy needs over the medium term.
l The current official estimate of Bangladesh's proven and probable natural gas reserves is about 28.4 TCF, out of which 20.5 TCF is recoverable. To date, approximately 9.2 TCF of the country's natural gas reserves have been utilized.
l Government-owned Petrobangla is the principal buyer of natural gas produced in the country, and it is the main entity that defines usage, pricing, and distribution of revenue. Gas distribution is controlled by Petrobangla under the administration of the Ministry of Power, Energy, and Mineral Resources.
l Onshore gas exploration and development is undertaken by Petrobangla and a few foreign firms; Chevron is by far the largest among them.
l The country's gas production is currently around 1.9 billion cubic feet per day (bcfd), while demand is more than 2.15 bcfd, creating a supply shortage of approximately 250 mcfd.
l Total gas production has stagnated in recent years, primarily because of restrictions on development by foreign companies, poor maintenance of existing fields, and a lack of investment funds for increased exploration by Petrobangla.
l Chevron's production from its three gas fields-Bibiyana, Moulvibazar, and Jalalabad -- has increased steadily. Chevron's fields now supply almost 50% of Bangladesh's gas production, or 832 million cubic feet of gas per day.
l The government realizes that investments in energy exploration have been woefully inadequate to meet today's demands. In particular, there has been a lack of appreciation within the government regarding the eight to ten-year timeline required to bring gas on stream, while it is even longer for offshore locations.
l As a result, the government recently expedited the approval of exploration of a new gas block by Chevron in southwest Bangladesh, as well as the company's development plan, which includes adding a compressor to one gas pipeline that will boost gas production to about 1,200 million cubic feet per day.
l In order to improve gas distribution and utilization from current fields, Chevron has advised that the three compressor stations planned will help boost gas flow. Most important is a new pipeline that the government plans to construct, as well as other dedicated pipelines for large power plants, that will make the entire distribution system much more efficient.11
l Bangladesh also has 25 offshore natural gas blocks, but only one has been explored successfully over the past two decades. However, because of the acute power shortage, the
government also recently removed the ban on providing onshore and offshore production-sharing contracts for the country's gas fields in order to attract more foreign investment to the lagging energy sector.
l ConocoPhillips was the lowest bidder in the latest government bidding for eight offshore national blocks for oil and gas exploration, but the company was awarded only two blocks because of competing claims on the other six by Myanmar and India. Bangladesh has referred this issue to the United Nations for resolution, and it is expected to be resolved within the next two years. Conoco- Phillips is moving ahead to develop the first two offshore blocks, and plans to start development of the disputed six blocks once the territorial issues are resolved and the blocks are officially awarded.
l Multilateral institutions such as the World Bank and the Asian Development Bank (ADB) are providing assistance to the energy sector. The ADB is extending loans totaling US$261 million to help Bangladesh address its natural gas supply constraints, and its board of directors approved a further US$5.0 million from its concessional Asian Development Fund for the Bangladesh Natural Gas Access Improvement Project.
Bangladesh Coal Reserves
l It is ironic that Bangladesh suffers from an acute shortage of energy when it is sitting on large reserves of high-quality coal that, if mined, would ensure the country's electricity supply for the next 30 years. Although the price of coal-fired plants has risen in recent years, coal has proved cheaper than natural gas or nuclear power.
l Coal was discovered at Phulbari in northwest Bangladesh between 1994 and 1997 by the Australian mining company BHP, and it is estimated that more than 80% of the country's reserves could be extracted through open-pit mining. However, this project has been opposed by farmers and nongovernmental organizations, and protests resulted in violence a few years ago.
l As a result of this opposition, the country's long-pending coal policy has not been instituted, and thus Bangladesh cannot utilize its huge reserves of coal to generate low-cost electricity. Even worse, the country currently has to import about 60,000 tons of coal from China, India, and Indonesia.
l Despite climate change concerns, numerous coal-fired plants continue to be built around the world, including more than 30 in the United States, where such plants provide more than 50% of America's electricity.
l A number of joint ventures between public- and private-sector enterprises have been proposed to develop the coal resources, but these have failed to materialize in the past because of government inaction on its coal policy. In contrast, the Indian government sold shares in its state-owned company, Coal India, and raised US$3.4 billion through a public offering.
l The government's delay in instituting a coal policy has frustrated foreign investors, who are now unwilling to build large, efficient coal-fired power plants, as all coal would have to be imported at a higher cost.
l Given the country's abundant coal resources and increasing power demand, there is an urgent need for the government to institute a coal policy to expedite the development of the country's coal resources. However, given the political opposition, Prime Minister Sheikh Hasina has been cautious in pushing forward this subject. At a meeting of the National Science and Technology Council held in June 2010, she said, "We will not take any decision whimsically; we will examine pros and cons of any proposal before implementing it."
l Nevertheless, it is critical for the government to actively promote the development of coal in order to ease its reliance on natural gas and provide power generation over the next 30 years.
If this happens, a large number of international coal companies, power producers, and foreign investors will become very interested in investing in Bangladesh.
Alternative Energy Options
l Because of the current energy crisis, numerous alternative energy proposals have been considered, including imported Liquefied Natural Gas (LNG) and domestic nuclear, hydro, wind, and solar energy. At the present time, these are all extremely expensive alternatives, especially considering the availability of natural gas and coal.
l In the longer term, it is possible that cost-effective hydro energy could be imported from Nepal, Bhutan, and northeast India. But in order for this to occur, significant investments would have to be made in these countries to greatly expand their existing capacity.
Transportation
The World Bank's Logistic Performance Index found Bangladesh's transportation infrastructure and services to be of poor quality, seriously impairing the efficient flow of freight both within the country and overseas. According to the World Economic Forum's 2010 Global Enabling Trade Report, Bangladesh is at a competitive disadvantage in terms of: airport density; paved roads; the quality of air transport, railroads, and port infrastructure; logistics industry competence as well as postal service efficiency.
If Bangladesh is serious about becoming a regional transport hub, it will need to undertake massive improvements to its roads, railways, ports, and airports. Obviously, the Bangladesh government will not be able to fund all of the required infrastructure improvements, and will have to reply on foreign investments through its Public-Private Partnership (PPP) program.
Roads
l The country's transportation links are predominantly by road, as railways are inefficient, and waterways and barge container transport are underutilized.
l By far, the most important link for transporting goods from factories to ports and vice versa is the connection from Dhaka to Chittagong, which needs to be improved in order to meet future freight demand. Other key links to Tripura in India and Myanmar in the east and to India in the west need to be upgraded significantly.
l Given the riverine nature of the country, bridges are a key, but also an expensive part of Bangladesh's highway network. A major improvement is the 4.8-kilometer Bangabandhu Bridge, which connects the eastern and western parts of Bangladesh. Its completion has made an important contribution to the development of the country's transportation network.
l A proposal to construct a bridge over the Feni River to connect Tripura in India with Khagrachhari in Bangladesh also will facilitate the easy movement of labor and materials between the two countries and provide access to Chittagong's port.
l Over the long term, if Bangladesh is connected with the planned Asian Highway, the country could act as a transit point for freight transport from India, China, and Southeast Asia. Integration with the Asian Highway is also critical for any new investment in improved sea ports to be viable.
l The upgrading of the Bangladeshi highway network will be an ongoing effort for a number of years, and it is critical that the country attract investors to its Private-Public Partnership program.
Railways
l The Bangladesh railway system is in need of a major upgrade, as it does not serve manufacturers well. For example, there is only one freight train a day that connects Dhaka to the country's major port in Chittagong, requiring all goods to be sent by road.
l In 2008, Bangladesh and India reestablished train service between Dhaka and Kolkata. During Prime Minister Sheikh Hasina's recent visit to India, both governments agreed on expanding the Dhaka-Kolkata rail line to connect to Agartala, the capital of the Indian state of Tripura. The expansion and improvement of both railway lines will bring major trade benefits to Bangladesh.
Ports and Waterways
l There are two major ports in Bangladesh, both of which are shallow-water ports:
l Chittagong is the principal seaport, handling about 92% of the country's export/import
l Mongla in the Khulna region serves the western part of Bangladesh; however, this port faces problems during low tides and must be dredged frequently. Mongla has substantial potential, but its revitalization as the country's second port will depend on increased investment in its operations and complementary infrastructure.
l Bangladesh urgently needs a deep-sea port if it is serious about becoming a global manufacturing center. A deep-sea port in the Bay of Bengal would open up numerous investment opportunities. Bangladesh can provide an alternative for shipping lines doing business in the region. The deep-sea port could act as a transit port, with vessels offloading containers for other ships to pick up. Bangladesh also could earn significant revenues from a deep-water port such as those in Singapore and Malaysia.
l Although there has been a considerable improvement in recent years, the performance of Chittagong port is still far behind its potential. The average container dwell time is 18 days, compared with 10-12 days for other ports in the Asian region. Container handling costs are estimated to be four times higher than those in Colombo, and twice as much as in Bangkok.
l Holdups at the Chittagong port are attributable to complex customs procedures, informal payments to custom officers, and inefficient dockworkers who lack incentives (especially competition) to improve their performance.
l Bangladesh export/import trade is increasing by more than 20% every year, but the capacity of Chittagong port remains stagnant. Investment is required to construct more jetties and to build private ports. The combination of new investments in Chittagong port to set up an adjacent private port along with a deep-sea port in the Bay of Bengal would help make Chittagong a global commercial hub.
l Ports in Bangladesh currently are classified as public-sector entities and managed by the Ministry of Shipping. However, in order to increase investment and efficiency, private-sector investments are needed, either through management contracts or a Public-Private Partnership, both of which are commonly used by governments in a number of Asian ports.
l Bangladesh's waterways are not used efficiently for moving domestic cargo; however, they offer tremendous potential. On May 29, 2010, Bangladesh and India agreed on measures to improve the country's waterway communications and port facilities. As part of this agreement, Bangladesh has agreed in principle to allow India to use its waterways, employing Ashuganj seaport to transport heavy machines for the Oil and Natural Gas Corporation's upcoming 740 MW power project being built in the landlocked Indian state of Tripura.
Airports
Airports are critical to the Bangladesh economy. Currently, there are 11 operational airports in Bangladesh, but of these, only the airports at Dhaka, Chittagong, and Sylhet serve international
l Hazrat Shahjalal International Airport (formerly Zia International Airport) in Dhaka is the principal airport and the base of Biman Bangladesh, the national airline. Biman operates international flights from Dhaka, connecting with 27 world cities. The airline is in the process of rebuilding its fleet, and has purchased 10 new regional and long-range aircraft from Boeing, which will significantly enhance its operational efficiency.
l Hazrat Shahjalal Airport, built in 1980, is incapable of handling the large and growing flow of passengers and cargo traffic that Bangladesh generates. In addition, its cargo handling and warehouse facilities are woefully inadequate-so much so that some garment exporters must leave their goods on pallets outdoors because of a lack of storage space in the warehouse.
l Feasibility studies have determined that the existing airport could not be expanded because of lack of land. Consequently, in April 2010, the government approved a plan to build a new international airport. The airport will be located outside Dhaka in order to cope with the growing air traffic and to reduce the pressure on the existing airport. The new airport will allow for further growth in cargo, and Biman Bangladesh can position itself to capture some of this cargo market share as it expands its fleet over the next 5-10 years.
l Civil aviation officials estimate that the proposed airport will be approximately the size of Bangkok's Suvarnabhumi airport, which has a capacity to serve 45 million passengers a year, 76 flights an hour, and 3.0 million tons of cargo annually. This will be a major improvement for foreign investors manufacturing in and exporting from Bangladesh, and certainly will enhance the investment climate in Bangladesh.
Telecommunications
l Over the past decade, Bangladesh's telecommunications sector has witnessed significant market penetration of cell phones, computers, and mobile banking. These developments have been welcomed by foreign investors looking to enhance market connectivity.
l The use of information and communications technology (ICT) is now an imperative worldwide, and it is a rapidly growing sector in Bangladesh. ICT in Bangladesh is now one of the fastest-growing sectors in the economy. The government of Bangladesh views ICT as immensely important for development. It has launched a program called "Digital Bangladesh," which includes among other things, setting up six information technology villages throughout the country.
This surge in ICT activities in Bangladesh has generated numerous investment activities in the areas of digital government, e-business, e-commerce, IT training, and education.
l To support its ICT efforts, the government has made significant reforms in the mobile telecommunications sector. For example, the state-owned telecommunications provider, Bangladesh Telegraph and Telephone Board, was converted into a limited public company, and the telecom market was opened to the private sector. The government's policy of increased competition in the cellular market, with six mobile operators, has led to significant growth in connectivity quality and lower tariffs. It also has led to a major increase in multiple phone use throughout Bangladesh.
l Underlying all of Bangladesh's ICT activities is a sole fiber-optic submarine cable that connects the main international cable to Cox's Bazar, from which data are transmitted by landline to Chittagong and Dhaka. This line is critical, as it carries high-speed Internet and telecommunications data for both mobile and landline operators. However, on occasion, because of a lack of regular maintenance as well as vandalism, the land link from Cox's Bazar to Chittagong and Dhaka gets disrupted, shutting down the country's entire communications and Internet
l When this happens, the problem is compounded by the fact that satellite services act only as a backup measure and provide limited bandwidth.
Without a doubt, telecommunications is critically important to modern business operations and if Bangladesh hopes to attract more foreign investment, especially ICT investment, a second fiber-optic submarine cable is needed to connect to Cox's Bazar, as well as an alternate land line in Dhaka, in order to meet the country's rapidly increasing telecommunications demand.
Revenue Administration
l The National Board of Revenue (NBR) is the central authority overseeing tax administration under the Ministry of Finance. The NBR is in charge of the following taxes, which affect most foreign investments and foreign investors:
l Personal and business income tax
l Valued-added tax (15%), which is levied on all imports and domestically produced goods and services. with some exceptions
l Customs and import duties
Although these three departments all are housed under the NBR, there appears to be little coordination among them, and the available tax data reflect this fact.
l Bangladesh's revenue and administrative structure under the NBR is in need of an urgent overhaul if the country wants to attract more foreign investors. Although the tax incentives for foreign investors are adequate, companies believe that both tax policy and tax administration in the country are complex and, in too many cases, arbitrary. Bangladesh's unnecessarily complicated taxation system remains a major concern among foreign investors.
l Over the years, the country's tax code has been modified to give tax relief or subsidies to a variety of interest groups, and, as a result, there are now too many tax rates and categories.
Compounding this problem is a lengthy and often uncertain application of the tax code that lacks transparency.
For these reasons foreign investors believe that the tax regime in Bangladesh is fair but complicated.
There is often confusion over tax rates, and tax officials have substantial discretion in deciding which rate to apply. This situation often leads to negotiations for tax payment settlements.
l Foreign individuals and companies are liable for taxes, although investors are eligible for tax holidays and lower tax rates under specific conditions, as well as under the framework of free trade agreements signed by Bangladesh with other parties. Bangladesh has signed Avoidance of Double Taxation Agreements with 28 countries, including the United States. Therefore, foreign investors from those countries are not liable for multiple taxation on their income.
l Foreign investors can avail themselves of a number of tax incentives.
l In spite of a number of generous tax benefits, foreign investors are still among the top taxpayers in Bangladesh in almost every category. Thus, individual, corporate, and value-added taxes, combined with customs duties paid by foreign companies on imported goods and exported products, represent a major revenue source for the government.
l It is estimated that the 832 foreign enterprises located in Bangladesh generate a significant amount of tax revenue for the country. It is difficult to determine the exact amount, as the NBR does not have a comprehensive database.
l According to the World Economic Forum's 2010 Global Enabling Trade Report, the country's high average tariff rates, additional taxes and customs duties, and inefficient tax administration procedures are significant barriers to doing business in Bangladesh. In fact, in terms of the "burden of customs procedures", the country ranks 119 out of 121 countries, far behind its competitors in the Asian region.
Employment and Labor Issues
Productivity: As Bangladesh tries to attract a more foreign investors to establish manufacturing facilities in the country, labor productivity will be a key factor in the assessment of Bangladesh's desirability as an investment location. Coupled with that are considerations regarding the educational quality and skill level of Bangladeshi workers.
One of the key factors leading Bangladesh's manufacturing competitiveness is the country's ample supply of labor. Currently, Bangladesh has approximately 80 million people in its labor force and its workers are perceived as hardworking, reliable, and enterprising.
One of the key factors leading Bangladesh's manufacturing competitiveness is the country's ample supply of labor. Currently, Bangladesh has approximately 80 million people in its labor force and its workers are perceived as hardworking, reliable, and enterprising.
Labor Relations: Labor unrest and strikes in some factories have had an impact on foreign investors, dampening the overall business investment environment. Nevertheless, Bangladesh is one of the world's lowest cost manufacturing locations, with a minimum wage of approximately US$43 per month, after the recent wage increase. The new minimum wage also includes an additional allowance of approximately US$3.0 per month for medical expenses and US$11.50 per month for housing. Previously, the wage rate was only US$25 per month.
Because of low wages and wage increases in China, on April 29, 2010, more than 1,000 Bangladeshi garment workers attacked factories with stones and blocked streets in Dhaka to demand a higher minimum wage. The wave of strikes soon spread to locations around the country. This was not without cause, as wages had not been adjusted in four years despite a period of rising food and fuel costs.
l As a result of the labor unrest, the government increased the minimum wage for garment workers to US$43 per month, although the garment workers' union had requested an increase to US$75 per month.
Labor leaders were not happy with the increase, and after continued protests, three prominent labor rights leaders were arrested and charged with inciting unrest. They were released a few weeks later after concerns were raised by the international community, most notably the United States.
Though the recent wage increase is in line with the demands from both the major Western retailers and the Bangladesh Garment and Manufacturers Export Association (BGMEA), the pay for workers in Bangladesh is low in comparison to China and other apparel production centers such as Cambodia, Indonesia, and Vietnam, all of which have faced similar labor unrest over the past nine months.
It is important to note that most garment factory owners were not opposed to the wage increases; however, they were opposed to a large increase all at once, which could hurt their competitiveness. Going forward, they believe that the government should increase the minimum wage incrementally, every year or every two years.
l The Bangladesh government faces the challenge of finding the right balance between worker compensation and benefits and the maintenance of its export competitiveness. This is an issue that will continue to confront government officials in the years ahead.
Legal Framework: The legal framework in Bangladesh is an impediment for foreign investors in a number of areas, particularly land acquisition, dispute settlement, and, to some extent, intellectual property rights. A broad issue is the need for Bangladesh to modernize a number of its existing laws, such as the Company Law, which should be brought up to date with global business practices. Another pressing issue is that a number of new laws need to be enacted in order to cover many new business and financial activities, especially in the fast-changing financial and telecommunication fields.
Land Acquisition and Property Rights: Access to land is regarded by foreign investors as one of the major impediments to establishing manufacturing operations in Bangladesh. Although foreign investors are allowed to own land, availability is severely limited, as large unused tracts are unavailable, either owned by state-owned enterprises or the government, or used for agriculture.
l A large share of property in Bangladesh is not properly registered, which makes it more difficult and costly to transfer property to foreign buyers. The property registration process also takes an inordinately long time to complete.
l According to the World Bank's 2011 Doing Business Report, Bangladesh ranks lowest among Asian countries in this area. Property registration typically takes 245 days in Bangladesh, compared with 44 days in India, 57 days in Vietnam, 22 days in Indonesia, and only two days in Thailand. Certainly, this process can be improved.
l With the recent passage of the Special Economic Zone legislation and the public-private partnership program, the government is seeking out ways to provide land for investment, either by recatorgorizing government-owned land or by allocating unused land held by state-owned enterprises.
l A recent success story is the establishment of a new Export Processing Zone at a closed state-owned jute mill at Adamjee. At its height, the mill employed 25,000 people, but at its closure, the employees numbered only 2,500. The new Export Processing Zone opened in March 2006, covering 294 acres of land. As of September 2010, about US$100,000 had been invested by private companies employing approximately 13,000 people and exporting approximately US$100 million a year. The government expects a fully operational Adamjee EPZ to employee 100,000 Bangladeshi workers.
l There are a number of other closed-down state-owned mills with hundreds of acres of land that could be converted into industrial parks located around the country in places such as Chittagong, Khulna, and other cities.
Investment Protection and Arbitration: The existence of an institutional mechanism to protect the rights of foreign investors is essential. There is currently no accepted established dispute process that is transparent and carried out in a timely manner in Bangladesh. Dispute Settlement
l According to foreign investors, a fundamental impediment to increased investment in Bangladesh is the weak and slow legal system, with no penalty for delaying proceedings and uncertainty of contract enforcement.
l Bangladesh is a signatory to the International Convention for Settlement of Investment Disputes (ICSID), and acceded to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards on May 16, 1992. A provision of the U.S.-Bangladesh Bilateral Investment Treaty permits the submission of investment disputes to the ICSID for third-party settlements.
l The World Bank's 2011 Doing Business Report tracks the efficiency of Bangladesh's judicial system in resolving commercial disputes compared to other countries in the Asian region. Bangladesh ranks among the lowest of the countries surveyed.
l With the exception of those conducted by internationally affiliated accounting firms, audits in Bangladesh generally fail to conform to international accounting standards. Consequently, dispute settlements are hampered by shoddy accounting practices and the inappropriate registration of retail property.
l To help address this problem, in March 2010, the Bangladesh Investment Climate Fund partnered with the Bangladesh International Arbitration Centre to develop a center to resolve commercial disputes out of court. The new center is expected to help businesses and investors save time and money by giving them an alternative venue to deal with disputes outside the courts. Intellectual Property Rights
l Although Bangladesh primarily manufactures low-end products, there have been complaints about intellectual property rights from some foreign companies. In particular, some international garment manufacturers have complained that their clothing designs have been copied without their permission.
l Bangladesh is a member of the World Intellectual Property Organization, and acceded to the Paris Convention for the Protection of Industrial Property of 1991. However, the government is proceeding slowly in bringing its intellectual property laws into compliance with the World Trade Organization's Trade-Related Intellectual Property Rights.
l The government enacted a copyright law in 2000, updating its copyright system, and an amendment to the Trademark Act of 1940 currently is being studied.
Investment Financing Availability of Financing: To make investing in Bangladesh more attractive to foreign companies, more coordination is needed between the government and domestic lending institutions to provide loans to potential investors. This is beginning to happen, particularly with the growth of private-sector financial institutions.
l Most large international investors can arrange their own project financing. However, for other foreign firms, project financing from local sources is not always possible because of the unavailability of long-term funds. Currently, the maximum domestic loan is available for five years at an interest rate of around 15%.
l To increase project investment levels, there needs to be a smoother mechanism that will enable entrepreneurs to have ready access to cheaper and long-term capital within the country.
l Government bureaucracy is also another impediment, as obtaining a loan from overseas sources with a repayment period of greater than one year requires authorization from the government of Bangladesh. This process can be quite time-consuming.
l The system of foreign loan approval applies to all loans, small or large, regardless of whether the loan is for export purposes, long-term infrastructure projects, or consumption spending.
l The processing of foreign loan applications by the government is not time bound, and the time required to complete the process averages around six and half months, unnecessarily delaying investment projects.
l Despite a huge increase in exports in recent years, trade financing remains a major problem, and Bangladesh letters of credit still are not readily accepted in other countries. However, this situation recently has improved, as Bangladesh now has country ratings from Moody's and Standard & Poor's, and foreign banks are more willing to enter into financial transactions with banks in Bangladesh.
Increasing Number of Financial Institutions: In the past, state banks have completely dominated the country's financial sector. However, in recent years, the share of financial sector assets owned by a growing number of private sector banks has increased considerably.
l Despite this large increase in financial institutions, there is still a limited number of financial instruments available to investors in Bangladesh as a result of several factors:
l Limited capital market financing is available.
l No corporate bond market is established.
l No secured transactions are available.
l No international factoring is available.
Foreign Exchange Risk/Convertibility: Despite the government's liberalization policies, financial policies in Bangladesh remain restrictive. However, in recent years, capital account liberalization policies in Bangladesh have eased restrictions on the capital and money markets, derivatives and other instruments, credit operations, direct investments, real estate transactions, personal capital movements, provisions specific to commercial banks, and provisions specific to institutional investors.
l The Bangladesh Foreign Investment Act of 1980 guarantees the right of full repatriation of invested capital, profits, capital gains, post tax dividends, and approved royalties and fees.
l The central banks' exchange control regulations and the U.S.-Bangladesh Bilateral Investment Treaty (enacted in 1980) provide similar investment transfer guarantees. In practice, foreign firms can repatriate funds without much difficulty in Bangladesh.
l The value of the Bangladesh taka has been very steady against the U.S. dollar, averaging 67-71 take per dollar. This is good for business, as a great deal of Bangladeshi foreign trade is denominated in U.S. dollars. The currency is fully convertible on current account transactions such as import, trade, and travel needs, but not for capital account transactions such as investing or currency speculation.
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Courtesy: Enhancing Trade and Investment between the United States and Bangladesh, a Trade and Investment Report by the Asia Society in Washington D.C. The report was presented by Mr. Jack Garrity, Executive Director, Asia Society in Washington at a luncheon meeting of American Chamber of Commerce in Bangladesh (AmCham), held in Dhaka on December 08, 2010