Investment in both public and private sectors is one of the critical needs for an emerging economy like Bangladesh. The government has set different targets and adopted policy measures to attract investment to mitigate growing employment challenges of the country. Increasingly, attracting new investment has become more strategic as investors want to study the strengths and opportunities of the country as well as explore infrastructure, market size, connectivity, financial issues and most importantly, the policies that will affect their investment in terms of both equity and knowledge.
The national budget for FY15 has announced some policies without specific milestones to achieve investment targets. Based on different assumptions, it mentions: "We hope that in the next fiscal, investment, export and remittance flows will increase as it is expected that the global economy will experience accelerated growth". It further says: "The government initiatives for developing physical infrastructure in the power, energy and communication sectors will continue". In order to encourage investment targets, especially those of private investment, the budget fails to provide any priority signals through which private sector will feel confident to bring in new investment.
Investment is a long-term venture that needs coordination of various factors including reliable policies. Budget FY15 has been prepared and placed in the backdrop of mixed economic indicators, among which enhanced public investment, stable inflation, substantial surplus of balance of payment (BOP), stable exchange rate, augmentation of foreign exchange, stable global commodity prices, etc. are positive elements while slowdown in GDP (gross domestic product) growth, declining private investment, significant shortfall in revenue mobilisation, reliance on domestic sources for financing fiscal deficit and depressed demands are identified as challenges that need serious attention.
Given this scenario, in order to achieve 7.3 per cent growth rate as proposed in the budget for FY15, the target for private investment should have been increased from the present level of 19 per cent to 25 per cent, i.e. increase of 5-6 per cent points or more than Tk 750 billion or US$9.5 billion in FY15. Public investment as percentage of GDP should also have been increased by 1-2 per cent in FY 15. At present, the actual private sector investment as percentage of GDP is 18.99 per cent and for public sector it is 7.85 per cent (Budget 2014-15).
Targets of investment in the private sector is US$ 140 billion and FDI is US$ 5.5 billion in order to achieve the SFYP and Perspective Plan targets while industrial employment needs to be raised to 25 per cent from the present level of 17.64. per cent. This will not happen automatically. Thus policy coordination and implementation are emphasised.
PUBLIC-PRIVATE PARTNERSHIP: Infrastructure development is one of the challenges for speedy investment growth and the budget states that it will encourage implementation of projects through Public-Private Partnership (PPP). Statistics show that 34 projects under six sectors have been approved on principle and advisors/consultants have been engaged for 33 projects to be implemented under PPP basis.
In order to attract PPP projects, the government is planning to enact a PPP law replacing PPP Policy 2010. In case of PPP, some concerned investors suggested the need for a suitable institutional framework since currently six different government institutions are involved at one stage or another. Also the government established other bodies such as the Investment Promotion and Financing Facility (IIFC) to help finance projects under the Infrastructure Development Company Limited (IDCOL), a public non-bank financial institution and created another source of funding called the Bangladesh Infrastructure Finance Fund (BIFF). In addition, the PPP office should be the prime organisation because it faces overlap and duplication of responsibilities.
As per policy, PPP projects are classified as small (below Tk 500 million in value), medium (between Tk 500 million and Tk 2.5 billion) and large (above Tk 2.5 billion) but approval processes are similar in all of the instances. In case of small projects, approving authorities could be planned in such a way so that they can avoid some rigorous process of approval and see implementation quickly. Also, the PPP law, which is going to be finalised soon, should clearly state the rules and conditions for PPPs including management and policy guidelines. One estimate suggests that Asia will attempt to invest $8 trillion on infrastructure over the next ten years and of this amount, about $1 trillion may provide PPP opportunities to foreign investors. According to McKinsey, this $1.0 trillion investment is likely to be in energy, roads, and ports. Therefore, Bangladesh should be serious in getting PPP funding in the required infrastructure sector.
FOREIGN DIRECT INVESTMENT: Interestingly enough, even though private investment is showing a sluggish trend, foreign direct investment (FDI) in Bangladesh has increased by 24 per cent as per the World Investment Report (WIR) 2013, even though there was political instability throughout the year. During this year, FDI was $1599 million while it was $1293 million in 2012 and $1137 million in 2011. Out of $1599 million FDI, the share of equity investment was US$541 million which is 9 per cent higher than the previous year, reinvestment was $697 millon showing 19 per cent growth over the last year and intra-company loans was 74 per cent higher at $361 million. As per Asian average, FDI stock of Bangladesh should be at least 18 per cent of the GDP, for which its stock should be US$ 19.9 billion since presently it is only US$ 8.6 billion (2013).
This year's World Investment Report focuses on Sustainable Development Goals (SDGs) and its slogan is 'Investment in Sustainable Development Sectors.' The private sector has investment in different Sustainable Development Sectors where FDI can also be attracted. Foreign investments exist in telecommunications, textiles, banking, power, gas and petroleum, food products and agriculture, among others. Through these investments, technology is transferred and skills and capacities are developed. Bangladesh needs proper capacity building with regard to developing skilled manpower. For instance, as per the Private Education Act 2010, foreign universities are allowed to open branches in Bangladesh but so far no foreign university has been established. The quality of education both at higher and tertiary levels need to be improved to develop skilled manpower to match the demand of the industrial sector.
SME DEVELOPMENT: SMEs (small and medium enterprises) are another important segment of the economy as 96 per cent of industries are SMEs and they contribute to about 70 per cent of industrial employment. Regarding SME development, the budget has announced that all possible support in terms of providing credit and refinancing facilities at a low rate of interest will continue in order to help labour intensive small, medium and cottage industries. SMEs thus need all related coordinated and coherent policy support.
The Business Initiative Leading Bangladesh (BUILD) conducted studies on some of the existing facilities available for SMEs but these cannot be fully utilised by them because of some policy anomalies. One of them is the existence of turnover taxes at 3.0 per cent instead of 15 per cent VAT extended to small and cottage industries. As such, BUILD suggested reviewing the list of non-eligible sectors, and at the same time publishing a clear statement including a list of eligible sector of business and criteria (revenue limit) that make them qualify for turnover tax including highlighting the exempted and the non-exempted firms. The study also suggested using definition of Industrial Policy as a reference to state firms to get these benefits.
Furthermore, BUILD also suggested a circular informing all government agencies that the eligibility of turnover taxpayers is mentioned next to the VAT payers in tender advertisements as tender advertisements require firms to be VAT payers in order to be eligible to participate in the procurement process. Also turnover sales receipt can be considered as a document for getting tax credits as per the turnover tax paid. This is because turnover tax payers do not import raw materials from abroad as they are not allowed to take IRC and the ERC. They generally buy and sell from local market. BUILD has found that the budget has no new policy directives in that respect to attract more investment from SMEs.
In other tax-related and SME issues in the budget, it has been found that minimum turnover tax has been reduced to 0.30 per cent from 0.50 per cent whereas there was no such tax in the past. The tax was repealed in 2008 and it is introduced again in 2012 and so BUILD suggested reverting to the earlier situation.
EXPORT AND IMPORT, AGRI-BUSINESS: Also, export and import is expected to grow by 15 per cent in FY 2015 but a number of key initiatives remain incomplete for the forthcoming VAT Act 2012 (to be implemented from June 2015). To simplify duty drawback for exporters, BUILD suggested redefining the duties and responsibilities of Duty Exemption and Drawback Office (DEDO) in line with the changed situation under the VAT and SD Act 2012 since no mention of Duty Drawback system through which exporters get refund of the duties that pay for importing inputs for export products, was found in the budget.
Agri-business is a potential sector that needs policy attention. As per an IFC study, agri-business sector of Bangladesh is growing at 5.2 per cent annually. Research shows that because of the absence of an enabling environment, Bangladesh is losing a significant amount of investment estimated at around US$850 million. If investment can be materialised, it could contribute to generation of about 6.3 million jobs. The agri-business sector thus needs coordinated efforts from both public and private sectors to exploit the full potential of investment in this sector. Some non-traditional sectors, such as meat and meat production, potato chips and seed also need required policy support for growth.
Supplementary duty reduction on some agricultural products, such as frozen shrimps (from 20 per cent to 15 per cent), tomatoes -fresh and chilled - (from 20 per cent to 15 per cent), potato chips (from 60 per cent to 45 per cent), fruit juice (from 30 per cent to 20 per cent) may hamper growth of these sectors as these budding sectors require some more time to achieve sustainability.
With regard to agriculture subsidy, it will remain at Tk 90 billion as it was in the previous year. A well-thought-out plan and supportive agri-business development policy is important.
BUILD, in its analysis of taxes in the budget, found that corporate tax for non-publicly traded companies has been reduced and incentives for listed companies have been reduced. Earlier, they were enjoying benefits of 10 per cent tax differences which has now been reduced to 7.5 per cent. Thus investment in the capital market will be discouraged. Therefore, a rational tax policy is required so that investment is attracted in all related sectors. One relevant instance of policy mismatch - the anti-export bias of the current tariff structure - needs attention of the policy makers.
Coordination and consistencies among relevant investment, tax and trade, SMEs and other related policies are required to exploit the latent potentialities of the economy for achieving investment targets.
The writer is CEO, Business Initiative Leading Development (BUILD). ceo@buildbd.org
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