The City Bank and FinanceAsia in partnership with The Daily Star organised a roundtable on "Bangladesh: Breaking through the frontier" on February 12, 2015 at City Bank Centre. Here we publish a summary of the discussion -- Editor
Opening remarks by Sohail R. K. Hussain
This is a follow-on event to the very successful Bangladesh Investment Summit held in Singapore last September. Then the central theme was how Bangladesh can migrate to middle- income country status. City Bank, FinanceAsia and Standard Chartered acted as a bridge between the international investors and Bangladeshi regulators as well as the Bangladeshi business community. The discussions were lively, useful and significant. The Daily Star published a two page supplement on the Summit. It generated a lot of interest. I want to thank The Daily Star for their valuable support.
Today we meet again to ensure that the dialogue continues. I am confident that today's discussion will be very useful and relevant. I want to thank FinanceAsia for organising today's event. I would also like to thank the participants for their valuable presence at this roundtable. My special thanks goes to our Chairman Mr. Rubel Aziz for actively supporting this initiative.
By "breaking through the frontier" we mean not just moving from a frontier market to an emerging market. More foreign direct investment is also an imperative, which is predicated on further economic and political development. What is Bangladesh doing to attract both types of overseas investment?
Dr Gowher Rizvi
We need to get our narrative right. Unfortunately we still suffer from a very poor and negative narrative. This poor and negative narrative does not match the reality of Bangladesh. Bangladesh has changed; Bangladesh has been transformed. All the objective economic and social indices suggest Bangladesh has been making tremendous progress. Of course, recent political troubles do not make it easy for us. Nonetheless, we have a powerful story to be told. It is an impressive story. We should say it again and again.
When our government came to office in 2009, Farooq Sobhan told me that if we could not fix the country's power situation we would be out of power soon. He was absolutely right. Such was the dire situation of the power sector. Today the power issue has ceased to be topical. That does not mean that we have solved the whole problem but we are on target and possibly ahead of target. There may be criticism about the efficacy of quick rental but given the results it has produced I think that criticism needs to be tempered with the outcome.
In the same way, work of important transport infrastructures have been going on. You all know it takes long digestive periods. Things are moving.
Also the other thing that was hurting us enormously was the question of labour. We are very much on target on this issue also. Although, some criticisms are still coming, we think that we are on the right track. We have made headway on labour law, factory security, health conditions and collective bargaining.
However, Bangladesh is not sufficiently integrated into the global economy. If it continues for a long time it will be a bad thing. Bangladesh has got over the global recession fairly successfully. It is important that we get into the tide of the global integration and take the advantages it offers. After all, we know that our private enterprises, whenever given an opportunity, are second to none. The challenge is to create an environment which will help them to flourish.
Some of our regulations and practices are not yet aligned with best global practices. The government's commitment is there, but sometimes we lack access to the necessary expertise and experience. This is an area where I feel we could do more by bringing good practices so that our businesses are much more in line with global practices. Important banking and regulatory reforms have taken place, but more needs to be done. We can speed things up if we, the private sector and the government, can work together in policy formulation. My experience says that working with private groups is immensely rewarding. Because, what may take the government a long period to do, private sectors can jump in and find solutions which will be easier for the government. Otherwise what happens in Bangladesh is that the government tends to hear the piecemeal special interest groups not the whole private sector. If private sector-led groups interface with selected ministries and bring policy recommendation based on empirical evidence and analytical value, things will gather more speed.
Bangladesh has already become a prime overseas investment target. Not only for the three largest economies in Asia--India, China and Japan-- but South Korea, Singapore and Hong Kong are also taking a keen interest in Bangladesh. This is a time when Bangladesh should be moving forward to promote connectivity and regional economic integration. We are not only a gateway to Nepal and Bhutan but also to the north east of India. We also have excellent opportunities to connect with China and the Asean region. The message coming out from our interaction with all these countries is the willingness to embrace Bangladesh as an integral part of the changing and emerging scenario of Asia. It is something we need to build on and leverage, in terms of attracting investment.
I would like to flag three issues which in my view are central to today's agenda. First,building a deep sea port which should be seen as a priority. Second, the need to fast-track not just the construction of the Dhaka-Chittagong highway but also linking it with Asian Highway so that we have an alternative route to Myanmar other than the proposed direct road link from Teknaf to Rangoon.
Third, we must develop our railway network and integrate it with the rest of Asia.
I believe the private sector has achieved wonders in the last few years. The government should keep up with the pace and energy of the private sector. Hence, the private sector should be involved more in policy making. Through good policy making the country can do much better than it is now.
Abrar A. Anwar
Investment is the key to financing the country's growth opportunities. When we deal with potential investors we find several areas of concern. One is more from the angle of how the risk management plan will work out and another is how the cash flow they are projecting in the business can be forecasted with some sort of definitive perspective. In Bangladesh investors perceive some major risks in terms of making large investments. One is the discontinuity of policy. There has been continuity of policy but there is always a concern whether a policy will remain same till the completion of a project. For example, for large investment in power sector there is a structure of agreement and commitment from the government. So far all the governments have delivered on the commitment. That's why we see good investment climate in the power sector. This is a good example.
Every year we see that various changes take place in tax regime. It creates a bit of an issue for the investors because they come with a horizon of ten to fifteen years. If it changes every year it puts their entire investment plan in jeopardy. At least some tax policy should be maintained for a period of time so that some forecasting can be made for the potential investment.
Domestic demand is also a critical factor in attracting investments. Bangladesh presents tremendous opportunities for investors because it has a young population of 160 million with a rising per capita income and it is poised to reap the demographic dividend. Not only does it have a large domestic market, Bangladesh also provides opportunities to thrive as a manufacturing hub.
If you look at the country like a company, it has to invest continuously to support its growth aspirations. 6% growth means it will be growing at 6% of $150 billion. To support that, we need investment of around $30-40 billion every year. The question is: how do we finance this investment? Our domestic saving is not good enough. So there is need as well as an opportunity to tap into the global capital market.
After the Singapore Summit, we have seen an influx of foreign investments into our capital market. Foreign investment percentage has moved up from 3% to 10 % in the last couple of months. It is a direct manifestation of the work we did in Singapore. Meanwhile BSEC has been upgraded by ISCO to A category regulator status from B status as a result of reforms targeting international investors. Our Honourable Prime Minister has recognised our efforts and the BSEC chairman and commissioners have been reappointed for four years.
Now, what are we doing to move from a frontier to emerging economy? The BSEC is taking up more reforms, for example, to improve reporting and auditing standards .The government has just placed a bill before the parliament, known as Financial Reporting Act, that will create a financial reporting council to improve disclosure standards.
The BSEC has also introduced a new corporate governance code. It will enhance corporate governance of all listed companies. We have been working on an investment relations guideline where every potential investor will get better information about all enlisted companies. There will be a separate department in every enlisted company dedicated to providing foreign investors with information about its operations, management and finances.
We are now working on a new regulation for private equity and venture financing which I think will be a very timely initiative in terms of attracting foreign investors to the country. We had a meeting with ADB on this issue and we did basic formulation for this new private equity and venture financing rule. We are setting up a separate clearing company so that we can get better settlement guaranty funds.
BEI was invited by the commerce ministry to facilitate the finalisation of the new Company Act. By April, we hope we can finalise the draft. I am confident that it will give a big boost to the investment climate. We have tried to prepare it in line with the best practices of the region.
There is a strong link between strengthening corporate governance and response of the institutional investors. I have been in touch with several institutional investors. With the improvement of corporate governance we are seeing good results. I hope the BSEC and Bangladesh Bank will continue their effort.
Dr Salehuddin Ahmed
Bangladesh's strength is its people. I had an opportunity to advice China's poverty alleviation minister. I told him that there were lessons to be learnt from Bangladesh and wrote a paper highlighting seven world class development success stories of Bangladesh: the garment industry, food production, population control, non-formal education, microfinance and women’s rights. Bangladesh has all the ingredients to attract investment. But, first of all, the political crisis has to be solved to realise this potential. We also have to focus on education. Our migrant workers have a very basic level of skills which translates into basic level of work and low income.
Sohail R. K. Hussain
To become a middle income country our economy needs to grow at 8% a year. We also need 8% remittance growth. To support this we need a 5% increase in investment which can translate into the productivity increase necessary for skill development.
The government needs to ensure that the business environment is appealing. That means not just providing serviceable factory space, but promoting a stable business climate, reliable law and order, better infrastructure, consistent business policies and so on.
On the question of productivity, the country is self-sufficient in food and our agriculture sector makes about 19% of the total GDP. Due to increased investments in industrial and service sectors, we see rapid labour migration from low earning marginal farming to these sectors. This is a good thing. It will enhance productivity and competitiveness which will in turn attract FDI. The same trend should happen in the service sector.
What is the government's role here? It has to create infrastructure which facilitates this growth. For example, Indians, Chinese and Japanese investors have approached the government and asked for special economic zones. If this can be done quickly we will have a lot of investments coming in. There is also the potential for technology transfer and job creation.
Finally, developing human capital is essential for achieving faster economic growth. In the short term, we need to target increasing average years of schooling from the current 5.7 to 7.3 years as well as quality of education. This is not going to happen without substantial government investment.
Bangladesh is an attractive market with great potentials; it has a population of 160 million of which 93 million are under the age of 28 years. This is a large young work force that can be trained, sent abroad or employed in better earning jobs in industrial and service sectors.
In Bangladesh export industries are driving growth and investments. Now, we export $30 billion worth of products. We would like to reach $50 billion by 2021 or preferably earlier. If we want to achieve this level of export, we need to diversify our export basket. But, how?
There are a number of ways to do this. We need to look at other industries that are doing well and where we are developing core competencies. Leather, pharmaceuticals, IT, ship building, etc. comes to my mind.
Of course, the most adaptive sector is the ready-made garment industry (RMG). It attracts substantial amount of FDI and has done well in terms of meeting the challenges of the times. Now it needs a vision to where the industry should be in 15 to 20 years' time. Currently, the industry is positioned around manufacturing competencies and we have expanded this to cover backward linkages i.e. spinning, weaving, knitting etc. quite successfully. However we need to focus on increasing our share of the global apparel value chain. This means moving into designing, marketing, distribution and retailing. Our RMG sector can also explore markets like Japan, Australia and BRIC countries where our presence is limited. To expand into these lucrative markets and to move up in the value chain we need more investments in R & D and human capital development.
As we move up in the Apparel Value Chain, our returns will multiply manifold. The total garment market is worth $1.2 trillion. How much do we really make? After deduction of all value additions apart from manufacturing, only approximately $4 is left in the country for a $200 final product value.
The two best ways for diversification in garment industry are diversification of locations and diversification of products. We have an 86% concentration in the US, EU and Canada. We should continue to grow in our existing markets but also target markets in Japan, BRIC countries and Australia. Our garments industries should not look at themselves as factory houses only. It is a large industry even in the international context.
Our leather and pharmaceutical industries need to develop aggressive visions for the future, which focuses on faster growth through international markets.
Bangladesh cannot grow at 8% a year without both domestic and foreign investment. Reforms are happening in Bangladesh but not fast enough to take capital away from Vietnam, Myanmar and other alternatives. If you cannot attract investment you cannot build large infrastructures and generate employment that can propel growth.
Human resource is the most precious resource of Bangladesh. Upgrading the level of human resources should be the top priority for private sector because government cannot do it alone. If we can increase our remittance by 5% through upgrading the skills of our migrant workers it would have a huge impact on our economy.
Another problem is political risk and opportunity cost to the country due to unstable politics. Moody's Investor Services has recently highlighted the downside risk to Bangladesh's sovereign rating because of the recent troubles and conflicts. This has substantial ramifications for financing.
To attract investment, we need an effective problem solving mechanism. If foreign investors have to run from pillar-to-post they will go elsewhere.
There have been a lot of talks about empowering BoI as a one-stop-shop. I have seen that it works in Sri Lanka, so it should be possible here too.
I would like to quote a recent comment by Standard & Poor's : "Investment is driven by a dynamic local entrepreneurial class that can effectively maneuver around red tape, bureaucracy and a shortage of physical infrastructure." Do you agree with this view?
Bangladeshi entrepreneurs would leap into a business opportunity even if the profit margin is 1%. They are very aggressive. In contrast, entrepreneurs in other countries will just drop the profile if the profit margin is not more than 20%.
In 2007, I was in Malaysia for almost a year and started man power business. I noticed that Bangladeshi labourers were less paid because they could not speak in English. If we can just improve in English our remittance feature will change radically.
What about start-ups in Bangladesh? If I ask Mr. Anwar that as a banker when someone approaches you for providing start-up capital how receptive are you to these appeals?
Abrar A. Anwar
We seem to be very happy with 6% GDP growth. But if you look at other countries they are doing better than us with their big economy. As a nation we should step back and ask ourselves what more we can do rather than saying we are doing very good.
In the garments industry we see many entrepreneurs who are very courageous. When they approach us for financing, we tend to see at what level they would be able to meet up their obligations. Our entrepreneurs will jump in even where there is only 1% profit but we, financiers, will not generally support this entrepreneur.
Typically we see that small time investments are possible to be financed. But to move the needle you need hundreds of millions of dollars of investment. That's where the BSEC comes into play. A large project has a large horizon. For large projects, it needs to ensure that investors are able to project their cash flows properly. The stability of the cash flow will depend on some ancillary agreements. In recent years, we have seen a lot of investment in power sector because there is a good structure in power purchase agreement, implementation agreements and others. So we need to replicate that in other big projects like building transport infrastructures.
BSEC has been doing good stuff but they are not doing any road shows outside the country to talk about the good stories of Bangladesh.
We have limitations in terms of funding and spending money. But we do take a proactive approach and go wherever possible and project the success stories of Bangladesh. I hope soon we will be able to hold such road shows abroad.
Sohail R. K. Hussain
RMG makes up 86% of the country's exports. We need to diversify our export base. Some government facilitation can make a huge difference.
There are around 150 private companies who export more than $1 billion worth of leather products every year. Yet, although Bangladesh accounts for 2% of global production of raw skins and hides its share of the global processed leather market is less than 0.5%. The industry is suffering from compliance issues, infrastructure limitations, poor technology and R&D facilities. The government initiative to transfer the tannery factories to Savar Leather Industrial Park, where the government allocated 2,000 acres of land with CETP and other support structures, is a very useful step but this needs to be completed quickly. This sector can achieve exports of almost $5 billion within a few years, provided adequate investments are made.
Ship breaking and ship building are two potential growth industries, and City Bank is part of an initiative with the Association of Bankers, the FMO, DEG and other multilaterals to create a model shipyard.
IT is another prospective sector. Bangladesh sells around $120 million worth of goods and services every year and boasts annual growth of 40%. Inadequate infrastructure and human resources are the main impediments to the growth of this sector. The government should set up internationally accredited institutions that can provide necessary training for skilled IT workers. The private sector has started doing this and the government should join them. Finally, pharmaceutical companies based in Bangladesh provide 97% of local demand, which is the largest proportion among LDCs. The local market size is currently USD 1.9 billion. We have to explore opportunities to export medicine to other LDCs. This could happen through the TRIPS arrangement but it is going to be terminated next year. If the facility could be extended to 2021 then the industry could grow to $5 billion within this period.
The TRIPS agreement in respect of the pharmaceutical industry has already been extended for LDCs. Bangladesh needs to take full advantage of this opportunity.
On the issue of SEZs, there has been movement but clearly this is again an area where we need to accelerate the process. The litmus test will be operationalising the Korean EPZ. It is now fully developed and ready to take off. For the IT sector, the sky is the limit. Tata Consulting and Infosys as well as other leading IT companies are very interested in Bangladesh. But the key requirement is for trained personnel. We need an IT park. We also need to encourage the private sector to build IT parks.
A Bangladeshi American company is now setting up an IT park; the government should provide support for their efforts and should encourage and support the many non-resident Bangladeshis who are keen to invest in IT start-ups or use their know-how to set up IT companies in Bangladesh.
We are working with Bangladesh Bank to solve the problem of attracting private equity funds which are very critical for investment growth.
The fastest path of growth is IT. We have seen how India has moved ahead in IT. There are already tax incentives for IT firms in Bangladesh. The government should help the industry more. It would not require big investment but more assistance and coordination to accelerate the growth of our IT industry.
Abrar A. Anwar
The recent circular on private equity exit is a very welcome move by the Bangladesh Bank and BSEC.
In terms of start-up financing we are heavily engaged in venture financing and private equity rule formulations. We have a road map in this regard which will be put on the website for public opinion in April. By June, there will be an official gazette. In a recent meeting with ADB, we agreed to reduce the lock-in period for equity venture financing institutions to one year.
Some private equity investors that take stakes in IT start-ups are concerned about how to exit by selling their shares bilaterally. A foreign exchange regulation stated that their holding should be priced at net asset value, which was unsatisfactory. It has been replaced by fair market value.
Abrar A. Anwar
Many investors are not interested in going public. If you change this obligation it will be better for investment because it deters investors from increasing their capital.
Dr Gowher Rizvi
I think rather than removing the provision all together we can arrive at an agreeable ceiling. We could go up to Tk 500 crore.
Sohail R. K. Hussain
The government gives 10% tax benefit to listed companies. So there are issues why after such a good amount of tax benefit companies do not want to go for public listing? I think one of the reasons is procedural complexities. Another issue is that there is a fear that with two valuation methods (book building and fixed price) whether I am getting a good price or would it make sense for me to get the money from my friends and family. If the BSEC is extremely fixated on fixed price method, investors will not go for that.
In typical markets like India, there is a substantial debt market that replaces financial institutions but that is really non-existent in our country. Without that this market will not flow. In Bangladesh there is only one private equity fund. India has more than forty private equity funds. I think part of the issue is developing the debt market and work with BSEC and other regulators to create an environment which will not discourage foreign funds from coming here.
Dr Gowher Rizvi
There is already a presupposition that government is corrupt, complex, slow and tedious and therefore we must find a body that can navigate through that. However, the navigator can itself create hindrances. The BoI was supposed to be the navigator but it failed to do so. We need something more institutional.
I have been told that there would be a renewed effort to empower the BoI. If we have to activate BoI, it is important that it is given the necessary power to deliver. I would recommend institutionalising it. It needs a high-level committee to meet every two weeks with the BoI as its secretariat. We had an idea of Bangladesh Better Business Forum (BBBF). But, the key ministries in the government are reluctant to surrender their power as facilitators. Ideally, the Prime Minister or the Prime Minister's Office (PMO) should take the initiative to establish this high-level committee with the BoI providing back up support, then hopefully problems that require immediate attention can be resolved quickly.
Dr Gowher Rizvi
I do not think the government is reluctant to hand over facilitating authority. It is the inter-ministry turf war that creates hindrances. I think we need a body to neutralise these conflicts.
I have been encouraged by many issues raised by Farooq Sobhan, especially the prospects of a BoI
one-stop-fast-track service and IT parks. These issues have been discussed for the last few years but no effective steps have been taken yet. These problems can be easily resolved within a month.
Let me end with an illustration of the challenge we face. Bangladesh has a robust toy industry, yet its export ambitions are stifled by unnecessary costs and restrictions. We have more than 4000 machines that can produce toys but we are making other products. There is more than 30% duty on plastic imports and businesses must have a bonded warehouse for exports. That costs 10% and another 10% is payable to the bank. With these obstacles our toy manufacturers can never compete with China. Meanwhile, toy businesses are shifting to Sri Lanka where there are no onerous duties.
The discussion today could lead to solving many problems in the country and boost its GDP growth rate by a further 2%- but only if action follows. I would request Dr Rizvi to arrange another meeting with this group and ensure the presence of our finance minister and the chairman of BoI.
I want to thank all the participants for their time and valuable comments.