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.
Rupert Walker
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.
Farooq Sobhan
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.
Rubel Aziz
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.
Arif Khan
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.
Farooq Sobhan
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.
Reaz Islam
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.
Farooq Sobhan
To attract investment, we need an effective problem solving
mechanism. If foreign investors have to run from pillar-to-post they
will go elsewhere.
Reaz Islam
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.
Rupert Walker
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?
Rubel Aziz
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.
Rupert Walker
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.
Arif Khan
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.
Farooq Sobhan
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.
Reaz Islam
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.
Arif Khan
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.
Reaz Islam
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.
Farooq Sobhan
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.
Rubel Aziz
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.
Rupert Walker
I want to thank all the participants for their time and valuable comments.
