Business Environment Final Term Paper

Industrial Sector ofBangladesh

Submission Date: January 18, 2006

Institute of Business Administration

University of Dhaka

Prepared forMr. Neaz Ahmed

Course Instructor

Business Environment

Institute of Business Administration

Prepared byTanvir B. Anwar Roll # 02

A.S.M Sharif ul Alam Roll # 45

Md. Parvez Hossain Roll # 64

BBA 11th Batch

January 18, 2006

Mr. Neaz AhmedAssociate ProfessorInstitute of Business AdministrationUniversity of Dhaka

Subject: Letter of Transmittal

Dear Sir,

We are glad to submit this report on the study of the environment of industrial

sector of Bangladesh. The report deals with several important aspects on

environment. The issues include the study of the current growth in manufacturing

industry, the trends and policies undertaken by the government. Current

procedures are reviewed, present flaws are identified and thereby

recommendations are made.

We thank you for your sincere co-operation throughout the duration of the study.

If you need further clarification on any issues, please summon us any time at your

convenience.

We, therefore, would like to request you to accept our report and oblige thereby.

Sincerely,

________________________________

Tanvir Bin Anwar Roll # 02

________________________________

A.S.M Sharif ul Alam Roll # 45

________________________________

Md Parvez Hossain Roll # 64

ACKNOWLEDGMENT

For the preparation of the report, we are grateful to various individuals. We are

indebted to Mr. Harunur Rashid, Managing Director of Asian Group of industries,Director of Bangladesh Chamber of Commerce. He has provided us with invaluable

information. The officials of Asian Textiles, Beximco and PHP glass factorydeserve our acknowledgement for supplying us with requisite information in their

limited time frame.

Finally, we would like to express our gratitude to Mr. Neaz Ahmed, CourseInstructor, Business Environment, for providing us with such an opportunity and

sufficient help in preparing this report.

Table of Contents

INTRODUCTION....................................................................................... 1

INDUSTRY SECTOR: OVERVIEW........................................................................ 3

HISTORY........................................................................................... 3

CURRENT SITUATION OF INDUSTRIALIZATION ....................................................... 6

DEMAND FOR INVESTMENT FROM ABROAD IN INDUSTRIAL SECTOR ................................... 9

INDUSTRIAL POLICY .................................................................................11

MAIN OBJECTIVES ................................................................................11

MAIN TARGETS OF THE INDUSTRIAL POLICY .......................................................12

FINANCIAL INCENTIVES TO INDUSTRIES ............................................................12

IMPACT OF GOVERNMENT’S INDUSTRIAL POLICY ......................................................13

ENVIRONMENTAL ISSUES AND PROBLEMS..............................................................17

ECONOMIC ENVIRONMENT .........................................................................17

LEGAL ENVIRONMENT .............................................................................18

POLITICAL ENVIRONMENT .........................................................................18

CORRUPTION .....................................................................................19

SOCIAL AND CULTURAL ENVIRONMENT.............................................................20

LESSER ISSUES ....................................................................................21

RECOMMENDATIONS .................................................................................22

RECOMMENDATIONS FOR AGRO-BASED INDUSTRY..................................................22

RECOMMENDATIONS FOR TEXTILE INDUSTRY.......................................................22

RECOMMENDATIONS FOR FROZEN FOODS..........................................................22

RECOMMENDATIONS FOR ELECTRONICS SECTOR ...................................................23

RECOMMENDATIONS FOR LEATHER AND LEATHER GOODS ..........................................23

OTHER RECOMMENDATIONS.......................................................................23

CONCLUSION ........................................................................................25

REFERENCES ........................................................................................26

APPENDIX ...........................................................................................27

SECTOR-WISE INDUSTRY OVERVIEW ...............................................................27

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INTRODUCTION

BACKGROUND OF THE REPORT

Industry is the backbone upon which the economy of any country prevails. The growthof economy, the internal development of a nation depends upon the development ofindustrial sector. The external environment of any industry, mainly the political andlegal along with social environments affect the growth of industries greatly.The importance of Environment Analysis is therefore, very high. This study isundertaken to discuss different aspects on the present situation prevailing in ourindustrial sector, analyzing the impacts on business and economy and recommendbetter measures to increase the efficiency by managing the environments directly orindirectly affecting the growth of industry in Bangladesh.This report is prepared as a fulfillment of partial requirement of BusinessEnvironment course. It has been authorized by Professor Neaz Ahmed to make areport on “Industrial Sector of Bangladesh”.

OBJECTIVE

General ObjectiveThis study is a partial requirement of the course on Business Environment. Thegeneral objective of the study is to develop a clear understanding about theenvironmental issues in Bangladesh.

Specific ObjectivesThe specific objectives of the study are:

§ To find out the current industrial scenario of Bangladesh.§ To find out the recent shake-ups and the trends in the growth of industrial

sector.§ To analyze the traits, players and government influence existing in the

industrial sector.§ To scrutinize the industrial policy of Bangladesh government.§ To analyze the external environment and the internal strengths and

weaknesses of the policy.§ To identify problems still prevailing in the industrial sector.

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SCOPE

This report primarily concerns the industrial sector, the government policies and itsimplementation. By its very nature this report limits itself from going into the verydetails of the various functional areas like marketing or finance. Here the concern ismainly the industrial sector and the environment affecting it. With this view in mind,this report focuses on the issues like what is the nature and current scenario of theindustrial sector, impact of external environment – mainly political, legal and social,advantages and disadvantages of the current policy.

METHODOLOGY

Information for this report is collected from both primary and secondary sources. Theprimary sources of this report are the different company personnel’s. In this regardface-to-face interview method was used.

The secondary sources of this report are annual reports of the companies, foreignjournal, books and Internet.

LIMITATIONS

The main limitation of the study is the time constraint. The time boundary was notenough to conduct this type of important study. As a result, direct interviews ofdifferent persons from different industries were not possible. For their views, we hadto depend on the national newspapers, internet and some well designated persons inindustries like PHP Float glass, Asian Textiles, Beximco Pharmaceuticals and one ofthe Directors of Bangladesh Chamber of Commerce.

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INDUSTRY SECTOR: OVERVIEW

Industry, in a general sense, refers to the production of goods and services in aneconomy. The term industry also refers to a group of enterprises (private businessesor government-operated corporations) that produce a specific type of good orservice—for example, the beverage industry, the gold industry, or the music industry.Some industries produce physical goods, such as lumber, steel, or textiles. Otherindustries—such as the airline, railroad, and trucking industries—provide services bytransporting people or products from one place to another. Still other industries, suchas the banking and restaurant industries, provide services such as lending money andserving food, respectively. Industry can be divided in three major parts. These are

1. Primary Industry: This includes fishery, pottery, agro based industries etc2. Secondary industry: This includes textiles industry, glass factories, electronic

and light industry etc.3. Tertiary industry: This includes services like banking industries, restaurants

etc.

Our study revolves around the manufacturing and tangible product based industry.This mainly comprises the primary and secondary industrial sector of Bangladesh.

HISTORY

Bangladesh had been a center of trade and commerce, arts and crafts from ancienttimes. The public sector started in 1972 with 72 jute mills, 44 textile mills, 15 sugarmills, 2 fertilizer factories, one steel mill, one diesel engine unit and one shipbuildingyard. Mills and factories in the public sector however, soon became losing concernslargely because of mismanagement and leakage of resources. The government had toquickly review its policy of dominating the public sector. Although it continued toexercise control over industries, it soon raised the allowable ceilings of privateinvestment. However, this did not bring much improvement.

After a series of adjustments and temporary changes in state policy, the governmentfinally adopted a new industrial policy in 1982, following which 1,076 state-ownedenterprises were handed over to private owners. Unfortunately, denationalizationcreated a new problem of industries. They started getting sick because of failures ofthe inexperienced owners. Many of them were more interested in getting ready cashfrom selling of the cheaply acquired property than in sustaining and developing theindustries. The result was that industrial sickness affected 50% of industries in foodmanufacturing, 70% of them in textile, 100% in jute, 60% in paper and paper board,90% in leather and rubber products, 50% in chemicals and pharmaceuticals, 65% inglass and ceramics, and 80% in engineering industries.

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The largest group of industries in Bangladesh falls in the category of small and cottageindustries and their number in 1984 was 932,200 units, of which 20.7% were inhandlooms, 15.4% in bamboo and cane work, 8.1% in carpentry, 6.1% in products fromjute and cotton yarn, 3.4% in pottery, 0.3% in oil crushing, 3.2% blacksmiths, 0.8% inbronze casting, and the rest in other types of crafts. Weavers work in almost all partsof Bangladesh but their major concentration is in areas like Narsingdi, Baburhat,Homna, Bancharampur, Bajitpur, Tangail, Shahjadpur and Jessore. The silk industryhas flourished in Rajshahi and bholahat. Other places earning reputation in cottageindustries during the 1980s in Bangladesh include Chapai nawabganj and Islampur(bronze casting), Sylhet (mat and cane furniture), Comilla (pottery and bamboowork), Cox's bazar (cigar), Barisal (choir) and Rangpur (checkered carpet).

In 1984, Bangladesh had 58 textile mills with 6,000 looms and 1,025,000 spindles. Theannual production of the mills was 106.2 million pounds of yarn and 63 million metersof cloth. Textile is a public sector dominated industry in Bangladesh and like mostother sectors; textile also incurred losses, which amounted to Tk 353.4 million in1984. Problems in the sector include poor management as well as difficulties indeveloping skilled workers and shortage in supply of raw material and power.Bangladesh had 70 jute mills with 23,700 spindles in 1984. These employed 168,000workers and 27,000 other staff and used 545,000 tons of raw jute. But theirproduction was less than the 561,000-tons figure of 1969, when the country had 55jute mills with 21,508 spindles. The three major centers of jute industry inBangladesh are Dhaka, Chittagong and Khulna. The jute industry in the country hasbeen declining in the face of competition from India and in an international situation,where jute goods are being replaced by cheap and durable plastic products.

Development of new industries like sulphuric acid, chemicals, paper, caustic soda,glass, fertilizer, ceramics, cement, steel and engineering in Bangladesh was slow inthe period before 1985. There were only two plants for production of sulphuric acid inthe country in 1985 and their total production was 5,995 MT, while the production ofthis important ingredient for industries like soap, paper, cast iron and steel was 6,466MT in 1970. Production of caustic soda in 1985 was 67.87 MT. The soda was usedalmost entirely in paper mills. Because of availability of sand, salt and limestonewithin Bangladesh, the country has a good prospect in developing its glass industry.Dhaka and Chittagong are the two major centers for this industry. The automatic glassfactory at Kalurghat of Chittagong produced 12.9 million sq ft of sheet glass in 1985.

The fertilizer industry in the country uses natural gas as the main raw material. Thefertilizer factories produced a total of 808,660 MT in 1985. 741,463 MT was urea,9,634 MT ammonium sulphate, and 57,563 MT triple super phosphate. The threemajor factories were at Fenchuganj, Ghorasal and Ashuganj. The total production ofcement in the country in 1985 was 292,000 MT. The major industries were at Chhatakand Chittagong. Pakshi of Pabna and Chandraghona of Chittagong were the mainlocations for the paper industry in Bangladesh. The total production of paper in 1985was about 75,000 MT. In 1985, Khulna had a newsprint mill with a production capacityof 55,000 MT and a hardboard mill that produced 1,621 sq meter of hardboard.

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Around this time Bangladesh also had some mills for production of particle boards andpartex. The country also achieved self-sufficiency in producing matches; majorcentres of match production were Dhaka, Khulna, Khepupara, Chittagong, Sylhet,Bogra and Rajshahi. The total production was 1.30 gross boxes in 1985. That yearBangladesh had 8 sugar mills with a total annual production of 87,000 tons. The sugarmill at Darshana (Ishwardi) produced sugar as well as alcohol, methylated spirit andrectified spirit. The iron and steel mills in Bangladesh were mostly under the Steeland Engineering Corporation and were concentrated in Chittagong and Dhaka,although there were some steel and ironwork enterprises in Khulna, Kushtia andBogra.

Industries marked by notable development in Bangladesh in the mid-1980s includeshipbuilding, automobiles (assembly), oil refinery, insulators and sanitary wares,telephone equipment, electrical goods, televisions (assembly), cigarette, andvegetable oil. The country achieved significant success in developing garment industryin this decade. The government followed a strategy of planned growth blended with'free play' of market forces. The manufacturing sector showed some growth in the1990s. The share of the manufacturing sector in the country's GDP rose to 11% in1996. Investment in the sector was Tk 57.8 billion in 1997 as compared to Tk 22.5billion in 1991. The share of the public sector in the total investment in the country'sindustries fell from 37.03% in 1991 to 8.63% in 1997.

The government continued to implement a privatization program to hand over publicsector enterprises to private owners. Simultaneously, the government implemented aprogram of rehabilitating industries identified as sick because of various reasons.Industries identified for rehabilitation under the program in 2000 included one cementfactory, one paper mill, one newsprint mill, 6 cigarette factories, 8 oil mills, 2 foodprocessing units, 2 fish processing units, 2 cold storages, one beverage producing unit,3 chemical industry units, one glass factory and 12 pharmaceutical units. The fifthFive-Year Plan for the period 1997-2002 stipulated a total outlay of Tk 8.95 billion inindustry including Tk 1.39 billion in the private sector. In 2000, the total employmentin industries was estimated at 0.6 million, of which the private sector employed 0.5million.

Industrialization efforts of the government during the 1990s included investment inbalancing, modernization and reconstruction, creation of new industrial estates andexport processing zones, promotion of private investment, and attraction of foreigndirect investment. The policy changes have been in line with trends in theinternational market, recommendations of donor countries and agencies forliberalization of trade and investment, and structural adjustment programs. Almost atregular intervals of 4 to 6 years after 1982, the government adopted new industrialpolicies with increased incentives for private investors from both home and abroad.These policies have some common aspects such as incentives to promoteindustrialization in rural and remote areas and to encourage entrepreneurs to uselocal raw materials, and the efforts towards development of a system that would helpin transfer of technology.

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CURRENT SITUATION OF INDUSTRIALIZATION

With a view to improving industrial efficiency and productivity, procedures fortransferring public sector industries to private ownership have been furtherstrengthened during the year under report through the enactment of PrivatizationAct, 2000 and conversion of the Privatization Board into a Privatization Commissionwith authority to sell out public sector industrial entities valued up to Tk. 25.00crores with long term loan inclusive, and to adopt any alternative means forprivatizing public enterprises besides direct tender and share offload. One industrialunit was handed over to the private sector, letters of intent for six units were issued,tender process was finalized for another five units and pre-divestment evaluationreports for 16 units were prepared during the year under report as against two unitstransferred, letters of intent issued for four units and pre-divestment evaluationreports for six units prepared in the preceding year. Government shares in fivemultinational companies, two banks and five public limited companies were sent toInvestment Corporation of Bangladesh (ICB) for transfer and sale to the private sector.

Government's policy to switchover from control to promotion of industries along withnecessary incentives and facilities for attracting local and foreign investmentremained in place during the year under report. Already, all industrial sectors exceptthe following four categories have been made open for private investment to paverapid expansion of the private sector.

§ Arms, ammunition and defense equipment;§ Nuclear energy;§ Security printing (paper currency) and mint; and§ Public reserve forests.

In addition, measures initiated in the previous year relating to tax holiday, duty onplant and spares import, royalty, double taxation, technical fees, expatriate workers,etc., remained in force. Logistic services were provided at increased level from the'One Stop' service window of the Board of Investment (BOI) in 1999-2000. A 'WelcomeCentre' was opened at the Zia International Airport, and a scheme for setting up fiveIndustrial and Hi-tech Industrial Parks is underway. Large number of work permits toforeign nationals were issued and renewed in that year. Remittances of Tk.32.30crores was approved in favor of 38 industrial enterprises as royalty, technicalassistance, technical know-how and consultancy fees etc., during the year underreport. Operations of the Adamjee Export Processing Zone (EPZ) will start fromFebruary 2007 as two industries will augment their industrial productions at the newEPZ. It is being built on 295 acres of land and would accommodate a total of 200industrial plots by June 2007.

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Private and Public Investment Statistics as percentage of GDP is given below:

Total Private and Public Investment since 1991-1992

Private and Public Investment as % of GDP since 1991-1992

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Analyzing the industry sector, overall growth in the industrial sector during FY2005 isestimated at 8.6 percent, near about one percentage point higher than 7.7 per cent inthe previous year.

The services sector registered steady improvement due to strong growth in foreigntrade and manufacturing. Improvement in trade, an increase in public administrationrecruitment, expansion of the cell telephone network like the invasion of Orascom inthe telecommunication sector and sharp rise in the number of private TV channels asper the introduction of N tv, R tv, Banglavision, Boishakhi, S tv, and an upsurge in theprofitability of private sector banks, were the main engines of growth, adding overall,the growth of the services sector during FY2005 is estimated at 6.6 per cent comparedwith 5.7 per cent in the preceding year.

The industry sector attained 7.7 percent growth in FY04, compared with 7.3 percentof FY03. The manufacturing sub-sector experienced steady growth, supported byrobust growth in export-oriented manufacturing activity and expansion in domesticdemand.

Table Breakdown of Industrial growth rates of GDP

(at FY 96 constant prices: percent)FY 01 FY 02 FY 03 FY 04

Industry 7.5 6.5 7.3 7.7a) Mining and quarrying 9.7 4.5 7.2 6.8

Manufacturing 6.7 5.5 6.8 7.4i) Large and medium scale 6.6 4.6 6.6 7.3

b)

ii) Small scale 7.0 7.7 7.2 7.7c) Power, gas and water supply 7.4 7.6 8.0 8.1d) Construction 8.7 8.6 8.1 8.3

The construction and, power, gas and water supply sub-sectors made some gains ingrowth rates. There was significant growth rate decline in the mining and quarryingsub-sector. But comparing with the growth rate in the industry sector with theservice sector, it can be concluded that though service has enjoyed a good growthrate, over the years which is due to the up going rise in the foreign investment in thissector, manufacturing and tangible based industries have enjoyed a much heaviergrowth rate over the years which is due to the RMG sector, more inclination of localinvestors towards large and medium scale industries.

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Sectoral growth rates of GDP

(at FY 96 constant prices: percent)FY 01 FY 02 FY 03 FY 04

Industry 7.5 6.5 7.3 7.7Services 5.5 5.4 5.4 5.7GDP(at FY96 constant market prices) 5.3 4.4 5.3 5.5

The picture can be depicted from the table above, which clearly states that duringthe past dew years, there has been an upward trend in the growth of both theindustry and service sector despite the relative fall in the growth rate in FY 02 forboth. However, the country overcame this and was able to achieve better growthrates specially in the industry sector. Compared to the service sector, industrialsector has had an increment in growth rate of 1.2% from FY 02 to FY 04; whereasservice sector was able to relish only 0.3% increment. For detailed sector-wiseoverview, please consult the appendix.

DEMAND FOR INVESTMENT FROM ABROAD IN INDUSTRIAL SECTOR

There is widespread support for the need of foreign investors in Bangladesh. There isno doubt that if the economy is to grow faster or even to retain the recent GDPgrowth rate of 4.5% it has achieved, then there is need for a much grater inflow offoreign investment than has been seen in the past. To make a significantimprovement in the growth rate the investment rate must be increased from 16% atpresent to 24% of GDP); this can only be achieved by increasing the domesticinvestment and saving level substantially, encouraging the growth of remittances andfinally drawing on foreign saving at a rate of 6-7% of GDP. Of this amount 3% is comingfrom foreign assistance so that private foreign investment must reach 3-4% of GDP ifforeign assistance continues as a fixed share of output. If there is a decline in thelevel of foreign assistance, relative to GDP, then even more foreign investment fromprivate sources will be needed. To meet the needs of the economy foreign investmentfrom private companies must grow rapidly to the order of one billion dollars per year.This is a figure that is readily achieved if the right economic policy environment hasbeen established. The position is clear : Given the low saving rate of the Bangladesheconomy, the declining relative flows of foreign assistance, and the limits to thegrowth of remittances, the only way to increase the level of investment is to increaseprivate saving, increase government saving and use much more foreign privateinvestment. Unless this is done there will be no improvement in the growth rate andno real progress in reduction of poverty. The FDI distribution of the year 2003-2004 isgiven below:

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Foreign Investment Registration during FY2003-04: Distribution by Sectors

Local Investment Registration during FY2003-04: Distribution by Sectors

From the above pie charts it is visible that foreign investment is mainly concentratingin the service sector by enhancing the Banking sectors like Standard Chartered Bank,HSBC, EBL, One Bank, DBBL etc along with restaurants and franchisees like Pizza hutand other service organizations. However, local investors are feeling freer to invest inindustrial sectors like textiles, agro based industries and chemical industries. On thecontrary, there has been a declination of foreign investment in the industrial scenariowhich encompasses a lot of reasons. Of these are chiefly corruption, politicalinstability and many other which are discussed elaborately afterwards. But it is

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inevitable that more investment in industrial sector is obligatory to augment thegrowth in this sector in the time to come.

INDUSTRIAL POLICY

The Fifth Five Year Plan of Bangladesh envisages that Bangladesh will have within adecade a sizable industrial sector where manufacturing will account for at least 25per cent of the gross domestic product (GDP) in place of present 11.3 percent and atleast 20 per cent of the employed workforce in place of present 7.7 percent.

A vibrant and dynamic private sector will be the principal actor in Bangladesh'sindustrial arena. The goals of export orientation and external competitiveness implythe pursuit of industrialization in accordance with the dynamic comparativeadvantage of the economy. Given Bangladesh's resource endowment, the principle ofdynamic comparative advantage means production of labor intensive manufactureswith skill up-gradation and productivity growth as its cutting edge. Decentralizedsmall and medium industries will constitute important elements in the industrialscene of Bangladesh. Industrial Policy, 1999 aims at addressing these concerns andbuild on earlier efforts and gains towards industrialization of Bangladesh economy.

MAIN OBJECTIVES

1. To expand the production base of the economy by significantly raising the level ofindustrial investment

2. To promote the private sector to lead the growth of industrial production andinvestment

3. To define the role of the government as facilitator in creating an enablingenvironment for expanding private investment

4. To focus public undertaking in those industrial activities where public sectorinvolvement is essential to facilitate the growth of the private sector.

5. To attract foreign direct investment in both export and import substituteindustries

6. To ensure rapid growth of industrial employment by encouraging investment inlabour intensive manufacturing industries including investment in efficientmedium, small and cottage industries

7. To generate female employment in higher skill categories through specialemphasis on skill development

8. To raise industrial productivity and to move progressively to higher value addedproducts through skill and technology up-gradation

9. To enhance operational efficiency in all remaining public manufacturingenterprises through appropriate management restructuring and pursuit of market-oriented policies

10. To diversify and rapidly increase export of manufactures

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11. To encourage the competitive strength of import substituting industries forcatering to a growing domestic market

12. To ensure the process of industrialization which is environmentally sound forpreventing environmental pollution and maintaining ecological balance

13. And to encourage balanced industrial development throughout the country byintroducing suitable measures and incentives.

MAIN TARGETS OF THE INDUSTRIAL POLICY

Liberalization of industrial policy in Bangladesh started with the announcement ofIndustrial Policy, 1982. This was followed by successive and progressive liberalizationin 1991, 1992 and 1999 to make it compatible with globalization and a competitivemarket economy. The targets of the policy are to:

1. Develop the industrial sector in order to increase its contribution to GDP, income,employment and poverty alleviation

2. Expand industries by the private sector and make role of Government‘promotional’ rather than ‘regulatory’

3. Encourage domestic and foreign investment in overall industrial and infrastructuredevelopment

4. Promote private sector –led export- oriented growth5. Develop export-oriented, export-linkage and efficient import-substitute industries6. Expedite development of labour intensive industries through acquisition and

improvement of appropriate technology7. Encourage the development of agro-based and agro-supportive industries and8. Motivate investment in the intermediate and basic industries.

FINANCIAL INCENTIVES TO INDUSTRIES

1. There shall be a tax holiday for five and seven years for industries set up in thedeveloped and less developed areas respectively which will remain effective untilthe year 1995

2. The National Board of Revenue in consultation with the Ministry of Industries willpublish in the official gazette area wise classification for the application ofconcessional duties and tax holidays

3. There will be no discrimination in case of duties and taxes for the same type ofindustries set up in the public and private sectors

4. Local industrial products will be protected through tariff rationalization keeping inview the interests of the entrepreneurs and the consumers

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5. To create internal market for jute products, industries producing jute substitutesynthetic fibers especially polypropylene bag will be discouraged, high tariff rateswill be imposed on related imports in these areas. In addition, effective steps willbe taken for compulsory use of jute bags for packing of food grains, sugar, cement& fertilizer etc

6. Duties and taxes on import of goods which are produced locally will be higher thanthose applicable to import of raw materials to be used to produce such goods

7. In case where credits/loans obtained from foreign institutions or Governmentthrough private initiative for private industrial investments, the followingconditions shall be applicable

§ The Government will re-lend the abovementioned credits/loans throughcommercial banks/DFIs. The concerned Banks/DFIs will disburses thecredits/loans to the entrepreneurs with applicable service charge§ The entrepreneurs shall undertake full responsibility for repayment of the

loans/credits. For this, the concerned Banks/DFIs will provide guarantee to theGovernment for repayment of the loans/credits. Concerned Banks/DFIs will,however, be entitled to claim collateral from the entrepreneurs.

8. An Exchange rate Fluctuation Absorption Scheme (EFAS) will be created to reducethe impact on industrial sponsor for fluctuation of Bangladeshi currency withforeign currencies.

9. Special incentives will be provided to encourage non-resident Bangladeshi forinvestment in industries. In case of their investment in Bangladesh, they will enjoyfacilities similar to those given to the foreign investors. Besides, they will be ableto buy newly issued shares/debentures of Bangladeshi companies. Moreover, theywill be able to maintain foreign currency deposit in the NFCD account for up tofive years.

10.Provision will be made up to 80-100 percent accelerated depreciation allowance.11.Special financial incentive for industries located in the least-developed areas and

for small and cottage industries. As long as natural gas can not be supplied to thenon-gas lined least developed areas and the price of natural gas remains lowerthan that of fuel oil, a subsidy will be provided on fuel oil use in industries in thisareas. The concerned ministries will make provision for necessary funds for thispurpose.

IMPACT OF GOVERNMENT S INDUSTRIAL POLICY

The impact of government policies on various industrial sectors of Bangladesh hasbeen considerable. In cases of main industrial segments like RMG, agro-based, oil andgas etc, the government reforms and strategies have brought about many advantages.

Government has liberalized the industrial and investment policies in recent years byreducing bureaucratic control over private investment and opening up many areas.Tax reduction has been a major strategy implemented by the government of

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Bangladesh. Following are some financial incentives provided to various industries inBangladesh.

Major incentives are as follows:§ Tax Exemptions: Generally 5 to 7 years. However, for power generation

exemption is allowed for 15 years.1. Dhaka and Chittagong Divisions (excluding 3 hill tract districts of Chittagong

Division) (5 years)2. Khulna, Sylhet, Barisal and Rajshahi Divisions And 3 Chittagong hill tract

districts (7 years)§ Duty: No import duty for export oriented industry. For other industry it is @ 5%

ad valorem.§ Tax Law:

1. Double taxation can be avoided in case of foreign investors on the basis ofbilateral agreements.

2. Exemption of income tax up to 3 years for the expatriate employees inindustries specified in the relevant schedule of Income Tax ordinance.

§ Remittance: Facilities for full repatriation of invested capital, profit anddividend.

Export-oriented industrialization is one of the major objectives of the Industrial Policy1999. Export-oriented industries will be given priority and public policy support willbe ensured in this respect. An industry exporting at least 80% of its manufacturedgoods or an industry contributing at least 80% of its products as an input to finishedexportables, and similarly, a business entity exporting at least 80% of servicesincluding information technology related products will be considered as an export-oriented industry. To make investment in 100 percent export-oriented industriesattractive, the following incentives and facilities will be provided:

§ Duty free import of capital machinery and spare parts up to 10 percent of thevalue of such capital machinery will continue.§ Existing facilities for Bonded Warehouse and back-to-back Letter of Credit will

continue which is a very positive policy for the industry in Bangladesh.§ The arrangement for providing loans up to 90 percent of the value against

irrevocable and confirmed Letter of Credit/Sales Agreement will continue.§ To ensure backward linkage, incentives will be extended to the "deemed

exporters" supplying indigenous raw materials to export-oriented industries.Export-oriented industries including export-oriented RMG industries, usingindigenous raw materials will be given facilities and benefits at prescribedrates.§ The local products supplied to local industries or projects against foreign

exchange L/C will be treated as indirect exports and be entitled to all exportfacilities.§ The Export Credit Guarantee Scheme will be further expanded and

strengthened.

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§ 10 percent products of the enterprises, located in both public and private EPZswill be allowed to be exported to domestic tariff area against foreign currencyL/C on payment of applicable duties and taxes.§ 100% percent export-oriented industry outside EPZ will be allowed to sell 20%

percent of their products in the domestic market on payment of applicableduties and taxes.§ The Government offers an incentive of 5% to the export oriented textiles,

leather, jute and other agro fisheries industries.

These incentives are mainly to encourage the export oriented companies so that thosecompanies can price their products lower than their competitors like Chinesecompanies. The government has also decided to give more importance to privatizationof various sectors for better management and effective utilization of the resources.With the new, market-oriented, direction of economic policy, the private sector isnow the major source of investment in the country. The Government has decided tomake no new investment in the manufacturing sector, barring the reserved areas(defense, forestry, nuclear power and security printing). Public investment is nowmainly going into the modernization and renovation of existing state-owned ventureswith a view to making them viable for privatization. The share of aggregateinvestment in Bangladesh has risen from 18.5 per cent of GDP to 23.63% of GDP, ofwhich the public sector accounts for less than 38 per cent.

These incentives have expanded the production base of the economy by acceleratingthe level of industrial investment and promoted the private sector to lead the growthof industrial production and investment. Currently, 33 SOEs have been privatized and98 more are in the list. These policies have also focused the role of the government asthe facilitator in creating an enabling environment for expanding private investmentrather than a regulator. These strategies have also attracted foreign directinvestment in both export and domestic market oriented industries that have made upfor the deficient domestic investment resources, and acquired evolving technologyand gained access to export markets. There has also been generation of femaleemployment in higher skill categories through special emphasis on skill development.Currently, the female workforce comprises of 21 million accounting for about 37.5% ofthe total work force.

The major consequence has been the rise in industrial productivity and progressivemovement to higher value added products through skill and technology upgradation.This approach of the government has diversified and rapidly increased the export ofmanufactures and encouraged the competitive strength of import substitutingindustries that cater to a growing domestic market. The government’s encouragementhas lead to balanced industrial development throughout the country effectiveutilization of the existing production capacity and also development of indigenoustechnology and expansion of production based on domestic raw materials.

Currently, due to the withdrawal of MFA, Bangladeshi RMG has suffered varioussetbacks and faces stiff competition from China who provides goods of almost same

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quality at a much cheaper rate. In order to counter the Chinese invasion of marketsRMG sector desire a 25% incentive as backward integration is not possible inBangladesh due to lack of environmental conditions. There are various problems facedby the industrial sector in terms of political instability, lack of proper implementationof law and order, inflation and so on. Hence, for better development and efficientmanagement of the industrial sector legal environment must be strengthened andimports must be regulated.

On the other hand, a major objective of trade liberalization is to promote industrialgrowth through encouraging the production and export of manufactured goods. Tradepolicy reform has focused on elimination of QRs, rationalization of the tariffstructure, simplification of import procedures, exchange rate liberalization andvarious measures to stimulate export growth. This has brought about an industrialgrowth of 3% at constant price in 2001.

Trade liberalization has increased economic openness and reduced the anti-exportbias. The economic openness index (i.e., the ratio of the sum of exports and importsto GDP) has risen from 19% in FY91 to about 35% in FY99.

While the share of the large scale sector shows a slightly rising trend, the opposite isthe case with small and cottage industry. Offsetting movements in the shares of largeand small industry have resulted in a virtual stagnation of the share of the overallmanufacturing sector in GDP at a little over 11% during the nineties.

Trade liberalization is expected to stimulate export-oriented industrial growth byreducing the anti-export bias through lowering the effective rate of protection (ERP)provided to an activity.

A major objective of economic development is to improve the economic and socialwell-being of the population. A stated economic objective of the Government ofBangladesh has therefore been to achieve growth with equity, implying a reduction inpoverty and attainment of a more equitable distribution of income. From 1991 to2000, the incidence of poverty declined from 59 percent to 50 percent. Povertyalleviation and greater equity in the distribution of the benefits of growth call for,among other things, a rapid increase in employment. Currently the Bangladesh has acivilian work force of 56 million. There are also 47 laws protecting the interests of theworkers. The results of participatory research show that small and cottage industrieshave been worst affected by import liberalization in terms of output and employmentloss. The Quantum Index of Production in medium and large industries stood at 235.20in 2001 from 179.30 in 1997.

Many small enterprises including small engineering workshops, rural industries, andbakery and biscuit factories have been forced to close down due to easy inflow offoreign goods. Self-employment has also been adversely affected due to the pressureof import competition on small and cottage industries. The participants in FGDs

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emphasized that many small industries (e.g., khadi of Comilla) are being wiped outfrom the market by cheaper and better-quality imports.

Trade liberalization is expected to promote export growth by reducing policy-inducedanti export bias. An overvalued exchange rate (ER) would discourage exports andthereby could frustrate the achievement of the goal of trade liberalization.

Any rational assessment of the SOE sectors’ predicaments would suggest that thepertinent question is not whether to privatize; it is rather how fast and how best todo it. A set of three inter-related reasons are put forward as rationale forprivatization in Bangladesh.

These are:§ Improvement of the governments’ fiscal situation;§ Improvement in enterprise efficiency following privatization; and§ Mobilization of greater domestic as well as foreign investments for higher growth

in the medium-term.

Privatization in Bangladesh has also formed part of the Government’s overall marketoriented adjustment strategy under which privatization and market-based economicreform measures have tended to reinforce one another.The most important aspect of the privatization program which has been subject tovery intense and recurrent public debates is the post-privatization performance of theprivatized SOEs. Unfortunately, sometimes the debates are devoid of objectivity andthus lose much of its significance as the range of opinions swings like pendulum underthe influence of push and pull by privatization’s most ardent opponents and itsproponents. Not surprisingly, therefore, each of these studies has its own policybiases.

ENVIRONMENTAL ISSUES AND PROBLEMS

ECONOMIC ENVIRONMENT

The investor is first of all looking for a stable support environment. This means threethings: reasonable quality of service; reliable supply, and clear understanding of whatis going on. The last thing that a foreign investor wants is a series of crises andsurprises from day to day which interrupts his work. This is precisely the environmentthe Bangladesh has not been able to present.

The support services are unreliable and not of reasonable quality. This applies to theelectricity supply, to the port operations, and to the telecommunications systems. Itapplies to the dealings with the customs service and with other parts of the regulatory

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wings of the government. While foreign investors can solve some of these problems ithas turned out that there is instability in the solutions; problems believed to beresolved pop up again.

A stable support environment cannot be created by a single organization or a singlegovernment; it requires an attitude of mind on the part of infrastructure suppliersthat they are servants of the rest of the society and that their duty is to provide goodservice to assist others. This cannot be done within the context of government ownedenterprise unless there is belief in their role of “servant of the public”. In South Asiaa much different tradition has emerged of “ruler of the public” which has made thepublic enterprises unable, with their “corporate cultures”, to provide an acceptablelevel of service. There can be no argument from analogy here that it has worked inother places; it has not worked to use public ownership in South Asian countries. Oneonly needs to examine the performance of the electricity generating authorities andtelecommunication authorities in India, Pakistan and Bangladesh to see the result ofthese corporate cultures in provision of service to the general population.Occasionally one will find that there develops an organization that is owned bygovernment and is able to go about its work in a satisfactory way. However, this israther unusual and generally government operated organizations to supplyinfrastructure services are not successful in South Asia. There is a lot of wishfulthinking about these calls for doing better what has failed before and similarwrongheaded ideas have delayed acceptance of the central conclusion which is thatto have quality service, required by the foreign investor, there must be privatecompanies providing this. Of course this does not mean there is no regulation, nor isthis an argument for the foreign investor abalone, all business would benefit.

LEGAL ENVIRONMENT

The investors find some aspects of Bangladesh law difficult. First, most foreigninvestors want to follow the laws and regulations of the country. The difficultiesbegin when the implementing. Ministry has a great deal of discretion in interpretingthe law. Laws referring to recovery of credit, of obtaining payments for accountsreceivable, and the protection afforded to labor are areas in need or review. Outsidethe management of overdue bills and labor the legal environment is generallysatisfactory for foreign firms. It is worth to mention that people have to go to sameplace a hundred times to get their work done or get work permit. This creates notonly delay in work but eventually creates frustration among the investors who cherishto inaugurate any industry for the country.

POLITICAL ENVIRONMENT

There is a great deal of discussion of the impact of political stability on the impact ofpolitical stability on the attitudes of foreign investors. This is probably not asimportant as many would argue. What is important is a government that is prompt to

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make decisions, makes these decisions clearly, and sticks to what it says. Years ofdealing with foreign assistance has developed an administrative culture in theBangladesh government that is completely wrong for dealing with the foreigninvestor. The donor comes apparently to help and this saint like posture develops thenatural counter reaction of resentment from which emerge the desire to capture theresources for ones own purposes and to resist being told what to do. This is thenormal human reaction to the donor culture. After years of dealing with whose issuesand trying to manipulate the donor resources the civil service must understand theforeign investor is a different animal. First and most important he is looking out forhimself, he is not a donor giving away money at the behest of a distant governmentwhose purposes are lost in a host of cross objectives. The foreign investor is out ofmake as much money as he can and is present in Bangladesh because he thinks he cando will here. He wants to be left alone and he wants the rules of the economy to beclear and mo9re or less stable then he can decide if he wants to come or not. He doesnot want continuing negotiations, aide memories, MOUs, and all the other apparatusof the foreign aid world. He wants clear rules to follow which will be maintained bygovernment and then to be left alone.

The problem with Bangladesh in the eyes of the foreign investor is not the politicalinstability. Many of the country of the region are far worse. Rather it is the failure ofthe government to shift from the culture of the aid donor to the culture of the privateinvestor. It is a different world and unless this shift in view is made the foreigninvestment will not come. It is a mistake to think that the manipulation of rules ontaxes etc. is the main issue. On taxes for example a Unites States company faces asituation of more or less paying a creation amount of tax and the question is how doesthis gets distributed among the different countries where the company operates. It ismy own view that Bangladesh should take a strong firm line with the foreign investorlaying down the rules taking account of course of what is going on in the world andthen sticking to those rules. The national interest must always come first. There isone recent example here in which a significant investment by a foreign group wasalmost certainly inappropriate for the economy and yet it was allowed to go aheadbecause the government did not stand firm on the key issue involved. Foreigninvestors are not saints and government has to stick to its principles. When howeverthe explicit rule is every thing is a special case there will be endless trouble andendless misunderstanding.

CORRUPTION

For the American investor the central problem in dealing, with Bangladesh is theForeign Corrupt Practices Act. This basically makes it very difficult for Americancompanies to make significant progress in investing in this country without violationUnited States law. The assessments of Transparency International rate Bangladesh asone of the most corrupt countries in the world. The American investor reading thisassessment may believe that this country is not worth the effort. While it is possiblefor foreign investor to function her in a non-corrupt way kit is difficult and takes a lot

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of effort. For most American companies the time and effort are in the end not worththe returns. Although the rates of return are high for the investor, the size of most ofthe investments is small. Thus it is easy to walk away from the opportunity if it istaking too long or is getting too confusing. In my view the foreign assistance processcreates major opportunities for corrupt practices; over the years the governments ofmany countries have learned to mange this for the private interests of many persons.Bangladesh is not alone in this; we hear a constant barrage of information from theIMF and the World Bank on this problem as a worldwide phenomenon. Privateinvestors are much different; while the aid donor, in a sense, does not care as hismoney is not involved although there is a strong moral obligation, the private investorhas to earn a profit and if the corruption costs are too high then the profitability isnot there. There is a self limiting size to the corruption. Furthermore, one of theimportant aspects of the corruption in the aid flows is the deterioration of quality inresponse to higher costs incurred from the corruption. In the public sector this can bedone- the machinery is not as good, the cement is not as thick, the quality so thematerials is inferior, etc. donors have learned to shut their eyes if they ever learn.This does not really work in the private sector where the investor is expecting toproduce to his own quality standards, often to export into markets where quality is acentral consideration. The prospects for corruption in the private sector are less thanin the government’s own projects. This makes all actions with respect to the privateforeign investment much more difficult. The American legal position makes it eventougher.

While it is popular to blame the political conflicts for the slow flow of foreigninvestment, I believe that one must look elsewhere. Political conflict is inevitable andis part of the democratic process. What is needed here, that we do not have, is alimiting of this conflict to forms that do not adversely influence the productionactivities of the country. Strikes but not hartals; public demonstrations, publicarguments and debates with and outside of parliament, pamphlets, newspapers,television all of these fields for political battles are acceptable. However, the day today going to work by ordinary people and making things or providing services shouldbe allowed to go on. In other parts of Asia political conflict is even more aggressivebut the business community has managed to limit the level of disagreement. Foreigninvestors find the concept of the hartal surprising.

SOCIAL AND CULTURAL ENVIRONMENT

These do not represent serious problems for the foreign investor. The law and ordersituation is satisfactory. While there are occasional problems by and large the Dhakaenvironment is personally secure, School and living accommodations are good. Foreigninvestors staff assigned to this country normally find that they have a satisfactory life.However, if there is significant increase in the size of the foreign business communitythen there will be some difficulties in terms of space, convenience, etc. These arenot serious difficulties however. On the negative side most staff of foreign investors

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are uncomfortable with the attitudes prevalent that always treat an outsider withsuspicion. The most talked about problem arises from the ritual of holy Jumma whichtakes place at Friday noon. Only for this reason, the national holidays in our countryare Friday and Saturday, whereas Saturday and Sunday in Europe and America. Thiscreates a total break in business for three consecutive days creating a huge loss forthe industries and businesses. On the other hand, our cultural and religious inclinationto Islam has eradicated the scope of producing “haram” things like alcohol in ourcountry, which is a big source of income for other foreign countries.

LESSER ISSUES

There are other problems facing the investor which are less systemic: First, foreigninvestors will always operate merit based systems. That is they hire persons who arequalified: They are resistant to excessive seniority oriented personal systems; theybelieve in training their staff for the jobs that they wish to do. This implies that thesefirms will seek good staff well qualified and of good character. Services to provideaccurate information on prospective staff with objective recommendations on who isa quality person are essential. At present it is difficult to locate good staff. It alsoimplies that these firms have serious needs for good training programs. Most trainingcarried out by the private sector now is for government and donor directed programs.Generally the government does not take training seriously; there is no link betweenthe staff assignments and the training material taught may have little to do there isneeds of the organization. Foreign investors have something quite different in mind sothere is need for training institutions that can provide good training relevant to theneeds of the clients. However the local investors in the industrial sector practicallyshun the training programs after hiring labor. The only training the unskilled laborsget here is by watching the experienced workers working in the factory. This resultsless efficiency and low production. This eventually depresses the investment inindustrial sector.

Another area of continuing difficulty is labor. The labor unions seem to have the ideathat the foreign investor is an endless source of wealth and approach the negotiationswith the viewpoint that this wealth is to be transferred to the workers. With theprospect of growing foreign investment in the country the issue of the labor relationsis going to grow in importance. This is a delicate area. The foreign investors like theEPZs as the labor laws do not apply there. However, one cannot develop the countryusing only EPZs. One must expect to encourage a complex set of industrialinvestments which buy and sell to each other smoothly. This requires that the laborlaws be reviewed and adjusted to limit strikes, to punish severely any abuse of thelabor laws, and that fair and reasonable arbitration procedures be developed. Thelabor problems have already disrupted one of the hotels with serious negative impacton foreign investors and there are other cases waiting to happen.

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RECOMMENDATIONS

RECOMMENDATIONS FOR AGRO-BASED INDUSTRY

1. Emphasis should be given to post-harvest handling of export-oriented agro-production.2. Multi-purpose cold storage should be promoted on regional level to store different winter

vegetables and fruits.3. Credit, interest, tax and other financial facilities/incentives should be given to promote

export-oriented agro-processing.4. Supporting preservation of horticulture products the import of reaper vans and

refrigerated containers should be exempted from duty and VAT.5. To support food processing industry import of preserving chemical and technology should

be exempted from tax, VAT and duty; and also foreign investment in this sub-sectorshould be encouraged.

6. To reduce and/or subsidise export freight charge.7. Establishment and /or capacitating of research institute for agro-industry.8. Development of infrastructure for productivity, diversification and development of

facilities and systems for compliance requirements.

RECOMMENDATIONS FOR TEXTILE INDUSTRY

1. Assistance (training, information and exposure meetings) in strengthening our complianceto international standards in this area. We need information on identification of forwardlinkage to export markets and supply chain requirements.

2. Improvement in availability of updated, relevant information on export markets,Chambers/ Trade Association should be supported to promote collection anddissemination of information on trade opportunities available.

3. Improvement in trade facilities especially in the Ports, Customs and management.4. Introducing measures to ensure uninterrupted power supply to all export-oriented RMG

enterprises, so that they can operate normally and at its full potential and capacity.5. Creating educational facilities for the labor force from export-oriented Textile Industries.6. As establishing a completely new textile mill is costly, risky and time consuming, existing

state owned textile mills could be used as starting point. In such a case, managementshould be transferred to a private limited company.

7. We must learn to use bureaucracy for the promotion of trade and business and otherwisewe cannot compete with others.

RECOMMENDATIONS FOR FROZEN FOODS

1. Development of infrastructure in and around present Shrimp field.2. Identification and allotment of New Land for Shrimp Culture3. Train up the shrimp farmers at field level.4. Attract the Foreign Investment in Hatchery, culture, feed mill, latest technology in

processing, international standard quality assurance system and human resourcedevelopment.

5. To ensure quality control and seal of quality.

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6. Rehabilitate non-performing factories by interest / penal interest waiving and by re-financing at soft term.

RECOMMENDATIONS FOR ELECTRONICS SECTOR

1. Completely Built in Unit (CBU) should be at higher slab of custom duty.2. Completely knocked Down (CKD) should be discouraged and may be abolished to enable

us to substitute and create local components producing units to support main products.3. Manufacturing of components/parts of Radio, TV, Freeze, and Air conditioner should be

encouraged.4. Plastic housing of Radio, TV, Air conditioners, Freeze, Table fan should be in lower slab.5. SMEs interested to produces these components should be provided incentives in the form

of long term policy, lower single digit bank interest etc.6. Parts & Components, casing of electronics item should be encouraged.

RECOMMENDATIONS FOR LEATHER AND LEATHER GOODS

1. Setting up Tannery Modernisation Fund to revamp technology and raise productivity.2. Introducing financial incentives and other necessary supporting policies to raise

productivity, improve quality and make this sector globally competitive.3. Supporting the establishment of linkage industries such as lasts, cutting dies etc to

reduce high import dependence and promote price competitiveness.4. Enabling duty free imports of rawhides and skins as well as wet blue and finished leather

for leather footwear exporters.5. Introducing measures to enable adaptation of new and modern technology such as

modern soling through joint ventures and international collaborations.6. Introducing financing and other incentives to increase local investment in this sector.7. Introducing attractive incentives and non-bureaucratic and user friendly operating

policies to promote foreign investment in this sector.8. Ensuring consumer safety and international standard of packaging to improve marketing

of leather and leather goods9. Introducing effective measures to protect environmental and improve international

image and reputation

OTHER RECOMMENDATIONS

qNational Political Measures

1. Introducing measures to create a national political consensus so that under allpolitical circumstance the export-oriented sector remains unaffected.

2. Introducing sound law and order situation so that all operation of the exportedoriented activities can take place without interruption and hindrance.

3. Trade Unions leader should be included in all relevant seminar and discussion so thatconsensus could be achieved.

4. Social and economic condition of the workers should be improved so that politicallymotivated forces do not get upper hand in labour organisation and disrupt the Labour-Management relation.

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qMarketing Support Measures

1. Supporting diversification of export products.2. Supporting the exporters by visiting important international trade fairs.3. Supporting marketing campaign especially in Canada, USA, EU and Japan to promote

the image "MADE IN BANGLADESH".4. Supporting sellers-buyers meetings.5. Introducing effective measures to protect environmental and improve international

image and reputation.6. Rationalised tariffs and access to the local market for exporters should be allowed so

that this sector does not suffer from stock lots and cancellations7. Eliminate discrepancy in the import policy to support value addition and reduce

import; it means, increase of import duty on finished shoes for a limited period,reduce duty on import of shoe accessories and components.

8. Supporting quality management and improvement, export documentation, andassistance in the cases of difficulties ensuring payment from abroad.

9. Supporting efforts for market diversification, i.e. expanding market in thecountries other than USA, EU, Japan and Canada.

qFinancial Measures

1. Ensuring direct fiscal incentives in the form of export cash subsidies, import licensebenefits against export performance, tax-free export earnings, reduced airfreightcosts, duty drawback, etc to promote export.

2. Introducing export credit guarantee schemes to retain export earnings as foreignexchange.

3. In place of L/C, open account facilities or easier import terms should be introduced topromote export

4. Carefully adjusting national currency to the currencies especially of the internationalcompetitors or introducing dual exchange rate to support export.

5. Providing long-term tax holiday to encourage local and foreign investment.

qInfrastructural Supporting Measures

§ Measures to remove Transport Congestion

1. Removing all port congestion so that export-import operation can take place withoutany delay.

2. Ensuring a well-developed national transport system so that communication amongexport-oriented industries and transport of goods to the ports could take placewithout any delay.

3. Regulating shipment charges so that it does not affect the competitiveness of thissector.

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§ Measures to ensure Uninterrupted Power Supply

1. Introducing measures to ensure uninterrupted power supply.

§ Measure to ensure Prompt Custom Services

1. Equipping custom offices with modern information and other technology to ensureprompt custom service.

2. Removing all anomalies and corruption opportunities from custom services.

§ Development Management and Institutional Measures

1. Establishing world class training and research facilities such as Leather ResearchInstitute, Footwear Development and Design Institute and manning these with highlyexperienced and trained instructors and consultants to ensure development of thissector.

2. Establishing design, product development and product testing capability.3. Measures to ensure Proper Development of Human Resource4. Creating education facilities for potential employees and workers.5. Creating Training facilities for potential employees.

CONCLUSION

In conclusion the development of Industrial sector of Bangladesh requires bothopportunity, over which one has little control, and performance over which thegovernment has a lot of control. When government makes difficulties for theinvestors, when the state enterprises impede and prevent the investor from doing hiswork then the adverse reputation of the country gets around. The investors will beinterested in Bangladesh when they find that it is possible to work –efficiently andquickly to establish company and then to produce. And the government has lot moreto do in attracting more investment and production in our industrial sector.

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REFERENCES

1. Aswathappa K. Essentials of Business Environment 7th edition

2. Board of Investment Bangladesh (BOI) Website www.boibd.org

3. Dhaka Chamber of Commerce & Industry (DCCI) Websitewww.dhakachamber.com

4. Federation of Bangladesh Chamber of Commerce and Industry (FBCCI) Websitewww.fbcci-bd.org

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APPENDIX

SECTOR-WISE INDUSTRY OVERVIEW

Bangladesh, traditionally known for jute and tea exports, has recently attracted world- wide attention forreadymade garments and leather exports. Bangladesh foresees an expansion of her agricultural sector,as well as increased diversity in non traditional industries and business. Below is a short account of a fewpotential investment sectors. In addition an indicative list of private sector investment opportunities ispresented at Appendix-A.

Textile

Sector Highlights:

• The fastest growing industry in Bangladesh with RMG accounting for more than 75% of totalexports.

• Bangladesh is best placed in the region for textiles and garments because of cheap labor andtrade status with the EU.

• Government incentives for the spinning and weaving industries include a 15% cash subsidy of thefabric cost to exporters sourcing fabrics locally.

• There is a huge fabric demand supply gap in the RMG industry which is being me by imports.Thus the potential for backward linkage industry is enormous.

RMG and Backward Linkage:

The phenomenal growth in RMG was experienced in the last decade. With about 2,600 factories and aworkforce of 1.4 million, RMG jointly with knitwear accounted for more than 70% of total investments inthe manufacturing sector during the first half of the 1990's.

Leather goods

a. Finished Leather b. Leather Goods

Sector Highlights:

1. The labor-intensive leather industry is well suited to Bangladesh having cheap and abundantlabor.

2. Bangladesh has a domestic supply of good quality raw material, as hides and skins are a by-product of large livestock industry.

3. Adequate government support in the form of tax holidays, duty free imports of raw materials andmachinery for export-oriented leather market

4. The industry lacks domestic technology and expertise and local support industries such aschemicals are still under-developed.

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Investment Incentives:

1. Present Government is in the process of setting up of separate Leather Zone relocating theexisting industry sites to an well-organized place.

2. New FDI inflow is highly encouraged and foreign investors are welcome to have the opportunity.

Industry Outlook:

There is already a substantial domestic leather industry, mostly export-oriented. The leather includessome ready-made garments, although that aspect is continued mainly to a small export-trade in "Italian-make" garments for the US market. Footwear is more important in terms of value addition. This is the fastgrowing sector for leather products. Presently Bangladesh produces between 2 and 3 percent of theworld's leather market. Most of the livestock base for this production is domestic which is estimated ascomprising 1.8 percent of the world's cattle stock and 3.7 percent of the goat stock. The hides and skins(average annual output is 150 million sq.ft.) have a good international reputation. Foreign directinvestment in this sector along with the production of tanning chemicals appears to be highly rewarding.

Having the basic raw materials for leather goods as well as for the production of leather shoe, a largepool of low cost but trainable labor force together with tariff concession facility to major importingcountries under GSP coverage, Bangladesh can be a potential off shore location for leather and leatherproducts manufacturing with low cost but high quality.

Frozen food

Sector Highlights:

1. Government is promoting semi-intensive shrimp farming.2. Fish and prawn exports grew at an average 20% in the past decade.3. Shrimp processing and export industry is largely dominated by the smaller unorganized sector.4. 15% cash incentive is given to shrimp export amount.

Industry Outlook

The frozen foods export is the second largest export sector of the country. The average annual growthrate is about 28%. This export-oriented industry includes the following sub-sectors which need properattention for augmentation of production and export earnings.

• Hatcheries• Sustainable aqua-culture technology• Feed meals plants• Processing unit for value-added products.

Investment in frozen food sector with new technology and equipment has a vast potential for growth.

Information Technology

a. Data Processingb. Software Development

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Sector Highlights

1. Investment is mostly confined to information processing.2. Bangladesh has a cheaper and rapidly growing IT workforce.3. Government is keen in establishing IT related infrastructure for the development of the industry.

Industry Outlook

Availability of substantial number of qualified and experienced young people in various branches ofengineering, science and technologies have opened up the scope of profitable investment in thesesectors. Comparatively short training period and low investment have made such ventures highlyprofitable.

A number of Bangladeshi IT firms are interested in finding international investors or collaborators invarious sub-sectors.

Agro-based Industry

1. Canned Juice / Fruit2. Dairy and Poultry

Sector Highlights

1. Bangladesh has a huge supply of raw materials for the agro-based industry.2. Fruits and vegetable production has increased significantly in recent years.3. Government and NGOs have been conducting regular training programs in developing a skilled

manpower for this industry.4. There is a substantial demand supply gap in the agro-based industry.

Industry Outlook

Bangladesh has the basic attributes for successful agro-based industries, namely, rich alluvial soil, ayear-round frost-free environment, an adequate water supply and an abundance of cheap labor.Increased cultivation of vegetables, spices and tropical fruits now grown in Bangladesh could supply rawmaterials to local agro-processing industries for both domestic and export markets.

Progressive agricultural practices, improved marketing technique and modern processing facilities wouldenable the agro-processing industry to improve its quality and expand production levels significantly.

Investment interests in agro-based industries are highly encouraged.

Ceramic

• Tableware• Sanitary ware• Insulator

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• Sector Highlights

1. Bangladesh has a skilled manpower in ceramic industry.2. Historically, tableware industry is labor-intensive.3. The clean gas reserve required for firing is a great competitive advantage for Bangladesh.

Industry Outlook

Global ceramic tableware industry is currently going through a phase of acquisition and consolidation assmaller industries in the developed countries are becoming incompetitive and bankrupt. As a result, thebig names like Noritake, Wedgewood, Lenox, Villeroy & Boch and Royal Doulton are all individuallybecoming billion-dollar operations.

Historically, tableware industry is labor-intensive and even after spending billions of dollars onautomation, developed countries could not reduce the number of workforce according to theirexpectations. As a result, the cost of production will always remain extremely high in developed countriesand the premium brands are only surviving because they are charging huge price to the consumers fortheir brand equity.

Bangladesh, being a gas-rich and low-labor-cost economy, offers to be a strategic partner in productionand supply of ceramic products. Investment interests in this sector are strongly welcomed.

Light Engineering

1. Machinery Parts2. Consumer Items

Sector Highlights

1. A growing and increasingly affluent middle class indicates demand for consumer durables.2. There is a significant sector of cottage industries engaged in simple electronic goods.3. Export-oriented production in light industries has gained momentum in the past few years.

Industry Outlook

Light industries in Bangladesh produce a multitude of labour intensive goods including toys, consumeritems, small tools and paper products for the domestic market. Further development for these industriesoffers various investment opportunities. Export-oriented production in light industries has gainedmomentum in the past few years. Entrepreneurs from Hong Kong, Japan and Korea have takenadvantage of Bangladesh's cheap and easily trainable labour and its infrastructure facilities tomanufacture products for the export market.

Natural Gas-based Industries

1. Electricity2. Fertilizer3. Petro-chemicals

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Sector Highlights

1. Bangladesh has a substantial gas reserve of about 20 trillion cubic feet (tcf)2. There is a huge demand for fertilizer in Bangladesh as the agriculture is the principal sector of the

economy.

Industry Outlook

The private sector power generation policy announced in 1996, under which private power companies areexempted from income tax for 15 years. Several barge-mounted power plants are in operation. But anextensive demand gap for electricity is crucial.

Opportunities exist in developing new plants (barge-mounted and other, large, small and mini),constructing transmission and distribution system, rehabilitating or upgrading existing plants andsupplying a variety of support services. Investment opportunities are available on a build-operate-transfer(BOT) basis.

Electronics

a. Semi-Conductorb. Cell Phone Assemblyc. Other Electronics

Sector Highlights

1. Manufacturing of semi-conductors could be established as a potential cottage industry.2. Bangladesh is going to be the largest cell-phone market in South Asia.

Industry OutlookBangladesh's experience in basic electronics spans over two decades. In recent years, European andAsian electronic firms have established technical collaboration with their Bangladeshi counterparts toproduce some electronic goods at competitive prices. This has tremendous potentiality for expansion.

The Government of Bangladesh has adopted National Telecommunication Policy, 1998. Investment isencouraged through BLT-BOT/BOO/BTO and other joint venture schemes which by greatly increasing thecapacity, quality and type of services, will create improved efficiencies in other sectors such astransportation energy and the textile industry.

To meet the telecommunication requirements of the country the government has been developing andexpanding the systems and services of BTTB. Private sector operations in the rural telecommunication,paging, cellular telephones and riverine radio trunking have already been allowed. At present 7 privateoperators are providing their services to about 100,000 customers. Government has allowed expanding300,000 digital telephones in Dhaka by private sector participation through open tendering.

In accordance with overall national policy, liberalization of the telecommunications sector will continue.However, the government retains the sale authority to determine the number of competitions that areeconomically viable for certain services. The strategy is to provide equal and rational opportunities to allcompetitors.

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Jute goods

Bangladesh is one of the leading producers of jute in the world. At present the annual production is890,000 MT. In 1996-97 Bangladesh exported raw jute worth US$ 116.32 million and jute goods worthUS$ 317.86 million in the form of sacking hessian carpet & carpet backing cloth, jute yarn/twine etc. Thisis one of the very prospective areas for investment with higher technology.

Coal

Besides Oil and gas a contract has been signed to extract coal from Barapukuria coal mine in Dinajpurdistrict with a Chineses consortium designed to extract 1.0 million MT coal a year. Another contract hasbeen signed with a North Korean company for the extraction of 1.6 million MT of hard rock per year atMadhyapara in the same district.

Power

Bangladesh is still at a low level of electrification with only 16% of it population having access to electricityand per capita generation is only 96 KW per annum. Hence, there is a great need and urgency to expandthe electrification programs. The government of Bangladesh has attached priority for the development ofthe power sector.The present installed generation capacity is 2908 MW. But the available generation capacity is about2200 MW due to old age of few power plants. The route length of transmission line is 3500 Km, the totallength of distribution network is 1, 28,000 KM and the number of consumers is 35, 00,000 at present.

The present demand of electricity is about 22,00 MW. It is estimated that the peak demand in FY 2000will be about 3150 MW and this will increase to about 4600 MW in FY 2005. A total of 2700 MWgeneration capacity is planned to be added to the system during the Fifth Five Year Plan period FY 1998-FY 2002.

Bangladesh has amended its Industrial Policy and the power sector is open to private investment. Thegovernment has approved the Private Sector Power Generation. The new policy of Bangladesh is toattract private investment in power generation. Under the policy, the private power companies shall beexempted from corporate income tax for a period of 15 years and the companies will be allowed to importplant and equipment without payment of custom duties and VAT.

Because of the favorable conditions for private investment a large number of Independent powerproducers (IPPs) have shown interests for setting up power plants in Bangladesh. A Rural Power Plant isbeing implemented by RPC at Mymensingh. A Rural Power Company (RPC) has been created A 60 MWGas Turbine Power Plant is being implemented by RPC at Mymensingh. Contracts with four IPPsselected through competitive bidding have already been negotiated and are expected to be signedshortly. Bids received for setting up a 360 MW combined cycle power plant at Haripur and 450 MWcombined cycle power plant at Meghna Ghat in the private sector are being evaluated. There is need formore private investment in power generation to meet the increasing demand in future.

The government of Bangladesh has undertaken some reform measures with a view to achievingoperational and management efficiency and commercial characteristics in the power sector. Power GridCompany of Bangladesh (PGCB) has been created. Initially PGCB will own the transmission linesassociated with Meghna Ghat Power Project. Ultimately it will take over the entire transmission system ofthe country. Dhaka Electric Supply Company (DESCO) has been created to manage the distribution areaof Mirpur. DESCO will eventually take over the entire distribution responsibilities of Dhaka metropolitancity area.

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Air Transportation

In air transport, the government has given provisional domestic air transport operating licenses to sixprivate companies for STOL Services. Seven airports have been refurnished to cater to their needs.International air & cargo transport in the private sector is now allowed for operation in Bangladesh.

Tourism

With growing international interest in traveling through Asia tourism is taking roots in Bangladesh.Bangladesh offers a variety of historically significant and culturally unique sites for tourists. Sylhet's teagardens, Cox's Bazar sea-beach, the Royal Bengal Tiger, Deer and the Sundarbans, the largestmangrove forest in the world with unique bio-diversity offer tourist attractions. Ancient mosques, Buddhistmonasteries, Hindu temples, monuments and other landmarks dot the countryside. Additional hotel andresort facilities could be created for attracting tourists from home and abroad. Dhaka and Chittagong alsohave an unmet demand for additional hotel rooms, restaurants, entertainment and recreational facilities.