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PRI Quarterly Policy Briefs onBangladesh Economy

April 2014

Policy Research Institute of Bangladesh (PRI) Department for International Development (DFID)

Volume V

ii

PRI Quarterly Policy Briefs on Bangladesh Economy April 2014

Foreword

The Government aims at becoming a middle income country by 2021, and improving further by 2041. Thiswould require sustained development at a high rate - say 7-8%, structural change and improvement, goodinstitutions and right kind of policies.

Knowledge is a critical input for achieving the goals that the Government has set. An independent think-tankcan make significant contribution to this national enterprise by independent analysis and realistic advice.

The present edition of PRI Quarterly Policy Brief moves in that direction. It addresses the issues of the bankingsector, the capital market, and export.

Banks play a critical role for the economy, making efficient allocation of financial resources to the sectorswhich are socially important. The nationalized banks, by and large, are the only institutions which lend forinvestment. The foreign banks and private banks are lukewarm to lending for investment; they prefer trade, importand export in particular, which has much less risk. The criteria for judging performance of the two types of banksneed to be differentiated by their lending strategies and attitude to risk.

Autonomy of central bank is recognized. However, while talking about autonomy of central bank, it isnecessary to separate its core function from the non-core or subsidiary functions. Monetary policy is its core function,which it ought to - and does actually - pursue with independence. Government's deficit financing could impactmonetary policy, but for decades deficit has remained stable at a low level. Disagreeing with the government is oftenconsidered autonomy, naively though. Quasi-fiscal operation or policy-based lending to preferred sectors or groupsis not part of the core monetary policy. In performing these tasks, the central bank acts as an agent of thegovernment or takes on a policy-related political function.

The stock market should function better to play its role in the development of the economy. However, thestock market may not get adequately strong unless the underlying assets are also in good shape. Stock marketanywhere in the world has a speculative element; an efficient market would contain within limit the speculativeelement and make the necessary corrections.

There is excessive dependence on export of RMG in terms of product as well as market. It is absolutelynecessary that there are initiatives for diversification.

RMG has grown very fast and the factory structures sometimes neglected safety standards. This needs to beremedied. RMG is essentially a global phenomenon; remedies of deficiencies also need coordinated global efforts.Compliance has a cost; and if each importer or group of importers defines its own standards, compliance gets muchmore complex and costly. ILO, the governments of the exporting country and of the importing countries, should jointo establish uniform - or at least compatible - standards. There is a need to provide accessible funds for financing thecost of compliance. More research is needed to identify the global contact-points.

Wage and productivity as well as the trade union practices are important areas for research and policy. Itseems that not enough has been done in these areas, especially for development of healthy industrial relations.While ILO embraces tripartite arrangement in industrial relations - the government, the employer, and the workers -other players also have entered the field who are not trade unions or institutions committed to professional researchin labor economics and trade union. This is a new phenomenon whose impact on trade unionism and industrialpeace should be examined carefully.

PRI deserves commendation for undertaking serious policy research addressing many of the relevant issues.

Dr. Mashiur RahmanEconomic Adviser to the Hon'ble Prime Minister

Government of the People's Republic of Bangladesh

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Contents

Summary: ................................................................................................................................. v

I. Bangladesh Current Macroeconomic Setting .............................................................. 1

Background and Introduction .............................................................................................1

Macroeconomic Performance under the Sixth Plan ...........................................................1

Why GDP Growth Did Not Pick Up? ....................................................................................2

What Explains Bangladesh’s Lackluster Investment Performance?....................................3

The Way Forward for a Speedy Economic Recovery...........................................................5

II. New Directions for Trade Policy.................................................................................... 6

Introduction ........................................................................................................................6

Trade, Growth, and Employment........................................................................................6

Mainstreaming Trade and Trade Policy ..............................................................................7

Exploiting Emerging Trade Patterns for Export Diversification...........................................8

Exploiting Non-traditional Markets for Exports ................................................................10

Trade Policy Stance: Where we stand...............................................................................11

The Way Forward ..............................................................................................................14

References ........................................................................................................................15

III. Special Economic Zones (SEZs) as Catalyst for Increasing Private Investment ....... 17

Background: ......................................................................................................................17

Economic Zones in Bangladesh .........................................................................................20

What can we learn from BEPZA experience?....................................................................21

Conclusion.........................................................................................................................24

IV. The Infrastructure Challenge in Bangladesh: Progress and Issues........................... 25

Background and Overview ................................................................................................25

Bangladesh Infrastructure Challenge in the Global Context .............................................25

Energy Sector Progress and Issues ....................................................................................26

Transport Sector Progress and Issues ...............................................................................28

Financing Strategy and Resource Allocation for Infrastructure ........................................30

The Way Forward ..............................................................................................................32

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List of Tables

Table 1.1: Progress with Macroeconomic Targets Under the Plan ....................................... 2

Table 2.1: Non-Traditional markets for RMG exports .......................................................... 10

Table 2.2: Tariff Trends FY01-14 ........................................................................................... 12

Table 2.3: Ranking of Bangladesh and selected comparators ............................................ 14

Table 2.4: Progress with Global Competitiveness ............................................................... 14

Table 3.1: Comparison of Infrastructure Quality 2013-2014............................................... 19

Table 3.2: Performance of BEPZA - EPZs............................................................................... 22

Table 4.1: Comparison of Infrastructure Quality 2013-2014............................................... 25

Table 4.2: Bangladesh Progress with Global Competitiveness........................................... 25

Table 4.3: Chittagong Port Performance .............................................................................. 30

Table 4.4: Status of PPP Financed Projects........................................................................... 30

List of Figures

Figure 1.1: Trend in Real GDP Growth, 1970s-FY13............................................................... 1

Figure 1.2: GDP Growth Rate FY10-FY13, Actual Vs Targets................................................. 2

Figure 1.3: Investment/GDP Ratios and GDP Growth Rates .................................................. 2

Figure 1.4: Investment Scenario --Actual Vs Target............................................................... 3

Figure 1.5: Share of Sectors in GDP (in %) .............................................................................. 3

Figure 1.6: Ease of Doing Business Indicator ......................................................................... 4

Figure 1.7: Global Competitiveness Index (Rank among 144 Countries) ............................. 4

Figure 1.8: Factors Contributing to the Lower Doing Business Ranking.............................. 4

Figure 1.9: Pillars of GCI (Rank among 144 countries)........................................................... 4

Figure 1.10: Protecting Investors, Rankings .......................................................................... 4

Figure 2.1: Top CD and NPR Rate (%) .................................................................................... 12

Figure 2.2: CD and Para Tariff Trends ................................................................................... 12

Figure 2.3: Trends in Avg. NPR for Output & Inputs (%) ...................................................... 13

Figure 2.4: Avg Tariff Trend in India for output (Consumer Goods) and inputs (%) ......... 13

Figure 3.1: Private Investment as Percent of GDP--Actual Vs Target ................................. 17

Figure 3.2: Progress with Structural Change ....................................................................... 17

Figure 3.3: Bangladesh 2012 Global Performance Ranking................................................ 18

Figure 3.4: Global Competitiveness Index 2012 .................................................................. 19

Figure 3.5: FDI Inflows as % of GDP ...................................................................................... 19

Figure 4.1: Recent Trend in Installed Capacity (MW) ........................................................... 26

Figure 4.2: Installed Capacity by Ownership........................................................................ 26

Figure 4.3: Installed Capacity by Fuel Type.......................................................................... 27

Figure 4.4: Power Subsidies (Taka billion)............................................................................ 28

Figure 4.5: Share of infrastructure in total ADP ................................................................... 31

Figure 4.6: Public Investment Priorities ............................................................................... 31

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Summary:

I. Macroeconomic Performance:

The lesson from Bangladesh’s recent experience interms of growth and investment performance andthe factors underlying the low scores on DoingBusiness Index and Global Competitiveness Indexneed to be addressed in a systematic manner if thegovernment really wants to move to a highergrowth trajectory in a sustainable manner.

In order to make the export driven growth strategyto work better with a much broader export base, allpolicies leading to anti-export biases need to becorrected.

Investment in infrastructure will help createimmediate domestic demand and at the same timewould lay the foundation for catalyzing higherprivate sector investment. The government hasrightly adopted a number of high-profile projectsfor implementation on a priority basis. The projectlist needs to be expanded, prioritized andimplemented.

Alleviate land constraint for industrialization byestablishing a series of Special Economic Zones invarious parts of Bangladesh through Private andPublic-Private Partnership (PPP) arrangement.

II. Trade Policy:

Benefits of trade generally outweigh the costs.Complimentary policies are required to assistworkers and producers to adjust to a morecompetitive environment that comes with tradeliberalization. Record shows that, on the whole,Bangladesh has benefited from trade openness interms of growth and employment.

Trade openness not only stimulates marketcompetition but also creates access to globalmarkets. Bangladesh’s goal of achieving 8-10%growth rate and creating jobs for the two millionlabor coming into the work force every year canonly come from strong export orientation.Domestic economy is limited in size, and cannotoffer the scale economies of the world market. Thatis why large economies like China and India seekglobal markets.

Given Bangladesh’s sound macroeconomicmanagement for the past decades, an environment

exists for taking the road to further tradeliberalization along with complimentary policies.

Bangladesh must exploit emerging trade patternsfor export diversification. Trade in intermediategoods formed the most dynamic sector ofinternational trade. Taking advantage of globalvalue chains, Bangladesh must seek FDI inproduction and export of intermediate goods, i.e.parts and components of many consumer andcapital goods.

Lessons learnt from RMG success must betransferred to other sectors. While RMG industryoperates in a free trade environment, otherindustries suffer from anti-export bias of the tariffregime. Hence, we are not getting much traction inexport diversification. So there is urgency toprovide the same duty-free import facilities to non-RMG exports Duty-free facility to exports is not aprivilege but a requirement for creating a levelplaying field in a competitive world market.

On protection to import substitute industries:protection once given has a tendency toperpetuate as producers in protected activitiesdevelop a vested interest in maintaining it;industries protected for too long become inefficientand uncompetitive at the global level as they havelittle incentive to innovate or raise productivity; andprotection to import substitutes creates anti-exportbias. It is time to seriously examine makingprotection time-bound.

Bangladesh must exploit non-traditional marketsfor its exports: Going beyond North America andEU, promising markets are BRICS (Brazil, Russia,India, China, South Africa), Japan, and ASEAN+(including Austraia, New Zealand).

III. Special Economic Zones:

Overcoming the institutional constraints,conducting feasibility studies and on that basisidentifying the Zone location; developing propermodel licenses, contracts, PPP capacity; havingtransparent rules and regulations for implementingthe Act, having in place a good procurement team;and to show some immediate success convertingclosed/loss making SOEs into SEZs preferablythrough BEPZA.

The best option would be to have one Regulator ofall Zones thereby merging Regulatory Functions ofBEZA, BEPZA, HTPA into one body. The publicZones then could remain under one development

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and management body. However, this sort ofmerger is not easy in the context of Bangladesh’spublic sector management. Given institutionalchallenge facing BEZA, another option could be tolet BEPZA do the development of PPP/Public Zonesunder the new Zones Act, while BEZA acts as theregulator and licensing authority, until BEZAcapacity is enhanced.

Some Specific Actions suggested for getting SEZ agendamoving forward:

Issue the necessary Rules and Regulations neededfor implementing the SEZ Act 2010.

A public-private partnership framework for zonedevelopment, outlining rights, responsibilities,obligations, and commitments of all parties withrespect to all aspects of zone development,financing and operation, regulation, andpromotion. This should be in conformity with PPPregulation that exists.

Implementing land use planning and zoning effortsin defined areas for industrial and commercialdevelopment to guide the actions of privatedevelopers.

Developing zone designation criteria in the zonelaw and implementing regulations to ensure thatprivate zones are conveniently located (nearpopulation centers and transportation hubs) andminimize offsite infrastructure developmentexpenditures of government.

While BEZA is strengthened, BEPZA also needs tobe given space to implement zones (given that lotof Foreign investments are scoping Bangladesh asinvestment destination).

o One option, will be to hand over lossmaking SOEs to BEPZA to convert to Zoneson more commercial footing (lease rent forexample) and use PPP option for deliveringas much of the services (ETP, Power, Water,built up buildings for rent etc.) Forexample, allow BEPZA to take over GEimmediately (200+ acres next toKarnaphuly EPZ) and convert to anEconomic Zone with a PPP model.

There needs to be real effort to see that Korean EPZbe a success. The option of bringing Korean EPZunder BEZA could be explored.

There are private jute mills around Dhaka andChittagong that are not doing well. BEZA coulddiscuss with such jute mill owners to see if some of

those could be licensed as private SEZs. This couldbe a quick win particularly for relocating RMG.

Given the difficulty in building new institutions andalso having different institutions (BEZA, BEPZA,HTPA, Private EPZ Cell, BSCIC) pursuing the samegoal under different paradigms, it would beoptimum for a country like Bangladesh to have oneAuthority regulating the entire zone developmentprogram, be it private, public, or PPP. Onechallenge will be to separate regulatory authorityfrom development.

IV. Infrastructure Challenge in Bangladesh:

In view of resource and implementation constraintsBangladesh needs to be much more strategic aboutidentifying critical infrastructure projects and thenallocating resources accordingly.

The priority should be to focus on theimplementation of what is deemedtransformational infrastructure investment. Inparticular, it is most important the Roads andRailway sectors select a number of high-priorityprojects and completes them in a timely manner.

In the power sector, given the high-cost ofgeneration, the focus should now shift to costconsiderations. Thus, the objective should not bejust increasing generation at any cost, but to go formore efficient and least-cost generation to ensurethe long-term competitiveness of themanufacturing sector as well as for being fiscallysound.

The Government should also build further on itsinitial success with electricity trade with India andenter into new trade arrangements with India,Nepal and Bhutan. Joint ventures with power-sharing arrangements along the border areas aswell as pure purchases should both be explored.

One big challenge in the primary energy sector isthe absence of a strategic long-term view abouthow the growing needs of primary fuel will be metin the next 10-20 years. Policy on primary fuel,particularly coal policy is urgently needed. Oncethis policy is adopted, considerable funding will beneeded. Priority also needs to be given to gasexploration and gas production. Additional publicand private investments in gas development isessential.

Urban transportation remains a big challenge.Dhaka continues to face increasing traffic

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congestions. The investment focus on removingtraffic bottlenecks through flyover and alternativeroutings is appropriate. This effort should continuewith emphasis on timely completion of all ongoingprojects.

Similarly urgent attention is needed to startimplementation of the metro rail. Alongside,substantial attention needs to be given to thebroader governance issues of city management,institutional challenges in urban transport planningand implementation, improved trafficmanagement, and the enforcement of parkingregulations and traffic laws.

In Railways, urgent attention is needed toimplement long-standing railway reforms. A reformpush in railways will pay rich dividends insupporting private trade and investment.

In the Roads Division, the main challenge is toestablish priorities and focus on speedy projectcompletion. As an example, the Road Division has156 projects under implementation. This has led toover programming of projects without adequatebudgetary allocations for each project.

Besides budgetary constraint, the Ministry ofCommunication itself identified inadequacy ofqualified staff, procurement related problems, delayin release of funds and long approval process asmajor constraints that are obstacles to meeting theSFYP targets.

Given the constraint the Government shouldprioritize the most transformative projects andprovide all necessary resources for completionwithin a well-defined timeline. Other projects ofless importance should be delayed for laterimplementation.

More generally, this should be the practice for allinfrastructure projects in Roads, Bridges Division,Railway Ministry, Power Division, and for UrbanTransportation. Some examples of transformativeprojects that need to be prioritized and fullyresourced include:

o The 4-Lane Dhaka Chittagong Highwayo Double Tracking of the Dhaka-Chittagong

Railwayo The Padma Multi-Purpose Bridgeo Completion of the two Bibiyana gas field

based large power plants.o The Dhaka metro rail

The Government should give top priority to thismatter and seek technical assistance to develop a

sound PPP framework based on good practiceinternational experience. There are a number ofnational institutions that have the capability toassist the government in this regard.

Finally, Government needs to internalize thelessons of experience of the Padma Bridge andfocus on procurement and other governancematters relating to infrastructure. Since largeamount of funding is involved in infrastructure, itnaturally attracts predatory attention. Unless theauthorities are vigilant and exercise utmost caution,the risk of wrongdoing and misappropriation islarge. One possible option will be to go for turn-keyprojects for large foreign-financed infrastructureprocured through oversight provided by donoragencies.

1


I. Bangladesh CurrentMacroeconomic Setting

Ahsan H. Mansur

Background and Introduction

Since independence Bangladesh economy has recordedhigher economic growth every decade including in the firstdecade of the new millennium. From the low levels ofgrowth in the 3% range in 1970s, the GDP growth ratesteadily increased to 6% or more in the post 2000 decade.All through this period the growth performance was drivenby corresponding increases in the national savings andinvestment rates in relation to GDP and the strive for highergrowth was also supported by strengthenedmacroeconomic stability. Bangladesh’s macroeconomicstability has also been buttressed by the governments’prudent fiscal and debt management, reforms in thefinancial sector, and improved monetary management.

Figure 1.1: Trend in Real GDP Growth, 1970s-FY13

The Sixth Five Year Plan (SFYP) of the government, coveringthe period FY10-15, was prepared against this backgroundof increasing private sector investment and savings, andcontinued macroeconomic stability. The Plan aimed atincreasing the real GDP growth to 8% by FY15 in asustainable manner, averaging 7.3% real growth over thePlan period along with continued macroeconomic stability.At its inception it was thought that the Sixth Plan set fairlyambitious but attainable macroeconomic targets, supportedby a well rounded and consistent MacroeconomicFramework and underlying reforms and policies.

The purpose of this note on current macroeconomicsetting is to reinforce the point that the most importantfactor contributing to the less than expected growthperformance under the Sixth Plan was the failure to achievethe investment target and the declining private sectorinvestment with corresponding deterioration in theefficiency of capital/investment. Due to variousdevelopments/factors investment and growth are likely tobe the lowest in FY14 and a rapid recovery in growth

through higher investment will be important for Bangladeshto achieve a rapid reduction in poverty and enhance theliving standards and social indicators steadily. The task willentail improvement in investment climate andenhancement of domestic competitiveness through majorinterventions in the form of policy reforms (including tradeand tax policies), improved infrastructure, and alleviation ofland constraint by expeditious development of SpecialEconomic Zones under Private and Public-PrivatePartnership arrangements.

Macroeconomic Performance under the Sixth Plan

The outcomes for the first three years of the Plan suggest amixed record of performance. The real GDP growth was ontarget in FY11 but was lower than planned in FY12 andFY13. The growth targets for the outer years were certainlyambitious and required bold initiatives to break away fromthe 6% growth rate recorded in the 5-year period precedingthe launching of the SFYP. The higher GDP growth and thecorresponding per capita real GDP growth targets werepredicated upon 8 percentage point increase in the nationalinvestment to GDP ratio over the Plan period. Theattainment of the investment rate increase was predicatedupon a strong public sector resource mobilization drive tofinance the targeted increase in public investmentcombined with improved environment for increased privatesector investment.

On the domestic front, both policy implementationincluding execution of the budget and economicperformance (particularly private sector investment andGDP growth) have been significantly impeded by politicalconflicts in the period preceding the National Elections inJanuary 2014. At the same time, Bangladesh did notexperience any major natural disasters like cyclone or floodover the last five years, which allowed the agriculture sectorto record steady increase in output albeit at a slow pacewith minimum volatility and disruptions in the levels ofproduction.

Prudent macroeconomic management has been thehallmark of Bangladesh’s long-term development. This wasunderscored in the Sixth Plan and the implementationrecord shows that it has been preserved during the firstthree years of the Sixth Plan. All major indicators like thefiscal deficit, export growth, export-to-GDP ratio, externalcurrent account balance, foreign exchange reserve build upand external debt management have been on track orexceeded the Sixth Plan targets. However, inflation rateremained higher than the target. It was significantly off-trackin the first two years as excessive monetary growth fueledhigher-than-targeted inflation. Subsequent correction ofmonetary policy put inflation back on course, although ataround 7.5% it is still higher than the Sixth Plan target (6%).

In the area of fiscal policy, although performance indicatorsare broadly on track, there are a number of concerns. First,

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In%

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As%

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Investment/GDP Saving/GDPGDP growth (in right scale)

2


the revenue outlook for FY14 is uncertain owning todisruptions in economic activity due to politicaldisturbances. Additionally, the implementation of the TaxModernization Plan is much slower than expected. Second,fiscal discipline has often required cutbacks in spending inareas of high priority project and programme spending dueto government’s inability to meet the Sixth Plan resourcecommitments in important areas (e.g. in education, health,social protection and environment), thereby adverselyaffecting delivery and performance of importantprogrammes. Third, procurement problems have sloweddown the implementation of major infrastructure projects(including Dhaka Chittagong Highway and Padma Bridge).Fourth, the important policy initiative of public-private-partnership (PPP) in infrastructure did not materialize.

Regarding external sector performance in terms of mostexternal sector indicators generally exceeded the targets.There are however some concerns. Despite the strongperformance in exports, the diversification of the exportbase did not happen. On the contrary, the share of RMGexports increased. Remittances did very well up to FY13 buthave shown signs of substantial softening in FY14. Both areworrisome trends that need to be addressed as highlightedin the main report.

The latest indicators of progress along with themacroeconomic targets of the Sixth Plan are shown in Table1.1 below.

Table 1.1: Progress with Macroeconomic Targets Underthe Plan

Period → FY11 FY12 FY13

Indicators↓Actual

Target

Actual

Target

Actual

Target

Real GDP growth 6.7 6.7 6.3 7.0 6.0 7.2Investment (as % of GDP) 25.1 24.7 26.6 26.8 26.8 29.6Export to GDP ratio 20.6 20.3 21.0 21.2 20.2 22.1Remittances ($ billions) 11.5 11.5 12.7 12.7 14.3 14.2Reserves (in month ofimports) 4.0 3.6 4.0 3.4 5.0 3.4Current Account Balance (%of GDP) 0.8

(-)0.3 0.4

(-)0.3 1.9

(-)0.2

Tax to GDP Ratio (%) 10.2 10.0 10.8 10.6 11.0 11.2Fiscal Balance (excludinggrants) (% of GDP) 4.5 4.4 4.0 5.0 4.4 5.0CPI Inflation (%) 8.8 8.0 10.6 7.5 7.7 7.0Source: Sixth Plan, BBS, Bangladesh Bank (BB) and Ministry of Finance

Why GDP Growth Did Not Pick Up?

The slower than targeted real GDP growth is the mostimportant setback in terms of Sixth Plan performance. Whilethere are many short-term factors, external and domesticorigin, which can be mentioned as possible causes for theGDP growth shortfall, the lackluster investment and growthperformance needs attention and adoption of remedialmeasures.

Figure 1.2: GDP Growth Rate FY10-FY13, Actual VsTargets

Source: Bangladesh Bureau of Statistics (BBS)

The Plan essentially recognized that Bangladesh’s growthperformance, like many other countries, has been mostlydriven by investment and exports. Capital accumulation hasbeen found to be most important driver of growth in mostemerging economies including China, India, Sri-Lanka, andBangladesh. In developing emerging economies labor andcapital accumulation/investment generally drives growthinstead of factor efficiency. Accumulation of labor is drivenby demographic developments and the rapid increase in theworking age population and the consequent demographicdividend can only be fully realized if capital investmentenables absorption of the workforce and enhance theirproductivity. This relationship between investment and realgrowth is clear from Figure 1.3 below.

Figure 1.3: Investment/GDP Ratios and GDP GrowthRates

(Right Hand Scale), Selected Countries (5-Year Averages)

Under the Sixth Plan, while private investment wasprojected to lead the way, a substantial increase in publicinvestment was also planned. In the event, the investmentchallenge has become progressively more difficult overtime. Compared with the Sixth Plan’s target to increase theinvestment rate from 25% of GDP in FY11 to 32.5% by

0123456789

FY10 FY11 FY12 FY13 FY14 FY15

GDP

Grow

th (%

)

GrowthRateForecastedGDPGrowth(%)ActualGrowthRatesTargeted (SFYP)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

0.00

10.00

20.00

30.00

40.00

50.00

Investment to GDP Ratio, 2007-11GDP Growth Rate, 2007-11

Source: World Bank

3


FY2014-15, the actual investment rate has stabilized at lessthan 27% of GDP during FY12-FY13.

Figure 1.4: Investment Scenario --Actual Vs Target

Source: BBS and National Budget Documents

Bangladesh’s inability to cross over to the 7% rate of growthof GDP is to a large extent a reflection of this investmentconstraint. Given this significant shortfall in FY13 and anuncertain economic environment in FY14, the ability toachieve the substantially larger investment targets for FY14and FY15 do not appear feasible. The declining privatesector investment is a matter of great concern. The modestincrease in total investment is entirely on account of publicsector investment with questionable quality. While politicalstability has returned and there is likely to be a recovery inprivate investment, on the whole it is clear that theinvestment targets for the Sixth Plan will not be achievedand this will reduce the average GDP growth rate to around6 percent over the remainder of the Plan period.

The underlying growth strategy in the Sixth Plan aimed atfacilitating a faster transformation of the Bangladesheconomy away from a primarily agrarian one towards amodern manufacturing and services oriented economy. TheSixth Plan targeted manufacturing as the main engine ofgrowth. Accordingly, the GDP share of manufacturing was torise by 4-5 percentage point. Bangladesh has achievedsignificant success on this front as suggested by thegrowing GDP share of manufacturing and a falling share ofagriculture. Nevertheless, full target will not likely berealized because of the likely shortfall in manufacturingsector value added in relation to the Sixth Plan target.

Figure 1.5: Share of Sectors in GDP (in %)

Near term and Medium-Term Growth Prospects: In FY14,with continued uncertainty and disruptions in the pre-election period, GDP growth is projected to slow down toabout 5½ percent. From FY15, on the assumption that thepolitical environment will remain calm, growth is expectedto strengthen gradually, reaching at 6.5 percent by the endof the Plan period aided by higher remittance and exportgrowth, as well as by prospects for a recovery in domesticprivate investment. A likely rise in consumer and investorconfidence, if the political situation remains stabile, is alsoexpected to stimulate demand and strengthen growthmomentum. Private investment has to underpin anypossible economic recovery supported by a substantialincrease in public investment. Continued political stability isa precondition for any rebound in private investment for therecovery in growth to materialize.

What Explains Bangladesh’s Lackluster InvestmentPerformance?

Decision to invest is a medium to long-term decision anddepends on a whole range of factors. To an investor,Bangladesh as an attractive investment destination woulddepend on the competitiveness of the economy and generalbusiness environment. A review of the perceptions ofdomestic investors about competitiveness and doingbusiness indicates some major areas where criticalinterventions are needed.

It is really a matter of concern that Bangladesh continues toperform very poorly in terms of both Ease of DoingBusiness Indicator (DBI) and Global CompetitivenessIndex (GCI). Bangladesh’s ranking at 129 in terms of DBI and118 in terms of GCI do not give us much hope for attractinghigher investment, be it domestic or foreign (FDI). It isdisappointing that even with cheapest labor cost among allthese countries, Bangladesh is perceived to be souncompetitive relative to its comparators. Most Asianemerging economies are much better performers in termsof the GCI.

19.5 20 18.9

25.2 26.5 26.824.7

26.829.6 31

32.5

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30

35

FY 11 FY 12 FY 13 FY 14 FY 15

Private Actual Target

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ors (

%)

Agriculture Industry Services

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Figure 1.6: Ease of Doing Business Indicator

Source: Doing Business 2014, IFC

Figure 1.7: Global Competitiveness Index (Rank among144 Countries)

Source: The Global Competitiveness Report 2013 – 2014

Figure 1.8: Factors Contributing to the Lower DoingBusiness Ranking


Figure 1.9: Pillars of GCI (Rank among 144 countries)

Source: The Global Competitiveness Report 2013 – 2014

In terms of both indicators, infrastructural gap/deficiencycomes out to be the most important factor hinderingproductivity and investment in Bangladesh.Underdevelopment of institutions and through that togovernance issue also came up high in bothcompetitiveness and doing business indices. Enforcement ofcontract and dealing with insolvency are essentiallymanifestations of weak institutions, weak governance andregulatory weaknesses.

It is interesting to observe that Bangladesh ranks quitefavorably in terms of protecting investors and for its marketsize. On protecting investors, Bangladesh is the bestperformer among all its regional comparators. In the scale of0-10, the environment in Bangladesh has been ranked atclose to 7, which is the highest among all comparators. Theimplied positive message, that Bangladesh has an investorfriendly investment regime and a large domestic market,needs to be disseminated more widely.

Figure 1.10: Protecting Investors, Rankings


130

96

134

105 110

8599

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150

110

29

60

117133

65 70

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74

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0 50 100 150 200

Protecting Investors

Srating a business

Getting credit

Dealing with…

Paying Taxes

Resolving Insolvency

Enforcing Contract

Getting Electricity

4579

89102104

113124127127131131132

Market SizeMacro Economic Enviorenment

Goods Market EffeciencyFinancial Market DevelopmentHealth and Primary Education

Business SophisticationLabor Market Efficiency

Higher Education and TrainingTechnological Rediness

InstitutionsInnovation

Infrastructure

22

98

34

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3452

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The Way Forward for a Speedy Economic Recovery

The lesson from Bangladesh’s recent experience in terms ofgrowth and investment performance and the factorsunderlying the low score on GCI needs to be addressed in asystematic manner if the government really wants to moveto a higher growth trajectory in a sustainable manner.Certainly increasing domestic investment and growth willrequire a multifaceted approach encompassing:

In order to make the export driven growth strategyto work better with a much broader export base, allpolicies leading to anti-export biases need to becorrected. This issue will be addressed in a separatePolicy Note.

Investment in infrastructure will help createimmediate domestic demand and at the same timewould lay the foundation for catalyzing higherprivate sector investment. The government hasadopted a number of high-profile projects forimplementation on a priority basis. The list ofprojects included may need to be prioritized bydropping the controversial ones (like the RuppurAtomic Energy Project or Coal based power projectin Rampal near Sundarban) and adding a few moreimportant ones to the list (like making most majorhighways into four lane highways including Dhaka-Tangail and Dhaka Sylhet).

Alleviate land constraint for industrialization byestablishing a series of Special Economic Zones invarious parts of Bangladesh through Public PrivatePartnership arrangement.

All these three important issues are the focus of the 3 PolicyNotes prepared and provided to you.

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II. New Directions for Trade Policy

Zaidi Sattar1

Introduction

After years of debate and controversy, trade has come to berecognized as the undisputed engine of growth. History isripe with the evidence that when countries chose to restricttrade in response to global crisis, they only exacerbated thecrisis. On the contrary, the world benefited immensely fromthe trade openness embraced by countries followingconclusion of the Second World War, with the result thatworld trade actually grew much faster than world income.By and large, available evidence shows that globalexpansion of trade contributed to growth and betteremployment outcomes.

Among developing countries, Bangladesh has been listedamong the “globalizers”, i.e. countries that have opened uptheir economies to global trade. However, after threedecades of trade policy reforms, most analysts andinternational institutions often describe Bangladesh’ssituation as a glass half full. Much has been done, but moreis left to be done in order to complete the trade reformagenda. Though the benefits of trade generally outweighthe costs of reallocation of labor and capital to moreefficient uses, it is critical to devise appropriatecomplimentary policies to assist workers and producers toadjust to a more competitive environment that comes withtrade liberalization. Only then can Bangladesh move fasterin its next phase of trade openness to keep in step with arapidly globalizing world economy. What is clear to tradeeconomists at home and abroad is that the status quo mightnot be the best option going forward. Hence, the need fortaking stock of the current state of play and makingappropriate adjustments to get the best outcome fromtrade, in terms of growth and employment.

Trade, Growth, and Employment

The impact of trade liberalization on growth andemployment is one of the most widely researched subjectsin the literature on international trade. Reviewing theevidence from research on the cross-country impact of tradeopenness, it appears that there is a preponderance ofevidence in support of the contention that trade opennesscontributes to growth and employment, provided it iscomplemented by appropriate policies (OECD et al, 2010)..While it may be argued that greater trade openness doesnot guarantee economic growth, there is scarce evidencethat economies that remained out of global production andfinancial networks through trade restrictions could attaingrowth on sustained basis.

1 Chairman, Policy Research Institute of Bangladesh (PRI)

While trade openness stimulates competition it also createsaccess to global markets. Trade restrictions on the otherhand cause growth and employment to be dependentrelatively more on the demand created within the domesticeconomy. No matter how large the size of the domesticeconomy, it is no match to the global economy of about $60trillion. It is for this reason that even large economies likeChina and India are eager to access world markets to selltheir products and services which is the best way to createjobs and sustain growth at home. Likewise, Bangladesh’sdomestic market could never have supported the fourmillion direct employment in the $25 billion RMG sector, notto mention the additional workers that are engaged inlinkage industries such as accessories and courier services.Thus trade openness frees countries from the constraints oftheir local economies of limited size when compared to thesize of the global economy, adding economies of scale toproduction, promoting greater efficiency throughcompetition, bringing more consumer and producer choice,and faster technology transfer. However, trade opennessalso implies that there will be some firms and workers whoare not equipped or ready to withstand import competition.In consequence, some of these firms will have to close andworkers have to be laid off reminding us of the painful costsof adjustment. Therefore, it is imperative that a policy oftrade openness be part of a comprehensive policyframework that addresses the problems associated withadjustment related to unemployment and closure of firms.

Trade stimulates growth. Trade theory argues that the gainsfrom specialization and trade according to a nation’scomparative advantage is the way to raise output and itsproductivity. Trade openness provides the right kind ofstimulus for productivity enhancement through efficiencygains stemming from enhanced competitiveness,specialization, greater economies of scale, and technologytransfer. In Bangladesh, a World Bank study (World Bank,2005) found that export industries (e.g. RMG) recordedhigher productivity than import substitute industriescatering to the domestic market, while FDI-financed RMGindustries (embedded with foreign technology andmanagement) in EPZ displayed higher productivity thantheir domestic counterparts. Another World Bank reportnoted that, in the 1990s, developing countries that loweredtrade barriers had their per capita incomes grow three timesfaster than those that did not.

Not only do the benefits come from greater access to exportmarkets but open trade also makes available to producersthe widest choice of imported inputs at the lowest of pricesand best in quality. A point that is seldom discussed inBangladesh’s policy circles is the important role of imports inachieving better economic performance. Imports are aconduit for technology transfer, and import liberalizationthat comes with trade openness offers producers, large andsmall, a greater variety of imported capital goods andintermediate goods that embody new technology and helpraise the quality and productivity of domestic output. An

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OECD study (OECD, 2009) found that for 29 industries in 11OECD economies, a higher inflow of foreign intermediategoods was associated with higher productivity.

In this context, it is worth pointing out that sometimes ourown policies on trade and investment could be damaging toour global integration and development. It might betempting to push for market opening in other countrieswhile protecting domestic industries and services with hightariffs and other barriers to trade and investment. Such astrategy could actually impede our development. FormerWorld Bank Chief Economist, Nicholas Stern (2002) makes aconvincing case, as follows: “Countries benefit from theirown market opening in many ways. One is technologicaland managerial: foreign direct investment brings with itinnovation in product, process, and organizationaltechnologies, while importation of goods brings embeddedtechnologies and access to lower-cost production inputsand consumer goods. Another benefit is greater efficiency:competition from abroad spurs domestic industry to makeproductivity improvements, promoting growth andemployment over the medium term”. Taking his argumentat face value, it would mean that Bangladesh should not beholding on to a restrictive trade regime simply becausedeveloped countries are not opening up agriculture ortextiles.

Employment implications of trade openness. A challengefor researchers and policymakers in Bangladesh is to betterunderstand how trade and the labor market interact andaffect the lives of millions of workers. To be sure, therelationship between trade and employment is rathercomplex and not subject to a clear channel of causation. Thehope is that the multilateral trading system, with itsflexibilities (special and differential treatment), will result inbetter employment outcomes for Bangladesh. Whether ornot we realize this potential will depend on the strategiesadopted to extricate the positive outcomes for the long-term.

By assuming long-run full employment, trade theoryignored the complications of employment adjustments (e.g.unemployment) focusing mainly on sectoral distribution ofemployment and wage effects. But reality is something else,and unemployment in less competitive sectors cannot beignored and must be addressed with appropriate safety netand skill development programs. Though consensus is farfrom clear in the vast literature dealing with theemployment implications of trade openness, there iscountry-specific evidence to suggest significantemployment creation potential of greater trade integration(Hoekman and Winters, 2007). Another study by Felbermayret al (2009) finds that a 10% increase in trade opennessreduces unemployment by 1% for a mix of developed anddeveloping countries.

An important outcome of the trade-employment nexus hasbeen described by researchers (Verhoogen, 2008) as a

“quality-upgrading mechanism (QUM)” in which, followingtrade openness, the more productive firms produce higherquality goods than do the less productive firms, also payinghigher wages to maintain a higher-quality workforce. It isthe more productive firms that can compete in the exportmarket. This QUM is especially significant for developingcountries like Bangladesh that produce higher quality goodsfor export to consumers in developed countries of Europeand North America. In consequence, workers engaged inthese export industries benefit from the dynamic effects oftrade – wage increases being one of them, defined as the“exporter wage premium”. Here lies the economic rationalefor recent demands for higher minimum wage for RMGworkers which, in light of the exporter wage premium, hasto be set at a level higher than the minimum wage indomestic import substituting sectors.

A final point about the dynamic employment effects oftrade openness is worth considering. If the RMG sector is anyguide, Bangladesh economy has experienced theemployment gains from the free trade channel created forthis sector that began as a 100% export-oriented industry.As for employment effects of trade liberalization in othersectors, economic literature points to a phenomenon akin toSchumpeter’s characterization of capitalist marketeconomies (Schumpeter, 1942) – a process he called“creative destruction”. The onset of import liberalization setsin motion a process of “churning” by which jobs are createdin more productive activities and destroyed in lessproductive ones. On balance, whether the net outcome oftrade liberalization on employment is positive or negativedepends on the initial state of play and the choice of policyregarding the pace and sequencing of trade reforms. Themoot point is that complimentary policies are required sothat firms and workers can benefit from the opportunitiescoming from the creative side of trade openness whileadjusting to the disruptions caused by its destructive side.Given Bangladesh’s sound macroeconomic management forthe past decades, analysts would argue that an environmentexists for taking the road to further trade liberalization alongwith complimentary policies that focus on human-capitalformation and investment in physical as well as tradeinfrastructure (e.g. modernization of customs and ports) inorder to capitalize on the employment outcome of tradeopenness.

Mainstreaming Trade and Trade Policy

In FY2013, the Bangladesh economy crossed an importantmilestone with its trade-GDP ratio reaching 50%, ascompared to a mere 19% back in 1990. Trade has been oneof the dynamos of growth for Bangladesh. Despite all itschallenges, with Bangladesh’s proven competitiveadvantage in low-skilled labor intensive production, tradehas created significant opportunities for this country toexport its way out of the 5-6% annual GDP growth and reachthe heights of 8-10% growth over the medium-term,something the domestic market alone could not have

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ensured. For this to happen, it would be important torecognize trade as an engine of Bangladesh’s growth, just asit has been recognized as an engine of global growth.

Thus mainstreaming trade and trade policy should becomea key agenda for policymakers and planners. This meanstaking trade-related issues into account when planning andexecuting broader development objectives. It furtherimplies using trade proactively to attain specific nationaldevelopment goals, including poverty reduction. In otherwords, trade policy agenda – with a focus on market accessand competitiveness -- has to be an integral part of thedevelopment agenda which has a focus on growth, jobs,and social stability.

East Asian countries reaped an early harvest of acceleratedeconomic prosperity by embracing trade orientation andexport-led growth in the 1970s and 1980s. Empiricalevidence of the economic prosperity of many othersuccessful economies shows that they were largely drivenby trade integration, export expansion and heighteneddegree of export competitiveness. It is also for this reasonthat the issue of mainstreaming trade into nationaldevelopment strategies has increasingly gained currencysince the mid-1990s. Now that trade and exports havegrown in importance in Bangladesh’s economic structure, itis time for trade policy to become an integral part ofnational policymaking. Likewise, for trade reform to unleashits catalytic potential, it should be designed as part andparcel of Bangladesh’s Five Year Plans and other longer-term Plans, where its role will be given due cognizance andthe necessary facilitating infrastructure adequately providedto make trade policy perform. Once the role of trade isestablished within a coherent national policy context, trade-related needs could be better defined, prioritized andsequenced.

Exploiting Emerging Trade Patterns for ExportDiversification

There are emerging opportunities for changing direction ofBangladesh trade stemming from the evolving pattern ofglobal trade. According to a WTO-UNCTAD report (WTO2011)), trade in intermediate goods was the most dynamicsector of international trade in the past two decades,accounting for more than 50% of non-fuel worldmerchandise trade. This is a new trend that has evolved inthe character of export-led growth. With the ‘unbundling’ ofproduction across countries fostered by widespread tradeliberalization, advances in ICT, and lower transportationcosts, entrepreneurs often find it more economical now to‘unpackage’ their factories and locate various productionstages far from each other, to other countries in accordancewith these countries’ respective comparative advantages.Such fragmentation of the whole manufacturing processtriggers increased vertical intra-industry trade as assemblyoperations typically migrate to lower-wage economies,while more developed economies specialize in the

production of higher-value added components. Thisinevitably fosters a boom in trade in intermediate goods,which has over the years become a major driver of exportgrowth particularly in East Asia and other emergingeconomies of Asia.

The fragmentation of production processes across differentcountries has given rise to global value chains (GVCs)creating opportunities for intra-industry trade globally aswell as between contiguous economies within a region. EastAsian countries have seized early opportunities from thisdevelopment by linking up with China – the world’sassembling powerhouse. As much as 75% of East Asia’strade is in intermediate goods, some of which involve highvalue-added components of sophisticated electronicproducts like mobile phones, computers, LED TVs, etc. AnIMF study found the share of intermediate goods in tradeflows into emerging Asia has increased to 65 percent, whilethe share in similar trade flows among more developedeconomies is about 40 percent (Gruenwald and Hori, 2008).Studies by Commonwealth-UNCTAD (2014) reveal thatthese trading opportunities have bypassed or are bypassingLDCs and low-income economies, depriving them of thebenefits of the fastest growing component of global tradeby keeping them out of some of the most profitable intra-industry production networks.

This conclusion is largely though not completely applicablein the Bangladesh context simply because Bangladesh wasan early participant in the GVCs through its leading exportsector – readymade garments. Bangladesh started as a pure‘assembler’ in a low value added GVC activity – cutting andmaking of readymade garments (RMG). Thanks to the initialinfusion of FDI, bringing technology, managementtechniques, marketing access and information, both forwardand backward linkages were established. Today, Bangladeshhas become a leading exporter of RMG in the world.

There are important lessons from this experience regardingthe prospects, challenges, and opportunities for Bangladeshstemming from the GVCs in other product or service sectors.

First, it was a foreign investor – in this instance,Daewoo of Korea – which facilitated Bangladesh’sentry into the GVC by teaming up with aBangladeshi company – Desh Garments. Daewoobrought technology, management, and knowledgeof market access under the umbrella of MFA. WithDaewoo’s advice, Bangladesh trade policy wasradically adjusted for RMG export production, byintroducing a system of duty-free imported inputswithin a high-tariff regime (special bondedwarehouse), in addition to providing for supply ofimported inputs on credit (back-to-back LC system).The total package created a free-trade channel forRMG export production that produced wonders for

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this one sector. Unfortunately, the lesson from thisexperience was not passed on to other sectors.Hence, there was no replication of RMG experience– at least, not yet.

Second, it was a fact that the choice of the GVCcomponent was based on Bangladesh’scomparative advantage in low-skill intensivemanufacturing production. Then, it must be thecase that Bangladesh also had comparativeadvantage in many other low-skill intensivemanufacturing production – which could be in finalconsumer goods or intermediate goods. Yet, therewas no progress in the emergence of intermediategoods in Bangladesh’s export basket. 98% ofBangladesh’s exports today are final consumergoods – an import-substitute sector that remainshighly protected from import competition for yearson end, with no sign of protection being phasedout. Protection to these final consumer goods hasbeen given at the expense of protection forintermediate goods, as tariffs on the latter havebeen scaled back over time. Indeed, the protectionstructure creates not just an anti-intermediategoods bias but also an anti-export bias thatconstrains the emergence of non-RMG products inthe export basket, thus stifling exportdiversification prospects. So, intermediate goodsproduction or exports has not been onBangladesh’s radar in the past. The new trends inglobal trade reveal existence of tremendousopportunities for export of intermediate goodswithin GVCs. This calls for a radical change in thecurrent incentive regime that favors production offinal consumer goods over intermediate goods.

What must Bangladesh do to exploit GVCs? What are theentry barriers? As mentioned earlier, to exploit GVCs,entrepreneurs may exploit two specific options: (1) Produceintermediate goods; or (2) emerge as an ‘assembling’ hub.With regards to the first, Bangladesh entrepreneurs need toidentify components that involve labor intensive or low skillintensive processes while searching to establish strategicpartnerships with established transnational who willassemble the final product in another location. With regardto the second option Bangladesh may ponder emulatingChina’s successes at GVCs by emerging as an ‘assembling’hub. In this case it is instructive to look at the economic riseof China associated with the emergence of a distinctivestructure for the Asian-US production system, commonlyunderstood as the ‘tri-polar trade through China’ model. Inthis structure: (i) East Asian countries, except China, producesophisticated parts and components and export them toChina; (ii) China assembles them into final products; and (iii)

these are further exported to the US market forconsumption.

There are several issues worth discussing. To start with, iflocal entrepreneurs are willing to engage in the productionof an intermediate good, then it is probable that they willface issues that are associated with efforts dedicated to‘learning how to imitate’. In short, the technical ‘know-how’needed for the production of an intermediate good in theGVC must be obtained if the local entrepreneurs are notexposed to such expertise. In this context, a prudentstrategy for local entrepreneurs is to opt for a collaborativeproduction structure that builds long-run commitmentsbetween local and foreign actors, so that the technical‘know-how’ needed by the local actors is obtained.

On the other hand, if local entrepreneurs are willing todevote resources to assembling activities, then they shouldchoose a product where there is a high local demand inaddition to high export demand (e.g. auto parts inBangladesh, automobiles in India). The security of sales inthe domestic market will attract FDI from the foreign firm,and a collaborative production structure will diffuse theinitial technical know-how needed for the assembling of thefinal good (or intermediate good). Thus the choice of theproduct for which assembling activities is undertaken ispartially determined by the characteristics of the localmarket, especially the level of effective demand it carries forthe product (Sattar, 2012).

Thus it becomes apparent that a prudent option for a localentrepreneur is to seek collaboration with foreign firms forthe production of intermediate goods, and also to emergeas a key ‘assembling’ player within the industry. This,however, will mean that foreign direct investment isneeded, and policy makers must mitigate any constraintsthat undermine the prospects of FDI. Apart from the criticalneed for a stable political environment, issues that needpriority attention are:

o Efficient Containerizationo Efficient Land Portso Information and Communication Technologyo Export Processing Zones or Special Economic Zones

Other issues that also merit attention are: corporate taxregime with appropriate incentives, import liberalization,strong intellectual property rights, rule of law, and adeveloped financial system, including modernization ofForeign Exchange Regulation Act (FERA) 1947.

Furthermore, in order to promote integration into GVC (andattract FDI with this objective), the following steps would beessential:

o Eliminating anti-export, and anti-intermediate goodsbias of the incentive regime.

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o A liberalized investment policy regime, which offersscope for international firms to have unlimited stake inthe local firm.

o Joint ventures with established actors within the GVCwill allow the diffusion of technology, which ultimatelyboost the export potential of the local firm.

o Local firms must have the capacity to innovate andacquire a basic level of technological standard, so thatsuch types of cooperation are possible.

o Availability of appropriately skilled labor at acompetitive price, which motivates established foreignactors to participate in joint ventures with local players.

Finally, substantial investment into infrastructure would berequired to solve existing problems of electricity, water, gas,transportation, which are obvious bottlenecks to normalfunctioning of joint venture firms and to facilitate theirintegration into GVCs (PRI, 2013).

Exploiting Non-traditional Markets for Exports

Bangladesh exported $27 billion worth of goods in FY2012-13 to over 150 countries of the world. Althoughgeographical diversification of export destinations has beentaking place, the fact remains that some 80% of our exportswent to USA and Canada in North America, the 27 membercountries of the European Union, and Japan. So, for theforeseeable future, it is important to recognize that our mainexport market for RMG and non-RMG products lies in thedeveloped countries of the world – in the East or in theWest. These countries together make up more than one-halfof the world’s GDP of about US$60 trillion, also accountingfor the bulk of the $300 billion market for readymadegarments. So the prospects of expanding Bangladesh RMGexports to these markets remain substantial as it nowexports merely $25 billion worth. It is not clear whetherMcKinsey LLC’s projection of Bangladesh RMG exportsdoubling in the next few years took note of markets otherthan in OECD countries.

So where are the next significant markets for Bangladesh’sexports? A cursory review of the growing RMG exports inemerging market economies shown in Table 2.1 gives agood idea of where to look for future markets. While RMG isone product whose demand grows in tandem with incomein developed and developing countries alike, in practicalterms, if we are looking for substantial volume growth, itwould be logical to look for economies with sizable GDPs (i.esizable markets) that give an indication of potential demand.The BRICS, Japan,

Table 2.1: Non-Traditional markets for RMG exportsFY 11 FY 12 FY 13 GDP (US$ Billion)

Brazil 94.6 127.8 171.8 2252.7Russia 51.9 76.5 139.6 2014.8India 35.9 55.0 75.2 1858.7China 52.8 104.5 139.1 8227.1South Africa 48.4 55.8 57.7 384.3Japan 247.5 403.7 478.5 5961.1Australia 192.9 307.5 428.4 1532.4South Korea 47.2 80.0 114.4 1129.6Total 23360Source: EPB and World Development Indicators, World Bank

Australia, and S. Korea would be foremost in the list offastest growing RMG markets for Bangladesh, with currentGDP totaling over $23 trillion. Adding up all the low-incomecountries or lower middle income countries of Africa andLatin America would not create a market of any significantsize. So it would be strategic for Bangladeshi garment andother exporters to target these markets for future growthand consequent employment creation.

One other notable development of recent times is the moveto foster regional groupings (or partnerships) of mega-sizewith the ultimate objective of removing all sorts of barriersto trade and investment. Whether you look East or West, youcome up with two mega initiatives in the offing led by USAand its partners in OECD: the Trans Pacific Partnershiparound the Pacific Rim and a potential Trans AtlanticPartnership between USA and EU. Some 80% of our exportsare destined for these regions. The other potentiallyformidable initiative for free trade and investment flows isthe extension of 10-member ASEAN, into ASEAN+ (wherethe plus sign could include as many countries as are willingto sign FTAs with the original 10). What is also brewing outof the ASEAN trading arrangement is the prospect of aneconomic community on the style of the EuropeanCommunity: a Regional Comprehensive EconomicPartnership (RCEP), which emerges from FTAs betweenASEAN and other economies signing up to thecommitments for free trade in goods and services besidesclosing in on a low tariff customs union over time. India hasbeen signing FTAs with individual countries and regionalgroups. It is important to reflect where Bangladesh standsvis-à-vis these mega-partnerships in the offing. AlthoughBangladesh cannot be a member of these regionalcommunities (due to its geographical location), it might notbe able to sign FTAs with them either, unless it substantiallyscales back its high tariffs.

It might be mentioned in passing that these latest movestowards mega partnerships or pacts have something to dowith the years of protracted – and often intractable –negotiations that has become the hallmark ofmultilateralism in trade, as symbolized by WTO. Partly, itcould arise from the disappointment of global economicpowers from getting critical decisions on freer trade andinvestment on a fast-track basis in WTO where emergingmarket economies and developing countries have shownmore clout than the size of their economies would warrant.

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The latest experience with the Doha Development Roundmight have hastened the process. The Doha Round, whichcame close to being abandoned on several occasions, wasinstructive in that it revealed the complexities of consensus-based decision-making in a multilateral organization such asthe WTO. Perhaps the principle of “single undertaking”which gave rise to a binding constraint that “nothing isagreed until everything is agreed” often led to an impassethat was almost impossible to come out of. For many, thiswas frustrating enough. And it might have provided theimpetus for rise of the proposed regional partnershipscommitted to reaching free trade and investmentagreements in a short period of time, within a rulesframework that would allow decisions to be made faster andeasier than what is presently the case in WTO. If the testy lastminute bargaining at the 13th WTO Ministerial in Balibetween India and the rest WTO on retaining politicallysensitive rice subsidies (a political commitment of India’sCongress Party) is any guide, it is no surprise that the salientfeature of the Bali package eventually centered on the leastcontentious of the Doha Development Agenda issues:“trade facilitation”.

Trade Policy Stance: Where we stand

If going beyond WTO becomes the norm and regional megatrade and investment partnerships are going to be thepopular order of future trade and investment flows, wheredoes that leave Bangladesh? A look at the prevailing tradeand tariff regime will give us some idea.

In evaluating Bangladesh’s current trade policy stance, itwould be useful to reflect on the prevailing viewpointsregarding trade openness amongst academics, policymakers and business circles. After all, what we get in thetariff structure, and the non-tariff measures governingimports, is the outcome of several inter-relateddevelopments, such as the approach to supportingdomestic industries, external initiatives for market accessand promotion of exports, and the strategy for courting FDI.For starters, there are no champion free traders to be found.The most common ground might be found in the positionthat trade is to be promoted, exports are to be expanded,but imports are to be restricted (a) to protect domesticimport substitute industries from stiff import competition,(b) to raise revenues by imposing a wide spectrum of taxesand levies on imports, and (c) to keep the country’s balanceof payments at manageable levels. This approach to tradecould be summed up in the following trade-related policies:

o the trend and structure of tariffs as they impinge onglobal competitiveness of exports and import substituteproduction,

o reforms and modernization of customs administrationand trade infrastructure,

Tariff structure and trend. Theoretically speaking, a tariff isan indirect subsidy on import substitutes and a tax onexports. The protection that is afforded through nominaland effective tariffs is also a tax on consumers who bear theultimate burden of the protection tax by having to payhigher than world prices (tariff-inclusive price) for importedproducts. So policymakers need to balance the support theyextend to producers with the social costs of protection. Thecommunity as a whole stands to gain from protection onlywhen the objective of protection is met: domestic importsubstitute producers become globally competitive in theshortest possible time so that protection can be removedand domestic prices of import substitutes converge tointernational prices. The longer this takes, higher are thesocial costs of protection.

The other adverse implication of tariffs and protection is theanti-export bias they create resulting in dis-protection ofexports which, in the first place, have to operate under zeroprotection in the world market, provided they are fullycompensated for duties they have paid on imported inputsprior to exporting. If they do not receive full duty drawbackor if they are not given the facility of importing inputs duty-free, export production becomes subject to negativeprotection – a substantial anti-export bias of policy.

Hence, the trade policy stance that is suitable for globallycompetitive export production must be characterized bylow and uniform tariffs and a seamless export-import regimethat facilitates least-cost transactions at the border. Below isa brief review of the tariff structure and trends.

Around 1990, an assessment of the World Bank’s IndustrialSector Adjustment Credit (ISAC II) project revealed thatroughly 40% of the tariff lines were subject to over 100%tariffs in addition to widespread bans and restrictions onimports. It produced a highly prohibitive import regime thatnevertheless failed to result in any breakthrough in import-substitute production or preventing an impending balanceof payments crisis. Tariff rationalization and importliberalization became a trade policy imperative.

We have come a long way since those days of prohibitivetariffs and import controls. Table 2.2 gives a picture of thelatest tariff trends in terms of their implications for nominalprotection2.

2 Nominal protection rates have to be distinguished from tariff/taxincidence as some trade taxes, such as VAT on imports (which are tradeneutral) or Supplementary Duties (SD) do not have a one-to-one impact onprotection.

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Table 2.2: Tariff Trends FY01-14Tariffs (%) FY01 FY 05 FY 10 FY 11 FY 12 FY 13 FY14

Avg. CD (un-weighted) 21.1 16.3 13.7 13.6 13.6 13.9 13.2Avg. para-tariffs 7.1 10.2 10.2 10.2 12.9 15.1 14.1Avg. NominalProtection 28.2 26.5 23.9 23.8 26.5 28.9 27.3Top CD rate 37.5 25.0 25.0 25.0 25.0 25.0 25.0Top NPR* 59.0 60.0 79.0 79 88.0 117.0 108.0(*) excludes tariffs on cars, alcoholic beverages, and cigarettes

Source: NBR & PRI staff estimates

Tariffs and para-tariffs3 on imports are now the single mostimportant determinant of trade protection after successivegovernments in Bangladesh made progressive tradeopenness the cornerstone of trade policy. Whereas tariffsand quantitative restrictions (QR) together determined theextent of openness or restrictiveness of trade policy in the1990s and before, the QR slate has been wiped pretty muchclean since FY2005, leaving tariffs as the main instrument oftrade policy and protection. The tariff structure has beensimplified by moving to only four non-zero tariff slabs – 3%,5%, 10% and 25%. Although the average customs duty hascome down over the past 13 years, the average nominalprotection rate (NPR) shows mixed trend. It initially declinedbetween FY01 and FY09 and then started rising again overFY10-FY13. What is notable is (a) the perceptible divergencebetween the top NPR rate (which moved up since FY01) andthe average NPR; (b) the top NPR and top CD rate (Figure2.1); and (b) proliferation of para-tariffs. Also notable are theprohibitively high NPRs on consumer goods that aredomestically produced (e.g. 108% in FY2013). Such highrates, if effective, constitute de facto import bans.

Figure 2.1: Top CD and NPR Rate (%)

The new element is the emergence and sharp rise of para-tariffs (Figure 2.2) as a protective instrument of trade policy,which rose to over 50% of average NPR since FY13. Going by

3 Trade taxes other than custom duties that are akin to tariffs.

Figure 2.2: CD and Para Tariff Trends

NPR rather than CD, it becomes evident that the top NPR,which is an indicator of the highest level of nominalprotection given to an import-competing product, is not25%, but as high as 108%, imposed on textile fabrics. This isthe top rate appearing on a significant number of tariff lines,though there are occasionally higher NPRs on such items asbiscuits and confectionaries (in excess of 200%); excludingthe high tariffs on cars, alcoholic beverages, and cigarettes,which are meant to generate revenue or to discourageconsumption. Though cross-country comparison of tariffs ismade on the basis of CD4, it is fair to conclude from availablecross-country data that NPR levels are relatively high inBangladesh thus raising the first wall of anti-export bias.Globally, tariffs have been coming down so that there is ageneral perception that they do not pose any barrier ormarket access problems any more and attention is nowbeing diverted to non-tariff measures. Once Bangladeshgraduates out of its LDC status or moves across the middle-income threshold, exporters to Bangladesh could soon startdrawing attention to the relatively high tariff and para-tarifflevels.

A close examination of the structure of tariffs reveals thatthe decline in average NPR was due primarily to thereduction in tariffs on basic raw materials, capital goods andintermediate inputs, while the top CD rate remained flat at25% since FY05, topped up by generous supplement oflevies such as supplementary duty (SD) and regulatory duty(RD) – para-tariffs. The trends in nominal protection rates ofimport categories reveals that in the recent past theaverage NPR for input categories have been decliningrapidly while that of final consumer goods remainedpractically flat if not increased (Figure 2.3). This trend couldbe symptomatic of the priority demand for higher revenue.But the pressures created by domestic producers ofconsumer goods seeking higher effective protection byholding on to the higher rates on final consumer goodswhile depressing rates on imported inputs have also hadtheir impact on tariff trends. The net outcome of this process

4 Due to lack of comparable cross-country information on trade taxes otherthan CD.

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FY 01 FY 05 FY 09 FY 13

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is higher effective protection to domestic producers overtime yielding windfall profits simply through tariffs andwithout any improvement in productivity orcompetitiveness. A comparison of the trend in India’s outputand input tariffs (Figure 2.4) shows that both rates trendeddownwards as tariffs were liberalized thus reducing effectiverates of protection or leaving them unchanged over time.

Figure 2.3: Trends in Avg. NPR for Output & Inputs (%)

Figure 2.4: Avg Tariff Trend in India for output(Consumer Goods) and inputs (%)

Source: UNTRAINS, WITS Database; NBR ASYCUDA database

According to the World Bank’s Trade Restrictiveness Index(TTRI) based on MFN tariffs, Bangladesh ranks 97th among125 countries. That perception is based entirely on nominaltariffs and does not include para-tariffs. A recent PRI studyfor the World Bank and WTO (PRI, 2012) found effective ratesof protection5 (ERP) for most import substitute products torange from 100% to over 300%. The ERP computationsacross products and firms now reveal that effectiveprotection rates far exceed NPRs by wide margins because

5 ERP measures the relative change in value added at domestic prices(protective effect on output net of protective effect on inputs) over valueadded measured in world prices.

average input tariffs are well below output NPRs, rangingfrom over 100% for agro-based products like fruit juice, toover 300% for such products as bicycles and plastic bottles.Barring a few products like carbon rods and jute textiles,which are intermediate products, most of manufacturing inBangladesh is concentrated on consumer goods production,all of which have output NPR rates between 50-100% (200%for biscuits!). More important for global competitiveness ofBangladesh’s exports, these high NPR and ERP levels createanti-export bias that has perverse resource allocationimplications. More than NPR, it is the effective protectionlevels that accentuate anti-export bias as they are muchmore pronounced than NPRs. And there seems no indicationthat these levels are on the decline; rather, the trend seemsto be opposite, implying that effective rates of protectionare on the rise. Research and cross-country evidenceregarding protection confirm that (a) protection once givenhas a tendency to perpetuate as producers in protectedactivities develop a vested interest in maintaining it; (b)industries protected for too long become inefficient anduncompetitive at the global level as they have littleincentive to innovate or raise productivity.

If anti-export bias is so prominent in our trade policyorientation, it is pertinent to ask how is it that RMG exportsrose to such heights as to make Bangladesh one of theleading RMG exporters of the world. It goes to the sagacityof our policy makers to have devised a “free trade channel”for this 100% export-oriented sector within an otherwisehigh tariff regime. Aided by the MFA which gave access toworld markets, domestic policies designed exclusively forRMG industry, comprising special bonded warehouse andback-to-back LC, were able to soundly neutralize anti-exportbias of a high tariff regime. Indeed, these policiesconstituted the bedrock of success for this labor-intensiveindustry that symbolized Bangladesh’s strength in low-skillintensive manufacturing, the sort of specialization thatshould spill over to other industries as well.

Customs modernization and trade infrastructure. Sound andefficient trade logistics made up of customs administration,ports (land, sea and air), rail and road communications, andinformation communications technology, are most critical inreducing trade transaction costs and ensuringcompetitiveness of nations. Bangladesh launched customsmodernization very early in the 1990s, introducing customsautomation with UNCTAD’s ASYCUDA package, but thework of customs automation is far from complete as toomuch manual intervention still delays trade transactions. Toget an assessment of where Bangladesh stands with regardto the competitiveness of its tradable products, two globalrankings (Table 2.3) are most relevant: World EconomicForum’s Global Competitiveness Index (GCI) and WorldBank’s Logistics Performance Index (LPI). In fact, the two areinter-related. The state of LPI is a strong determinant of acountry’s overall competitiveness in global trade. The tablebelow shows that Bangladesh has a huge challenge inreducing its trade transactions cost in

0

10

20

30

40

50

60

FY 01 FY 05 FY 09NPR Final Consumer Goods

35.88

23.6530.18

19.42

0.005.00

10.0015.0020.0025.0030.0035.0040.00

2001 2003 2005 2007 2009Consumer Goods Inputs

13











FY 13Avg. NPR Input

16.34 15.41

13.07 11.17

2009 2011Inputs

13











14


Table 2.3: Ranking of Bangladesh and selectedcomparators

Countries World Economic Forum’sGlobal Competitiveness

Index*

World Bank’sLogistics Performance

Index**Bangladesh 110 108Malaysia 24 25Thailand 37 35Indonesia 38 53India 60 54Sri Lanka 65 89Vietnam 70 48Pakistan 137 72

(*) Ranked among 148 countries (2013-14) and (**) 160 countries (2014)Source: World Economic Forum (2013) and World Bank (2014)

the coming years. What is evident is the huge gap in tradeinfrastructure between Bangladesh and some its closecompetitors like Vietnam, India, and Sri Lanka. This suggeststhat Bangladesh needs to pay continued attention to theefficient implementation of infrastructure investments alongwith necessary institutional changes relating to customsadministration, trade finance, and other behind-the-borderfacilities to minimize trade transaction costs.

Table 2.4 shows the progress made by Bangladesh on thecompetitiveness front in the past few years relative to othercountries. While it is evident that Bangladesh has madesome progress in improving its competitiveness ratings, itcontinues to face infrastructure challenges. Most visibleprogress has been made in electricity supply, where thescore has risen significantly to 2.2 from 1.6, therebyincreasing the overall logistics performance index forBangladesh quite noticeably, from 130 in 2010-11 to 110 in2013-14. But the score for a key infrastructure, roads, hasdeclined to 2.8 from 3.0. Railroad has also slightly declined(from 2.5 to 2.4), although the score for Ports slightlyimproved (3.5 from 3.4). On the whole, despite progress, thetrade infrastructure challenge remains enormous.

Table 2.4: Progress with Global Competitiveness

Year

Coun

try

Rank

ing

Ove

rall

Infr

astr

uct

ure

Scor

e

Elec

tric

ity

Road

s

Railr

oads

Port

2013-2014 110* 2.8 2.2 2.8 2.4 3.5

2010-2011 130** 2.7 1.6 3.0 2.5 3.4

Source: 2013 World Economic Forum, the Global Competitiveness Report2013-2014

Bangladesh’s notable progress in improving its globalcompetitiveness needs to be sustained and deepened overtime. Urgent actions in terms of resource allocation andimplementation of infrastructure projects is needed alongwith other “trade facilitation” measures deemed as prioritiesunder WTO’s Bali package of undertakings.

The Way Forward

Bangladesh has come a long way since the early years ofinward-looking import substituting industrialization policiesthat neither led to industrialization nor resulted in anacceleration of economic growth. By changing its policystance to outward-looking export oriented development, itsubscribed to a regime of trade openness, on a gradualrather than radical track. Of course, the change in tradepolicy stance was complimented with a number of marketoriented institutional reforms that included privatizationand de-regulation of investment, exchange rate flexibilityand current account convertibility, and opening up theeconomy to foreign portfolio and direct investment. Theresults are so evident.

For nearly three decades running, our exports have beenclocking annual average growth of some 15%, creatingdomestic employment in export and linked industries ofabout 5 million workers. Though direct causation would bedifficult to establish, the growth acceleration and rapidity ofpoverty reduction that the economy experienced in the lastthree decades can in large measure be attributed to thedeepening of trade openness, which was one of the mostsignificant policy change of this period. If anything, thisexperience tells us that the momentum of trade reformsought to be maintained and even deepened in order tomove ahead in our global competitiveness ranking relativeto our comparator countries.

With that objective, some new thinking and new directionsin trade policy orientation have become the latestimperative. Some of them are listed below:

High protection for a long period createsinefficiency and undermines competitiveness overthe long-term. Consider reviewing protectionpolicy, scale down the level of protection, andinstitute a mechanism of time-bound protection forimport-substitutes.

Bangladesh tariffs, nominal and effective protectionlevels are among the highest in the world. Inaddition, tariff escalation, and the spread betweenNPR on output and inputs is too high. Recognizingthat a high tariff regime undermines exportcompetitiveness, it is time to seriously start scalingback NPR on domestically produced final consumergoods. NBR must adopt a strategy of loweringaverage NPRs by 2-3 percentage points every yearuntil 2021, largely by reducing NPR on import-substitute consumer goods.

The spectacular success of RMG industry has notbeen replicated. A major reason for this is theexistence of anti-export bias in non-RMG exportproduction. To replicate RMG success in other

15


labor-intensive production, the facility of duty-freeimported inputs must be provided even to firmsthat export part of their total production. The policyfor providing duty-free inputs for export productionis not a privilege (or support) but a requirement forall export production in order to be on a levelplaying field with global competitors who haveaccess to world-priced inputs. Export success callsfor a policy environment with no anti-export bias.

98% of Bangladesh’s exports are final consumerproducts with little or no intermediate goods. Tradeand domestic policies have an anti-intermediategoods bias. This needs to change as trade inintermediate goods is the fastest component ofglobal trade. Bangladesh needs to exploit theopportunities created by cross-border productionnetworks to produce and export intermediategoods that could be assembled elsewhere.

Bangladesh is a beneficiary of the multilateraltrading system under the auspices of the WTO. Itstands to gain from the flexibilities accorded underthe special and differential treatment as an LDC.However, while using the special dispensation ofS&D, it must not lose sight of a long-term strategyof deepening its competitiveness in order toprepare for the time when it graduates out of itsLDC status. At the same time, it should alsocontinue seeking market access under the variousbilateral and regional trade and investmentarrangements. What is notable is that it might beeasier to sign on to South-South regionalarrangements, but the greatest gains will comefrom North-South regional communities. In future,apart from emerging market economies,Bangladesh should be looking forward andpreparing to reach trading arrangements with TPP,TTIP, and RCEP, where the bulk of our exportmarkets lie. However, to access those communitiesthrough potential FTAs will require fulfillment ofstringent tariff and non-tariff standards. Unlessrationalized, our tariff regime will become the firstsignificant hindrance to such FTAs.

To conclude, it is time to mainstream trade and trade policy.For trade reform to unleash its catalytic potential it shouldbe designed as part and parcel of Bangladesh’s Five YearPlans and other longer-term Plans, where its role will begiven due cognizance and the necessary facilitatinginfrastructure adequately provided to make trade policyperform. In practical terms, this means incorporating trade

issues into every stage of the development planning cycle.This must be underpinned by strong inter-ministerialcoordination and consultative processes with a wide rangeof stakeholders, including consumer groups.

References

Commonwealth Secretariat (2014). “Trade, Growth and Jobs:Opportunities through Value Chains”. BackgroundPaper on Promoting Regional Value Chains.Marlborough House, London SW1Y 5HX, March2014.

Gereffi G and Frederick Stacy (2010). “The Global ApparelValue Chain, Trade and Crisis: Challenges andOpportunities for Developing Countries”. World Bank.

Gruenwald, P. and Masahiro Hori (2008). ‘Intra-regionalTrade Key to Asia’s Export Boom’, in IMF Survey,International Monetary Fund: Washington.

Jansen, M. and E. Lee (2007). “Trade and Employment:Challenges for Policy Research”, A joint study of theInternational Labour Office and the Secretariat ofthe World Trade Organization. Geneva.

Hoekman, B. and L. A. Winters. (2007). “Trade andEmployment: Stylized Facts and Research Findings”.Chapter in Ocampo et al. (2007).

Krugman, Paul (1986). “Introduction: New Thinking aboutTrade Policy”. In Paul Krugman, ed. , Strategic Tradepolicy and the New International Economics.Cambridge, Mass.: MIT Press.

OECD (2009). “Trade in Intermediate Goods and Services”,OECD Trade Policy Working Papers, No. 93.Paris.

OECD, World Bank, ILO, WTO (2010). “Seizing the Benefits ofTrade for Employment and Growth”. Final reportprepared for submission to the G-20 Summitmeeting in Seoul, 11-12 November, 2010.

Ocampo A., K.S. Jomo and S. Khan, eds. (2007). “PolicyMatters: Economic and Social Policies to SustainEquitable Development”. London and Opus, NewDelhi: Zed Books.

PRI (2012). “Assessment of Effective Rates of Protection. 2012Survey of Manufacturing Industries”. Unpublishedreport prepared for World Bank-WTO DiagnosticTrade Integration Study (DTIS).

PRI (2013). ‘A Strategy for Manufacturing SectorDevelopment’. Unpublished draft submitted toWorld Bank and Planning Commission, underSPEMP project.

Porto, G., and B. Hoekman, eds. (2010). “Trade AdjustmentCosts in Developing Countries: Impacts, Determinants

16


and Policy Responses”. Washington, D.C.: The WorldBank.

Rodriguez, Francisco and Dani Rodrik. (2001). “Trade Policyand Economic Growth: A Sceptic‘s Guide to the Cross-National Evidence”.‖ NBER Macroeconomics Annual2000. Cambridge, MIT Press, pp. 261-324.

Rodrik, Dani, (1997). “Has Globalization Gone too Far?”,Institute for International Economics, Washington,D.C.

Stern, Nicholas (2002). “A Strategy for Development”. TheWorld Bank, Washington, D.C.

Sattar, Z. (2012). “Prospects for and Constraints to ExportDiversification in Bangladesh”. PRI report preparedfor Asian Development Bank.

Schumpeter, J. (1942). “Capitalism, Socialism, andDemocracy”. London: Routledge.

Verhoogen, Eric A. (2008). “Trade, Quality Upgrading, andWage Inequality in the Mexican ManufacturingSector”. Quarterly Journal of Economics, Volume123 Number 2.

World Bank (2005). “End of MFA Quotas: Key Issues andStrategic Options for Bangladesh ReadymadeGarment Industry”. Bangladesh Development Series– paper No.2. Dhaka.

World Bank (2014). The Logistics Performance Index.Washington, DC.

World Economic Forum (2013). The Global CompetitivenessReport 2013-2014.

WTO (2011). “Trade patterns and global value chains in EastAsia: From trade in goods to trade in tasks”. Jointreport of IDE-JETRO and WTO. Geneva.

17


III. Special Economic Zones (SEZs)as Catalyst for Increasing

Private Investment

Dr. Khurshid Alam

Background:

The growth strategy in the Sixth Plan targeted to achieve adouble digit plus GDP growth for manufacturing with a viewto achieving the required structural transformation of theBangladesh economy from a primarily agrarian and informalservices economy to a more modern manufacturing andorganized service based economy. It is well recognized thatBangladesh growth is mostly driven by investment andexports. The Sixth Plan targeted an increase in theinvestment rate growing from 24% of GDP in FY10 to 32%by FY15 (of which private investment targeted to grow from19% of GDP in FY10 to 22.7% in FY13 and 25% by FY15), as acritical driver of growth. Compared with the Sixth Plan’starget increase in investment rate, the actual investmentrate has stabilized at around 27 % of GDP (with privateinvestment at 21.4%) during FY12-FY13. The inability tocross over to the 7% rate of growth of GDP is to a largeextent a reflection of this investment constraint. Theshortfall in the actual rate of private investment from theSixth Plan target rate is significant and growing (Figure 3.1).This is worrisome because the Sixth Plan identified privateinvestment as a major engine of growth and exports,especially in the manufacturing sector. ImplementingSpecial Economic Zones (SEZs) could be one way catalyzingnew desired private sector investments.

Figure 3.1: Private Investment as Percent of GDP--ActualVs Target

Source: BBS

Bangladesh is enjoying a demographic dividend thatpotentially brings in a large working age population as wellas large number of consumers if quality jobs can be createdleading to increased incomes. Both historical and cross-country evidence shows that the prospects of rapid growth

with extensive job creation requires a high-performing anddiversified manufacturing sector which will remain, for sometime to come, the main driver of growth in countries likeBangladesh. The good news is that the share ofmanufacturing is increasing (See Figure 3.2 below), butneeds to accelerate.

Figure 3.2: Progress with Structural Change

Source: BBS

But there is an ever-changing global landscape in whichmanufacturing sector development takes place. Fourdistinct phenomenon characterizes the global setting: (a)globalization and greater trade openness, which hasresulted in the greater integration of the Bangladesheconomy with the global economy, an integration that hasyielded many benefits but also poses many challenges; (b)to be globally competitive, a high performingmanufacturing sector must have reached a high level ofindustrial sophistication meeting internationally recognizedstandards of product quality within a compliant productionenvironment; (c) technology has emerged as the keyresource and input for industrial growth and development;and (d) fragmentation of production and vertical integrationacross countries through trade in intermediate goods is fastbecoming the dominant trading pattern.

This phenomenon has led to a surge in intra-industry trade(which serves as a reflection of greater vertical specializationthat exploits differences in comparative advantage to builda production network targeting foreign markets) creatingglobal value chains (GVCs). In Asia, owing to availability ofcertain specialized skills and trained human resources, ITfirms in India, and electronics firms in China, TaiwanProvince of China, Malaysia and Singapore have successfullyintegrated into GVCs. Given Bangladesh’s success inexploiting the GVC in the RMG sector, it could very well lookfor opportunities to integrate into it and exploit benefitsfrom GVC in other sectors, especially in the production andtrading in intermediate as well as final goods based on itscomparative advantage. This integration can be triggeredthrough FDIs as well as domestic investments, and the SEZscould be the catalyst for attracting such FDI while at thesame time source from domestic supply chain.

20.3 21.7 21.419.5

22.2 22.7 23.8 25

0

5

10

15

20

25

30

FY11 FY12 FY13 FY14 FY15

Actual Target

20.3 18.7 16.617.9 19.5 22.3

61.8 61.8 61.1

010203040506070

FY10 FY13 FY15

Perc

ent o

f GDP

Agriculture Manufacturing Services &Others

18


However, investments, including FDI, could reach thedesired level (e.g. what was stipulated in the SFYP) providedpolicies, regulations, and institutions conducive to betterbusiness environment and improved investment climate.Many countries, to address the investment climate andbetter business environment issues, have successfully usedEconomic Zones as a catalyst for investment; but therationale for their development differs between developingand developed countries. For developing countries, theZones have traditionally had both a policy and aninfrastructure rationale. 6 On the policy side, it includesmeasures meant to boost investment competitiveness andreduce business entry and operating costs, which can be auseful tool as part of an overall economic growth strategy toenhance industry competitiveness and attract foreign directinvestment (FDI)7. On the infrastructure side it can planproviding right type of infrastructure within a limited areamaximizing on economies of scale.

While variants of Economic Zones have been in existence forlong 8 it is the SEZs, which are now seen as more promisingfor triggering desired investments. SEZs have normally thefollowing attributes9: (a) geographically delimited area; (b)single management; (c) eligibility of benefits based uponphysical location within the zone; and (d) Separate customsarea and streamlined procedures. Through SEZs,governments aim to develop and diversify exports whilemaintaining protective barriers (political economy issue), tocreate jobs, and to pilot new policies and approaches (forexample, in customs, legal, labor, and public- privatepartnership aspects). The other big advantage isopportunity to streamline regulatory processes andproviding efficient one-stop service as well as ensuringcompliance with all regulatory requirements like labor,environment, building code, work place safety etc. But forcountries with poor infrastructure, limited land access, it isas important for on-site infrastructure like fully serviced siteswith purpose-built facilities for saleenhancing the competitiveness of manufacturers andservice providers. It isagglomeration benefitsone geographical area. These benefits include efficiencies in

6FIAS Report on SEZs7 Jin Wang, London School of Economics Job market Paper Version ofNovember 2009 – The Economic Impact of Special Economic Zones: Evidencefrom Chinese Municipalities. His research concluded that, the SEZ relatedpolicy package, including private property rights protection, tax breaks andland use policy, increases per capita municipal FDI by 58% in the form offoreign-invested and export oriented industrial enterprises. The report alsofound out it increased municipal foreign owned capital stock and did notcrowd out domestic capital (and investment), and showed that it helped bringin more advanced technology and increased municipality TFP growth by 0.6percentage points.8Special Economic Zones Performance, Lessons Learned, and Implications forZone Development – FIAS Report of April 20089Thomas Farole, GokhanAkinci edited Special Economic Zones – Progress,Emerging Challenges, and Future Directions. The World bank; and FIASReport, April 2008

government supervision of enterprises, provision of off-siteinfrastructure, improved environmental controls. It is theSpecial Economic Zones (SEZs) that has helped manycountries (China, East and South East Asia for example) inovercoming similar business environment and investmentclimate related constraints. SEZs were established by Chinato serve as “demonstration areas” for policy reforms and toencourage foreign investment. The very well knownSchenzhen SEZ provides a snapshot of the impact of theSEZs on China’s economic development. Twenty-threeyears of growth has transformed Shenzen from a smallfishing village to a thriving urban metropolis. In 2003 it hadan export value of $48 billion, $30 billion in FDI, and 3million people directly employed. This all happenedbecause of right policy, good business and regulatoryenvironment. There have also been not so successful SEZs asin the case of Dominican Republic, because of policyreasons. An interesting comparison by Leong10 betweenthe first SEZ of India (Kandala SEZ established in 1965) andthe Chinese SEZ (Schenzen set up in 1980) shows the ChinesSEZ by implementing reforms and trade-liberalizationthrived while in contrast Indian SEZ remained isolated.

The State of Business Environment/Investment Climateand need for SEZs. Bangladesh is deficient in both businessenvironment and infrastructure and SEZs could be a way outover the short to medium term. Over the longer term thesehave to improve across the country. According to WorldBank’s Doing Business Reports, performance rankings forattaining construction permits, getting electricity forbusiness, registration of property suggest that investorscontinue to regard these areas as problematic (See Figure3.3 below). Moreover rankings for getting credit facility,protection of investment, payment of tax and resolution ofinsolvency have worsened relative to other countries. Onthe whole, investors feel that getting electricity, enforcingcontracts and resolving insolvency are serious constraints.

Figure 3.3: Bangladesh 2012 Global PerformanceRanking.

Source: Doing Business 2013

10Leong, C.2007. “ A Tale of Two Countries: Openness and Growth in China

258383

9597

119119

175182185

0 50 100 150 200

Protecting InvestorsDealing with Construction Permits

Getting CreditStarting a Business

Paying TaxesTrading Across Borders

Resolving InsolvencyRegistering PropertyEnforcing Contracts

Getting Electricity

19


In the rankings of global competitiveness index (GCI) also,Bangladesh ranks at 118 in terms of GCI when comparedwith 144 countries in 2012, and compares poorly with mostof its competitors. Comparison of infrastructure amongdifferent Asian countries shows that Bangladesh is quitedeficient in quality of infrastructure to all the countries inTable 3.1 below except Myanmar. It is interesting to notethat Pakistan, which is way below Bangladesh in countrycompetitiveness rankings (133 compared to 110 forBangladesh), is ahead of Bangladesh in quality of overallinfrastructure, roads, and port infrastructure. The twocountries are comparable in electricity and railroadsinfrastructure. It is also important to note Bangladesh’scompetitor country, Cambodia, is not only way ahead incountry rankings, but scores higher in quality of all theinfrastructure services except railroads.

Figure 3.4: Global Competitiveness Index 2012

Source: GCI, 2012.

The two countries are comparable in electricity and railroadsinfrastructure. It is also important to note Bangladesh’scompetitor country, Cambodia, is not only way ahead incountry rankings, but scores higher in quality of all theinfrastructure services except railroads.

Table 3.1: Comparison of Infrastructure Quality 2013-2014

Coun

try/

Regi

on

Ove

rall

Infr

astr

uctu

re S

core

Elec

tric

ity

Road

s

Railr

oads

Port

Bangladesh 2.8 2.2 2.8 2.4 3.5India 3.9 3.2 3.6 4.8 4.2China 4.3 5.1 4.5 4.7 4.5Cambodia 3.9 3.2 3.7 2.0 4.0Myanmar 2.1 2.9 2.4 1.8 2.6Pakistan 3.3 2.0 4.0 2.5 4.5Sri Lanka 4.8 5.0 4.7 3.6 4.2Thailand 4.5 5.2 4.9 2.6 4.5Source: 2013 World Economic Forum, the Global Competitiveness Report2013-2014

Low FDI flow: As a result of the challenging businessenvironment and investment climate, the domesticinvestment effort has been restrained and the flow offoreign direct investment (FDI) has been small relative tocompetitors. Despite some recent improvements,Bangladesh’s average net FDI level of less than 1% of GDP isthe lowest among the regional comparators (Figure 3.5). Itis generally believed that 1-2% of GDP in additional FDIinflows would help GDP growth by about 0.5% on averagewith employment generation of about 150,000 per year inthe formal sector.

Figure 3.5: FDI Inflows as % of GDP

Source: UNCTAD Database 2013

It is in this context that Bangladesh could use Special EconomicZones (SEZs) to pilot regulatory/institutional reforms thatimproves business environment and reduces infrastructurebottlenecks there acting as a catalyst for domestic and foreigninvestments to take advantage of the opportunity that theglobal manufacturing landscape is providing. However, overlong term the focus should be to learn from SEZ experience andimprove the investment climate and regulatory oversightthroughout the country. Bangladesh also has competingdemand on its limited land resource from agriculture/foodsecurity, infrastructure, urbanization, and industry needs.So it is even more important that Bangladesh develop a landuse plan that caters to all of the above needs, and SEZscould be one important input for a broader land use plan.

Setting up SEZs automatically does not make themsuccessful. To a great extent, the fate of zone initiatives getsdetermined from the outset, by the choices made in theestablishment of policy frameworks, incentive packages,and various other provisions and bureaucratic procedures.The experience suggests that maximizing the benefits of zonesdepends on the degree to which they are integrated with theirhost economies and the overall trade and investment reformagenda. In particular, when zones are designed to pilot legaland regulatory reforms within a planned policy framework,they are more likely to reach their objectives11.The success ofzones is also critically linked to how they are developed,managed, regulated, and where located.

11FIAS Report, April 2008

118

59

29

68

0

20

40

60

80

100

120

140

BD India China Sri Lanka Vietnam

19




Source: GCI, 2012.



Coun

try/

Regi

on

Ove

rall

Infr

astr

uctu

re S

core

Elec

tric

ity

Road

s

Railr

oads

Port








75

124

Sri Lanka Vietnam Pakistan

1.00

3.652.17

0.00

2.00

4.00

6.00

8.00

Perc

ent o

f GDP

2007-12 (Avg.)

19




Source: GCI, 2012.



Coun

try/

Regi

on

Ove

rall

Infr

astr

uctu

re S

core

Elec

tric

ity

Road

s

Railr

oads

Port








2.17 1.80 1.46

7.212007-12 (Avg.)

20


Management of zones is enhanced when they are operatedon a cost-recovery rather than a subsidized basis, and aremarket-oriented and customer-focused. This aspect is likelyto be more effective if zone development and operation areundertaken by private sector groups on a commercial basis,rather than by government organizations that frequently aresubject to political pressures and funding constraints.Another major factor contributing to the outcome of thezone program is the autonomy and effectiveness of thebody charged with regulating zone operations. While a widerange of institutional arrangements have been used,international experience suggests that success is dependenton the autonomy of the body; adequate funding; customerorientation and ethos; ability to provide one stop regulatoryservice; partnerships with private zone operators andenterprises; and maximizing the role of the private sector inservice provision.

However, given the regulatory environment prevailing inBangladesh, especially institutional capacity, it needs to beimplemented carefully lest the privately licensed zones changecourse and there is inadequate oversight to effectively enforceregulatory compliance. The caution is because Bangladesh isa land-poor country and land market speculation is an issue.Besides, any rapid proliferation of private zones can alsoplace significant, unanticipated costs on governments,especially in terms of offsite infrastructure and facilities, asexemplified by the Dominican Republic, and more recentlythe Philippines and Vietnam12.

Economic Zones in Bangladesh

Bangladesh is not new to setting up of Economic Zones.The Bangladesh Export Processing Zone Authority (BEPZA)as an institution has evolved since the 1980s, successfullydeveloping, maintaining EPZs, and providingfully servicedland and a better business environment for investors,targeting establishment of large-scale export-orientedmanufacturing industries in the country. But, the EPZ Modelhas its limitations in terms of creating spillovers to thedomestic economy. In 2010, the Government rightly felt theneed to further broaden the horizon of zones to optimize itsbenefits, particularly taking lessons from China and othersuccessful East Asian countries and passed the BangladeshSpecial Economic Zones Act 2010.

The SEZ Act 2010 draws vastly on successful examples fromaround the world, as well as Bangladesh’s positiveexperience with the EPZ model. As stipulated under the Act,the Government has also set up a new institution, theBangladesh Economic Zones Authority (BEZA)13. The

12 Special Economic Zones, World Bank13There seems to a proliferation of Zones Authorities, which raisesinstitutional challenges. Besides BEPZA and BEZA, the Government has alsoset up the Hi-Tech Park Authority (HTPA) to develop IT related Zones.Beyond these there is the BSCIC, which has for long building and runningIndustrial Estates. There is also a separate Private EPZ Act governing theKorean EPZ, administered by a Private EPZ Cell located in PMO.

expectation is that under the new SEZ paradigm, with aregulatory authority in place, there will be quickimplementation of new Zones so that local firms canharness spill-over impact from Foreign Direct Investment(FDI), and in the process additional investment can beencouraged within value chains, more local productsprocured and better linkages could be established betweenfirms and educational institutions (easily available skilledmanpower is important for success of SEZs). The Act also hasprovisions for private and PPP based zones, and hasprovisions adaptation to required environmental and socialpractices through rules, streamlined regulations, andinstitutional setup. It will allow the Government to developand pilot an approach that is less reliant on Governmentsubsidies, while leveraging comparative advantages andprivate sector capability wherever possible. Morespecifically, the SEZ Act 2010 has the following strategicprovisions14:

Establish one law to govern all economic zone programs inthe country;

Create a broader and more flexible model for zonesallowing exports as well aslocal sales;

Bring larger areas under special regimes, which mayinclude existing EPZs andindustrial estates;

Set clear and objective criteria for site selection andmandatory feasibility studies to eliminate discretionarypowers and erratic decision making;

Facilitate an increased role of the private sector inownership, management,and operation of zones;

Allow a light-handed approach to the regulation of zones; Ensure that all zones are operated on commercial

principles and the market todrive the price of services; Allow the conversion of any zone into an SEZ with

parameters fulfilled; Make a provision for declaring large geographic areas to be

brought under special administrative and incentiveregimes to allow “brownfield” approach

Institutional capacity a challenge for BEZA: While the Act2010 has been passed, with BEZA in place, and some initialwork undertaken, yet till now no new Zone could be set upunder it. Meanwhile, there has been some effort by BEZA toget some licenses issued, conduct feasibility studies, anddevelop PPP contracts15. While the Act has been place, therules and regulations in support of the Act is yet to bepublished. This is important for potential investors.Meanwhile, BEZA has put on its website guidelines forselecting bidders through PPP for two of its identified SEZsites at Mongla and Sirajgonj. It is detailed and with EOI, RFPand selection criteria. It has also standard license andlicense process spelt out.

However, as with any PPP, it is important to have feasibility

14 Thomas Farole,GhokanAkinci, Special Economic Zones-Progress, EmergingChallenges, and Future Directions, World Bank15The PSD Support project of the World Bank is supporting BEZA and HTPAinstitutional capacity building and infrastructure financing for setting up ofZones.

21


studies completed before the bidding takes place; yet, it isnot clear if this has been done in the case of proposedMongla and Sirajgonj SEZs. As will be evident from Table 3.2below, among the existing EPZs the Mongla EPZ of BEPZA(located adjacent to the proposed Mongla SEZ site) hasbeen the least successful with very minor level ofinvestments. So if Mongla EPZ is not working, why shouldMongla SEZ work? So BEZA will have to adequately addresssuch locational and other feasibility related issues to seesuccess. It is welcome, however, that recently, feasibilitystudy on three other sites, Mirershorai and Anwara inChittagong and Sherpur in Sylhet, has been undertaken.The challenge will be for BEZA to go through a steep learningcurve, develop its institutional capacity, and move this processforward in a transparent way so that genuine zone developerssee it as a competitive process, and respond to the bids.

What can we learn from BEPZA experience?

Quick Implementation capacity and Innovations tofacilitate sustainable investments: BEPZA, on the otherhand, has gained institutional maturity and experience fromimplementation of the most successful EPZs in Dhaka andChittagong ,and also not so successful EPZs in other parts ofBangladesh, particularly Mongla EPZ. Lessons from BEPZAexperience and using their institutional capacity could beone way of jump-starting the setting up of SEZs. BEPZA, toensure 24/7 quality power supply, innovativelyimplemented PPPs in power generation, and for ensuringenvironmentally sustainability used PPPs to build EffluentTreatment Plants (ETPs), and water treatment and supply ofquality water in CEPZ and DEPZ. BEPZA takes a premium of15% over the bills payable for each of these services by theenterprises. There are also spill overs in betterenvironmental management and regulation within CEPZand DEPZ; the excess electricity generated thought itsprivate plants are sold to the grid in the evening, therebyacting as peaking plants in Savar and Halishar industrialregions. BEPZA for ensuring better labor relationshipimplemented another innovative program through its laborcounselors. It is evident from that that institutional capacity,and experience in zone related activities are important ingetting results.

Zone Location: From Table 3.2 below it is evident thatthere are successful EPZs and also not so successful EPZs.The most successful EPZs are in the Chittagong and Dhakaregions. This becomes apparent when we see that theKarnaphuly EPZ in Chittagong and the Adamjee EPZ inNarayanganj (greater Dhaka), which were last EPZs built byBEPZA, have already surpassed in terms of employment,investments, and exports compared to EPZs in other regionswhich were set up much earlier. While Chittagong hasparticular advantage of being a port area, the same did nothappen in the case of the other port, Mongla. In fact theMongla EPZ has the weakest performance in terms ofemployment, investments and exports. BEPZA implementedthe non-successful EPZs to meet political economy need of

spreading out zones in other regions. So location is animportant ingredient to achieving success, and decision onlocation should follow economic and business principles. Itwill be important that atleast the first few SEZ should be asuccess and the location should where it is most likely toattract investors.

BEPZA’s success in converting lossmaking SOE’s intosuccessful EPZs in short time: BEPZA has not been able toexpand, as Government, for some time, has not beenallocating public funds for new EPZs. However, in 2005 and2006, the Government handed over two loss making closedState Owned Enterprises (Adamjee Jute mills and theChittagong Steel mills) to BEPZA to convert to EPZs. BEPZAquickly moved in and set up the Adamjee EPZ andKarnapuly EPZ. When Adamjee was closed it was makingannual loss of over Taka 100 crore each year and it had25,000 permanent/temporarily employed. Besides, both theSOEs had huge debt with the state owned banks and thepower company (PDB). Today Adamjee EPZ has 61 privateexport oriented enterprises. It has 33,000 directemployments as of April 2014 (expected to go over 100,000once all allotted enterprises are fully constructed), and inseven months (July 2013 to February 2014) exported USD250 million (expected to reach USD 1 billion each year onceall the enterprises are fully constructed). There is an evenbetter story in the case of Karnaphuly EPZ (formerlyChittagong Steel Mills) where 58 enterprises are operating,over 41thousand direct employment (expected to go over100,000 once all the enterprise construction is complete),and in seven months of this fiscal year (July 2013- Feb 2014)generating exports USD 326 million (expected to reach USD1 billion annually once all enterprises are constructed).

22


Table 3.2: Performance of BEPZA - EPZsCh

itta

gong

Dha

ka

Com

illa

Pabn

aIsh

war

di

Nilp

ham

ari

Bage

rhat

Mon

gla

Tota

l

CEPZ

KEPZ

DEP

Z

AEP

Z

Com

EPZ

IEPZ

UPE

Z

MEP

Z

Year Set up 1980

2006

1993

2005

2001

2000 2000 2000

Size of EPZsHectares

183

109

140

119

108 125 93 186

ExportsMillion USDJuly2013-Feb2014 (7months)

1,471

326

1,250

250

135 53 20 20 3,525

EmploymentActual (April2014)

184,438

42,719

89,164

33,073

15,165

6,332 11,292 1,704 383,887

Employment -Proposed byinvestor

223,401

141,452

106,499

158,588

99,562

61,781 52,940 26,573

No. ofEnterprisesexisting (April2014)

184

58 108

61 65 32 23 32 563

ExistingForeignOwned

94 36 69 32 35 12 9 12 299

Existing No.JVs (April2014)

24 4 17 13 12 4 2 7 83

Existing No.of LocalEnterprise(April 2014)

66 18 22 16 18 16 12 13 181

ClosedEnterprisessincebeginningand replacedlater (up toApril 2014)

5 4 28 21 7 4 3 12 84

ProposedInvestmentMillion USD

980

985

1,347

902

667 424 289 230 5,824

ActualInvestmentMillion USD

1,155

289

1,008

238

188 75 55 13 3,021

Source: BEPZA. CEPZ -Chittagong EPZ, KEPZ –Karnaphuly EPZ, DEPZ-Dhaka EPZ,AEPZ-Adamjee EPZ, Com.EPZ-Comilla EPZ, IEPZ-Ishwardi EPZ, UEPZ-Uttara EPZ,MEPZ-Mongla EPZ

Experience of the first private EPZ in Bangladesh: TheKorean EPZ– its success or failure could impact futureprivate/PPP SEZ investments. Youngone Corporation, set upthe first private EPZ (known as Korean EPZ) under a separate“Private EPZ Act 1996”. Youngone is a Republic of Koreaconglomerate that has been operating in the BangladeshEPZs since the early 1980s. It is one of the largest and mostreputable companies in BEPZA’s zones, with at least eightcompanies operating in textiles, garments, footwear,sportswear, and plastics. There is a Private EPZ Cell locatedin the Prime Ministers Office (PMO) to administer the KoreanEPZ. The Government, in mid-1990, facilitated YoungoneCorporation in purchasing 2,500 acres of land in Chittagongto build the Korean EPZ in the mid-1990s. The landacquisition was done as per law by the designated

government agency, i.e. Deputy Commissioner’s office,Chittagong. This was an important step since given that landtitle can be difficult to ensure without such governmentintervention.

The land has since been prepared and the site has beenzoned. Equipped with housing, hospitality, independentjetty, and an 18-hole golf course, the Korean EPZ is designedto host an array of activities and service within itsboundaries, including both light and heavy industry. Themaster plan for the project estimates that it will attract US$1billion in investment, resulting in at least 100,000 jobs andUS$1.25 billion worth of exports.

While the land acquisition and handing over to Youngonewas completed efficiently and in a short span of time, thenext steps took long. The process of establishing the EPZhas proceeded far from smoothly. Licensing of this EPZtook almost eight years and an operational license was onlyobtained in May 2007. This delay is also attributed toproblems in gaining environmental clearance, bureaucraticprocedures including completing land transfer deeds, andinadequacy in the institutional structure to support privatesector zone development. In addition, the project sufferedlong delays because of the inability to access electricity andgas supplies.

One aspect that becomes apparent is that even though KoreanEPZ was rolled out with cover of a law, there have been lackinstitutional and regulatory clarity as to how EPZ can becomeactually operational. While there is a “Private EPZ Cell” in thePMO to administer there is no means of providing one-stopservice to facilitate the developers’ needs. BEZA has been set upto facilitate SEZs including private SEZs. The option of bringingthe Korean EPZ within BEZA’s regulatory purview could belooked into as a possible way overcoming institutionalbottlenecks.

International experience has shown that countriesembarking on private SEZ development often find it difficultto reconcile the divergent functions of zone management,regulation, and investment promotion16. Conflicts ofinterest could arise when regulatory bodies are alsoengaged in zone development activity, especially whenexisting public zones would directly compete against newprivate zones. This element could have affected theimplementation of the Korean EPZ. Opportunities forperceived and actual conflicts of interest have to beavoided through institutional and regulatory measuresso that investors find it good enough to invest in Zonedevelopment.

Success or failure of the Korean EPZ could have far reachingimpact on future of SEZs in particular and overall FDI flows inparticular. There are now rumors that on the pretext of delayin getting the Korean EPZ operational, there may be a move

16FIAS Report 2008

23


to reduce the amount of land in their possession. Whileactions for non-performance can be taken, it needs topursued carefully, within the cover of law and also keepingin mind the negative perception that might be created onfuture FDI. There are also lessons to be learnt by BEZAspecially the causes of the long delay in getting factoriesinto this private zone even though it has long beendeveloped, and the fact that the sponsor company hassuccessfully been in operation CEPZ and DEPZ sinceearly 1980s.

The Way Forward for SEZ program to get desiredinvestments in manufacturing. The success of the SEZprogram will depend in overcoming the institutionalconstraints, conducting feasibility studies and on that basisidentifying the Zone areas that would be in locations investorsfind feasible, developing proper model licenses, contracts,having transparent rules and regulations for implementing theAct, having in place a good procurement team; and to showsome immediate success converting closed/loss making SOEsinto SEZs preferably through BEPZA. The issue of perceived oractual conflicts of interest that could arise from being bothregulatory bodies and also being engaged in zonedevelopment activity will have to be overcome through properpromulgation of rules and regulations.

The best option would be to have one Regulator of allZones thereby merging Regulatory Functions of BEZA,BEPZA, HTPA into one body. The public Zones then couldremain under one development and management body.However, this sort of merger is not easy in the context ofBangladesh’s public sector management. So, given theinstitutional under-capacity of BEZA, another option couldbe to let BEPZA do the development of PPP/Public Zonesunder the new Zones Act, while BEZA acts as the regulatorand licensing authority.

Some Specific Actions for getting SEZ agenda movingforward so as to leverage private resources throughlicensing and developing private and PPP based SEZsare as follows:

Issue the necessary Rules and Regulations needed forimplementing the SEZ Act 2010.To facilitate theprivate/PPP zones will require the development of anappropriate regulatory, and institutional framework,including:

A public-private partnership framework for zonedevelopment, outlining rights, responsibilities,obligations, and commitments of all parties withrespect to all aspects of zone development,financing and operation, regulation, andpromotion. This should be in conformity with PPPregulation that exists.

Implementing land use planning and zoningefforts in defined areas for industrial andcommercial development to guide the actions of

private developers. Developing zone designation criteria in the zone

law and implementing regulations to ensure thatprivate zones are conveniently located (nearpopulation centers and transportation hubs) andminimize offsite infrastructure developmentexpenditures of government.

The success of BEZA will greatly depend on its capacity tomanage implementation of PPP based zones. It needs towork closely with PPP Office for it. Besides, it should findways of leveraging BEPZA experience in not only Zonedevelopment but also the PPPs implemented by them intheir EPZs.

Since BEZA has mandate to license private Zones, it willbe important to understand the constraints/regulatorychallenges facing the Korean EPZ and introducemeasures to overcome those in case of private SEZlicenses that they will be issuing.

Complete the feasibility studies undertaken by BEZA.Based on the conclusion of feasibility studies immediatelydeclare the territories as zones. The choice shoulddefinitely take the location issue into considerationbecause the fist few zones should be successful withgood anchor companies who would give positive globalsignal on Bangladesh investment climate.

In order to jump start the process, one option could bethat BEPZA on behalf of BEZA undertakes the initialtasks(including supervising the feasibility studies,location selection, PPP contracting)of setting up firstone/two SEZs and then hand over to BEZA for regulatingthem.

While BEZA is strengthened, BEPZA also needs to begiven space to implement zones (given that lot ofForeign investments are scoping Bangladesh asinvestment destination). One option, will be to hand overloss making SOEs to BPZA to convert to Zones on morecommercial footing (lease rent for example) and use PPPoption for delivering as much of the services (ETP, Power,Water, built up buildings for rent etc.) For example, allowBEPZA to take over GE immediately (200+ acres next toKarnaphuly EPZ) and convert to an Economic Zone with aPPP model. The land lease rents will be more commercial,other regulatory issues will get more streamlined here.

There needs to be real effort to see that Korean EPZ be asuccess. The option of bringing Korean EPZ under BEZAcould be explored.

Given the difficulty in building new institutions and alsohaving different institutions (BEZA, BEPZA, HTPA, PrivateEPZ Cell, BSCIC) pursuing the same goal under differentparadigms, it would be optimum for a country likeBangladesh to have one Authority regulating the entirezone development program, be it private, public, or PPP.One challenge will be to separate regulatory authorityfrom development.

24


Conclusion

Bangladesh is a land-constrained country. Besides it needsto find ways to reduce regulatory hassles and infrastructurebottleneck faced by investors. With growth the demand forindustrial land will continue to rise. At the same time landalso needs to be preserved for its agriculture, urbanizationand other needs. So zoning of land can lead to moreefficient land use. Similarly more streamlined regulatoryprocesses could be piloted in smaller areas like SEZs, whichwould have necessary infrastructure to make industriescompetitive. Such zones could potentially bring in FDI thatcould help link Bangladesh to the GVC and in the processdiversify its export base. It is in this context the SEZ plan ofthe government backed by the PPP agenda could becatalytic for desired investment growth. However, theinstitutional constraints surrounding BEZA and the multipleAuthorities pursing the same objective with different levelsof capacity will have to be overcome.

25


IV. The Infrastructure Challenge inBangladesh: Progress and

Issues

Sadiq Ahmed17

Background and Overview

In the globalized environment of trade and investments it ismost important for countries to be competitive in order tobenefit from trade and attract foreign investment. Thequality and affordability of physical infrastructure is a keyinput for strengthening competitiveness. The Sixth FiveYear Plan (SFYP) of the Government of Bangladeshrecognized this challenge and put considerable emphasis tothe development of electricity, energy and transport18. TheSixth Plan strategy consists of three main elements:

A massive public investment drive to narrow asmuch as possible the large infrastructure gapthrough critical investments, especially in electricityand road transport.

Develop a public-private partnership (PPP) programto encourage private investment opportunities ininfrastructure.

Reform public utilities and other infrastructure-related service agencies to strengthen theirfinances, improve procurement policies andenhance project implementation capacities.

This paper reviews briefly the progress made ininfrastructure development in recent years and providessuggestions for moving forward. The paper is organized asfollows: Section B looks at the Bangladesh infrastructurechallenge in the global context. Section C reviews progressin the energy sector and identifies the major gaps. Section Ddoes the same for the transport sector. Section E looks atthe financing aspects of infrastructure. Finally, Section Fprovides some recommendations for the future.

Bangladesh Infrastructure Challenge in the GlobalContext

The World Economic Forum regularly updates countrycompetitiveness rankings based on 12 pillars. Infrastructure(energy and transport) is a key pillar. Comparison ofinfrastructure among different Asian countries shows thatdespite progress Bangladesh is still deficient in terms of thequality of infrastructure in regards to all the countries shownin Table 4.1 except Myanmar. Even Pakistan, which is waybelow Bangladesh in country competitiveness rankings (133

17 Sadiq Ahmed is Vice Chairman of the Policy Research Institute ofBangladesh. He can be reached at [email protected] Government of Bangladesh (2011). The Sixth Five Year Plan.

compared to 110 for Bangladesh), is ahead of Bangladesh inregards to the quality of its roads and port infrastructure.The infrastructure gap is especially large with competitorslike Sri Lanka, India


Coun

try/

Regi

on

Coun

try

Rank

ing*

Ove

rall

Infr

astr

uctu

re S

core

Elec

tric

ity

Road

s

Railr

oads

Port

Bangladesh 110 2.8 2.2 2.8 2.4 3.5India 60 3.9 3.2 3.6 4.8 4.2China 29 4.3 5.1 4.5 4.7 4.5Cambodia 88 3.9 3.2 3.7 2.0 4.0Myanmar 139 2.1 2.9 2.4 1.8 2.6Pakistan 133 3.3 2.0 4.0 2.5 4.5Sri Lanka 65 4.8 5.0 4.7 3.6 4.2Thailand 37 4.5 5.2 4.9 2.6 4.5Source: 2013 World Economic Forum, the Global Competitiveness Report2013-2014; Rankings among 148 countries. The rankings are indescending order with “1” as the best performer.

and Cambodia. This suggests that Bangladesh needs to paycontinued attention to the efficient implementation ofinfrastructure investments along with necessary institutionalchanges relating to implementation, regulation, and policyformulation.

Table 4.2 shows the progress made by Bangladesh in thepast few years relative to other countries. While it is evidentthat Bangladesh has made some progress in improving itscompetitiveness ratings, it continues to face infrastructurechallenges. Most visible progress has been made inelectricity supply, where the score has risen significantly to2.2 from 1.6, thereby increasing the overall performanceindex for Bangladesh quite noticeably, from 130 in 2010-11to 110 in 2013-14. But the score for a key infrastructure,roads, has declined to 2.8 from 3.0. Railroad has also slightlydeclined (from 2.5 to 2.4), although the score for Portsslightly improved (3.5 from 3.4). On the whole, despiteprogress, the infrastructure challenge remains enormous.

Table 4.2: Bangladesh Progress with GlobalCompetitiveness

Year

Coun

try

Rank

ing

Ove

rall

Infr

astr

uct

ure

Scor

e

Elec

tric

ity

Road

s

Railr

oads

Port

2013-2014

110* 2.8 2.2 2.8 2.4 3.5

2010-2011

130** 2.7 1.6 3.0 2.5 3.4

Source: 2013 World Economic Forum, the Global Competitiveness Report2013-2014* Rankings out of 148 countries; ** Rankings out of 139 countries

26


Energy Sector Progress and Issues

The energy sector consists of electricity, gas, coal, liquid fuel,wind energy, solar and other non-petroleum fuel. These areall interlinked with the main focus on generation ofelectricity and the two primary fuels, gas and coal. Thecritical role of assured supply of electricity at an affordableprice for social and economic development is universallyrecognized. The Government of Bangladesh has identifiedpower supply as a major constraint on GDP growth, privateinvestment and overall economic development. It has,therefore, adopted a strong and well-rounded reformprogram to increase the supply of electricity involvingsubstantial investment, sector reforms and regional trade.The key elements of the Government’s power sectorstrategy are:

A rapid growth in electricity production,distribution and consumption.

Mobilizing private investment in electricityproduction.

Enhancing the availability of primary fuel based onexpansion of gas and coal production.

Improving power sector efficiency by reducingtransmission and distribution losses.

Improving power-pricing policy for better demandmanagement and for reducing the burden on thenational budget.

Exploring electricity-trading options with neighbors(India, Nepal and Bhutan).

Electricity installed capacity, production andconsumption: The trend in installed power capacity isshown in Figure 4.1. Between June 2009 and September2013, total installed power capacity increased from 5166MW to 9598 MW. This amounts to an annual growth rate of17% per year as compared with less than 5% in the decadeof FY98/99- FY08/09. The installed capacity furtherincreased to 10,213 MW in November 2013 mainly due tothe commissioning of 500MW of power imports from India.This is a massive increase in installed capacity within a 4 yearperiod that is unprecedented in the history of Bangladesh.As a result of this growth in installed capacity, powerproduction increased from 26,533 GWh in FY08/09 to 38,229GWh in FY12/13, which is a growth of almost 10% per yearas compared with 6% per year in the decade of FY98/99-FY08/09. Combined with the expansion of transmission anddistribution networks, the population’s access to electricityincreased from 47% to 62% between FY08/09-FY12/13.

Figure 4.1: Recent Trend in Installed Capacity (MW)

Source: Power Development Board

Per capita electricity consumption increased from 165 KWhto 226 KWh over the same period. On the whole, thesenumbers suggest an impressive performance in electricityproduction, distribution and consumption over the past 4years.

Mobilization of private investment in power generation:Mindful of the financial constraints in the public sector, theGovernment aimed to secure a substantial increase in powergeneration from the private sector based on its PrivateSector Power Generation Policy (PSPGP). The PSPGP wasapproved in 2006. The record shows a substantial increase innew generation from private sources (Figure 4.2). Forexample, the share of private power supply in terms ofinstalled capacity increased from 26% in FY2008 to 42% inFY2013. Along with 500 MW of imports, the total share ofprivate power supply reached 48% in November 2013. Thiscontribution of private sources to increased power supply inthe past 4 years is impressive.

Figure 4.2: Installed Capacity by Ownership


Electricity trade with neighbors: The Government hasbeen discussing electricity trading options with all three

0

2000

4000

6000

8000

10000

12000

FY98

FY99

FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

0

20

40

60

80

Public Private IPP Rental

Perc

et

FY2008 FY2013

27


neighbors – India, Bhutan and Nepal. It is well known thatBhutan, and Nepal in particular, have tremendous hydro-power potential and Bangladesh can gain from trade withthese two countries. India, overall, is an energy deficitcountry. It buys hydro-power from Bhutan and is alsoactively seeking large-scale hydro-power purchase fromNepal. Even so, there is significant scope for Bangladesh topurchase power from India. Owing to its geographicallocation, Bangladesh can buy power by connecting toIndia’s power grids in the North-eastern part where there isan energy surplus. This option has been actively pursued byBangladesh and the first purchase, with an initial transfercapacity of 500 MW, based on grid connectivity betweenBehrampur in India and Behramara in Bangladesh hashappened in November 2013. This is a welcomedevelopment and sets a good example for future trade. Onthe whole, this element of the power sector strategy is ontrack.

Concerns in spite achievement of key results: Whilegeneration capacity has increased remarkably with visibleincrease in private generation capacity and through energytrade, this has also led to an unforeseen development – ahuge increase in the marginal cost of electricity. Much ofthe additional private electricity supply has come fromrental plants that supply electricity to the national grid at amuch higher unit cost than from other sources. For example,in FY10/11 the average generation cost of BPDB plants wastaka 3.19/KWh while for rental power it was taka 8.05/KWh,which was 150% more expensive.

Fuel mix and primary fuel supply: Bangladesh powersector is heavily reliant on gas. In FY09, some 83% of power-installed capacity was gas-based; some 5% was coal based;4% was hydro-based; and the remaining 8% was fuel oilbased (Figure 4.3). With competing demands for gas andconstrained supply, the share of gas-based electricity supplyfell to 65% in November 2013. The contribution of hydroand coal were already negligible; they fell further (2.3% and2.5% respectively) in November 2013. Some 5% of powersupply is import based; and the remaining 25% is now fueloil-based.

The rapid growth in the share of oil-based power supply-from only 8% in FY09 to 25% in November 2013- is areflection of a major primary fuel constraint in Bangladesh.Gas supply is increasingly getting constrained relative todemand. There is now a severe rationing of gas. Eventhough priority has been given to power sector, which hascome at the expense of fertilizer production, the gallopingdemand for primary fuel in power production faroutstripped gas supply. Coal mining has not proceededowing to the lack of a coal policy. Overall, there is anabsence of a strategic long-term view about how thegrowing needs of primary fuel will be met in the next 10-20years. It appears that the increasing reliance on imported

fuel oil will likely continue that could exert considerablepressure on the balance of payments and the budget. Thisis a serious long-term challenge and a major weakness withthe implementation of the Government’s overall energypolicy.

Figure 4.3: Installed Capacity by Fuel Type


Energy pricing policies: The establishment of theBangladesh Energy Regulatory Commission (BERC) in 2003-2004 improved power tariff setting mechanism. Tariffs nowget adjusted fairly regularly in accordance with establishedBERC guidelines. Even so, the gap between the average costof electricity production and the average selling priceremains large.

The substantial reliance on rental power and the growingshare of fuel oil in power generation have played havoc onthe average generation cost of power and have severelystrained power sector finances. The average cost of powersurged from taka 2.68/KWh in FY10 to taka 4.20/KWh inFY11, which amounts to a galloping 57% increase in oneyear. The BERC responded by increasing bulk average tariffby 7.3%. Yet, the cost increase swamped the small priceincrease. The average sales price amounted to taka 2.5/KWhleading to a loss of taka 1.70/KWh. As a result, total powersector loss amounted to taka 46.2 billion in FY11, comparedwith taka 8.3 billion in FY09. Average electricity tariffs havebeen raised by BERC a number of times during 2012 and2013. Yet, the gap between the cost of electricity per KWhand the average tariff paid by consumers remains large. Theresulting financial losses have created substantial pressureon the national budget (Figure 4.4). Thus, the electricitysubsidy bill increased from taka12 billion in FY10 to taka 60billion in FY12. The subsidy amounted to taka 52 billion inFY13.

0

20

40

60

80

100

Gas Furnace OilDiesel Hydro Coal ImportsPe

rcen

t

FY2009 FY2013

28


Figure 4.4: Power Subsidies (Taka billion)

Source: Ministry of Finance

Electricity is not the only energy product that faces a pricingchallenge. Fuel oil and gas also have major pricing issues. Inthe case of fuel oil, the big challenge is the pricing of diesel.Despite numerous adjustments, the gap between averagecost and price is substantial. Given the large volume ofdiesel consumption, the losses from the Government’s fueloil operations are enormous. The subsidy on account of fuelamounted to taka 152 billion in FY13. In the case of gas,there is no net financial loss because gas is produceddomestically. But gas prices are very low in relation to theopportunity cost in terms of imported-fuel equivalence. Ifelectricity were to be priced based on the full cost of oil andthe opportunity cost of gas, the economic cost of electricityper KWh would be much higher and the resultant electricitysubsidy in economic terms would also be much higher.

Even without accounting for the economic price of gas, totalenergy subsidies amounted to taka 204 billion in FY13,which is almost 2% of GDP. This subsidy excludes capitalinvestments financed entirely from the national budget,which amounted to taka 100 billion in FY13. The total gap inenergy sector finances was taka 304 billion, which is about3.0% of GDP. Research shows that much of the energysubsidies benefit households that are not poor. As such,there is a huge policy issue relating to proper pricing ofelectricity, fuel and gas.

Progress with institutional reforms: Good progress hasbeen made in several institutional reforms. Billing andcollections have improved vastly; account receivables havebeen reduced; O&M practices have improved helping lowerT&D losses. Nevertheless, there are several areas wherefurther efforts are needed. These include: continueunbundling of power sector institutions along the functionalline; carry out corporatization of generation anddistribution; strengthen generation and distributioncompanies already in place to improve operatingperformance and customer satisfaction; implement thepower sector restructuring plan; upgrade electricity price

gradually to cost level and strengthen BERC to be able toperform its agenda on licensing, energy pricing, quality ofutility performance including energy efficiency, andconsumer satisfaction/dispute resolution. The ongoingpower generation expansion strategy (PSMP -2010) needs tobe made consistent with a strategy for competitive selectionof least-cost generation plants in public and private sectors.Power utilities need to acquire the capability to timely andefficiently implementation of large contracts. Rapidconclusion of procurement can help bring in largeinvestments in the power sector especially in generation.

Transport Sector Progress and Issues

The transport system of Bangladesh consists of roads,railways, inland waterways, ports, maritime shipping, and airtransport. Among the different modes of transport, roadtransportation has become the dominant mode, carryingover 70% of passenger and 60% of freight traffic. The SFYPrecognized the importance of transport sector and hasprovided the strategic framework for a more efficient andbalanced multimodal transport system along with regionalconnectivity that helps improve the competitiveenvironment of the country. Some of the strategic goals forthe transport sector include:

Undertaking an optimal mix of “market integrationapproach” and “poles of development approach”through development of five main corridors:Dhaka-Chittagong, Dhaka-Northwest, Dhaka-Khulna, Dhaka-Sylhet, and Khulna-Northwest.

Building an integrated transport network byconstructing Padma Bridge at Mawa-Janjira point.

Reinforcing the above by a rural transportdevelopment strategy that hinges on integratinginland water transport with existing road transportsystem.

Improving connectivity with neighboring countriesthrough development of inter-modal transportnetwork.

Improving resource mobilization throughintroduction of user charges and fees in the entiretransport network.

Ensuring deficit free operation of BangladeshRailway.

Improving on transport safety standards to reduceincidence of accidents.

Increasing private participation in the transportsector through the PPP framework.

The transport sector strategy in SFYP was built aroundachieving an overall target of 7.5% annual GDP growth inthe transport sector to help achieve the Plan’s desiredaverage growth target. The Government has also been

0

10

20

30

40

50

60

70

FY2010 FY2011 FY2012 FY2013

Taka

bill

ion

29


allocating significant resources through the ADP. However,unlike the power sector, the transport sector has not beenup to speed. The performance of the transport sectorcontinues to lag in spite of growth in the sector thoughsome visible addition of new infrastructure in Dhaka andChittagong. This weak performance gets reflected in theGCI for 2013-2014, which shows deterioration in the scoresfor both roads and railway sectors since 2010-2011 signalingthe better progress in other countries.

Roads and Bridges

The specific targets of the Roads and Highways Department(RHD) in the SFYP are: (i) to develop, maintain, and managestrategic road corridors, linking rural areas with National andDistrict roads; (ii) improve Dhaka-Chittagong highway to sixlanes, and other National Highways and corridors to 4/6lanes; (iii) construct bridges tunnels, overpasses, flyovers;and (iv) take measures to reduce road accidents. Whilevarious road networks and bridges are being constructed,and initial work for connectivity to the Asian Highwaynetwork has started, overall implementation is slow. Forexample, work on improving the major corridor of Dhaka-Chittagong highway has fallen behind schedule. The slowprogress in completing major roads construction andimprovement may not help achieve the desired optimalinter-modal transport mix of the transport strategy.

In specific terms, the RHD had a target of constructing 4,672kms of new roads by FY15. As reported by the RHD,between FY11 and FY13 a total of only 702 kms of new roadshas been completed, which, is only 15% of the FY15 target.Another important target for the SYFP is the widening andstrengthening of the roads for 8433 kms by FY15. BetweenFY11 and FY13 a total of 1868 kms of roads have beenstrengthened and widened, which is only 22% of the FY15target. These are illustrative of the substantialimplementation problems in the roads sector.

Bridges: Construction of the Padma Bridge at the Mawa-Janjira point has been the most important infrastructureproject under the Sixth Plan. As per the original timeline thisproject should have now neared completion. However,because of procurement related problems and subsequentwithdrawal of donor funding the implementation of theproject has been substantially delayed. There is now arevised schedule for the project and some initial work hasstarted. The delay in implementing this project hasadversely affected the size of public investment in transportand the associated growth target of the transport sector.

Railways: The performance of the railway sector is alsolagging with respect to Sixth Plan targets. The best measurefor passenger traffic is “passenger-kilometers” and that forfreight carried is “tons-kilometer”. There has been anincrease in “passengers-kilometer” carried but a sharpdecline in freight carried from FY10 to FY13. This is a matterof concern because an important element in improving the

efficiency of the Chittagong Port hinges on increased abilityof the railway, road, and river transport system to move thecontainers to and from the hinterland more efficiently. Amajor institutional objective of SYFP was to ensure a deficitfree operation of the Bangladesh Railway (BR). As part of theRailway reform effort there has been an increase in its ticketprices. Yet the evidence shows that BR’s Operating Lossincreased from Tk. 584 crore in FY10 to Tk. 841 crore in FY13.The timeliness and quality of service remain of majorconcerns. More generally, the institutional reforms of therailways have not made much progress.

Urban transport: Rapid urbanization in Bangladesh duringthe last few decades increased urban transport demandsubstantially, leading to manifold increases in the number ofmotorized and non-motorized vehicles on city streets. Theincrease in the number of vehicles without concomitantexpansion of road facilities and improved trafficmanagement has led to severe congestion on roads anddeterioration in urban environment. Such trends are likely tocontinue as further urbanization takes place. Unless properlychecked and controlled, the consequent growth incongestion and pollution will adversely affect the health andquality of life of the urban residents. The cost to economicgrowth from the loss of excessive time spent on commutingcan also be enormous.

The SFYP recognizes the urban challenges to growthparticularly those linked to the Dhaka city transport system.The goal and vision for Dhaka is to take short, medium andlong-term measures to develop a multi-modal integratedand safe transportation system for the city. Better trafficmanagement measures and increased public transportincluding mass transit metro-rail are part of that strategy.

A number of measures have been taken to improvemultimodal and integrated urban transport system. Theseinclude flyover/overpasses that have been completed onthe airport road helping avoid two railway level crossingsand connecting Mirpur and the Bashundhara and thePurbachal new town. Besides, a major flyover connectingGulistan with Jatrabari has been completed under PPPeasing up entry and exit to the city from Narayanganj area.There is also a PPP contract for building the DhakaExpressway connecting Uttara and Kamlapur. However,implementation has been extremely slow and way behindoriginal time frame of completion. As part of the multimodal transport system commuter DEMU (Diesel ElectricMultiple Unit) train service has been introduced. A projectto introduce metro rail system has been taken up withsupport from JICA. Formal implementation of the project isyet to start. Another addition has been new east-westconnecting roads as part of the Hatirjheel project.

Notwithstanding these improvements, Dhaka continues toface increasing traffic congestions. The broader governanceand institutional challenges and improved trafficmanagement remain to be tackled. A particularly difficult

30


problem is enforcement of parking and other traffic laws.Unregulated construction activities adds to the congestionproblem as many single lanes become virtually impassableowing to dumping of construction materials and spaceoccupation by construction vehicles. Innovative solutionslike time-of-day uses are non-existent.

Ports: Ports are lifelines for international trade and theChittagong Port handles 95% of the country’s sea borneexport and import trade. So the SFYP had projectedChittagong Port’s cargo handling to increase to 41 millionton in FY13 from 35 million ton in FY11. Similarly itscontainer handling was projected to increase from 1.31million TEUs in FY11 to 1.6 million in FY13. This wouldrequire increasing efficiency in port handling as well asquick implementation of the Dhaka-Chittagong Highwayexpansion and improved rail links. While there has beensome improvement in Chittagong Port handling as reflectedin the Table 4.3 below, progress in the roads and the railwaypart of the equation are lagging behind. There has beenimprovement in turnaround time of vessels, which is 4.91days in FY13 compared to 6.90 days in FY11. Throughputper ship day for both container and bulk cargo has increasedin FY13 compared to FY11. The improvement of Porthandling is also reflected by slight improvement in the GCI(Table 4.2 above).

Table 4.3: Chittagong Port PerformanceIndicators FY10 FY11 FY12 FY13

Turn Around Timeof Vessels (days)

5.15 6.90 4.88 4.91

Throughput pership day Container

416.82 372.69 442.27 490.27

Throughput pership day Cargo(Tons)

1598.02 1615.04 1636.34 1666.97

Source: CPA website- Port Performance Indicators

Progress with Public-Private Partnership (PPP) inTransport

The Government identified a long list of transport projectsfor implementation under PPP arrangements (Table 4.4below). Progress, however, has been negligible. So far, onlyone project, the Dhaka Elevated Expressway, had reachedthe final stages of contracting. Even that contract ran intonew issues for which a revision of the contact has beenmade. The project implementation is yet to start after thecontract revision.

Table 4.4: Status of PPP Financed Projects

SL.N

o

Sect

ors

Nam

e of

the

Pro

ject

Est

Pro

ject

Cos

t ($

Mill

ion

)

Neg

otia

tion

Con

trac

t Si

gned

1 Road Dhaka-Elevated Expressway $1,088 ● ●

2 Port2 Jetties at Mongla Port throughPPP

$50

3 RoadDhaka-Ashulia ElevatedExpressway

$1,471

4 RoadFlyover from Santinagar to MawaRoad (New) Bridge overBuriganga River

$313

5 RoadUpgrading of Dhaka Bypass to 4Lane (Joydevpur-Debogram-Bhulta-Madanpur)

$117

6 RoadHemayetpur-Singair-ManikganjPPP Road

$86

7 RoadJatrabari-Sultana Kamal Bridge-Tarabo PPP Road

$45

8 RoadDhaka-Chittagong AccessControlled Highway

$1,625

9 PortConstruction of Laldia BulkTerminal

$60

10Rail

Depot

Construction of a New InlandContainer Depot (ICD) nearDhirasram Railway Station

$205

11Rail

BridgeFulchhari-Bahadurabad MGRailway Bridge

$1,435

12Rail

BridgeDual gauge Double lineBangabandhu Bridge

$1,025

13 PortConstruction & Operation of InlandContainer Terminal (ICT) atKhanpur

$32

14 Bridge2nd Padma Multipurpose Bridge atPaturia-Goalundo

$1,640

15 Port 3rd Sea Port $1,20016 Energy LPG Bottling Plant at Kumira $31

Total $10,422 1 1Source: PPP Office

Although the expected list of PPP-financed projects intransport is undoubtedly highly ambitious, the negligibleprogress with implementation is a reflection of a majorweakness in the implementation of the transport sectorstrategy. While there are several reasons for this lacklusterperformance of the PPP initiative, the two most importantfactors are the serious institutional inadequacy of the PPPframework and difficulty in the bidding and contractingprocess. Urgent policy attention is needed to do a fulldiagnostics of the constraints that are hindering theimplementation of this high-priority policy initiative andsuggest remedial measures based on this diagnostics.

Financing Strategy and Resource Allocation forInfrastructure

The Sixth Plan recognized that financing needs forinfrastructure are large and even with a strong publicresource mobilization effort and top priority given toinfrastructure spending from public resources, there will bea significant resource gap. Accordingly, it advocated thedevelopment of a strong public-private-partnership (PPP)arrangement to mobilize additional funding from private

31


sector. The Plan took an ambitious stance in this regard andprojected annual PPP financing to expand from almostnothing in FY10 to 1% of GDP every year starting From FY12.The PPP implementation record shows limited success,mostly concentrated in the power sector. Although data isnot available, total funding of infrastructure from PPPsources is believed to have been very modest and muchbelow the 1% of GDP target in the first three years of theSixth Plan. Within the public sector, public entities (otherthan the Port sector) have been running operational deficits.Hence, the bulk of infrastructure financing has come fromthe government budget. This is a major shortfall with theimplementation of transport sector strategy.

The priority assigned to infrastructure in regards to publicinvestment is illustrated in Figures 4.5 and 4.6. Theinfrastructure development spending (electricity, energyand transport) has progressively increased, reaching 40% oftotal Annual Development Program (ADP) in FY14 (Figure 5).Indeed, as indicated in Figure 4.6, transport and powersectors get the highest priority in the allocation of ADPfunding as compared with education, health andagriculture.

Figure 4.5: Share of infrastructure in total ADP


Figure 4.6: Public Investment Priorities


In terms of size, infrastructure investments surged from lessthan 1% of GDP in FY09 to about 2% of GDP in FY13. Thebudget allocation further increased to 2.5% of GDP in FY14.This is a substantial investment effort, but still considerablylower than needs and the target set in the SFYP. Forexample, the unmet demand for investment in transport, asreflected by the unfinanced long list of transport projects ona PPP basis (Table 4.4), is an indication of the financing gapin transport. The unmet investment needs in primaryenergy is similarly large.

ADP funding for power sector: A comparison with originalsectoral allocations envisaged under the SYFP shows thatonly the power sector received more than SYFP allocationsin FY11, FY 12 and FY 13, it also has been diligent inspending available resources each year. The policiesundertaken for the power sector also saw a surge in privateinvestments through rental power and IPPs. These had alarge positive impact in the generation of power. However,the large reliance on high-cost rental plants is a source ofconcern.

Other energy: In the other energy sector the Governmentaction was mixed. While ADP allocation almost matched theFY11 allocation projected under SFYP, it fell short in FY12and FY13. As noted earlier, the rapid growth in the share ofoil-based power supply- from only 8% in FY09 to 25% inNovember 2013- is a reflection of a major primary fuelconstraint in Bangladesh. The lack-luster performance ofthe primary energy sector is a reflection of both a weakpolicy framework and inadequacy of investments from bothpublic and private sector. There is an urgent need for strongsector to avoid the emergence of a binding constraint ongrowth.

Roads and railways: The Road and Railway sector togetherhave been receiving allocation of resources through ADP inFY 11, FY12 and FY13 which are in line with SFYPexpectations. In fact in FY13 the two combined receivedhigher ADP allocation (Taka 66.56 billion) compared to SYFPenvisaged allocation (Taka 59.05 billion). Actualimplementation in all years was lower than allocatedresources. The implementation of major projects in Roadand Railway sectors are critical for achieving the higher GDPgrowth targets of the Sixth Plan. For example, a project like“4 Laning of the Dhaka-Chittagong Highway” is atransformational investment for taking Bangladesh to ahigher growth trajectory. Yet the slow pace ofimplementation of this transformational project is pullingback the SYFP growth expectations. As reported in theIMED evaluation this high priority project, which started inJanuary 2006, was originally planned for completion byDecember 2013. However, until end of FY 12 only 18.38%physical progress was achieved while 27.18% of the totalproject cost was spent. This is a serious implementationshortfall.

05

1015202530354045

FY10 FY11 FY12 FY13 FY14B

Perc

ent o

f tot

al A

DP

0

5

10

15

20

25

FY10 FY11 FY12 FY13 FY14B

Perc

ent o

f ADP

Transport Power EnergyAgriculture Education Health

32


More generally, a major challenge facing the roads sector isits implementation capacity constraint. The Roads Divisionhas 156 projects under implementation with ADP allocationof Taka 358.52 billion for FY 13. The original project cost forthe 4-Lane Dhaka-Chittagong highway was 238 billion andTaka 64.74 billion was spent until FY12. This means that theRoads Division has not been allocating adequate resourcesthrough ADP for its timely completion. The slow completionof projects, serious over- programming of number ofprojects in the pipeline and the implementation challengesmake the performance of the Roads sector less thansatisfactory. The Government needs to rethink itsinvestment strategy for the roads sector and focus muchmore attention on the timely completion of strategicprojects rather than taking too many projects on hand andslowing completion of every project. Greater policyattention is also needed to jump-start the ambitious PPPinitiative for roads.

Bridges: Another transformational project of high priority isthe construction of the Padma Bridge at the Mawa-Jajirapoint to be implemented by the Bridge Division. The SFYPproposed high allocation for each fiscal year, and in FY 11government allocated Taka 11.06 billion but finally spentonly Taka 3.84 billion. The project was supposed to havemajor donor funding but because of procurement relatedproblem the implementation halted and none of the majorcontracts could be awarded. Had it not been forprocurement problem, by now this project could have beencompleted. The Government’s plan to do this massive andcomplex project on its own needs to be supported byprocurement of sound international technical competenceand careful watch on procurement and implementationactions to avoid cost over-runs, weak design and longimplementation delays.

The Way Forward

The success achieved in the power sector is commendable,but there is a still a long way to go on the infrastructurefront as indicated by the results of GIC rankings. In view ofresource and implementation constraints Bangladesh needsto be much more strategic about identifying criticalinfrastructure projects and then allocating resourcesaccordingly. The priority should be to focus on theimplementation of what is deemed transformationalinfrastructure investment. In particular, it is most importantthe Roads and Railway sectors select a number of high-priority projects and completes them in a timely manner.The Roads and Railway performances have implications forthe performance of Chittagong Port and thecompetitiveness of the manufacturing sector.

In the power sector, given the high-cost of generation, thefocus should now shift to cost considerations. Thus, theobjective should not be just increasing generation at anycost, but to go for more efficient and least-cost generationto ensure the long term competitiveness of the

manufacturing sector as well as for being fiscally sound.This would entail reliance on large and cost-efficient powerplants funded by public sector or under IPP arrangementsrather than expansion of high-cost rental programs.

The Government should also build further on its initialsuccess with electricity trade with India and enter into newtrade arrangements with India, Nepal and Bhutan. Jointventures with power-sharing arrangements along theborder areas as well as pure purchases should both beexplored.

One big challenge in the primary energy sector is theabsence of a strategic long-term view about how thegrowing needs of primary fuel will be met in the next 10-20years. Policy on primary fuel, particularly coal policy isurgently needed. Once this policy is adopted, considerablefunding will be needed. Priority also needs to be given togas exploration and gas production. Additional public andprivate investments in gas development is essential.

Urban transportation remains a big challenge. Dhakacontinues to face increasing traffic congestions. Theinvestment focus on removing traffic bottlenecks throughflyover and alternative routings is appropriate. This effortshould continue with emphasis on timely completion of allongoing projects. Similarly urgent attention is needed tostart implementation of the metro rail. Alongside,substantial attention needs to be given to the broadergovernance issues of city management, institutionalchallenges in urban transport planning and implementation,improved traffic management, and the enforcement ofparking regulations and traffic laws.

In Railways, urgent attention is needed to implement long-standing railway reforms. The reform agenda is well known;political will and reform leadership is needed. The railwaydeficits remain large and service quality and efficiencyrequire substantial improvement. A reform push in railwayswill pay rich dividends in supporting private trade andinvestment.

In the Roads Division, the main challenge is to establishpriorities and focus on speedy project completion. As anexample, the Road Division has 156 projects underimplementation. This has led to over programming ofprojects without adequate budgetary allocations for eachproject. Besides budgetary constraint, the Ministry ofCommunication itself identified inadequacy of qualifiedstaff, procurement related problems, delay in release offunds and long approval process as major constraints thatare obstacles to meeting the SFYP targets. Given theconstraint the Government should prioritize the mosttransformative projects and provide all necessary resourcesfor completion within a well-defined timeline. Otherprojects of less importance should be delayed for laterimplementation.

33


More generally, this should be the practice for allinfrastructure projects in Roads, Bridges Division, RailwayMinistry, Power Division, and for Urban Transportation.Some examples of transformative projects that need to beprioritized and fully resourced include:

The 4-Lane Dhaka Chittagong Highway Double Tracking of the Dhaka-Chittagong Railway The Padma Multi-Purpose Bridge Completion of the two Bibiyana gas field based

large power plants. The Dhaka metro rail

The budgetary and some of the implementation relatedchallenges in the infrastructure sector could be overcomethrough PPPs. The Sixth Plan’s strategy of greater relianceon PPP for infrastructure development is sound. But policyframework has been lagging. The Government should givetop priority to this matter and seek technical assistance todevelop a sound PPP framework based on good practiceinternational experience. There are a number of nationalinstitutions that have the capability to assist thegovernment in this regard.

Finally, Government needs to internalize the lessons ofexperience of the Padma Bridge and focus on procurementand other governance matters relating to infrastructure.Since large amount of funding is involved in infrastructure, itnaturally attracts predatory attention. Unless the authoritiesare vigilant and exercise utmost caution, the risk of wrongdoing and misappropriation is large. One possible optionwill be to go for turn-key projects for large foreign-financedinfrastructure procured through oversight provided bydonor agencies.