The potential investment destination of South Asia

Mahmudur Rahman, Executive Chairman, Board of Investment

Bangladesh is a moderate, democratic and homogeneous country. But being the eighth most populated nation in the world, Bangladesh needs immediate attention from strategic planners.

It is her people who can shape our desired destiny by utilizing energy and creativity in the production sector. The country has so far enjoyed limited success in the face of enormous calamities, manmade and natural. But the fortitude and resilience shown by the people on many occasions have made us proud and impressed the outside world.

In 1991 Begum Khaleda Zia and her government were democratically elected and arrived with refreshing ideas and a sense of urgency to transform a poverty-stricken economy to NIE within a short time. As a result, the change in Foreign Direct Investment (FDI) inflow during the next decade, though not spectacular, was definitely significant. In BOI-registered investment proposals, the share of local and foreign investment was 88 percent and 12 percent respectively during the 1981-1991 period. During the 1991-2001 period, this trend has shown a gradual change and it is now 42.5 percent and 57.5 percent respectively.

The Government initiated fiscal reforms, undertook an ambitious scheme to improve literacy in general and female literacy in particular, started creating a conducive environment for investment and above all established rule of law in the country.

Improvement in various social development indicators during the last 10 years is a testimony to all these efforts.

Table 1: Social Development Indicators in Bangladesh -- 1991 to 2001

Indicator Unit 1991 1996 2001 1. Annual GDP Growth % 3.38 4.62 6.04 2. Per Capita GDP US$ 277 334 369 3. Total Export million US$ 1,718 3,884 6,4674. 4. Population Growth % 2,17 - 1,42 5. Adult Literacy Rate

(15 years & above) % 35.32 47.3 64 6. Infant Mortality at Birth per 1,000 live births 92 67 51 7. Life Expectancy at Birth Year 56.10 58.90 61.80 8. Access to Safe Water % - 83 97.9 9. Primary Enrollment Rate % 76 85 95 10. Social Sectors' Share

in ADP Allocation % 6.3 23.4 24.8

Sources: Bangladesh Economic Review 2001, Ministry of Finance, GOB & Bangladesh Bureau of Statistics.

The democratic government has taken several measures to stimulate the economy. In macro-economic terms, we now have very prudent market-oriented fiscal policies.

However, to improve the overall economy of the country and achieve the ultimate goal of eradicating poverty, annual investment has to grow rapidly from the present low base.

The country's long-term economic future will hinge on the dynamism and success of the private sector. A recent study conducted by the United Nations Commission for Trade and Development (UNCTAD) has revealed that foreign firms usually see Bangladesh as quite open to foreign investment and that FDI policies are liberal. Relative to other competing locations, Bangladesh is also improving its competitiveness. Let us now analyze the competitive strength of Bangladesh as an "Investment Destination". 1. Location: Geographic location of the country is ideal for global trade with very convenient access to international sea and air routes. 2. Natural Resources: Bangladesh is endowed with an abundant supply of natural gas, water and its soil is very fertile. 3. Human Resources : We have a population of 130 million who are hard- working and generally intelligent. There is an abundant supply of disciplined, easily trainable and affordable workers suitable for any labor-intensive industry. 4. Social Stability: Bangladesh is a liberal democracy and mostly a one- race, one-religion country. The population of this country irrespective of race or religion have been living in total harmony and understanding for thousands of years. 5. Language : Although Bengali is the official language, English is generally used as a second language. The majority of even moderately educated people can read, write and speak in English. 6. Market Access: As a result of a low per capita GDP of only US$386, present domestic consumption is not significant. However, it should always be considered that there exists a middle class with some purchasing power. As economic growth picks up, the purchasing power will also grow substantially. And in a country of more than 130 million people, even a small middle class may constitute a significant market. Furthermore, Bangladeshi products enjoy duty free and quota free access to almost all the developed countries.

This access to the global market is further helped by the fact that policies of Bangladesh for foreign direct investment is by far the best in South Asia. 7. GSP Facility: Most Bangladeshi products enjoy complete duty and quota free access to EU, Japan, USA, Australia and most of the developed countries. However, for apparel export to USA, we have certain quotas which are generally favorable to Bangladesh. 8. Cost of Business: Overall cost of doing business in the country is fairly competitive by global standards. Some of the important indices to for companies considering Bangladesh as an investment destination are given below :

a. Land: US$10-15 m2 b. Construction : US$100-125/m2 c. Gas: US$65 per/1000 m3 d. Power: US$0.07/kwhr e. Labor: US$50-100/month, depending on skill level f. Management : Mid Level -US$6,000/annum Top Level - US$ 30,000/annum g. Tax structure : Public Company: 35%

Private Company: 40%

Personal Income: 25% maximum

Incentives for Foreign Investors:

1.Tax Exemptions: Generally 5 to 7 years. However, for power generation an exemption is allowed for 15 years. 2. Duty: No import duty for export-oriented businesses. For other sectors it is 5 percent ad valorem. 3. Tax law: i. Double taxation can be avoided for foreign investors on the basis of bilateral agreements. ii. Exemption of income tax up to 3 years for expatriate employees in industries specified in the relevant schedule of Income Tax ordinance. 4. Remittance: Facilities for full repatriation of invested capital, profit and dividends. 5. Exit: An investor can finish its operation in the country either through a decision of the AGM or EGM. Once a foreign investor completes the formalities to exit the country, he or she can repatriate the sales proceeds after securing proper authorization from the Central Bank. 6. Ownership: Foreign investors can set up ventures either wholly owned or in joint collaboration with a local partner.

Sustainable Competitive Sectors: Considering the strength of Bangladesh either in the form of offering substantial resource advantages or low-cost, skilled manpower and global market demand, the following sectors could form the backbone of industrial development of the country:

Table 2: Investment Opportunity: Sustainable Competitive Sectors in Bangladesh.

1. Textile a. RMG Backward linkage industries 2. Electronics a. Semi-Conductor a. Cell Phone Assembly a. Other Electronics 3. Information Technology a. Data Processing a. Software Development 4. Natural Gas-based Industries a. Electricity a. Fertilizer a. Petro-Chemicals 1. Frozen Foods 1. Leather a. Finished Leather a. Leather Goods

7. Ceramic a. Tableware b. Sanitaryware c. Insulator

8. Light Engineering a. Machinery Parts b. Consumer Items

9. Agro-based Industry a. Canned Juice/Fruit

Concluding remarks: The world has seen a spectacular wave of global corporate activity particularly during the second half of the last decade. This has been facilitated by advances made in the information technology sector. This trend, strengthened with the direction toward borderless economies, is drawing more and more TNCs into the global operation.

FDI is no longer only a strategic option of corporations, it also plays a key role in the national economic development strategies. Various countries are attempting to attract foreign investors through a variety of measures, i.e. liberalization of the investment environment, fiscal reforms and a package of incentive offers. FDI can transform a country's economic situation within the shortest possible time. It is not merely access to funds, but also provides transfer of technical know-how and management expertise.

It is also a stabilizing factor in any economy, because once TNCs have made an asset-based direct investment, they can not simply pull out overnight like in the case of portfolio investment.

The present Government under the leadership of Prime Minister Begum Khaleda Zia is absolutely focused on the importance of FDI in the industrialization process of the country. Historically, the ruling BNP (Bangladesh Nationalist Party) has been a pro-reform, private sector- friendly and democratic party. The Government has a clear strategy on harnessing the benefits of FDI and transforming the country as the most sustainable "Investment Destination" of South Asia. We may now draw the following conclusions on the FDI reality and prospects for Bangladesh: * Bangladesh has experienced a stable social and political order during the last decade. * Government policies on foreign investment are liberal, supportive and focused. * Cost of doing business in Bangladesh is fairly competitive. * Incentive package for the foreign investors is lucrative and transparent. * There is an abundant supply of disciplined, highly motivated, low-cost workers. * There exists global market access for both primary and manufactured products originating from Bangladesh. * Entry and Exit policies for foreign investors are simple, transparent and liberal.