The Financial Express

Policy reforms to attract FDI

| Updated: October 22, 2017 19:54:34

Policy reforms to attract FDI
Bangladesh fails to attract investment, both private and foreign, due to a lack of policy supports, good governance, skilled manpower and poor infrastructure. Economic analysts, at an investment summit held in the city last week, summed up these factors that stand in the way of investment inflow notwithstanding prudent macroeconomic management in the country. 
To overcome the problems, they highlighted the urgency of undertaking policy reforms to remove the roadblocks on way to foreign direct investment (FDI) that presupposes massive investment in the country's transport, infrastructure and human development.
For a long time, Bangladesh had neglected investment in infrastructure, making it the most binding constraint on investment. The country would fail to reap benefit of its resilient economy and demographic dividend unless it improves its infrastructure, develop human resources and simplify regulatory framework with necessary reforms.
Analysts say investors tend to look for compliance with international production standards, confidence in regulatory framework, skilled labour and easy access to critical inputs like power, transport and industrial land. 
In order to attract more FDI, they advocated for further measures for facilitating investment, greater coherence between trade and investment policies, fine-tuning of investment incentives and focusing more on investment- promotion and retention strategy. 
Bangladesh aims to become higher middle-income country by the year 2021 and high-income country by 2041. To reach the 2041 targeted income level, the country's per capita income needs to grow at least by 13 per cent per annum in dollar terms which is an extremely challenging task. 
Although the government's planned objective is to move to a higher-growth trajectory (up to 8.0 per cent) under the sixth five-year plan, the growth performance remained range-bound at more than 6.0 per cent. For that reasons, even achieving the growth target for the seventh five-year plan (SFYP) will be difficult unless the government removes the impediments and activates the key drivers of investment.
To achieve the SFYP target, the economy has to grow at a level of 8.0 per cent, investment at 34 per cent by FY 2020, private investment 26.6 per cent, export US$ 54 billion and FDI to reach 3.0 per cent of GDP (about US$ 9.0 billion). Besides, the share of manufacturing in GDP (gross domestic product has to grow at 25 per cent.
For economic growth, experts say, the country needs to improve its connectivity, access to quality power and energy, improve physical infrastructure, including ports, and increase exports substantially. The growth acceleration will require Bangladesh to be more export-oriented.
Reinvested earnings account for a major chunk of all the FDIs coming in a particular country. However, analysts stressed the need for retaining current investors as investments bring further investments. There is a need to diversify into other sectors such as electronics, manufacturing and services, away from garments.
Bangladesh now attracts between $1.5-1.9 billion a year in FDI, which is much lower than that of Vietnam's $90 billion. Bangladesh provides the investors with almost similar incentives like those in Vietnam, and the country also offers more facilities to overseas investors than the local investors. Profitability of investments is high. Still, the FDI inflow to the country remains conspicuously low. 
According to a recent study of the Multilateral Investment Guarantee Agency of the WB Group, civil disturbance, terrorism and war are the topmost factors that put foreign investors at bay. But one out of four corporate investors either withdrew from an existing investment or cancelled the planned investments over the recent past because of reasons that are within the control of the government.
The reasons include adverse regulatory changes, expropriation, non-honouring of government's guarantees, breach of contracts and transfer and convertibility restrictions. In fact, countries have to be investment-centric to bring in more investors. Also, the retention of investors is crucial. Almost 30 per cent of all the investments that goes to developing countries stop expanding or leave because of regulatory constraints. 
In Bangladesh, it takes 1,442 days to enforce a contract while the duration is 400 days in Vietnam and 453 days in China. The financial cost of enforcement is 67 per cent of the claim in Bangladesh, and 29 per cent and 16 per cent of the claims in Vietnam and China respectively. Economists say Bangladesh cannot afford this. 
A modern multimodal transport system is a must to improve Bangladesh's competitiveness in the global economy and to increase the access to goods at reasonable prices. The upgrading of logistics workforce and technology systems is also needed for ensuring that the transport system is scalable and sustainable. 
The road and rail freight transportation companies, in particular, can set up partnerships with internal shipping lines or logistics providers in order to increase trade with multinational companies. New modes of transport such as barge services for transporting containers between Chittagong and Dhaka, instead of trucking by road, can also help improve logistics. 
Bangladesh was the 45th largest economy in the world in 2015. But when it came to logistics and transport, it stood at the bottom third globally. In fact, public-private partnership (PPP) might be the key to raising investment for improving the country's transport infrastructure.
The PPPs for airports and river ports do not require any outlay from the governments other than providing the land for the project and connecting infrastructure. This is in contrast to PPP for the power sector, where the government usually has to buy the power from the project. 
Allowing private operators to operate alongside the state-owned enterprises (SoEs) on a level playing field is another way of getting the benefits of private sector investment and innovation. It will also provide incentives to the SoEs to improve their services. To attract private investors to PPP projects, Bangladesh will have to provide commercially viable tariff level, operating autonomy and termination compensation. 
The growth in container traffic of the Chittagong port should be much higher than the country's economic growth. It needs to grow at 15 per cent annually. During the last 10 years, there has not been any significant improvement in the container handling capacity relative to the growth in twenty-foot equivalent units. 
Despite modernisation and upgradation in facilities, time taken for customs clearance is still beyond the acceptable limit at Chittagong port. So, the main focus should be given to an integrated supply chain for smooth movement of goods and people.
All said and done, there is a need for initiating policy reforms as many of the policies, including the one on FDI, are not forward-looking. Local businesses say giving more focus on innovation and quality education will definitely raise skilled manpower and standard of services.

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