Published: Tuesday, Oct 25, 2016
Posted : 25 Oct, 2016 00:00:00
Investment facilitation in Bangladesh, and globally!
Syed Mafiz Kamal
For all the reservations about its investment climate there is little doubt that Bangladesh could be a hot prospect for global investors due to its growth momentum, its favorable demographics and hard-working labour force, and its track record of export dynamism. What is sorely lacking is an effective investment facilitation regime, but things are improving. In the 2016 World Investment Forum, Bangladesh was given an exclusive platform among world business leaders whereby it was highlighted as a role model due to its readymade garment (RMG) sector progress.
In his latest three-day visit World Bank President Jim Yong Kim struck a familiar chord:
"The World Bank Group is looking forward to working with Bangladesh to promote private sector investment by strengthening governance and improving the investment climate. Strengthening governance will be important for areas critical to job creation: infrastructure, diversifying exports, moving up the manufacturing value chain, and ensuring the health and safety of workers."
Kim's visit was preceded by that of Chinese President Xi Jinping whereby Bangladesh got package of some $20 billion in form of soft loans and investment. Most of the agreed capital are for mega infrastructural projects. Chinese firms have signed investment agreements of $186 million to invest in Bangladeshi companies, a much-needed boost to Bangladesh's foreign direct investment (FDI) account.
FDI has represented a small fraction of the gross domestic product (GDP) and private investment in Bangladesh. Its inflow in 2015 reached to $1.7 billion (0.9 per cent of GDP). In 2012, FDI stocks remained below 7.0 per cent of GDP. The average cumulative FDI as percentage of GDP in the least developed countries (LDG) is 25 per cent. Increasing FDI will help in augmenting the quality of investment because foreign firms are increasingly a source of innovation spillovers, market access with supply chain linkages, and modern management practices, to name only a few.
Sluggish or stagnant investment have been a paralyzing factor for Bangladesh economy for quite a few years now. It is well noted that Bangladesh fares poorly in indicators such as World Bank's "Ease of Doing Business Index" (173 out of 189) and the World Economic Forum's "Global Competitiveness Index" (109 out of 144).
Among the measures infrastructure is the most constraining element to doing business (Tables 1-2). Bangladesh ranks 189 out of 189 in "Getting Electricity." In "Index for Economic Freedom", Bangladesh is labelled as "mostly unfree". Its score is lower than its South Asian neighbors, India and Pakistan.
The investment requirements for 8.0 per cent GDP growth are substantial. Based on international evidence and Bangladesh's own experience, there needs to be an investment of 36 per cent of GDP by the end of fiscal year (FY) 2019-20. This compares with an investment rate of about 29 per cent of GDP in FY15 (22 per cent for private sector and 7.0 per cent for public sector).
Private investment has been around 22 per cent for over half a decade now. The Seventh Five Year Plan projections suggest that the private investment rate should grow from 22% to 27%.While the government is taking initiatives for investment promotion (such as setting up Economic Zones, investing on hard infrastructure and giving tax-holidays), investment facilitation schemes are still trailing.
Bangladesh's primary investment promotion agency (IPA) -- Bangladesh Investment Development Authority (BIDA), successor of the Board of Investment (BOI) -- has its work cut out in terms of investment facilitation. Although investment facilitation schemes such as pre-investment information service and assistance in obtaining industrial plots, falls under the mandate of BIDA, the agency has yet to deliver. Recent change in leadership in BIDA is a promising notion to look forward to.
The recent BIDA-organized Bangladesh Investment Summit is another encouraging initiative which has the potential to gain traction in the future. However, BIDA needs to be institutionally empowered to make it a one-stop destination for investors. It needs to have effective implementation authority whereby it can guarantee investors that electricity and energy can be delivered to the investor within a week of set up. It is the need of the hour. In doing so, policymakers can may approach the action lines of investment facilitation menu of the United Nations Conference on Trade and Investment (UNCTAD) discussed below.
To address the severe challenges, international policy makers, business leaders and thought shapers convened at the 2016 World Investment Forum (WIF) in July in Kenya. The Forum was particularly important because it was the first major international meeting on financing the Sustainable Development Goals (SDGs) following the UN's post-2015 development Summit and COP21 meeting on climate change. The lessons from the Forum, which Bangladesh attended, is vital to developing countries because it shared cross-cutting experiences on how to direct investment towards key SDG sectors.
2015 was a bounce-back year for FDI. The financial crisis has done great damage to global FDI flows, with 2015 being the only year registering increased FDI flows since 2008. There is no alternative to investment. It is one of the driving forces of the global economy.According to the UNCTAD, in order to realize the targets of SDGs, investment of some $ 5.0-7.0 trillion per year is required. The amount certainly doesn't tell the whole story, given it will all be in vain if the investment is not channeled in the right direction. In light, the developing countries alone face an annual SDG-investment gap of $2.5 trillion. The governments alone cannot the meet the massive estimated amount that will be needed to achieve the SDGs. Stability and predictability are the keys to attracting investors.
So far most governments have focused on investment promotion and it is high time they gear up for investment facilitation by securing an open, transparent and predictable environment. Investment promotion and investment facilitation work hand in hand. One is about promoting a location as an investment destination, while the other is about making it easier for investors to establish or expand their investments, as well as to conduct their day-to-day business in host countries. In short, investment facilitation initiatives aim to tackle ground-level obstacles to investment.
Among myriad measures, there ought to be strong investment promotion agencies (IPAs) which can drive investment facilitation across government machinery, sound contract laws, investment in human capital, intellectual property protection and engaging into international cooperation such as signing more Bilateral Investment Treaties (BITs) and devising multilateral agenda "that leaves no one behind."In the multilateral agenda, issues such as the vulnerability of developing countries to volatile commodity markets, given the slowdown of global trade and decline of commodity prices, can be addressed.
At national level many countries have set up policy schemes to attract investment, particularly foreign investment. It is noteworthy that between 2010-2015, more than 173 new investment related policies were introduced around the globe. Almost half of these measures were related to investment incentives followed by special economic zones, and only 23 per cent focused on investment facilitation (Fig.1).
A study by the UNCTAD found that only 20 per cent of the national investment laws deal with specific aspects of investment facilitation, such as one-stop shops. Meanwhile, at the international level, most of the international investment agreements (IIAs), which are more than 3300, do not have any strong investment facilitation actions ingrained in them. In sum, investment facilitation has a structural gap in both national and international level.
To specifically address the gap of investment facilitation, the UNCTAD's "Global Action Menu for Investment Facilitation", an updated version of which just got released in September, is an apt playbook for policymakers. The Menu proposed a number of action lines with options for investment policymakers. It contains specific actions to support investment facilitation in low income countries such as Bangladesh. Among them the following elements of the action lines are noteworthy:
* SINGLE WINDOW: A single window for all enquiries concerning investment applications ought to be established.
* DISPUTE SETTLEMENT MECHANISM: A friendly dispute settlement mechanism to facilitate dispute prevention and resolution vis-à-vis investment is essential.
* EFFICIENT ADMINISTRATIVE PROCEDURES: Improve the efficiency of investment administrative procedures whereby timebound approval to speed up processes would be established.
* INVESTMENT FACILITATION SERVICES: Increase capacity of Investment Promotion Agencies (IPAs) on business and investment facilitation services, including support in compliance processes. Build capacities for post-investment services, including expansion of existing operations.
* STAKEHOLDER CONSULTATION: The consultation with private sector and investment stakeholders throughout the lifecycle of the investment has to be maintained.
* ELIMINATE CORRUPTION: Collaborate on anti-corruption measures at international and domestic level in the investment process.
* URBAN DEVELOPMENT: For developing countries like Bangladesh, which faces grave urban migration problem, and severe deficiencies in urban infrastructure, IPAs focused on urban investment may be established.
While opportunity beckons, Bangladesh faces enormous challenges in raising its investment rate to attain the Seventh Five Year Plan's goal of sustained 8.0 per cent GDP growth by 2020. It is about time the investment facilitation becomes an integral part of its long-term strategy.
Mr. Kamal, a Senior Research Associate at PRI, can be reached at firstname.lastname@example.org