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Investing in Bangladesh

1. Bangladesh, which is one of the world's poorest and most densely populated countries, has a large low cost workforce, which although poorly trained, has been found to be hard-working and trainable, making Bangladesh a good base for any labour-intensive manufacturing operation.

2. Bangladesh is a country that although poor in non-energy natural resources, has abundant supplies of natural gas from some 20 gas fields discovered to date, with reserves that are estimated to lie between 15 and 45 trillion cubic feet of which some 13.7 trillion feet are known to be recoverable.

3. Successive government reforms to open up the economy by transforming Bangladesh into a market-based economy, have seen the average annual GDP growth rate to average 5% between 1995-99 and foreign trade to grow at an average of 16% per year during the same time period, with the majority of export growth coming from the ready-made garments sector.

4. The government would like to reduce the role of the public sector in industry and increase the role of private sector, on account of constant consolidated losses of no financial state owned enterprises, which rose from Taka 4.9 billion in 1997/98 to Taka 8.1 billion in 1998/99. However, progress in privatisation has been very slow on account of insufficient government efforts, lack of professional ability and labour union resistance, with very few of the 50 enterprises identified for privatisation in 1998/99 being privatised.

5. Bangladesh suffers from a very weak trade balance, on account of the high level of imports that are needed to sustain the manufacture of the key items for export, such as ready made garments, which account for some 73% of all exports. The European Union and the United States are the main destinations of Bangladesh's exports, accounting for some 80% of all exports in 1997/98.

6. The majority of viable investment in Bangladesh, apart from the export processing zones, has been in non-tradable sectors, such as energy and infrastructure services, which also includes the telecommunications and engineering services. This is the opposite to other South Asian countries, where the majority of foreign direct investment is usually in export oriented sectors.

7. The levels of foreign investment flowing into Bangladesh have been estimated by the World Bank to have increased from US$ 89 million in 1994/95 to US$ 807 million in 1998/99, they have also estimated that foreign investment outflows will increase from US$ 96 million in 1997/98 to US$ 848 million in 2004/5.

8. Hence, the Bangladesh economy must also find ways to generate sufficient foreign exchange in order to finance the constantly increasing capital outflows resulting from foreign investment in the non-tradable sectors such as gas, power and telecommunications.

9. Firms from EU Member States are only minor investors in Bangladesh, with the majority of foreign investment coming from the United States and other Asian countries, according to the Bangladesh Board of Investment. However, a significant level of investment is provided by several governments of European Member States, namely: Denmark, France, Germany, Netherlands and the United Kingdom, particularly from bilateral funds and financial institutions to fund infrastructural development.

10. Currently the energy sector is the major recipient of foreign direct investment into Bangladesh, especially the gas and power sub-sectors, which are both dominated by North American international energy companies, though several European controlled firms are significant investors. The gas sector, which has been by far the largest recipient of foreign investment within the energy sector, has already attracted over US$ 400 million of foreign investment, mostly from American multinational oil and gas companies such as Unocal, as well as Shell and Cairns Energy PLC from Europe. Currently a considerable portion of projected foreign investment in this sector is on hold, as the Bangladesh government does not permit gas to be exported, with recovered gas having to be sold back to the Bangladesh State through Petrobangla. The decision to export gas is totally dominated by politics, domestic and international, and is dependent on accurate estimates of national energy consumption during the next fifty years.

11. Telecommunications has also been a sector that has attracted considerable foreign investment and since private sector investment has been allowed in the telecommunications sector, private firms and investors now operate in cellular mobile services, rural telephone exchanges, Internet, e-mail services and paging and trunking services.

12. Most investment in the textile and ready made garments (RMG) sectors has originated from other Asian countries, who have stood to benefit from Bangladesh's preferential treatment with respect to exports of RMG to the United States, Canada and the European Union. Although export earnings from the ready made garments sector is one of the largest sources of foreign exchange, it is largely offset by the large import bills, since most components must be imported. Hence the government is trying to develop a large programme of backward linkages to make the whole sector more profitable and thus allowing it to be able to compete more effectively with other Asian countries after 2005 when the Multi-Fibre Agreement (MFA) has finally been phased out. Hence, any backward linkage programme would create business opportunities for European companies in both the export and investment sectors.

13. Bangladesh has some of the most liberal investment incentives in Asia, with an absence of any prior approval requirements or limits on any foreign equity participation, except registration with the Bangladesh Board of Investment (BOI). The government actively seeks to attract European investors by reducing bureaucratic control over private investment and opening up many areas that were previously reserved for the public sector. The government, in order to streamline bureaucratic procedures and controls, have restructured the BOI to facilitate investment, rather than regulate it, offering investors a variety of different services under a single umbrella and within a prescribed time period.

14. While all foreign investors are well protected by the Foreign Investment Act, which includes a guarantee of national treatment, some 20 countries, including many EU Member States, have concluded bilateral treaties on investment promotion and protection, as well as bilateral treaties for the avoidance of double taxation with Bangladesh.

15. Investors wishing to invest in export industries are encouraged to locate in export processing zones, where they can enjoy attractive tax concessions, reduced bureaucratic regulation and special bonded warehouses. The Bangladesh Export Processing Zones Authority (BEPZA) has been set up to provide infrastructure facilities for new investors and to attract foreign investment in export based industries.

16. Although the government is seen to be actively encouraging foreign investment in Bangladesh, there are still some difficulties that face new investors, which could affect the financial or economic viability of new investments. Such difficulties include: poor infrastructure for transportation, roads, and telecommunications and poor availability of power supply. The legal system, in general, is largely outdated, especially regarding land ownership, where the law only provides for the registration of deeds, but not the registration of property ownership. The extent to which foreign judgements are enforceable in Bangladesh is also uncertain. The country has high levels of bureaucracy and non-transparency as well as shortages of skilled people in most sectors. Potential investors are also concerned by the large numbers of political strikes or "hartels", which are regularly called by whichever political party is in opposition; by trade union militancy and by the slow progress of the government in implementing their policies for improvement.

17. Although portfolio investment in Bangladesh remains insignificant, and is not now even listed in the IMF financial data for Bangladesh, considerable efforts continue to be made by the Bangladesh government, with assistance from the International Finance Corporation, to improve investor confidence that stems from the serious governance problems, as well as taking steps to improve settlement procedures and enhance the supervisory powers of the Securities and Exchange Commission, in order to improve market capitalisation to the levels it reached in the middle 1990's, when market capitalisation reached US$ 6 billion, representing some 17% of GDP.

18. The financial system is dominated by the nationalised commercial banks (NBCs) which account for 70 per cent of all deposits. But with a weak institutional capacity and a high level of non-performing loans, the system propagates a default culture, which represents a major-obstacle when trying to modernise the sector. Although infrastructure development is the major source of financial flows into Bangladesh, the manufacturing and industry sector have been the main targets for FDI, with ready made garments and knitwear attracting 70% of investment.

A major source of European FDI was found to come from European Development Finance Institutions (EDFIs), such as the CDC, FMO, IFU and DEG. These financial institutions have also invested in both investment development corporations, such as the Industrial Promotion and Development Company (IPDC), which is supported by DEG, CDC, and the Aga Khan Fund for Economic Development, while the FMO has invested in the Dutch Bangla Bank. The institutions have also invested in leasing companies such as the Industrial Development Leasing Company of Bangladesh, often in collaboration with the International Finance Corporation (IFC).

19. The prime sources of finance for infrastructure development in the public sector were found to be multilateral agencies such as the World Bank, the Asia Development Bank, the European Union and bilateral institutional investors such as Danida, KfW, DEG, CDC and the Dutch Ministry of Foreign Affairs.

In the private sector, theWorld Bank has recently funded the Private Sector Infrastructure Development Project (PSIDP) which is intended to provide mechanisms for mobilising commercial equity and debt financing for infrastructure projects, while creating an appropriate framework for the sustained and efficient operation of private infrastructure projects.

20. Many expatriate staff living in Bangladesh, claim it to be an affordable, safe and comfortable place to live, with easily affordable accommodation and readily available education for their children at several international schools. A number of foreign communities were found to be present in the Dhaka region, each with their own social club.

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