Financial incentives for intermediaries cannot attract foreign investment

The Bangladesh Investment Development Authority (BIDA) has taken several initiatives to attract foreign investment. One such initiative is to offer financial incentives to expatriate Bangladeshis who act as intermediaries in attracting foreign investment. Any expatriate Bangladeshi who facilitates foreign investment will be provided with a financial incentive amounting to 1 percent of the investment they help secure. This investment must be new and amount to at least USD 5 million. Many expatriate Bangladeshis attempt to attract foreign investment by leveraging their personal image and relationships. The provision of financial incentives will undoubtedly encourage them.

Additionally, many locals can also act as intermediaries in bringing in foreign investment through various processes. The remittances sent by expatriate Bangladeshis are mostly spent by local beneficiaries on building houses or purchasing essential items for daily living. Only a very small portion of the large volume of remittances received annually is used for income-generating investment. If remittances could be channelled into income-generating investments, it could significantly alter the country's economic landscape.

The manpower export sector plays a crucial role in Bangladesh's economy. There is no alternative to remittance for building foreign exchange reserves. However, the huge amount of remittances is not being utilised for investment purposes. During previous governments, due to the confusing policies of Bangladesh Bank, remittances were sent through illegal channels such as hundi rather than through formal means. If expatriate remittances could be used for investment, the country would benefit greatly. If facilities for investment could be ensured for the local beneficiaries of remittances, extensive efforts to attract foreign investment might not even be necessary.

The decision by BIDA to provide financial incentives to intermediaries for attracting foreign investment is a new initiative in the context of Bangladesh. There is no doubt that this decision will generate interest among those who want to work as intermediaries in securing investment. But the question remains, will providing financial incentives to intermediaries alone lead to a surge in foreign investment? Will foreigners rush to invest in Bangladesh? Providing financial incentives to expatriate Bangladeshis for mediating investment is certainly a good initiative. However, this measure is unlikely to significantly contribute to the actual mobilisation and realisation of foreign investment proposals.

Due to its geographical location and large population, Bangladesh deserves to be considered a highly attractive destination for foreign investment. The country has a population of 180 million. The proportion of middle-class households has increased from 12 percent to 20 percent. Consumer spending capacity has grown significantly. Based on these considerations, there is potential to attract foreign investment to Bangladesh. Every past government has made various attempts to bring in foreign investment. But the results have been virtually nil. The main reasons for the lack of substantial foreign investment are the lack of internal good governance in state institutions and the steadily deteriorating investment environment. In the World Bank's latest Ease of Doing Business Index, Bangladesh ranked 176th out of 190 countries.

The World Bank has recently introduced a new index called "Business Ready". Among the 50 emerging economies included, Bangladesh has been placed in the fourth tier. In such an investment environment, any foreign entrepreneur will think twice before bringing in investment proposals. Investment is a long-term effort. Those coming to Bangladesh with investment proposals will first consider the real investment environment in the country.

Due to various legal constraints, local investors cannot freely invest abroad even if they wish to. Hence, many are illegally taking funds abroad to invest. Foreign investors are entirely free in making decisions. If they do not like the investment environment, they can choose to invest in any other country. Foreign investors are like migratory birds.

Just as migratory birds will not settle in a water body without adequate food and safety, foreign investors too will not be interested in investing in a country unless they see security for their capital and lives, and a good prospect of returns. Foreign investors cannot be attracted through force or temptation. There must be guarantees that investment policies will not change with a change in government. Similarly, unless transparency and accountability are ensured within service institutions, the desired level of foreign investment will not be achieved.

Bangladesh does have some advantages when it comes to attracting foreign investment. In particular, EU member states offer duty-free GSP benefits for exporting goods from Bangladesh. This could have been a major reason to attract foreign investment to Bangladesh. But we have failed to take advantage of this opportunity. If a product manufactured in China is exported to the EU, a minimum 12 percent tariff is applicable. But if a Chinese company sets up a factory in Bangladesh, manufactures the product here, and then exports it to any of the 27 EU countries, there will be no tariff at all. Thus, Chinese companies can set up factories in Bangladesh, manufacture goods, and export to the EU without paying any tariffs.

Whenever the topic of foreign investment is raised, we proudly claim that Bangladesh can provide a steady supply of cheap labour in abundance. Therefore, foreign entrepreneurs will be encouraged to invest here. But we must remember that merely having an abundant supply of cheap labour does not automatically bring in foreign investment. Most Bangladeshi workers are untrained and unskilled. Unskilled workers always earn less. An abundance of cheap labour is not a matter of pride — it is, in fact, something to be ashamed of. If the workforce is trained and skilled, it becomes a nation's greatest asset. But if it is unskilled and untrained, it turns into the country's greatest liability.

Previous governments have not taken significant initiatives to train and skill the workforce. Rather, they created avenues for foreign workers to come to Bangladesh. During past governments, an initiative was taken to establish 100 special economic zones in various parts of the country. But no thought was given to who would work in the factories of these economic zones or where the workers would come from. Rather, the policy was to make arrangements to attract foreign workers to come and work in Bangladesh. Previously, a foreign citizen working in Bangladesh could instantly remit 75 percent of their monthly salary abroad. The remaining 25 percent was to be used to pay taxes and personal expenses, with any surplus kept in a local bank account as a deposit. They could take this amount home upon completion of their contract. However, a few years ago, Bangladesh Bank changed this policy.

According to the revised policy, any foreign worker in Bangladesh can now remit 80 percent of their monthly salary immediately to their home country. The remaining 20 percent, after paying taxes and covering personal expenses, can also be remitted abroad. This has harmed national interests. Many believe that Bangladesh Bank made this legal change to benefit certain countries. Foreign entrepreneurs may bring in capital to invest, but they will not bring labourers. So they will look for skilled and trained workers. If skilled labour is not available locally, they will try to hire from neighbouring countries. We talk about investment, but we have no clear idea of how it will actually materialise.

There is no reason to believe that giving financial incentives to intermediaries will flood the country with investment. To attract investment, we must improve the real investment environment. Once an investment proposal is registered with the Board of Investment, it must pass through numerous state-run service institutions. At every step, the investor faces harassment. It is unlikely that a single investor has been able to implement a project without paying some form of bribe or illicit payment.

Many years ago, the Board of Investment conducted a survey on the implementation of foreign investment proposals. It found that only 39 percent of registered proposals were converted into actual investments. The remaining 61 percent were withdrawn at various stages of implementation. In the 1990s, an investor came to the Bangladesh Shilpa Bank. Although he was born in Bangladesh, he lived in Spain and was a member of the Spanish Chamber of Commerce. When he applied for a loan from the Shilpa Bank, he was subjected to various forms of harassment. After the loan was approved and he went to purchase land in Bhada, Tongi, local thugs forced him to buy land through them. At every level, bank officials took financial favours from him.

Eventually, the gentleman, fed up, withdrew his investment proposal and returned to Spain. This is the reality. A former Executive Director of BIDA once referred to Bangladesh’s position in the World Bank's Ease of Doing Business Index and promised to bring it down to double digits within a year. But at the end of the year, he had to admit failure. On one occasion, two top Japanese investors brought a proposal to invest in Bangladesh. But they were not provided with suitable land to set up industries. A vast amount of land lies uncultivated in the three hill districts. These lands could be used for various industries. But no initiatives are visible in this regard. The law and order situation in the three hill districts is frequently unstable. At the root of this unrest lies unemployment. If industries had been established in the three hill districts of Chittagong Hill Tracts, employment opportunities would have been created, and the unrest would have subsided.

There may be some excitement in BIDA’s recent initiative, but such plans alone will not result in the expected volume of foreign investment. For that, we must improve the real investment environment. Institutional good governance must be ensured. Otherwise, the dream of attracting adequate foreign investment will remain a daydream.

MA Khaleque is a retired banker and writer on economic issues