Bangladesh and Industrial Sector

By Super Admin Published 1 October 2006 Report, Assignment, Case Study and Term Paper Rating:

Industry

Bangladesh will have within a decade a sizable industrial sector where manufacturing will account for at least 25 per cent of the GDP and at least 20 per cent of the employed workforce. This will mean a considerable rise from the figure of 10 per cent around which the sector's share in GDP and employed population have hovered for most of the past two decades. A vibrant and dynamic private sector will be the principal actor in Bangladesh's industrial arena. The industrial sector of Bangladesh will be competitive in the liberalized internal market as well as in the external market. The industrial sector of Bangladesh shall have a dominant export orientation. The goal of external competitiveness implies the pursuit of industrialization in accordance with the dynamic comparative advantage of the economy. Given Bangladesh's resource endowment, the principle of dynamic comparative advantage means production of labor intensive manufactures with skill up-gradation and productivity growth as its cutting edge. This however, does not preclude the possibility of Bangladesh having a niche high-tech industrial sub-sector that may be externally competitive. Dispersal of small and medium industries will constitute an important element in the industrial policy approach. Industrial development will be sustainable from the point of view of environmental concerns and resource availability. Industrial Policy 1999 aims at addressing these concerns building on earlier efforts and gains towards industrialization of Bangladesh economy. INFRASTRUCTURAL FACILITIES AND UTILITY SERVICES IN BANGLADESH GENERAL: The investors will, in general, find the infrastructural facilities and utility services available in Bangladesh to be adequate. Bangladesh is now trying to establish itself as the next rising star in South Asia as a location for foreign investment. The government has implemented a number of policy reforms designed to create a more open and competitive climate for private investment, both foreign and domestic. The issues relating to infrastructural facilities and utility services have been given high priorities in those policy reforms and implementations. COMMUNICATION: The transport sector of Bangladesh consists of a variety of modes. The country being a flat plain, all three modes of surface transport i.e. road, railway, and water are widely used in carrying both passengers and cargo. More than half of Bangladesh has access to an all-weather hard surface road within three miles distance. There has been a dramatic expansion of road network in recent years. In 1997, the total length of paved road under the Roads and Highways Department stood at more than 20,000 kilometers. It is increasing over time. It is estimated that mechanized road transport carry about 70% of the country's total passenger and cargo volume. Ports and important business centers are well connected by roads and highways.

In recent years, construction of a number of bridges such as the Bangabandhu Jamuna Bridge, Meghna Bridge, Meghna-Gumti Bridge, Bangladesh-China Friendship Bridge, Shambhuganj Bridge and Mahananda Bridge have been completed. The 4.8 kilometer long Bangabandhu Bridge which has been opened to traffic in June, 1998, is the eleventh longest in the world. It has established a strategic link between the East and West of Bangladesh, has integrated the country, is generating multifaceted benefits to the people and promoting inter-regional trade. Apart from quick movement of goods and passenger traffic, it is facilitating transmission of electricity and natural gas and has integrated the telecommunication link. About 32% of the total area of Bangladesh is effectively covered by the railways. It connects all the administrative and business points of the country. Railway container service from Chittagong port to Dhaka are available. About two-thirds of Bangladesh is a wetland laced with a dense network of rivers, canals and creeks. The navigable waterways vary between 8372 kilometer during the monsoon to 5200 kilometer during the dry season. Bangladesh Inland Water Transport Authority has been established by the government for maintenance of navigability of ports and channels. The entire coast along the Bay of Bengal is 710 Kilometer long. There are two major ports in the country. Chittagong Port, the oldest port, has been an entry point for at least 1000 years. The Mongla Port in Khula region serves the western part of Bangladesh. Worlds reputed shipping lines are operating through these two ports. There are now 11 operational airports in Bangladesh. Of these, the airports at Dhaka, Chittagong, and Sylhet serve international routes. WATER: Water is supplied by the Water and Sewerage Authority (WASA) in the metropolitan areas. Very high priority is attached regarding availability of water in industrial areas. GAS: Natural gas supply is available in major industrial areas. TELECOMMUNICATION: Comprehensive telecommunication services such as fully automatic telex, fax, e-mail, internet, telephone including international direct dialing are available. ELECTRICITY: In Bangladesh, electric power is generated in hydro, steam, gas-turbine, and diesel power plants. All the generating stations are interconnected through a national grid. INDUSTRIAL LAND: Once an industrial project is registered, the entrepreneur is eligible to apply for allotment of land to the government. Price of land in most of the industrial estates/ areas is relatively lower than the market rate. These estates are developed with necessary infrastructure facilities such as electricity, gas, water, sewerage, etc. Industrial plots are allotted by Bangladesh Export Processing Zones Authority (BEPZA) and Bangladesh Small and Cottage Industries Corporation (BSCIC) in industrial areas developed by them. Plots in other industrial estates/areas, owned by the government or owned/controlled by any local authority, are allotted on the recommendation of the Board of Investment (BOI).
Ready-made Garments

The ready-made garment industry in Bangladesh is not the outgrowth of traditional economic activities but emerged from economic opportunities perceived by the private sector in the late 1970s. Frustrated by quotas imposed by importing nations, such as the United States, entrepreneurs and managers from other Asian countries set up factories in Bangladesh, benefiting from even lower labor costs than in their home countries, which offset the additional costs of importing all materials to Bangladesh. Bangladesh-origin products met quality standards of customers in North America and Western Europe, and prices were satisfactory. Business flourished right from the start; many owners made back their entire capital investment within a year or two and thereafter continued to realize great profits. Some 85 percent of Bangladeshi production was sold to North American customers, and virtually overnight Bangladesh became become the sixth largest supplier to the North American market. After foreign businesses began building a ready-made garment industry, Bangladeshi capitalists appeared, and a veritable rush of them began to organize companies in Dhaka, Chittagong, and smaller towns, where basic garments--men's and boys' cotton shirts, women's and girls' blouses, shorts, and baby clothes--were cut and assembled, packed, and shipped to customers overseas (mostly in the United States). With virtually no government regulation, the number of firms proliferated; no definitive count was available, but there were probably more than 400 firms by 1985, when the boom was peaking. After just a few years, the ready-made garment industry employed more than 200,000 people. According to some estimates, about 80 percent were women, never previously in the industrial work force. Many of them were woefully underpaid and worked under harsh conditions. The net benefit to the Bangladeshi economy was only a fraction of export receipts, since virtually all materials used in garment manufacture were imported; practically all the value added in Bangladesh was from labor.
SMALL AND COTTAGE INDUSTRIES

1. Small Industry means an industrial undertaking engaged either in manufacturing process or service activity whose total fixed investment excluding the prices of the land, expenses for inland transportation and commissioning of machinery appliances and duties and taxes , is limited to taka three crore i.e. Tk. 30 million (including initial working capital). In the case of BMRE, even of the total investment limit exceeds Tk. 30 million, it would still be considered as a small industry. However , the extent of extended investment for BMRE shall not be more than 50% of the total investment limit. 2. 'Cottage Industry ' means an industrial unit either engaged in manufacturing or servicing generally run by the family members either as full time or part time and the total investment is limited to taka five lac (Tk.500, 000). 3. For the development and expansion of Small and Cottage Industries, BSCIC will be responsible for the registration, determination of import entitlement of raw materials and packing materials, issue of import pass book recommendation for local raw materials, allotment of land in its own industrial zones, and also for providing assistance in all other matters. 4. BSCIC will provide financial types of small and cottage industries; in this case, BSCIC shall have to mobilize its own fund. The fund to the banks may not be utilized for this purpose.

5. During the selection of investors for small and cottage industries, special priority shall be given to women educated unemployed, skilled technicians, laborers, engineers, wage- earners and those depended upon them. 6. Small Industries of the textile sector will enjoy similar facilities as those of small and cottage industries from the Bangladesh Small and Cottage Industries Corporation. 7. BSCIC will continue its efforts in creating infrastructure facilities in the growth centers similar to those available in the industrial estates. In the regions, where there are no industrial estates, the relevant authorities on the recommendation of BSCIC, will provide infrastructural facilities to the small and cottage industries on a priority basis. Irrespective of the amount of investment, BSCIC will approve the plans and lay-outs of the buildings of all the industries situated in the BSCIC, industrial states and are their controlling authorities, but for the sake of expansion of small industries, no permission shall be granted for the establishment of any new large or medium industry in the BSCIC industrial estates. 8. To assist in the marketing of products of small and cottage industries, the government, semigovernment and autonomous bodies will ensure the purchase of these products, as per rules and the government purchase policy. By utilizing their own funds, the Thana Parishads will also try to support BSCIC and the related institutions by organizing fairs and exhibition, setting up of sales and exhibition centers and providing infrastructural facilities like setting up of special Hat Corner. 9. The Jurisdiction, Sector and amount of investment and the type of production to be controlled by the Board of investment and the BSCIC will be clearly demarcated. 10. Small and cottage industries which have been granted credits by financial institutions/banks must be registered with BSCIC. 11. A Review committee will be formed in the Ministry of Industries with members from BSCIC, Bangladesh Bank, relevant banks/financial institutions and representatives from Chamber of Commerce and Industry and NASCIB for reviewing the implementation of the investment schedule of the small and cottage industries and monitoring the credit, policy being followed by the banks and other financial institutions. 12. Machinery/spare parts required by the new and existing heavy and medium industries and Government. Semi-Government and Autonomous bodies have to be procured from small industries and in these cases subcontracting will be given preference. 13. In addition to the existing facilities, the following special incentives and facilities will be provided to intensify the expansion of small and cottage industries: a. Small Industry Credit Guarantee Scheme will be introduced with joint collaboration of Bangladesh Small and Cottage Industries Corporation, Government / Private General Insurance Corporation, Government / Private General Insurance Corporation / companies. b. Based on the recommendation of the BSCIC, the National Board of Revenue will provide tax holiday to appropriate small and cottage industries. c. To assist the sub-contracting banks and financial institutions will make provisions for funds in accordance with their rules; the sub-contracting industries shall enjoy incentives and facilities similar to those provided in the SCI sector irrespective of their locations.
Traditional and other sectors

Traditional Sectors The industrial sector produces around 10 percent of GDP, and long-term national strategies in the late 1980s did not anticipate a major increase in that percentage. The greatest need and the greatest opportunities remained predominantly in the agricultural sector. Eastern Bengal was known for its fine muslin and silk fabric before the British period. The dyes, yarn, and cloth were the envy of much of the pre modern world. Bengali muslin, silk, and brocade were worn by the aristocracy of Asia and Europe. The introduction of machine-made textiles from England in the late eighteenth century spelled doom for the costly and time-consuming handloom process. Cotton growing died out in East Bengal, and the textile industry became dependent on imported yarn. Those who had earned their living in the textile industry were forced to rely more completely on farming. Only the smallest vestiges of a once-thriving cottage industry survived. At independence, Bangladesh was one of the least industrially developed of the populous nations. Annual per capita consumption of steel and cement was only about one-third that of India, for example, and electric power consumption per capita was less than one-fifth. Other Industries Not all industrial growth in Bangladesh was stimulated by anticipation of foreign sales. The national economy stood to benefit equally from domestic production that could eliminate the need for imports of one kind or another. A good example of import substitution manufacturing was the pharmaceutical industry, a field that attracted both foreign and domestic investment in the first decade of independence, based on the large potential domestic market. The Drug Ordinance of 1982 introduced controversy and claims by foreign firms that they were victims of discrimination vis--vis local pharmaceutical firms. The foreign firms found that the ordinance restricted the kinds of drugs they could manufacture, import, and sell; specifically, foreign pharmaceutical firms could no longer manufacture drugs that Bangladeshi-owned companies were capable of producing. The difficulties foreign investors have encountered seem to have been limited essentially to this one industry, and even there the foreign firms already established have managed to cope more or less successfully. In 1988 one United States firm announced a decision to expand its Bangladeshi manufacturing operations by moving into production of highly specialized medicines with greater profit margins. Public sector corporations produced a substantial part of the country's paper and newsprint requirements, as well as carrying on sugar-refining operations at modest-sized mills in several parts of the country. They also produced about 100,000 tons of steel per year, 1 million tons of petroleum products, and gasoline pumps, radios, television sets, bicycles, paints and varnishes, cement, and industrial chemicals.
INDUSTRIAL SECTOR EXPANSION MEASURES

As a complement to building a vibrant economy and achieving a sustainable growth, the government has been taking comprehensive package of measures for expansion of the industrial sector and consolidation of the industrial base for the last few years.

Moving along the path of free market economy, almost all industries except defense have been made open to private sector. To accelerate the pace of industrialization, the process of approval of projects has been simplified. Identical provisions have been made in respect of bank loans, tax holiday, duty concessions and extension of other facilities for setting up industrial projects without any discrimination between the local and foreign entrepreneurs. Apart from guarantee for full security of investment and arrangement for easy repatriation of dividends and invested capital, provision has also been made to grant permanent residence/citizenship to foreign entrepreneurs making large investments. The Privatization Board has been transformed into the Privatization Commission and strengthened further to expedite transfer of public sector industrial units as well as government shares in other industrial enterprises to the private sector. A good number of government-owned industrial units and government shares in other industrial enterprises have already been off-loaded to private hands. In order to rejuvenate the prospective sick industries, a Special Committee has been formed for identifying such industries and allowing remission of interest on loans taken by them. Based on recommendations of the committee, the government will pay 50% of the interest remission in the form of bonds to the concerned banks. A number of fresh measures has been taken during the year under report under the new industrial policy of 1999 for development and nourishment of industrial sector. With a view to creating funds for long term industrial finance, arrangement has been made for issuance of 5- year and 7-year government-guaranteed Industrial Development Bonds worth Tk.500 crores through the Agrani Bank, and 5-year Bangladesh Industrial Development Bonds worth $100 million through the Sonali Bank. For enabling financial institutions to provide long term industrial finance as well as strengthening the capital market of the country, a US$57.69 million Financial Institutions Development Project (FIDP) has been put in place during the year under report. Technical and financial assistance will be given to the financial institutions from this project in securitization of their loan/lease and issuance of their medium and long term debentures/bonds. Two new organizations, namely, the Infrastructure Facilitation Center and the Infrastructure Development Company Limited have been established to help development of industrial infrastructure in the country. Necessary law has been enacted for establishment of Private Export Processing Zones (PEPZ) in the country. Initiative has already been taken to set up four PEPZs, one each at Mongla, Ishwardi, Saidpur and Comilla. Besides, the process of establishment of 5 Industrial Parks and High-tech Parks in the country has been started. As a result of these measures, the potential for strengthening of the pace of industrialization in the country has been brightened. A total of 1,563 industrial projects involving a total investment outlay of Tk.17, 215 crores (1428 local and 135 joint venture/100% foreign) were registered during 1999-2000. The amount of investment during the year was 15.4 per cent higher than in the previous year. Alongside increased registration of industrial projects, the amount of industrial loans disbursed during the year also increased. Compared to the level in the preceding year, the amount of working

capital finances and term loans disbursed in the industrial sector during 1999-2000 increased by 33.3% to Tk.12,309 crores (wthe previous year. Alongside increased registration of industrial projects, the amount of industrial loans disbursed during the year also increased. Compared to the level in the preceding year, the amount of working capital finances and term loans disbursed in the industrial sector during 1999-2000 increased by 33.3% to Tk.12,309 crores (working capital Tk.10,681.74 crores, and term loans Tk.1,627.26 crores). The Credit Guarantee Scheme which was introduced for encouraging expansion of employment creating and income generating small industries by mobilizing small entrepreneurial initiatives in the country remained in operation during the year under report. Credit covered by guarantee under the Scheme against loan given to investors in small industries stood at Tk.27.23 crores as on 30th June, 2000. Under the Khudra Uddyog Rin Karmosuchi (Small Initiatives Credit Scheme) introduced for self-employment of the voluntarily retired officers/staff, a total of Tk.4.92 crores were disbursed up to 30th June,2000 against which refinance provided by Bangladesh Bank stood at 3.69 crores.
EXPORT PROCESSING ZONES (EPZ) IN BANGLADESH AND BEPZA

Introduction In order to stimulate rapid economic growth of the country, particularly through industrialization, the government has adopted an 'Open Door Policy' to attract foreign investment to Bangladesh. The Bangladesh Export Processing Zones Authority (BEPZA) is the official organ of the government to promote, attract and facilitate foreign investment in the Export Processing Zones. The primary objective of an EPZ is to provide special areas where potential investors would find a congenial investment climate, free from cumbersome procedures. Two EPZs, one in Chittagong and the other near Dhaka are now operational. Following information is provided to the potential investors for investment in EPZs of Bangladesh. Eligible investors 100% foreign owned including Bangladesh nationals ordinarily resident abroad (Type-A).Joint venture between foreign and Bangladesh entrepreneurs resident in Bangladesh (Type-B) 100% Bangladesh entrepreneurs resident in Bangladesh (Type-C). Mode of Investment Investment is convertible in foreign currencies by foreign investors. Option to establish public/private Ltd companies or sole proprietorship/partnership concerns. Investment Guarantee Foreign Private Investment (Promotion and Projection) Act 1980 secures all foreign investment in Bangladesh. OPIC"s (Overseas Private Investment Corporation, USA) insurance and finance programs operable. Security and safeguards available under Multi-national Investment Guarantee Agency (MIGA) of which Bangladesh is a member. Arbitration facility of the International Center for the Settlement of Investment Dispute (ICSID) available. Tele-communications Telex, Fax and International Dialing Services connected through satellite system available. Communications Adequate sea, rail, road and air communications services are available. BEPZA

Sanctions projects generally within one week. Issues required Import/Export Permits. Issues required Work Permits for foreign nationals working in EPZ enterprises. Provides required infrastructure facilities in EPZs. Offers 'One Window Same Day Service' to investors in EPZs. PRODUCTION ORIENTED LABOR LAWS Law forbids formation of any labor union in EPZs. BEPZA is vested with responsibility to administer labor matters for all enterprises in EPZs. Minimum Wages (Monthly) Apprentices/Trainee US $22.00, Unskilled US $38.00, Semi-skilled US $45.00, Skilled US $63.00 Other benefits include Conveyance Allowance, House Rent, Medical Allowance and Festival Bonus. Working Hours 48 hours a week in a factory. 40 hours a week in an office. 5 working days in a week Employees leave 10 days Casual leave, 17 days Annual leave
FACILITIES AND INCENTIVES

FACILITIES a. Land and factory building are available on rental basis. b. Electricity, water, gas and telecommunications are provided by the zones. c. Import and export permits are issued by EPZ within 24 hours. d. Work permits are issued by BEPZA. e. EPZ is a secured and protected area. f. Recreational facilities are available. g. Availability of food stuff and beverage on payment of nominal tax foreigners working in EPZs. h. Potential investors are required to deal only with BEPZA for investment and all other operational purposes. INCENTIVES Fiscal

I. Tax Exemption a. Tax holiday for 10 years b. Exemption of income tax on interest on borrowed capital. c. Relief from double taxation subject to bilateral agreement. d. Complete exemption from dividend tax for tax holiday period for foreign nationals. e. Exemption of income tax on salaries of foreign technicians for 3 years subject to certain conditions. II. Duty Free Import and Export a. Duty free import of machinery's, equipment and raw materials. b. Duty free import of three motor vehicles for use of the enterprises in EPZs under certain conditions. c. Duty free import of materials for construction of factory buildings in the zones. d. Duty free export of goods produced in the zones. Non-Fiscal I. Investment a. All foreign investment secured by law. b. No upper limit on extent of foreign investment. c. Full repatriation of profit and capital permissible. d. Repatriation of investment including capital gains, if any, permissible. e. Remittances allowed in following cases: f. All post tax profit and dividend on foreign Capital. Savings from earnings, retirement benefits, personal assets of individual on retirement/termination of services. Approved royalties and technical fees. No permission required for expansion of the project or product diversification. II. Project financing and banking a. Off-shore banking facilities available. b. Local and international banking facilities also wide-open. III. Import a. Freedom from national import policy restrictions. b. Import of raw materials also allowed on Documentary Acceptance (DA) basis. c. Advantage of opening back to back LC for certain types of industries for import or raw materials. d. Import of goods from the domestic tariff area permissible.

IV. Project Implementation Re-location of existing industries from one zone to another within the country permissible. V. Operation a. Sub-contracting within EPZ allowed. b. Inter-zone and intra-zone export permitted c. All customs formalities done at the gate site of the respective factory building within the zone. d. Permission for import/export given in the same day. e. Repairing and maintenance's of machinery's and capital equipment from domestic tariff area allowed. VI. Employment a. Liberal employment of foreign technicians/experts allowed. b. Foreigners employed in the zones enjoy equal rights similar to those of Bangladesh nationals. c. Law forbids formation of any labor union in the zones. Strike within the zones prohibited. VII. Support Services Customs office, Post Office, Medical center, Fire station, Police station etc DHAKA EXPORT PROCESSING ZONE Location: Savar 35 km from Dhaka city center 25 km from Zia International Airport, Dhaka Zone Area: 58 hectares (142 acres) Land Total number of plots: 100 Size of each plot: 2000 M2 Tariff: US $ 1.50/M2/year Standard Factory Building Space: 72,000 M2 in 16 blocks Tariff: US $ 2.00/M2/month Warehouse Space: 2,300 M2 Tariff: US $ 2.00/M2/month Utility Services Water supply: CEPZ gets water from Chittagong WASA Storage Capacity: 45, 20,000 litters/day Tariff: Tk. 13.56 per M3 Power Supply: 11 kV, 3 phases, and 50 cycles Tariff: Tk. 2.86 per kWh (Industrial use) Gas supply: 1, 36,000 M3/day or 5,667 M3/hour Tariff: Tk 3.64 per M3 (Industrial use) CHITTAGONG EXPORT PROCESSING ZONE Location: 2.40 km from Chittagong Sea Port 5.63 km from the main business center of Chittagong 7.24 km from the Chittagong International Airport Zone Area: 255 hectares (630 acres)

Land Total number of plots (planned): 430 Size of each port: 2044 M2 Tariff: US $ 1.50/M2/year Standard Factory Building Space: 39,000 M2 in 16 blocks Tariff: US $ 2.00/M2/month Utility Services Water supply: DEPZ gets water from its own water supply system Tariff: Tk. 13.56 per M3 Power Supply: 11 kV, 3 phases, and 50 cycles Tariff: Tk. 2.70 per kWh (Industrial use) Gas supply: DEPZ gets gas from the Titas Gas Field Tariff: Tk 3.64 per M3 (Industrial use)
Cottage Industries

Main Cottage Industries Handloom industry Silk industry Hand-spinning industry Pottery industry Biri-making industry Conch-shell and Ivory industry Coir industry Salt industry Cane and Bamboo industry Soap industry Brass and bell metal industry Wood industry Miscellaneous Importance of cottage industries 1. Supplementary occupation for the farmers 2. Additional source of income 3. Cottage industry is labor intensive 4. Female employment 5. Economy of labor 6. Economy of capital 7. Earning of foreign exchange 8. Balanced industrial development 9. Freedom of work and homely atmosphere 10. Preservation of arts and skills 11. Use of by-products of large industries 12. Equitable distribution of income 13. Raw materials of cottage industries are easily available Problems of cottage industries 1. Lack of capital 2. Want of credit 3. Low wages

4. Scarcity of raw materials 5. Scarcity of modern tools 6. Lack of education 7. Lack of technical training 8. Lack of power (gas, electricity etc.) 9. Absence of government patrons 10. Competition with large scale industries 11. Uncertainty of market 12. Lack of gradation and standardization of product Suggested Solution 1. Improvement of credit facilities 2. Up to date technique of production 3. Supply of raw materials 4. Marketing facilities 5. Education and training 6. Supply of cheap power 7. Creation of external market 8. Removal of competition by the large scale industries 9. Classification and standardization of cottage product 10. Development of transport and communication 11. Organization of cottage workers 12. Purchase by the government 13. State support