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Privatisation in Bangladesh

Conflicting Trends in Programme Hinder Prospect

by A B M S Zahur
**Whatever may be the problems and impediments the success of privatisation will depend on how much Bangladesh government is committed to develop an overall framework favourable to the free inter-play of market forces.
PUBLIC enterprises were created in both development and developing countries to overcome market failures i.e. to intervene where the free working of the market would not produce optimally efficient outcome. They were also expected to achieve important social goals such as improved Income distribution, increased Job op-Cortunities, development of ackward regions. They were certainly not set up to make losses. They were either to run at break-even or to make handsome profit.
In Bangladesh, public enter-Sirises were originally supposed o be monitored on the basis ol profit. At the time of creation of public enterprises (i.e. in 1972) it was envisaged that the operations of such organisations would be carried out on commercial lines with due weight given to other government objectives. Bangladesh public enterprise can oe categorised as nationalised (P.O 27). abandoned (P.O. 16). vested (P.O 29) and enterprises promoted and set up by the then Elast Pakistan Industrial Development Corporation (EPIDC) and enterprises set up after 16 December 1971.
Bangladesh has a long history of privatisation. It started within two years of attaining independence rather informally. The policy of disinvestiture was formally announced for the first time in 1975. Subsequently the polity was revised in 1982 and 1986. The public enterprises failed to play any significant role in the economic development and to ensure distributive lustice. Thus the government had no option but to allow the private enterprises to play greater and more significant role in the economic development of the country.
Privatisation can be generally achieved in three forms : Privatisation of ownership, privatisation of management or allowing private sector to provide the goods or render the service.
All the methods for privatisation have been adopted in disposing of more than six hundred public enterprises in Bangladesh. Despite this impressive figure ol privatised public enterprises, so far no clear policy on privatisation has been formulated. No significant study has yet been made as to the success or failure of each method of privatisation. As such we are still in the dark in regard to more appropriate method of privatisation In Bangladesh.
One finds in the programme of privatisation two conflicting trends in Bangladesh : Heavy bureaucratisation and a traditional hostility to the private sector on the one hand and a relatively long history of privatisation of state enterprises on the other. Due to lack of clear commitment of successive governments between 1975 and 1996 by and large the existing public enterprises are incurring huge losses in their operations. This has far reaching impact on the country's finances and contributed significantly to depressed growth rates of the economy Tn recent years. With slow growth and little progress in reducing poverty and em-ployment objectives, revival of GDP growth to levels above 7 per cent is now recognised as the centre-piece of country strategy in Bangladesh. The prerequisite for this strategy is the acceleration of the private sector. Privatisation and scaling back of the operations of loss making enterprises is an important element of that strategy. Privatisation will complement and facilitate Bangladesh's effort to increasingly shift to a market oriented economy.
The largest number of state-owned enterprises (SOEs) are in the manufacturing sector and cover industries such as tex-
tiles, steel and engineering, food and chemicals and Jute. The energy and power sector Is dominated by the Power Development Board. OU, Gas and Mineral Corporation and petroleum corporation. In the transportation sector also SOES play a central role. Self-financing ratio of SOEs has been less than 10 per cent in recent years. The overall picture is one of negative profitability.
In view of current resource constraint, government reviewed the public sector development programme and prepared a core three-year investment programme for 1990/91-1992/93. It involved substantial reduction of government investments in industrial sector. Under the programme the gov ernment would not undertake any further investments In subsectors where there were excess capacities and In units which were not viable technically, fi nancially and economically. Self financed Investments In public sector industries would also not be undertaken unless the enterprises were able to meet their debt service obligations on schedule, internally generate sufficient cash reserves and Investments were viable without price control and subsidies. Any public Investment in the industrial sector would have to be supported by strong strategic Justification and would be undertaken only on the basis of Joint venture arrangement. Budgetary support would not be provided to public sector projects Instead, the government will strongly encourage foreign and domestic private sector investment In these projects. Due to noncommittal attitude of the then government the programme could not be implemented and the process of privatisation was
too slow. However, a privatisation board was set up. The board could not function properly due to lack of adequate support from the government.
The present government, though hardly 20 months old has already shown enough seriousness about privatisation. The Privatisation Board has been upgraded, the chairman of the Board has been given the status of a minister. Tne chairman is a dynamic person. With adequate government support it Is expected that he would be able to make an appreciable impact.
Privatisation on the development agenda is mainly due to external pressures from international donors and banking agencies such as World Bank and the International Monetary Fund. The US Agency for International Development (US AID) promotes denationalisation for Ideological reasons. World Bank Is more sensitive to the diversity of economic culture worldwide and adopts a more pragmatic approach to privatisation. It points out to growing debts of many state-owned enterprises swallowing public spending which could otherwise go on health or education. The International Monetary Fund had seen privatisation as one way of reducing public sector debt. Strictly speaking, outside pressures and force of circumstance rather than domestic ideology and Interest are propelling the debate of privatisation In Bangladesh
Capital markets have a crucial role In fostering any transfer of public enterprises to pri vate ownership Weakness in Bangladesh capital market is a major obstacle. Thus reform of its capital market has become urgent and essential. This requires a gamut of policies; an
end to interest or dividend controls: a legal and administrative framework to guarantee investor protection: a system company law which sets standards for accounting and disclosure: training of accountants and auditors; reductions in the cost, complexity and bureaucracy of equity issues; and end to tax discrimination against corporations as a form of business organisation compared with private firms; Incentives to encourage institutional investment and opening market to foreign capital. We understand the present government is aware of this. The previous government took some positive steps in this direction, such as opening of second Stock Exchange in Chittagong, revision of Company Law. encouraging institutional investment and opening of market to foreign capital. Whatever may be the effort development of capital market is a slow process.
With weak and less developed capital market and low domestic saving an Immediate option may be direct sale of state-owned enterprises to overseas companies instead of gradual sale through domestic outlets As a supplement to domestic saving, foreign risk capital may be considered. In case of strategic Industries it would be advisable to avoid foreign direct Investment because such industries should not be controlled from abroad. Like many other developing countries a large number of Industrial plants are not profitable in competitive world markets because of their size, location or lack of reliable supply of electricity. In such cases tax concessions, market privileges may be considered.
We have to accept the fact that there Is a limited scope for
privatisation in Bangladesh because of low level of domestic saving, weak capital market, union opposition and lack of adequate bureaucratic cooperation. To us it should be a programme for reform. Restrictions and controls on capital markets need to be reduced. Improvement of management of public enterprises and liberalisation of capital markets are likely to bring major efficiency gains by themselves. Over the years performance of public enterprises has necessitated larger government subsidies. This has contributed to increased budget deficits and greater reliance on external borrowings to support these deficits. Thus privatisation will (1) relieve financial burden on government, (ii) enable government for greater investment in infrastructure facilities; (ill) further advances in technology (iv) increased productivity and (v) Increased allocative efficiencies
Whatever may be the problems and impediments the success of privatisation will depend on how much Bangladesh government is committed to develop an overall framework favourable to the free inter-play of market forces. During more than two decades in the past sporadic transfers of ownership from public to the private sector could at best resulted in very little positive impact in the economic growth of the country. This should not discourage us In our progress toward privatisation. Despite unenviable record of performance Bangladesh government is likely to go much further because very few believe that an extensive state sector is the secret of faster growth. The bureaucratic opposition and unhappy union may prove to be fragile. The shift toward privatisation will move faster. It is the wave of the future. Nothing can stop it.
The writer is a retired Joint Secretary.