Bangladesh has the natural resources and potential for growth that should make it perfect for foreign investment, but only the most daring would consider it, writes Damon. Bristow. Bangladesh has many of the things that foreign investors look for...

WHEN it comes to investing in the Asia-Pacific region. Bangladesh does not usually spring to mind: its traditional image is of an impoverished and underdeveloped country susceptible to natural disasters.

But the Bangladeshi government is keen to change all that. It advertises regularly in the international media and arranges for official and private trade delegations to visit Asian. European and North American cities. Its objective? To point out to anybody who will listen that the country is ripe with Investment opportunities.

About 200 overseas companies currently have investments in Bangladesh. In mid-1996, the Bangladeshi stock-market was one of the world's best performers. However, most multinationals consider the country to be off the radar screen. Yet their reticence — since June 1996 just $1.5bn has dribbled into the country — is understandable. However you look at it there is no escaping the fact that it is a tough place to do business.

Bangladesh is one of the poorest countries in the world. Unlike India, it doesn't have much of a middle class to speak of; indeed, according to the Asian Development Bank, 61.3% of urban households live below the poverty line. Because of its geography, the country is susceptible to regular natural disasters. Between July and September last year, for example. massive floods covered two-thirds of the country. They affected 30m people, and caused more than 1,100 deaths. It is therefore hardly surprising to find that Bangladesh is one of the world's largest recipients of development aid.

Military and Strikes

The volatile political situation hasn't helped much either. Political violence, politically motivated strike^ (known as hartals) and the involvement of the military have been part and parcel of life in Bangladesh since it gained independence from Pakistan in 1971.

Yet after the most recent elections in mid-1996. there was hope that the cycle of violence would be broken. The elections were won by the Awami League (AL), which came to power promising to reform the economy and tackle the problem of endemic corruption and lawlessness.

Business as Usual

But things returned to normal almost immediately after the elections. Granted, the military has so far managed to keep its nose out of politics, but the Bangladesh Nationalist Party (BNP) has taken every opportunity to actively oppose the AL §overnment. The party imme-iately announced its decision to boycott parliament in protest

against alleged police harassment of BNP activists. Since early 1997. the country has been paralysed by a series of BNP-sponsored hartals, and in recent months the party has threatened to plunge the country into turmoil unless Sheikh Hasina head of the coalition government, either stands down or calls another election. Reports of extortion, intimidation and human rights abuses are increasingly common.

Bangladesh's economy is in a pretty parlous condition, too. Agriculture accounts for 32 per cent GDP. as opposed to 11 per cent for manufacturing and a little over 1 per cent for the service sector. In 1997. economic growth slipped to 5.1 per cent, down from 5.9 per cent the year before. Since 1997 inflation has also climbed steadily and is now about 8.7 per cent.

Worse still, the economic and financial crisis that has unfolded in Bangladesh’s neighbours to the east has led to an outflow of money from the country's fledgling stockmarket. A pledge the AL made in April 1998 — to achieve economic growth in excess of 7 per cent a year over the next five years — is increasingly looking like wishful thinking. This is down to a general absence of political will, a shortage of electricity, and a weak financial and banking system that is inefficient and weighed down by bad debts.

Rich Pickings

Yet paradoxically. Bangladesh has many of the things that foreign investors often look.for. It is rich in natural gas and oil — it has reserves of 22.500 bn cu ft of gas (of which 10,400 bn cu ft,are recoverable) and 4m barrels of oil.

On paper at least, the country also has one of the most liberal investment regimes in the entire Asia-Pacific region. Since the early 1980 a range of measures have been introduced so that today foreign companies are allowed 100 per cent ownership in most sectors and have access to a range of tax holidays.

Trade has been liberalised and duties reduced. And the government has established a number of export processing zones (EPZs). Free repatriation of profits is allowed, and the taka, the Bangladeshi currency, is almost fully convertible on the current account. No prior approval is required for foreign direct investment, although companies must register with the Board of Investment (BOI). The 1 government has also

pledged to privatise the country's loss-making state-owned enterprises.

II conies as no surprise to find that the most high-profile investors currently operating in Bangladesh have been in oil and natpral gas. In 1997. state-owned 'oil company Petrobangla, signed exploration and development contracts with the US firm Occidental Petroleum. United Meridian International, and the Scottish company Cairn Energy, with Shell and Haliburton/Brown Root of the US as development partners. Negotiations for additional licensing rights to explore for oil and gas are ongoing.

Looking to the future, many of these companies are hoping that they will be able to export natural gas to the booming East Bengal market in neighbouring India. The industry should also benefit from the decision by the World Bank and the Asian Development Bank (ADB) to provide backing for a number of pipeline projects to help ease the distribution bottleneck that is developing.

In keeping with other developing countries, power developers have been close on the heels of their friends in oil and gas. Consumption of commercial energy in Bangladesh is amohg the lowest in the world. Like India. Bangladesh sees private power generation as the solution to its problems. The government intends to increase the country's generation capach- to 4.600 MWby the year 2005.

In 1997 (at about the same time the major oil deals were being signed), a couple of US companies signed contracts to build two 100 MW bargemounted plants to be fired by natural gas. And at the start of 1998. Khulna Power and Smith Cogeneration Bangladesh of Hong Kong signed implementation and power purchasing agreements with the Bangladesh Power and Development Board. As with oil and gas. both the World Bank and the ADB have pledged money to help improve the country's transmission and distribution facilities.

Opportunities have also opened up for chemicals com-Eanies. British Oxygen, which as a historical presence in the country, has recently said that it will build a major new separation plant to produce 80 tonnes of liquid argon, nitrogen and oxygen a day (these are vital for oil and gas exploration). More generally, a number of Japanese and Italian foreign investors have joint ventures to

produce a range of other chemicals with the state run Bangladeshi Chemical Industries Corporation.

Phone Home

Since 1989. when the Bangladesh Telegraph and Telephone Board's monopoly was broken up, a number oi foreign telecommunications companies have established themselves in the country (with only three lines per 1.000 people. Bangladesh has one of the lowest telephone densities in the world).

Today, there are seven private sector developers operating in Bangladesh, running terrestrial and mobile services. In March 1997. for instance, Grameenphone was launched. This service is a partnership between the Grameen Bank of Bangladesh, the Marubeni Corporation of Japan and Gono-phone. a New York-based company. It currently covers around 10m people in Dhaka and should be expanding soon. Just recently. Telecom Malaysia and the AK Khan Group of Bangladesh launched the AKTEL mobile phone service in Dhaka. This is the third such joint venture.

A small number of companies interested in port development. roads and airports have also ploughed money into Bangladesh: a US company, Freight Systems Co Ltd, recently invested $500m in a joint venture to establish two container terminals in Chittagong, the country's largest port. The ADB has offered to upgrade the facilities at the country's two major ports at Chittagong and Mongla if they are privatised, and this should lead to further opportunities opening up.

Flying High

A $13Im expansion of Chittagong airport, which started in 1998. has attracted some overseas interest as well. Bangladesh is also trying to attract foreign investment in roads and bridges. Two British companies. Butterly Engineering and Sir William Halcrow & Partners, are already involved in the Jamuna Bridge Project. In anticipation of a future construction boom, two cement plants, one built by Daewoo and the other by the Associated Cement Companies of India, are about to come online as well.

The textile sector has' also attracted some interest from foreign investors, In April this year, for example. Hua Peng Enterprises of Shanghai. China. . established a joint venture with Regional Spinning Mills.

But perhaps more surprising is the fact that some electronics companies have made a go of it. A number of them have already set up light assembly plants in the Chittagong EPZ. Looking to the future, the estimated market for computer hardware, peripherals and software • in Bangladesh is estimated to be around $15m and increasing at a rate of 15 per cent a year. The government is particularly keen to encourage investment in' this area.

Until now. the general opinion of most companies on the ground is that once they are established. Bangladesh can be a profitable — and pleasant — place for them to do business. But the current climate of political animosity is steadily eroding what little business confidence exists.

In May. six of Bangladesh’s chambers of commerce issued a joint statement. It said: ’The country's trade and industry is deeply worried over the breakdown of law and order and increasing criminalisation of society.' To make matters worse, foreign investors who are already in the country are getting more worried by the. day.

A Time of Troubles

Traditional problems, such as slow government decisionmaking. dicey law and order, inadequate courts, a lack of basic infrastructure; and a daily ritual of power cuts, are reportedly once again getting worse. Corruption and political violence are also posing serious problem.

Some companies are voting with their feet. Just recently, Vita Dairy Industries, a Bangladeshi-Japanese joint venture that planned to develop a tourist resort in Comilla, was placed on hold while the company's complaint that the local power company demanded bribes was investigated. Potential investors, meanwhile, are simply looking elsewhere.

If it wants to drum up interest in Bangladesh, the government has little choice but to speed up its privatisation programme, move ahead with financial and administrative reform. develop infrastructure, try to curb political violence, and get corruption under control. Sadly, actions such as-these require a modicum of political stability — something of a rarity in Bangladesh these days.

The country therefore looks set to remain a destination for only the hardiest of foreign in? vestors for many years to come.

The author is deputy head of research at Temple-Smith Hilliard, an international firm of management counsel specialising in international business and management.

Courtesy: Accountancy International. March 1999.