Hope and fear: dichotomy in new industrial policy

Tanim Ahmed*, NewAge, May 7, 2009

The obvious dichotomy and contradiction in the spirit of the industrial policy and the objective of the investment regulations make it quite plain that the two are not compatible and, thus, regardless of how strongly worded the policy or the statements are, foreign investment will continue to play an adverse role in the country’s industrialisation process

THE most distinguishing factor of the new industrial policy is its stance on state-owned enterprises. In sharp contrast to what had almost become the norm during the previous regimes, as well as the draft prepared by the military-controlled interim government, the Awami League-led government has come out firmly against wholesale privatisation of public sector enterprises. The industries minister, Dilip Barua, rightly criticised such privatisation, pointing out that the privatised public sector enterprises had not brought about the desired benefits either through employment generation leading to increased welfare or through increased revenue. Instead, many were broken into parts and sold off. A report in New Age on April 26 quotes a number of people questioning the very manner of privatisation of public mills.

When unveiling the draft industrial policy that day, Dilip Barua, in fact, said the government would not only halt privatisation but also reopen government-owned mills that had been shut down. If needed, the government would invest and bring about the necessary reforms to make those mills more efficient. This was almost the opposite of what the draft policy prepared by the military-controlled interim government had stated. The relevant chapter read, ‘In pursuit of the government’s private sector-led industrialisation strategy, the privatisation process of state-owned enterprises will be expedited with special focus on loss making units.’ It went on to say that the forms of privatisation would include outright sale, leasing, partial or full off-loading of share in the capital market and private-public partnership.

Rather commendably, that part was modified and virtually turned on its head, stating the opposite as reports and statements suggest. Soon after, the prime minister, Sheikh Hasina, told a public meeting that retrenched factory workers would be employed again when the closed mills resumed operations. She told a large rally of the Sramik League, the labour front of the ruling Awami League, on May 1, that the mills would resume operations after ensuring workers’ partnership in public enterprises. Although she did not elaborate on the scheme, Hasina was actually harping on another provision that the Awami League government had introduced in the industrial policy.

The public sector enterprises would be denationalised through Employee Owned Stock Programme, which has yet to prove its efficacy. But the scheme does suggest that it would be far more acceptable vis-à-vis the workers’ point of view and labour welfare in general. Another encouraging provision that the policy states is that it would stop discriminating between private and public sector enterprises in terms of tariffs and other regulations. Preference for the public sector enterprises has for a long time made private manufacturers of similar products uncompetitive. While private operators have been at pains to explain the kind of adverse effect such regimes would have on the emergence of private sector operations, this has typically been one of the reasons that most of private manufacturers were always supportive of wholesale privatisation to see off the unfair competition. If the private and public sector enterprises are indeed streamlined and not given unwarranted preference then there would also be an extra pressure on them to become competitive on a level playing field. This would then lead to genuine efficiency and ensure genuine competition.

Other sections of the industrial policy are also encouraging. Provisions include special incentives for small, medium and cottage industries that are said to contribute substantially to employment generation. There is a separate list of controlled sectors where investment will have to be vetted and approved separately. Although health is mentioned as a thrust sector, specifically hospitals and clinics, there are no indications about the government’s principled position as far as health service delivery is concerned. That health is a ‘thrust sector’ could only mean that the government would encourage more private investment here, but that might also mean that the government is trying to absolve itself of a serious responsibility. Furthermore, it begs some explanation as to how hospitals and clinics could be classified as ‘industries’.

Reports also stated that the government would provide necessary protection for the domestic industries so that they might flourish. This has also long been one of the prime concerns of different sections that the successive governments gradually liberalised imports making it extremely difficult for fledgling industries to establish themselves firmly before being wiped out by foreign competition.

Investment incentives include rebate or discount on taxes for special areas of the country and specific sectors. The most prioritised areas include Rajshahi, Barisal, Khulna and Sylhet divisions and the Chittagong Hill Tracts — undoubtedly the more neglected regions of the country — with full tax holiday for the first three years, followed by 50 per cent tax holiday for the next three and so forth. Although not on the same scale, there are also incentives for investment in Dhaka and Chittagong divisions, which only lighten the effect of incentives for the more neglected regions. The incentive structure, although marginally higher for the poorer and less industrialised regions of the country, hardly appears as the decisive factor to attract investment in Kurigram or Khagrachari, for instance. Additionally, there is almost no mention of infrastructure development in those areas, which is another key factor in generating investment anywhere.

There are also provisions that more appropriate foreign investment would be sought after. The policy states that the government would encourage such foreign investment that has a higher possibility of technology transfer and higher contribution to the economy. But it is here that the industrial policy raises grave concerns. According to the draft industrial policy, both national and foreign investment would be given national treatment. In other words, there would be no discrimination between foreign and national investment. Quite obviously, in a bid to attract foreign investors with more liberal and lucrative terms and conditions, the policy keeps special incentives for foreign investment intact and in fact worsens the prospect for local industries and entrepreneurs. Although it mentions special protection for locally manufactured goods, the section on foreign investment does not make any mention of local content requirement or any form of performance requirement. To a great extent, the provisions of the investment regulations adopted in 1980 would nullify the other provisions of the industrial policy.

Currently foreign-owned enterprises do not have any requirement to source any proportion of their raw materials from locally manufactured goods. There are also no requirements to reinvest their profits. The companies as well the expatriate employees working there are allowed to remit 100 per cent of their profits and incomes abroad. This has actually been a cause for concern in case of the cell phone companies. Their remittances have at times become rather threatening for the foreign exchange reserve situation. Although some of the cell phone companies have recently indicated that they would float a portion of their equity in the stock market, the country’s investment regulations do not really make any such stipulations. 

The obvious dichotomy and contradiction in the spirit of the industrial policy and the objective of the investment regulations make it quite plain that the two are not compatible and, thus, regardless of how strongly worded the policy or the statements are, foreign investment will continue to play an adverse role in the country’s industrialisation process. It only demonstrates the need for a comprehensive approach towards industrialisation appropriately modifying the relevant policies and regulations. That concerted effort and planning quite similar to the successive governments of the past is still missing. There is still time though.

*Contact: tanimahmed@gmail.com


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