Export Diversification and Role of Export Processing Zones (EPZ) in Bangladesh (Text Document)

Transcription

1 Export Diversification and Role of Export Processing Zones (EPZ) in Bangladesh (Text Document) Prepared By BRIG GEN MD. ZAKIR HOSSAIN psc, G (Retd) Executive Chairman Bangladesh EPZ Authority, BEPZA

2 Export Diversification and Role of Export Processing Zones (EPZ) in Bangladesh Prior to liberation of Bangladesh all the major industries of our country belonged to West Pakistani entrepreneurs. Just after liberation all the medium and big size industries were nationalized with a view to back up socialistic economic order, consequently the process of creating individual industrial entrepreneurs came to a halt. In late 70 s the economic theme of Bangladesh started to revert back from state ownership to individual ownership. But the process of transition to new economic system was not backed up by specific rules and regulations, institutional arrangement and state sponsorship. As a result, the process of growing individual entrepreneurship could not be accelerated. Till the middle of 80 s maximum Bangladeshi businessmen were engaged in import based trading business. Meanwhile, the Government started to denationalize the state owned industries and many industries were sold out to the individual businessmen. But that process of disinvestment by the government also could not contribute a lot for creating industrial entrepreneurs in this country. Of late, at present many individuals have got the opportunity to float industrial undertaking with Govt. patronization, active support from the financial institutions and personal initiative. 2. In late 70 s when individual ownership economy revived in our country EPZ was created to attract capital investment, employment generation and rapid industrialization. As a matter of fact the main objective of setting up EPZ is to create individual industrial entrepreneurs and thereby to achieve the other objectives. The economy of Bangladesh is basically agro-based. The habitants of agro-based economy are generally remains habituated in a riskless life. In other way, business investment particularly industrial investment brings solvency and dynamism in human life but it is risky and hazardous. Therefore, to create industrial entrepreneurs some institutional support must be extended to the individual businessmen. Bangladesh EZP ensures this institutional support to the potential business entrepreneurs. Economic Profile: 3. It reveals from the Economic Profile of Bangladesh that last year s GDP was recorded at US$61.41 billion with 5.40% annual growth. 4. Industry: GDP growth of broad Industry sector was 8.43% in the last year compared to 7.10% in the preceding year. The performance of the industrial sector was mainly based on the growth in textile and wearing apparel, drugs and pharmaceuticals, fertilizer, petroleum products, glass

3 products, cement, electronics, footwear and food and beverage industries. In the last year the contribution of this sector in national income is 28.44%. 5. Agriculture: Agriculture still holds an important position in our national economy in creating employment and increasing national income. In the last year the contribution of this sector in national income is about 21.91%. Growth in agriculture has increased to 2.41%. Growth during the year preceding year was 3.29%. Fish production in the last year has increased by 5.03%. Growth in the sector during the preceding year was 3.6%. Food production during the last year was about million tons compared to million tons in the year preceding year. 6. Services: The service sector continued to the largest contributor to the country s real GDP growth in The sector grew by 5.7% during the year, compared to 5.4% in and contributed 49.65% to GDP growth. All sub-sectors shared in the overall growth of the services sector activities, but relatively higher growth rates were registered by education (7.66%), transport, storage and communication (6.64%), hotel and restaurant (7.29%), financial services (6.77%), public administration and defense (5.75%). Industry, 28.44% Service, 49.65% Agriculture, 21.91% Fig 1: Contribution of Broad Sector in GDP of Investment and savings: Gross national savings during the year was 26.50% of GDP compared to 25.40% during the previous year. In the FY the rate of total investment was 23.14% of GDP in which the shares of public and private sector were 5.90% and 18.50% respectively. Total investment registered by BOI was US$ 19,992 million out of which US$ 8763 million was foreign investment. Investment made by in the EPZs was US$ 987 million.

4 Export Policy: 8. Export policy has been liberalized by the Government of the People s Republic of Bangladesh in order to keep pace with the present globalization system under WTO rules. The objectives of the Export Policy are: Capacity building of export related institutions like EPB (through its reorganization to enhance institutional efficiency), BEPZA, Customs department, Land and Seaports, Fisheries department, BSTI, Tea board and Trade bodies; Product diversification; Develop product quality and design and production of high value products; Adopt new strategies for expanding export products, ensure good use of IT or computer technology, E-commerce and other technologies; Develop necessary infrastructures and in required cases backward and forward linkage industries to ensure production of maximum volume of exportable items; Create new exporters and provide all assistance to existing exporters and develop a business friendly environment; Develop expert manpower on trade; and Equip trade bodies, businessmen and concerned people with necessary knowledge on systems of world trading. 9. Use of Foreign Currency: The exporters can deposit a certain amount of their export earning in foreign currency under a retention quota in their foreign currency account in the form of US dollar, Pound, Sterling, Japanese yen or Euro. The amount of retention (in terms of percentage) will be fixed by the government/bangladesh Bank. This foreign currency can be used to fulfill real business needs like business trips abroad, participation in export fair or seminars in foreign countries, import of raw materials and spare parts and setting up office abroad. Presently 10% has been fixed for lower value added products (like RMG, petroleum by products, Naphtha, furnace oil etc.) and 50% for high value added products (like Computer software and data entry/processing service etc.) GSP 10. Generalized System of Preferences (GSP) is a preferential treatment of tariff facilities (by way of reduced or duty free tariff rates) which is granted by the industrially Developed countries to the eligible products imported from Developing or Least Developed Countries. In fact this is an international trade instrument of the developed countries to promote the

5 development of developing and least developed countries. The scheme is non-reciprocal and non-discriminatory system of preferences. The objectives of the GSP scheme are: a. To increase export earnings of the preference receiving countries; b. To promote their industrialization and c. To accelerate their economic growth. The original six member states of the EEC implemented the first full-fledged GSP scheme in July, Norway introduced the GSP scheme in October, Japan followed it a month later. Denmark, Finland, Ireland, New Zealand & Sweden implemented the scheme in January, Switzerland & Austria followed shortly thereafter. USA as late entrant to the scheme implemented the same in As on today 36 developed countries are offering GSP facilities to all the developing and LDC countries of the world. Bangladesh being a beneficiary of the scheme has been enjoying this facility since the inception of all the schemes. The current GSP scheme of EU is in effect since Bangladesh as an LDC is enjoying the GSP facilities. 36 countries including European Union members are providing GSP facilities to Bangladesh. New GSP Scheme of EU: With a view to encourage greater co-operation, EU member-states have recently adopted the new preferential market access system, which is the new GSP scheme. The reform of the GSP scheme will make the EU s system of preferential market access simpler and fairer then before. The new GSP scheme as a whole will be in operation from 1 st January, The application of the new GSP plus incentive system will grant additional preferences to vulnerable developing and LDC countries that pursue good governance and sustainable economic development policies will be on fast track. Export Performance: 11. During export performance of Bangladesh raised upto US$ million (13.83% growth). Most contributors to the exportable items are RMG (Woven Garments and Knitwear), Frozen food, Home textile, Computer Service, bicycle and ceramic. Sector highlights of major exportable commodities are given hereunder:

6 11.22% 0.21% 1.05% 1.59% 2.78% 3.24% 5.13% 28.25% 46.53% Woven garments Knitwear Frozen food Jute goods Leather Chemical products Raw jute Tea Others Fig 2: Bangladesh Export by Major Products 12. Textile: Ready Made Garments, Textiles and Composite Textiles a. Sector Highlights The Ready Made Garment industry in Bangladesh accounts for more than 75% of total exports. Bangladesh is best placed in the region for textiles and garments because of lowcost labor, preferential trade status and advantageous global market access. Government incentives for the spinning and weaving industries include a 15% cash subsidy of the fabric cost to exporters sourcing fabrics locally. There is a huge fabric demand supply gap in the RMG industry which is being met by imports. Thus, the potential for backward linkage industry is enormous. b. Industry Background and Status The phenomenal growth in RMG was experienced in the last decade. With about 2,600 factories and a workforce of 1.4 million, RMG jointly with knitwear accounted for more than 70% of total investments in the manufacturing sector during the first half of the 1990 s. At present, number of RMG factories exceeded 3,000, employing over 50% of the industrial workforce and having 75% of the total exports earning of the country. FIG-2 shows the growth of RMG exports from Bangladesh since [In million US$]

7 / / / / / / / / / / / Fig 3: Growth of RMS Exports from Bangladesh ( to ) c. Industry Outlook Multi-Fiber Agreement (MFA) and Generalized System of Preference (GSP) of the EU are the main actors behind acquainting Bangladesh RMG products to global market ensuring assured market access. Bangladesh is now a significant RMG supplier to North America and Europe. Due to phasing out of MFA, many are doubtful about Bangladesh s ability to maintain the fast growth of the recent years in this sector. However, on a more positive note, Bangladesh is expected to maintain its tariff-free access to EU under the European GSP, since the GSP is not covered by the Uruguay Round Agreement. Recently, Canada has also provided tariff-free access of all the items from Bangladesh. Meantime, Bangladesh RMG industry has earned strong competitiveness as a global standard RMG source. Marketing network has been spread over the economics of the continents. End users could well recognize and differentiate the products confidently. Till today, Bangladesh RMG industry largely depends on the imported yarns and fabrics. Bangladesh produces only 10% of export-quality cloth used by the garments industry. The need for establishment of backward-linkage industry has become an immediate concern to the government and the exporters. There are enormous opportunities in setting up composite textiles industry combining textile, yarn and garments. d. Investment Opportunities

8 RMG and textile sectors have enormous investment opportunities. Government provides highly favorable policy framework for investment in these sectors. Investors have the following choices: Establishment of new textile/rmg mill in the private sector. Joint ventures with the existing textile / RMG mill. Acquisition of public sector textile mills that are being privatized. Indirect investment through financial services and /or leasing. 13. Frozen Foods Frozen Shrimp, Frozen Fish, Other Items a. Sector Highlights Government is promoting semi-intensive shrimp farming. Fish and prawn exports registered a modest growth in past decade. Shrimp processing and export industry is largely dominated by the smaller unorganized sector. 15% cash incentive is given to shrimp export amount. b. Industry Situation The frozen foods export is the second largest export sector of the country. After some initial difficulties in terms of quality achievement, exporters have earned credibility and trustworthiness in the global market. Assurance of reliable and continued product quality is a major challenge in this sector. Technology orientation, marketing perceptions, and quality improvement aspects invite foreign investment in this sector. [In million US$] / / / / / / / /05

9 Fig 4: Frozen food Exports from Bangladesh 14. Information Technology Data Processing, Software Development, Hardware Manufacturing a. Sector Highlights To instigate the IT industry robustly, deregulation of the telephone has been decided and executed by mid The extensive growth of mobile telephony resulted in significant opportunities. The industry is at its introductory stage and has opportunity of capitalizing the potential. Bangladesh has a well-educated, skilled, dedicated and growing IT workforce. There is a fast growing domestic market and export demand. Strong research assistance from the universities and research institutions are available. Government is keen in establishing IT related infrastructure for the development of the industry. Connectivity with the information highway through submarine cable. b. Industry Status IT Hardware Import Policy Export of Software, data processing, transcription etc. 15. Ceramic Tableware, Sanitary ware, Insulator a. Sector Highlights Global market of ceramic tableware is about US$10 billion. Bangladesh Ceramic tableware has a good reputation to the international market like North America and EU countries. Bangladesh has achieved technical expertise on ceramic tableware manufacturing. Historically, tableware industry is labor-intensive and Bangladesh has a skilled manpower in ceramic industry. Sanitary ware and insulator has also a domestic and international market demand. The clean gas reserve required for firing is a great competitive advantage for Bangladesh. b. Industry Status

10 A few ceramic table ware manufacturers dominate the industry producing high quality products for the international brands. A pool of skilled manpower has been developed. The latest technological advancements in ceramic are also acquainted. Bangladesh produces high quality Bone China transferring the technology from Japan. The domestic market is also attractive. Some low-quality tableware are imported from mainly China to cater the demand of lower segment of the domestic market. [In million US$] / / / / / / / / / / /05 Fig 5: Growth of Ceramic Tableware Exported from Bangladesh Export Diversification: 16. Since the economy of Bangladesh is agro-based, its export base was set on primary commodities like raw jute, tea, frozen food, agro product etc. Product-wise Export During pro-liberation Period: A. Major Primary Commodities: (Value in Million US$) Raw Jute Tea Frozen Food Fish Shark fins & Fish maws

11 6. Agricultural products Animal Feed Animal casings Crude fertilizer Other primary com Total Primary Com Fig 6: Primary commodities export from Bangladesh Fig 7: Primary commodities Export Growth (Million US$) During last 33 years, average annual growth rate of primary commodity export stands around 14% per annum. Prior to , country s major exportable manufactured commodities were jute goods and leather. Since independence, average annual growth rate of traditional jute goods comes at 2.62% and leather goods stands at 5.42%. 17. In late 70 s, Bangladesh economy was opened for private sector investment. Consequently, from Bangladesh started exporting Ready Made Garments (RMG). At present, this item accounts for more than 75% of total export. During the last 24 years average annual growth rate of RMG product export comes at 268%. Moreover, presently the country is exporting innumerable items under 27 major commodity head to almost 200 countries of the world.

12 B. Major Manufactured Commodities: (Value in Million US$) Jute Goods Leather Leather goods Petroleum by Products Readymade garments Knitwear Chemical products Paper and allied products Handicrafts Engineering products Specialized textile and Household linen 12. Molasses Electronics Stainless steel cutlery Handloom products Glass Sheet Other mfd. commodities Total mfd. Commodities Fig 7: Manufactured commodities export from Bangladesh

13 Fig 8: Manufactured Commodities Export Growth (Million US$) (Value in Million US$) Total Primary Commodities (A) Total Manufactured Commodities (B) Grand Total (A+B) Fig 9: Year-wise Export During pro-liberation Period EPZs of Bangladesh: 18. In late 70 s Bangladesh EPZ has emerged to attract capital investment in EPZ. The manifested target to set up EPZ has been fixed up at rapid industrialization, employment of human resources, transfer of technology and foreign exchange earning by boosting up export. With this end in view, some targeted efforts have been taken to attract foreign investment and promotion of exports through creation of special infrastructures and support service facilities, giving fiscal and non-fiscal incentives and ensure free trade environment with the EPZ.

14 Theory of EPZ: An Export Processing zone is an industrial area that constitutes an enclave with regard to customs tariffs and the commercial code in force in the host country. Economic Rationale for a better export performance of the zones: EPZs are special enclaves, separated from the Domestic Tariff Area (DTA) by fiscal barriers and are intended to provide an internationally competitive duty free environment for export production at low cost. EPZs are benefited usually from the following: Modern and efficient infrastructure General fiscal and non fiscal concessions to firms Better governance due to single window facilities to ensure corruption and red tape free business environment. 19. Mode of Investment: BEPZA pursues an open door policy in matters of foreign investment in its EPZs. Bangladesh Export Processing Zones Authority is a statutory body but very different from other autonomous organization. It enjoys complete freedom of action in its decision making process independently of any Administrative Ministry. Investment with 100% foreign ownership (Type - A ' ) Joint ventures (Type- B ) with no limit to the extent of equity sharing by the foreign partner 100% Bangladeshi ownership (Type-C) are allowed in the EPZs. Type - C Type - B Type - A Fig 10: Type of Industries 20. The first zone in Bangladesh was set up in South Halishahar in Chittagong in Following the tremendous success of the Chittagong EPZ, the government has decided to establish the

15 country s second EPZ at Savar near Dhaka a decade later in In view of the growing demand of the investors the government has established 4 new EPZs one at Mongla, a southern port city of Bangladesh, one at Comilla, situated in an unique place between Dhaka and Chittagong, one at Ishwardi near the Jamuna Bridge and the fourth one at Nilphamari named Uttara EPZ near Syedpur Airport. The Authority has already started allotment of plots for setting up industrial unit in those EPZs and 3 EPZs have already started operation. 50% concession on rent of plot and factory building at EPZs of Mongla, Ishwardi & Uttara (Nilphamari). Recently, two new EPZs has been declared; one at Adamjee Jute Mills area and the other at Karnaphuli Steel Mills area. Fig 11: EPZs of Bangladesh Investment: 21. Despite world wide recession FDI has increased in the EPZs during the last 48 months. In June, 2001 the cumulative investment in EPZs was US$ million but up to June-2005 the

16 investment stands at US$ million. The volume of investment has increased to US$ million with a growth ratio of 82.45%. Comparative Analysis on Investment 22. National BOI conducted one FDI inflow survey during 2004 where it is revealed that BEPZA alone shares 73.08% of total manufacturing FDI inflow in Bangladesh. BOI Registered BEPZA Financial Inst. Total FDI Component BEPZA Share % In million US$ In million US$ In million US$ In million US$ a. Manufacturing Textile Chemical Leather & Rubber Agro-based Food & Allied Glass & Ceramics Printing & Publications Misc/NEC b. Service Telecommunications Energy & Power Power Generation Oil, Gas, & Coal Other Services Financial Institutions Others c. Engineering Total (a+b+c)` Fig 12: Extended Sectoral Distribution of FDI during

17 23. International: Indian council for Research on International Economic Relations Conducted a study on comparative performance of EPZs in Bangladesh, India and Srilanka. This working paper clearly reflects Bangladeshi EPZs is on the top in attraction of investment and creation of employment. Investment (Million $) Employment (Number) Year Sri Lanka Bangladesh India Sri Lanka Bangladesh India (28.2) (19.7) (24.3) (3.6) (2.4) (362.2) (132.3) (39.8) (18.2) (22.0) (14.7) (62.0) (18.0) (16.5) (1.7) (2.8) (114.8) (105.2) (43.8) (14.3) (58.8) (19.4) (15.8) (13.9) (2.9) *Source: Ministry of Commerce, Government of India; Mondel (2002). Bangladesh EPZ is on the top in attracting Investment and creation of Employment. Fig 13: Total cumulative investment and employment and growth rates in Export: 24. Bangladesh has achieved phenomenal export success through the EPZs. In the total foreign exchange earnings of the country through exports, the share of EPZs increased from a microscopic low of 0.02% in to a spectacular high of 17.88% in The share of EPZs in the foreign exchange earnings through the exports of manufactured goods also shows the same trend over the corresponding period reflecting fast decline in the relative share of the DTA in both total exports and the exports of manufactured goods and the resulting foreign exchange earnings of the country. Annual trend rate of growth of export earnings of the EPZs has been more than six times higher than that of total national export earnings and more than four times higher than that of total national export earnings from manufactured goods. It means that export performance of the EPZs is much more impressive than that of the country as a whole.

18 25. The enterprises of EPZs have exported goods worth of US$ 10, million up to June, 05 and it was US$ million till June During the last 4 years the export volume increases to about US$ million. This shows an increase of %. The export earnings from EPZs crosses billion dollar mark in the last four years. BEPZA represents average 18% of total national export during the last four years. Year Total export of Bangladesh (m US$) Total export of EPZs (m US$) % of BEPZA s contribution (m US$) Fig 14: BEPZA s contribution towards total national Export

19 26. Productivity Performance of EPZ Workers During the export performance of EPZ workers in textile cluster stands US $ per worker whereas export performance of one DTA worker in the same sector recorded US $ Therefore, EPZ worker s productivity performance is 3.5 times than the DTA workers. DTA EPZ SECTOR EMPL (NOS.) EXPORT US$ m EXP/ EMPL US$ EMPL (NOS.) EXPORT US$ m EXP/ EMPL US$ TEXTILE CLUSTER 18,00, ,40, Total Export: Bangladesh $ b 100% EPZ $ b 17.88% RMG & Knit Export: Bangladesh $ b 100% EPZ $ b 26.86% * TEXTILE CLUSTER INCLUDES GARMENTS, KNIT & OTHER TEXTILE, TEXTILE, TERRY TOWEL, GARMENTS ACCESSORIES, CAP, TENT Fig 15: Productivity performance

20 27. Export Performance on Investment: EPZ enterprises derives highest dividend in terms of their investment. During fiscal, average export performance of enterprises stands around 1.79 times of their actual investment. SL PRODUCT UNIT INVEST M US$ Export US$ Exp Per M US$ Inv. 1 GARMENTS TEXTILE TERRY TOWEL KNIT & OTHER TEXTILE GARMENTS ACCS CAPS TENT ELEC & ELECTRONICS FOOTWARE & LEATHER METAL PRODUCT PLASTIC GOODS PAPER PRODUCT FISHING REAL & GOLF ROPE SERVICE ORIENTED INDUSTRIES AGRO PRODUCT MISCELLANEOUS Gr. Total Fig 16: Export Performance on Investment 20

21 28. Brand Products: The enterprise are exporting world famous brand products like Nike, Reebok, Lafuma, H & M (Sweden), GAP, J.C. Penny, Walmart, Kmart, OSPIG (Germany), Mother Care (UK), Lee, Wrangler, Dockers, NBA, Tommy Hilfiger, Out Door, Adidas, Falcon (USA), Edie Bauyer, Eagle, Releigh (UK), Emmilee, Free Spiril (UK), Miles (Germany), Brouks, American Eagle, Hi-Tech (UK), Decathlon, Phillip- Maurice (UK), Federated, Styles Co, SAG Harbour (USA), Wins More, H & M (SWEDEN), LL Bean, Target, Autica, Disley, Vans, Vftnfcamera Lens (IO Parts) Konika, Minolta, Golf Shafts, Abu Garcia, Mobile Parts of Sony, Automobile Parts of Nissan, Mitsubishi & Hino. 29. Diversification of Export: Diversification of Bangladeshi export was started with RMG product in early 80 s. With the influx of FDI in EPZs, RMG sector gives a fresh thrust in boosting national export. RMG and textile cluster alone represents 90% of EPZ export and 26% of national RMG export in Moreover, BEPZA could attract substantial amount of FDI for Tent, Camera parts, Golf Shaft, Bi-cycle, Zipper manufacturing plant. There is no single manufacturing unit of this kind outside EPZ. BEPZA is expecting big investment particularly FDI in composite textile, home textile and Ceramics in near future. Obviously, more investment will lead to diversification of country s export basket. During the last four years BEPZA has been maintaining a steady growth rate of national export. 30. Development of linkage industries in DTA: One of the major activities of setting up EPZ is to encourage linkage industries outside EPZ which will expedite establishment of industrial base in the DTA. EPZ manufacturing units prompted establishment of multiple number of linkage industries in DTA. During fiscal EPZ enterprises made export and import transaction with DTA enterprises to tune of US $ million. This huge volume of transaction with DTA industries marked about 26% of export earnings by the EPZ enterprises during Apart from manufacturing activities private sector enterprises participation in Banking, Insurance, C&F agent, courier, catering, sub-contracting, transporting, container handling, cell phone operator, shopping mall, medical center, school, college are being made in different EPZ. It is expected that BEPZA will be able to attract private sector investment in power, water generation and distribution, effluent treatment, telecom operator and dormitory in EPZs.

22 (Value in Million US$) PERFORMANCE EXPORT PARTICULARS OF EXP. AMOUNT % EXP. AMOUNT % EXP. AMOUNT % EXP. WAGES RENTAL UTILITY SV. CHARGE DTA GOODS ADMN. EXP TELE COM SURPLUS RETAINED BY LOCAL INVESTORS TOTAL Cumulative Performance: The following shows the cumulative performance of all the EPZs of Bangladesh. It reveals from the record total number of industries in EPZs rose upto 337 with cumulative investment of US$ , export US$ million and employment upto 154,788. Zone-wise Performance (up to June 2005) EPZ Industry Investment Export Employment In Op. (No) U/Impl. (No) (US $ in M) (US $ in M) (No) CTG ,419 DHK ,280 COM ,814 MON UTR ,050 ISD Adamjee Total ,54,788

23 Fig 18: Zone-wise aggregate performance Performance Factor: 32. Infrastructure Facilities The success stories of EPZs in different countries formed to be closely associated with the physical facilities provided by them to the potential investors. Therefore, the provision of creating infrastructure, buildings and ensuring public utilities to the investors were planned in the early stage of Bangladesh EPZ. Infrastructure Facilities 1. Basic infrastructure: Electricity, gas, water, road, telecom, etc. 2. Fully serviced plots (Avg. size 2000 sqm) 3. Factory building available on rental basis. 4. Enclave for workers dormitory. 5. Godown available 6. Business support service: courier (DHL, FedEX), Banks, Police station, fire station, post office, C&F agent, shipping agent, MTO etc. 7. Administrative support service: shopping center, green area, daycare center, commissariat, health club, investors club, medical center, sports complex, accommodation for expatriates, school and college, public transport etc.

24 Fig: Partial Infrastructural view of Dhaka EPZ

25 Fig: Partial Infrastructural view of Chittagong EPZ 33. Why infrastructure needed: Bangladesh is a small country with huge population, where per capita land holding is very minimal. Land title, acquisition and registration are cumbersome. Except costal area and hilly land it is very difficult to get huge chunk of industrial land. Moreover, investment friendly infrastructure for industrial operation is absent in the wider economy. Considering these limitations the theory of EPZ was evolved in Bangladesh. If an entrepreneur wants to set up an industry around Dhaka or Chittagong city, first of all he will have to find out some suitable Industrial land adjacent to that particular city. Even if he does get the land of his choice then possibly he will have to negotiate the purchase with more than one owner and thereby the cumbersome process begins. Suppose, on completion of all formalities he managed to buy the land within one year from the date of planning. Then he will have to wait for another year for the construction of factory building and other infrastructures. Still, he will have to look for electricity, water, gas or Telephone line connections. Before the utility connections given he will not be able to start production. After

26 long three years when he starts production possibly he will find that his arranged market is lost. The present trend of global market economy is changeable; therefore, the demand for any particular product in the market is very much flexible. In this circumstances, only a very few lucky entrepreneurs can set up their industries in conformity with the market demand. But major portion of intended entrepreneurs lost their enterprising ability during the gap of planning and implementation of the project. EPZ is an ideal place for these sorts of entrepreneurs. In every EPZ there are fully serviced plots, ready made factory buildings, infrastructural facilities and utility connections to meet the demand of every prospective investor. Accordingly as per the theory of economics any production process involves four factors viz land, labour, capital and entrepreneurship. Among these factors 1 st three are almost readily available in EPZs. In every EPZ plots are ready to be leased out, skilled and semi-skilled laborers are very much available in EPZ area, the third one is banking facilities for providing capital. Now only an entrepreneur having knowledge of business and enterprising ability can set up production unit in EPZs with a shortest possible time. 34. Beyond creation of infrastructural facilities, BEPZA provides space to local and foreign bankers, insurers, C&F agents, Freight Forwarder and Courier services to give financial help and support services to the investors. Although, BEPZA has been exempted from operation of number of Acts and ordinances, the authority of relevant functionaries is applied by BEPZA in rational and adaptable ways. BEPZA officials ensure smooth commercial, manufacturing and operational activities within the zone. Investors clubs are also created within the zone for recreation of executives and expatriates. The Industrial Relation Department of every zone remains vigilant all around to clench labour-management feud within the zone. EPZs in Bangladesh house mostly labour-intensive industries with a view to employing unemployed manpower. The Chemicals of all processing industries pose environmental hazards if not disposed of properly. In two different EPZs of Chittagong and Dhaka, there is provision for disposal of industrial waste. These would give more cost-effective options to the manufacturers for recycling or remarking industrial by-product than those available to isolated plants. 35. In developing EPZs, BEPZA is totally dependent on Government fund to create basic infrastructure like land purchase/development, construction of factory and service buildings, road, drain etc. But due to resource constraint, Government normally does not invest in hi-tech infrastructure like Central Effluent Treatment Plant, Water treatment Plant, Electric Substation, Overpass, Digital ID Card etc. To enable healthy investment climate in different EPZ, BEPZA have to create these infrastructure on priority basis. Meanwhile, BEPZA made a request to the Government of Japan to provide financial assistance for installation of above infrastructures. Japan Government agreed in principle to provide DRGA Counter Part fund to

27 install 5(Five) central Effluent Treatment Plant, 3(Three) Water Treatment Plant, 2(Two) Electric Sub-station and Female workers dormitory in different EPZs. If this limited assistance can be lined up, obviously it will reduce environmental hazard, improve power and water supply in some EPZs. Similar assistance will be necessary for other EPZs also. 36. Public Sector Investment in development of EPZs The direct income of EPZ is negligible in comparison to overall economic benefit of the country. The scenario of actual cost recovery in terms of investment is far behind the book standard. Because, the capital recovery factor permits calculating what constant annual payment would be necessary to repay capital invested over a given period of time at a presumptive interest rate. But this formula cannot be applied in EPZ due to its investment peculiarity. In every EPZ infrastructural facilities are made in uniform design that serves the exclusive purpose of investors. Because of that more than thirty eight percent of Government investment in EPZ is made in non-income generating head of expenditure which gives nil rate of return on investment. A pertinent question that can be raised here Is whether the existing tariff rates of land or factory building could be raised in order to bring about quick cost recovery. This can be seen in the light of tariff rates prevailing in other EPZs of neighboring countries where such rates are reportedly similar or little bit lower than our tariff rates. In these circumstances, if we try to recover our cost by enhancing tariff rates, we may loose investment.

28 Sl no. Item CEPZ (in million US$) DEPZ (in million US$) Direct income generating 1. Land acquisition & Development Factory building Bay-shopping centre Gas distribution network Electricity distribution network Water supply system Percentage of total investment 62% 62% Non-income generating 1. Roads & drains Office & enterprise service Bldg Residential Building Investors Club Custom, Police, Fire brigade equipment store, Health centre, Security etc Others Percentage of total investment 38% 38% Grand Total Fig 19: Investment in EPZs up to June, Prospect and Constraint: BEPZA is taking up initiative to develop EPZ, where private sector stimulate industrial investment and that will ultimately gives a momentum to make thousands of economic transaction in the society. Now, what happened in Dhaka and Chittagong EPZ is that BEPZA has invested around US$ 40 million to establish EPZs where private sector industrial investment accrues US$ 770 million followed by US$ 1500 million infrastructure investment around these zones. Moreover, there is a clear spillover effect of linkage support industries. It is mentioned in the foregoing paragraph that during EPZ

29 enterprises made transactions with domestic industries to the tune of 26% of their export earnings. Due to availability of better infrastructure in Dhaka and Chittagong area, prospective investors asking more space in the EPZs of these regions. In this connection I may mention that at present we are developing Adamjee EPZ (near Dhaka City) and Karnaphuli EPZ (near Chittagong EPZ). Lot of investors from home and abroad are coming to invest in these two zones although we are not fully ready to allot space to them. On the other hand there have three EPZ in North and South-West of the country viz. Mongla, Ishwardi, and Uttara EPZ. In spite of reduced tariff BEPZA couldn t attract considerable number of enterprises due to lack of urban facilities, residential accommodation, educational institutions, hospitals, telecommunication facilities, hotel and resort centers. Moreover, Export oriented industries outside EPZ enjoy more or less same incentives still they could not do upto the mark due to lack of proper infrastructure. Therefore, public sector BEPZA can only establish EPZs with basic infrastructure. Now, private sector may come up to provide infrastructure related works to enterprises, transportation, hotel and resort centers, shopping mall, universities and vocational institutes and other social infrastructures, operation and management of water, effluent disposal, power, telecommunication, linkage industry and supportive financial infrastructure. If we sum up investment (FDI and Local) necessity in Bangladesh proper infrastructure is considered as the main factor for rapid industrialization in the country. Policy Concessions: 38. Incentives: Fiscal To augment investment in EPZs, the government has declared a fiscal and non-fiscal incentive scheme in the early stage of EPZ development. Incentives - Fiscal 1. Tax holiday for 10 years followed by 50% rebate on export sales. 2. Duty free import of const. materials, machinery/spare parts/equipments. 3. Duty free export and import. 4. Relief from double taxation. 5. Exemption from dividend tax. 6. GSP facility available. 7. Duty free import of 2 vehicles. 8. Expatriates exempted from income tax for 3 years.

30 9. Accelerated depreciation on machinery or plant allowed. 10. Remittance of royalty, technical and consultancy fees allowed. 11. Duty and quota free access to EU (EBA), Canada, Norway, Australia etc and USA under process. Fig 20: Fiscal incentives provided by BEPZA 39. Incentives: Non-Fiscal Incentives: Non-Fiscal 1. Investment protected under the Foreign Private Investment (Promotion and protection) Act % foreign ownership permissible 3. Enjoy MFN status. 4. No ceiling on foreign investment. 5. Full repatriation of Capital and dividend. Fig 21: Non-Fiscal incentives provided by BEPZA The above incentive scheme may need to be further broadened to compete with the big industrial giant of far-east and western world. Despite limitations BEPZA has been following an affirmative policy to nurture investment activities in EPZs. It creates infrastructural facilities including buildings, utilities and warehouses. The office of BEPZA processes the application for setting up of industries, allot plot of land or building space and sometime the investors are allowed to mortgage the building and machinery for raising loan from financial institutions. The process of sanctioning takes minimum span of time. Sometimes the EPZ officials haunt the prospective investors up to their home countries. Almost every time they receive the investors in Airport and the whole process from landing to sanction of industries is done by BEPZA officials believing the doctrine of one window service. 40. Although policy concession is seems to be adhoc arrangement for rapid industrialization but concessions have good impact on new investment and re-investment of profit in new venture. Yet policy concession is considered as second agenda for investment attraction. 41. Regulatory Streamlining: To foster and generate investment in the EPZs of Bangladesh, there have specified Acts like BEPZA Act, Foreign Private Investment Act, Workers Right Act and Conductive rules on Custom Procedures, credit facilities, Foreign Currency, capital issues and Income tax. These

31 Acts and rules have more or less simplified the procedure for establishment and operation of industrial activities in the zone. For better operation of the zone there should have more regulatory streamlining of existing law of the land. 42. Technology Transfer: Technology transfer or spillover constitutes one of the most important dynamic effects expected of foreign investment. The field survey reveals that in a relatively simple industry with no proprietary technology, such as RMG and footwear, technology transfer takes place readily both inside and outside the EPZs, though on a very limited scale. The transfer is from foreign technicians and managers working together on factory floors, from foreign buyers to local firms, and through consultants, movement of employees, visits to plants abroad, and so forth. But in industries, such as electronic components, with internationally established firms resist challenging, fast-changing, and largely proprietary technology, transfer of technology to Bangladesh is very limited. In any case, firms in Bangladesh are not capable of mounting a competitive challenge without a lot of help. In such industries, the direct transfer of product and process technologies through the EPZs has been very small, except in simple industries, such as RMG Skill Transfer: 43. Technology transfer is intertwined with skill transfer. The field survey reveals that skill transfer to the rest of the economy occurs mainly through the movement of people who have received training in foreign and joint-venture firms in the EPZs and through learning by locally owned firms there. Interviews with a number of factory managers in the EPZs indicate that the factories in the EPZs contribute significantly to workers technical production and factory management skills even though the acquisition of broader management capability or marketing skills is very slow. There are quite many instances in both CEPZ and DEPZ that technicians and managers who have acquired the ability to compete in the world market have carried this expertise to the rest of the economy. To foster such mobility and make it more productive, the business environment outside the EPZs must be rationalized as well, through deregulation and import liberalization (for healthy competition) and industrial restructuring (for efficient production). When the business environment outside the zones is not attractive, technology and skill transfer effects tend not to be fruitful or to contribute much to the local economy. In such cases, on-the-job training in the foreign firms and joint ventures is instrumental in transferring skill to the DTA. One cannot avoid the conclusion that the only feasible way to acquire skills through the EPZs at an early stage of development is through on-the-job training, not at training centers, in formal courses, or from written materials. In this context, it may be

32 noted that the relocation of electronics assembly operations in the EPZs leaves the more skilled jobs involving high technology in their original locations giving the EPZ firms a truncated occupational structure. Thus the notion that EPZs could serve as nurseries for the development of industrial skills are not borne out by experience. Economic Contribution: 44. Annual Economic Benefit BEPZA contributes as a multiplier of economic activities in Bangladesh. Having identified the elements relevant for estimation of benefits from EPZs, we have a rough estimate of economic contribution of US $ million to Bangladesh in which is around 43.71% of the total export. Thus the foreign currency retention is 43.71% (Value in Million US$) PERFORMANCE EXPORT PARTICULARS OF EXP. AMOUNT % EXP. AMOUNT % EXP. AMOUNT % EXP. WAGES RENTAL UTILITY SV. CHARGE DTA GOODS ADMN. EXP TELE COM SURPLUS RETAINED BY LOCAL INVESTORS TOTAL WAGES RENTAL UTILITY SV. CHARGE DTA GOODS ADMN. EXP. TELE COM. WAGES RENTAL UTILITY SV. CHARGE DTA GOODS ADMN. EXP. TELE COM.

33 For year (Taka in Crore) For year (Taka in Crore) Fig 22: Annual Economic benefit for the years and Special Economic Zone enlarged version of EPZ 45. Given the scarcity of land in Bangladesh, its efficient use for industrial purposes is of utmost importance. Indiscriminate use of land for industrial purposes coupled with poor environmental practices is causing environmental damage and is emerging as a major problem in Bangladesh. Poor availability of infrastructural facilities identified as the most important constraint in investment climate assessment in Bangladesh. Investors, in particular foreign investors, are also discouraged by property right problems, such as lack of clean titles, which make access to land difficult. In view of this, our development partners especially World Bank proposed to Bangladesh Government to set up special Economic Zones with the following strategy: Introduction of a broader concept of economic zones, i.e., including Special Economic Zones (SEZ) which have not been tried in Bangladesh, and the provision of a broader range of value added services, such as logistical service in the zone. A greater role for the private sector in the development and operation of economic zones. A clear option to establish both export-oriented industries and manufacturing units for domestic market. A separation of the regulatory function of Government from its zone ownership functions. Conclusion 46. One of the basic elements critical for any export activity is adequate infrastructure especially Physical infrastructure within the zone like Water, Electricity, Factory & Service buildings, Warehousing, Transporting, Telecommunication, Police Stations, and Fire Stations. Outside the zone infrastructure like Port, Roads leading to the zones, transport facilities to the zone etc. Zones must be supported by Financial Infrastructures (Bank, Insurance, C&F Agent, Freight forwarder, couriers etc) and Social Infrastructure within the zone (Residential Complex, School, Hospital, Club, Resort centers etc). Again, infrastructure within EPZs is generally considered superior to that available in the wider economy. In spite of same incentive scheme for EPZ enterprises and export oriented industries of DTA the EPZ enterprises performing well due to adequate planned infrastructures in EPZ area.