Privatization in Bangladesh
Compiled from the Speeches of one of theThank you for reading this post, don't forget to subscribe!
Former Presidents, FBCCI
The prevailing industrial management scene is replete with pictures of sick units of production. They have become sick due to inefficient management and ultimate loss of market share for their products. Those in management have apparently failed to keep the industrial installations operational and that largely due to their failure to adopt any production schedule and supply inputs including raw materials. Some of the installations could not ensure disposal of their products both for lower quality and for higher price. Some local products also face competition from producers abroad. Foreign producers managed to gain a share in the market opened in pursuance of the policy of liberalization. But local production units have not taken into consideration the upcoming needs and realities.
That some abandoned units of industries were nationalized by the government immediately after the liberation of the country has to be appreciated by all. These units were set up in fifties and sixties and after necessary analysis of the investment climate. Some industries were set up for processing farm sector products like jute and sugarcane, natural gas and the like. Other industries were set up by entrepreneurs, like textile mill owners, who wanted to produce textile products for meeting local demand. These installations had machinery imported from abroad. Some local entrepreneurs invested in production units that produce intermediate products including spare parts of machinery needed in the country. Pharmaceutical units of production, set up both in private and public sector, have either become profitable or losing concerns and that also due to ineffective management.
Bangladesh experienced rapid growth in the public sector immediately after its liberation, between 1971 and 1975 to be precise. The regime in power had firm commitment towards a dominant public sector. Moreover, it had to take over possession of businesses abandoned by the Pakistani owners. Although subsequent regimes demonstrated less inclination towards the public sector, still the country has about 200 public enterprises (grouped under 38 cooperation) in operation. They are incurring a loss of about Tk. 25 billion per year. State-owned Enterprises (SOEs) relating to industries and public utilities are the worst loss makers.
Losing concerns in public sector have already drawn support from the treasury. Every year, the government has transferred part of revenue earnings to financially non-viable and sick industries. Such transfer has not only diverted money that could be used for more productive purposes, it has also made sick industries dependent on subsidy or grants from the treasury. Sick units in private sector are normally closed by entrepreneurs, who look for alternative use of their investable capital. For sick industries in the public sector, the government created the Privatization Board for ultimate transfer of such industries to private sector buyers. The response from private sector remains inadequate and official authorities have not succeeded in transferring public sector industries to private buyers.
Apparently, the exercise on privatization has not been all that objective. The value of asset side of listed industries has been quoted on the basis of current price of land, machinery and spares as well as raw materials and finished products. The liability side has also been calculated on the basis of depleted value of machinery, on the one hand, and the inflated value of loans and interests thereon, on the other. The quoted value of selected public sector industry looks very high and buyers from private sector and foreign investors are not found showing interest in entering into any deal for transfer. As a result, the pace of transfer remains largely slow.
The private sector entrepreneurs in this country, have done their bit in setting some profitable industries in different sub-sectors including garments, leather goods, pharmaceuticals and the like. They are not all that interested in buying sick industries, even though price thereof may be cheap. Some of them have since bought disinvested units, only to recover the money spent by immediate sale of machinery, land and allied assets. The ultimate goal of the public authorities to keep the transferred units’ operational looks largely defeated. That being so, more positive measures may have to be taken by official agencies to go for privatization.
The government has come up with the passage of the Privatization Act duly approved by the Parliament. It was, nevertheless, an onerous task on the part of government to implement the privatization programme and indeed, the Act is destined to hasten the process. The government thinks the guidelines of the Act have been formulated in conformity with the needs of the present-day requirements.
According to the Act, Privatization Commission has been set up replacing Privatization Board to expedite the denationalization process of the State-owned Enterprises (SOEs) as the existing rules failed to make any headway in offloading those.
The Commission has been empowered to adopt any alternative means to sell out State-owned Enterprises (SOEs) if tender and re-tender fail to get successful bidder. If necessary, it can take steps for commercialization of an enterprise. There are also provisions that the Commission can take over any of the denationalized enterprises if the conditions of agreement are not followed.
As, privatization in Bangladesh has generally been associated with sale of loss-making state-owned industrial enterprises. However global experience shows that meaningful and rapid economic development is possible when infrastructural sectors, such as, power generation, electricity and gas distribution, telecommunications, airlines, tollways are privatized. The infrastructural sectors have the potential of attracting massive foreign direct investment which in turn would spur a chain of economic activities in the country. In a country like Bangladesh where one of the biggest hindrances to rapid economic growth is weakness in our infrastructure, we should proactively look at privatization of these sectors, as has been done successfully in many other countries. The authorities need to shake off fear of pressure groups and take bold, urgent and effective steps towards a meaningful privatization of both state-owned industrial enterprises and equally important infrastructural sectors.
The SOEs in infrastructural sectors are prime candidates for immediate privatization. These sectors are important for a number of reasons. First of all, in most developing countries including Bangladesh, prices of infrastructural services do not reflect cost and growth, or development of these sectors do not depend on consumer demand. Second, these sectors have powerful spill-over effects on the growth and development of other sectors. Third, privatization of the infrastructural facilities- such as water, energy, telephone system, railways- promise tremendous gains.
Privatization target is, no doubt, achievable provided a strategy is firmed up. Firming up a strategy, based on consensus, however, is not an easy task. The political parties react keeping at the back of mind, the likely impact on the political situation. The trade unions being the vested party, resist privatization for fear of losing their employment. The bureaucracy creates snags in the fear of losing the empire and there are some academicians for whom privatization will mean defeat of an ideology.
Privatization is still largely a misunderstood concept in Bangladesh. Many still do not realize that privatization refers to transferring, to the private sector, of activities and functions which have traditionally been with the public sector. Also, privatization may take many forms, such as public ownership with operation contracted to the private sector, private ownership and operation under government regulations and community and user provisions. Another problem with the privatization effects is that privatization did not start in the country with clear policy guidelines. Therefore, besides firm political commitment and public education, making progress in privatization in Bangladesh would require a clear-cut policy, perhaps a privatization master plan.
Privatization in Bangladesh: Privatization in Bangladesh: Privatization in Bangladesh
Economic reforms give rise to social costs in the form of losers and gainers. Careful management of these transitional costs will, therefore, be an important part of the government policy for years to come. Concerns about job losses and other adjustment costs still deter many countries from undertaking privatization and liberalization. The available evidence, however, suggests that adjustment costs tend to be limited than sometimes feared. Nevertheless, there is much that governments can do to minimize such costs by fostering strong private investment and facilitating a smoother movement of workers from declining ones to expanding sectors. By contributing to economic growth in the longer term, trade liberalizations in likely to make contribution to poverty reduction. Policy makers may also wish to put in place social safety-net to assist adjustment for vulnerable groups who may be adversely affected by reforms.
Privatization does not mean only transferring the liability or the state to the private shoulders; it means privatization of over-all economic activities having impact on the growth and developments, in order to achieve competitive efficiency keeping pace with the changes. For a speedy privatization, the following steps should be taken and carried out with utmost sincerity:
- The privatization process should be accelerated with a work plan and phased timetable for accomplishing the set targets. Privatization of highly loss-making SOEs related to industries and utility sectors should be undertaken on priority basis.
- Steps should be taken to encourage more buyers and better bids.
- Specific and adequate safety-net programmes including attractive severance package may be undertaken to allay fear of retrenchment of workers.
- The Privatization Act should be widely discussed outside and inside parliament.
- While accepting bids, highest quoted price should not be the only consideration.
Effective financial sector reforms, introduction and enforcement of modern corporate laws, share bidders right, transparent free market policies, etc., should be ensured to pave the way for privatization.