Definition and Origin of Export Processing Zones 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.
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.
It reveals from the Economic Profile of Bangladesh that last year’s GDP was recorded at US$61.41 billion with 5.40% annual growth.
GDP growth of broad Industry sector was 8.43% in the last year compared to 7.10% in the preceding year. The performance of the industrial sector was mainly based on the growth in textile and wearing apparel, drugs and pharmaceuticals, fertilizer, petroleum products, glass
products, cement, electronics, footwear and food and beverage industries. In the last year the contribution of this sector in national income is 28.44%.
Agriculture still holds an important position in our national economy in creating employment and increasing national income. In the last year the contribution of this sector in national income is about 21.91%. Growth in agriculture has increased to 2.41%. Growth during the year preceding year was 3.29%. Fish production in the last year has increased by 5.03%. Growth in the sector during the preceding year was 3.6%. Food production during the last year was about 30.05 million tons compared to 27.90 million tons in the year preceding year.
The service sector continued to the largest contributor to the country’s real GDP growth in 2004-2005. The sector grew by 5.7% during the year, compared to 5.4% in 2003-2004 and contributed 49.65% to GDP growth. All sub-sectors shared in the overall growth of the services sector activities, but relatively higher growth rates were registered by education (7.66%), transport, storage and communication (6.64%), hotel and restaurant (7.29%), financial services (6.77%), public administration and defense (5.75%).
Fig : Contribution of Broad Sector in GDP of 2004-05
Investment and savings:
Gross national savings during the year 2004-05 was 26.50% of GDP compared to 25.40% during the previous year. In the FY 2004-05 the rate of total investment was 23.14% of GDP in which the shares of public and private sector were 5.90% and 18.50% respectively. Total investment registered by BOI was US$ 19,992 million out of which US$ 8763 million was foreign investment. Investment made by in the EPZs was US$ 987 million.
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.
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.)
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 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, 1971. Norway introduced the GSP scheme in October, 1971. Japan followed it a month later. Denmark, Finland, Ireland, New Zealand & Sweden implemented the scheme in January, 1972. Switzerland & Austria followed shortly thereafter. USA as late entrant to the scheme implemented the same in 1976. 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 1995. 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 1st January, 2006. 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.
During 2004-05 export performance of Bangladesh raised upto US$ 8654.52 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:
Fig : Bangladesh Export by Major Products
Ready Made Garments, Textiles and Composite Textiles
- 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 low-cost 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.
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 1981-82.
[In million US$]
Fig : Growth of RMS Exports from Bangladesh (1981-82 to 2004-05)
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
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.
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$]
Fig : Frozen food Exports from Bangladesh
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 2003.
- 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.
Tableware, Sanitary ware, Insulator
a. Sector Highlights
- Global market of ceramic tableware is about US$10 billion.
- Bangladesh Ceramic tableware has a good reputation to the international market like North America and EU countries.
- Bangladesh has achieved technical expertise on ceramic tableware manufacturing.
- Historically, tableware industry is labor-intensive and Bangladesh has a skilled manpower in ceramic industry.
- Sanitary ware and insulator has also a domestic and international market demand.
- The clean gas reserve required for firing is a great competitive advantage for Bangladesh.
b. Industry Status
A few ceramic table ware manufacturers dominate the industry producing high quality products for the international brands. A pool of skilled manpower has been developed. The latest technological advancements in ceramic are also acquainted. Bangladesh produces high quality Bone China transferring the technology from Japan. The domestic market is also attractive. Some low-quality tableware are imported from mainly China to cater the demand of lower segment of the domestic market.
Fig : Growth of Ceramic Tableware Exported from Bangladesh
Since the economy of Bangladesh is agro-based, its export base was set on primary commodities like raw jute, tea, frozen food, agro product etc.
Product-wise Export During pro-liberation Period:
- Major Primary Commodities:
Fig : Primary commodities export from Bangladesh
Fig : Primary commodities – Export Growth (Million US$)
During last 33 years, average annual growth rate of primary commodity export stands around 14% per annum. Prior to 1981-82, 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 1981-82 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.
B. Major Manufactured Commodities:
Fig : Manufactured commodities export from Bangladesh
Fig : Manufactured Commodities – Export Growth (Million US$)
Fig : Year-wise Export During pro-liberation Period
EPZs of Bangladesh:
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.
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.
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.
Fig : Type of Industries
The first zone in Bangladesh was set up in South Halishahar in Chittagong in 1983. Following the tremendous success of the Chittagong EPZ, the government has decided to establish the country’s second EPZ at Savar near Dhaka a decade later in 1993. 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 : EPZs of Bangladesh
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$ 475.20 million but up to June-2005 the investment stands at US$ 867.01 million. The volume of investment has increased to US$ 391.81 million with a growth ratio of 82.45%.
Comparative Analysis on Investment
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.
Fig : Extended Sectoral Distribution of FDI during 2004
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.
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 1983-84 to a spectacular high of 17.88% in 2004-05. 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.
The enterprises of EPZs have exported goods worth of US$ 10,003.62 million up to June, 05 and it was US$ 4823.79 million till June 2001. During the last 4 years the export volume increases to about US$ 5179.83 million. This shows an increase of 107.38%. 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.
Fig : BEPZA’s contribution towards total national Export
Productivity Performance of EPZ Workers
During 2004-2005 the export performance of EPZ workers in textile cluster stands US $ 9952.00 per worker whereas export performance of one DTA worker in the same sector recorded US $ 2886.43. Therefore, EPZ worker’s productivity performance is 3.5 times than the DTA workers.
Export Performance on Investment:
EPZ enterprises derives highest dividend in terms of their investment. During 2004-2005 fiscal, average export performance of enterprises stands around 1.79 times of their actual investment.
Figure : Export Performance on Investment
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.
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 2004-05. 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.
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 2004-05 fiscal EPZ enterprises made export and import transaction with DTA enterprises to tune of US $ 528.310 million. This huge volume of transaction with DTA industries marked about 26% of export earnings by the EPZ enterprises during 2004-05.
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.
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$ 867.01, export US$ 10003.62 million and employment upto 154,788.
Fig : Zone-wise aggregate performance
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.
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 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 fourmfactors viz land, labour, capital and entrepreneurship. Among these factors 1st 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.
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.
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 Sub-station, 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
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.
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.
Fig : Investment in EPZs up to June, 1998
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 2004-05 EPZ 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.
To augment investment in EPZs, the government has declared a fiscal and non-fiscal incentive scheme in the early stage of EPZ development.
Fig : Fiscal incentives provided by BEPZA
Fig : 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’.
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.
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
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.
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
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 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.
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 $622.300 million to Bangladesh in 2004-2005 which is around 43.71% of the total export. Thus the foreign currency retention is 43.71%
Fig : Annual Economic benefit for the years 2003-2004 and 2004-2005
Special Economic Zone – enlarged version of EPZ
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.
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.
A major preferential treatment is essential for development of EPZs units by granting them the Government policy concessions in the form of fiscal and no-fiscal incentives. Although it is an adhoc arrangement but for initial investment attraction incentive scheme should run parallel.
There should have separate specific rules/regulations for different kind of zones in regard to Customs, Income Tax, Foreign exchange, VISA/Landing permit etc. EPZs should be strengthened enough to exercise regulatory functions and to act as an independent regulatory body. At present BEPZA is exercising some regulatory functions independently.
For better export performance international market access of Bangladeshi product is of prime important. Bangladesh has got huge potential in respect of natural resources, skilled manpower and investment friendly atmosphere. Development partners should come forward to find market for Bangladeshi products in the developed countries.