Industrial Policy 2010 A Critical Appraisal By Professor

Industrial Policy 2010: A Critical Appraisal By Professor A. R. Bhuyan Organized By Islamic Economics Research Bureau

Industrial Policy 2010: Overview • The purpose of this in-house seminar is to highlight the main features of the recently announced draft Industrial Policy 2010, critically appraise the Policy, and present some constructive suggestions. • The Cabinet Committee has already approved the draft policy, which now awaits parliamentary approval. • When approved by the Parliament, the new policy will replace the earlier industrial policy announced in March 2005. • The new policy proposes an integrated strategy for achieving high economic growth through rapid industrialization.

Industrial Policy 2010: Overview Contd……. . 01 • The policy has been prepared taking into consideration the government’s determination to achieve the MDGs by 2015, and halve the number of the unemployed and hunger- and poverty-stricken people by 2017. • To alleviate poverty by creating additional employment opportunities, the policy aims to create job for at least one man per family. • It envisages rapid industrialization through short-, medium-, and long-term measures, aiming to raise the rate of GDP growth to 8 percent by 2013, and 10 percent in 2017 and thereafter. • The policy reiterates the cherished goal of achieving the status of a middleincome developing country by 2021. • The proposed policy puts emphasis on private sector industrialization efforts but at the same time vows to reform the public sector enterprises to make them profitable.

Goals and Objectives of the Policy • The proposed industrial policy envisages an increase in the industry sector’s share in GDP to 40 percent by 2021 from the present 28 percent, and the proportion of the employed workforce to 25 percent by that period from 16 percent now. • The main features of Bangladesh’s industrial sector will be the growth and expansion of local industries with opportunities for establishing importsubstituting industries alongside expansion and improvements of exportoriented ones. • To create higher value addition in exports, the new policy will encourage transforming resource-based export industries into process-based ones. • It puts emphasis on the development of small, medium and cottage industries, including women entrepreneurs, to boost economic growth through creating more jobs.

Goals and Objectives of the Policy Contd……… 01 • It encourages the growth of SMEs in rural areas to reduce the pressure of migration to urban areas. • The new policy encourages both foreign and domestic investment. • It will encourage investment in sectors that have comparative advantage by rationalizing the existing incentives. • It will devise medium- and long-term measures for the development of the industrial sector and monitor the progress in policy implementation. • The policy puts emphasis on the establishment and balanced development of industries in different geographical regions of the country. • It will encourage the establishment of separate economic zones for sectors such as textiles, ceramics and pharmaceutical ingredients.

Industrial Policy Strategies • The policy regards a vibrant and dynamic private sector as the key to the country’s rapid industrial growth. • Public investment will be limited to sectors that are considered crucial and sensitive to national security and in areas that will have a crowding-in effect on private investment. • Government will only play the role of a facilitator. • The policy will ensure that investors can invest without any hassles and undesirable official interference. • The policy calls for simplification of investment sanctioning procedures and for the removal of all legal complexities, delays and red tape in decision-making to give prompt services to investors.

Industrial Policy Strategies Contd……. . 01 • Priority will be given to provide the industrial sector with adequate facilities of electricity, gas and water, and other physical infrastructure like road, rail transport and telecommunications. • Public Private Partnership (PPP) shall be an important element in the proposed industrial policy. • PPP projects like flyovers, elevated expressways, monorail, underground rail, economic zones etc will be approved under the Private Sector Infrastructure Guidelines. • Funds will be arranged under PPP initiatives for developing infrastructure for industrial clusters, industrial parks, the development of labourintensive industries, and setting up environment-friendly industries.

Industrial Policy Strategies Contd……. . 02 • To meet the demand for industrial term loans, the policy recommends institutional reforms in banks and financial institutions. • The capital market will be strengthened to enable it raise more industrial investment from the secondary market. • Agro-based, food processing, and labour-intensive industries will receive priorities in matters of getting fiscal and other incentives. • In cooperation with banks and training institutes of government, private, and non-government organizations, steps will be taken to raise investment in the tourism industry and raise its efficiency. • The policy will provide necessary protection to local industries from unfair competition from dumped or smuggled imports.

Industrial Policy Strategies Contd……. . 03 • The policy formulates measures to tackle problems of sick industries and devises an exit policy for industries that have remained sick for 15 years. • It will adopt appropriate measures to rehabilitate sick industries, wherever possible, and at the same time formulate a law to rid the nation of sick industries. • Sick industries, if found potentially viable by appropriate studies, may be converted into public limited companies to make them efficient, competitive, and profitable. • Government shall not undertake any new projects to replace sick industries without settling their liabilities.

Industrial Policy Strategies Contd……. . 04 • It seeks to make the industrial sector environment-friendly and encourage industrial enterprises to adopt control pollution measures. • Government will ensure that the industrialization process is environmentfriendly and conforms to specific WTO agreements and standards. • It will adopt appropriate reforms and take measures to make the jute sector industries profitable and diversify the uses of jute. • The management of public sector cotton textile mills will be improved to make them profitable.

Classification and Size Definition of Industrial Enterprises • The proposed Policy gives a uniform definition of the size of Manufacturing and Service industries in terms of both fixed capital and labour employment. • It classifies industries into five categories: Large, Medium, Small, Cottage, and Micro. Cottage and micro industries are new additions in the industry classification. • Service industries (30 in 2010 policy, 19 in the 2005 and 5 in the 1999 policy). • Reserved industries (four in number – the same as in the 2005 policy).

Classification and Size Definition of Industrial Enterprises Contd…… 01 • Thrust Sector industries (30 in the 2010 policy as against 33 in the 2005 policy). These industries are believed to have high potential and will be eligible for special incentives and supports, viz. , tax exemption, tax at reduced rates, avoidance of double taxation etc. • Regulated industries (17 in the 2010 policy). Because of concerns over national security or threat to national culture, the private sector will be allowed to set up certain industries (called regulated industries) only with the express approval of government. • Women Entrepreneurs shall be eligible for receiving special incentives. Women entrepreneurs may be either proprietors or they may hold 51 percent of shares in partnership or joint stock companies.

Reform of Public Sector Industries • The growth and expansion of the private sector will be the main objective of government policy. • Public sector enterprises will be encouraged as complementary and competitive to private sector industries. • Privatization of PSEs will be encouraged but, before any privatization, alternative employment for the existing workforce will be ensured.

Investment Incentives • There is a plethora of tax incentives in the proposed policy, viz. , tax exemption, tax holiday, accelerated depreciation allowances, tax policy benefits, incentives for NRBs, equal treatment for local and foreign investors etc. • The prevailing tax holiday facilities (valid until 30 June 2011) shall continue under the proposed policy. • At present, industrial establishments in Dhaka and Chittagong Divisions, except the three hill districts, enjoy 100% tax exemption in the first two years, 50% tax exemption in the next two years, and 25% tax exemption in the fifth and final year.

Investment Incentives Contd…… 01 • In the case of Rajshahi, Khulna, Sylhet and Barisal Divisions and the 3 hill districts, prevailing tax exemptions are 100% in the first three years, 50% in the next three years, and 25% in the seventh and final year. • The provision of accelerated depreciation allowances shall continue until 30 June 2010. • The prevailing four-tier customs duty rate structure shall continue under the proposed industrial policy. The rates are 2. 5% for machinery and spare parts, 5% for basic raw materials, 10% for intermediate inputs, and 25% for finished products.

Economic Zones, Industrial Parks, High-Tech Parks, Private EPZs • A special law will be enacted for these purposes.

Institutional Arrangements for Expanding Industrial Activity • The Ministry of Industries shall be the focal point. • The Board of Investment (BOI) shall be the main agency to assist and develop private sector industrial investment. • BSCIC and EPZs will allot industrial plots in their respective areas. • Programmes of different training institutes under different ministries engaged in human resource development shall be made more dynamic and effective.

Institutional Arrangements for Expanding Industrial Activity Contd…… 01 • The training institutes are Bangladesh Institute of Management – BIM; Bangladesh Institute of Technical Assistance Centre – BITAC; National Productivity Organization – NPO; Small and Cottage Industry Training Institute – SCITI; Training Institute for Chemical Industries – TICI; National Hotel and Tourism Training Institute – NHTTI of Bangladesh Tourism Corporation; different training institutes under Jute and Textile Ministries and their corporations; other training institutes under Bangladesh Handloom Board and Bangladesh Sericulture Board. • Programmes and action plans of various private sector organizations shall be utilized for effective implementation of the 2010 industrial policy.

Implementation, Monitoring and Evaluation • A high-level 15 -member body – National Council for Industrial Development (NCID) – with the Prime Minister as president and the Industries Minister as vice-president is proposed. NCID shall meet at least once in six months. • • There shall be a 24 -member executive committee of the NCID (ECNCID) with the Industries Minister as its convener. • • The policy refers (paragraphs 16. 4 and 16. 7) to the Bangladesh Better Business Forum (BBBF) and the Regulatory Reforms Commission (RRC) (formed during the Caretaker regime) to promote contact and cooperation between industrialists and government policymakers and create a conducive business environment. • There shall be a coordination committee (comprising 18 members) to coordinate activities of different government organizations.

A Critical Appraisal of the Industrial Policy 2010 • A welcome feature of the 2010 industrial policy is that it retains all the good provisions of the 2005 policy. For example, – It recognizes the dominant role of the private sector in industrial development in which the government will act only as a facilitator. – It lays emphasis on both export orientated and import substituting industries and raising their competitiveness in both domestic and international markets. – It proposes to give special incentives and support measures to assist women entrepreneurs, and for promoting agro-based and foodprocessing industries.

A Critical Appraisal of the Industrial Policy 2010 Contd…… 01 • The 2010 Policy has also brought an improvement over the 2005 policy by changing the classification of Industry and giving a new definition of industry size. Thus, – The 2010 policy classifies industry into five categories – large, medium, small, micro, and high-tech industries. The 2005 policy classified only three – large, medium, and small. – The 2010 policy has also changed the size definition of manufacturing and non-manufacturing industries. – The 2005 policy defined the size of manufacturing industries in terms of the amount of fixed capital investment, and the size of nonmanufacturing industries in terms of the employment of workers.

A Critical Appraisal of the Industrial Policy 2010 Contd…… 02 • The 2010 policy has redefined all types of industries in terms of both fixed capital and the employment of labor. • Comments on the reclassification and redefinition of Industry Size – We appreciate that the 2010 policy has recognized micro and hightech industries as separate categories of industry. The reclassification will enable micro and high-tech industries avail of the facilities catering for their special needs and problems. – We also welcome the redefinition of industry size because, for purpose of ascertaining the presence of anti-competitive or monopoly practices, both capital and employment of labour are necessary to measure the true size of industrial enterprises.

Thrust Sector and Service Sector Industries • In order to turn the industrial sector into a major instrument of economic growth, the industrial policy has made a long list of thrust sector industries. • Although the number of thrust sector industries in the new policy is fewer (30) than in the 2005 policy (33), the list is still large, even unwieldy. • The 2010 policy has also widened the coverage of the service sector industries. It provides a list of 30 service industries as against 19 in the 2005 policy and as few as five in the 1999 policy. • The rationale behind the long lists of thrust and service sector industries is difficult to understand.

Thrust Sector and Service Sector Industries Contd……. 01 • The lists of thrust and service sector industries, of course, include some industries with high potential, but there are others, which do not produce standardized products, require only small amounts of capital, and have very small markets for their products. • The long lists of Thrust and Service industries may in fact detract attention from the relatively more important ones that genuinely need significant fiscal, financial and infrastructural support. • Moreover, the proposed policy makes incentives for the service and thrust sector industries conditional to their performance and contribution to the economy. • The incentives will thus not be automatic, which will create confusion among new entrepreneurs that will need guaranteed access to the declared incentives. • Comment. Limiting the number of the industries in the respective lists to accommodate the most important ones would be more realistic and meaningful.

Regulated Industries • The proposed policy includes a large number of industries (17 in all) in the list of Regulated Industries. • The highly restrictive provision that the registering authorities – BOI. BSCIC, BEPZA etc. – shall not register the regulated industries without the express approval of the concerned Ministry could hinder private sector initiative. • Comment. The list may be shortened and contain fewer industries.

Policy Contradictions about Private and Public Sector Involvement • The proposed industrial policy suffers from a contradiction. On the one hand, it recognizes the role of a vibrant private sector in industrial growth, but on the other hand it plans to go ahead with SOEs and calls for raising their profitability. • It is hardly likely that an SOE will ever behave like a profit-seeking entity and improve its efficiency. Asking a public sector manager to earn profit is like asking a monk to run a casino. • It is common knowledge that a market economy cannot thrive if there is a large presence of SOEs. • Given the continuing operating losses of SOEs, discarding the principle of divesting the loss-making SOEs just for purpose of protecting jobs is fraught with the danger of increasing the number of sick industries.

Policy Contradictions about Private and Public Sector Involvement Contd…… 01 • Comments: – A proper solution of the problem of the ailing SOEs is their outright privatization. – Instead of running businesses, Government’s role should be that of a facilitator. – The sphere of Government should be limited essentially to the provision, development and maintenance of essential infrastructure and utilities in which the private sector is unlikely to show any interest. – Unnecessary regulations should be withdrawn. – Regulations that are necessary, for example, regulations pertaining to environment, and worker health and safety policies, should be set realistic goals, implemented efficiently, and subjected to periodic review.

Public Private Partnership (PPP): Comments • The emphasis on PPP in the proposed industrial policy is laudable but the concept is still in a rudimentary stage. • Expeditious action will need to be taken by government to devise a transparent mechanism and frame well-defined rules for participating in and mobilizing funds for the PPP projects. • Usually in the advanced countries, the debt-equity ratio in PPP projects is 70: 30 and the 70% debt are generally funded by commercial banks, specialized financial institutions, and international financial institutions. • In Bangladesh, given the weak state of the capital market, the debt requirement will perhaps be much higher. • Hence, in order to enable the private sector entrepreneurs to participate in PPP projects, the banking sector should be directed to extend credit on easier credit and other lending terms.

Investment Incentives: Comments Tax Holiday and Accelerated Depreciation Allowances • The continuation of the prevailing tax holiday facility proposed in the Policy is welcome. • However, the tax holiday facility should not be limited for a given time period but extended for further periods on case-by-case basis. • Area wise exemption facilities enjoyed by industrial establishments could be made more liberal. • Thus, in Dhaka and Chittagong Divisions, excluding the three hill districts, the exemptions could be allowed for seven years: 100% in the first four years, 50% in the next two years, and 25% in the next and final year.

Investment Incentives: Comments Contd……. 01 Tax Holiday and Accelerated Depreciation Allowances Contd…. . 01 • In the other Divisions and the three hill districts, exemption could be allowed for nine years: 100% in the first five years, 50% in the next three years, and 25% in the next and ninth year. • We appreciate the continuation of the provision of accelerated depreciation allowances. • Nevertheless, we will recommend for bringing more industries under the tax holiday facility, because tax holiday is widely regarded as superior to accelerated depreciation allowances. • Needless to mention, for purpose of giving tax holiday facility, industries should be chosen based on sound economic criteria.

Investment Incentives: Comments Contd……. 02 Other Fiscal Policy Measures Comments • Keeping in view the need of the local industries to remain competitive, it would be advisable to reduce the customs duty rates on machinery and spare parts, basic raw materials, and intermediate products from the prevailing 2. 5%, and 10%, to o. 5%, 2. 5%, and 5%, respectively. • Moreover, there should not be any VAT or any other duty on the import of machinery and spare parts and basic raw materials. • A reasonable rate of customs duty may, however, be imposed on intermediate products that have domestic production.

Some Pertinent Observations on Industrial Policy General • All successive governments in the country since independence announced policies and strategies for accelerating the process of economic growth through the development of the industrial sector, but the growth of the industrial sector remained slow. • One may attribute this slow growth to factors like energy shortage, reduced availability of bank credit, poor inflow of foreign direct investment (FDI), labor unrest, and poor law and order conditions, but no less responsible were the inconsistent policies, which vitiated the overall business environment, discouraged investors, and hindered industrial activity in the country. • It is generally suggested that in order to pave the way for strong growth and expansion of the industrial sector, industrial policies periodically announced by government, should contain appropriate measures to address these problems.

Some Pertinent Observations on Industrial Policy Contd……. 01 Specific Observations on the 2010 Policy • The proposed industrial policy 2010 contains provisions, which appeared in almost all past industrial policies starting from the New Industrial Policy of 1982 to the Industrial Policy of 2005. • To name a few, the provisions relate to expanding private sector participation in manufacturing, increasing the efficiency of public sector enterprises, liberalizing the import regime, providing incentives to exporters, liberalizing the foreign investment regime, and offering attractive incentives to foreign investors. • However, these provisions achieved little by way of raising investment levels or achieving sustained industrial growth.

Why did past Industrial Policies fail? • Past industrial policies were not effective because they lacked a strategic vision or a clear direction for industrial development. • The policies scarcely addressed the hard-core problems that hindered industrial activity, thus making the policy incentives meaningless. • There was virtually no recognition in the policies of the supply-side constraints, both structural and policy-induced, that were the major impediments to the expansion of private sector manufacturing industries.

Major Structural Constraints that hindered industrial growth include 1. 2. 3. 4. 5. 6. 7. 8. limited access to credit, its high cost, legal or illegal, and procedural complexities in obtaining credit from banks, poor physical infrastructure, acute energy shortage, and unreliable supply of power and other utilities such as gas and water, lack of skilled labor and the tendency for labor to be militant, competition from dumped and smuggled imports, pervasive corruption in bureaucracy, particularly in the administration responsible for delivery of public services, poor law and order conditions, and growing incidences of crime and extortion at every stage starting from production to distribution and marketing of the products.

Major Structural Constraints that hindered industrial growth include Contd……. . 01 • These structural impediments continue to vitiate the business climate and dissuade entrepreneurs to bring in new investment or expand the existing ones. • This also explains why foreign investors are not willing to invest in this country despite the availability of attractive incentives. • Foreign investors want a congenial, secure, business environment, not just incentives. If the local investors are hesitant to invest in the country, why will the foreigners invest?

Policy Failures that affected Industrial Growth • Apart from the structural constraints mentioned in the foregoing, manufacturers faced a number of problems, induced by policy failures. • Many entrepreneurs, in particular the foreign investors, complain that most policy reforms in this country are incomplete and remain only in paper. • For example, during the early 1990 s, the government opened up the economy, lowered tariffs, eliminated quantitative restrictions, and used the floating exchange rate mechanism to promote exports. • However, the progress in these reforms was not maintained. • Moreover, the lack of complementary reforms to improve the conditions of power infrastructure, telecommunication and financial services has meant below potential benefits from increased openness.

Remedies for Structural and Policy-induced Constraints: Our Recommendations • The proposed 2010 Industrial Policy does not appear to seriously address the structural and policy-induced problems mentioned above. • Some of the measures proposed in the policy are largely peripheral in nature. • For example, the decisions to have large thrust/service/regulated sectors or to give new definitions to industry do not address the genuine problems of the industrial sector. • In order to take full advantage of emerging global opportunities, Bangladesh will need to remove the structural impediments and address the weaknesses in its domestic policy environment. • The root causes of the problem lie in the fundamental governance issues in power infrastructure, finance, enforcement of law and order, and eradication of corruption. • Without improvements in these areas, the mere announcement of an ambitious industrial policy with lofty objectives is unlikely to help achieve a sustained growth of the country’s industrial sector.

Addressing Sector-specific Problems • Apart from addressing the broader issues centering structural and policyrelated constraints, the proposed industrial policy should also address the sector-specific problems faced by different industries. • While the most common problems faced by all industries are those of infrastructure, capital and technology, some of the problems are specific to particular industries. • The proposed industrial policy should incorporate appropriate provisions to periodically monitor and address the specific industry-related problems.

Policy toward Foreign Direct Investment (FDI) • Industrial policy should not consider FDI merely a means of complementing domestic resources for industrialization. • It should also ensure that foreign investors bring in new technology. A strict screening of FDI would therefore be necessary. • To that end, the proposed industrial policy should clearly lay down that foreign investors would not be accorded permission to invest in this country unless they brought the latest technology.

Protection of the Environment • The proposed industrial policy lays strong emphasis on the protection of the environment and directs manufacturing enterprises to control environmental pollution by setting up effluent treatment plants (ETPs) and strictly comply with environment-related laws and regulations. • While the policy emphasis on environmental protection is highly welcome, it will be expected of the government to adopt appropriate measures that will make the private sector enterprises’ tasks easier to take effective steps against environmental pollution and desist from such activities as may cause such pollution.

Industrial Policy Needs to be Simple and Easily Implementable • The test of a good policy lies in its simplicity and implementability. • With 16 elaborate chapters, the proposed industrial policy document appears to be rather large. • Unduly long and elaborate policy documents may have the unintended effect of the crucially important objectives getting lesser priority. • As regards implementation, the availability of adequate resources, whether institutional, financial, or human, will be crucially important. • Better coordination among concerned ministries and implementing agencies will be needed to improve policy implementation.

Last but not the least • Industrial policy implementation in Bangladesh remained weak in the past because of inherent bureaucratic complexities, red tape, and delays in decision-making. These problems will need to be addressed seriously. • Given the slow growth experience of the industrial sector over the past three decades, the target of raising the industrial sector’s share to 40 percent of GDP by 2021 may appear somewhat ambitious. • Nevertheless, if the state machinery were able to improve the quality of governance, Bangladesh could expect to achieve a double-digit industrial growth in the coming years and move closer to achieving the target of raising the industry sector’s share in GDP to 35 -40% in the next decade as set by the 2010 industrial policy.

Thank you all. As-salamu ’alaikum wa rahmatullah