asian development bank ppa: ban 23441 development bank ppa: ban 23441 ... 1635-ban strengthening of...

ASIAN DEVELOPMENT BANK PPA: BAN 23441

PROGRAM PERFORMANCE AUDIT REPORT

ON THE

SECOND INDUSTRIAL PROGRAM(Loan 1147-BAN[SF])

IN

BANGLADESH

July 2000

CURRENCY EQUIVALENTSCurrency Unit – Taka (Tk)

At Appraisal(November 1991)

At Program Completion(April 1994)

At Operations Evaluation(March 2000)

Tk1.00 = $0.027 $0.025 $0.020$1.00 = Tk37.64 Tk40.13 Tk51.00

ABBREVIATIONS

ADB – Asian Development BankBFIDC – Bangladesh Forest Industries Development CorporationBTMC – Bangladesh Textile Mills CorporationEA – executing agencyGDP – gross domestic productICIR – Interministerial Committee on Industrial ReformsICP – Interministerial Committee on PrivatizationMOI – Ministry of IndustriesPCR – project completion reportPME – public manufacturing enterprisePPAR – program performance audit reportSDR – special drawing rightTA – technical assistance

NOTES

(i) The fiscal year (FY) of the Government ends on 30 June.(ii) In this report, “$” refers to US dollars.

Operations Evaluation Office, PE-546

CONTENTS

Page

BASIC DATA ii

EXECUTIVE SUMMARY iii

I. BACKGROUND 1

A. Rationale 1B. Formulation 1C. Objectives and Scope at Appraisal 2D. Financing Arrangements 2E. Program Completion Report 2F. Evaluation 3

II. IMPLEMENTATION PERFORMANCE 3

A. Policy Reforms and Institutional Development 3B. Procurement and Disbursement 6C. Management of the Program 6D. Effectiveness of Technical Assistance 6

III. PROGRAM RESULTS 7

A. Achievement of the Objectives 7B. Sustainability 10

IV. KEY ISSUES FOR THE FUTURE 10

A. Program Formulation 10B. Ownership and Political Commitment 12C. Accountability and Governance Structures 13

V. CONCLUSION 14

A. Overall Assessment 14B. Key Lessons for the Future 14C. Follow-Up Actions 16

APPENDIXES 17

BASIC PROGRAM DATASecond Industrial Program (Loan 1147-BAN[SF])

PROGRAM PREPARATION/INSTITUTION BUILDINGTA No. TA Project Name Type Person-

MonthsAmount Approval

Date1635-BAN Strengthening of Institutional Framework for

Restructuring Public ManufacturingEnterprises

AOTA 12 $400,000 2 Jan 1992

1636-BAN Improvement of Labor Productivity in PublicManufacturing Enterprises

AOTA 9 $325,000 2 Jan 1992

1637-BAN Implementation of Privatization Program forPublic Manufacturing Enterprises

AOTA 21 $446,000 2 Jan 1992

KEY PROGRAM DATA ($ million)As Per ADB

Loan Documents ActualADB Loan Amount/Utilization–SDR ($ equivalent) 90.5 ($125.0) 45.2 ($62.3)1

ADB Loan Amount/Cancelation–SDR ($ equivalent) 45.2 ($62.7)2

KEY DATES Expected ActualFact-Finding 10-22 Mar 1990Appraisal 20 Oct-1 Nov 1990Loan Negotiations 18-20 Nov 1991Board Approval 17 Dec 1991Loan Agreement 24 Dec 1991Loan Effectiveness 16 Mar 1992 20 Jan 1992First Disbursement 13 Oct 1992Program Completion 1 Dec 1993 25 Apr 1994Loan Closing 30 Jun 1994 Apr 1994Months (Effectiveness to Completion) 20.50 27.15

BORROWER The People’s Republic of Bangladesh

EXECUTING AGENCY Bangladesh Bank and Ministry of Industry

MISSION DATAType of Mission No. of Missions Person-DaysAppraisal 1 97Program Administration

Review 5 76Tripartite Meeting 2 5Program Completion3 0 0

Operations Evaluation 1 30

ADB = Asian Development Bank, AOTA = advisory and operational technical assistance, BAN = Bangladesh, SDR =special drawing right, TA = technical assistance.1 As of December 1991.2 As of April 1994.3 No program completion review mission was undertaken. The program completion report was prepared based on a

desk study.

EXECUTIVE SUMMARY

Reforms as a process of change -- no blueprints please!

During the early 1990s, the Government of Bangladesh implemented a series of reformsto improve economic performance. The objectives were to (i) create competitive industries, and(ii) enhance private sector development. Complementing the reforms for trade and exchangerate liberalization, the Government began reforms to reduce its presence in manufacturingactivities. From 1988 to 1990, the Asian Development Bank provided policy-based loan tointroduce policy reforms for the steel and engineering, textiles, and leather industries. TheSecond Industrial Program (the Program) was expected to continue the process of improvingthe overall policy environment to promote industrial growth and efficiency. The newGovernment’s 1991 industrial policy was accompanied by an ambitious agenda of policyreforms; the Program was essentially designed to support implementation of this policy as itrelated to public manufacturing enterprises (PMEs). The Program was also to implementdivestment and privatization measures for selected PMEs.

On 17 December 1991, the Board approved the Program loan for SDR90.456 million(about $125 million). Three technical assistance (TA) grants were provided to assist theGovernment with program implementation. The TAs supported (i) development of a legalframework for institutional reform of PMEs, (ii) development of modalities and mechanisms forprivatization, and (iii) assessment of human resources of PMEs and labor productivity of themanufacturing sector.

The Program focused on seven major areas of reforms: (i) minimizing the Government’srole in the industry sector in general and in manufacturing in particular, (ii) enhancingmanagerial autonomy and accountability of PMEs, (iii) enhancing financial autonomy andaccountability of PMEs, (iv) implementing privatization of PMEs, (v) rationalizing employment,(vi) developing policy actions for the environment, and (vii) supporting institutional reforms toprovide better oversight of PMEs.

The first tranche of SDR45.228 million was disbursed in two installments in Februaryand April 1992. Because of the considerable delays in meeting the policy covenants, the secondtranche of the loan was canceled on 24 April 1994. The loan was closed in April 1994. Theprogram completion report prepared in December 1997 rated the Program as unsuccessful.

This program performance audit report presents an analysis of the Program’s designand implementation arrangements, an assessment of the Program's effectiveness in initiatingand implementing policy reforms, and overall impact on the industrial economy. Although theGovernment announced the new industrial policy in 1991 and initiated wide ranging policyreforms, overall implementation has been weak and uneven. Several policy covenants remainunfulfilled.

An important impact expected from the Program was the reduction of the role of theGovernment and particularly PMEs within the overall economy. The PMEs’ share in investment,output, value added, and employment has been reduced substantially.

A major aspect of PME reform was to provide a proper legal framework to enable thePMEs and sector corporations to function as autonomous companies. By June 1992, all of thePMEs were to be incorporated under the Companies Act. This legal change was seen as thestarting point for restructuring, as it freed the existing PMEs from heavily regulated procurement

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processes, and labor and pricing procedures. It was expected that such autonomy would help tomake PMEs commercially viable. The Government did not agree with a crucial policy covenantof giving PMEs the autonomy to allow market wages for their employees. As a result, althoughmost PMEs now exist as companies, overall autonomy of their boards remains weak. Thefinancial performance of PMEs continues to remain an area of concern as PMEs continue toreport large losses. The overall financial liabilities of PMEs also remain high. The Program wasnot successful in reducing negative fiscal burden of PMEs.

While the Program specified various measures for privatization of PMEs, overallimplementation has been very slow and remains largely incomplete. Only three units wereprivatized during program implementation, compared with the target of substantial divestment of14 units and privatization of 20 textile mills.

This audit report identifies three major issues as determinants of program performance:(i) program formulation and design weaknesses, (ii) ownership and political commitment, and(iii) accountability and governance structure. The Program was complex because it aimed toreform a sector that had chronic performance problems. The Program had several designdeficiencies, and did not incorporate in-depth analysis of institutional structures and governmentprocesses to identify barriers to reforms.

Policy reforms usually require strong political commitment and ownership. The Programwas formulated, processed, and implemented by different governments. While high-rankingofficials did exhibit some ownership at times, this ownership was neither widespread norretained throughout the program. Even for the TAs there was only limited ownership, by theGovernment and the PMEs. The TAs helped to identify important tasks, but only duringimplementation. By the time most of TA reports were finalized, the Program had already missedmajor performance milestones and hence the overall impact of the TAs was limited.

Poor motivation, combined with inadequate skills and little accountability, usually lead toimplementation problems. Successful reforms require a strong governance structure with clearand effective accountability. Thus, it is important to address governance and accountabilitysimultaneously with civil service reforms when widespread policy reforms are being introducedat the sector level.

Because the policy reforms identified under the Program remain largely unfulfilled, theProgram is rated as unsuccessful. Program implementation provides four important lessons:

(i) Program loans with difficult policy reforms need to build an explicit componentaimed at strengthening stakeholder partnership and thus create a demand for thereforms.

(ii) Introducing policy reforms in a developing economy is a complex process andthe new lending instrument—program cluster loans—with targeted resourcetransfer linked to performance seems more appropriate.

(iii) A robust system of monitoring within the Government is very important andneeds to be built in explicitly. Resources may be provided for this.

(iv) Privatization and restructuring of PMEs require a high level of politicalcommitment, and hence an in-depth political analysis of the feasibility of thereform programs is an important prerequisite. Because there is residual

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sympathy for the public sector in Bangladesh, this needs to be targeted atmultiple levels if any major change is to be brought about. Only when civil societybecomes much more demanding for reforms and modernization in Bangladesh,reforms will take roots.

TAs aimed to support implementation and capacity building must have realistictimetables. Most of the diagnostic analysis pertaining to identifying implementation constraintsneed to be completed prior to major milestones.

Although the Program has contributed in opening up the economy indirectly, theGovernment has been unable to remove the structural constraints preventing PMEs fromfunctioning as commercial units. It needs to develop a credible and time-bound action plan todeal with these constraints and accelerate the process of privatization. Improved access tofinancial resources is crucial for promoting the private sector growth and diversity needed toremove widespread poverty in Bangladesh. Since PMEs continue to account for a large share ofnonperforming assets, the Government must address this issue.

I. BACKGROUND

A. Rationale

1. During the early 1990s, the Government of Bangladesh implemented a series of reformsto improve the country’s economic performance. The reforms were an integral part of themedium-term adjustment program supported under an enhanced structural adjustment facility ofthe International Monetary Fund. The Asian Development Bank (ADB) and the World Banksupported a number of policy-based reform programs1 in industry and trade. Complementing thereforms for trade, exchange rate liberalization, and macroeconomic structural adjustmentprograms, the Government began reform of public sector enterprises with the goal of reducingGovernment presence in manufacturing activities. ADB provided its first Industrial Program loan2

to support policy-based reforms in steel and engineering, textiles, and leather industries. TheSecond Industrial Program (the Program) loan was expected to support the process ofimproving the overall policy environment to promote industrial growth and efficiency.

2. When the Program was initiated, about 160 public manufacturing enterprises (PMEs)were organized in six sector corporations. Three sector corporations, Bangladesh ChemicalsIndustries Corporation, Bangladesh Steel and Engineering Corporation, and Bangladesh Sugarand Food Industries Corporation were supervised by the Ministry of Industries (MOI) andcomprised a total of 67 PMEs. Bangladesh Textile Mills Corporation (BTMC) was operating42 units under the oversight of the Ministry of Textiles, while Bangladesh Forest IndustriesDevelopment Corporation, with 14 units, was under the Ministry of Environment and Forest.Thirty-three enterprises were under the Bangladesh Jute Mills Corporation. One of the mostdifficult problems facing the Government was to reduce the operating losses of PMEsamounting to Tk1 billion per year. These PMEs also accounted for a large share of the financialresources of the nationalized banks, thus crowding out access of other sectors to theseresources.

3. The 1991 industrial policy set an ambitious agenda of policy reforms; the Program wasessentially designed to support implementation of this policy as it related to the PMEs. Therationale for the Program is elaborated in the development policy letter of November 1991(Appendix 1). The ultimate objective of the Program was to assist the Government in improvingfinancial discipline of the PMEs by setting a framework for greater accountability forperformance and providing the necessary autonomy. The Program was also to implementselected PME divestment and privatization measures.

B. Formulation

4. The policy reforms were identified and finalized through several internal studies, and along consultative process3 with the Government. The program period was set at three and halfyears, from July 1990 to December 1993.

1 The World Bank processed three loans during the same period: Industrial Sector Adjustment Credit I, approved in

1987, and a loan of $175 million, approved in June 1990 to address financial sector reforms. The Second IndustrialAdjustment Credit was under preparation after its identification in November 1988.

2 Loan 891-BAN(SF): Industrial Program , for SDR46.96 million, approved on 30 June 1988 and closed in April 1990.3 Given changes in governments, several missions were fielded by ADB during March, May, and June 1990 to

identify and develop areas of policy reforms in consultation with the Government. This process continued evenafter appraisal with three more missions in May, August, and September 1991.

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5. Three technical assistance (TA) grants were provided to help the Governmentimplement the Program: Strengthening of Institutional Framework for Restructuring PublicManufacturing Enterprises,4 Improvement of Labor Productivity in Public ManufacturingEnterprises,5 and Implementation of Privatization Program for Public ManufacturingEnterprises.6

C. Objectives and Scope at Appraisal

6. The principal objective of the Program was to stimulate growth and efficiency in theindustry sector by minimizing the Government’s role in the ownership and management ofmanufacturing activities. Implementation of the Program was to enhance financial discipline ofPMEs and thus free resources to revive private sector activities.

7. The Program included policy reforms in seven areas: (i) minimizing the Government’srole in the industry sector in general and in the manufacturing sector in particular, (ii) enhancingmanagerial autonomy and accountability of PMEs,7 (iii) enhancing financial autonomy andaccountability of PMEs, (iv) implementing privatization of PMEs, (v) measures to addressemployment issues, (vi) policy actions for the environment, and (vii) supporting institutionalreforms to provide better PME oversight.

D. Financing Arrangements

8. On 17 December 1991, the Board approved the Program loan for SDR90.456 million(about $125 million) to support the Government's reform program. The loan became effective on20 January 1992. The Borrower was the People’s Republic of Bangladesh and the ExecutingAgencies (EAs) were the Bangladesh Bank for administration and utilization of the ADB loanproceeds, and MOI for program implementation.

9. The loan was to be made available in two equal tranches: the first tranche on loaneffectiveness and the second by December 1992. The release of the second tranche dependedon compliance with the conditions set out in the policy matrix and the loan document.

10. The counterpart funds generated from the loan proceeds were to be used to finance(i) the local currency cost of ongoing ADB-financed projects, (ii) other development projects, and(iii) the financial restructuring of selected PMEs to be divested during the Programimplementation period. In addition, up to Tk900 million was to be used to rationalizeemployment in the PMEs.

E. Program Completion Report

11. The release of the second tranche was canceled on 25 April 1994 due to delays inmeeting important policy covenants. The loan was closed in April 1994, earlier than the target

4 TA 1635-BAN: Strengthening of Institutional Framework for Restructuring Public Manufacturing Enterprises, for

$400,000, approved on 2 January 1992.5 TA 1636-BAN: Improvement of Labor Productivity in Public Manufacturing Enterprises, for $325,000, approved on

2 January 1992.6 TA 1637-BAN: Implementation of Privatization Program for Public Manufacturing Enterprises, for $446,000,

approved on 2 January 1992.7 Bangladesh Jute Mills Corporation was excluded from the Program as it was to be covered under a separate World

Bank loan.

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date of June 1994. The program completion report (PCR)8 discusses the scope,implementation, impact of policy reforms, and benefits of the Program. Three TAs supported theprogram implementation (footnotes 4, 5, and 6). The PCR found that insufficient time given toimplementation of the TA recommendations resulted in the TAs not being very effective.

12. The PCR noted that by opening up the economy to private investment in the keyinfrastructure sectors under the 1991 industrial policy, the Program paved the way forstimulation of growth and efficiency in the industry sector in the medium to long term. However,in the short term, the impact of the Program policy conditions was minimal due to the slow paceof the privatization program and the inability of the PMEs to operate on commercial terms. Thus,the Program was rated as unsuccessful.

F. Evaluation

13. This program performance audit report (PPAR) focuses on important design aspects ofthe Program with a view to drawing lessons for future operations. The Operations EvaluationMission visited the country from 6 to 21 March 2000. The final PPAR is based on a review of thePCR, loan documents, and materials in ADB files; as well as discussions with ADB staff, EAs,other agencies of the Borrower, and the larger development community in the field. The draftPPAR was sent to the Borrower and the EAs with a request for comments. Although the requestwas followed by faxes, no comments were received; it is therefore assumed that neither theBorrower nor the EAs wish to comment on the PPAR.

14. The PPAR presents an analysis of (i) the Program’s design and implementationarrangements, (ii) its effectiveness in initiating and implementing policy reforms, and (iii) overallimpact on the industry sector. The report also presents findings on progress made in animportant area of industrial policy, i.e., PME commercialization and privatization. Based on theanalysis, the PPAR lists important lessons for future operations.

II. IMPLEMENTATION PERFORMANCE

15. The Program identified over 40 specific policy actions, which were organized in a policymatrix with specific target dates for action. An updated report on the status of compliance ispresented in Appendix 2. Many policy covenants remain unfulfilled. Although the Governmentannounced a new industrial policy in 1991 and initiated policy reforms in trade and exchangecontrol liberalization, overall implementation of the Program has been weak and uneven. Thefollowing sections provide a summary assessment of the implementation of major policymeasures.

A. Policy Reforms and Institutional Development

16. Government Role in the PMEs. The basic objective of the Program was to reorient theexisting PMEs to become commercial organizations. Six specific components were identifiedand incorporated in the 1991 industrial policy. The ultimate goal of establishing fullyautonomous commercial organizations has not been fully achieved. While the Government haswithdrawn guarantees for PME borrowing, the sector corporations (fully owned by theGovernment) continue to provide counterguarantees. Output price controls continue for fertilizer,sugar, and paper, and occasionally, the Government exercises price restraints to fulfill other

8 PCR: BAN 23441: Second Industrial Program Loan, December 1997.

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objectives. Overall progress has been very slow in divesting the PMEs. Finally, the Governmenthas yet to set up transparent and commercial procedures for bringing private sector personnelon to the management boards of sector corporations.

17. Improving PME Management Autonomy and Accountability. Prior to the Program,most PMEs operated under Presidential Order 27 issued in 1972. Under this order, theGovernment could virtually give any instruction to the corporations, which could do the same tothe individual PME. The Program planned to amend this framework and establish PMEs ascommercial entities, independent of Government. By June 1992, all of the PMEs were to beincorporated under the Companies Act. This legal change was seen as the minimal startingpoint for restructuring and freeing existing PMEs from heavily regulated procurement processes,and labor and pricing procedures. It was expected that by creating separate companies underthe Companies Act, the PMEs would be subjected to the commercial discipline of independentboards and management, external audit, requirements for annual general meetings, andtransparent and accountable functioning. In reality, although most PMEs now exist ascompanies,9 overall autonomy of boards remains weak. Sector corporations were not convertedto holding companies,10 they have retained their original form. The Government was to amendthe provisions of the Services (Reorganization and Conditions) Act (Act XXXII of 1975) toexclude its application to sector corporations and PMEs. This amendment was to provide thePMEs with the necessary autonomy to set salary and benefits of its employees according tomarket conditions rather than follow civil service salary scales. The Cabinet rejected thisproposal. Thus PME wages and salaries remain tied to Government pay scales.

18. Measures to Improve Financial Autonomy and Accountability. Under the Program,the PMEs were to be subjected to a performance and accountability system with incentivecompensation linked to profitability. With salaries tied to civil service rates, the important linkbetween compensation and company performance was not established. Covenants relating toautonomy for the budget and rolling plans, and uniform standards of accounting were notimplemented either. While the PMEs and sector corporations are required to prepare externalaudit reports and publish these annually, these reports continue to be delayed. The criteria forreturn and payment of dividends by the PMEs to the Government have not been implemented,and the PMEs continue to provide dividends on an ad hoc basis, as per the demands of theMinistry of Finance and the general budget. The Government has withdrawn the guarantees itused to provide for PME borrowing, but the financial discipline and accountability for PMEs andsector corporations remains weak. The program reforms have made the process of interfirmtransfer of funds more transparent.

19. Measures to Encourage Privatization. The Program specified various policy measuresfor PME privatization. As a first step, the Government was to develop a classification systembased on financial and economic criteria to select PMEs for divestment, but this was not done.Just prior to the loan negotiations, the Government identified individual units to be privatized 9 The Operations Evaluation Mission requested the latest annual reports of the sector corporations to determine if

the corporations were operating as commercial entities; however, reports were not readily available. Most auditedannual reports are delayed by more than two to three years.

10 There were a few but important discrepancies in the covenants as set out in the policy matrix attached to thedevelopment policy letter and the final Loan Agreement. The Loan Agreement specifically provides forincorporation of sector corporations under the Companies Act to enable them to function under the Companies Act,the policy matrix does not specifically require this. As a result of this ambiguity, sector corporations such asBangladesh Chemical Industries Corporation continued to function under the Presidential Order 27 and not underthe Companies Act as was envisaged in the Program. During implementation, a TA consultant noticed thisparticular discrepancy, but monitoring was continued using the policy matrix.

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under MOI based on the decision of the Disinvestment Board at their October 1991 meeting.Time-bound targets were agreed under the Program for privatization and divestment; five unitswere to be fully privatized by December 1992 and nine others by December 1993. To increasePME private shareholdings, the Government was to take steps to float shares in five partiallyprivatized PMEs by December 1992, and the remaining nine by December 1993. This was notachieved as per the time schedule. The Government was also to prepare a plan for privatizingthe remaining PMEs in forest, engineering, sugar, food, and chemical subsectors, as well astake steps to privatize 20 textile mills in two separate batches of 10 each. In all, the Programaimed to divest 14 units, privatize 10 textile units, and undertake offers of sale for 10 textile unitsbefore the release of the second tranche. Only three units were privatized during programimplementation. Another two units were approved for privatization, but the process was stalleddue to opposition. Privatization of one unit was held up due to legal complications, and thetender response of six units was poor. Overall success of the Program in privatization wasrather modest. Appendix 3 provides a comprehensive account of privatization.

20. Measures to Address Employment Issues. The PMEs were to introduce a compulsoryretirement age of 60, impose a freeze on new hiring except for identified categories, and offeradditional incentives for voluntary separation. These conditions were fully complied with. TheGovernment has reduced staff in the PMEs substantially. During 1990-1999, BTMC laid offnearly 27,904 workers under various voluntary schemes at a cost of Tk2.87 billion. BTMC nowhas 11,252 employees compared with 42,670 in 1993. Similarly, Bangladesh Steel andEngineering Corporation now has 6,452 employees compared with 13,182 in 1990. An actionplan to deal with surplus labor was to be prepared to reduce the number of employees byapproximately 3 percent annually during program implementation. Compliance with theseconditions cannot be determined due to lack of data.

21. Environment. Three loan covenants relating to environmental improvement of theindustry sector were to (i) enact legislation for monitoring pollution control facilities and enforcingenvironmental standards in industries; (ii) complete reorganization of the Department ofEnvironment to address environmental concerns associated with industrial development; and(iii) formulate and implement pollution control measures for major polluting industries including,at minimum, fertilizer, paper, leather, and chemical industries in the public sector and forprivatized PMEs. There was substantial delay in meeting these three covenants. TheEnvironment Conservation Act was passed only in 1995. ADB provided another projectpreparatory TA in 1992 to assist the Government in formulating and implementing industrialpollution measures.11 This TA prepared an institutional development program for theDepartment of Environment and identified polluting industries and sources of pollution in PMEs.Progress in actually implementing these recommendations is very slow. The Government didnot approve the proposals prepared by the consultant for reorganization of Bangladesh ForestIndustries Development Corporation. The corporation’s overall financial performance hasimproved: it is the only sector corporation involved with manufacturing activities that does nothave large losses.

22. Institutional Reforms. Two high-level interministerial committees were to assist theExecutive Committee of the National Economic Council, headed by the Prime Minister. TheExecutive Committee was responsible for restructuring and divestment of PMEs. TheInterministerial Committee on Industrial Reforms (ICIR) was set up under the secretary, MOIand the Interministerial Committee on Privatization (ICP) was established, headed by the

11 TA 1769-BAN: Industrial Pollution Control Management, for $600,000, approved on 22 October 1992.

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principal finance secretary and supported by the Autonomous Bodies Wing. A new division, theIndustrial Policy Reforms Wing headed by a joint secretary was set up in MOI and the TA oninstitutional reforms was to assist them with overall program implementation (footnote 4). Theseinstitutional arrangements were put in place prior to program loan approval. The othercovenants related to rationalizing public investment programs by setting criteria for newinvestments in the PMEs and for all Government investments. None of these wereimplemented. The level for private investment requiring government approval was raised fromTk100 million to Tk300 million.

B. Procurement and Disbursement

23. The first tranche, SDR45.228 million, was released in two installments in February andApril 1992. It was fully liquidated by October 1992. The proceeds of the loan were utilized tocover the foreign exchange costs of eligible imported items that originated from ADB developingmember countries. The largest source, in terms of value, was Singapore accounting for about32 percent of imports under the loan. Other sources include Japan (13 percent); Hong Kong,China (11 percent); Indonesia (9 percent); and France (about 9 percent). Imports included crudepalm olein, B.P. sheet, cement, and high-speed diesel.

24. The Program was to use up to Tk900 million to rationalize employment in the PMEs. Thecost of the labor redundancy program has been Tk2.8 billion; this was funded largely from thebudget.

C. Management of the Program

25. Monitoring Mechanisms. Various monitoring mechanisms set up under the Programand TAs were not adequate to deal with the basic design deficiencies of the Program. Programmonitoring system did not create a permanent group within the Government to support achange process that promised long-term gains, but at the expense of short-term costs. ICP andICIR could not carry out these functions because they themselves were constantly changing.The Government was to send a trend, progress, and impact report periodically, but most of themonitoring activities were timed around a visit of a mission or a major milestone in TAimplementation, such as a tripartite meeting.

26. Procedural Problems. The inadequacies of the privatization modality and institutionalweakness also affected program implementation. The Government did not develop criteria forselecting units for privatization. The lack of an adequate number of staff with necessary skills toselect and value units to be privatized at different levels adversely affected the preparation andprocessing of privatization proposals.

27. Clarity of Roles. Similarly, lack of a clear mandate and authority for ICP, and failure toclearly define the responsibilities of relevant line ministries hampered privatization. Units andline ministries perceived divestment as a curtailment of their power. Lack of executive authorityfor privatization in one central place was largely responsible for delays: even with the formationof the Privatization Board, this constraint has continued to remain binding.

D. Effectiveness of Technical Assistance

28. ADB provided three TAs to assist in implementing the reforms. Discussions indicate thatthe Government would have liked one comprehensive TA with a much greater role for localexpertise. Moreover, because the Government perceived the TAs to be prerequisites for the

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Program, the TAs were not seen as additional resources available for program implementation.There was a limited ownership of the TAs, by the Government or the PMEs.12 In all, the TAsseem to have assisted the Government, but only in a limited way. An important reason wastiming. Most reports were finalized between June 1993 to October 1993. Thus, by the timereports were prepared, the Program had already missed important covenant milestones. Thequality of TA reports was average.

29. The TA on strengthening the institutional framework for PME restructuring (footnote 4)was very important for program implementation and sustainability of the program results. TheTA was to provide institutional strengthening for MOI and the PMEs, to enable the PMEs tofunction as separate companies on commercial lines, with corporations supervising their budgetand performance. Initially, the TA team helped the Government prepare the relevant draft toamend Presidential Order 27, and prepared draft resolutions at individual company levels. Thesecond phase of the TA was designed to implement the framework, but in reality very little wasachieved.13

30. By the time evaluation was undertaken, MOI’s institutional structure had changedsignificantly. The Privatization Board handles individual cases of privatization, and mostministries have set up a cell dealing with privatization. There was no evidence of institutionalknowledge or skill build-up in the areas of these TAs. The overall outcome of the TAs was onlytheir reports.

III. PROGRAM RESULTS

A. Achievement of the Objectives

31. The loan document identified expected effects and ultimate desired impacts of majorpolicy reforms. These effects were to be monitored through trend, progress, and impact reports,which the Government was to periodically send to ADB during implementation. Two years afterthe end of the Program, the Industrial Policy Reform Wing was to prepare a comprehensivereport on the program benefit monitoring and evaluation study. In a separate appendix, the loandocument presented a tentative list of impacts, but no specific indicators were identified tomeasure these impacts. No linkages were indicated between the proposed policy reforms,immediate effects, and the final desired impact. Thus, the task of identifying indicators wasimplicitly delegated to the Government.

32. In reality, the monitoring was confined to progress with covenant compliance and TAimplementation, rather than effects or impacts of the policy reforms. The Government does notseem to have prepared the final program benefit monitoring and evaluation report. The PCR tooprovided only the immediate effect of the Program and no systematic attempt was made toevaluate the impact of the Program on industrial performance, overall efficiency, or performanceof PMEs.

12 At times, the consultants working on the TAs were not allowed to enter the PME facilities.13 "It has to be admitted that, during the year of the extended Phase II, virtually no practical implementation has

occurred of the policies and recommendations approved at or before the Tripartite Meeting that ended Phase I,despite countless meetings, decisions, timetables, and assurances from the corporations." TA 1635-BAN:Strengthening of Institutional Framework for Restructuring Public Manufacturing Enterprises, Executive Summary,Phase II Report, October 1993.

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33. The reforms initiated by the Program were an integral part of the overall structuraladjustment program aimed at making domestic industries competitive. This requiredsimultaneous liberalization of trade and exchange rate policies. It is, therefore, difficult to isolatethe overall impact of the Program on overall industrial performance.

1. Industrial Growth

34. The Program was to improve overall efficiency of the industry sector by (i) making thePMEs more internationally and domestically competitive, (ii) deepening trade-related reforms,and (iii) encouraging the private sector by streamlining the business environment and reducingbarriers to new investment. A reduction of the Government’s role in manufacturing activities andreform of the PMEs by imposing greater financial discipline were seen as integral componentsof the adjustment program to rejuvenate the moribund industry sector. Appendix 4 provides anoverall review of the industry sector during last decade.

35. Throughout the 1970s and 1980s, the industry sector stagnated with a growth rate ofonly 3.2 percent per year compared to the 3.9 percent gross domestic product (GDP) growthrate. Thus, instead of providing a stimulus, manufacturing actually constrained economicgrowth. Within the manufacturing sector, the performance of small-scale industries remainedweak growing at only 1.4 percent per annum. During the first eight years of the 1990s, theperformance of the economy improved markedly with GDP growing at nearly 5 percent perannum. Manufacturing expanded to 6.5 percent with large-scale manufacturing faring better(8.4 percent) than small-scale industries (3.9 percent). Although these rates are by no meansspectacular, they indicate significantly better performance compared with the past 20 years(Table 1).

Table 1: Annual Growth Rates(percent)

Item 1975 to 1991 1991 to 1999a 1991 to 1995 1995 to 1999a

Manufacturing 3.2 6.5 8.2 5.2Large 5.0 8.4 10.7 5.6Small 1.4 4.0 3.5 4.4

Agriculture 2.3 2.7 0.8 3.7Gross Domestic Product 3.9 4.9 4.3 5.5

a 1999 figures are provisional.

Source: Government of Bangladesh, Economic Survey 1999. Dhaka.

2. Competition and Efficiency

36. In 1993, several industries including jute and cotton textiles, sugar, leather, leatherproducts, and ready-made garments were shielded by effective protection rates of nearly100 percent or higher; while other goods, particularly agricultural products such as cereals andchemical fertilizers, were subject to negative effective protection. The tariff and quantitativerestriction rationalization program of the 1990s substantially reduced the effective protection ofall protected industries, except textiles, which continues to enjoy a high level of protection.Overall unweighted tariffs have been reduced from 89 percent in 1991 to about 20 percent in1999.14

14 World Bank. 1999. Bangladesh: Key Challenges for the Next Millenium . Dhaka.

9

37. During the 1980s, the average growth rate of exports (in nominal dollars) was only about7 percent per annum. But in the 1990s, it jumped to more than 15 percent. Imports grew atnearly 11 percent. Such rapid rates of growth mean that the share of exports and imports inGDP rose steeply. Compared with 1990, the exports to GDP ratio increased from 6 percent to15 percent, and imports to GDP from 14 percent to about 20 percent. The share of trade in totalGDP is higher at 34 percent now compared with 20 percent in 1990.

38. There is some evidence that dismantling of the negative bias against exports led to theexpansion of export-oriented units. Industries that were able to adjust to changing conditionsfared better than the units that did not adjust or were slow to adjust. Overall, the industry sectoris more competitive now compared with the early 1990s.

3. Performance of the PMEs

39. Role of the PMEs in the Economy. An important impact expected from the Programwas a reduction of the role of the Government and particularly the PMEs within the overalleconomy. The Government’s share of output, value added, and employment has been reducedsubstantially. From a contribution of almost 30 percent of total output or 1.6 percent of GDP inthe early 1970s, the PMEs in 1998 accounted for 9.9 percent of total industrial output or0.6 percent of GDP. The value added by the PMEs also decreased substantially even innominal terms. In 1989, the PMEs accounted for about Tk11.4 billion of value added; thisdeclined to Tk7.9 billion in 1999. This decline is largely due to the closure of many PMEs,decrease of new investments, and faster growth of the private sector. The Government reducedinvestments in the PMEs drastically during this period: from Tk8.4 billion in 1990 to Tk1.7 billionin 1998. Total employment also declined substantially: from 238,908 in 1990 to 149,230 in 1999.

40. Fiscal Impact. Another important program objective was to reduce overall fiscalpressure on government finances. Overall fiscal burden on government finances increasedsharply during this period. Despite a reduction of the numbers of PMEs, overall net losses offive PMEs increased from Tk53 million in 1989 to Tk3.8 billion in 1999 (Table 2). Total PMElosses continue to account for a substantial share of the overall losses of state-ownedenterprises. Detailed performance of individual PMEs is presented in Appendix 5.

Table 2: Profits and Losses of Public Manufacturing Enterprises(Tk million)

Corporations 1989 1990 1991 1994 1996 1997 1998 1999BCIC 246 455 (464) 255 (1,214) (2,379) (689) (1,674)BFIDC 8 (39) (57) (51) 30 17 (70) 61BSEC (78) (358) (856) (1,102) (645) (1,033) (1,124) (978)BSFIC (255) 171 (125) (196) (378) (653) (392) (360)BTMC 25 (170) (629) (1,539) (1,344) (1,633) (927) (887)Total PMEs (53) 59 (2,131) (2,632) (3,551) (5,681) (3,202) (3,838)

BCIC = Bangladesh Chemical Industries Corporation, BFIDC = Bangladesh Forest Industries DevelopmentCorporation, BSEC = Bangladesh Steel and Engineering Corporation, BSFIC = Bangladesh Sugar and FoodIndustries Corporation, BTMC = Bangladesh Textile Mills Corporation, PME = public manufacturing enterprise.

Source: Monitoring Cell, Ministry of Finance. Budget of Autonomous Enterprises. Various issues.

4. Privatization of PMEs

41. The Program set out an ambitious timetable for reducing Government shareholdings andprivatizing the PMEs. Fourteen units with existing private shareholdings were to be substantially

10

divested, whereas 20 other textile units had to be privatized. In addition, the Government was toprepare a privatization plan for the remaining PMEs. In reality, only three units were privatizedduring the Program.

42. Since loan closure, the Government has privatized 18 units for a total sale price ofTk1.9 billion. In addition, 7 units have been issued letters of intent, and tender processes havebeen completed for another 4 units. In the textile sector, BTMC has initiated a system ofoperating leases with the private sector, and as a result, no mills are operated by BTMC directly.

B. Sustainability

43. The Government remains committed to the reforms initiated under the Program. In 1999,the Government announced a new industrial policy15 to achieve the long-term objective ofmanufacturing contributing at least 25 percent of GDP and 20 percent of overall employment. Inthis new policy, the Government has retained only four areas (arms and ammunition, securityprinting, nuclear energy, and forest plantation) under the reserved list for the public sector. Theprivate sector can set up units without any restriction for all other industrial activities. Under theprivatization and reform of state-owned enterprises, the Government is contemplatinginternational collaboration and management contracting systems to make these unitscompetitive. The Government is also continuing its efforts for privatization of PMEs. Overall, theexisting policy measures are expected to continue the reform process initiated under theProgram. The 1999 policy proposes a new scheme, employee-owned stock program, to divestsome units. Nine textile mills are being handed back to the workers.

IV. KEY ISSUES FOR THE FUTURE

44. The Program supported diverse policy measures to improve efficiency of andcompetition in the industry sector, and to rationalize the role of the Government inmanufacturing activities. The PMEs continue to report large financial losses: the PMEs’ liabilitiescontinue to account for a large share of nonperforming assets of the nationalized bankingsector. Overall resource mobilization for the economy continues to be adversely affected. Theprogram implementation highlights three important issues.

A. Program Formulation

45. Barriers to Policy Reforms. It is essential to identify significant barriers to reforms atthe outset. This requires an in-depth analysis of institutional structures and governmentprocesses. The Program was an extremely complex program because it aimed to reform asector that had chronic performance problems. There were several studies during programformulation, but none dealt with the basic question of why the Government was not able toimprove the performance of PMEs. Such an analysis should have been an essential first step.Although there was a policy statement indicating political commitment to reforms, the Programwas far too demanding for the political system16 given the agenda of reforms and the capacity ofthe Government.

15 Government of Bangladesh. 1999. Industrial Policy 1999. Dhaka.16 It is important to recognize that inefficiency in any economic system implies creation of large vested interest

groups. Ability of the existing political system to deal with such interest groups is a very important parameter inimplementing reforms. With a new government, this was a major uncertainty and there was no track record ofreforms to go by.

11

46. Reforms as Process. It is important to see policy reforms as a long-term process. ADBand most other international financial institutions had extensive experience with project financethat involved limited uncertainty, low risks, and a top-down approach to economic governance.As a result, even programs of reforms were designed using largely the same tools andapproaches. Most policy-based reform programs were seen as delivering straightforward policychanges in exchange for aid finance. Participation was defined as explaining the key elementsand monitoring of progress. Institutional development was simply management of TAs. TheProgram (and other similar programs) designed to improve the existing policy environmentinvolve much more than these blueprints. Overall success depends on effectively addressingthree factors that contribute to performance: the formal rules or structures, informal norms, andenforcement mechanisms.17 The Program aimed to change the formal PME structure andexpected this would automatically lead to commercial viability. It was difficult to succeed withoutaddressing the other two factors. Even with the changed legal status, the PMEs have no realautonomy. Given the weak enforcement structure, the PMEs continued to have soft budgetconstraints.18 The process approach to reforms required maintaining the focus on organizationalchange and institutional development, and working with the Government to implement changeprocess. It also needed flexibility during implementation. The program lending instruments in theearly 1990s did not provide such flexibility or resources: most program loans normally allowedtwo tranches, over 12 to 18 months. Overall concern for quality of the country portfolio meantthat timing could not be extended without adverse effects on the pipeline of projects.

47. Specificity and Timing of the TAs. It is important to identify individual tasks clearly.Specificity19 was not a strong aspect of the program design; specific tasks were identified andcarried out during implementation using the TAs. Although the matrix identified major policyactions, each action required several specific tasks; in many cases these involved otherGovernment agencies. For example, the requirement for the PMEs to be restructured intocompanies needed legal changes (amendments to existing rules). This required preparing andpiloting this amendment in Cabinet and Parliament, changing articles of association of individualcompanies, passing appropriate board resolutions, and listing with the registrar of companies asa separate company under the Companies Act. Each change involved accomplishing numerousspecific tasks. Given the weak institutional capacity of the bureaucracy, work culture, and lack ofstrong incentives, even simple tasks became long and arduous. It was important to completethe TAs and identify all tasks before the Program began.

48. Institutional and Human Capacity. There was no systematic assessment at the designstage of institutional capacity, existing skills, or human resources for the required tasks. Theinstitutional capacity was perceived as a risk to implementation, but the creation of separatestructures in the form of high-level committees and provision of TA was seen as adequate todeal with this risk. In reality, ICP was unable to either remove the existing institutionalconstraints (lack of skills, motivation, accountability, or continuity), or to create a strong focalinterest group within the Government. Uneven political support, combined with weak institutional

17 Douglas North. 1995. The New Institutional Economics and Third World Development in The New Institutional

Economics and Third World Development edited by John Harriss, Janet Hunter, and Colin Lewis. London:Routledge.

18 When the Government stopped providing counterguarantees for their borrowings, two other informal structures (inthe form of friendly instructions to nationalized commercial banks and counterguarantees from sector corporations)afforded them resources that would not have been available otherwise.

19 Specificity includes the degree to which it is possible to articulate the objectives of a particular activity, the methodsfor achieving them, and the ways of controlling achievement.

12

and human capacity were not explicitly built into the design of the Program. The TAs associatedwith the Program were not able to remedy these weaknesses.

49. Financial Structure and Labor. Privatization in the Program was seen as a simpleexercise of restructuring the PMEs into companies and then off-loading their shares throughstock exchange. In reality, the process was much more involved. High debt liability and excesslabor were two structural problems, and lack of a systematic approach to deal with the problemof debt meant very slow progress in implementing privatization targets. Enterprise valuationcontinued to be carried out at book values of fixed and current assets and liabilities. Buyerswere expected to assume responsibility for all long-term liabilities making appropriatearrangements with the financial institutions for debt management. For the initial sales, buyerswere also to refrain from laying off workers for at least one year. Financial liabilities continue tohamper the privatization process even today.

50. Incentives. In retrospect, the program design points to an inherent mismatch ofincentives for different stakeholders. The sector corporations wanted to retain ownership andcontrols of profitable PMEs and pass on largely loss-making units for privatization. The marketwas not interested in only loss-making units. Labor largely resisted the changes as alternativeemployment opportunities in the surplus labor economy were limited. It was not realistic toexpect bureaucrats and the politicians who benefited from the PMEs to become agents ofchange. For the Program to be successful, a large part of MOI’s oversight functioning needed tobe eliminated, but the very same officials were given the task of divesting and restructuring thePMEs. Even within ADB, there are strong incentives for the staff to develop a demanding policyreform agenda for program loans because the Board lends its support more easily to difficultreforms to be achieved as quickly as possible.20 Reality checks on risk assessment, if evercarried out, only tend to scratch the surface. The peer review process in this case broughtimportant risks to the forefront, but they were dealt with superficially.

B. Ownership and Political Commitment

51. Policy reforms usually require strong political commitment and ownership. The Programwas formulated, processed, and implemented by different governments. The electedgovernment was quite new, and so to a large extent, implementation depended on theownership and commitment of the bureaucracy to carry the reforms forward. Discussions in thefield indicated that though a few high-ranking officials had a high degree of ownership at thetime of program formulation, this ownership was neither widespread, nor retained throughoutthe program period. While there were in-principle agreements over the broad policy changes,there were no specific "buy-ins" at the middle and working levels to push the tasks to adhere tothe program timetable. Given the bureaucratic structure, there was only limited continuity in ICPand ICIR, and as a result, no single focal group owned the program reforms.

52. At the macro level, all the loan proceeds were available for general budget purposes andfor development projects. MOI had to undertake the difficult task of restructuring units inexchange for the promise of long-term gains. With little motivation and weak institutionalstructure, the best possible option for the officials was to delay reform implementation. Inretrospect, it is safe to conclude that it was not correct to expect commitment from MOI officialsor sector corporations, because with reforms their own power base and, at times, even jobopportunities were at risk. It was important to devise an institutional framework that enhanced

20 Review of internal documents, including Board discussions on several program loans, confirms this observation.

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the existing incentives.21 Thus, it is important to look for indicators of political commitment andownership beyond the mere fact that the Government’s new industrial policy implied a high levelof ownership. Greater emphasis needs to be placed on issues such as inherent incentives.

53. It is not just the Program that ran into problems with bureaucratic delay and lack ofpolitical will. The World Bank's Industrial Sector Adjustment Credit 2 and the Jute SectorAdjustment Program were not fully disbursed. The self-evaluations for these programs point tolack of commitment and political will for reforms as the key issue.22 The issue of ownership andpolitical commitment goes beyond isolated operations and needs to be dealt with at multiplelevels.23

54. The international best practice for privatization indicates different models depending onthe local conditions. The most frequently successful practice is to give the privatizationresponsibility to a third agency. However, it is important to transfer ownership24 to theresponsible agency so that sector ministries do not block the process. It may also be useful toreduce the size of the oversight ministry simultaneously. The Government should not transfer allsuch units to a third agency as it may not have the capacity to deal with so many newresponsibilities. An action plan could be used with transfer of ownership staggered so that theagency remains efficient. The process should be made as autonomous and transparent aspossible.

C. Accountability and Governance Structures

55. Overall, motivation in many national bureaucracies is quite low; Bangladesh is noexception. Low motivation, combined with inadequate skills and little accountability, usuallyleads to implementation problems. Most of the program implementation problems arose fromincomplete policy, and the poor legal and supervisory environment. Successful privatizationrequires effective accountability in terms of appropriate standards of law, accounting, disclosure,and governance.

56. Successful reforms require a strong governance structure with effective accountability.Overall institutional structure for accountability in Bangladesh is weak, and as a result,implementation of reforms is slow. Even when reforms are implemented, overall impact may bemuch lower compared with countries, where there is much greater accountability. It is importantto address governance and accountability weaknesses and to work on civil service reformsimultaneously when widespread policy reforms are being introduced at sector levels. Clear andeffective accountability is a precondition for any reform program to deliver positive impacts.

21 In retrospect, one could say that an independent structure with full authority in the Ministry of Finance might have

worked effectively; or part of the loan proceeds could have been given to MOI as additional resource transfers, buttied to delivery of the desired policy reforms.

22 The implementation completion report for the Adjustment Credit concludes as follows: "even strong politicalcommitment, a few highly competent senior officials, and vigorous Bank support may be unable to prevail in theface of an unsupportive bureaucracy which is at the same time threatened by rapid change and technically weak insome key areas and thus empowered to thwart implementation of policy reforms."

23 For example, country programming needs to keep policy reforms and im portant milestones on their discussionagenda. Partnership with other parts of civil society can also be used to exert pressure.

24 With full ownership rights, the agency should also have the authority to change management in case the existingmanagement is delaying the process.

14

V. CONCLUSION

A. Overall Assessment

57. The Program was provided when the Government was in need of financial resources.However, the Government was unable to implement most of the reforms as per the agreedtimetable. In December 1997, the PCR rated the Program as unsuccessful. To date, the overallperformance of the Program in meeting its key objectives and intermediate tasks remains weak.Financial losses of PMEs remain high. Progress with privatization was very slow during programimplementation, and although now a few more units are privatized, the Program was unable toenhance domestic resource mobilization in any substantive way through these reforms. Laborrationalization in the PMEs has not led to either improved PME productivity or efficiency.Although the Program was successful in creating appropriate legal framework, most of thePMEs continue to lack market orientation and commercial viability. The Program is, therefore,rated unsuccessful.

58. There are some indirect positive impacts. One positive outcome from the Program is thatthe Government seems committed to the strategy of private sector-led, export-oriented growthof the economy.25 The desirability of reducing the role of the Government in productive activitiesoutside of some clearly defined areas is now fully established. The Government has ceasedsetting up new manufacturing units, and new investment in the PMEs (other than fertilizer) hasslowed substantially. Manufacturing investment is now mostly private. Similarly, the inevitabilityof privatization is no longer seriously questioned, although the actual act of privatization ofspecific units frequently gets caught in procedural and legal problems that stall its progress.

59. At the macro level, the reforms have succeeded in opening up the economy. Publicinvestment was contained at about 6 percent of GDP, while private investment rose from6 percent to 11 percent during the decade to the late 1990s. The relatively free investmentclimate seems to have encouraged the increase in private investment. During the 1990s,industrial production increased at more than twice the rate of that in 1980s. Electricityconsumption nearly doubled between 1991 and 1997. All these indicators suggest theemergence of a more dynamic industrial economy. Much of this can be attributed to the seriesof trade and industry reforms implemented in the 1990s.

B. Key Lessons for the Future

1. Stakeholder Partnership

60. Introducing policy reforms in a developing economy is a complex process. Experiencewith the Program indicates that even Government policy statements are not adequate to ensurethe Borrowers' full ownership. Government is not one dimensional; even within government,there are many layers. Although policy reforms maybe owned by some sections, efforts areneeded to ensure greater partnership of all. A strong demand for change must be created.

61. Program loans with difficult policy reforms need to build an explicit component aimed atstrengthening stakeholder partnerships. Greater awareness of the costs of not undertakingreforms should be systematically and continuously enhanced among larger civil society. Withtechnological advances such as web pages and the expanded role of resident missions, this

25 The 1999 Industrial Policy reiterates the Government's commitment.

15

task is simplified. Such partnerships need to be an integrated part of the implementationstrategy and should involve groups of like-minded stakeholders. If possible, independentstakeholders should also be involved in the monitoring process.

2. Reforms as a Process

62. In any bureaucratic system, the introduction of reforms needs to be seen as a long-termprocess. First the roles of ADB, Government, and consultants need to be clarified. All effortsneed to ensure that the Borrower retains ownership and that the Program is not seen as ownedby either ADB or the TA consultants. Second, barriers to policy changes must be analyzed.Based on this analysis, an action program must be prepared in consultation with stakeholders,specifying important tasks and monitoring mechanism.

63. Incentives must be aligned with those who deliver the reforms (and thus bear the costsof reforms) and those who receive financial resources. Most program loans seem to be ownedonly by the Ministry of Finance, because the Ministry receives the additional financial resourcesthat program loans bring. MOI had no financial or other incentive (other than being the reformingsector), but was accountable for undertaking some very difficult tasks such as laborrationalization or closure or privatization of units. In the Program (and in similar program loans),there seems to be thus a mismatch between incentives and accountability. ICP and ICIR werevested with overall responsibility, but they had no authority to make the final decisions. Inbureaucratic systems, it is important to aim for better alignment of incentives with accountabilityfor the reforms. In some cases, difficult reforms could also be made the collective responsibilityof a few ministers; such groups must be given complete authority to implement the tasks.

64. The new lending instrument, program cluster loans, may be more suitable for correctlyaligning incentives with accountability. The overall incentives will be enhanced with targetedresource transfers linked to performance.

3. Monitoring

65. An important lesson is that though loan covenants can supplement the implementationsystem, they cannot replace broad agreements on ends and means between the Borrower andADB. It is important to get up-front agreements on all of the specific tasks required forsuccessful program implementation. Covenants can be useful only as monitoring mechanisms;major differences, if any, need to be resolved prior to committing resources.26

66. ICIR and ICP were supposed to monitor the progress, but in reality, ADB and the TAconsultants did most of the monitoring. It is important to have an internal system of monitoringthat is less vulnerable to bureaucratic transfers. The TA consultants or ADB should supplementinternal monitoring, not replace it.

4. Political Feasibility and Governance

67. Most policy reforms and proposals for institutional development impact on the politicaleconomy of the countries involved. Reforms in areas such as PME restructuring requireeconomic and institutional analysis of the public enterprise sector, including readiness (capacity) 26 It was brought out in the field that from the point of view of the Government, the costs of not completing reforms are

very large. When international institutions walk away from a sector without completing reforms, overall costs borneby the Government are high, and there is no local constituency to continue reforms under such conditions.

16

and willingness (ownership) to privatize. An in-depth political analysis of the feasibility of thereform program would be an important prerequisite. Such an analysis should also clearly spellout labor market and institutional constraints.

68. If the Borrower is genuinely committed to a task, it will take all the actions needed. ADBor TA consultants cannot make up for a government's lack of commitment to a project orcomponent, or for inadequate implementation capacity, by imposing conditions on its loans.Sometimes, commitment is enhanced if borrowers can anticipate a stream of increasingly largerloans. In a sense, program loans have to have an element of progressive lending if the reformprocess is to be sustained by greater commitment and political feasibility.

69. Finally, processes of public enterprise reform usually threaten many vested interests andresult in resistance in any society. It is important for ADB and other external financiers to makeefforts to bring about attitudinal changes within all of civil society. These changes need to beundertaken in partnership with domestic institutions that support the reforms. In economies likeBangladesh, only when the civil society supports reform and modernization much moreaggressively, it is possible to implement reforms. There is a residual sympathy for the publicsector in this country, and hence, this needs to be targeted if any major change in attitudes is tobe brought about.

C. Follow-Up Actions

70. The policy reform agenda of the Program remains largely unfulfilled. The Governmenthas not been able to remove the structural constraints to the functioning of PMEs as commercialentities. The lack of privatization progress reflects deep-seated inefficiencies and governanceproblems. The PMEs continue to have soft budget constraints with large negative fiscal impacts.Vested interests, lack of political commitment, and trade union opposition continue to delayprogress. It is important for the Government to reduce the fiscal burden resulting from the PMEsby divesting the PMEs as quickly as possible. Since the Privatization Board does not have thenecessary authority to speed up the process, the Government must develop a time-boundcredible action plan to deal with the PME problem.

71. Finally, improved access to financial resources is crucial to promote industrial growthand diversity. Unless there is substantial progress with financial sector and banking reform,growth will not be achieved. Because the PMEs account for a large share of nonperformingbanking assets, the Government must urgently address this issue.

17

APPENDIXES

Number Title Page Cited on(page, para.)

1 Development Policy Letter 18 1, 3

2 Industrial Policy Matrix 24 3, 15

3 Privatization in Bangladesh 34 5, 19

4 Industrial Performance 41 8, 34

5 Performance of Public Manufacturing Enterprises 46 9, 40

INDUSTRIAL POLICY MATRIX

AGENDA OF POLICY REFORMS UNDER THE PROGRAM

Policy Area/Objective Policy Action Compliance StatusSecond Tranche Cancellation PCR (Dec 1997) Current Status (Mar 2000)

A. POLICY REFORMS

1. Government Role in Public Manufacturing Enterprises

Announce overall policy and medium-term strategy to reform the publicmanufacturing enterprises (PMEs).

The revised industrial policy will statethat

(i) PMEs will operate on a commercialbasis, with full autonomy;

(ii) foreign private investment(including joint ventures) torestructure PMEs will be encouraged;

(iii) Government guarantees on PMEborrowing will be withdrawn;

(iv) output price controls would beeliminated, except for monopoly andsensitive items;

(v) total disinvestment of up to 100percent of partially disinvested PMEswill be permitted; and

(vi) qualified private sector personnelwill be inducted in the managementboards of sector corporations andenterprises.

The new Industrial Policy wasannounced prior to the approval ofProgram Loan (1991).

Industrial Policy introduced in 1991and amended in 1992 continues to bein effect. The draft Fifth Five YearPlan identifies private sector as themain engine of industrial growth andaims at facilitation of private sectorinvestments through privatization ofstate-owned enterprises,liberalization, deregulation of publiccontrol, incentives to attract foreigndirect investments.

(i) Not implemented. PMEs areneither fully autonomous noroperating on a commercial basis.

(ii) A policy for joint investment is nowbeing framed.

(iii) The Government is not providingany guarantee but the corporationsare providing counterguarantees.

(iv) Output price controls have notbeen fully withdrawn. TheGovernment is exercising amoratorium on paper price increases.

(v) Not implemented fully.

(vi) Not complied with.

2. Measures to Improve Managerial Autonomy and Accountability

Incorporate the sector corporations asholding corporations of the PMEs.Incorporate the PMEs as publiclimited liability companies.

a) The PMEs will be incorporated assubsidiary companies with limitedliability under the Companies Act of1913 with the shares owned by thesector corporations, while the sectorcorporations will be designated asholding corporations.

Status of Incorporation

Units under Ministry of Industries(MOI)Bangladesh Steel EngineeringCorporation (BSEC): All 19 unitsincorporated.

Most of the PMEs are incorporatedunder the amended Companies Act of1992. However, the sectorcorporations continue to operateunder the separate statutory acts.

BSEC: All companies with limitedliability. Sector corporations continueto operate under the separatestatutory acts.

Appendix 2, page 1

24


Bangladesh Chemical IndustriesCorporation (BCIC): Out of 22 units,21 were incorporated.

Bangladesh Sugar and FoodIndustries Corporation (BSFIC): Outof 19 units, 3 remained to beincorporated.

Units Under Ministry of Textile(MOT)Bangladesh Textile Mills Corporation(BTMC): Out of 41 units, 17 wereincorporated, and 20 units that wereexpected to be privatized were notincorporated. However, 4 unitsremained to be incorporated.

Units under Ministry ofEnvironment and Forest (MOEF)Bangladesh Forest IndustriesDevelopment Corporation (BFIDC):BFIDC rejected recommendations ofconsultants regarding itsreorganization and has undertaken anin-house study to consolidate itsunits. According to therecommendations of this study,BFIDC was to reorganize its 15 unitsinto 4 by grouping the rubber andtimber units and one logging unit wasto operate under BFIDC.

BCIC: Only one enterprise remains tobe converted into a company withlimited liabilities: Tekerhat LimestoneMining Project.

BSFIC: All enterprises are limitedcompanies.

No further progress.


b) The Government will establish aprocedure for screening prospectivecandidates for corporation boardappointments drawn from the publicand private sectors and from theacademic, legal, and accountingprofessions.

The Government did not establish therequired procedures; however, MOIissued instructions to the sectorcorporations (through notification of29 Nov 1992) to take steps to appointdirectors.


Appendix 2, page 2

25


Strengthen managerial autonomy forPMEs.

c) The PME management will begiven the authority to decide onappropriate manning levels, includingthe right to hire and fire on acommercial basis, subject to totalfreeze on new hiring except foridentifiable categories of skilled ormanagerial staff.

The Boards of sector corporationsand PMEs (excluding BFIDC)adopted the resolutions drafted by theconsultants which grant autonomy atcorporation and enterprise level andrecognize that sector corporations areto operate as holding corporations.However, the effectivity of theseresolutions was pending the approvalof Presidential Order (PO) 27 by theParliament. In addition to provision inthe resolution regarding manninglevels, the sector corporations as wellas enterprises initiated the laborrationalization program.

Amendment to PO 27 related to theautonomy of the PMEs has beenenacted and gazetted.

The PMEs continue to function withlimited autonomy.

Identify and eliminate legalconstraints that limit policyimplementation.

d) The Government will amend theprovisions of the Services(Reorganization and Conditions) Act,(Act 32 of 1975) to exclude itsapplication to PMEs and to enablethem to function on a commercialbasis and to be incorporated underthe Companies Act of 1913. TheGovernment will review and amendthose of its directives that affectcommercialization of PMEs.

The Cabinet rejected the proposal toamend the Services (Reorganizationand Conditions) Act.


3. Measures to Improve Financial Autonomy and Accountability

Establish performance objectives,guidelines, and targets betweencorporation and enterprises.

a) The corporations will set strategictargets for PMEs on the basis ofguidelines given by the Government.The PME boards will set qualitativeand quantitative targets that will formthe basis for management incentivecompensation over and above regularcompensation.

The resolutions adopted by sectorcorporations (except BFIDC) andPMEs (except those under BFIDC)provided instructions on theseaspects, but their effectivity waspending subject to the approval bythe Parliament of PO 27.

Amendment to PO 27 related to theautonomy of the PMEs has beenenacted and gazetted. However, theimpact of new regulations on thefinancial performance of PMEs hasbeen negligible. Furthermore, overallfinancial performance of publicenterprises, as shown by theconsolidated accounts of BTMC,BSEC, BSFIC, BCIC, and BFIDC,deteriorated, with losses increasingfrom Tk2.44 billion in 1993/94 toTk5.15 billion in 1996/97.

No further development.

Redefine the system of budgetdetermination and introduce financialaccountability to PMEs.

b) The PME budget will be preparedon a three-year rolling basis withannual update and semiannualreview, and will be established as theprimary document for determiningfinancial accountability of theenterprise.

Not complied with. Not implemented.

Appendix 2, page 3

26


c) The Government will issue newguidelines to all PMEs with regard touniform standards for financialreporting.

Guidelines were issued in Nov 1992but compliance is weak.

Compliance with accountingstandards continues to be weak.

Guidelines in force but compliancecontinues to be weak.

d) External audit reports prepared byindependent auditors will bepublished annually.

Not complied with. Complied with.

e) The PMEs will be given authority,responsibility, and accountability fortheir finances.

The resolutions adopted by sectorcorporations (except BFIDC) andPMEs provided instructions on theseaspects, but their effectivity waspending subject to the approval byParliament of PO 27.

Not implemented.

Establish greater transparency inenterprise-Government flows.

f) The Government will establishfinancial criteria relating to return oninvestment for payment of dividendsfrom PMEs to the Government.

Guidelines were drafted and wereunder the Government’sconsideration.

The Company Law 1994 has giventhe directive regarding return oninvestment. But for the PMEs, theMinistry of Finance (MOF) determinesthe amount of dividends on anarbitrary basis.

g) The Government will withdrawguarantees given to bank borrowingby PME.

MOI issued a notification in Nov 1993to reconfirm the decision that theGovernment will not provideguarantees against any loan byPMEs.

Explicit guarantees have beenremoved. However, the Governmentstill exercises control over the lendingdecisions of the nationalizedcommercial banks and can pressurethem to lend to PMEs.

The Government does not give aguarantee, but the corporations doprovide counterguarantees.

h) Within a sector corporation, inter-PME transfer of funds from profitableenterprises to loss-making ones willbe properly accounted for with a viewto eliminating such transfers.

MOI issued instruction in May 1992 tocease inter-enterprises transfer offunds.

Implemented.

Remove price controls on goodsmanufactured by PMEs, and givemanagement full responsibility andauthority for free market operations.

i) The output prices will be determinedon an export-parity basis for ureafertilizer, on an import-parity basis forall imported fertilizers.

Subsidies on fertilizer prices werewithdrawn in Dec 1992. However,price and export controls on urearemained.

Government resumed subsidization offertilizer prices with Tk2.1 billionallocated in the budget for 1997/98.

Not complied with.

Improve productive efficiency ofPMEs through increased competition.

j) The Government will issue annualperformance evaluation of PMEs andrank them according to profitabilitycriteria.

Not yet done.

Appendix 2, page 4

27


4. Measures to Encourage Privatization of PMEs

List PMEs to be phased out and to beprivatized.

a) The Government will develop aPME classification to formulatefinancial and economic criteria toselect PMEs for disinvestment, andwill make a list of units to be retainedor disinvested within a specific timeframe in sectors other than jute andtextiles.

Privatization of Bangladesh Cycle,Bangladesh Blade, KhulnaHardboard, Deshbandhu Sugar, andKohinoor Battery was initiated. Noresponse was received to the tenderon General Electric. Selection ofPMEs for disinvestment was done onan ad hoc basis.

Overall, in the period from 1993 to1996 only 12 PMEs had been handedover to the private sector. CurrentGovernment announced privatizationas an essential element of its reformagenda. It currently aims to privatize224 enterprises mostly in themanufacturing and industry sectors.In 1996/97, share of nine partiallystate-owned companies werearranged to be offloaded through theInvestment Corporation ofBangladesh. In addition, letters ofintent to hand over to private sectorbuyers were issued for eightcompanies.

There is no set criteria for classifyingprivatization candidates. It is beingdone on an arbitrary basis.

b) Steps will be taken to increaseprivate shareholding in 14 partiallyprivatized PMEs.

Of the five units, 3 (ChittagongCement, Kohinoor Chemical, andDhaka Vegetable Oil) were privatized.Eagle Box and Shampur Sugar Millwere not privatized. Nine units wereat various stages of privatization. Fortwo units, the National Tubes andMetalex, which had been approvedfor privatization by the PrivatizationBoard (PB) and Cabinet Committeefor Finance and Economic Affairs(CCFEA), the process was stalleddue to opposition and awaited theGovernment’s further decision.Privatization of Lira Industries wasbeing held up because of legalproblems. The remaining six unitswere tendered, but the response waspoor.

Overall, 82 enterprises are earmarkedfor privatization in 1997/98 andtenders for their sale have beenfloated.

Not fully complied with.

c) A plan for privatization of theremaining PMEs in forest,engineering, sugar and food, andchemical subsectors will beformulated and discussed with AsianDevelopment Bank (ADB) prior to itsimplementation.

Difficulties with privatization ofidentified units delayed prospects fordevelopment of an action plan forprivatization of the remaining PMEs.

The World Bank is currently financinga technical assistance project aimedat establishment of the strategy planand legal framework to governprivatization of PMEs.

Not implemented.

Appendix 2, page 5

28


Build upon the successful momentumon the privatization of textile mills tostimulate further privatization in thesector.

d) The remaining audit discrepanciesbetween the BTMC and the privatizedtextile mills will be resolved.

Audit discrepancies were resolved,and the parties concerned agreed toaccept the joint audit report.Guidelines for dealing withoutstanding financial liabilities wereissued in Dec 1992.

e) The Government will develop anaction program for the privatization ofthe entire public sector textile mills.

Difficulties with privatization ofidentified units delayed prospects fordevelopment of an action plan forprivatization of the remaining PMEs.

At present, there are 31 textile millsoperating in the public sector. Most ofthem are technologically outdatedand all of these mills run at a loss.Government policy as elaborated inthe draft Fifth Five Year Plan, is toprivatize public sector mills in phases.

Limited progress.(Appendix 3)

f) The Government will take steps toprivatize 10 textile mills.

Delay in processing of the tenderingof the 10 textile mills occurredbecause of difficulties in managinglabor and debt issues. With theGovernment’s decision to rationalizethe work force in textile sector, theMOT retendered the 10 mills severaltimes. Privatization of the BangladeshTextile Mill was approved by CCFEA.Four other units, Zofine, Sharmin,Khinoor Spinning, and MadaripurMills, were to be placed beforeCCFEA for privatization. Noakhali Millwas to be revalued to determine itsrealistic indicative price. Barisal andKishoreganj Mills are to beretendered by PB. Dhaka and KhulnaCotton Mills were not privatized.

Up to 31 textile mills, includingBangladesh Textile Mill, Noakhali Mill,Dhaka and Khulna Cotton Mills, arestill to be privatized.


g) The Government will take steps toprivatize an additional 10 textile mills.

The list of another 10 textile mills wasprepared tentatively, and put up forapproval by the Cabinet. In theinterim, the MOT was planningretrenchment of another 10,000workers from these 10 mills tofacilitate the process of privatization.

Under the new privatization list, theGovernment is planning to privatize17 of the textile mills still under itscontrol. However, the progress todate has been slow due to theresistance of trade unions and poorfinancial conditions of the mills.


Appendix 2, page 6

29


5. Measures to Address Employment Issues

Implement measures to rationalizePME employment.

a) All PMEs will be committed to(i) introduce fixed compulsoryretirement age for workers, (ii) imposea freeze on new hiring except foridentifiable categories of skilled ormanagerial staff, and (iii) offeradditional incentives to all workersand employees for voluntaryseparation from service.

Cabinet approved-corporations/PMEswere in the process of adopting the60-year retirement age rule. Thesector corporations assessed excesslabor and started laying off workers.But the bill to fix the retirement age at60 years, which had been originallyplanned for presentation to theParliament for approval, waswithdrawn.

Retirement age of employees hasbeen fixed at 60 years.

b) PMEs with unsatisfactory financialperformance and with high labor costswill be required to reduce the numberof their respective employees in orderto achieve more cost-efficientoperation, higher productivity, andsatisfactory financial performance.

Overemployment was estimated at:

12,654 workers under MOI (includingBSEC, BCIC, and BSFIC), of whicharound 700 were laid off with fundsreceived from MOF

22,768 workers under MOT (BTMC)of which 9,500 were laid off

1,350 workers under MOEF (BFIDC)

The Government introduced avoluntary retirement scheme for PMEemployees. Under the scheme,21,100 employees opted forseparation. About 14,300 employeesactually retired. Further progress isstalled due to the shortage of funds.

27,904 employees were laid off atcost of Tk2.9 billion.

c) The labor rationalization program isto be implemented in accordance withan action plan that reduces workersand employees by approximately3 percent annually during the programimplementation period.

Consultants submitted theirrecommendation of overemployment.

Overall employment in the publicsector enterprises leveled off in recentyears at around 260,000 employees,after reduction by close to 20 percentin 1991. Further progress in laborrationalization is being slowed by thelack of funds to finance the separationpackages and the resistance fromtrade unions.

No evidence to sustain this claim.

6. Environment

Address environmental concernsassociated with industrialdevelopment.

a) The Government will enactlegislation to monitor and enforcepollution control facilities andenvironmental standards in industries.

Draft legislation was prepared andsubmitted to the Cabinet.

The Environment Conservation Actwas passed by the Parliament in1995. The Act empowers theDepartment of Environment (DOE) torequire conservation-focused,curative, precautionary, andpreventive measures. Implementationis however deficient.

Appendix 2, page 7

30


b) Pollution control measures in majorpolluting industries (e.g., fertilizer,paper, chemical, leather) in the publicsector as well as in privatized PMEswill be formulated and implementedafter review by ADB.

The quality standards were drafted.

B. INSTITUTIONAL REFORMS

1. Ministry of Industries

Improve and institutionalize thepolicy-making role of the Governmentwith a view to controlling indirectly thesector corporations, with anexpanded role for the corporations,and greater enterprise autonomy.

a) An Interministerial Committee onIndustrial Reforms (ICIR) headed bythe secretary, MOI will be set up tosupport and coordinate with theExecutive Committee of the NationalEconomic Council for undertakingindustrial policy reforms (includingPME reforms) and coordinate with theInterministerial Committee onPrivatization (ICP) for undertakingprivatization program for PMEs. ICIRwill be supported by a secretariatheaded by a joint secretary of MOI toformulate and monitor policymeasures for managerial andfinancial autonomy of PMEs andundertake the proposed privatizationprogram in liaison with theAutonomous Bodies Wing in MOF.

In view of the difficulties encounteredwith the implementation of theprivatization program based on theproposed institutional framework thatincludes ICP and ICIR, ADBrecommended establishment of anindependent empowered authority tooversee and implement privatization.In response, the Governmentestablished in Mar 1993 a PBheaded by a chairman and twoexecutive members.

PB is in operation. However, itsinstitutional capacity remains low. Ithas staff of only seven professionalofficers. Technical expertise regardingvaluation of enterprises, evaluation ofbids and offers, and divestmentprocedures and techniques is limited.Under the recently approvedBangladesh Capital MarketDevelopment Program Loan, ADB willprovide technical assistance toenhance PB’s capacity to carry out itsprivatization program.


b) The Secretariat will consist of thestaff of the Disinvestment Wing andother relevant MOI staff and is to bemade operational.

The Board has no flexibility to take adecision on commercial basis. It isbound by set procedures.

Monitor the impact of policy reformsand improve the planning and policy-making process within MOI.

The Government will prepare andimplement a program that will ensureregular feedback and monitoring ofongoing policy reform based onanalysis of reliable data by competentprofessionals.

The Government provided regularfeedback on the Program. Monthlyreviews to monitor and expeditecompliance with the Program werejointly undertaken by the MOI and theBangladesh Resident Office.

Appendix 2, page 8

31


2. Department of Environment

Develop the institutional structure forenvironment management.

The ongoing reorganization of DOEwill be completed.

The reorganization and recruitmentrules were placed for consideration ofMOI.

The recruitment rule for DOEreorganization was approved by theBangladesh President in Apr 1994.However, implementation is veryslow.


C. INVESTMENT PROGRAM

1. Public Sector

Access to Government budgetaryfunds for public sector developmentprograms of PMEs will be minimized.

a) The public sector developmentprogram for the industrial sector,including the three-year (1990/91-1992/93) core rolling investmentprogram, will be discussed with ADBprior to its implementation to ensurethat the allocations are in accordancewith the priorities and objectives ofthe industrial reform program.

Not complied with, though thebudgetary support for the PMEinvestment program was graduallyscaled down. However, MOI wasprovided an allocation of Tk2.2 billionfor the public investment of PMEs in1993/94.

Public sector investments in industrywere further reduced fromTk2.2 billion in 1993/94 toTk1.1 billion in 1996/97. The share ofpublic sector investment was reducedfrom 8.26 percent in 1993/94 to1.87 percent in 1996/97, while theoverall investment level, includingprivate sector, increased fromTk2.8 billion to Tk5.8 billion during thesame period.

Not complied with.

b) The self-financed investmentprogram of the PMEs will not beundertaken (i) until the PMEs are ableto meet their debt-service obligationson schedule and internally generatesufficient cash reserves, (ii) unlessthe PME is viable without price controlor subsidies, and (iii) unless theinvestment has strong strategicjustification and is undertaken in theform of residual equity in jointventures with the private sector.

Self-financing of PMEs wasinsignificant.

Operating losses of PMEs continue tobe a significant burden on theGovernment coffers. Operatingsubsidies estimated at about$600 million per annum (about2 percent of GDP) continue to be aserious constraint on the budget.

Not implemented.

c) The Government will establishcriteria for its public industrial sectorinvestments. As a minimum, theGovernment will not undertake anyfurther investments in subsectorswhere there is excess capacity and inunits that are nonviable on technical,financial, or economic grounds. Anyinvestment in the industrial sector willhave to be supported by strongstrategic justification and will beundertaken only on the basis oflimited joint venture arrangement inthe form of residual equity.

The Government did not establishcriteria for public investment in themanufacturing sector. Ad hocinvestments continue to beundertaken by the various sectorcorporations.

Public investments in industrialprojects, although at a smaller scalecompared to the past, continue inunfocused manner with 65 projectsincluded in the 1996 AnnualDevelopment Program.

Appendix 2, page 9

32


2. Private Sector

Increase threshold of projectsrequiring Government approval toenhance competition.

a) The threshold will be raised fromthe present level of Tk100 million toTk300 million, with no restriction onforeign equity participation within therevised threshold.

Complied with. Under the draft Fifth Five Year Plan,private sector is expected tocontribute up to 96 percent of allindustrial sector investments over thenext five years. All sectors of theeconomy, except for the five sectorsidentified in the Industrial Policy, areopen to foreign investment. No priorapproval or no objection certificate isrequired for setting up of a jointventure or 100 percent foreign-ownedcompanies.

Fully complied with.

b) The threshold of projects requiringGovernment approval will be raised toTk1,000 million.

Complied with. Fully complied with.

Appendix 2, page 10

33

Appendix 3, page 1

PRIVATIZATION IN BANGLADESH

A. Background

1. Soon after the emergence of Bangladesh as a sovereign country in December 1971,under Presidential Order 1, the Government of Bangladesh nationalized all abandonedproperties valued in excess of Tk1.5 million and the entire textiles, jute, and sugar industriesirrespective of ownership. The Government decided to restructure the economy and socializethe means of production. The entire formal financial sector comprising banks and insurancecompanies as well as jute trading were also nationalized. This policy of nationalization suddenlyraised the share of public sector assets in modern industry from a modest 34 percent to92 percent, as the Government acquired full control of 392 substantial industrial and commercialenterprises and numerous smaller units.

2. Although small relative to the total number of business enterprises, these enterprisesproduced about 7 percent of gross domestic product, 58 percent of manufacturing value added,and 80 percent of exports. It was envisaged at the time that such direct control would help theGovernment design and implement economic plans to promote rapid industrialization andeconomic growth of the country within an egalitarian socialist framework. Rigid wage and pricecontrols, and a highly regulated trade regime were put in place. However, the public sectorperformed poorly and became a serious drag on Government finances. So the Government, in1974, decided to expand the role of the private sector. Since then, successive governmentshave emphasized greater reliance on market forces and private initiatives to achieve rapideconomic growth. In reality, the legacy of the public sector has remained.

B. Implementation of Privatization

1. Overall Privatization Experience

3. The first attempts at privatization in Bangladesh began quite early, but very little isknown about the institutional arrangements prior to 1982. By 1975, 462 out of a total of725 mainly small companies were returned to their owners, liquidated, or privatized. Severalsmall industrial units were sold through tenders, using procedures approved by the Cabinet.Implementation was through the Ministry of Industries (MOI). The privatized units did notperform very well and the process was far from transparent. The 1982 new industrial policyrepresented a major step forward, and a number of jute and textiles industries that werereserved for the public sector until then were partially privatized. Nearly 650 previouslynationalized units were returned to the private sector. The Government also initiated steps toimprove performance of public manufacturing enterprises (PMEs) by giving greater autonomy,establishing better management information systems, and initiating critical performanceevaluation.

4. In one year, the Government denationalized 27 textile mills and 33 jute mills by returningthese units to their original owners. This was perhaps the largest and quickest divestment everdone in Bangladesh. The process has slowed considerably since then. The major problemfaced by the Government in selling the mills back to the owners was the large cumulative debtliability during the period of public ownership.

5. With the 1986 industrial policy, the Government created two new institutionalarrangements to accelerate the privatization program: an executive committee to function as anoversight body for the Disinvestment Board and a working committee to help review and

34

Appendix 3, page 2

implement divestiture. However, the roles of various agencies were not clearly defined, and as aresult, not a single unit was privatized during 1986-1991. Table A3.1 gives information on thenumber of units that remained under the sector corporations.

Table A3.1: Number of PMEs under Sector Corporations

Corporations 1976 1986 1991

BCIC 65 23 23BJMC 78 38 33BFIDC 20 13 14BSEC 54 21 21BSFIC 58 18 20BTMC 75 48 42

BCIC = Bangladesh Chemical Industries Corporation, BFIDC = Bangladesh Forest Industries DevelopmentCorporation, BJMC = Bangladesh Jute Mills Corporation, BSEC = Bangladesh Steel and Engineering Corporation,BSFIC = Bangladesh Sugar and Food Industries Corporation, BTMC = Bangladesh Textile Mills Corporation, PME =public manufacturing enterprise.

Source: Consultant's progress reports and Asian Development Bank files.

6. In June 1987, the Government issued a denationalization amendment ordinancewhereby 49 percent of shares of profitable PMEs under MOI (Bangladesh Sugar and FoodIndustries Corporation, Bangladesh Chemical Industries Corporation, and Bangladesh Steel andEngineering Corporation) to be sold to the private sector with 34 percent allotted to the generalpublic and 15 percent to PME employees. Implementation was slow, partly due to inappropriateselection of units. Some of the units that were considered profitable by the Government undertrade barriers were very fragile under the liberalized policy environment. The Governmentseemed to focus only on the current profitability. Thirteen units were partially divested by 1989.Ten more were listed for FY1990.

7. The Government soon realized that partial solutions would not work and therefore in the1991 new industrial policy, the Government adopted a comprehensive approach to privatizemanufacturing units. There were specific commitments relating to privatization under theSecond Industrial Program (the Program) loan. A phased program of privatization of 20 unitswas agreed to. The Government identified 40 units for privatization, and in the April 1992 aidgroup meeting, the Government made a commitment to privatize a significant share of theseenterprises expeditiously.1 The sale of 6 units was completed by mid-1992 through the sale ofshares to a wholly state-owned insurance company. In the 1993 aid group meeting, theGovernment expanded its commitment to privatize additional units.

8. A new privatization board was set up in 1993 to facilitate privatization. However, itmanaged to sell only 12 units for a total sum of Tk1,869.4 million during 1993-1996. During thetenure of the current Government, the process of privatization has slowed considerably. It soldonly 6 units during 1996-1999. These units were mostly small units and the total sale price wasonly Tk24.8 million. Thus, eight years after the Program was initiated, only 18 PMEs have beenfully privatized.

1 World Bank. 1994. Bangladesh: Privatization and Adjustment. Report No. 12318-BD. South Asia, Country

Department I, Washington, D.C.

35

Appendix 3, page 3

9. Table A3.2 gives the current status of units privatized by the Privatization Board since itsinception in 1993. So far, 18 units including 6 very small units have been privatized. In addition,letters of intent have been issued to 7 units for finalization of handing over units to buyers. In4 cases, the tender process has been completed. The Government is also off-loading shares of7 additional units through the Board. Two points are worth noting from the data given inTable A3.2. First, overall sale receipts are less than Tk1.2 billion, and in a number of cases, theliabilities are almost twice the tender price. Second, about a third of the units privatized are verysmall.

TableA3.2: Privatization Efforts Since 1993(Tk million)

Item Tender Price Liabilities Sale Price

A. List of Units Privatized by the Privatization Board

1. Kohinoor Chemical Company (51% share) 79.7 287.5 367.22. Chittagong Cement 335.0 137.9 472.93. Eagle Box and Carton Manufacturing (51% share) 20.0 — 20.04. Squibb (Bangladesh) Limited (40% share) 1.1 — 1.15. Madaripur Textile Mills Limited 80.7 22.1 102.86. Sharmin Textile Mills Limited 117.6 115.8 233.47. Kishoreganj Textile Mills 95.3 3.8 99.18. Kohinoor Spinning Mills 180.5 9.2 189.79. Zofine Fabrics Limited 12.5 4.0 165.010. Barisal Textile Mills 50.0 16.1 66.111. Bangladesh Cycle Industries 22.9 0.9 23.812. Dhaka Vegetables Oil Limited 139.4 137.6 276.913. Bangladesh Cold Storage 12.5 — 12.514. Royal Textile 2.6 — 2.615. I.K. Industries 7.0 — 7.016. Feroz Ata Dal Mills 0.04 — 0.0417. National Ice Factory 1.2 — 1.218. B.G. Bangla Rice Mills 1.6 — 1.5

Subtotal 1,159.5 754.8 1,894.3

B. List of Units where Letter of Intent for sale is Issued

1. Asrafa Oil Mill 7.7 — 7.72. Can Making and Tin Printing 16.0 5.3 21.33. Dosha Extruction 13.0 — 13.04. Nabarun Jute Mills 44.1 95.5 139.65. Kohinoor Battery Manufacturing Company 160.0 19.6 179.66. Engineering Industries Limited 35.1 1.7 36.87. Deshbandhu Sugar Mills Limited 23.5 153.5 177.0

Subtotal 299.4 275.6 575.0

— = no long-term liabilities.

Source: Privatization Board.

2. Process of Privatization

10. The process of privatization has now become more transparent. The privatization cells inthe line ministries finalize a list of enterprises that they wish to sell. The board then obtainsapproval of the Cabinet Committee for Finance and Economic Affairs (CCFEA) for selling theseunits. Once the approval is obtained, the board appoints chartered accountant firms or

36

Appendix 3, page 4

consultants to value the assets and liabilities of the units to be sold. Separate charteredaccountant firms or consultants may carry out a revaluation if considered necessary. Thepresent policy is that the buyers have to assume long-term liabilities against the fixed assetsand the short-term liabilities are taken over by the Government.

11. The process is time consuming. A meeting of all the concerned parties is held to agreeon the final asset value that must correspond closely to what the market will bear. The processof finalization of valuation takes about 3-4 weeks. International or local tenders are floated afterthe valuation is finalized. The prospective bidders have access to the valuation documents andthe units’ commercial performance reports for three years. The Privatization Board scrutinizesthe bids and selects the prospective buyer in 3-4 weeks. The whole tender process takes about45-60 days to be completed. The board then forwards its recommendation to the CCFEA, whichtakes about 2-3 weeks to give its opinion. If the CCFEA approves the recommendation for sale,it is sent to the Prime Minister who gives a decision usually within a week and routes it to theCabinet Division, which takes 1-2 weeks to send it back to the Privatization Board. ThePrivatization Board then sends out a letter of intent and sets up an inventory committee thatincludes the buyer’s representatives. This committee prepares a report in 2-3 months. Exceptfor the payments on the bid and final handover, there are no time limits imposed on most ofthese stages. In the assessment of senior official members of the Board, if there are no unusualproblems, the process of privatization can be completed within about 30 weeks to seal a dealafter the CCFEA has approved the sale of a public enterprise.

3. Major Constraints

12. The Government has now experimented with numerous institutional arrangements toimplement the privatization process. The Interministerial Committee on Privatization set up asthe part of the Program was not very successful and so the Government set up an independentboard to expedite the work of privatization. It too had limited success in privatizing units asagreed under the loan covenants of the Program loan. While there are some genuineinstitutional and legal barriers to privatization in the short term, the main barriers to privatizationin the longer term are the financial liabilities of the enterprises, a lack of political will, andbureaucratic resistance. The latter shows up in lengthy delays in passing or amendingnecessary laws and regulations, appointment of incompetent people in crucial positions, andfoot dragging in completing the process of privatizing units even after initiating the process.Similarly, lack of competence also sometimes creates serious legal problems in the course ofprivatizing a unit. For example, the sale of a unit was stalled because the land on which it wassituated belonged to another unit that was privatized earlier and no longer belonged to theGovernment.

13. Some delays and problems also emanate from the structure of the Privatization Board.The board reports to the Economic Affairs Committee of the Cabinet headed by the minister offinance, however, all decisions by cabinet subcommittees have to be approved by the PrimeMinister. Thus there is a two-stage process of privatization and the Prime Minister has aneffective right of veto.

14. Although the Privatization Board is entrusted with the responsibility of selling publicenterprises, it does not have direct control over them. The line ministries exercise the overallcontrol on these units. These ministries were asked to set up privatization cells to identify,prepare, process, implement, and monitor privatization of units under their control. Nine of the13 ministries that have state-owned enterprises under their control have set up privatizationcells. Thus, another major constraint faced by the board is the lack of authority over the units

37

Appendix 3, page 5

owned by separate ministries. The board has no statutory authority over the ministries; it canonly sell the units that are handed over to it by them. Even when these units were slated forprivatization, several procedures require reference back and forth to the concerned ministries.While there are no incentives for expediting the process, the board structure and the processgives implicit powers to numerous officials to introduce delays. There is diffused responsibility atall levels.

15. There are also structural barriers to privatization. Most of the units for privatization arenot run efficiently, and as a result, there is large debt liability on most of the units. The units arenot modern, have outdated technology or declining market shares, and require substantialrestructuring and renovations. The financial demands to turn around the units are quite large.Although some progress has been made in dealing with the surplus labor issues, theGovernment has not, as yet, dealt with the issue of financial liability. There are serious problemsof valuation of current assets as well. Given that most units have large current assets andliabilities, actual handing over of the unit gets delayed due to problems of valuation at currentprices and that of reconciliation with books of accounts. Many items that are valued at bookvalue have no market value, and usually handover delays of more than a year stem from theseproblems.

16. By now, the board has also become a large bureaucracy, but continues to lackappropriate skills. For example, there is no in-house expertise for financial analysis andvaluation. Overall technical capacity of the board remains weak, and there seems to be noevidence of skill buildup required to carry the process through, in spite of technical assistanceby all major financiers, including the Asian Development Bank.

17. Finally, there is a residual public sympathy for the public sector in Bangladesh at alllevels. Although there are pronouncements in various policies, the overall commitment toprivatization is lacking. It is difficult to locate strong references supporting privatization in thefive-year plan 1997-2002. Similarly, privatization does not even find a place in the 17 objectiveslisted in the 1999 industrial policy. In the subsection dealing with privatization, it contains a fairlystandard statement that the present privatization policy will be vigorously pursued. Althoughthere will be no new investments in areas other than reserved sectors, this policy states thatpublic enterprises will be encouraged to supplement and compete with the private sector.

4. Two Cases of Privatization

a. Success Story

18. The privatization story of Chittagong Cement Clinker Grinding Limited is one of fewsuccess stories. The former president of the Bangladesh Federal Chamber of Commerce andIndustries bought the unit's majority share of 51 percent. The public holds the other 49 percent.The Government was keen to privatize in the early years, and the owner indicated that eventhen strong lobbying was necessary to complete the sale of the shares in less than a year. Itwas necessary to continuously work with the trade unions and erstwhile management of the unitto ensure they did not put up insurmountable obstacles to the transfer.

19. Since privatization, the unit has tripled its capacity from only 1,000 tons per day to3,000 tons per day. The workforce was reduced immediately after the takeover, but as thebusiness expanded more and more workers were hired. The unit has adopted modernenvironmental control mechanisms and declared a 50 percent dividend last year. There wasalso net gain in employment as a result of this expansion. The management has set up a

38

Appendix 3, page 6

participatory mechanism for workers and they are consulted before important decisions aretaken. On the whole, it is a trouble-free enterprise that has recently entered into a joint venturewith the world's leading cement producer. In all, a true success story of a privatizationimplemented speedily!

b. Long Delays

20. The second case relates to a unit whose privatization process has been stalled since theearly days of privatization. It took the authorities more than one and half year from the date ofscrutinizing the tenders to issuing the letter of intent to sell the unit. More than five and halfyears after the buyer has fully paid the bid money; the unit has not been transferred. On thecontrary, the ministry now wants to cancel the tender. The chronology of main events is given inTable A3.3.

Table A3.3: Chronological Account of a Case Delayed for the Last Five Years

Date Actions

12 Dec 1992 Tenders invited for the sale of the unit.

22 Mar 1994 The Privatization Board accepted the offer of the highest bidder at its 9th board meeting and sent itsrecommendation to the Cabinet Committee for Finance and Economic Affairs.

13 Apr 1994 The Cabinet Committee for Finance and Economic Affairs accepted the recommendation for sale ofthe unit and fixed the liabilities of the unit at Tk81 million. It sent its recommendation to the PrimeMinister for approval; it was approved without delays.

26 May 1994 The Privatization Board sent the cabinet recommendation to the secretary, Ministry of Industries(MOI) and the chair, Bangladesh Chemical Industries Corporation, but inserts a new condition forsale. MOI sent two letters to the buyer showing the liabilities to be almost double the original amountapproved by the Cabinet Committee. The buyer protested.

31 Aug 1994 Letter of intent issued by MOI showing excessive liabilities.

22 Sep 1994 The buyer accepted the letter of intent with a strong written protest against the additional liabilitiesand conditions. The buyer paid the bid money on 22 September 1994.

Shares were not transferred. Process is under negotiations.

11 Feb 1998 MOI sought the opinion of the Ministry of Law in this matter.

9 Jul 1998 The Ministry of Law gave its opinion that the decision of the Cabinet Committee approved by thePrime Minister was the final.

24 Sep 1998 MOI sent the opinion to the Privatization Board for comment.

23 Nov 1998 The Privatization Board asked MOI to transfer the share as per the law.

29 Dec 1998 A meeting chaired by the minister of industries and attended by the chair, Bangladesh ChemicalIndustries Corporation, senior officials of the ministries of Industries and Law, and the PrivatizationBoard was held. The buyer was also invited to attend. The meeting decided to ask the PrivatizationBoard for specific suggestions regarding the handover of the factory to the buyer.

The process continues.

20 Feb 2000 MOI sought the opinion of the Ministry of Law regarding cancellation of the tender and transfer byany other means.

1 Mar 2000 The Ministry of Law informed MOI that the buyer cannot be held responsible for liabilities in excessof Tk81 million approved by the Cabinet Committee and the Prime Minister as the unit was nevertransferred to them. It also advised that there were no other means to transfer the shares.

Source: Interview and discussions with officials of Privatization Board, the buyer, and MOI officials.

39

Appendix 3, page 7

21. The matter remains unresolved. The transfer has not taken place even 5 years after thefull payment of the bid money. The tender document stipulates the completion of the transferwithin 60 days of the full payment of the bid money.

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Appendix 4, page 1

INDUSTRIAL PERFORMANCE

A. Macroeconomic Performance

1. Bangladesh’s macroeconomic performance in terms of the major indicators wassignificantly better in the 1990s than in the earlier decades. The growth rate of real grossdomestic product (GDP) was only 3.9 percent per annum during the 1970s and 1980s. Thegrowth rate improved during the first half of the 1990s rising to 4.3 percent and has registered asubstantial increase to 5.5 percent during the subsequent years.

2. Macroeconomic measures and reform programs undertaken during the last two decadeswere successful in other areas too. Conservative monetary management quickly contained therunaway inflation of the early 1970s. Money supply (broad) expanded at the rapid rate of over20 percent per year during the 1980s, but slowed down to just over 12 percent in the 1990s.This sharp fall in monetary expansion helped to contain inflation in the latter period. The overallbudget deficit in recent years was in line with the aid inflow. The current account deficit showedmarked improvement (Table A4.1).

3. The favorable trend in these macroeconomic indicators does not suffice to promote rapidadvancement of the economy. This ultimately requires a high rate of accumulation of bothphysical and human capital. The rate of domestic saving is quite low; it stagnated at around only2 percent during the 1970s and 1980s. It rose in the 1990s, but is still below 8 percent. The lowrate of saving was reflected in the low rate of investment of around 12 percent during the 1980s.There was some improvement in the first half of the 1990s; gross domestic investmentincreased to about 17 percent. Public investment accounted for more than half of the totalinvestment in the 1970s and accounted for about 6 percent throughout the last two decades.Private investment on the other hand rose from about 6 percent in the late 1980s to over11 percent by the late 1990s. However, most of this increase was achieved during the first halfof the 1990s.

Table A4.1: Macroeconomic Variables(percent of GDP)

Item FY1991 FY1994 FY1996 FY1998

Real Gross Domestic Investment 11.5 15.4 17.7 17.8Real Gross Domestic Savings 4.1 7.5 7.5 7.6Foreign Aid 7.4 6.1 4.5 3.7Remittances 3.3 4.2 3.8 4.5Trade Deficit 7.4 6.4 9.5 6.4Current Account Deficit 0.7 (0.1) 3.3 0.8Overall Budget Deficit 7.2 6.0 5.7 5.4GDP = gross domestic product.

Source: Government of Bangladesh. Statistical Yearbook , various issues; Economic Survey 1999; and staffestimates.

41

Appendix 4, page 2

B. Review of the Industrial Economy

1. Industrial Growth

4. The reforms initiated by the Second Industrial Program (the Program) were an integralpart of the overall structural adjustment program aimed at the globalization of the economy. Theindustry sector stagnated throughout the 1970s and 1980s growing at only 3.2 percent per year(Table A4.2). This was less than the growth rate of GDP of 3.9 percent. During the first eightyears of the 1990s, the performance of the industrial economy improved markedly.

5. Until 1981, small-scale manufacturing plants produced most of the manufacturing output.Since then, the major part of the output of the manufacturing industries has come from thelarge-scale manufacturing enterprises; this contribution has increased over time. In 1989, large-scale manufacturing produced 58 percent of the total manufacturing output, but by 1997, itscontribution rose to over 66 percent. Within the large-scale manufacturing subsector, textiles(27.2 percent) and tobacco (14 percent) dominate accounting for 41.2 percent of the totalproduction. Chemicals and chemical products (10.1 percent), food manufacturing(10.5 percent), and petroleum and coal products (10.1 percent) contribute another 32.7 percent.Thus, the concentration of industrial production continues to be quite high.

6. Manufacturing did not contribute to large-scale new employment opportunities for thegrowing labor force. The reduction in the employment of public manufacturing enterprises(PMEs) was not matched by increases in employment in private enterprises; on the contrary,employment in manufacturing actually declined from 5.9 million in 1990 to only 4.1 million in1995. The service-oriented sectors accommodated most of the increase in the labor force; theemployment in this sector rose from 10.9 million to 16 million during the same period.

Table A4.2: Growth Rates of Sectoral GDP at Constant 1984-85 Prices(percent)

Sector 1974-1990 1990-1999a 1990-1994 1994-1999a

Manufacturing 3.2 6.5 8.2 5.2Large 5.0 8.4 10.7 5.6Small 1.4 4.0 3.5 4.4Gross Domestic Product 3.9 4.9 4.3 5.5

a 1998/99 figures are provisional.

Source: Government of Bangladesh. 1999. Economic Survey 1999 . Dhaka.

2. Policy Environment and Investment Climate

a. Trade Liberalization

7. The low industrial performance in the 1970s and the 1980s made it clear thatprivatization alone will not accelerate industrial growth unless it was accompanied by anenabling business environment and removal of other restrictions imposed on trade andcommerce. The Asian Development Bank and other international organizations, such as theWorld Bank, worked with the Government to support wide-ranging liberalization of the trade,industry, and finance sectors so as to open the economy to international competition. The tradeliberalization policies since the mid-1980s sought to reduce both tariff and nontariff barriers.The ultimate goal was to create a more open economy with domestic relative prices morealigned with the corresponding international prices. The production structure would thus more

42

Appendix 4, page 3

closely match the comparative advantage of the economy thereby maximizing the gains ofspecialization.

8. The trade liberalization measures undertaken during the second half of the 1980sconsisted essentially of reduction in the number of commodities that attracted QuantitativeRestrictions (QRs); 639 commodities in the 4-digit list were subjected to QRs in 1986. Thenumber was sharply reduced to 315 within the next three fiscal years. At present, only 28 items,mostly in the textile industry are subject to QRs. The highest tariff rates were cut sharply from350 percent in 1991 to 40 percent in 1998. The number of tariff slabs were also reduced from 17to 6. The unweighted average of custom duty came down from 88.6 percent in 1990 to20.2 percent in 1998, while import weighted duty fell from 42.1 percent to 14.1 percent duringthe same period. In the recently announced policy, the number of tariff slabs was furtherreduced to 4 with the highest duty of 37.5 percent. The unweighted average tariff declined to16.7 percent in 1999. Despite the large reduction in the average tariff, the dispersion has notdeclined (Table A4.3).

Table A4.3: Tariff Slabs on Imported Products, 2000

Product Category Rate of Duty (%)

Finished consumer goods 37.5Intermediate goods (semiprocessed) 25.0Raw materials 15.0Capital goods 5.0All products 16.7

Source: Ministry of Finance.

b. Exchange rate

9. Bangladesh has maintained a “strongly managed” flexible exchange rate regime afterunifying the multiple exchange rates in 1992. Careful management of the exchange rate hasenabled the country to prevent a currency crisis from developing, and thereby avoid any abruptlarge changes in the external value of the currency. The fact that there was very little differencebetween the official and the open market exchange rates suggests that the central bank hasbeen largely successful in steering the exchange rate close to the market rate. Despitemanagement of the exchange rate, Bangladesh had a real appreciation of about 4 percent inthe real effective exchange rate from 1990 to 1998, compared with depreciation experienced byits immediate neighbors: Indian currency depreciated 35 percent, Pakistan 19 percent, andNepal 7 percent during the same period. The taka also appreciated in real terms relative to thecompeting Southeast Asian countries of Indonesia, the Republic of Korea, Malaysia, andThailand.

c. Investment Policy

10. The 1999 industrial policy aimed to liberalize the private investment environment toachieve private sector-led growth of industrial production to at least 25 percent of GDP within adecade. Unlimited private sector investment will be permitted in all industries except for fourreserved sectors, namely, armaments and defense equipment, forest plantation andmechanized extraction, production of nuclear energy, and security printing. Foreign investmentwith up to 100 percent equity will be encouraged in all sectors excluding the reserved sectors,ready-made garments, and the financial sector. Foreign investors will enjoy the same facilitiesas the domestic entrepreneurs for tax holidays, payment of royalty, technical know-how fees,etc. Full repatriation of profits and dividends as well as the invested capital will be permitted.

43

Appendix 4, page 4

The Government will play a facilitating role in promoting private investment, and permit publicsector involvement only in those activities where it will facilitate private sector growth (and/orwhere there are overriding social concerns to be addressed). To implement the industrial policy,the Government will enact an investment promotion act to make the 1999 policy enforceablethrough the court of law.

11. No prior permission from government will be necessary to set up an industry other thanthose in the reserve list. Permission is also not needed for its subsequent balancing,modernization, rehabilitation, and expansion. However, it will require clearance from appropriateauthorities for safety and environmental concerns. Clearance must also be obtained for settingup new units in the ready-made garments and financial sector. All foreign investment must beregistered with the concerned promotional body before setting up a unit.

3. Competition and Efficiency

12. The structure of prereform tariffs and QRs implied a widely varying effective rate ofprotection for various industries. In 1992, several industries including jute and cotton textiles,sugar, leather and leather products, and ready-made garments were shielded by effectiveprotection rates of nearly 100 percent or higher, while other goods, particularly agriculturalproducts such as cereals and chemical fertilizers were given negative effective protection. Thetariff and QR rationalization program of the 1990s substantially reduced the effective protectionof all protected industries.1

13. Trade and industrial production increased due to these structural reforms. During thedecade of the 1980s, the average growth rate of exports (in nominal dollars) was only about7 percent per annum: in the 1990s it increased to more than 15 percent. Imports grew at arelatively smaller rate of nearly 11 percent. Such rapid rates of growth meant that the share ofexports and imports in GDP rose steeply from only 6 and 14 percent respectively in 1989 to14.6 and 19.8 percent respectively in 1998. Thus, the overall trade ratio increased from21 percent to 34 percent during the period.

14. The surge in exports could be attributed to the performance of only one industry: ready-made garments. By 1997 about three quarters of all export earnings and more than 85 percentof the increase in exports (achieved during 1987-1997) was contributed by the ready-madegarments industry. There is some concern in the industry and Government that it may not beable to compete successfully against such countries as the People’s Republic of China and Viet Nam once the existing quota entitlements are withdrawn in 2005.

C. Overall Impact Assessment

15. In terms of the objectives of the Program, the Program was judged unsuccessful, andthe second tranche of the loan was cancelled. Even today, the PMEs do not function asautonomous commercial units. The various inefficiencies show up in the large financial lossesreported every year. Only a handful of PMEs have been privatized and the Government stillcontrols a large portfolio of industries with significant negative fiscal impacts on the budget,contradicting one of the main objectives of the Program.

16. The Program did have some long-term impact that was in conformity with its ultimategoal of achieving an open competitive economy dominated by the private sector. The Programwas an integral part of all liberalization programs implemented in the 1990s and so it is difficult

1 Textiles continue to enjoy higher protection than any other industry.

44

Appendix 4, page 5

to isolate the economy-wide impact of each. One of the most important outcomes of theProgram is that the Government is now committed to the strategy of private sector-led, export-oriented growth of the economy. This is enshrined in several important Government documentsincluding the 1999 industrial policy. The desirability of reducing the role of the Government inproductive activities outside of some clearly defined areas is fully established. Although thepace of industrial reform leaves much to be desired, it is certainly in the right direction. TheGovernment has ceased setting up new manufacturing units routinely, and new investment inthe PMEs have virtually stopped except for the fertilizer subsector. Manufacturing investment isnow mostly private as envisaged by the Program.

17. The inevitability of privatization is no longer seriously questioned, although the actual actof privatization of specific units frequently gets caught in procedural and legal problems that stallits progress. The Government has initiated several steps to remove these impediments. An actconverting the Privatization Board into a privatization commission and empowering it to directlyand independently negotiate the sale of Government stakes in PMEs has been approved by theCabinet and the President, and is being placed before the Parliament. Many of the privatizationbottlenecks will be removed by this act, and the pace of privatization will likely quicken in thenear future. This will also make most other objectives, such as autonomy and commercializationof the PMEs redundant.

18. The reforms have undoubtedly succeeded in opening up the economy. Exportsincreased at a much faster rate in the 1990s than anytime before. Imports also increasedrapidly; but the current account deficit, always a cause of worry, showed marked improvement.Public investment was contained at about 6 percent of GDP, while private investment rose from6 percent to 11 percent during the decade to the late 1990s. The relatively free investmentclimate contributed to this increase in private investment. During the 1990s, industrial productionincreased at more than twice that achieved in the 1980s. Electricity consumption nearly doubledbetween 1991 and 1997. All these indicators suggest the emergence of a more dynamiceconomy in the 1990s. Much of this dynamism can be attributed to the trade and industrialreforms implemented in the 1990s.

45

Appendix 5, page 1

PERFORMANCE OF PUBLIC MANUFACTURING ENTERPRISES

A. Role of the Government in Manufacturing

1. In 1990, public manufacturing enterprises (PMEs) accounted for 30 percent of the valueadded of large-scale manufacturing and 18 percent of all manufacturing or 1.5 percent of grossdomestic product (GDP). By 1999, PMEs’ contribution fell to 8 percent of the value added oflarge-scale manufacturing and only 5 percent of that of all manufacturing (0.5 percent of GDP).In terms of both output and employment, the PMEs no longer remain important.

2. One of the major thrusts of the Second Industrial Program (the Program) was tominimize the role of the Government in the industry sector. The Government had decided “tofocus the role of the Government as a facilitator in creating an enabling environment forexpanding private investment”1 by limiting public investment “to only those cases where there isspecial need to complement private investment or where there is an overriding social andnational objective to be achieved.”2 Accordingly, public investment in the PMEs came down froman annual average of over Tk12.5 billion from 1988-1991, immediately before thecommencement of the Program, to only Tk1.6 billion per annum from 1996-1999, i.e., areduction of 87 percent in nominal terms. Given that the price level rose by about 70 percentduring this period, the decline in real investment was even larger.

3. The reduction in the role of the Government and the public sector was also reflected inthe five-year plans of the country. The plan allocations to the public sector remained unchangedin the second and the third five-year plans at slightly over 64 percent. But there was a reductionin the public sector allocation in the fourth five-year plan to less than 56 percent. The publicsector was further trimmed in the fifth five-year plan in which it received an allocation of about44 percent.

4. The share of the public and the private sector in the total investment of the country wereroughly equal in the early 1990s. Private investment grew fairly rapidly in the 1990s. By 1998,real private investment had increased by more than twice its 1990 level. The faster growth ofprivate investment raised the share of the private sector in gross domestic investment from 50to 63 percent in the last seven years.

B. Employment

5. One of the reasons identified for the large losses of the PMEs was overemployment. TheProgram had, therefore, suggested a rationalization of the labor force: mandatory retirementage and voluntary separation. Furthermore, steps were to be taken to reduce the number ofemployees in the PMEs during program implementation. These measures would, it wasanticipated, improve productivity of the workers, reduce costs, and ensure better financialoutcomes. Employment in Bangladesh Textile Mills Corporation was reduced by 71 percentduring the seven years from 1991-1999. Further reduction have been reportedly made morerecently. Most of these reductions were achieved through retirement and voluntary separations.Bangladesh Steel and Engineering Corporation reduced its workforce by 47 percent, whileBangladesh Sugar and Food Industries Corporation achieved a reduction of 27 percent.Bangladesh Chemicals and Industries Corporation reduced its workforce by about one-fifth.

1 Government of Bangladesh. 1999. Investing in Bangladesh: A Guide to Opportunities. Board of Investment. Dhaka.2 Government of Bangladesh. 1999. Industry Policy 1999. Ministry of Industries. Dhaka.

46

Appendix 5, page 2

Bangladesh Forest Industries Development Corporation actually increased employment duringthe period by 25 percent.

C. Financial Performance

6. From inception, the nationalized enterprises suffered from serious inefficiencies. At thetime, there was a belief that as these enterprises matured, their performance would improve andthey would contribute significantly to capital accumulation of the new nation. But this did nothappen as PMEs continued to post large losses and required large budgetary transfers or loansfrom the nationalized banks. The net real losses suffered by both manufacturing andnonmanufacturing are not only enormous, but also increased rapidly during 1988 to 1999. Thelosses of the PMEs in 1998 amounted to 61.5 percent of their value added and 5.4 percent ofthe actual total expenditure under the annual development plan. The losses were greater thanthe total spending of the annual plan on entire agriculture.

7. The substantial reduction in the public enterprise workforce did not improve the financialperformance of any of the sector corporations. The real losses (at constant 1985 prices)suffered by all the corporations, except Bangladesh Forest Industries Development Corporationand Bangladesh Steel and Engineering Corporation, increased such that the combined reallosses in these PMEs in late 1990s were larger than that in 1991. This would tend to indicatethat overemployment was not the main source of the financial losses of the PMEs.

8. There could be several reasons for this outcome. Trade liberalization had reducedprotection and monopoly status of many PMEs, such that some of the erstwhile profitableindustries have turned unprofitable in the competitive markets. Some units have becomeobsolete and have not upgraded technology or entered new markets. Nearly 70 percent of thetotal expenditure of the public enterprises are spent on the purchase of goods and services, andonly about 30 percent on employee compensation. It is necessary to carefully scrutinize theprocurement procedures to get a better perspective on cost overruns and losses. There is alarge debt overhang of nonperforming assets, and as a result, overall liabilities of the PMEshave increased significantly. Finally, the PMEs have very little commercial autonomy.

D. Performance of Individual PMEs

9. Table A5.1 to A5.5 provide long-term time series data on performance of six PMEs from1989 to 1998 for four indicators: public sector investments, employment levels, value-addedgenerated by these PMEs, and annual financial losses reported. As can be seen from thesegraphs, the role of the PMEs has declined in terms of demands for new investments oremployment. PME financial performance continues to remain an area of concern.

47

Table A5.1: Performance of Bangladesh Chemicals and Industries Corporation

48Appendix 5, page 3

Investments(Tk million)

0

5,000

10,000

15,000

20,000

25,000

30,000

1989/90 1991/92 1993/94 1995/96 1997/98

Employment Levels

0

10,000

20,000

30,000

1988/89 1990/91 1992/93 1995/96 1997/98

Value Added(Tk million)

0

2,000

4,000

6,000

1988/89 1990/91 1992/93 1994/95 1996/97 1998/99

Financial Losses(Tk million)

-500

0

500

1,000

1,500

2,000

2,500

1988/89 1990/91 1992/93 1994/95 1996/97 1998/99

Table A5.2: Performance of Bangladesh Steel and Engineering Corporation



-700

-400

-100

200

500

800

1989/90 1991/92 1993/94 1995/96 1997/98

Employment Levels

0

5,000

10,000

15,000

1988/89 1990/91 1992/93 1995/96 1997/98


0

500

1,000

1988/89 1990/91 1992/93 1994/95 1996/97 1998/99


0

500

1,000

1988/89 1990/91 1992/93 1994/95 1996/97 1998/99

Table A5.3: Performance of Bangladesh Sugar and Food Industries Corporation



0

200

400

600

800

1,000

1989/90 1991/92 1993/94 1995/96 1997/98

Employment Levels

0

10,000

20,000

30,000

1988/89 1990/91 1992/93 1995/96 1997/98


0

500

1,000

1,500

2,000

1988/89 1990/91 1992/93 1994/95 1996/97 1998/99


-700

-500

-300

-100

100

300

500

700

900

1988/89 1990/91 1992/93 1994/95 1996/97 1998/99

Table A5.4: Performance of Bangladesh Textile Mills Corporation



0

500

1,000

1989/90 1991/92 1993/94 1995/96 1997/98

Employment Levels

0

10,000

20,000

30,000

40,000

50,000

1988/89 1990/91 1992/93 1995/96 1997/98


-50

450

950

1,450

1988/89 1990/91 1992/93 1994/95 1996/97 1998/99


-30

470

970

1,470

1988/89 1990/91 1992/93 1994/95 1996/97 1998/99

Table A5.5: Performance of Bangladesh Forest Industries Development Corporation



-10

10

30

50

70

90

1989/90 1991/92 1993/94 1995/96 1997/98

Employment Levels

0

1,500

3,000

4,500

1988/89 1990/91 1992/93 1995/96 1997/98


0

100

200

300

1988/89 1990/91 1992/93 1994/95 1996/97 1998/99


-65

-15

35

85

135

1988/89 1990/91 1992/93 1994/95 1996/97 1998/99