Ensuring an enabling environment for investment

M Jalal Hussain | Published: April 18, 2016 17:56:41 | Updated: October 23, 2017 06:25:55


There's no alternative to production and investment to compete and to survive in this globalised world. Investment means expansion, modification and change in businesses and industries. An investor takes risks and invests money in businesses and industries and spurs economic development by way of employment, production and distribution. Investors are known to be catalysts, architects and engineers of growth and development. They need a level-playing field to develop their ideas and strategies at national and international levels. Every business and industry badly needs supports of the governments, state policymakers and local authorities.
 
The enabling environment for investment (EEI) includes favourable norms and customs, laws, regulations, business policies, international and local trade agreements and other facilities that speed up smooth movement of goods and services and hastens the decision-making process. In this context, creation of an enabling business environment through reforms has been acknowledged as an important pre-requisite for unleashing a private sector response that leads to vibrant growth, and ultimately to employment and income generation. 
 
Good governance matters most for creating an enabling environment for investment in private and public sector industries. At all levels - local markets, foreign direct investment (FDI) and international trade - private enterprises require an operational and effective environment favourable to their growth and development, including peace and stability, the rule of law, good governance with accountability and transparency, absence of corruption, adequate infrastructure, an educated workforce, clear property rights and contracts. Business has a critical role to play in fast-tracking progress towards sustainable development as an engine of economic growth and employment, as a key contributor of government revenues, and as a driver of innovation, capacity building and technology development. 
 
In-depth studies by economists and analysts envisage that easy, less-time-consuming, less expensive systems, laws and regulations are more encouraging than complicated and more complex, lengthy and expensive rules and regulations for investment. Starting a business or an industry isn't easy under anti-investment-environment; rearranging talent recruitment, capital infusion, cash flow, customer relations, government's logistic and policy support are extremely essential. In underdeveloped and developing countries in Asia, Africa and Latin America, start-ups have to face problems in getting government licenses, energy, complicated tax-systems, unfavourable and inefficient infrastructures, corruption, lengthy bureaucratic systems and the like. 
 
A government structure is dependent on consistent and systematic application of legal rules. The lack of universal protection for private property and contractual rights constitutes a constraint on economic freedom for investment and trade. As such, the rule of law and the protection of private property and contractual rights constitute an important prerequisite for private investment-driven economic growth and high productivity. A functional legal system is not only key to building economic foundations, it's also crucial in safeguarding democratic values. Without an integrated system of institutions that create order and facilitate daily transactions of all types - from traffic flows to business contracts - rule of law and democratic governance are lacking. Creating the right conditions may require strategic reforms to long-standing regulatory practices to unlock the full potential of private enterprises and open markets in a way that can promote economic growth, environmental protection and social development.
 
Why have Africa and Latin America often been described as lands of risk and opportunity in the past decade or so and why are many forward-thinking international companies increasingly focusing on Africa and Latin America?  A large number of young population and huge untapped and unutilised natural resources are available in these continents but this area remained underdeveloped due to low and inadequate investment in businesses and industries during the last few decades. The economists say the enabling conditions for investment in these continents are unacceptable, not up to the required level and infrastructure development, one of the prime preconditions for investment and development. Development and uplift of these areas largely depend on capability, quality and appropriate decisions of the governments, state policy-makers and public-private stakeholders to create enabling conditions for investment without further loss of time. 
 
Anti-investment policies, rules and regulations in many emerging countries affect investment and development. Every day an entrepreneur spends his valuable time in filling out paperwork or has to be in queue at a government office or local authorities. Troublesome, lengthy and unpredictable regulations are costly both in terms of time and money required for compliance. In many countries, these costs are substantial. In Brazil, an emerging country in Latin America for example, not only is the tax rate nearly 70 per cent, but the procedures are so complex that the average amount of time required to prepare, file and pay taxes is estimated to be 325 days. Because of its unfavourable conditions for investment, the country's ranking in 'doing business' is 116 and its ranking in 'starting business' in the year 2016 is 174.
 
The economic setting of a country must be investment-friendly. Bangladesh, an emerging country in South Asia, needs to review and amend existing laws, rules and regulations for making those favourable to 'start and do business'. To start a corporate export-oriented business or industry, an entrepreneur has to get dozens of mandatory documents such as, (1) memorandum and articles from the Registrar of Joint Stock Companies (RJSE), (2) certificate of incorporation from the RJSE, (3) permission from the Board of Investment (BOI), (4) Export Regulatory Certificate (ERC), (5) Import Regulatory Certificate (IRC), (6) Customs Bond License. (7) Tax Identification Number (TIN), (8) VAT Registration Number, (9) trade license from local bodies, (10) fire and safety license (11) BGMEA/BKMEA membership, (12) EPB enrolment certificate, (13) boiler certificate, (14) environment certificate and many more for starting business. The entrepreneurs who are doing business in the country know the hassle, time, costs and real pains in getting these documents from various organisations. It's worth mentioning here that most of the certificates/ licenses are valid for only 1 year and need to be renewed annually. To renew the documents every year is really a big burden, time-consuming and costly venture for local and foreign entrepreneurs.
 
The existing requirements of certificates severely hurts smooth business flow and and many export-oriented industries lose businesses as overseas buyers always ask for these documents. To ensure the enabling environment for investment and to ease doing business, economists and business analysts suggest that the required licenses should be issued for five years instead of one year. In that case, the investors will be relieved from the hassle of yearly renewal. It takes some months (even a year) to get an environment license and to renew it after one year it takes another 3 to 6 months. A Managing Director of an export-oriented industry, who wanted to remain anonymous, said that he lost a few valued buyers for not having renewed environment license on time. In addition to all these, tax and VAT system of the country is very complex and complicated.
 
The government is planning to introduce uniform 15 per cent VAT on all items. If it's implemented, local and export-oriented manufacturers will suffer a big blow as their costs of products will go up and will face tougher competition in local and international markets. The borrowing procedures with banks and other financial institutions are lengthy and complicated as these also need some dozens of documents and certificates. Charges like interest and bank commission are very high in comparison with other developed and developing countries. Bangladesh is ranked 174 by the World Bank Group in 'doing business' and 117 in starting business in 2016. These are really poor ranks compared to other developed and developing countries like South Korea (4 and 23), Canada (14 and 3) and Malaysia (18 and 14).
 
For a developing economy like Bangladesh, foreign direct investment is a key to spur development and put the country's economy in a  competitive global marketplace. However, in order to attract more FDI flow into Bangladesh, the enabling environment for investment must be in place. This country has huge potential for rapid growth, especially its vast young and energetic people. It needs dynamic, dedicated, promising and farsighted leadership which can create enabling environment for investment.
 
A small businessman faces a serious choice: compliance with regulations and incurring huge costs which in fact jeopardise the business viability. Approximately 60 per cent of urban businesses in Africa, 40-60 per cent in Asia and 58 per cent in Latin America remain outside the formal sector. These are limited in their ability to grow and hire more workers. The workers they do employ have no legal protection. 
 
The writer is a fellow chartered accountant and the CFO of a private group of industries. 
 
m.jalal.hussain@gmail.com

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