Mega projects: Opting for equity financing

Bangladesh economy has remained exclusively dependent on tax revenue for its public sector financing for long. Tax revenue constitutes almost all the incomes of the government although it is seen that incomes from other sources like equity investment, fees and service sales remain insignificant. Bangladesh switched to market economy long time ago, but the government has yet to adequately use the market forces to generate income or financing.

The major source of income for any government in the world is tax revenue, but other complementary sources in the market economies are incomes from equity investment, fees they charge for the services rendered and the prices for the services or commodities they sell. But the government of Bangladesh receives a very negligible portion, less than 10 per cent of the total government income, from the above sources.

The government went for equity investment, in most cases up to 100 per cent only in the government-owned enterprises, many of which it inherited from the Pakistan days. There are some enterprises the government set up directly by providing 100 per cent equity or fixed capital. It also remained as a guarantor for bank loans for working capital of those enterprises, but did not receive any expected return from those.

The government employees, in many cases top bureaucrats, were engaged as the top executives and functionaries in the government-owned enterprises. But as the economy was slowly opened up to private sector investment, the government-owned enterprises turned out to be losing entities. As a result, the government did not receive any dividend income from its so-called equity investments, which amounted to billions of taka.

Unfortunately, from this bitter experience or for some other reasons, the Bangladesh government did not provide capital or take part in any equity investment in a good number of worthy private sector enterprises. The foreign multinational companies in many LDCs (least development countries) and developing countries even offered a portion of their equity capital to the local governments, where they decided to operate.

But in the particular case of Bangladesh, the government neither asked for such stake, nor did the foreign companies offer the same to the government on their own. The examples include the mobile telephone companies operating in Bangladesh, which are owned wholly by the foreign equity holders, but not by the government of Bangladesh.

What the government is receiving and remains satisfied with are the seemingly huge license fees, VAT (value added tax) and some other taxes on calls and SIMs along with the revenue from selling the airwave or spectrums. But income from a small portion of equity holding would have given the government good dividend income.

Even today, whenever any new investment is coming to the economy from abroad, the government is welcoming it, but still not asking for any equity participation in it. In other countries like Malaysia, the scenario is different. The Malaysian government has a sizable equity investment in many commercial enterprises, both local and foreign-owned, through investments from its sovereign fund. A huge amount of revenue is received by the Malaysian government from its equity investments.

If it wants to finance its mega projects wisely, Bangladesh must go for equity financing instead of tax-based financing through budgetary allocation.

Tax revenue has its own limitations, there are many heads in the economy for financing from the tax revenue, such as that for salaries and wages of the government employees, allocation of expenditure for social safety net, that for pension funds, and the leftovers are for project financing. For the successive governments in Bangladesh, development budget has always been residual in the sense that whatever remains as leftover after meeting the demands and charges in the revenue budget is received by the development budget.

As a result, Bangladesh's development budget remains small in size compared with its revenue budget. The size of budgetary allocation under revenue demands is growing at a faster pace than that for the development budget. The only way we can increase the size of our development budget is to source its financing other than from the one based on tax revenue only.

Some projects the government already undertook and finished should be sold to other investors through equity market, or be converted into PLCs (public limited companies) and then sold through IPOs (initial public offering). In that way, the government will not only have additional money for financing new projects, but will also embrace private equity investors as its partners.

Abu Ahmed is Professor of Economics, University of Dhaka.

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