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FDI: High growth rate worth celebrating but the tobacco deal begs questions

Ferdaus Ara Begum | Published: July 16, 2019 20:30:37


The growth of foreign direct investment (FDI) to Bangladesh by about 68 per cent ($ 3.6 billion) in 2018 compared with 2017 is an outstanding performance of the country. But compared to India ($42 billion)  and Vietnam ($35.46 billion), the figure is still much low.

The 2019 edition of UNCTAD's (United Nations Conference on Trade and Development) World Investment Report was launched on June 12.  The Bangladesh Investment Development Authority (BIDA) revealed details of the report in a press conference  on June 24. Global flows of FDI fell by 13 per cent to $ 1.3 trillion in 2018, which was the lowest after the 2007-2008 global financial crisis. But significant acceleration in FDI growth was required to meet the sustainable Development Goals (SDGs), address debt vulnerability and reduce trade tensions.

The UNCTAD report categorically mentioned that most important instrument for attracting investment is special economic zones (SEZ) and more than 5000 SEZ have been planned across the world. 

In case of Bangladesh, its success in attracting FDI has been calculated in two specific ways - gross inflow and outflow of capital reduced by the outflow of the capital. In 2018 equity investment was $ 1.12 billion against $0.54 billion of the previous year, while reinvestment earnings was $ 1.31 billion against $ 1.28 billion. In respect of intra-company loan, it is $1.18 billion in 2018 against $0.33 billion of 2017. It has happened because of confidence of investors in Bangladesh.

From the country-wise FDI inflow, China comes first with about $ 834 million and next is the Netherlands with $608 million. Highest FDI inflow was in the power sector which amounted to  $ 1030 million, and the second highest was in the food sector amounting $ 692 million. In the banking sector, highest amount of $150 million came from the UK. In the telecom sector, $103 million was received from Norway.

MOST DISCUSSED STORY OF FDI: The investment of Japan Tobacco Inc, one of the five largest tobacco companies in the world, was the most discussed story of FDI inflow in the country. Japan Tobacco International in 2018 signed an agreement with Bangladesh's Akij Group to acquire the tobacco business of Akij with a cost of $1.476 billion (Tk 12,430 crore). Of the transaction amount,  the investment is $1.09 billion or Tk 9,180 crore for the outstanding shares, and $386 million or Tk 3,250 crore for trademarks and design rights. In addition to the amount, there are transaction costs such as stamp duties, worth $28 million or Tk 240 crore, payable to the National Board of Revenue (NBR). In revenue context, tobacco is an important and attractive sector. Cigarette is the biggest source of value-added tax for the NBR. Industry insiders said the entry of Japan Tobacco is likely to increase competition and compliance in the Tk 330 billion (33,000 crore) annual cigarette market, where British American Tobacco enjoys 60 per cent share.

There were criticisms how the increase of FDI through the tobacco deal will bring economic, social  & environmental benefits, the three important pillars of SDG for the country.  The deal, however, was one of the biggest cross-border mergers and acquisition transactions involving a Bangladeshi company. Even though the sector is a big question mark, it is true that Bangladesh for the first time entered into such a big deal of merger and acquisition. Questions were raised how many jobs will be created with this big FDI and what will be its impact on health care  while the country has already announced to become a tobacco-free country by the year 2040.

DSE AND CHINESE CONSORTIUM: Another major FDI came through the investment of Shenzhen Stock Exchange and Shanghai Stock Exchange which formed a consortium to purchase share of Dhaka Stock Exchange (DSE). On May 14, 2018, DSE signed a memorandum of understanding with the Chinese consortium to sell 25 per cent of its shares to the group to make it the strategic partner of the bourse.  Initial investment is about Tk 9,47 billion (947 crore), another Tk 3.0 billion (300 crore) for infrastructural and technological development. Ownership structure of DSE has been changed through this deal - brokerages will now have 40  per cent and the remaining will go to foreign investors and  the government.

SPECIAL ECONOMIC ZONES: Traditional physical production is facing challenge in  utilising incentive packages of SEZs, but industries  need to be competitive. UNCTAD report has put special emphasis on this matter. Bangladesh is  planning at per global trend, so far some progress have also been visible, but implementation requires much time. There are six types of economic zones (EZ): PPP Economic Zones, established through public and private partnership (PPP) by local or foreign individuals, body or organisations;  Private Economic Zones, established individually or jointly by local, non-resident Bangladeshis (NRBs) or foreign investors, bodies business organisations or groups; Government Economic Zones, established and owned by the Government; Special Economic Zones, established privately or by public private partnership or by Government  initiative, for establishing any kind of specialised industry or commercial organisation; government-to-government (G2G) Economic Zones, established through initiative by the  government of a foreign country or the Government of Bangladesh and/or in partnership between Government of  Bangladesh and Government of a foreign  country; and Economic Zones, established in collaboration with and/or partnership between Government authorities or organisations.  Different types of certification, customs and ownership policies, profit repatriation, land procurement, labour policies will be required to be handled very carefully.

Bangladesh is a FDI-hungry country and is still behind the required mark. The country would like to attract sectors which will create jobs, help technology transfer and help building capacities of the domestic and joint venture industries. Bangladesh expects large-scale investment in the textile, tannery & leather, chemical, glass & ceramics, engineering and service sector. For export diversification, Bangladesh needs diversified FDI and foreign investment.

 

Ferdaus Ara Begum is CEO, BUILD, a national public-pivate dialogue platform supported by DCCI,

CCCI and MCCI,  works for private sector development.

buildbd@yahoo.com

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