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The Financial Express

Unlocking the growth potential of IT sector through mitigating financial barriers 

| Updated: August 21, 2021 21:14:26


--Representational image --Representational image

The unique level of commitment from Bangladesh's government for digitisation has been working as a driving force for the country to thrive in the digital economy. The current government has accelerated the rapid digitisation and smart use of Information and Communication Technologies (ICT) to spur progress in almost all sectors in Bangladesh (Strategic Priorities for Bangladesh, A2i, 2011). In this context, partnering with the University of Oxford's Digital Pathways Initiative, BRAC Institute of Governance and Development (BIGD), intended to chart a pathway for Bangladesh to decide holistic strategies to accelerate its inclusive growth in the digital age. The study identified three opportunity areas and 13 strategies to leverage those opportunities for the purpose of ensuring inclusive growth.

The first opportunity area revolves around scaling up the BPO and IT/Software industry in the strategy primer. The study identified several bottlenecks hindering the growth of the industry. In this series of op-eds, the various bottlenecks will be analysed along with recommended policy measures. The first op-ed presented here illustrates financial and regulatory barriers that hamper the growth of this industry and discusses relevant strategies to mitigate the issues.

WHERE DOES THE BPO AND IT/SOFTWARE INDUSTRY CURRENTLY STAND?: Software development firms share 47 per cent of the market for the technology industry in Bangladesh (BASIS and LICT). Bangladesh's IT/ITES industry is expected to grow nearly five-fold to reach USD 4.6-4.8 billion revenue by 2025 (BCG Everest Group). Evaluating the size of the BPO industry is difficult as a mix of enterprises drives it. There are 500,000 regular freelancers and 2,500 agencies that are serving in different freelancing platforms. Besides, more than 120 call centres have been operating in Bangladesh, and in FY 2016-17, they earned approximately USD 300 million reportedly. Among the top 250 global IT-ITES delivery locations, Bangladesh is one of the lowest cost destinations offering significant savings over many of its counterparts, including well established and dominant offshore centres such as India and the Philippines (BCG Everest Group, 2017). The ability to operate at significantly lower costs than India and the Philippines is one of Bangladesh's IT/ITES industry's key value propositions.

FINANCIAL AND REGULATORY BARRIERS FOR THE GROWTH OF BPO AND IT/SOFTWARE INDUSTRY:

a) Existing gaps in Foreign Direct Investment: Bangladesh currently ranks 168th out of 190 economies in the World Bank's Ease of Doing Business Index. Although the 7th five-year plan targeted USD 9.6 billion FDI annual inflow by FY2020, it was only USD 1.6 billion in 2019, falling by 56 per cent compared to USD 3.6 billion in 2018. The FDI to GDP ratio in Bangladesh was 0.7 per cent in 2019, which is one of Asia's lowest values, even lower than peer countries like India, Vietnam, and the Philippines (World Bank, 2020). Furthermore, with special incentives such as 100 per cent equity control on the businesses, the software and IT industry received USD 26.1 million foreign direct investment in FY 2019-20 whereas India's computer software and hardware industry garnered USD 7.67 billion FDI during the same FY. Lower affordability and accessibility of ICT hardware, software, and services and inadequate internet bandwidth on both the demand and supply side are some of the sector-specific hurdles to attract foreign direct investment in the industry.

b) Barriers for the local investors: Local private investors can avail of corporate income tax exemption on their investment from BIDA and Hi-Tech Park authority for the first 10 years. However, there are struggles at various stage of operations for IT companies. In the initial stages, the private banks do not cater to their requests for loans due to the high risks associated with the sector in the absence of a proper mechanism or practice to quantify the value of IT work in Bangladesh (Bangladesh Sectoral Growth Diagnostic, EDIG, 2017). Secondly, in comparison with the Indian or Filipino offshore industry, the industry in Bangladesh is still nascent; therefore, investors need to build entire ecosystems investing in training talent and infrastructure which is often burdensome for the local investors (Everest Group Research, 2017). Besides, there is an inherent entry barrier for new and small entrepreneurs in the industry with policies inclined to the large producers/ exporters. For example, IT firms with less than 200-bit data storage have to bear a larger burden of tax compared to the firms with higher data storage.

c) Weaker cross-border payment system: The cross-border payment system works as a significant obstacle in Bangladesh compared to its neighbouring countries. The payment system in Bangladesh operates through international bank transfer, which is a time-consuming, tedious, and costly option. Many companies prefer not to use these services, and instead, prefer to go through informal channels. In the absence of international payment gateways like PayPal, freelancers, and small and medium IT/ITES service providers usually deal with very few direct clients outside the marketplaces such as Fiverr and Upwork. Bangladesh, as a consequence, is losing a considerable amount of revenue every year.

ENSURING ADEQUATE FINANCING AND FIXING THE REGULATORY BARRIERS: From the discussion, it is clear that the financing and regulatory issues work as developmental hindrances affecting the growth and sustainability of the IT/ITES Sector in Bangladesh. Considering the challenges, the primer discussed following strategies to make Bangladesh IT industry recognised globally as a  premium service location for IT/ITES/BPO by increasing financial attractiveness and enabling the business environment:

  1. Improve the overall business environment, including regulatory or legal adaptability to attract foreign investors to invest in the IT/ITES industry: Enforcing contracts, registering property, trading across borders, getting electricity, and resolving insolvency are the bottom five indicators for Bangladesh's Doing Business Index, where Bangladesh has performed poorly. These are areas where improvement of the indicators is pertinent. Among the regional competitor countries of Bangladesh, India has the highest rank (63rd) on the World Banks' Doing Business Index, while Vietnam, with its 70th position, continues to be a magnet for attracting foreign direct investment. Both these countries proactively improved their business and investment environment for foreign companies. India's strategy was to reform areas of starting a business, dealing with construction permits, trading across borders, and resolving insolvency (The World Bank, 2019). On the other hand, Vietnam's reforms have focused on access to credit and payment of taxes (Vietnam Briefing, 2019).

       Bangladesh can benefit from following Vietnam's strategies by focusing on improving access to credit and simplifying the payment mechanism of taxes to have a quick jump           on the Doing Business ladder. This is to mention that streamlining the administrative procedures through digitisation worked as a key step for Vietnam in this regard.                     Moreover, to attract foreign investors in the IT industry, Bangladesh essentially needs to reduce costs and increase the accessibility of the internet, ICT hardware, software,           and services in rural and remote areas.

  1. Encourage the local investors with incentives to invest in the IT/ITES industry to compete with the foreign investors equally: One of the significant problems local investors face here is access to credit. In general, having access to credit in Bangladesh is more complicated than the regional competitor countries like India (Bangladesh ranks 119th and India ranks 25th in Doing Business Index 2020 for this indicator). Bangladesh needs to formulate an integrated or unified legal framework for secured transactions that extend to the creation, publicity, and enforcement of functional equivalents to security interests in movable assets (as an alternative of collaterals) to encourage local investors. At the same time, banks and financial institutions should have access to borrowers' credit information online, which might be through a secured online platform.

       For IT industries, proper mechanisms need to be in place to quantify the value of IT work to reduce the sector-specific difficulties to access credit from the banks. The higher         interest rate should be reduced, and the investors in this industry should receive borrowing and loan benefits like in the RMG sector. Incentives should be taken to create a             level playing field for the new and small entrepreneurs in the industry who are often not tenanted in the formal economic zones.

  1. Initiate platforms to ease the process of international payment: PayPal is the most popular digital payment method, currently available in 203 countries globally, including India, Nepal, Bhutan, and Sri Lanka. Even though PayPal is welcomed by the ITES providers and the service seekers worldwide, it's not available in Bangladesh. This platform can facilitate speed, convenience, and international transactions' security - something precious for users, especially for the freelancers with recurring transactions.

 The Banking Company Act, 1991 states that Bangladesh Bank is an autonomous body; however, the establishment of the Banking Division by the Ministry of Finance (MoF)           has practically reduced Bangladesh Bank's capacity and jurisdiction. Therefore, despite facing no obstacles from the central bank, PayPal cannot operate in Bangladesh due           to   bureaucratic complexities. To avoid losing a considerable amount of revenue from foreign direct clients in the freelancing sector every year, MoF might be able to play a           role based on the non-objection of the central bank.

Although a payment system called Xoom has been introduced instead of PayPal in Bangladesh, it cannot be regarded as a proper replacement as this platform contains similar difficulties like other conventional payment systems like bank transfers. Therefore, even if alternative platforms are introduced, it must offer a money transfer experience as smooth as PayPal.

The removal of the financial and regulatory barriers through implementing the aforementioned strategies can contribute towards scaling up the BPO and IT industry in the country. That would allow the sector to generate broader employment creation opportunities for the youth. However, one of the core challenges for the industry is supplying skilled professionals. The next op-ed of the series will focus on this shortage of skilled labour.

 

Dr. Zulkarin Jahangir, Research Fellow, BIGD, BRAC University. [email protected]

Abdullah Hasan Safir, Senior Research Associate, BIGD, BRAC University

[email protected]

Tanjim-Ul-Islam, Outreach Team Member, The Financial Express

[email protected]

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