bangladesh: steering the drivers of change

Bangladesh: Steering the Drivers of Change Creating a common business environment reform agenda among donors, the government and the private sector October 2006 Craig Wilson Program Manager, Investment Climate Assessments SouthAsia Enterprise Development Facility (SEDF) International Finance Corporation Shihab Azhar Senior Research Associate Bangladesh Enterprise Institute James Crittle South Asia Regional Program Coordinator FIAS: Leaders in Investment Climate Solutions International Finance Corporation/World Bank Group

Contents

Executive Summary.................................................................................................5

The Drivers of Change...........................................................................................10

The Private Sector Development Task Force ............................................11

The PSD Core Group .................................................................................12

The Private Sector Consultative Group .....................................................15

The Development Partners Support Group................................................17

The Roadmap .........................................................................................................18

Integration into Diagnostic Studies............................................................18

Working Groups.........................................................................................19

Project Specific Meetings, Seminars and Workshops ...............................20

Results and Driving Lessons Learned....................................................................21

The Road Ahead ....................................................................................................26

Annexes

A Government of Bangladesh PSD Vision and Policy Statement.............................28

B PSD Core Group Terms of Reference ...................................................................31

C Guidelines for Study Tour Individual Papers ........................................................36

D Exit Evaluations of Core Group Members.............................................................39

E BICF Outcomes and Outputs During the first Four Years ....................................44

Bangladesh: Steering the Drivers of Change 5

Executive Summary

Often the most difficult part of policy reform is fundamental agreement on the need for change. In Bangladesh, however, this agreement has been reached. Donors, government and the private sector see the very real need for investment climate reform in Bangladesh, a country where 42% of its 140 million people live in extreme poverty. Gross national income per capita is $470, well below both the South Asia average of $590 and the low-income countries’ average of $510. Bangladesh ranks near the bottom of many private sector development-related indicators. Foreign Direct Investment (FDI) is coming in at the rate of only $3 per capita compared to $10 in Pakistan, $40 in China, and $250 in Latin America.

In its Poverty Reduction Strategy Paper (PRSP) released in October 2005─Unlocking the Potential: National Strategy for Accelerated Poverty Reduction─the Government of Bangladesh acknowledged the private sector as a key driver of growth and made a strong commitment to improve the country’s operating environment for businesses. Several months earlier, a group of donors in Bangladesh had pooled human and financial resources to provide technical assistance to the government regarding key investment climate issues. Born out of two previous projects, one funded by DFID and one by the World Bank, this integrated, multi-donor funded program began in late 2004 as a design phase of the proposed World Bank-led Private Sector Development Support Project (PSDSP) and has now led to the launch in late 2006 of the Bangladesh Investment Climate Fund (BICF), an 8-year, $55 million program. The BICF was requested by the Government and the donors based on the success of the diagnostic and preparatory work over the last two years.

The success of the multi-donor effort was largely due to a priority focus on stakeholder involvement and management. Although agreement on the need for investment climate reform was clear, the various stakeholders in Bangladesh are not naturally inclined to address the issues in the same way. Donors are ready to charge ahead and push for reforms, but at the risk of leaving the Government behind, presenting a typical problem in Bangladesh of development initiatives viewed as prescribed donor policies with little lasting benefit. The Government’s key players are convinced of the need for improvement, but the ranks of the bureacracy lack the understanding of private sector needs and exposure to private sector development policies. The private sector lacks the necessary cohesiveness to speak with one voice and apply pressure for the policy changes that would benefit them.

Through innovative project design, these stakeholders began to form a common agenda around business environment reform. Ownership of the reform agenda was established within the Government. Common ground among private sector representatives was established and integrated into reform design, and support from multiple donors was offered in a coordinated and constructive way. The visible champions of reform created through the project have begun to chip away at the great mistrust between the public and private sectors in Bangladesh through increased dialogue.


The real work of reform has just begun in Bangladesh, but a strong foundation for managing sustainable change has been built. Through coordinated donor processes and increased public-private dialogue, these multiple drivers of change are beginning to head in the same direction.


The Road to Reform

If you’ve ever sat at a busy intersection in Bangladesh’s bustling capital city, Dhaka, you’ve experienced what it means to share the road. You have no choice if you want to get anywhere. Across only two lanes, you are likely to see seven or eight lanes of traffic. Many different types of vehicles are packed in—large sport utility vehicles, small sedans, huge passenger buses, rickshaws, motorized 3-wheel vehicles, “rickshaw vans” loaded with cargo, pedestrians weaving throughout and the occasional livestock. At least half of these vehicles will be pointed in a different direction than typical rules of the road dictate. Often a vehicle or two in the middle will be disabled and not able to move at all without outside assistance. It is no wonder that progress on only a short distance of road can take an exasperatingly long time. Creating a better business environment for enterprise development in Bangladesh presents similar challenges as does getting from Point A to Point B in Dhaka traffic. There are many players on the road to reform, with different destinations in mind and a wide array of vehicles at their disposal to get there. The Government (GoB), although openly cognizant that the business climate in Bangladesh needs improvement, lacks the experience and capacity—and perhaps the critical mass of political will necessary—to lead the process alone. The private sector, although pro-reform as a group in theory, drive individual cars in different directions, rather than a more effective “car-pooling” approach to move forward with one voice. Individual interests in the private sector are also a factor in resisting reform altogether, as some companies know how to effectively work the system to leverage a competitive advantage. Finally, donors in Bangladesh are plenty, and increasingly under fire for implementing disparate and/or overlapping projects—often with expenditures beyond Bangladesh’s absorptive capacity—which offer no real benefit to poverty reduction in the end. Further, at least perceptually, vested interests abound within all these stakeholder groups. Weak infrastructure, corruption, and the overall regulatory burden were cited in the 2003 World Bank Investment Climate Assessment as the largest barriers to private sector development. These findings are also reflected in IFC’s Doing Business Report (Bangladesh ranks 167/175 for registering land and 134/175 for trading across borders) and in the Kaufmann and annual Transparency International Surveys. While Bangladesh has made significant advances over the last few years, such an investment climate is poorly positioned to drive the significant private sector contribution needed for sustained poverty reduction. While GDP is growing at a decent 6.3% (up from 5.2% over the 1994-2004 period), the inflation rate is relatively low at 6-7%, and the exchange rate remains stable, Bangladesh continues to under-perform in attracting investment. FDI is coming in at the rate of only $3 per capita compared to $10 in Pakistan, $40 in China, and $250 in Latin America.

In its Poverty Reduction Strategy Paper (PRSP) released in October 2005─Unlocking the Potential: National Strategy for Accelerated Poverty Reduction─the GoB acknowledged the private sector as a key driver of growth and made a strong commitment to improve the country’s investment climate. Businesses, domestic and foreign, face many obstacles in


Bangladesh. Many are real─excessive regulation, corruption or anti-competitive practices, and poor infrastructure. There is also the perception that the security and infrastructure problems make it a difficult place to do business. The GoB is willing to address these issues, and donors are supportive, but the path to change is fraught with roadblocks of outdated laws and systems, vested interests and great mistrust between the public and private sectors. A group of some of the largest donors in Bangladesh has taken notice of the GoB’s own recognition and initiative and is providing significant financial and technical assistance support. A major multi-donor effort focused specifically on investment climate issues in Bangladesh began in July 2005. The Bangladesh Private Sector Development Support Project (PSDSP) has its roots in two parallel projects that were proposed by the two largest donors in Bangladesh in early to mid 2004. The Department for International Development (DFID) developed a project called the Regulatory and Investment Systems for Enterprise Growth (RISE), based on a scoping mission and its subsequent report— “Unleashing the Bengal Tiger”—which outlined a full program of interventions for implementation. The program of interventions was formally approved by Dr. Kamal Uddin Siddiqui, Principal Secretary to the Prime Minister, in July, 2004. The RISE program consisted of three major sets of outputs:

1. “Improving governance of the private sector”, including • improving GOB capacity for better Private Sector Development (PSD)

policies • establishment of a regulatory unit to conduct regulatory reform • monitoring regulatory impact and providing capacity building across

ministries • improving governance of the private sector through compliance with

regulations and CSR 2. “Improving conditions for Bangladesh’s participation in the World Economy”,

including • streamlining of export and import related regulations • the capacity building of the Bangladesh Export Processing Zones

Authority (BEPZA) and the Board of Investment (BOI) 3. “A working model for reform at a local level”, including the establishment of

an SEZ and the creation of enhanced zoning policies. At the same time, the World Bank was proposing a similar project on PSD entitled the Private Sector Development Project (PSDP), based on a similar private sector scoping mission. There were significant overlaps between the proposed RISE and PSDP programs, most notably in the areas of zoning, regulatory reform and CSR. In order to avoid duplication of effort, the World Bank and DFID agreed to combine their parallel projects into one comprehensive project to address the constraints to private sector development in Bangladesh.


The PSDSP then began with a design phase, managed and implemented by the Foreign Investment Advisory Service (FIAS), a joint service of the International Finance Corporation (IFC) and the World Bank, and the SouthAsia Enterprise Development Facility, a multi-donor facility managed by the IFC. FIAS and SEDF worked closely with the BOI, the implementing agency from the GoB. Outputs of this design phase will contribute to the implementation of the PSDSP and the complementary Bangladesh Investment Climate Fund (BICF), to be managed by the IFC and initially funded by DFID and the European Union. The BICF will begin implementation activities in fall 2006, with the PSDSP to follow in mid-2007. The PSDSP was prepared in the context of the expiry of the Multi-Fiber-Agreement1, the recent increase in foreign investor interest in Bangladesh, and the finalization of the PRSP. While the three components of the PSDSP, as described below, have been prescribed through numerous previous studies by government, non-government and donor agencies, the PSDSP was the first time all three were combined under the banner of a single project. The overall project framework is described in Box 1 below.

Box 1 PSDSP Project Framework

1 The Ready-Made Garments (RMG) industry constitutes the largest group of exporters in Bangladesh. The RMG industry boomed in Bangladesh in the 1990s, fueled by the confluence of cheap, available labor, positive government steps to boost RMG exports and the Multi-Fiber Agreement (MFA) that provided protection to smaller RMG manufacturers and exporters like Bangladesh and other LDCs in the face of intense competition from India and China. It was feared that the withdrawal of the MFA on January 1, 2005 would cause a crisis for Bangladesh exports. In reality, such a crisis did not occur on the scale expected, but intense competition in the region is still a major threat to Bangladeshi exports.

PSDSP Project Framework Regulatory Reform and Streamlining

• Identification of 6-10 key regulatory target issues and recommended solutions (more with time)

• Introduction of e-governance and capacity building • Establishment of a regulatory reform unit to track the investment climate • Creating an inventory of business regulation

Economic Zones

• Facilitation of a zoning strategy for export processing zones, industrial parks, special economic zones and private sector investment

• Investing in infrastructure to support the zoning strategy and investment promotion • Regulatory streamlining in special economic zones • Supporting land ports

Government Capacity and Dialogue

• Building the capacity of key institutions • Creating a cadre of regulatory and zoning experts in Government • Improving information on private sector issues • Support to line ministries • Facilitation of a strategy and vision for private sector growth with stakeholders


From the very beginning, stakeholder consultation helped to determine the appropriate activities of the PSDSP design phase. A two-day roundtable on “An Enabling Environment and Free Zones for Investment Promotion and Export Competitiveness in Bangladesh” was organized jointly by Bangladesh Enterprise Institute (BEI) and FIAS on December 14 and 15, 2004 and was supported by DFID, SEDF, JICA, IFC, CIDA, the World Bank and the EC. The roundtable was chaired by Mr. Farooq Sobhan, President, BEI and inaugurated by Mr. Morshed Khan, MP, the Minister of Foreign Affairs, Government of Bangladesh. The inaugural session of the roundtable also featured opening remarks by Mr. Anwar Choudhury, British High Commissioner and Mr. Matsushiro, Japanese Ambassador, both of whom, on behalf of the donor community, stressed the need for accelerating reforms to reduce corruption and red tape, and to ensure infrastructure development for creating an enabling environment for increased investment and export competitiveness of Bangladeshi products. After the December 2004 roundtable and the outcomes of the other preparatory activities and deliberations, in February 2005 the World Bank submitted a letter to the GoB setting out the approximate scope and objectives of the proposed PSDSP. It was agreed by the GoB that FIAS and SEDF would undertake an extensive amount of analytical work during the design phase. Already in these early stages, many stakeholder groups had become involved in this design process. It was clear that facilitating the design phase would require structures to involve all of these stakeholders in the process in their appropriate roles and keep them focused on the same goals. Three key objectives formed the guiding principles for managing stakeholders:

1. Establishing ownership with the GOB;

2. Fully integrating the voices of the private sector; and,

3. Providing coordinated donor support.

The Drivers of Change

To meet the challenge of managing these stakeholder groups, GoB, FIAS-SEDF and the development partners together designed the following:

1. PSD Task Force — a high-level GoB group made up of the heads of 10 private-sector facing ministries and agencies;

2. PSD Core Group —37 mid-level officials from 17 PSD-related ministries and agencies;


3. Private Sector Consultative Group (PSCG) — consisting of 25 individual business leaders and heads of business associations;

4. Development Parnters Support Group (DPSG) — World Bank, DFID, the EC, JBIC and JICA, CIDA, and ADB (some funding donors, some non-funding donors) formed this group to work closely with the GoB and FIAS-SEDF management throughout the project.

The Private Sector Development Task Force

The Private Sector Development Task Force provided the senior-level government buy-in and support necessary to facilitate the PSDSP design phase activities. The composition of the PSD Task Force, shown in Box 2 below, brought together the heads of the Government agencies that deal frequently with the private sector. The only members of the Task Force who were mentioned by name in the composition of the PSD Task Force were the chair and the co-chair, the two pioneers and main supporters of the PSDSP within the government. The seniority of both these individuals within the Government hierarchy provided immense benefits in organizing the meetings of the PSD Task Force. The remaining membership of the PSD Task Force was established ex officio. As a result, the heads of the respective government agencies were always members of the Task Force, instead of individuals who may retire or be transferred from the position.

Box 2 PSD Task Force Composition

PSD Task Force Chair: Mr. Mahmudur Rahman, Adviser, Energy and Mineral Resources Division and Executive Chairman, Board of Investment Co-Chair: Dr. Kamal Uddin Siddiqui, Principal Secretary to the Prime Minister Members: Secretary, Ministry of Finance Secretary, Ministry of Commerce Secretary, Economic Relations Division Secretary, Ministry of Establishment Secretary, Ministry of Shipping Chairman, Bangladesh Export Processing Zone Authority (BEPZA) Chairman, Bangladesh Small and Cottage Industries Corporation (BSCIC) Vice-Chairman, Export Promotion Bureau (EPB) Chairman, National Board of Revenue (NBR)


Transfers, in fact, were one of the primary constraints to the effectiveness of the PSD Task Force. Throughout the first year of existence of the Task Force, there were two different Secretaries of Finance, Commerce and Establishment and three different Chairmen of BSCIC. Such changes made it difficult for the PSD Task Force to function effectively. Following every transfer and new appointment in the ministries, the facilitator team made every effort to brief the new Secretary on the project. The members of the PSD Core Group in the agencies were also very helpful in this task, as they had frequent contact with their respective agency heads and could brief them sufficiently. Another major constraint of the PSD Task Force was infrequent meetings due to the hectic schedules of the Chair and Co-Chair. This made it quite difficult to keep the Task Force fully informed of the progress of the design phase of the project, and to get key decisions on project ideas that were necessary for sustainable project design. This problem was successfully overcome to an extent towards the middle of the design phase, with the formation of the PSD Working Groups, incorporating members of the PSD Task Force, the PSCG and the PSD Core Group. These Working Groups enabled discussion to proceed effectively without placing added burdens on the Chair and Co-Chair to organize meetings. Attendance at PSD Task Force meetings was also often an issue. Although meetings were called weeks in advance, all members frequently had conflicting appointments and were unavailable to participate. Instead, the members often sent junior staff to attend the meetings in their place. This made it quite difficult to ensure that the proceedings, decisions and action items of the meetings were effectively communicated to the members of the PSD Task Force. These constraints notwithstanding, the PSD Task Force proved an effective new institution. The selection and composition of the PSD Core Group was undertaken and completed by the Task Force in record time, with effective contributions from all members. The formation of the Task Force also enabled the GoB to make critical decisions regarding policy matters effectively and in a timely manner and provide effective feedback on project design components. Finally, the PSD Task Force provided the necessary support and buy-in at the most senior levels of the bureaucracy, and provided the project design team with the authority to manage the process. In a top-down policy environment such as Bangladesh, the PSD Task Force is critical for any movement and support within the Government.

The PSD Core Group

Whereas the PSD Task Force participated in the broad strategic design of the PSDSP, the PSD Core Group was formed with the initial goal to participate in the detailed design, implementation and monitoring of the project. For this purpose, the members of the PSD Core Group—mid-level officials at the Deputy Secretary and Senior Assistant Secretary level drawn from various government ministries and agencies—would require extensive capacity building, a key to creating sustainable champions of reform.


The concept of the PSD Core Group was introduced to the members of the PSD Task Force at its first meeting, and the idea was welcomed unanimously. The members of the Task Force were asked to nominate individuals from their agencies for participation. Initially envisioned to consist of 30 members from different government ministries and agencies, the final Core Group selections constituted 37 officials, due to issues such as gender parity and increased interest in the capacity building opportunities available. Box 3 PSD Core Group Membership The members of the PSD Core Group were offered exposure to various issues related to PSD through learning events over the duration of the design phase. The Learning Events focused on a wide range of topics, including:

• Global PSD trends; • The identification of binding constraints to growth; • Administrative barriers reviews; • Corporate social responsibility; • Contract enforcement and Alternative Dispute Resolution (ADR); • Land market issues; • Special economic zones; • Public sector-private sector dialogue; • Regulatory reform processes; • Regulatory impact assessments; • Urban planning; and • Competition policy.

PSD Core Group Prime Minister’s Office – 2 officials Board of Investment – 5 officials Ministry of Finance – 3 officials Ministry of Commerce – 4 officials Economic Relations Division – 2 officials Ministry of Establishment – 2 officials Ministry of Shipping – 2 officials Ministry of Land – 1 official Ministry of Communication – 1 official Ministry of Power, Energy and Mineral Resources – 3 officials Ministry of Environment and Forests – 1 official BEPZA – 4 officials BSCIC – 1 official EPB – 4 officials NBR – 2 officials


Study tours constituted the most enjoyable portion of the capacity building program for the members of the PSD Core Group. The study tours were organized on two different levels. First, the PSD Core Group members were taken to different agencies and ministries within the GoB to increase their awareness of the activities of these agencies. Visits to the BOI and the Dhaka Export Processing Zone, along with an extended study tour to Chittagong to visit the Chittagong Port, the Custom House and the Chittagong Export Processing Zone, helped Core Group members understand the day-to-day functioning and operations of these agencies, and the role these organizations played in the private sector of Bangladesh. The members of the PSD Core Group were also taken on study tours abroad to South Korea, Malaysia, the United Arab Emirates and Jordan to examine the best practices in PSD in operation in these countries, and how the countries have improved the environment for private sector growth and development. A key focus of these international study tours were special economic zones (SEZs) and the various regulatory reform initiatives underway in these countries. In addition, some members of the PSD Core Group received capacity building on specialized issues—and became deeply involved in the project activities related to these issues— through the formation of Working Groups on thematic areas. Working Groups addressed vision development, the Administrative Barriers Review (ABR), monitoring and evaluation systems, special economic zones, and capacity building. In particular, the ABR Working Group played a key role in facilitating completion of the first Bangladesh Administrative Barriers Review by providing vital access to the agencies and processes examined. As a result of this extensive involvement, members of the ABR Working Group now have the experience to initiate future ABRs within their own agencies. The capacity building of the Core Group has already shown results and has been crucial in developing a store of knowledge on PSD issues within the GoB. Core Group members have developed a sense of responsibility and leadership on these issues, and are already becoming agents of change within their respective government agencies. They have led the government’s contributions to the final design of the PSDSP, through written and oral contributions to the design process and their active involvement in the various working groups. They have also become a useful resource and point of contact for other development partners working on PSD projects when access to and input from the government is required. Through their interactions with the PSCG, Core Group members have developed an understanding of the needs and constraints of the private sector and have been exposed to the importance of public-private dialogue in a reform process. Despite the successes of the PSD Core Group, some key constraints remained, including the seniority of members. Most of the members of the PSD Core Group are at the Deputy Secretary level within their agencies, although some have recently been promoted to the Joint Secretary level. However, it is feared that most of the members of the PSD Core Group will not attain the position of head of their agencies before they retire. As a result, the members of the PSD Core Group may not be in a position to implement the lessons they have learned as the heads of their agencies. As a result, it may be advisable to target such capacity building to slightly more senior officials of the ministries—at the Joint Secretary level, perhaps—in the future, to enable them to use the fruits of their knowledge effectively and implement the necessary changes for sustainable PSD in Bangladesh.


As with the PSD Task Force, the prospect of transfers posed an imminent threat to the consistency of the PSD Core Group. Although the PSD Task Force requested that the members of the PSD Core Group remain in their respective agencies for a minimum of at least three years, such an order was never officially finalized. As a result, several members of the PSD Core Group were transferred to non-private sector related government agencies, including the Freedom Fighter’s Welfare Trust and the Film Development Corporation. Such transfers are common at the junior levels of the Government, meaning that any capacity or specialization that is developed in an agency is not retained. Although the government has recently proposed specialization, the initiative has yet to be implemented, and will only apply to more senior bureaucrats at the Joint Secretary level. Finally, the selection process for the PSD Core Group was not ideal. The heads of agencies alone nominated their representatives. As a result, there is no guarantee that the best officials from each agency were selected for membership in the Core Group. Although the majority of Core Group members participated fully and brought much enthusiasm and dedication, as time went on, it was clear that a handful of members were not adequately committed to their roles.2 It is suggested that future iterations of the PSD Core Group incorporate strict selection criteria in recruiting members, to ensure that only the most deserving and motivated officials from each government ministry and agency are selected.

The Private Sector Consultative Group

The Private Sector Consultative Group was formed early in the design phase to directly incorporate the views of the private sector into the PSDSP. The PSCG was initially composed of senior private sector leaders and representatives, but due to the effective outputs of the younger members, the membership of the group was later expanded to include more young and women entrepreneurs. Membership was based on the individual, rather than the office. As elected officials of business associations change frequently, it was determined that PSCG members would join or remain as members even as former holders of a relevant position. The composition of the PSCG was determined by the Bangladesh Enterprise Institute (BEI), in consultation with the various development partners involved in the project design. Initially, the PSCG held meetings separate from the PSD Task Force and the PSD Core Group. These meetings were held over lunch, hosted by an Ambassador or head of delegation of the major development partners involved in the project3. Later in the design phase, this format was discarded in favor of focused and structured meetings with individual missions that were fielded on the individual project components, including the

2 In at least one instance, Core Group members copied verbatim each other’s submissions of the required paper on lessons learned from study tours abroad. 3 The first meeting of the PSCG was held at the residence of the Japanese Ambassador, the second at the residence of the British High Commissioner, and the third was hosted by the Ambassador of the European Union.


Economic Zones Review, Vision Development and Regulatory Impact Assessment. In addition, the PSCG members were also invited to meetings of the PSD Task Force and the PSD Core Group to directly share their inputs with the Government. Box 4 Private Sector Consultative Group Membership

The dialogue that was initiated through these meetings between the PSCG and the government representatives of the PSD Task Force and Core Group represented the first initiative at large-scale public-private dialogue in the design of a comprehensive private sector development program in Bangladesh. Both the government and the private sector representatives at the meetings welcomed the opportunity to interact with each other, and all participants found immense value in the discussions that arose at these meetings. In particular, the PSD Core Group welcomed the opportunity to interact with the private sector as a valuable way to learn more about the needs and constraints of the private sector in Bangladesh. The PSCG provided concrete guidance to the design phase activities. In particular, they were invaluable in the selection process for the government processes to be examined under the first Bangladesh Administrative Barriers Review, and also in the drafting of the PSD vision for Bangladesh. The PSCG also served as a valuable sounding board for other donors interested in launching other private sector development projects in Bangladesh. The World Bank, in particular, used the PSCG as a resource on several occasions, for example to provide input into the Country Assistance Strategy and in conceptualizing the 2006 Investment Climate Assessment report.

Original Members of the PSCG • Former President, Federation of Bangladesh Chambers of Commerce and Industry • President, Dhaka Chamber of Commerce and Industry • President, Metropolitan Chamber of Commerce and Industry • President, Women Entrepreneurs Association • President, International Chamber of Commerce – Bangladesh • President, Bangladesh Garments Manufacturers and Exporters Association • President, Bangladesh Knitwear Manufacturers and Exporters Association • President, Chittagong Stock Exchange; • President, Foreign Investor’s Chamber of Commerce and Industry • Member, Executive Committee, Bangladesh Employer’s Association • Two young entrepreneurs, representing the leather and services sectors. Additions to the PSCG • Two CEOs of financial institutions, including Citibank, North America; • Three young entrepreneurs representing the energy, handicrafts and garments sectors; and• Three senior entrepreneurs representing the handicrafts and energy sectors.


The primary constraint of the PSCG was the fact that, since the members were all very senior business people, it was extremely difficult for them to commit much time to meetings and other PSCG activities. As a result, PSCG meetings late in the design phase were low in attendance, and consequently, feedback from the private sector may have been insufficient in certain aspects. However, during the Working Group meetings, the PSCG members provided excellent feedback on their thematic areas, contributing significantly to the writing of the Working Group papers on each of the three thematic areas of the project that served as inputs to the project appraisal. In addition, towards the end of the design phase, the members of the PSCG began to complain of severe “meeting fatigue”. They had begun to feel that their inputs and opinions had been discussed numerous times with no result. It will therefore be an interesting challenge to keep the members of the PSCG involved throughout the implementation of the PSDSP and the BICF. It may be advisable to implement the project in such a way that some concrete results are visible fairly early, in order to motivate the private sector to take a greater interest in the success of the project.

The Development Partners Support Group

The final “pillar” of the PSDSP was the Development Partners Support Group, a conglomeration of representatives of the various development partners that had committed to supporting the design and implementation of the project. The composition of the DPSG is illustrated in Box 5 below. Box 5 Development Partners Support Group Membership

The primary strength of the DPSG was that it provided a platform for dialogue between the different development partners in Bangladesh. In the context of Bangladesh, competition between development partners is common, giving rise to duplication of effort and sometimes even to hostility. The formation of the DPSG allowed for development partners to coordinate with one another effectively to design a comprehensive project that would satisfy their own PSD goals while avoiding duplication of effort. The DPSG also

Development Partners Support Group Representatives from: • The World Bank • The Department for International Development (DFID), UK • The Canadian International Development Agency (CIDA) • The European Commission (EC) • The SouthAsia Enterprise Development Facility (SEDF) • The Foreign Investment Advisory Service (FIAS) • The Japanese Government, particularly the Japan Bank for International

Cooperation (JBIC) and the Japan International Cooperation Agency (JICA) • The Asian Development Bank (ADB).


provided development partners with a base upon which to launch new project concepts and ideas, and for improved overall donor coordination within Bangladesh. Such a model of cooperation, consultation and dialogue represents the first time so many development partners teamed up for one major project. The DPSG also allowed donors to present a united front to both the government and the private sector, and thus strengthen their commitment to the successful design and implementation of the project. Such cooperation and coordination was welcomed by the members of the PSCG, PSD Task Force and PSD Core Group, which benefited greatly from the wealth of knowledge and experience on PSD issues that was retained by all these agencies combined. The DPSG’s decision to delegate detailed project design to a joint venture of FIAS and SEDF was also an important step to ensure that the design of the project would proceed smoothly and steadily. The arrangement allowed for all donors to reduce their time and effort commitments to the detailed design of the project, instead serving an efficient managerial and advisory position. The DPSG is a model that should be replicated for other projects of such scale in developing countries.

The Roadmap

Forming these groups alone was only the first step towards creating a common agenda for PSD reform in Bangladesh. FIAS and SEDF, with the assistance of BEI, created specific goals and activities for these groups to keep them focused and create ample platforms for frequent interaction.

Integration into Diagnostic Studies

The most important way to provide this interaction and keep all parties involved was through the implementation of the components that made up the PSDSP design phase. Five major diagnostic studies and reports constituted the tangible outputs of the design phase:

1. Piloting Reform through the Development and Management of Economic Zones, June 2006

2. Pursuing Investment Climate Improvements: From Analysis to Reform, June 2006

3. Regulatory Impact Analysis Diagnostic Study and Design, June 2006

4. Assessing and Addressing Stakeholder Interests in PSD Reform, September 2006

5. Monitoring and Evaluation of Private Sector Development, August 2006


For each of these studies, teams of FIAS and SEDF staff, along with local and international consultants as appropriate, met with PSD Core Group members, members of the PSCG, and with the DPSG to gather important input. PSD Core Group members, both through the working groups described below and individually, were particularly active in their assistance with data and opinion collection. They facilitated meetings with other appropriate officials within their agencies—including access to high-level officials—provided background data and material, reviewed draft reports and participated in workshops. This extensive involvement created both a sense of ownership over the outputs of the project as well as provided a foundation for these officials to become champions of implementing reforms in the next phase of the project.

Working Groups

Three major working groups consisting of members of the PSD Core Group and the PSCG covered the central themes of economic zones, capacity building and regulatory reform. Each of these groups submitted a paper as input to the initial project preparation mission held in September 2005. Additionally the working groups continued to support the project by meeting with various consultants and attending the major project meetings.

Figure 1 PSD Working Group Structure

The Administrative Barriers working group—comprised of 5 PSD Core Group members from relevant agencies— was instrumental in facilitating the detailed research necessary to produce the first Administrative Barriers Review (ABR) in Bangladesh. Comprised of representatives from the agencies and ministries directly involved in the ABR, the working group assembled the appropriate contacts from within their own ministries and agencies and provided extensive background information on the six administrative processes analyzed in the review. The group presented its work at the Administrative Barriers workshop held on February 8, 2006.

PSD Task Force

PSD Core Group

Private Sector Consultative

Group

Monitoring & Evaluation Team

PSD Vision Team

Admin Barriers Team

Regulatory Reform

Capacity Building

Special Economic Zones


A Monitoring and Evaluation (M&E) working group of the PSD Core Group was formed drawing additional representatives from key government organizations including the Bangladesh Bureau of Statistics and the private sector. This working group substantially contributed to the design of the M&E report. In the future, it is proposed that this working group, under the supervision of the PSD Task Force, carry out the monitoring and evaluation of private sector development. The working group should coordinate with relevant government organizations to collect necessary data for the determined set of indicators, oversee data collection from international sources, and prepare a summary document in a regular interval (e.g., annually). A PSD Vision working group was formed early in the project comprising representatives from the Core Group and the PSCG. The mandate for this group was to formulate a clear vision and policy statement towards private sector development on behalf of the Government. The working group formulated a draft and submitted it to the PSD Task Force for approval. The vision and policy statement were finalized in mid-March 2006. The vision statement reads as follows:

“A vibrant and efficient partnership between the public and private sectors, based on mutual trust, will transform Bangladesh into a major business hub in Asia through creating a competitive and transparent business environment. We will raise private investment to 26% of GDP, quadruple annual FDI inflows to $2.65 billion, increase real GDP growth to or above 8%, increase per capita income to $1000, attain 100% literacy rate, and halve the percentage of the population below the poverty line to 20% by 2015.”

Project Specific Meetings, Seminars and Workshops

Over the course of the project, numerous project specific meetings served to increase awareness among several levels of government officials regarding private sector development issues and solidify government of the project. These events also increased the public-private dialogue and strongly incorporated the private sector voice into project design. Some of the meetings were also open to a broader audience—such as civil society organizations and sector business organization not already represented in the PSCG—allowing for a wider distribution of information about the project and broader input from potential stakeholders.

These events included:

• Meeting of the PSD Core Group with the mission on Economic Zones on September 27, 2005

• Working Lunch on PSDSP Pre-Appraisal on October 25, 2005

• Focus Group Discussion on Bonded Warehouse Licensing on November 20, 2005


• Focus Group Discussion on Environmental and Location Clearance on November 20, 2005

• Focus Group Discussion on Customs Clearance and Duty Drawback on November 21, 2005

• Meeting of the PSCG with the missions on Regulatory Impact Assessment and Institutional Review of BEPZA, BSCIC and EPB on November 23, 2005.

• Focus Group Discussion on Foreign Loan Documentation on December 5, 2005.

• Economic Zones Workshop on February 7, 2006

• Administrative Barriers Workshop on February 8, 2006

• Focus Group Discussion on Regulatory Impact Assessment with representatives of the private sector on February 13, 2006.

• Discussion on Regulatory Impact Assessment with the members of the PSD Core Group on February 13, 2006.

Results and Driving Lessons Learned

The importance of partnership and dialogue

Although there is still much to be done to address the great mistrust between the public and private sector4, the interactions that occurred between the PSD Task Force, the PSD Core Group and the Private Sector Consultative Group constitute a milestone in the history of Bangladesh. As a result of the success of the interactions during the PSDSP design phase, Bangladesh will soon embark upon a formalized dialogue system between the public and private sectors under the BICF—a platform that has not previously existed. The partnerships between the DPSG and the other three stakeholder groups of the PSDSP are also important in affording the development partners greater involvement from stakeholders in project design than previously possible. The greater the involvement of all concerned stakeholders on reform project design, the greater the chance of success in reform implementation.

4 The “Assessing and Addressing Stakeholder Interests in PSD Reform” report found that most bureaucrats believe the private sector is intent upon abusing the systems, while private entrepreneurs think that public agencies are obstructing their work only to make personal gains. While this fact was already a point of general knowledge, the extent to which this mistrust shapes PSD stakeholder perceptions, and their corresponding potential positions on reform, is extreme. Changing these perceptions is fundamental to regulatory reform.


In addition, it is important to note the partnership between the development partners in the development and design of the project. The PSDSP was a first in bringing together all major development partners in Bangladesh for project development on such a large scale. Traditionally, intra-development partner relationships in Bangladesh have been strained. The PSDSP provided the opportunity for the development partners to collaborate in a way that would mean maximum benefit for the host nation. In addition to reducing duplication of effort, this partnership allowed for the formation of a platform for dialogue between the development partners—a dialogue which holds much promise for the future in a donor-saturated country.

The need for demonstrable results

A predominant characteristic of the project, especially in the later stages, was the need for the development partners to show some demonstrable results in the field. The emergence of this viewpoint among the various stakeholders has many causes. The first cause is the fact that the national elections are imminent, and, as such, the political government is eager to show as many pro-poor development and growth initiatives as possible. The impending election seemed to make the political government more open to the prospect of implementing the various components of the project, but is also a source of risk for future implementation. Government commitment will continue to be key for success and is traditionally unstable around elections. The second important cause of this need for demonstrable results is due to what may be called “donor fatigue” on the part of the Government of Bangladesh. GoB is no longer satisfied with volumes of reports, studies and recommendations from donors. It would prefer to receive assistance towards concrete actions on all the recommendations that have accumulated through development projects over the years in Bangladesh. In the case of the PSDSP, this is a sign that the Government believes it is ready to implement the recommendations of the project, and that Bangladesh as a whole feels ready to support regulatory reform and SEZs. The private sector itself has continuously endorsed the need for regulatory reform, and this insistence on demonstrable results and quick wins is a positive sign that the government is willing to change its mindset from that of a regulator of the private sector to that of a facilitator. Indeed, in planning and designing a project of this scale and magnitude, it is extremely important to plan for a few “quick wins” early on and throughout the project, in order to satisfy the needs of all stakeholders. In addition, some positive demonstrable results can assist in gaining more support for the project from a wider audience of stakeholders, including civil society and the media. In the case of the Bangladesh PSDSP, the ongoing capacity building of the members of the PSD Core Group fulfilled this purpose in a way. It assured the GoB of the commitment on the part of the development partners, and, simultaneously, reassured the private sector that the GoB is willing to undergo training to understand and serve them better. In addition, the issues selected for the ABR were chosen to provide a series of quick wins with maximum benefit. The implementation of the agreed reforms set out within the ABR report are now to be taken up by the GoB with the support of the BICF. As these reforms take hold, GoB will be providing the private sector with the necessary confidence to continue the dialogue.


The preparation for the BICF has taken this lesson into account. Program effectiveness after two years will be measured by quantifiable reductions in the time and cost of the targeted five administrative processes from the Administrative Barriers Review, by improved private sector perceptions of how the targeted government agencies serve as service providers, and by the licensing of a private economic zone. An improved investment climate must be characterized by a measurable reduction in the time and cost of doing business and growth in private investment, jobs and the number of businesses.

The importance of capacity building

At the December 2004 roundtable, the capacity building of the Government officials was given high prominence by all participants. The experience with the design of the PSDSP has shown similar importance. At the beginning of the process, the PSD Core Group members were not ideally suited to play the important role of agents of change. The capacity-building activities they were offered led to a visible change in their capacity. They are now well-versed in the details of regulatory reform and special economic zones, and can see the benefit of such initiatives to the country. They are now also aware of the activities of the many institutions in Bangladesh that work with the private sector. Through their direct interactions with the PSCG, they are able to identify with the needs and concerns of the private sector. This is a critical prerequisite to instilling in government the ability to work with the private sector in boosting private sector growth and development and has laid the foundation to begin building trust. Due to this success, the BICF will continue this strong focus on institutional and civil servant capacity building.

For this capacity-building to be a long term success, the PSD Core Group must believe in the process and the end results. The PSD Core Group members are required to commit considerable time to the learning activities and design process. For membership to be sustainable, members must believe that: a) the process is a practical and constructive pursuit; b) with the development partners, they are in expert hands; c) participation in the process is endorsed by their seniors and is consistent with their own professional and career development; and d) they will be rewarded and recognized for their contributions in some form.

An interesting side-effect of the capacity-building process has been the popularity of these initiatives among other government officials. Many mid-level government officials have now heard about the PSDSP and are eager to participate in the capacity-building initiatives when they are replicated.

The importance of developing champions

A key strength of the PSDSP stakeholder management model has been the development of champions amongst all stakeholders. Going forward, these champions will be


instrumental in communicating private sector development issues to a wider audience to better ensure sustainable reforms and a sustainable reform process for the future. In a sense, the entire PSD Task Force, PSD Core Group and PSCG are champions for the three components of the project. However, most importantly, the chairs of the PSD Task Force, Mr. Mahmudur Rahman and Dr. Kamal Uddin Siddiqui, have given the project their full support and backing, on behalf of the government. This support has enabled the design phase of the project to accomplish much more than could have been accomplished otherwise. In a sense, the support of these two key players has opened many doors that would otherwise have remained closed.

Towards the end of the design phase, efforts were made to gain the support and championship of the political government, for example, through a formal briefing to the Finance Minister. Even with improved dialogue between the public and private sector and improved communications within the relevant government agencies, policy-making and implementing in Bangladesh is still a “top-down” process. Finding and supporting champions of reform from the highest levels of government—and also within the bureacruacy, parliament, privae sector, and civil society—is vital to success.

The importance of vision

On their study tours, PSD Core Group members discovered that many of the positive private sector development initiatives in the host countries were only possible through a strong and consistent vision carried out over a long period of time. A strong and consistent vision is of particular importance to Bangladesh, where the continuity of policy is strongly affected by the political government. It is essential for PSD programs to be based on such a vision, to prevent its long-term goals and objectives from being disavowed by future governments. The vision for Bangladesh must be neutral and non-partisan, and must have the support of all major stakeholders in the process. So far, the vision developed under the PSDSP design phase has received the buy-in of the political government, the bureaucracy and the private sector. However, the support of the opposition cannot be underestimated in ensuring the success of the project. In the future under the BICF and PSDSP, it is advisable that platforms for networking with the opposition are developed sooner rather than later. In addition, it will also be important to ensure that the vision is shared by all levels of the political government, and not simply the leaders. This will prevent the formation of future barriers on the grassroots level, and will ensure the continuity of the vision throughout future generations of political leaders.

The importance of organization and sequencing

The design phase also highlighted some important organizational lessons for setting up a PSD or investment climate project to integrate the various stakeholder groups.


• Initial commitment and early buy-in from the government is crucial. The leadership of the more senior PSD Task Force and its interest in the success of the working-level PSD Core Group is critical to the functionality and initial commitment of the PSD Core Group process. The requirement for such facilitation and formation of such a group(s) should be realized and requested directly from the Prime Minister or delegated senior official from the central bureaucracy at the very beginning.

• Participation and contribution of the PSD Core Group members must be rewarded and some incentives must be in place. Aside from the incremental benefit of learning, other forms of reward may need to be offered such as peer recognition, a chance to make a collective call on the head of government, additional high-value learning opportunities, or influence on career advancement.

• Adopt a merit-based system at the time of initial admission. The initial admission process into the PSD Core Group should be based on merit using a simple testing and filtering process.

• Seek maximum breadth of PSD Core Group membership from across the civil service. As an investment climate/PSD program gets underway, the multi-dimensional nature of PSD work requires a wide net of access, inputs and support from across government. A PSD Core Group should include members from all agencies with some element of responsibility for PSD issues.

• The duration of the life of the PSD Core Group process should be finite. It can be useful to have a time-bound limit to the process. This will help determine results of the process and help underpin and continuation or replication.

• Well-coordinated and planned approach to avoid fatigue and burn out of PSCG. During the course of the project, meetings, workshops, visists, consultants’ meetings, etc. must be well coordinated to make the most efficient use of the time and effort of the Privatre Sector representatives and also to avoid the ‘fatigue’ within the PSCG. When meetings are necessary, be sure to communicate any early results of the work thus far expended.

• Ensure Private Sector participation and engagement through a variety of methods. Ensuring active and inexhaustible private sector participation and input in the course of the project is very important. Furthermore, the value of the private sector’s time and effort must be acknowldged and communicated effectively (e.g. analytical bulletin, flyer, brochure, seminars, PPD etc.) Also, a mixture of targeted involvement based on individuals and ex officio invovlment is desirable to achieve any sustainability. Too much reliance on individuals and not the institutions they represent may work in the short term, but may falter in the longer term.


• Ensure sufficient resources, especially task management time, are included in design. Task management requires considerable time, which should be incorporated into project design. If government, the private sector and the donors retain confidence in the project management team, these groups will become valuable assets for an overall investment climate improvement agenda.

The Road Ahead

Why will a targeted intervention program such as the proposed BICF succeed to further improve the investment climate? There are a number of reasons. Firstly, foreign investor interest in Bangladesh is at an all time high driven by its natural resources. Led both from within and outside the region, high interest sectors include resource based investments in coal, fertilizer and steel, communications and banking, textiles, coal and manufacturing. Taken together current investor interests represent investments approaching $10 billion, equal to some 20 years FDI at current flows. These investments are only potential, however, and all are asking for improvements in the business enabling environment ranging from infrastructure provision through transparency to national treatment.

Secondly, the Government has demonstrated over the last 18 months of the PSDSP design phase a commitment to PSD reform and have articulated that commitment through the prominence given to PSD in their Poverty Reduction Strategy Paper and Implementation Forum, through the formation of the high level government PSD Task Force and through the request for the development partners, the IFC and the World Bank to proceed with the BICF initiative and PSDSP.

Finally, a group of significant development partners, including not only DFID and the EC but also CIDA, the Japanese Government, ADB, USAID and the World Bank Group, have committed to assisting the Government to deliver on its commitment and have initiated a number of interventions either directly or indirectly targeting PSD reforms and they have indicated a willingness to use their combined influence to ensure that the Government delivers on PSD reform. The convergence of these three forces presents a unique opportunity for change in Bangladesh.


The BICF is designed as a multi-year, multi-donor and above all multi-stakeholder program reflects both the experience of successful PSD reform programs (in developed and developing countries) and the experience of implementing projects in Bangladesh. First, PSD reform is a marathon, not a sprint, requiring a sustained effort over many years. In this long-term view, it is critical to not only resolve the stock of poor regulations, but also establish systems that ensure flow of future regulations are appropriate. Second, the multi-donor construction reduces the risk of PSD program overlap of many agencies—often an issue in Bangladesh—while ensuring that the donor community will have a common voice around the PSD reform agenda. Finally, to be successful the implementing agency must be capable of maintaining effective relationships with multiple Government stakeholders throughout the life of the program. The implementing agency must be able to directly manage and implement a complex and large array of program design, procurement, supervision and management activities in the field in coordination and cooperation with the Government of Bangladesh.

Based largely on the experience of the PSDSP design phase, the BICF will employ a three-pronged strategy to assist the Government to reform the investment climate in Bangladesh:

1. Develop momentum for reforms by undertaking some “quick wins” across five important and easily improved administrative areas (the same five proceses studied under the ABR);

2. Use the credibility and momentum gained from the ‘quick wins’ in building the institutional and regulatory foundations necessary to address the more intractable barriers to a conducive investment climate and to sustain an effective regulatory environment; and

3. Build overall awareness and capacity of stakeholders—the public service, the private sector and civil society—to implement and sustain the reform.

The BICF seeks to continue with the momentum gained over the last two years to build the environment for investment climate reform through these multiple drivers of change now beginning to move in the same direction. As a facilitator and a capacity builder—rather than an implementer of reforms—the BICF will enhance the ability of all stakeholders to sustain reform.


A Government of Bangladesh PSD Vision and Policy Statement

Private Sector Development Policy Statement

PSD Vision of the Government of Bangladesh The Government of Bangladesh views the private sector as the driving force behind well-functioning markets and pro-poor growth. A competitive market economy supported by accountable and transparent institutions plays a vital role in reducing poverty. To give voice to this view, the Government of Bangladesh has adopted the following Vision to guide its PSD strategy towards fast and sustainable growth in Bangladesh over the next decade:

A vibrant and efficient partnership between the public and private sectors, based on mutual trust, will transform Bangladesh into a major business hub in Asia through creating a competitive and transparent business environment. We will raise annual private investment to 26% of GDP, quadruple annual FDI inflows to $2.65 billion, increase real annual GDP growth to or above 8%, increase per capita annual income to $1000, attain 100% literacy rate, and halve the percentage of the population below the poverty line to 20% by 2015.

Implementing the PSD Vision To create opportunities for the private sector to flourish, the Government of Bangladesh is determined to reduce interventionist policies and provide a supportive business environment. In implementing its PSD Vision, the Government of Bangladesh seeks to: • Promote a competitive, business-friendly environment; • Support good governance for private sector development; • Ease supply constraints; • Mainstream gender in private sector development; • Increase market access for the informal and SME sectors. The key to achieving success towards this Vision does not lie with government alone, however. The Government of Bangladesh commits to removing unnecessary regulation and asks businesses, on the other end of the partnership, to comply with improved policies. Both parties are accountable for a thriving private sector in Bangladesh. Creating a business-friendly and competitive environment In the context of a land-starved country of 142 million, stimulating private investment is essential to meet the poverty reduction targets set by the Millennium Development Goals.


Critical constraints to private investment and competition ─ policy discontinuity, unnecessary bureaucracy, loss-making State Owned Enterprises, a deficient legal system, poor law and order, and corruption ─ must be tackled in order to foster a well-functioning free market, which allows businesses to compete fairly. To this end, the Government of Bangladesh is committed to: • Streamlining and improving legal and regulatory systems; • Reducing the time and cost of business entry, operating and exit procedures; • Enforcing the rule of law to guarantee security of life and property; • Improving access to information so as to reduce risk, uncertainty, and policy

volatility; • Removing unfair business practices to ensure a level playing field; and • Reducing the role of the State in commercial and industrial activities by expediting

the privatization process. Supporting good governance for private sector development Effective public-private partnerships require transparent and accountable public institutions that deliver services effectively and efficiently. Unexplained delays in obtaining clearances and utility connections, nonexistent or inefficient appeals processes and lack of information regarding business rules and regulations lead to arbitrary imposition of rules. In this environment opportunities for corrupt behavior are prevalent, increasing the cost of doing business. This cost is further inflated when essential business support services and investment information on product, labor and environmental standards is lacking. In an effort to provide good governance for private sector development, the Government of Bangladesh is committed to: • Promoting in-house capacity of government institutions and officials; • Increasing public-private interactions; • Creating necessary business support service institutions; and • Enhancing accountability and transparency through e-government and public sector

reform Easing supply constraints Private investment in Bangladesh faces serious supply-side constraints, such as scarce industrial land around major industrial and commercial belts, lack of credit, a poorly performing capital market, inadequate transportation networks, inefficient port facilities, delays and disruptions with utility services, and lack of a skilled workforce. The Government of Bangladesh is thus committed to: • Increasing the supply of industrial land and improving infrastructure services; • Expanding the supply of institutional finance and strengthening the capital market; • Enhancing entrepreneurial, managerial and labor skills; and • Using economic zones to pilot and scale-up regulatory reform nation-wide. Mainstreaming gender in private sector development


Although impediments to private investment affect all entrepreneurs and workers, women are particularly disadvantaged and represent a significantly underutilized resource for the development of Bangladesh. The Government of Bangladesh is committed to ensure women’s full participation in private sector activities by: • Dedicating a fund for women entrepreneurship development and workplace skills

development programs; • Providing preferential access to industrial plots and infrastructural facilities and

business support services and marketing; • Enforcing workplace rights and providing child-care facilities to enhance the quality

of working life for women; and • Including women’s entrepreneurship support in all extension programs. Increasing market access for informal and SME sectors In order to ensure that the benefits of growth are widespread, the Government of Bangladesh will include the informal and SME sectors, where the bulk of the poor are employed, are targeted by the PSD strategy. Constraints to the maturity of these sectors stem from regulatory policies which raise transaction costs, structural issues including access to finance, and poor governance. The Government of Bangladesh will take measures to understand the appropriate policy, institutional and infrastructure needs of these sectors, and will incorporate suitable actions to maximize both their contribution to, and their share of the benefits of, growth. These measures will include: • Creating pro-active policies for rapid development of SMEs, particularly through

simplification of regulatory procedures; • Improving access to finance through appropriate credit guarantee schemes and non-

collateral lending, enlarging the base of conduit lending institutions and easing loan application and processing procedures;

• Extending the Board of Investment's One Stop Service to cover SMEs; • Fostering public-private cooperation for design and implementation of effective

business support services; and • Calibrating tax and trade policy reform towards needs of SMEs. Monitoring and evaluation Monitoring and evaluation is an integral part of the Government of Bangladesh’s PSD strategy. The Government of Bangladesh will call upon the recently formed PSD Task Force to monitor progress of the PSD program. Appropriate indicators are under development by the Government of Bangladesh’s PSD Core Group, through its M&E Working Group, with assistance from representatives of Bangladesh’s private sector and our Development Partners. Indicators will be regularly monitored and government agencies made accountable for the results. These results will be publicized and serve as a basis for public-private dialogue.


B PSD Core Group Terms of Reference

Terms of Reference

Bangladesh

For the Government of Bangladesh Private Sector Development Core Group

Design Phase of the Proposed Bangladesh Private Sector Development Support Project

18 August 2005

_______________________________________________________________ PSD Core Group Coordinator: Mr. Mamdood Hossain Alamgir Lead Government Counterpart: Mr. Mahmudur Rahman, Executive Chairman,

Board of Investment and Chair, Private Sector Development Task Force

Task Manager: Craig Wilson, SEDF _______________________________________________________________ This Terms of Reference (TOR) has been prepared to help inform the members of the PSD Core Group of the processes and design phase activities related to the proposed Bangladesh Private Sector Development Support Project (PSDSP) and to set out some of the activities and expectations of the PSD Core Group. Annex A has a list of the PSD Core Group members. Annex B has a list of the proposed PSDSP design phase activities. Annex C has a diagram showing the various groups. Introduction The design phase of the proposed PSDSP is being co-managed by the SouthAsia Enterprise Development Facility (SEDF), a multi-donor-funded project development facility, managed by the International Finance Corporation (IFC), along with the Foreign Investment Advisory Service (FIAS), a joint service of the IFC and World Bank. SEDF, launched in October 2002, with its headquarters in Dhaka, is currently mandated to cover Bangladesh, Nepal, Bhutan, and Northeast India. The objective of SEDF is to contribute to the reduction of poverty in the target regions by increasing competitiveness, performance and growth of the SME sector, which in turn is expected to contribute to growth and improvement in economic and social conditions.


SEDF’s four main component programs are: • Increasing Access to Finance for SMEs • Increasing Access to Business Development Services • Improving the Business Environment • Investment Climate Assessments/Foreign Investment Advisory Service

SEDF and FIAS are collaborating with the Development Partners Support Group (DPSG) which is working closely with the Government to advance the design of the proposed PSDSP. The DPSG is made up of FIAS, SEDF, the World Bank, the United Kingdom’s Department for International Development (DFID), the European Union (EU), Japan (JICA and JBIC), the Canadian International Development Agency (CIDA), and the Asian Development Bank (ADB). The proposed PSDSP in Bangladesh, to be valued at around $150m, will be led by the World Bank and will be funded and supported by a group of development partners, known as the Development Partners Support Group (DPSG). The PSDSP design phase activities were conceived late in 2004 and, following approval from the Ministry of Finance in April 2005, commenced in May 2005 and will run approximately through to December 2005. The proposed PSDSP will have three components: (i) Regulatory reforms and streamlining (ii) Economic zones (export processing zones, industrial parks, special economic

zones) (iii) Capacity building in Government on PSD issues The design phase of the PSDSP will focus its work on four strategic elements: (A) Institutionalizing the PSD regulatory reform process (B) Embedding the process of regulatory reform within Government (C) Piloting reform through the development and management of economic zones (D) Enhancing Government’s capacity to implement and administer the business

regulatory environment Background PSDSP: The aim of the proposed PSDSP is to help the Bangladeshi private sector enhance its competitive strength and successfully respond to the challenges posed by the end of the Multi-Fiber Arrangement (MFA). The focus of the proposed PSDSP will be on streamlining regulatory processes and procedures, provision of infrastructure and focused capacity building in Government on PSD issues.


The design and supervision of the proposed PSDSP will be led by the World Bank, working in conjunction with Government of Bangladesh’s Private Sector Development (PSD) Task Force which has been formed to help steer the project. The PSD Task Force is made up of senior inter-departmental officials headed by the Principal Secretary of the Prime Minister’s Office. To support the work of the PSD Task Force and the design of the PSDSP, a PSD Core Group has also been formed, which is made up of 36 senior working-level civil servants from across a number of PSD-related agencies. The PSD Task Force and PSD Core Group will be supported by the Development Partners Support Group (DPSG). The overall process will benefit from the inputs of the newly-formed Private Sector Consultative Group (PSCG), whose membership is made up of key private sector representatives. The Executive Chairman of the Board of Investment is Chair of the Task Force, the Prime Minister’s Principal Secretary is Co-Chair. The Board of Investment will also coordinate the initial design phase activities and the formation and training of the PSD Core Group and host a project secretariat which is now being established. The DPSG has agreed to fund the cost of these various activities during the design phase, a total value of $1.3m. The design phase activities of the proposed PSDSP have been developed over the last several months. The activities and focus of the design phase were chosen based on the outcomes of a number of high-level meetings with Government and other stakeholders. The initial scope of the design phase activities draws heavily on the deliberations and outcomes of the December 2004 roundtable (supported by DFID, FIAS and SEDF) on competitiveness, economic zones and the business environment, and reflects the thrust of the Government’s 2005 draft Poverty Reduction Strategy Paper (PRSP). A letter which set out the proposed framework and approach of PSDSP was submitted to the Government of Bangladesh by the World Bank in February 2005. The scope of the proposed project was subsequently approved in a letter from the Economic Relations Division (ERD) of the Ministry of Finance to the World Bank on 23 April 2005, along with some suggestions which can be taken into consideration during the World Bank appraisal process. Following receipt of this in-principle approval from the Government of Bangladesh, the design phase activities for PSDSP have commenced. The World Bank approved a formal Project Concept Note in June 2005. The first PSDSP project preparation mission is scheduled for the last two weeks of September. It is expected that this will be followed by an appraisal mission around January 2006. The approval of the project by the World Bank Board is anticipated between March and June 2006. The PSDSP is being prepared in the context of the expiry of the Multi-Fiber Agreement, the recent increase in foreign investor interest in Bangladesh and the finalization of the PRSP. While the expiry of the MFA poses particular challenges for the ready made garment (RMG) industry, there is also a broader challenge, i.e., the need to broaden Bangladesh’s export basket. Irrespective of how the RMG sector performs in the post-MFA world, Bangladesh needs to reduce its excessive dependence on a single export item. This places a premium on enhancing the competitiveness of Bangladeshi firms,


including those of domestically-oriented firms. In a globalized world, with liberalized imports, all firms need to be competitive. Foreign investment will be pivotal in enhancing competitiveness – that is why the recent increase in foreign investor interest in Bangladesh is a particularly important development. In order to diversify its export basket, Bangladesh needs a critical mass of high-performing, dynamic firms that are “trail-blazers”. Many such firms will be foreign-owned, including joint ventures. It is thus important that the recent foreign direct investment (FDI) interest is transformed into actual investments. This will have a powerful signaling effect in attracting further investment. Some Bangladeshi firms also have the potential to become trail-blazers. Finally, in order to achieve the pro-poor growth emphasized in the PRSP, the benefits of economic growth will have to be wide-spread. This will require linkages between the high-performing enterprises and new FDI and other enterprises in the economy, especially small and medium sized enterprises (SMEs). Enhancing competitiveness, attracting and sustaining large volumes of foreign investment, and engendering broad-based enterprise growth will require actions on many fronts. Analytic work by the World Bank Group, such as the 2003 Investment Climate Assessment, the study on the rural non-farm sector, and the more recent Competitiveness Study, has identified a wide range of factors that affect competitiveness. Of these, two sets of factors appear to be particularly important: the regulatory interface between government and the private sector, and the provision of infrastructural services. Bangladesh is not attracting FDI commensurate with the size of its economy and the opportunities available. FDI has not grown at levels expected. For example, a 1999 World Bank Report forecast FDI into Bangladesh which was running at an estimated level of $400 million per year would be at $800 million. The latest full year FDI figures for Bangladesh from the International Monetary Fund (IMF) show just under US$80 million of FDI in 2002 having, peaked the previous year at US$280 million. Bangladesh Bank records inward FDI flows for FY02, FY03, and FY04 as $391m, $376m and $385m respectively. Separate estimates from the Board of Investment show a considerably higher total inward flow of FDI (for calendar 2002, 2003 and 2004 as $328m, $441m and $660m respectively). And it is worth noting that two potential multi-billion dollar investments are currently under preparation. Yet despite heartening progress in macro-economic performance, Bangladesh is falling short of its growth potential. It is being outperformed by other populous and low income competitors such as China and India. Objectives The members of the PSD Core Group have been chosen from a wide-range of PSD-related Government agencies. They have been chosen by their Secretaries and supervisors based on past good performance and their assessed ability to become contributing members to the PSD Core Group activities. They are to remain in their current positions for three years while they benefit from inputs to the PSD Core Group’s membership.


The objective of the PSD Core Group is to learn more about a range of PSD issues over time and to eventually become the central repository of knowledge at a working level within the civil service on PSD issues. In particular, the members of the PSD Core Group are expected to provide a leading contribution throughout 2005 and early 2006 into the design of the proposed PSDSP. This will be in the form of written inputs and oral contributions at the various workshops and seminars that will be convened. Scope of Work and Deliverables The PSD Core Group will participate in a series of learning activities throughout 2005. They are expected to participate in every learning event, except where they report beforehand an acceptable reason for absence. The PSD Core Group will undertake learning events, study tours, briefings and will participate in various working groups. These include the working group on Administrative Barriers review, the PSD Vision Team, the Monitoring and Evaluation Working Group, and the joint PSD Task Force-PSD Core Group-PSCG working groups on capacity building, regulatory reform and special economic zones. The PSD Core Group is expected to deliver insightful contributions throughout the PSDSP design phase process and into the PSDSP implementation period. This includes written and oral contributions, policy papers, contributions for the working groups, inputs for the PSDSP design, contributions to the various projects such as the institutional reviews and economic zones project. Time Schedule The work of the PSD Core Group will proceed in, probably, three stages. First, from inception in April 2005 until the end of the PSDSP design phase around February 2006. Second, from February 2006 until the commencement of the PSDSP implementation in mid-2006 (during this period it is likely that the Private Sector Forum will be launched). Third, following from the commencement of PSDSP implementation in mid-2006.


C Guidelines for Study Tour Individual Papers

Each member of the Core Group will be required to compose a short paper (not exceeding five pages in length) on the study tour.

The paper should be comprehensive, and should attempt to provide answers to each of the following questions:

1. What key lessons and best practices are prevalent in the zones in UAE and Jordan that can be implemented in existing zones, including Industrial Parks and EPZs, in Bangladesh?

2. What key lessons and best practices are prevalent in the zones in UAE and Jordan that can be implemented in future zones, both EPZs and SEZs in Bangladesh?

3. What key questions should be addressed in designing a comprehensive zoning strategy for Bangladesh?

4. What role should be played by my Ministry or Agency in designing and implementing a Special Economic Zone?

5. What are the lessons and ideas that should be included in the design of the PSDSP?

As part of the Core Group’s ongoing capacity building activities, ample attention has already been paid to orientations with Bangladesh rules, regulations and the functions of core Government ministries and agencies. In order for the study tour to be of maximum benefit to all participants in the design and implementation of the proposed PSDSP, it is necessary for the Core Group members to shift their focus slightly, and, keeping in mind what they have learned from Bangladesh already, attempt to identify key lessons and practices in the zones we will visit from the point of view of various stakeholders in Bangladesh.

In order to assist the Core Group members in composing these papers, all members of the delegation are requested to take notes during the study tour. In order to determine what information could be useful in writing the papers, the following questions may be considered for thought during the meetings and visits to zones:

For meetings with regulators:

• If I were to perform these regulatory functions in the context of Bangladesh, what critical preconditions would have to be met by the Government of Bangladesh, in terms of:

• Laws, rules and regulations


• Capacity and awareness

• If I were to perform these regulatory functions in the context of Bangladesh, what critical preconditions would have to be met by me, in terms of:

• Capacity and awareness

• Job functions and responsibilities

• If I were to perform these regulatory functions in the context of Bangladesh, what critical preconditions would have to be met by the private sector, in terms of:

• Mechanisms for interaction

• Mechanisms for consultation

• How can I, in my present position, assist the Government of Bangladesh in designing a comprehensive strategy for the design and implementation of an SEZ in Bangladesh?

For visits to zones:

• How is the total land area of the zone utilized for maximum benefit?

• What is the composition of the firms operating in the zone? Is the zone more service-oriented or manufacture-oriented? Is the zone more export-oriented or more domestic market-oriented?

• How are security issues addressed in the zone?

• How are environmental issues addressed in the zone?

• What basic infrastructure is provided to investors in the zone?

• For export-oriented industries, what infrastructural support (port, logistics etc.) are provided by the zone?

• What social infrastructure is in place in the zone, and how does this benefit the investors and workers?

• What rationale and logical process is used in identifying expansion opportunities and facilities for the zone?

• What mechanisms are in place to ensure that investor concerns and queries are dealt with in a timely manner?


• Is there a separation between the regulatory Authority and the Management of the Zone. How is this separation affected? What lessons can I learn from this separation?

• How are regulations administered in the Zone? What can I learn regarding administrative processes from this zone?

• What value adding services are offered in the Zone? Who offers them? Regulatory Authority? Zone Management? Private Sector? Gov't Agencies? How well are these services appreciated by the clients?


D Exit Evaluations of Core Group Members

Introduction

One year after the Government of Bangladesh PSD Core Group first formed, all 37 members were sent a questionnaire in early April 2006 to fill out. The questionnaire was designed to obtain feedback on the activities, impact and value of the PSD Core Group, and to obtain suggestions for future improvement.

The questionnaire was divided into several parts:

1. A section on participation, where PSD Core Group members were asked to indicate how many Learning Events and Working Groups they had participated in, and how many PSDSP design phase missions they had met with.

2. An evaluation of the learning process, where PSD Core Group members were asked to rank the learning experience on a scale of 1 to 5, where 1 was strongly disagree, 2 was disagree, 3 was neutral, 4 was agree and 5 was strongly agree.

3. An assessment of their role and impact on the PSDSP design phase and their future influence on and interest in PSD, using the same scoring scale.

4. A section where PSD Core Group members could provide general written comments about the capacity building and learning activities and suggestions for future improvements.

Summary Results

The overall message from the PSD Core Group was that the experience of their involvement in the PSDSP design phase over the past year was positive. All either agreed or strongly agreed that they had benefited from the learning events and that they felt better placed to drive public policy improvements for private sector development. All indicated they would be happy to remain involved in future civil service PSD capacity building activities. Details of the average scores provided by PSD Core Group members in response to the questions posed are attached below. A couple of the most interesting results, based on relative scoring, were:

• PSD Core Group members felt they would have benefited from additional interactions with the private sector in Bangladesh.

• PSD Core Group members felt better placed to argue for PSD improvements with their civil service colleagues.


• All agreed that increased dialogue between the public and private sectors would help drive private sector growth.

• Relatively few strongly agreed that public-private partnerships in infrastructure provision would benefit existing economic zones.

Responses on Participation

• Each PSD Core Group member, on average, participated in 11 of the 14 possible Learning Events that were organized for them.

• Each PSD Core Group member, on average, met with 6 of the 11 missions that visited Bangladesh during the design phase of the proposed PSDSP.

• Each PSD Core Group member, on average, participated in:

• One of the SEZ, Regulatory Reform or Capacity Building Working Groups; and

• Two of the Vision, ABR or M&E Working Groups.

Evaluation of the Learning Process

• 61% strongly agree and 39% agree that they have participated in the overall design of the PSDSP to the best of their ability;

• 58% strongly agree and 39% agree that they have benefited from the Learning Events of the PSD Core Group;

• 57% strongly agree, 36% strongly agree and 6% are neutral that they are confident that they will be effective in advocating for further private sector development among their colleagues in the civil service;

• 55% strongly agree and 45% agree that the skills they have learned will assist them in being better able to facilitate the activities of the private sector;

• 52% strongly agree, 33% agree and 15% are neutral that the Learning Events were useful in developing skills necessary for them to better perform in their current roles;

• 52% strongly agree and 42% agree that they have been able to develop strong ties with fellow Government officials;

• 45% strongly agree, 42% agree and 12% are neutral that visiting other private sector-related Government agencies enabled them to gain a deeper understanding of the functioning of these agencies;


• 42% strongly agree and 58% agree that the Learning Events gave them an opportunity to develop a better understanding of the needs of the private sector;

• 42% strongly agree and 52% agree that the interactions with the private sector have been useful for them in developing an understanding of private sector needs and constraints;

• 39% strongly agree, 33% agree, 21% are neutral and 6% disagree that they have been able to develop strong ties with development partners and international experts on PSD.

• 27% strongly agree, 48% agree, 12% are neutral and 12% disagree that they have been able to develop strong ties with private sector representatives;

Assessment of the PSDSP Design Phase Activities

• 70% strongly agree and 30% agree that increased dialogue between the public and private sectors can be beneficial to the further growth of the country;

• 64% strongly agree, 33% agree and 3% are neutral that implementing regulatory reforms in Bangladesh will be essential in ensuring sustainable development of the private sector;

• 61% strongly agree and 36% agree that a special economic zone can be of great value to Bangladesh;

• 48% strongly agree, 48% agree and 3% are neutral that regulatory reforms, through ABRs and RIAs, can reduce the costs of doing business in Bangladesh;

• 45% strongly agree and 45% agree that the Learning Events of the PSD Core Group should be offered to a wider audience of Government of Bangladesh officials;

• 45% strongly agree, 42% agree and 12% are neutral that the PSD Core Group approach is a successful model for the capacity building of Government officials.

• 42% strongly agree, 48% agree, 6% disagree and 4% are neutral that future Administrative Barriers Reviews should be conducted primarily by the Government of Bangladesh, with the support of international experts;

• 36% strongly agree, 52% agree and 12% are neutral that Bangladesh should look towards more modern models of economic zones, instead of continuing to focus on Export Processing Zones.


• 33% strongly agree, 58% agree and 9% are neutral that Regulatory Impact Assessment may be used to reform the existing stock of legislation in Bangladesh; and

• 33% strongly agree, 52% agree, 12% are neutral and 3% disagree that Bangladesh’s existing economic zones need to be restructured to ensure that they meet international standards.

• 18% strongly agree, 76% agree and 6% are neutral that Bangladesh’s existing economic zones can benefit through increased public-private partnership in infrastructure provision and management; and

Future Participation

• 100% of the members of the PSD Core Group are interested in continuing their involvement with the PSDSP; and

• 100% of the members of the PSD Core Group are interested in continuing their involvement with future versions of the PSD Core Group.

General Suggestions on Improvement of Core Group Activities

Below are some selected suggestions on how the PSD Core Group learning experience can be improved:

• Training sessions on ICT and Project Management (Formulation, Appraisal, Implementation, Monitoring, Evaluation etc) should be organized.

• The PSD Core Group should be taken on visits to the northern districts of Bangladesh, Mongla port and Benapole Land Port as well, to examine existing infrastructure and potential for future development.

• The PSD Core Group should interact with civil society and media personalities in order to create awareness about private sector led development through infrastructure development.

• Officials of the Foreign Exchange Division of Bangladesh Bank, Taxation Service, the Ministry of Foreign Affairs, the Registrar of Joint Stock Companies and Chittagong Port Authority should be included in the PSD Core Group.

• More meetings with private sector representatives should be organized.

• The PSD Core Group members should visit more private sector related Government ministries and agencies.

• The PSD Core Group should visit some EPZs and BSCIC estates which have not been properly utilized.


• The PSD Core Group should visit local and multinational companies to learn about corporate culture.

• The PSD Core Group should be given training on the current procedures for starting up and operating a business in Bangladesh, as well as existing investment related laws, rules and regulations.

• The PSD Core Group should receive training on complex issues like negotiations and trade.

• Private public partnership towards development of private sector should be further encouraged.

• There should be ample scope for individual as well as group assessment to identify areas for capacity building and learning for each member of the Core Group.

• PSD Core Group members should be placed in the positions where administrative barriers, SEZ and regulatory reforms are to be conducted.


E BICF Outcomes and Outputs During the first Four Years

Main Outcomes and Outputs 2 Years 4 Years

1. Better Business Regulations (Phase 1 - $8.6 million) Main Outputs: • Better Business Unit (BBU) established within the Board of Investment

(BoI) to assess the regulatory environment and implementing reform • 6-8 government agencies undertake self-administered administrative

barrier review • Regulatory impact assessment mechanisms and processes piloted within

two PSD-related Ministries/Departments, including e-Government processes

• 2 regulatory regimes reformed (e.g., Environment, Customs, Tax Administration, etc.) including e-Government processes

Main Outcomes: • Time and cost for environmental clearances for firms reduced by 50%

from the current average of 20 days and $600 • Time and cost for foreign loan approval process reduced from 90-180 to

15 days and from $1,500 to $100 • Processing time for duty drawback claims reduced from 90 days to 1 day • Time and cost to obtain a bonded warehouse license reduced from an

average of 120 to less than 30 days and from $6,000 to less than $1,500. • Time to assemble and process import documentation reduced from 21 to

10 days; Time to clear customs reduced from 7 to 1-2 days

Main Outputs: • 16 Government Agencies undertook self-administered administrative

barrier reviews • Regulatory impact assessment mechanisms and processes adopted by the

Government for all business regulations • 4 regulatory regimes reformed • Competition Policy Framework adopted by the Government • e-Government options instituted in 4 key PSD agencies • 300 Civil Servants trained annually (starting in Year 4) from 10 GoB’s

PSD related agencies • Policy enforced that staff for PSD training remain in PSD agencies for at

least three years Main Outcomes: • Time and cost associated with all the relevant administrative processes

intervened by BICF on average reduced by 25%

2. Improve Regulatory Framework and Institutions for establishing Economic Zones (Phase 1 - $9.5 million) Main Outputs: • Creation of a special economic zone coordination office • Policy and regulatory frameworks developed and adopted to enable

private investment in economic zones, including private provision of infrastructure services

• PPP Development Unit established and operationalised within Government

• Reformed regulatory framework to allow investment in privately serviced industrial land and economic zones

• Changes to the Factory Act enacted which allows common treatment of co-located adverse environmental effects

Main Outcomes: • Private EPZ(s) licensed

Main Outputs: • Key zone agencies restructured and employing commercial principles • Economic Zones Regulatory Authority Established • BICF Training Modules incorporated into the BoI, BEPZA, BSCIC, and

EPB Main Outcomes: • First two PPP industrial estates established • Implementation of at least 2 privately and/or publicly financed common

effluent treatment plants in economic zones and other industrial land after two years (Year 4)

• Increased number of companies compliant with the international labor standard

3. Institutional and Civil Service Capacity for PSD Strengthened (Phase 1: $1.5 million) Main Outputs: • PSD Core Group Development Program-40 members graduated annually

on a rotating basis • PSD Outreach Program through regular public-private dialogues (to raise

awareness and create a dialogue with the broader stakeholder community) • Establishment of public-private forum Main Outcomes: • Majority of the firms rated the services received from the key PSD

agencies (which are under the umbrella of BICF training and capacity development interventions) as “good, very good, or excellent”

Main Outputs: • PSD Core Group Development Program-40 members graduated annually

on a rotating basis • PSD Outreach Program through regular public-private dialogues (to raise

awareness and create a dialogue with the broader stakeholder community) Main Outcomes: • Majority of the firms rated the services received from the key PSD

agencies (which are under the umbrella of BICF training and capacity development interventions) as “good, very good, or excellent”

• ICRG Bureaucratic Quality Index improved by 0.25 points from 2 (in a scale of 1 to 4, 1 being worst best)

• Index of Government Effectiveness (World Bank Governance Dataset) improved by 0.5 points from -0.72 (in a scale of -2.5 to 2.5)

bangladesh: steering the drivers of change

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