Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 13252

PERFORMANCE AUDIT REPORT

BANGLADESH

INDUSTRIAL SECTOR CREDIT(CREDIT 1816-BD)

JUNE 30, 1994

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Currency Equivalents

June 1987 May 1989

1 Taka - US$0.0325 1 Taka - US$O.031030.80 Taka - US$1.00 32.27 Taka = US$1.00

ACRONYMS AND ABBREVIATIONS

ADB Asian Development BankBB Bangladesh Bank (the Central Bank)BEPZA Bangladesh Export Processing Zone AuthorityBTC Bangladesh Tariff CommissionCCIE Chief Controller of Imports and Exports (MOC)CD customs dutyCL Control Ust (part of IPO)CY calendar yearDCA Development Credit AgreementDEDO Duty Exemption and Drawback Office (in NBR)DFI Development Finance InstitutionDS Development SurchargeECGD/S Export Credit Guarantee Department

(in SBC) SchemeED excise dutyEDP Export Development (Credit) ProjectEMU Export Monitoring Unit (in EPB)EPB Export Promotion Bureau (attached to MOC)EPS Effective Protection Studies (unit in BTC)EPZ Export Processing ZoneFSAC Financial Sector Adjustment CreditFY fiscal yearGOB Government of BangladeshHS Harmonized Commodity Description and Coding SystemIDA International Development AssociationIPC Import Program CreditIPO Import Policy OrderISC Industrial Sector CreditISAC-2 Second Industrial Sector Adjustment CreditL/C letter of creditLCA L/C authorizationLF LCA and import permit feeMOC Ministry of CommerceMOI Ministry of IndustryNBR National Board of RevenueNCB nationalized commercial bankNIP New Industrial Policy (1982)OED Operations Evaluation Department (WB)PSIC Private Sector Investment CreditPRMAC Public Resource Management Adjustment CreditOR quantitative restriction (on imports)RD Regulatory DutyRIP Revised Industry Policy (1986)SAR staff appraisal reportSBC Sadharan Bima CorporationSBW special bonded warehouseSEM secondary (foreign) exchange marketSOE statement of expenseST sales taxTA-V/VI Fifth/Sixth Technical Assistance ProjectTIP Trade and Industry Policy (Studies)UNDP United Nations Development ProgrammeUSAID United States Agency for International Development

Fiscal Year of Borrower: July 1 - June 30

FOR OFFICIAL USETHE WORLD BANK

Washington, D.C. 20433U. S. A.

OMce of Director-GeneralOperations Evaluation

June 30, 1994

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Performance Audit Report on Bangladesh:Industrial Sector Credit: (C1816-BD)

Attached is a Performance Audit Report for the Bangladesh Industrial Sector Credit(Credit 1816-BD) prepared by the Operations Evaluation Department.

The Industrial Sector Credit supported policy changes in the industrial sector to:introduce administrative and financial reforms affecting export trade; rationalize thestructure of protection; liberalize the investment approval system; undertake publicenterprise reforms, including centralized monitoring of performance and strengtheningmanagement; and improve industrial financing.

Despite the relatively modest objectives sought in trade and industry reforms, theprogram was complex. Covenants regarding the reduction of tariffs and quantitativerestrictions were not followed strictly, resulting in further slowdown of a modestliberalization program. There were also shortfalls in loan recovery targets of the financialinstitutions whose programs were monitored and also in the collection of public enterprisearrears. These findings confirm those of the Project Completion Report. This PARincludes a discussion of issues related to privatization in Bangladesh.

The project outcome is rated as unsatisfactory. Sustainability of the program israted as uncertain and institutional development as modest.

The PAR, however, finds that the operation initiated a very positive reform processin the context of structural policy changes in trade and industry.

Robert Picciottoby H. Eberhard K6pp

Attachment

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed without WorldBank authorization.

FOR OFFICIAL USE ONLY

PERFORMANCE AUDIT REPORT

BANGLADESH

INDUSTRIAL SECTOR CREDIT(Credit 1816-BD)

CONTENTS

Preface iBasic Data Sheet iiEvaluation Summary vii

1. INTRODUCTION 1

II. THE INDUSTRIAL SECTOR CREDIT I 1

Ill. IMPLEMENTATION OF PROGRAMS AND POLICY IN TRADEAND INDUSTRY REFORMS 3

Improvement of Export Regime 3Competitiveness and Real Effective Exchange Rate 3Trade and Tariff Reforms 5Tax Reforms 10Export Administration and Policies 10Financial Sector Issues 11Public Enterprise Reforms 14

IV. RESULTS, SUSTAINABILITY AND LESSONS OF EXPERIENCE 15

Sustainability 17Lessons from Experience 19

Annexes

A. Privatization in Bangladesh 21

This report was prepared by Gerardo Sicat (Task Manager) who audited the project in July1993. Alejandra Sarmiento and Norma Namisato provided word processing assistance.

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

Contents (cont'd)

FIGURES

1. Some Indicators of Export and Economic Performance 22. Bangladesh Tariffs in FY87 63. Program of Removal of QRs 94. Import Tariff Protection in Bangladesh:

Average Rates and Spread of Rates, by Period 18

TABLES

1. Policy Action Matrix and Implementation Performance 332. Gross Domestic Product at Constant (1984/85) Prices 413. Balance of Payments 424. Quantity and Value of Traditional Exports 435. Comparative Trade Statistics (% of GDP) 446. The Changing Structure of Import Taxation and Protection 457. Progressive Removal of Import Controls 468. Comparative Position of Classified Loans 469. Synopsis of Problems Underlying Losses

of Selected Public Enterprises 47

PERFORMANCE AUDIT REPORT

BANGLADESH

INDUSTRIAL SECTOR CREDIT(Credit 1816-BD)

PREFACE

This is the Performance Audit Report (PAR) for the Bangladesh Industrial SectorCredit I, for which Credit 1816-BD, in the amount of US$190 million equivalent, wasapproved on June 9, 1987. The Credit closed on May 11, 1989. It was fullydisbursed and the last disbursement was on May 11, 1989.

The PAR was prepared by the Operations Evaluation Department and based onthe Project Completion Report' (published in 1993 by the South Asia Regional Office),the President's Report, project documentation and discussions with Bank staff. Anevaluation mission visited Bangladesh in June, 1993 and examined the effectivenessof the project, in cooperation with the representatives of the Government and theprivate sector. We wish to draw particular attention to their kind cooperation andassistance in preparing this report.

The PAR finds that the operation initiated a very positive reform process in thecontext of structural policy changes in industry and trade reforms, by undertaking aliberalization of the trade regime, restructuring of the protection system and supportinginstitution building. The operation, however, fell short of its relatively modest reformagenda in the trade and industry front and in increasing loan recoveries in the financialsystem.

No comments have been received from the Borrower.

1 Project Completion Report, Bangladesh: Industrial Sector Credit (Report No. 11656,February 12, 1993).

iii

PERFORMANCE AUDIT REPORT

BANGLADESH

INDUSTRIAL SECTOR CREDIT(Credit 1816-BD)

BASIC DATA SHEET

CREDIT POSITION(Amounts in US$ Million)

As of March 31, 1994

Credit Original Disbursed Cancelled Repaid Outstanding

1816-0 190.0 195.94 - 208.741816-1 2.5 2.43 - 2.68

Note: Discrepancies between various amounts are due to fluctuations in the exchangerate of the US$ in relation with SDRs in which IDA credit was expressed.

CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS

FY87 FY88 FY89 FY90

Appraisal Estimate (USSM) 15.0 175.0 175.0 190.0Actual (US$M) - 105.8 198.4 198.4Actual as % of Appraisal (%) - 60.5 113.4 104.4

Date of Final Disbursement: May 11, 1989

PROJECT DATES

Original Actual

Initiating Memorandum 02/25/86 02/25/86Letter of Sector Policy 04/15/87 04/15/87Negotiations (concluded) 04/14/87 04/14/87Board Approval 06/09/87 06/09/87Credit Agreement 06/22/87 06/22/87Effectiveness 06/30/87 06/30/87Amending Agreement 03/29/89Amended Effectiveness 04/25/89Actual Completion 06/30/89 05/11/89

iv

STAFF INPUTS(staff weeks)

Fiscal Pre-Year Appraisal Appraisal Negotiation Supervision Other Total

1985 18.2 18.21986 78.8 21.4 0.5 100.71987 27.7 25.2 52.91988 26.7 26.71989 1.8 1.819901991 1.2 1.219921993 0.5 0.5

TOTAL 97.0 49.1 25.2 30.2 0.5 202.1

MISSION DATA

No. of No. of Staff Date ofMonth/Year Weeks Persons Weeks Report

Preparation 05/85 2.5 3 6 06/10/85Appraisal 03/86 3 6 18 04/28/86Supervision I 09-10/87 3 3 17 10/10/87Supervision II 02/88 3 4 12 04/06/88Completion 02/91 1 1 1 02/11/91

V

OTHER PROJECT DATABorrower: People's Republic of Bangladesh

Follow-on Project(s):

Project Credit No. Amount Board Date

Financial Sector Adjustment 2152-BD US$175 million 06/05/90Public Resource Mgmt. Adj. 2361-BD US$150 million 05/05/92Second Industrial Sector Adj. 2427-BD US$100 million 10/27/92

YEAR-END ANNUAL REPORT ON PORTFOLIO PERFORMANCE RATINGS(Form 590)

Evaluation Development Legal ManagementYear Overall Objectives Covenants Performance

1988 1 1 1 11989 1 1 1 1

- vii -

PERFORMANCE AUDIT REPORT

BANGLADESH

INDUSTRIAL SECTOR CREDIT(Credit 1816-BD)

EVALUATION SUMMARY

1. INTRODUCTION 11. IMPLEMENTATION OF PROGRAMSAND POLICY IN TRADE AND INDUSTRY

i. The Industrial Sector Credit was REFORMSintended to be the first of a series ofadjustment credits to help Bangladesh Trade and Tarff Reformsundertake structural reforms. It followed along list of sector credits and import iv. By the mid-i 980s, the import regime

program credits. in Bangladesh was dominated byquantitative restrictions (QRs) and by a

ii. The Credit supported trade and highly protectionist tariff structure. The

industrial policy reforms to: (a) improve policy measures for a rationalization of the

export policies and administration; (b) trade regime included: (a) reduction of the

simplify and rationalize the structure of variation of the number of tariff rates,protection; (c) liberalize the investment allocating product categories to these rate

approval system; (d) improve the structure more consistently and reducingmonitoring of public enterprise the range of effective protection among the

performance, while strengthening PE products; (b) phase-out of QRs andmanagement through greater autonomy; streamlining of import procedures; and (c)

and (e) improve industrial financing. The introduction of tax reforms which

broadness of these measures necessitated complemented the trade regimes. Theinvolvement of a wide range of government program was one of gradual liberalization ofagencies. the import regime.

iii. The Credit of US$190 million V. Taiffreduction. Following earlier

equivalent represented about 7.9 percent measures taken to initiate the tariff reform,

of gross capital inflows over the intended a gradual tariff reduction program to bedisbursement period of 1987-88, financing implemented between FY88-90 was

about 4.8 percent of merchandise imports. adopted to lower the average tariff ratesApproved on June 9, 1987, the Credit and their range. The average rate ofbecame effective on June 30, 1987, one effective protection would be reduced bymonth ahead of planned effectiveness. lowering most of the rates above 150The second tranche was released on June percent to that level in FY88 and to'1O28, 1988. It was fully disbursed and percent in FY89. With respect to theclosed on May 11, 1989. textiles and steel/ engineering sector,

nominal protection rates were to be

- viii -

reduced over three years to a maximum of banned. A joint Bank-Fund mission advised85 percent ad valorem. Bangladesh on tax issues, by developing

alternative tax sources. The result of thisvi. Reduction of auantitative restrictions work led to the enactment of a value addedon imoorts. The program sought to reduce tax in 1991, to be implemented in theQRs and introduce an improved foreign following year. Progress in direct taxexchange allocation scheme by: (a) moving system reform has been slower.away from a controlled official foreignexchange market through a secondaryforeign exchange market; (b) substitution Export Administration and Policiesof a "negative" list of controlled imports forthe positive list of allowed imports in ix. Actions under the Credit includedeffect; and (c) gradually getting rid of ORs. direct measures in export promotion,Up-front actions by the Government were guided by three general principles: (a)undertaken prior to ISC-I approval. Foreign priority was to be given to improvingexchange allocations for exports and administrative systems supporting policiesimports gradually shifted to the secondary adopted but not yet implemented; (b)market from the official controlled regime. product or firm-specific policies andThe exporters' share of transactions in the guidelines would be generalized to allsecondary market was raised from 27 industries and firms that generate directpercent in FY86 to 71 percent in FY87. and indirect exports; and (c) adoption ofThe negative list for ORs was introduced. institutional mechanisms that were needed

to react with speed and flexibility tovii. The trade liberalization program was external challenges through closemodest. The quality of implementation collaboration between the Government andwas below the indicated goals at the the export sector.beginning. This revealed the low level ofcommitment of the Government to the x. Most of the Government actionsprogram. The tariff restructuring was regarding the above measures were takenimplemented even more slowly than before effectiveness. The actions requiredplanned. The removal of QRs was not at second tranche were adopted.given high priority in the actions of the Implementation, however, was notGovernment. There was also a resistance smooth. The bonded warehousing systemto eliminate restrictions on industrial was not made available to exporters forimports. In short, performance was not whom input requirements were moresatisfactory. complex than that encountered for

garments. The duty drawback office,DEDO, was established, but initially lacked

Tax Reforms adequate authority and budget. Technicalassistance provided by an Export

viii. One of the major results of the Development Project to help it in its taskCredit is that it led to the reform of the later improved the performance of DEDO inindirect tax system. Bangladesh is highly speeding up the drawback mechanism.dependent on import duties as a source of Export financing and credit guaranteerevenues, accounting for about 55 percent programs were beset with delays, andof total tax revenues. It was expected that progress in this was also facilitated only byrevenue losses would be offset in part by later credit operations, in this case also thethe tariffs on imports that were previously Export Development Project.

- ix -

Financial Sector Issues Autonomous Bodies Wing (ABW) that hadbeen established earlier was to be

xi. The loan recovery rates of the DFIs strengthened at the Ministry of Finance.and the nationalized commercial banks This body was designed to oversee the

(NCBs) had been very low. To facilitate development of an improved contract

recovery of loans, the credit instituted an performance system for selected publicaction program so that the DFIs collection enterprises and to introduce with it a

ratio would rise from 9 percent in FY86 to program of monitoring and evaluating

13 percent in FY87 to 18 percent (or 50 of public enterprise performance. The new

the new amounts coming due) in FY88, system was to collect information on

while that of the NCBs would planning, performance, budgeting and

correspondingly rise from 19 percent financial control measures. Target-setting

through to 33 percent and finally to 46 and performance evaluation was to be

percent. The Credit also supported a instituted. The system was designed to

complementary program that would identify areas for improvement, set targetsincrease operational autonomy of the DFIs and monitor respective achievements of

and strengthen them institutionally. these targets, and evaluate aggregateenterprise performance.

xii. The agreement required that beforesecond tranche release, both DFIs and xv. The system did not become fully

NCBs should meet the specific collection operational. Initial efforts involved

targets. All public enterprise arrears to technical assistance. These operations

Bangladesh Shilpa Rins Sangstha (BSRS) were adequately monitored on an

were to be settled by end of FY88. The experimental basis. The system was tooDFIs increased provisions for complex for implementation on a wider

nonperforming loans in their FY87 financial scale, but it was adopted in a few

statements and undertook debt enterprises on an experimental basis.

reschedulings and writeoffs in appropriate There were delays in the recruitment of

cases. The Government also recapitalized suitable staff, and the program reliedthe DFIs to the agreed ratio, but they did mainly on the UNDP-funded TA personnel

not meet the targets for collection and to undertake most of the work. Project

settlement of arrears. personnel were put on contract, and theproposal to recruit additional professionals

xiii. This issue remains difficult. The did not get approved by the Government.

Government failed to restore creditdiscipline; after second tranche release had xvi. Performance contracts did not result

been made, both DFI and NCB loan in improved performance of publicrecovery rates dropped back to their old enterprises. Gains from these efforts were

levels. only temporary. Problems affecting thepublic enterprise sectors - redundant labor,weak financial controls, poor collection

Public Enterprise Reforms rates, pilferage, neglect of maintenance andoperations and high rate of system losses,

xiv. The measures dealing with public continued to affect overall performance and

enterprises under ISC-I focused on the generate low efficiency of services.

monitoring and improvement ofperformance of existing publicmanufacturing enterprises. An

-x-

Ill. RESULTS, SUSTAINABILITY AND rate reductions. So long as QRs remain,LESSONS OF EXPERIENCE the tariff system is ineffective with respect

to those products or industry protected byxvii. The overall result of this operation is the QRs, and the tariff system cannotrated unsatisfactory. This judgment become a transparent tool of policy. Byconfirms the findings of the Project FY93, around 10 percent of the items inCompletion Report, which provided a frank total tariff categories were still subject toanalysis of the issues. Covenants with ORs. However, the remaining QRsrespect to the reduction of tariffs and continue to add protection to industriesquantitative restrictions were not followed already benefiting from high tariffs.strictly, resulting in slowdown of theprogram. There were also shortfalls in xxi. In terms of PE reforms, therecovery targets of financial institutions achievements were modest. Emphasis onand in collection of public enterprise improvement of performance contract andarrears. management information systems is critical

for those PEs remaining in the Governmentxviii. The Government adopted measures sector. But ISC-1 was not fully suited tothat directly supported the administration deal with the complex issues of the PEof incentives for export. Some of these sector and related issues, such as itsmeasures stalled for a while in view of the downsizing and privatization.administrative and budgetary implications,but by and large, with the technical xxii. On financial sector issues, theassistance support which was made emphasis was to improve the recoveryavailable later, measures related to duty rates of DFIs and NCBs. Even thoughdrawback administration have begun to recovery rates improved prior to trancheproduce good results. Measures to release, collection suffered again from theimprove investment promotion were also same problems afterwards. This responseundertaken by removing investment is worrisome, for it continues to highlightregulation, thus making it easier to invest. the weak efforts undertaken to resolve the

issue. The collection targets were not fullyxix. Modest as the goals were, progress met, and in the case of NCBs, theon the liberalization of tariffs and the collection rate was below 50 percent of theremoval of quantitative restrictions has original target.been slower than planned. The reductionof tariffs has produced a slow fall of xxiii. The major reforms under ISC-1 are onaverage rate of tariffs, with narrower trade and tariff reforms and the promotionspreads about the average rate. This drop of exports. The operation achieved somein average rates was accomplished beyond objectives, but encountered majorthe lifetime of ISC-1. This change has difficulties which often translated in delaysaffected tariffs in agriculture and industry, on the required actions. Taking note alsoand to some extent mining. However, of the problems associated with industrialBangladesh is still far from the rates of loan recovery programs of DFIs and NCBs,tariffs of comparable countries in Asia. on balance the operation was

unsatisfactory. Even though it advancedxx. Removing QRs has proved much economic policies in a number of fronts,tougher to implement than reducing tariffs. the accomplishments related to the coreTherefore, the reduction of QRs is even objectives were spotty.less satisfactory than the progress in tariff

Sustainability thus, achieved partial institutionaldevelopment impact.

xxiv. The sustainability of the reforms isuncertain. However, the operation initiateda positive reform process. Some of these Lessons from Experfencereforms showed a deepened level of effortafter the credit had closed, implying that xxvi. Borrower commitment to the reform

the adjustment has continued. Reform p The hesitation to proceed with

deepening is the result of the use of other the reform process and to fully implement

adjustment operations to support the the agreed framework demonstrated low

reform process. Sustainability of the program ownership. Some of the slowness

program would depend on the firmness of in implementation was due to inadequate

Government in pursuing the program administrative capacity, but low

objectives even beyond the period of Government commitment accounted for a

assistance. Evidence of slowdown of the good part of it. After the change in

reform process after the tranche release Government, in 1991, however, there was

period indicates the danger of reversibility. an improved commitment to the reform

For instance, there were tariff increases process, resulting in improved speed of

undertaken in the FY91 and FY92 budgets, some components of trade reforms. When

which were not consistent with the tariff there is a low commitment to reforms, the

reform objectives. These were corrected implementation of agreed actions do not

subsequently. Moreover, under the follow- prosper after the availment of a tranche or

up ISAC-2, almost all ORs are now closure of a credit unless there is a new

removed and the tariff structure is now far credit.lower and more compressed than wasenvisioned under the first ISC. Protection xxvii. Strategic d Given that

for textiles and steel still remains high, the trade liberalization was designed to be

however. a multi-year slow process, sequencing ORremoval ahead of tariffs would have been

xxv. In the reforms requiring institution the more natural scheme to undertake.

building, such as export administration Moving first in OR reductions would have

procedures, PE monitoring and speeded the whole reform process but

management information systems, and would have run the risk of the program

strengthening of DFIs, sustainability stalling all the more because it began with

remains a problem. Many of the institution more difficult reforms.

building efforts depend on the fragileimpact of technical assistance programs xxviii. Another issue is related to targeting

(which include sizable inputs from other spcii ORs. The ORs to be removed

bilateral and multilateral donors). Initially, could have been targeted to industry

the technical assistance projects are well- groups more directly. Because the OR

funded compared to normal budgetary reduction was basically undertaken by

activities and, in addition, have technical removing import categories from the

expertise. The problem is how the negative list, it focused more on numbers

institutions would survive beyond the of categories to be removed rather than

technical assistance phase when their their potential impact on industrial reform.

functions are integrated into the This result explains the failure of the OR

Government machinery. The operation, reduction to have a major impact on the

- xii -

textiles and steel/engineering sectors, led to ISC-1, studies on trade and industrywhich were significant in the industrial were undertaken covering a period of fourreform program. years through a technical assistance

project. These studies prepared thexxix. Finally, the monitoring base for the groundwork for policy dialogue with theOR reduction program was changed in Government prior to the adoption of themidstream, when the Government shifted adjustment program. Theto the "harmonized system" of recommendations of the studies wereclassification of imports. This complicated important in bringing the Governmentthe monitoring of the reform process, closer to the problems that needed focusbecause items in the original list had to be on. One lesson learned from the TIPtracked against what was being used for studies, however, was that once theofficial purposes. The cost to the Bank in program ended, the Government's capacityterms of supervision resources was large, to continue the policy analysis partbut the implied cost to the borrower, which diminished. The expertise had not beenhad to implement the system, would have transferred and internalized in Government.been larger. Thus, one lesson from this The fault lay in part with the trainingexperience is that it is very important to component of the project, which did notagree on a common monitoring base at the give local counterparts sufficientstart of the process. opportunity to interact and learn from the

process.xxx. ImDortance of oreDaratory studies.Prior to the adoption of the programs that

PERFORMANCE AUDIT REPORT

BANGLADESH

INDUSTRIAL SECTOR CREDIT(Credit 1816-BD)

1. INTRODUCTION

1.1 Bangladesh has a high population density, limited natural resources, and

widespread poverty. About half its gross domestic product (GDP), of US$150 per

capita, is in agriculture. Industry accounts for about 10 percent of GDP. In view of

its large growing labor force, industrial development offers a major potential for

alleviating economic conditions. Exports of labor-intensive products could

constitute one element of this strategy. But for years, industrial development

policies have proceeded on a wrong course and failed to take advantage of the

country's comparative advantage. Inefficient public enterprises (PEs) were the

mainstay of the development strategy in industrial growth. Restrictive trade and

payments policies have impeded growth of exports and domestic industry. The

financial system has been weakened by past practices.

1.2 Despite its problems, Bangladesh has made progress in the 1980s. The

economy has grown at about 4 percent per year. Development assistance has been

an important component of resource flows. Export industries, however, have not

been sufficient to meet resource requirements for growth. Traditional exports,

based on jute mainly, have stagnated, but some breakthrough in labor intensive

exports, especially garments, has been achieved. Based on the proportion of trade

to GDP, Bangladesh compares poorly with other Asian countries. If not for the

remittances of worker's incomes earned abroad which in recent years have

accounted for 50 percent to 80 percent of the current account balance (CAB), the

balance of payments gap of Bangladesh would be much larger. (See Fig. 1).

1.3 In recognition of the need to achieve broad policy and institutional reforms,

IDA's assistance strategy to Bangladesh shifted in 1986 from sector credits andimport program credits to policy-based credits. The Industrial Sector Credit was

intended to be the first of a series of adjustment credits to help Bangladesh

undertake structural reforms.

II. THE INDUSTRIAL SECTOR CREDIT I

2.1 The policy reforms supported by the Credit were the result of a joint review

by the Government and IDA on the experience under the New Industrial Policy (NIP)

adopted in 1982 and on preliminary policy studies undertaken under the Fourth

Technical Assistance Credit (Cl 1 24-BD) on trade and industrial policies, on a

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-3-

UNDP-financed public enterprise sector monitoring and management project, and on

an audit review of the performance of development finance institutions (DFIs). The

result was a comprehensive medium term industrial reform program. The Credit

was designed to support the industrial policy reforms and strengthen administrative

arrangements needed to: (a) improve export policies and administration; (b) simplify

and rationalize the structure of protection; (c) liberalize the investment approval

system; (d) improve the monitoring of public enterprise performance, while

strengthening PE management through greater autonomy; and (e) improve industrial

financing. The broadness of these measures necessitated involvement of a wide

range of government agencies.

2.2 The Credit of US$190 million equivalent represented about 7.9 percent of

gross capital inflows over the intended disbursement period of 1987-88, financing

about 4.8 percent of merchandise imports. The Credit became effective on June

30, 1987, one month ahead of planned effectiveness. The second tranche was

released on June 28, 1988. It was fully disbursed and closed on May 11, 1989.

2.3 The policy reforms under the Credit are spelled out fully in Table 1, which

shows the specific measures required under each set of policy objective, and the

timing of those measures. The last column provides a brief assessment of

implementation performance. The Credit involved a number of important upfront

measures which were undertaken by the Government prior to appraisal. Many of

these upfront measures (outlined in said table) were significant efforts related to the

initiation of reforms in each of the policy areas. For instance, the measures on the

liberalization of investment sanctioning were all made before the effectiveness of

the loan.

Ill. IMPLEMENTATION OF PROGRAMS AND POLICY IN TRADEAND INDUSTRY REFORMS

Improvement of Export Regime

3.1 One of the pressing problems of Bangladesh is export diversification. The

economy is too dependent on the fortunes of one major traditional export-jute-

and on external aid. The key to decreasing this dependence on external resources

is an improvement of export performance through policies that would promote

diversification and expansion. Even though such export expansion could come from

the agricultural sector, given the high growth rate of the labor force in the country,

export growth from industry is needed and feasible, as shown by the recent growth

of nontraditional exports.

Competitiveness and Real Effective Exchange Rate

3.2 Continued management of the exchange rate to maintain a competitive real

exchange rate was part of the key programs related to export policy regime. In

-4-

spite of periodic nominal devaluations of the taka during the 1980s, the realexchange rate has appreciated over time, causing tradables to lose competitiveness.Staff measurements of alternative formulations of the real exchange rate tell thesame story: an appreciation of the real exchange rate.' This means that on thebasis of the domestic price regimes for both tradables and nontradables, tradableswere not receiving sufficiently attractive prices over time in relation tonontradables. The decline of the jute export industry-the main traditional export ofthe country-has been partly caused by real exchange rate appreciation. Of course,the overall impact of this situation was to discourage export growth. Studies ofagriculture also indicated that exchange rate overvaluation had adversely affecteddomestic rice and other food production.

3.3 Taka overvaluation has its roots in several aspects of policy. One factorwas the tendency to undertake inadequate nominal exchange rate adjustments.Another reason was the restrictive import regime and the high tariff protectionstructure. Public expenditure policies also had an effect on exchange rateappreciation.' Public expenditure had an impact on the composition of demandfor tradables and nontradables, as a consequence of a (high) wage policy within thepublic sector and the investment allocations resulting in preferences for activities inthe nontradables sector. A study of this phenomenon had estimated that duringFY83 to FY91, the real exchange rate had appreciated by about 19 percent as aresult of public expenditure policy.'

3.4 The Government had introduced various measures in the past to encourageexport growth especially in the early 1980s. As a result, Bangladesh had already inplace many incentives to promote exports, such as an export performance licensingsystem, duty exemptions and drawback provisions for exporters, bondedwarehousing schemes, export financing, and an export processing zone. Some ofthese measures have helped to offset the disincentives against export productionthat exchange rate policy had caused. But the complexity of trade regulations anda weak administrative capacity had discouraged a supply response. The measuresunder the Industrial Sector Credit were designed to sharpen the contributions ofdirect export promotion policies, utilizing a variety of trade, fiscal and otheradministrative measures. The real appreciation of the exchange rate continued tobe a problem during the period of the Credit.

I See Bangladesh: Selected Issues in External Competitiveness and Economic Efficiency.South Asia Country Department, Country Operations, Industry and Finance Division, Report No.10265-BD.

2 World Bank, Bangladesh: Public Expenditure Review: Public Resource ManaaementDurina the Fourth Five-Year Plan, FY91-95, Report No. 7545-BD, March 13, 1994.

3 World Bank, Banaladesh: Selected Issues in External Comoetitiveness and EconomicEfficiency, opsit. p. 47, citing Kazi Matin, "How Composition of Public Expenditure AffectsCompetitiveness: The Case of Bangladesh," World Bank (mimeo), Nov. 1991.

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Trade and Tariff Reforms

3.5 By the mid-1980s, the import regime was dominated by quantitativerestrictions (QRs) and by a highly protectionist tariff structure. The usual pattern ofcascading structure of protective tariffs-very high or prohibitive on final products,low on intermediate imports-existed for Bangladesh. High tariff rates were alsoineffective since, in any case, pervasive quantitative restrictions prevented theimports of many types of goods. Tariff exemptions for some industries furtheraccented the protective bias of trade policies. In addition, a domestic sales taxationon imports further produced a new base for taxing import trade.

3.6 ISC-I supported policy measures were designed to be intermediate steps fora rationalization of the trade regime, and contained three elements: (a) reduction ofthe number of tariff rates, allocating product categories to these rate structure moreconsistently and reducing the range of effective protection among the products; (b)phase-out of QRs and streamlining of import procedures; and (c) introduction of taxreforms which complemented the trade regimes. The program was one of gradualliberalization of the import regime.

3.7 Upfront actions were undertaken by the Government in preparation for theCredit. With respect to the tariff regime in FY87, the Government had classified7,000 import product categories into 11 tariff rates (from 24 rates previously). Therates on raw materials were planned between zero and 20 percent ad valorem,intermediate products would be subject to 50 percent rate, consumption goods at100 percent and luxuries from 150 percent to 400 percent rates. About one-sixthof the tariff items were classified as luxury goods. The sales tax on imports wasreduced to three rates (zero, 10 percent and 20 percent), and most taxes wereshifted to the zero rate to reduce the protective impact (see Fig. 2). Also, thetariff rates surrounding the two largest manufacturing subsectors-textiles andsteel/engineering were also to be liberalized.

3.8 Tariff reduction. Following the earlier measures to initiate the tariff reform,a gradual tariff reduction program to be implemented between FY88-90 wasexpected to lower the average tariff rates and their range. The average tariff ratestructure was to be reduced from 11 to 7 rates (2.5%, 5%, 10%, 20%, 50%,75%, and 100%), with the maximum of 20 percent being applied to all rawmaterials, 75 percent intermediates, and 100 percent on final products. Theaverage rate of effective protection would be lowered, by reducing most of therates above 150 percent to that level in FY88 and to 100 percent in FY89. Theonly exceptions to this were a few luxuries such as tobacco products, beverageconcentrates, precious and semi-precious stones, perfumes and cosmetics, spiritsand luxury motor cars. With respect to the textiles and steel/engineering sector,nominal protection rates were to be reduced over three years. This sector, which

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Figure 2. Bangladesh Tariffs in FY 1987.

1200

1000

800

600

400

200

0 2.5 5 10 15 20 30 40 50 75 100 150 200 300

Duty Rate (Percent)

01987 Statutory and Exemptions g1987 Exemption Rates

accounted for about 40 percent of value added in manufacturing and more than 50percent of all imports, is highly protected, and the intention was to graduallyexpose it to more competition by lowering tariff rates from over 200 percent to 125percent in FY89 by the time of the second tranche, and by undertaking downwardadjustments in tariffs on imported inputs and raw materials. In due time, theintention was to reduce the maximum rate for these industries to 85 percent advalorem, inclusive of the protective effects of any other additional tax increases.

3.9 The targets with respect to tariffs reforms affecting textiles and steel/engineering were met for FY88, but the progress was not sustained. There was adelay in reducing the level of tariffs as envisioned within the three year period.They remained well above the 85 percent average rate planned. The tariffsimplification achieved with the reduction of most imported items into seven tariffrates. But a few exceptional rates remained, including those above 150 percentrates. In spite of this simplification, the tariff system remained complex because ofthe Government's efforts to introduce compensating duties (developmentsurcharges, import permit fees, advance income tax, and regulatory duties), certainexemptions from these additional levies, and the use of "tariff values" or referenceprices as basis of tax, rather than actual import values.

3.10 Reduction of quantitative restrictions on imports. The program sought toreduce QRs and introduce an improved foreign exchange allocation scheme by: (a)

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moving away from a controlled official foreign exchange market through asecondary foreign exchange market; (b) substitution of a "negative" list ofcontrolled imports for the positive list of allowed imports in effect; and (c) graduallygetting rid of QRs. Up-front actions by the Government were undertaken prior toISC-1 approval. Foreign exchange allocations for exports and imports graduallyshifted to the secondary market from the official controlled regime. The exportersshare of transactions in the secondary market was raised from 27 percent in FY86to 71 percent in FY87, partially freeing the taka. At the same time, the amount ofimports utilizing the secondary foreign exchange market also went up from 20percent of imports to 42 percent during the same period. Also, the negative list forQRs was introduced, even though, in contravention of this principle ofsimplification, three additional restrictions were introduced. These coveredimportable items by exporters and exchange-earning hotels; registered industrialenterprises up to values specified in their passbooks; and importers with priorpermission (e.g., seeds, insecticides, explosives, and pharmaceuticals).

3.11 By the time of credit effectiveness, the negative list for import controls andother restrictions were liberalized further. This was done by deleting 68 of the four-digit import trade control categories and by removing 140 more narrowly defineditems.

3.12 The objectives of the trade liberalization program from credit effectivenesswere to be fulfilled by the following expected actions:

* The negative import list would be reduced by about 20 percent of theremaining 359 four-digit categories each year, beginning in FY88 atsecond tranche, and sufficient priority would be given to the textilesand steel/engineering subsectors, so as to eliminate them by FY90;

* the restricted list for industrial imports of registered industrialenterprises would be phased out in three approximately equal stepsbeginning in FY88, before second tranche, and covering all items byFY90;

* all non-governmental, non-aid, non-barter imports were to utilize thesecondary foreign exchange market allocation, therefore leaving onlyfood grains, fertilizer and equipment imports, and exported jute, tea andleather, exchanged at the official rate); and

* an action program was to be undertaken to simplify import and customsclearance procedures between the Government and IDA.

3.13 These objectives were modest and gradualistic. The slowness of theliberalization program indicated to some extent the Government's perceiveddifficulty to proceed with it. The quality of implementation was below the indicatedgoals at the beginning. This revealed the low level of commitment of theGovernment to the program. The tariff restructuring was implemented more slowlythan planned. The removal of QRs was not given high priority in the actions of the

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Government. There was also a resistance to eliminate restrictions on industrialimports. In short, implementation performance was far from satisfactory.

3.14 The Government did not meet the changes required with respect to theremoval of high tariffs above 100 percent. At second tranche release in FY88, IDAallowed a waiver of the reduction to 150 percent tariff rate on condition that theGovernment would meet the target reduction rate of 100 percent for FY89. Thesecommitments were not implemented. After the release of the second tranche,there was no other instrument of IDA to assure compliance of the trade andindustry reforms until agreement was reached to proceed with the appraisal of theIndustrial Sector Adjustment Credit II in FY92.

3.15 The Government slowed down implementation of the program of reducingORs by lengthening the planned five year period into seven years. At secondtranche release, 79 import item categories (representing 22 percent of headings)were removed to meet the target, thus leaving some 280 tariff headings on thenegative list. The number of import categories removed from the restricted list forindustrial importers missed the target reduction of 33 percent since only about 30percent of industrial categories were removed. This being minor, the target attranche release was deemed met. (See Fig.3).

3.16 The removal of QRs did not affect the textile and steel/engineeringindustries very much. The original goal was to eliminate all the QRs by FY90,thereby making the tariff protection rates effective on these industries, but morethan 50 percent of textile items and about 10 percent of metal items still remainedin force through the FY91. In fact, 24 textile items still remain within the negativelist as late as FY94.

3.17 Problems of monitoring design. The reduction of QRs was based ondelisting of items under the four digit import trade control (ITC) categories, and didnot focus on those categories that were significant to the industrial reform program.The text of the condition was "to reduce the number of items in the Negative Listby about 20 percent each year beginning FY88 (defined as 20 percent of thenumber of four-digit (SITC) categories).'" In assessing whether the Governmenthad met the condition, the Staff noted that the Government had issued a revisedimport order reducing the Negative List by 79 4-digit ITC categories, or 22 percent,thus meeting the target. Similarly, the text for determining compliance with thecondition pertaining to the reduction of items in the Restricted List for industrialinputs, related to the number and not importance of items to be removed from therestricted list. Even though the Credit attached importance to the removal ofprotection related to the textiles and steellengineering subsectors, there was nomechanism in the conditionality on QRs which stressed their importance over somecategories of imports. Thus, in supervising the implementation, Bank staff was put

4 Emphasis added.

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Figure 3. Program of Removal of QRs

znb.r of conür~I.d ]t.

20

20 -

15m-

0&

60e

o0FY88 FY89 FY90 FY91 FY92 FY93

..0 ..-. ..-. -. -. . . . . . .. . . . . . .-. ...-. ...-.

4 0 - -.. . .. - .. .. ..-. .. ...-. .. ..-. .. . ..-. .. ..-. .

6 0 - -.. . . - -. .. -.. . .. . .. ...-. . .. .. . .. ..-. . ..

FY88 FY89 FY90 FY91 FY92 FY93

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in the position of counting the number of items delisted from the negative list ratherthan the importance of each item. After disbursing the second tranche, it found outthat compliance with the substance of import liberalization in textiles and steellengineering was far from fulfilled. A provision to the effect that certain itemsrelated to the textile and steel/engineering industry imports would have taken careof the problem of monitoring this provision.

3.18 A second problem in the supervision was caused by the Government's shiftfrom an import control classification of imports to a "Harmonized System of tariffclassification," which was based on the Brussels nomenclature. The number ofsome items under the negative and restricted lists got switched around in thereclassification, and this caused some needless complications in the supervision ofprogress on the removal of QRs and hence on trade liberalization.3.19 A final problem, of a more general nature, was related to sustainability ofthe efforts being undertaken. Lacking any specific instruments to follow themeasures through, at the end of the second tranche when all the proceeds of theCredit had been released, the Government's implementation of the programslackened. Without firm ownership of the program, the import liberalizationprogram did not progress further, until a new industrial sector adjustment credit(ISAC II) was negotiated and carried through some of the conditionality.

Tax Reforms

3.20 One of the major-if unanticipated-results of the Credit is that it led to thereform of the indirect tax system. Bangladesh is highly dependent on import: dutiesas a source of revenues, accounting for about 55 percent of total tax revenues. Itwas expected that revenue losses would be offset in part by the tariffs on importspreviously banned. A joint Bank-Fund mission advised Bangladesh on tax is.sues, bydeveloping alternative tax sources. The result of this work led to the enactrnent ofa value added tax in 1991, to be implemented in the following year. Progress indirect tax system reform has been slower.

Export Administration and Policies

3.21 Actions under the Credit included direct measures in export promcition,which were guided by three general principles: (a) priority was to be given toimproving administrative systems supporting policies already adopted but not yetimplemented effectively; (b) product or firm-specific policies and guidelines wouldbe generalized to all industries and firms that generate direct and indirect exports;and (c) adoption of institutional mechanisms needed to react with speed indflexibility to external challenges through close collaboration between theGovernment and the export sector.

3.22 Aside from maintaining a competitive real effective exchange ral:e, policieswere designed to assure that exporters could obtain inputs at world prices throughimprovement of procedures in the export processing zone (established before the

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credit); assurance that exporters secured access to inputs restricted or banned forother purposes (to give effect to the waiver of the negative list under importcontrols); making available the facility of the bonded warehousing system for 100percent exporters, such as those of garments; and development of duty drawbackmechanisms. In addition, efforts were made to improve the access of new exportoriented enterprises (including indirect) to export credit guarantee schemes, and toother forms of credit, such as the inland back-to-back L/C (letter of credit) systemfor all direct and indirect exporters. Provision was also made for the establishmentand operation of an export monitoring unit in the Export Promotion Board, toprovide a mechanism for responding to new international developments, such asgarments quotas.

3.23 Most of the actions of the Government regarding the above measureswere taken before effectiveness, and the actions required at second tranche wereimplemented. But implementation of the measures was not smooth, as problemswere encountered in many of them. The bonded warehousing system was notmade available to exporters for whom input requirements were more complex thanthose encountered for garments. The duty drawback office, DEDO, wasestablished, but initially lacked adequate authority and budget. Technicalassistance provided in 1991 by an Export Development Credit to help it in its tasklater improved the performance of DEDO in speeding up the drawback mechanism.Export financing and credit guarantee programs were beset with delays, andprogress was facilitated only by later credit operations, in this case also the ExportDevelopment Credit. The waiver of the "negative list" and the back-to-back L/Csystem were not made available to new and potential exporters until recently,because of administrative inaction. In general, bureaucratic obstacles continued toslow down the implementation of many measures that the Government hadadopted.

Financial Sector Issues

3.24 The loan recovery rates of the DFIs and the nationalized commercial banks(NCBs) had been very low. The Credit supported a program to improve therecovery rates for industrial term lending undertaken by two DFIs (the BangladeshShilpa Bank (BSB) and Bangladesh Shilpa Rins Sangstha (BSRS)) and three NCBs(Somali, Janata, and Agrani) to small and medium industries. These measurescomplemented early actions already contained in the Thirteenth Imports ProgramCredit for the recovery of agricultural loans and prospective assistance beingplanned to support broader financial sector reforms (undertaken later on through theFinancial Sector Adjustment Credit in 1990).

3.25 In the case of the DFIs, the collection rates as a percent of payments duefell from 35-40 percent in late 1 970s to 9 percent in FY86. The repayment rate forNCB loans for two IDA-financed small industries projects had also declined from 23percent in FY84 to 19 percent in FY86. Many reasons accounted for this poorrecovery rates. Firstly, the banks had weak appraisal capacities, limited managerialautonomy, and generally followed Government directives in lending to targeted

- 12-

sectors without regard to project viability. Secondly, there were instances in whichprojects experienced start-up difficulties, which delayed their repayment capacities,and the banks had not undertaken loan restructurings. Thirdly, taka devaluationshad affected the debt burden of companies with foreign exchange denominateddebt. Fourthly, the repayment problem had been affected by the privatizationprogram undertaken in the early 1 980s; the problem of debt restructuring of theprivatized enterprises was not undertaken to clarify the debt obligations of the newprivatized owners. The result was a dispute on the accuracy of DFI calculations ofborrower obligations and the corresponding liability for debts incurred beforeprivatization. Finally, there is a tendency by many borrowers in Bangladesh to bewillful debt defaulters.

3.26 The last reason, known in Bangladesh as the "default culture," is said tocomprise several self-reenforcing elements: a premeditated and willful intention ofthe borrower to default on financial obligations; a permissive legal framework; lackof political will to enforce loan recovery; and absence of social stigma against loandefaulters. The default culture had been fostered by previous practices, such asdirected lending to "priority sectors"; by lack of legal enforcement for loan recoverywhich immunized borrowers from loss of personal assets or expropriation; byfrequent practice of the Government to announce loan forgiveness or waiverpackages which eroded credit discipline; lending indiscriminately; and to formulalending with fixed debt-equity ratios which greatly reduced business risks toborrowers.

3.27 Actions on recovery. To facilitate recovery of loans, the credit instituted an

action program so that the DFIs collection ratio would rise from 9 percent in FY86to 13 percent in FY87 to 18 percent (or 50 of the new amounts coming due) inFY88, while that of the NCBs would correspondingly rise from 19 percent throughto 33 percent and finally to 46 percent. The Credit also supported acomplementary program that would increase operational autonomy of the DFIs andstrengthen them institutionally.

3.28 The agreement required that before second tranche release, both DFIs andNCBs should meet the specific collection targets. All public enterprise arrears toBSRS were to be settled (this comprised 18 percent of all arrears) by end of FY88.To improve the operations of the two DFIs, the Government would cause them toincrease provisions for bad debts in their FY87 financial statements, rescheduleindividual loans as appropriate, and selectively write off nonperforming loans;recapitalize them to enable them to maintain a debt/equity ratio at no more than 3to 1; and to provide them with additional technical assistance to strengthen their

operations.

3.29 The DFIs increased provisions for nonperforming loans in their FY87financial statements and undertook debt reschedulings and writeoffs in appropriatecases. The Government also recapitalized the DFIs to the agreed ratio. But it didnot meet the targets for collection and settlement of arrears.

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3.30 With respect to loan recovery, the two DFIs collected 91 percent of thetarget recovery, while the NCBs recovered only 47 percent. Even though both DFIsand NCBs increased their collection rates significantly over the recovery rate for theprevious year, this collection performance was clearly considered a violation of theloan covenant, especially in the case of NCBs. All actions related to the release ofthe second tranche were met, except for this component. The Asia Region,' inrequesting release of the tranche, argued that NCBs' small industry portfoliosconstituted only a small percent of their loan portfolios (one-half of one percent)and that the targets were set without a clear understanding on their part of whatcollection levels would remain feasible. The Region added two additional reasons:the problems brought about by the worst flood in 40 years and politicaldisturbances during the period. With respect to the settlement of PE arrears withBSRS, the Government was able to eliminate only one-half of the targeted amountof arrears, so that, again, the condition was not fulfilled. The Government hadindicated that the responsible ministries and concerned PEs had the intention ofsettling the remaining arrears in the succeeding fiscal year.,

3.31 In approving the release of this tranche without requiring a waiver of thecondition, Management 7 took note of the fact that the NCB condition wasperipheral to the credit and the noncompliance did not significantly reduce itsusefulness. In addition, however, three points were stressed: (a) the record ofcollections was very bad; (b) the real commitment to improve collections appearedabsent; and (c) the authorities should have provided IDA with a plan for intensifyingcollections by NCBs as they had for DFIs.

3.32 This issue continues to be difficult, as shown by recent statistics on loanrecoveries (see Table 8, Annex). The Government failed to restore creditdiscipline; after second tranche release had been made, both DFI and NCB loanrecovery rates dropped back to their old levels. IDA supported these efforts furtherunder the Financial Sector Adjustment Credit (FSAC). Under that credit, loan courtswere set up to help in settling disputes on collection. This led to some loanrecovery. A large number of borrowers have reportedly settled out of court toavoid going through legal actions. A major problem posed by loan appeals is thatthey tend to delay the process of collection by several years.

3.33 The institutional results related to financial recovery and improvement ofthe performance of the DFIs was disappointing. The DFIs continued to lose money,and the temporary improvement in their capital base was soon eroded again. Thesame problems reemerged.

5 Memorandum, Asia Vice President to Senior Vice President for Operations, on therelease of the second tranche, June 22, 1988.

* The arrears were not settled in FY89.

7 Memorandum, EAS Director to Senior Vice President, on second tranche release, June23, 1988.

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Public Enterprise Reforms

3.34 The public enterprise sector has a large presence in the Bangladesh

economy. The public enterprise sector accounts for about 6 percent of GDP, taking

up about one-third of overall fixed capital formation in the country. It employsaround 0.4 million workers in a country with a active labor force of 50 million.

Only the central Government employs more workers (around 1 million). The public

enterprise sector at present is composed of about 225 enterprises, grouped under

38 holding corporations. These enterprises are relatively important in the industrial

(mining & manufacturing) and services sectors, accounting for 14 percent of

industrial sector value added and 8 percent of value added in services. In the field

of manufacturing, the public enterprises are important especially in textiles, jute and

sugar, which supply the main export earnings of Bangladesh. In services, they are

important in transportation (railways), in banking, and in trade.

3.35 A key feature of public enterprises in Bangladesh is their operational

inefficiency. The causes of these inefficiencies are many (see Table 9, Annex A,

for examples of specific causes in major enterprises). When set against yearly

development aid inflows, the losses of public enterprises are equivalent to about 30

percent of annual aid disbursements. Reducing these losses would therefore make

available more resources for public investment, aside from providing more room for

maneuver in improving the fiscal position.

3.36 Under the New Industrial Policy (NIP), and the Revised Industrial Policy

(RIP) announced in July 1986, the Government was committed to (a) reduce the

role of the public sector through the privatization ("denationalization") of previously

Bangladeshi-owned jute and textile mills and disinvestment of abandoned units; (b)

restructure the capital and physically restructure retained PEs; (c) give PEs

autonomy in setting prices; (d) sell 49 percent of the shares of PEs to the general

public; and (e) give enterprise boards more autonomy in PE operations. A more

detailed review of privatization in Bangladesh is presented in Annex B.

3.37 PE actions under ISC-1. The measures dealing with public enterprises

under ISC-1 focused on the restructuring and performance improvement of existing

public manufacturing enterprises. There are about 160 public sector industrial

enterprises which are grouped under six main industrial holding companies

controlled administratively by three different ministries. Each industrial PE is

controlled by a public corporation, which in turn is supervised by its ministry. The

functional ministries (Finance, Planning, Labor, etc.) exercise control by orders and

directives through the administrative ministries. In this way, the Government keeps

decision-making powers.

3.38 Under the Credit, an Autonomous Bodies Wing (ABW) that had been

established earlier was to be strengthened at the Ministry of Finance. This body

was designed to oversee the development of an improved contract performance

system for selected public enterprises and to introduce with it a program of

monitoring and evaluating public enterprise performance. The new system was to

- 15-

collect information generated by the system in order to provide quick information onplanning, performance, budgeting and financial control measures. Target-settingand performance evaluation was to be instituted. The system was designed toidentify areas for improvement, assign weights of different priorities, set targetsand monitor respective achievements of these targets, and evaluate aggregateenterprise performance.

3.39 The system did not become fully operational. Initial efforts involvedtechnical assistance and were adequately monitored on an experimental basis. Butthe system was too complex for implementation on a wider scale. There weredelays in the recruitment of suitable staff, and the program relied on the UNDP staffto undertake most of the work. Project personnel were put on contract, and theproposal to recruit additional professionals did not get approved by theGovernment.

3.40 Performance contracts, suggested by the program, did not result inimproved performance of public enterprises. Gains from these efforts were onlytemporary. Problems affecting the public enterprise sector-redundant labor, weakfinancial controls, poor collection rates, pilferage, neglect of maintenance andoperations and high rate of system losses continued to affect overall performanceand continue to account for low efficiency of services. The measures designed toimprove performance of enterprises, through performance evaluation involvingincentive payments, were viewed as additional paperwork rather than as measuresnecessary for assuring improved performance. Lack of autonomy of managementof public enterprises was a major consequence of highly centralized controls ondecision-making at the enterprise level, hence weakening accountability ofmanagement at the plant level.

IV. RESULTS, SUSTAINABILITY AND LESSONS OF EXPERIENCE

4.1 The overall outcome of this operation is rated unsatisfactory. Thisjudgment confirms the findings of the Project Completion Report, which provided afrank analysis of the implementation issues. Covenants with respect to thereduction of tariffs and quantitative restrictions were not followed strictly, resultingin slowdown of the program, and there were shortfalls in recovery targets offinancial institutions and in collection of public enterprise arrears. Yet, supervisionratings in 1988 and 1989 indicated that there were no outstanding problems interms of performance regarding development objectives and legal covenants.

4.2 After relying on program import credits for years, the Industrial SectorCredit was conceived as the first of a set of adjustment operations to restructurethe economy of Bangladesh. The focus was on reforms in trade and industry, but italso covered reforms in the financial sector and the public enterprise sector. Theoperation was conceived without any direct macroeconomic conditionality, but itwas undertaken in the context of a rolling three-year Policy Framework Paper,

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which involved the IMF, the Bank and the country. Under the IMF Stand-By

Arrangement effective until June 1987, the Government was to maintain a

competitive real exchange rate.

4.3 As already indicated, during the credit period, the authorities allowed the

real effective exchange rate to appreciate, hence causing exports to be relatively

less competitive. Subsequent measures after the closing of the Credit, however,

led to a devaluation of the taka in 1990, to be followed by another devaluation in

1991.

4.4 The Government adopted measures that directly supported the

improvement of incentives for export, in the area of administration. Some of these

measures stalled for a while for administrative and budgetary reasons but, by and

large, with technical assistance support made available later, measures related to

the duty drawbacks have begun to work. Measures to improve investment

promotion were also undertaken by removing investment regulation, thus making it

easier to invest.

4.5 On liberalization of tariffs and the removal of quantitative restrictions,

modest as the goals were, progress has been slower than planned. A small

reduction of average rate of tariffs, with narrower spreads about the average rate,

was accomplished beyond the lifetime of ISC-1. This change has affected tariffs in

agriculture and industry, and to some extent mining (see Fig. 4). Bangladesh

needs to continue this movement towards lower rates of tariffs to levels that

approximate other export-oriented economies of Asia.

4.6 Removing QRs has proved much tougher to implement than reducing

tariffs. Therefore, the reduction of QRs is even less satisfactory than the progress

in tariff rate reductions. So long as QRs remain, the tariff system is ineffective

with respect to those products protected by the QRs, and the tariff system cannot

become a transparent tool of policy. By FY93, around 10 percent of the items in

total tariff categories were still subject to QRs.

4.7 In terms of PE reforms, the achievements were modest. Emphasis on

improvement of.performance contract and management information systems is

critical for those PEs remaining in the Government sector. But ISC-I was not fully

suited to deal with the complex issues of the PE sector and related issues, such as

its downsizing and privatization.

4.8 On financial sector issues, the emphasis was to improve the recovery rates

of DFIs and NCBs. Even though recovery rates improved prior to tranche release,

collections suffered again from the same problems afterwards. This is worrisome

and highlights the weak efforts undertaken to resolve the issue. Collection targets

were not fully met, and in the case of NCBs, the result was below 50 percent of

the original target.

4.9 The major reforms under ISC-I were on trade and tariff reforms and the

promotion of exports. The operation achieved some objectives, but encountered

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major difficulties which often translated in terms of delays on the required actions.Taking note also of the problems associated with industrial loan recovery programsof DFIs and NCBs, on balance the operation was unsatisfactory. Even though itadvanced economic policies in a number of fronts, the accomplishments related tothe core objectives were spotty.

Sustainability

4.10 The sustainability of the reforms is uncertain. It can be said, however, thatthe operation initiated a positive reform process. Some of these reforms showed adeepened level of effort after the credit closed, implying that the programcontinues. Reform deepening occurred in response to new lending instruments tosupport the reform process. Sustainability of the program would depend onfirmness of Government in pursuing the program objectives beyond the period ofassistance. Evidence of slowdown of the reform process after the tranche releaseperiod indicates the danger of reversibility. For instance, there were tariff increasesundertaken in the FY91 and FY92 budgets, which were not consistent with thetariff reform objectives. These were corrected subsequently. Moreover, under thefollow-up ISAC-2, almost all QRs are now removed and the tariff structure is nowfar lower and more compressed than was envisioned under the first ISC. Protectionfor textiles and steel still remains high, however.

4.11 In the areas requiring institution building, such as export administrationprocedures, PE monitoring and management information systems, andstrengthening of DFIs, sustainability remains a problem. Many of the institutionbuilding efforts depends on the fragile impact of technical assistance programs(which include sizable inputs from other bilateral and multilateral donors). Initially,the projects funded by technical assistance are well-funded compared to normalbudgetary activities and they have technical expertise support. The problem is howthe institutions survive beyond the technical assistance phase when their functionsare integrated into the Government machinery. Thus, institutional developmentimpact is rated as partial.

18

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4.12 The reforms supported by ISC-I and the subsequent adjustment operationswere partly conceived under a large IDA technical assistance project, known as theTrade and Industry Policy (TIP) studies covering the years 1983-1986.' Thisprogram produced a large number of studies in which covered many aspects oftrade and industry in Bangladesh. TIP studies included recommendations designedto remove QRs and replace them with tariffs, tax reform, investment reforms, andexchange rate issues. This technical assistance, however, failed to produce astronger analytic capability within the Government on issues of trade and industrypolicies, partly as a result of inadequate interaction between technical experts andthe local counterpart. The TIP program failed to institutionalize the analytic andmonitoring capability within the Government. Subsequent programs involvingtechnical assistance components, funded from grants from other sources,attempted to link components of the technical assistance with implementation ofthe adjustment operation.

Lessons from Expedence

4.13 Borrower commitment to the reform wocess. The Government initiated theindustrial adjustment program, with modest goals and without a strongcommitment. Some of the slowness in implementation was due to inadequateadministrative capacity, but low Government commitment accounted for some of italso. After the change in Government, in 1991, there was an improvedcommitment to the reform process, resulting in improved speed of somecomponents of trade reforms. When there is a low commitment to reforms, theimplementation of actions often falters after tranche release or closure of a creditunless there is a new credit.

4.14 Strateoic desion issues. With trade liberalization designed to be a multi-year slow process, sequencing OR removal ahead of tariffs would have been themore natural scheme. Moving first in OR reductions would have speeded the wholereform process even with the risk that the reform would have stalled because itbegan with more difficult reforms.

4.15 Another issue is related to targeting specific QRs. The QRs to be removedshould have been targeted to industry groups more directly. Because the ORreduction was undertaken by removing import categories from the negative list, itfocused more on numbers of categories to be removed than their potential impacton industrial reform. This result explains the failure of the OR reduction to have amajor impact on the textiles and steel/engineering sectors, which were significant inthe industrial reform program.

8 See World Bank Report 8154, Project Completion Report for the Fourth TechnicalAssistance Credit, Nov. 3, 1989.

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4.16 Finally, the monitoring base for the QR reduction program was changed inmidstream, when the Government shifted to the "harmonized system" ofclassification of imports. This complicated the monitoring of the reform process,because items in the original list had to be tracked against what was being used forofficial purposes. The cost to the Bank in terms of supervision resources was large,but the cost to the borrower, which had to implement the system, was even larger.Thus, one lesson from this experience is that it is very important to agree on acommon monitoring base at the start of the process.

4.17 Importance of preparatory studies. Reforms for structural adjustmentrequire careful study of the problems and the possible solutions. Prior to theadoption of the programs that led to ISC-1, studies on trade and industry wereundertaken covering a period of four years through a technical assistance project.These studies prepared the groundwork for policy dialogue with the Governmentprior to the adoption of the adjustment program. The recommendation of thestudies were important in bringing the Government closer to the problems thatneeded focus on, but it could have been undertaken with less cost, both in timeand dollar resources.

4.18 Another lesson learned from the TIP studies was that once the programended, the Government's capacity to continue the policy analysis part haddiminished. The expertise had not been transferred and internalized in Government.The fault lay in part with the training component of the project which did not givelocal counterparts sufficient time to interact and learn from the process.

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Annex A

PRIVATIZATION IN BANGLADESH'

Introduction

1. After independence in 1972, Bangladesh decided to follow a state-led developmentpolicy. All abandoned foreign properties were confiscated and large manufacturingenterprises owned by Bangladeshi nationals, including established private industry in jute,textile and sugar industries, were nationalized.'

2. This policy of nationalization of industry was gradually reversed. With changingleadership,' the government began to realize that denationalizing (i.e., privatization of)some public enterprises would contribute to an improvement of economic performance aswell as enlarge private sector participation in the economy. Thus, Bangladesh beganprivatizing some public enterprises, while still keeping a significant number of the publicenterprises within the government sector.

First Phase: 1973-1981

3. The first phase was characterized by divestment of relatively small enterprises,those mostly owned before independence by non-Bangladeshis. In part, this privatizationprogram was undertaken in order to correct problems arising from mismanagement ofmany enterprises. There was prevalence of rent-seeking activities and asset stripping ofthe enterprises by managers and employees. The government sold these small enterprisesthrough tender offers and negotiated sales.

4. A total of 255 public enterprises were privatized or divested. Of the 115enterprises small firms which were divested under the Directorate General of Industries, 30were from confiscated properties, and the remaining 110 enterprises were medium sized

1 This annex is a supplementary note on issues related to privatization. It is part of the auditreport on the Credit, undertaken in relation to the broader implications of public enterprise reforms.

2 With the mass exodus of Pakistani owners and managers during the war of independence,factories and commercial establishments as well as houses and motor vehicles were abandoned. Thegovernment took, under its first presidential order of 1972, possession of these industrial, commercialand other assets. In addition, nationalization of key large and medium industries was also undertaken,this time from formerly Bangladeshi owners, so that the means of formal production, trading, andfinance were taken over by government, under a socialist agenda.

3 The first leader of Bangladesh, Mujib was the master of the nationalization policy. PresidentZia (1975-1981) pushed for more private sector development by initiating the first phase privatization.Under President Ershad (1982-91), the more recent privatization programs were undertaken.

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enterprises that were controlled by various state corporations. However, theseenterprises were not significant in size compared to those enterprises left within the publicsector.'

Second Phase: 1982-1986

5. Under the New National Industrial Policy (NIP) adopted in 1982, the governmentplanned further to strengthen the participation of the private sector. This new policyincluded a mandate to sell PEs and targeted some enterprises in the jute and textileindustry. Other policy measures were related to the liberalization of investments and thebroadening of permitted activities for the private sector. In theory then much of theindustrial sector was opened to the private sector.

6. The target PEs for divestment included those enterprises abandoned by theirowners and those suffering losses. Under this program, many jute and textile millsoriginally owned by Bangladeshis were sold back to their original owners. The enterprisesthat came under privatization under this phase were large enterprises compared to thosethat were privatized during the first phase. The enterprises were sold at basically thesame prices that the government originally paid at the time of nationalization.

7. The number of enterprises that were privatized during this phase was not clear.But they included 27 mills and 33 jute mills which were resold to their original ownersduring a one year period. Inclusive of the privatizations undertaken during the first phase,650 enterprises had been transferred to private ownership by the end of 1986." Theprivatization program had led to a reduction of industrial fixed assets in the public sectorfrom 90 percent in 1972 to about 40 percent by 1986.

8. Not all jute and textile mills were privatized. A large number of them continued toremain under the public sector. The sale price to the former owners was close to thecompensation determined at the time of their nationalization, in 1972. A floor price wasset as the basis of negotiation, and the final sale price was the higher price tendered bythe bidders (in the case of more than one bidder among former owners). A down paymentof 25 percent was required for mills located in developed areas and 20 percent for less

4 A succinct summary of early privatization experience in Bangladesh, written by a governmentofficial in charge of the program, is found a Shamsul Haque Chishty, "Privatization in DevelopingCountries: The Experience of Bangladesh," in Asian Development Bank, Conference on PrivatizationPolicies, Methods and Procedures, 31 January to 1 February, 1985, Manila. For a broader perspectiveof the early privatization efforts in Bangladesh, see Clare E. Humphrey, Privatization in Bangladesh:Economic Transition in a Poor Country, University Press Ltd., Dhaka, Bangladesh, Asian edition, withupdate, 1992. This book has an interesting treatment of the early record of privatization, and containsa lively discussion of current privatization issues in the country. It has a comprehensive bibliography,and contains a listing of divested industrial enterprises from 1977, the divestiture price, and acomprehensive listing of enterprises still in government hands.

5 The number of enterprises that were reprivatized is a subject of uncertainty. For instance, C.Humphrey, o , presents different numbers of enterprises covered by this wave of privatization.

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developed areas, the balance to be paid in three annual installments for enterprises locatedin developed regions and four installments for those in less developed areas.

9. There were conditions stipulated in the sale of PEs, which made it difficult for newowners to undertake changes in their business operations. It was not possible to get rid ofemployees until after one year of the date of purchase. Also, the liabilities incurred by theenterprises under public ownership were transferred to the buyers. All of these wouldcreate problems for the viable operations of enterprises.

10. The privatization program during this stage, which began auspiciously with the saleof many public enterprises, slowed down soon afterwards. The main reason was that thegovernment yielded to labor and political opposition to privatization and decided to use adifferent approach, which was to offer for sale up to a minority position shares of PEs tothe general public, which commenced the third phase.

Third Phase, 1986-to Present

11. The new approach was designed to open ownership of larger PEs, some of themwith good commercial possibilities. The idea was to encourage participation of smallinvestors through purchase of stocks. Enterprises were identified for privatization of aportion of public ownership to the general public.' The government identified publicmanufacturing enterprises under the Ministry of Industries which would be sold toinvestors, up to 34% of the shares to the general public and 15% to the employees of theenterprises concerned.

12. Of the 40 enterprises which were identified for privatization, six enterprise unitshad their shares acquired by a government owned insurance company, and only four otherunits had been sold. The textile and other industry privatization program which wasagreed with the Asian Development Bank under their industrial sector program loan, wasalso behind schedule. The reasons for this slow pace are discussed elsewhere, below(paras. 35-39).

13. Public policy pronouncements on privatization and the need for private sectorencouragement have not been wanting in Bangladesh. In 1991, the list reserved for thepublic sector was further limited only to airways, railways, production and distribution ofelectricity and telecommunications. More recently, this list was further reduced, byallowing private investment in power and telecommunications sector and "to reconsiderthe need for reserving to the public sector such activities are air transport, railways, andexport-oriented defense industries." These policy pronouncements included a commitmentto sell 100 percent of shares of public enterprises, "wherever appropriate", and theliberalization of investment in shares to include foreigners. Foreigners could invest in

a The partial divestment scheme was introduced under a Denationalization Amendment Ordinanceof June, 1987. Subsequent yearly industrial policy announcements had broadened the scope andcoverage of the privatization program, mainly in line with a program agreed to in loan covenants withthe Asian Development Bank, but the progress has been slow.

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shares through the stock exchange and 100 percent foreign ownership of enterprisesallowed.

14. Support of privatization has received a major attention from other aid donors. Atpresent, the privatization program is focused on the sale of jute and textile mills. Bysupporting the adjustment program in trade and industry, IDA helping to strengthen thecomplementary policy measures that would make privatization and private sectordevelopment attractive. Other donors are active in direct privatization support. Inparticular, the Asian Development Bank (ADB) has been providing a technical assistanceprogram for the privatization of the textile sector.

15. IDA recently (1994) approved a loan to help in the adjustment of the jute industry.This program has given a fresh push to the privatization program which has languished. Itis designed to help strengthen the state machinery for privatization. Key components ofthe measures include financing for severance and termination pay, as an inducement tomake privatization more acceptable in the affected enterprises. Moreover, the governmenthas committed to undertake PE liquidations as an alternative to enterprises that cannot beprivatized for lack of buyers within a given period.

16. The rest of this Annex summarizes findings about the performance of enterprises,the reasons behind the modest achievements of privatization despite the amount ofenterprises reverted to the private sector, and lessons that can be learned from theexperience in Bangladesh.

Performance of Privatized Enterprises

17. A number of studies have been made on the performance of privatized enterprisesin Bangladesh. It is therefore possible to determine what happened to the enterprises aftera shift of ownership. It would be useful to find out if changes have been observed on theunderlying mechanisms that propel enterprise performance. Did the privatized enterprisesdemonstrate improved performance after a change in ownership and management?

18. In general, the findings of these studies indicate that a change from public toprivate ownership did not assure improved performance for an enterprise. There are othercritical factors-management, business environment, overall policy-which induceimproved enterprise performance. The evidence suggests that a change in ownershipmight beneficially influence the behavior of enterprises towards improved efficiency andcost-awareness.

19. A study undertaken at the Bangladeshi Institute of Development Studies7 took asample of 45 enterprises and examined the impact on performance two years after theirprivatization. Information on production, sales, and financial performance were gathered.

7 Sobhan, Rehman & Ahmad Ahsan, Disinvestment and Denationalization: Profile andPerformance. Bangladeshi Institute of Development Studies, Research Report No. 38, July 1984,Dhaka.

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In terms of production, 19 enterprises experienced increased output, 11 a decline, and 5closed down. Some enterprises reduced product lines in order to concentrate on narrowerlines of production. In terms of sales, 29 enterprises improved sales and 9 experiencedsales decline. Of 24 enterprises with profit and loss statements, 8 enterprises improvedtheir financial position. Of these, 4 enterprises turned losses into profits, 2 increased their

profits, and 2 reduced their losses. There were also enterprises which turned for theworse: 4 enterprises turned profits into losses, 7 increased the magnitude of their losses,and 5 went out of business altogether. This study concluded that change in ownership did

not guarantee that performance of the enterprises would also improve.

20. The Canadian International Development Agency (CIDA),e undertook a study of a

sample of privatized companies. Information covering 28 divested enterprises wereanalyzed, supplemented by additional financial data from the Dhaka Stock Exchange. The

sample represented a diverse group of enterprises: 8 jute mills, 4 textile mills, 7enterprises in tanning, leather, and rubber production, 4 in engineering, among others.Performance in terms of sales, profitability, tax payments and employment showed that in

general, the post divestiture performance failed to support any evidence that theireconomic performance improved in general after divestiture. The enterprises increasedtheir sales in real terms, but this was not significant enough to draw a positive conclusionthat improved sales performance was caused by privatization. Other factors, however,were responsible for improved sales performance, since enterprises that remained withinthe public sector also made similar gains. After privatization, the pattern of sales switcheddramatically for the privatized enterprises. They were forced to seek private markets sincethey immediately lost their sales from public sector procurements in view of publicprocurement policy preference for public enterprises.

21. In terms of profitability, divested enterprises continued to suffer losses as in the

past, except in a few sectors, such as cotton, tannery and rubber products. There was a

slight decrease (around 4 percent of employed labor) in total employment among divestedenterprises. A separate survey of employment by CIDA was also undertaken. The surveyshowed a minimal decline in employment (below 4 percent of employment level in 1986).The fall in employment in officer and staff level was relatively high (it exceeded 10 percent

for each category). There was only a decline of 1.4 percent in the employment of factoryworkers. These survey results were commensurate with the situation faced by thedivested enterprises in the study.

22. Divested enterprises reported a litany of major problems in this survey. Amongthem were lack of working capital; poor management practices; inadequate and misleadingaccounting systems (some of which were inherited from the public enterprises); bloatedpayrolls and absenteeism; smuggled imports (especially in the case of textiles); old andpoorly maintained machinery; preferential government procurement of supplies from publicenterprises; poor divestiture procedures which led to unrealistic negotiated sales andinadequate screening of buyers of the enterprises.

8 H.H. Mansurul Ameen, A Study of Divestment of Industries in Bangladesh, CanadianInternational Development Agency, Dhaka, March 1987.

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23. Enterprises that had been privatized since independence were included in a surveyby the Ministry of Industry to determine the extent of their current activities.' Out of the488 enterprises sampled, only 214 were found to be still in operation; 133 enterprises hadclosed down; and there was no trace of the remaining 141 enterprises. The closures ofenterprises meant that under private ownership, privatized enterprises got liquidated muchsooner, hence causing an improved use of remaining enterprise assets. For instance, landand factory building assets could be reallocated for other productive uses. Indeed, asurvey undertaken for the World Bank on what happened to divested enterprises in onelimited region (Tejgaon) indicated that 18 units had been conducting alternative operationsthan they were expected to undertake under privatization. These could be seen as aresponse to other economic opportunities by those who succeeded into the ownership ofthe enterprises.

24. In the case of financial institutions, three commercial banks-Uttara, Pubali, andRupali banks-were privatized. After privatization, these banks have not had shown anyimprovement in their services and in their profitability. The changes that were consideredessential for improving efficiency were not adopted by the privatized banks. On the otherhand, the case of a bank in which the government had a minority shareholding-IFIC-hadbeen continually performing better than the privatized banks, showing evidence thatmanagement plays an important role in institutional performance.

25. A World Bank supported study dealt more specifically with the comparison of thedivested textile enterprises with those that remained in the public sector.'o This studycompared enterprises covered by the privatization of 1982-83 of the Bangladeshi textileindustry within the spinning operation with a sample of those remaining in the PE sector.The enterprises studied were both privatized and publicly owned mills, each ownershipgroup involving at least 20 enterprises. The enterprises were comparable in plant size,location, products, technology, and management at the time of privatization, except thatthe privatized mills included fewer very old and very new mills. At the time of study, fouryears had elapsed since privatization, so that performance could be assessed. The studysought to compare performance after privatization along dimensions of static and dynamicefficiency, among others by conducting cross-sectional comparisons of public andprivatized enterprises during the post-privatization years (1983-1986).

26. Static efficiency was assessed in four areas of operations: procurement,production, sales and support functions. Cost advantages of private mills relative to publicmills was estimated in financial terms, expressed as a percentage of yarn cost. Financialmeasures reflected the prices actually paid or received by firms for inputs and outputs.These costs were then converted to economic costs utilizing conversion factors for

* Binayak Sen, "Experience with Earlier Privatization Program: An Assessment of the EconomicPerformance of Divested Units," prepared for the World Bank.

'0 Klaus Lorch, "Privatization Through Private Sale: The Bangladeshi Textile Industry," in RaviRamamurti & R. Vernon, eds., Privatization and Control of State-Owned Enterrises, EconomicDevelopment Institute, World Bank, 1991, pp. 126-153. This study was prepared at the HarvardInstitute of Development Studies for the World Bank.

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salaries, skilled and unskilled wages, electricity, gas, cotton, interest charges and foreignexchange. In terms of dynamic efficiency, the study explored three possible sources:investment in new capacity and in training, and adoption of technological improvements.

27. In terms of static efficiency, the privatized textile mills were found to outperformthe publicly owned mills in all aspects," except in the procurement function, in which thepublic mills enjoyed economies of centralized procurement. The differences in procurementcosts were modest. The main strength of the private mills over the public mills was thattheir owner-managers were more concerned with maximizing profits and avoided, throughfamily-based management, formal control mechanisms that were present in publicly ownedmills. Therefore, they had much greater flexibility. For instance, with respect to the salesfunction, privatized mills changed their prices frequently, often daily, whereas prices ofpublicly owned mills controlled by under the public holding company, Bangladesh TextileMills Corporation (BTMC), were overly rigid and failed to reflect quality differences acrossdifferent batches of yarn or changes in market conditions. The typical publicly owned millchanged prices only once every six months.

28. In terms of production, privatized mills also had greater flexibility in containingwage costs. In both types of mills, the workforce was excessive, and the one year banagainst dismissals plus strong union pressures made it difficult to lay off workers. Butprivate mills were able to make adjustments better than public mills. Since most of theenterprises had no capacity improvements, the only way to move labor was within theenterprises and among functions. While it was possible to retrench managers throughretirement incentives, factory workers could be reclassified. In all, executives employmentfell by 5 percent, but permanent workers by 0.04 percent, and total employment by 0.05percent. The privatized mills reclassified workers on the basis of tasks, by using less-skilled workers to do what more-skilled workers did in the public enterprises. And eventhough incentive performance bonuses existed in both enterprises, the public mills utilizedthe incentive system much more than the privatized mills. However, the performanceincentive system in the public mills was often ineffective, because management had beenpressured by unions to pay them despite their under-performance.

29. Taking stock of overall operations," privatized enterprises in the cotton spinningindustry appeared to have produced an economic gain in static efficiency ranging from 6

" These findings are consistent with information on labor productivity within the jutemanufacturing sector, for which there is comparative information on employment and output of publicand private jute mills. In general, all private mills employed less labor and had relatively less outputcompared to the public mills. But their output per unit of labor input was, on the average, from 1983to 1990, 19 percent higher than those of public jute mills. It is not known from the data on privatelyowned jute mills whether they were previously public enterprise mills that were privatized earlier bythe government as in the case of textile mills discussed above. But it is likely that part of the sampleof these privately owned mills were privatized jute mills.

" The methodology applied by Lorch in this study was a mixture of interview methods andanalysis of enterprise financial statements and other sources. The sources of differences in variouscomponents of costs were detailed in Table 6.1 of the study, which is reproduced as part of thestatistical annex of this study.

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percent (in the range of 3% to 9%) of annual yarn costs. The financial gains from theviewpoint of the mill owners was larger-more than twice as much as the economic gain,ranging from 12 percent to 24 percent of yarn cost. There was therefore no doubt aboutthe financial benefits of private owners of mills after privatization. However, part of thefinancial benefits were tied up with the default on huge liabilities to the government and topublicly owned banks. The financial advantage from nonpayment of these debts' 3 rangedfrom 3.5 percent to 6 percent. It is, however, important to note that these differences incosts do not necessarily translate in terms of profitability of the operations. This type ofinformation has not been tracked down in these studies, but the results of other studies onprofitability performance indicates that even privatized enterprises had varying financialperformances with respect to profitability of their operations.

30. In terms of improving efficiency over time, the performance of privatized mills wasnot any better than those of the public mills. Five years after privatization, only two millshad expanded plant capacity significantly, and only half a dozen others had replaced oradded a small number of spindles. As a result, use of improved technology or process didnot take place. In this respect, the privatized mills did not promote dynamic efficiency anymore than the public textile mills. The private mills had a poor record in improving thequality of managers and workers through training. They did not send trainees to aninstitute set up with international assistance, as much as the public mills did. There werecases in which privatization worsened the quality of management. Some mills reverted tofamilies with no record in running textile mills before, and in others, inexperienced heirstook over from the former owners. The privatized mills tended to employ family membersto critical posts, and this did not encourage the development of managerial talent. In fact,the wide fear that privatization would cause a transfer of good managers to private millsdid not take place as a result.

31. Several factors were responsible for this poor record in dynamic efficiencyimprovement. First, lack of resolution of the liabilities of the mills when privatization tookplace created barriers to performance. In the hurry to undertake the sale of the enterprisesback to the owners, the matter of debt was not resolved. Instead of facing the difficulttask of undergoing financial restructuring for the enterprises, the contentious issues ofenterprise liabilities which was not fully settled at the time of privatization.

32. Second, because the owners of privatized mills tended to be overly consumed bycommercial matters in the short run, which enabled them to improve (static) efficiencywithin the firm, they paid little attention to the larger issues of capacity improvement andgrowth.

13 This issue is tied up with the endemic occurrence of nonpayment of commercial obligations ofcompanies in Bangladesh and is discussed elsewhere in this audit paper. However, one of thecontentious points about this problem was that the debts were incurred during the time of stateownership of these mills and that inefficiencies and irregularities were involved in incurring them. Inany case, this was one issue that was not settled prior to privatization, and the owners of theprivatized mills had claimed that some form of debt relief was promised at the time of privatization.

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33. Third, the weak adjustment in this regard was partly due to the state ofdevelopment of the private sector in the country. Traditional reliance on family rather thanprofessionalism has been a feature of businesses controlled by Bangladeshi enterprise.This is a problem shared in many low income countries in which the private sector is stillnot fully developed.

34. Last but not least, post privatization performance is affected by the overall businessenvironment. Despite the improvements in several spheres of economic policy, theenterprises were operating under a still highly protectionist and regulated industrial regime.Included in this regulation was uncertainty with respect to the future of the enterprise, asa result of the threat of government intervention. The "right to intervene" in theprivatization agreement was a source of concern. The concern that policies would not besustained in view of uncertain fears of political instability contributed to lack of dynamismwithin the industry.

Factors Affecting the Pace of Current Privatization

35. The present slow pace of privatization during the 1980s (up to 1994) in Bangladeshis the result of a number of factors. The relatively easy stage of privatizing small units ofbusiness enterprises, undertaken during the early phases if privatization, is now a thing ofthe past. Many of the small enterprises in the private sector have already been privatized.The concentration now is on the privatization of larger enterprises within the country. Inthe past, the method utilized to privatize enterprises had been largely to sell them directlyto the buyers, under a procedure of tender offers or negotiated sales. This had achieved adegree of speed in transferring enterprises from the public to the private sector. Eventhough liquidation had not been used as a means of disposition of enterprises, manyprivatized enterprises had been found to have been either abandoned or transformed aftersome period had elapsed. This indicated that, eventually, privatizing through direct sale bythe government had ended up as liquidations by the private owners.

36. Yet, the government had been reluctant to liquidate inefficient enterprises becauseof the concern about unemployment. Liquidation would also leave no residual claimsagainst the enterprise after assets are divided, as in bankruptcy.

37. Another obstacle to privatization is the culture of bureaucratic controls ofenterprises and the highly regulatory stance of government. There is innate resistance toprivatization within the bureaucracy, even though the official policy is to embrace it. Onemajor cause of this resistance is overemployment in the public enterprises. If theobjectives of privatization-to reduce the cost of subsidies to enterprises in the budget andto make the enterprises more efficient-are to be achieved, then one consequence ofselling the enterprise to new owners would be job reductions. Safeguards that had beenintroduced in past privatization efforts to reduce the impact of privatization onunemployment of factory workers had led to the very conditions that made privatizationless successful in achieving more efficiency in operations of the privatized enterprises.These contending opposite forces have made the ownership of the privatization programrather weak.

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38. The administrative and institutional limitations within government provide additionalbottlenecks towards developing a smoother process of privatization. This is also true withrespect to implementing parallel reforms in the economic and business environment. Suchgaps in objectives and realities lead to ambitious targets. For instance, expectations thatthe domestic capital market would be able to provide a stream of buyers of shares ofpublic enterprises being privatized are somewhat unrealistic. Given the relatively lowprivate savings rate in Bangladesh (about 5 percent to 6 percent of GDP during the 1980s)and the rudimentary developments of the domestic capital market (e.g., the Dhaka StockExchange is still in its early stages of development), it would be difficult to expect that alarge amount of public enterprises would find buyers when offered for sale. The presenceof institutional buyers, such as a government employee pension fund, might provideresources for investing in privatized enterprises, as a preliminary stage for transferringshares in the future to a wider set of investors. Recent estimates of the potential networth of public enterprises (derived mainly from net book values) appear to be more thantwice the value of their contribution to GDP.'"

39. In view of the limitations of domestic savings and the magnitude of the publicenterprises being brought forward for privatization and the methods of privatization beingpreferred by government, it would take a great leap of confidence for foreign sources ofprivate savings to venture into financing the privatization program. For this to materialize,many improvements in the regulatory environment affecting private business in general,and foreign investments in particular, will have to take place, to strengthen credibility ofinvesting in Bangladesh.

Lessons Learned from Privatization Experience

40. The early experience of Bangladesh with privatization provides interesting lessons forthe future. In view of the unfinished privatization program in the country, these lessonscontinue to remain relevant both for the country and for other countries.

41. Chanqe of ownership is important, but it is not a sufficient condition for improvingeconomic performance. Change of ownership from public to private could change theincentive patterns for a company's performance. But a number of factors-such as businessenvironment, management, and economic policy-are important ingredients in creatingimproved economic performance. Even though some (static) internal efficiency gains wereobserved for privatized companies, these gains were not necessarily permanent. They wereconfined to improved flexibility of operations of privatized enterprises as compared with morerigid styles of operations that are employed under public ownership. They did not necessarilylead to increases in profitability for the enterprises in relation to the publicly ownedenterprises.

14 It was estimated that the net worth of public enterprises is equivalent to about 14 percent ofGDP, while the overall contributions to GDP of the enterprises is only 6 percent of GDP. Thus, undera realistic pricing of enterprises on the average, the upper bound of pricing assets would be close toone-half of their estimated net worth. See World Bank, Bangladesh: Privatization and Adjustment,Report No. 12318-BD, South Asia Country Department.

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42. Speed vs. preparation during privatization process. In the effort to speed up theprivatization decision, certain important decisions linked to valuation were postponed. Thesedecisions had the effect of reducing the immediate transaction costs of the privatizationprocess and thereby facilitated an artificially speedy process. The gain in speeding up theprocess resulted in unsettled issues which complicated future enterprise adjustment. Somefinancial restructuring of the enterprise put up for privatization would be essential if only todefine the enterprise liabilities transferred to new owners. Failure to fully address the statusof debts of the privatized PEs in Bangladesh contributed to intractability of the privatizationprocess. This lesson indicates that as much as possible, debt restructuring should beundertaken ahead of sale, in situations of relatively sizable enterprise sales. In the case ofsmaller enterprises, a speedy solution to enterprise debts, which should be taken into accountin the sale price, should be undertaken ahead of privatization.

43. Importance of business environment for enterprise performance, The poorperformance of firms, especially those in the traditional industries of Bangladesh, attests tothe importance of overall policy environment for enterprise. The persistence of the poor policyenvironment prolonged and cumulated problems over time. This further weakened theperformance of the companies. Policy issues which contributed to these problems werestructural in character, both at the macroeconomic and sector levels. An improvement ofthose policies which affect the business environment, in addition to those that help in privatesector development, would be needed to create opportunities for a betterment of enterpriseperformance.

44. Increased response to market forces within the privatized enterprise. Privatizedenterprises demonstrated a more flexible response to economic changes than publicenterprises, which were hampered by centralized controls. The privatized enterprises showedmore sensitivity to market changes, be they in the form of input price changes, in outputdemand, or in terms of deployment of labor (despite restrictions placed in the latter).Allocative efficiency therefore improved within the firm. This improvement in firm efficiencyhas an impact in overall efficiency of the economy. However, even this greater sensitivity tochanges in market conditions do not necessarily affect the overall incentives for dynamicimprovements in efficiency, in the sense that privatization induces new investments andtechnological modernization. The evidence on this last point is absent for Bangladesh.

45. Level of develooment of the private sector limits enterprise performance. In spite ofthe above, there are major limitations to the performance of the private sector. The traditionalfamily-oriented enterprises had limited prospects for expansion. They would makeadjustments to improve cost positions within the enterprise in relation to marketdevelopments, but they may not encourage managerial growth, except from within the family.

TABLE 1. POLICY ACTION MATRIX AND IMPLEMENTATION PERFORMANCE

Actions Already Undertaken Actions to be Taken Prior to

Objectives Second Tranche Release Implementation Assessment

A. ExLort Policy Administration Indication in FY87 Import and Conversion of Duty Overall assessment. Various

Export Policy Orders that 'negative Exemption/Drawback Cell into a forms of delays in implementation

Ensure free trade status for all list" does not apply to imports for permanent office and initiation of had been encountered,

indirect as well as direct exporters, export production (para 46) its activities (para 47) specifically with respect to

improve financing and guarantees second tranche release. Most of

available to all exporters, maintain Promulgation of revised orders for Initiation of implementation of the actions related to first tranche

appropriate exchange rate and Export Processing Zone Authority to proposals made by task force on release or other upfront actions

strengthen institutions which enhance its autonomy and incentives for indirect exporters were taken. Hence, credit

support exports streamline procedures for securing (para 51) effectiveness took place only one

approvals and utility connections month after signing.

required for new industries in the Initiation of implementation of

zone (Para 48) proposals by export financing task DEDO was established with

force (para 50) inadequate authority and limited

Creation of Duty budget and specialized staff;

exemption/Drawback Cell as first needs had to be assisted in later

step in creation of permanent office credits, by providing it with

to design and implement improved technical assistance.

duty exemption and drawbacksystems; assignment of core staff to Institution of back to back L/C

cell (para 47) system was subject toadministrative barriers which

Preparation by an inter-agency task negated efforts; recent efforts

force of proposal to provide are beginning to bear fruit, but

incentives to indirect exporters by after much delay.

applying inland back to back L/Csystem to all direct and indirect Delays and technical

exports (para 51) difficulties prevented progress inimproving export finance and

Formation of task force within credit guarantee actions; TA

Bangladesh Bank and to preparation provided by IDA in later

of proposals to improve export operations. (institutionalizing of

financing to modernizeadministrative arrangements forpreshipment financing, create aforeign exchange revolving fund tofinance exporters' imports &establish an automatic rediscountingmechanism for export loans (para50)

TABLE 1. POLICY ACTION MATRIX AND IMPLEMENTATION PERFORMANCEActions Already Undertaken Actions to be Taken Prior to

Objectives Second Tranche Release Implementation Assessment

B. Tariff and Import Regime Revision of internal quota allocation Satisfactory operation of the Export Significant delays encounteredpolicy for 1987-88 (para 52) Monitoring Unit for garment exports before the export quota

Liberalising the trade regime by including assignment of staff, monitoring unit could function.rationalizing tariff structures, Establishment of Export Monitoring development specifications forreducing effective rates if Unit in Export promotion bureau periodic publication of information These proposals wereprotection in key sectors and (para 52) and distribution to concerned delayed. (See above)reducing quantitative restrictions exporters (Para 52)

Strengthening of Export Guarantee The real effective exchange ratescheme by converting it into a appreciated with respect to majordepartment and increasing its capital Preparation of plan to further competitors, especially with India.and staff (para 44) strengthen Export Guarantee (See discussion in text).

Scheme which would include asMaintenance of flexible exchange necessary, proposals for therate policy to avoid appreciation of scheme, and initiation of this plan.official real effective exchange rate (para 50)(Para 44)

Maintenance of flexible exchangeChange from positive list of rate policy to avoid appreciation ofunrestricted imports to negative list official real exchange rate (para 44)of prohibited products (para 62)

Significant shift from official foreignexchange market to secondarymarket so that in FY86 53% ofexport and 28% of importtransactions were made throughsecondary market, compared to27% of exports and 20% of importsduring FY85 (para 61)

Reduction of tariff rates to 11 andreclassification of items within newrates (Para 56)

Agreement to introduce a revisedtariff schedule in FY88 and FY89 byreducing the number of tariff ratesto 8 and

TABLE 1. POLICY ACTION MATRIX AND IMPLEMENTATION PERFORMANCE

Actions Already Undertaken Actions to be Taken Prior toObjectives Second Tranche Release Implementation Assessment

Liberalization of imports through Implementation of reductions in At negotiations, agreement offurther reductions in number of negative and restricted lists agreed shift of QRs from positive toitems in negative and restricted at negotiations by incorporating negative list undertaken. Thislists, lifting restrictions on 140 items them in the FY88 Import Policy major shift, however, was slowed(such as trucks, diesel engines and Order (para. 62) down in that the reduction of thebuses), reducing by 537 number of negative list of restrictions werespare parts items for jute and textile delayed. Upfront actions wereindustries included in restricted list taken, but delays in secondand eliminating part of restricted list tranche release werepertaining to commercial importers encountered. Phasing of negative(para. 62) import list lengthened from 5 to 7

years. ORs removed did not fullyAgreement to reduce the negative take into account itemslist by 20% each year giving priority considered important for textilesto textile and steel and engineering and steel/ eng'g subsectors.products and remove restrictions on Some reclassifications of items incommercial importers of industrial list under a new 'Harmonizedraw materials in equal installments System caused confusion andover three years (para. 62) problems in implementation.

(See text).

Commitment to lower tariffs in Reduction of tariffs on luxury goods Few changes undertakenphases during FY88-89 on luxury above 150% to a maximum of on time. Waiver on secondgoods with tariffs of 150% or more 150% (para. 57) tranche release of ceilings onto a maximum of 100% by FY89 understanding that these would(para. 57). be undertaken by the budget year

FY89. Basically delayed, andissues carried on to ISAC-11. ByFY93, 4 items still exist. (See

text).Tariff changes in FY86 and FY87budgets in textile and engineering(para. 57)

Agreement on a phased program Restructuring of tariffs on imports These two sectors are critical,during FY88-FY90 to restructure for textiles and steel/engineering since they account for high valuetariffs and reduce quantitative subsectors; such that the maximum added in manufacturing (aboutrestrictions in textiles and total protective tariff for final goods 40% and more hfan 50% of allsteel/engineering subsectors to 0- in these sectors are reduced to imports). Reduction of tariffs85% for both subsectors (para. 57) 125% and corresponding undertaken in right direction

reductions will be made in tariffs (reduction), but progress slow andfor raw materials and intermediate spotty. Even by FY93, the rangeproducts (para. 57) of the nominal tariff for most

items remained around 75%.

TABLE 1. POLICY ACTION MATRIX AND IMPLEMENTATION PERFORMANCEActions Already Undertaken Actions to be Taken Prior to

Objectives Second Tranche Release Implementation Assessment

Simplification of import procedures,elimination of import licenses andimplementation of pass books forindustrial imports (para. 37)Review of existing studies on importand customs procedures andagreement to develop a program toimplement these recommendationsby October 1987 (para. 63).

TABLE 1. POLICY ACTION MATRIX AND IMPLEMENTATION PERFORMANCE

Actions Already Undertaken Actions to be Taken Prior toObjectives Second Tranche Release Implementation Assessment

C. Investment Sanctioning Modification of investmentsanctioning system by replacing

Liberalize investment approval specific quantitative targetssystem by reducing government investment schedule with generalcontrol on new industrial guidelines and making it indicativeinvestment. (para. 68).

Except for industries reserved forpublic sector, designation of allindustries as free sectors notrequiring approval (para. 68).

Increase in the limits on financeinstitutions' term lending whichrequire government approval (para.68).

Increase from 20% to at least 50%in the minimum percentage ofimported inputs which requireprojects to be reviewed by theInvestment Board (para. 68).

-J

TABLE 1. POLICY ACTION MATRIX AND IMPLEMENTATION PERFORMANCEActions Already Undertaken Actions to be Taken Prior to

Objectives Second Tranche Release Implementation Assessment

OBJECTIVES Major public sector enterprisedenationalization program under

D. Public Sector Industrial which about 650 enterprises wereEnterprises transferred from public to private

sector (para. 73).Significantly reduce the scope andsize of public sector in Enactment of Public Enterprisemanufacturing by Management Ordinance limitingdenationalization, limiting the areas government intervention in publicin which public sector can operate sector enterprises' operations byand introducing a new performance giving their Boards greatertargeting and evaluation system to operational authority (para. 77).increase autonomy and efficiencyof remaining public enterprises. Issues of revised industrial policy

statement limiting the areas inwhich public sector can enter anddefining the future denationalizationpolicy (para. 71).

Award of management contracts toforeign firms to run large PSEs(para. 74).

Development of new system toincrease enterprise autonomy whileestablishing clearer accountabilityand performance criteria (para. 76).submission to IDA final proposal forstrengthening Finance Ministry'sAutonomous Bodies Wing &organizational arrangements fordeveloping & monitoringperformance targets for publicsector industrial enterprises (para.78).

Initiation during FY87 of pilotprogram involving one public sectorindustrial enterprises to introduce anew public enterprise performancetargeting, monitoring & evaluationsystem and agreement to include 3additional public sector enterprisesin pilot program during FY88 (para.80).

TABLE 1. POLICY ACTION MATRIX AND IMPLEMENTATION PERFORMANCEActions Already Undertaken Actions to be Taken Prior to

Objectives Second Tranche Release Implementation Assessment

E. Financial Sector DFI technical assistance program Overall assessment. This is theReforms (para. 85). weakest element of performance.

The problem of loan repaymentsIncrease recovery of industrial Agreement on TOR for additional Satisfactory implementation of DFI in Bangladesh for NCBs and the

loans & strengthen Development DFI technical assistance to technical assistance program two major DFIs is severe, andFinance Institutions (DFIs). strengthen appraisal, loan (para.99). affects the overall efficacy of the

supervision/collection & portfolio financial system. (Seerehabilitation capabilities & discussion).accounting 6 personnel systems(para. 99).

Agreement with donors on anAction Program to strengthen theDFIs & improve loan recoveries(para. 85).

Implementation of key elements ofAction Program, including closure ofconcessions under ExchangeFluctuation Absorption Scheme(EFAS)f measures against willfuldefaulters, take-over actions againstlarge defaulters, appointment oflawyers without prior Governmentapproval, & satisfactory proposedamendments to DFI Orders (paras.87-90).

Enactment of revised DFI charters(para. 96)

Submission to IDA of DFI and IDA Acceptable provisioning for badfinanced NCB loans' portfolio debts was not sustained for theanalyses, strategies to increase two DFIs. Later operation oncollections & reschedule & write-off financial sector adjustmentloans, & revised projections of assisted the situation, but duringfuture collections (paras. 92- the period, the financial situation93). of the banks deteriorated.

Cash collection targets set for July Collection of Tk. 1,370 million by Collection targets almost met1-Dec 311986 of Tk. 330 million DFIs and Tk. 136 million by NCBs for DFIs (91% of target), but notby DFIs and of Tk. 39 million by during Jan 1 -Dec 31, 1987 (paras. for NCBs (47%).three NCBs participating in IDA- 92-94)financed small industries projects(paras. 92-94).

TABLE 1. POLICY ACTION MATRIX AND IMPLEMENTATION PERFORMANCEActions Already Undertaken Actions to be Taken Prior to

Objectives Second Tranche Release Implementation Assessment

Agreement to eliminate public sector This condition was partiallyenterprises' arrears to Bangladesh met. The government indicatedShilpa Rin Sangstha, the DFI for arrears would be cleared in nextwhich this is a significant problem fiscal year (FY89); however thisby July 1988 (para. 91). did not happen.

Initiation of increased provisions for Satisfactory progress in Condition met. But oldbad & doubtful debts, implementing DFI programs for problems of DFI returned later.recapitalization to achieve & provisions for bad and doubtfulmaintain DFI debt/equity ratios at no debt, recapitalization and loanmore than 3:1, & selective reschedulings & write-offs (paras.rescheduling & writingoff of loans 97-98).

9paras. 97-98).

Source: President's Report (C181 6-BD) for first three columns.

0

Tablo 2GROSS DOMESTIC PRODIJCT AT CONSTANT (198485) PRICES.(Taka Mllion)

1982183 1983184 194855 19 198687 198788 1989190 1991192 1992/93

Agrcuure 160278 160264 169970 175549 176250 174901 190354 197662 201364Cps 127784 133921 135031 139599 139596 137119 150828 155101 156526Forestfy 10791 11801 10948 11413 11168 12038 12586 13147 13536Ilvastock 10006 10501 11785 12131 12801 12922 13805 14615 15522

Fisheries 11697 12035 12206 12406 12685 12822 13135 14799 15780

kidusry 56696 63049 64982 66709 72093 75902 84632 94558 101580MningandQuarryingla 3 4 4 3 4 2 66 94 95Manuactnun 37921 40765 40112 41156 44403 44682 49256 54117 58435Large Scala 19537 22134 21282 2208 25087 25263 28095 32342 36029Stnall Scala 18384 18631 18830 19068 19316 19419 20561 21775 22406

Cosinctilon 16711 200/2 22518 22908 24469 27415 29749 32471 34094Power. Gas W und 2061 2208 2348 2642 3217 3743 5561 7876 8956

Saniary Senecl~ee

Smnices 156442 160225 171961 182335 194004 204332 222541. 243969 257176Tranport. Slorage and 41742 43508 45655 47115 52341 54293 59024 63349 66383Trade Sencas 36692 36093 38816 39389 40394 41675 44965 48561 50940HousingSndcas 30489 31413 32444 33435 34534 35645 38030 40656 42187Public Admn. & Deol 10726 9984 13235 15944 17191 18553 20363 24184 26256Banking and Insurance 5551 5867 6689 8700 9180 9312 9523 10002 10302Proessoal andMisc. 31242 33360 34942 37752 40364 44854 50636 57217 61108

Services

GDP at Markat Plcms 373416 391538 406933 424593 442347 455135 497527 536189 560120Gro~th lale(4) 4.7 4.9 3.9 4.3 4.2 2.9 6.6 4.23 4.48

idiuect Taxes - Sulkw .. .. 21794 23496 24657 24958 20200 34019 37518

GDP al Factor Cosi .. .. 385139 401097 417690 430177 469327 502170 522602

la Duo to varatiion hn coverag, the #gures may not be comparable lor the previous period.Souce Bangladesh Bureau cd Skascs.FY93 Figures ara prolminary.

尋

!

&&&&----------1---------------------------------------.-.--&’・

TABLE 4QUANTMY AND VALUR OF TRADMMAL EXPORIS

PAWV~ ('"0 u" 101892 110000 117102 160800 123890 104000 806» 07270 124820 104210 06490

a~ 1 ~ 96 1911379 £*M~ 1902~ 1«~ 2301000 22,41000 13~ 1617006 204~ i»m00 1393790

U" ptkø (US~ 6320 48 911 81.02 107.11 63 94 4641 0007 00.15 9038 7683 6134

H0"an GUGMity (M 1) 180502 224609 214097 184841 161371 204501 IU700 100700 - - 91186

oéc~ c~ lm i l 292919 186961 141234 17=44 242486 16~ 178700 10~ 190824

cafp«-" QU~ IM.T-I 64306 00750 9411010 72009 89731 721a3 71100 31000 626M

Coopmo Q~ fm Ir 1 221 907 230 - - - - -

C>d~~øcføpw" a~ v (u Il 1»4 -3007 37234 10000 10200 17600 16~ 145100 140a30

T~# Mmm#h~v^m (.«0 usq **~2 30~ $Ull$ 367722 294318 274730 2~10 24i1M 320~ 294790 17"70

G~ AI4 037354 60~ 00~ 4~ 407900 470~ 49~ 43~ 510~ 806~ 34~

Unk pdra (USW.T.) 527.59 601.18 001.04 81300 029 42 572 47 589 91 sel ýw 84324 Gæ 94 61*97

PVO~v~ (-000 usq $038 12000 ~ 7 32079 658 201DIO 38~ ~20 - 73000 122770

Uø* Peim ~ 4 13~ 12000 3~ 34181 1011 8900111 0~ - - 148140

Unn ~ (U~ .Tj 0m71 US-48 8011.23 eitel 948 U ~.00 SM.63 - - 87

T«v~ (.om us" 379M 61018 32780 29~ 3"00 391130 39480 43210 32430

a~ f~ m 8904 1 9m7 W~ 0~ 811703 47102 0~ 56242 9=0 "280 a~

Unk pdeo (US~ 64950 890.00 1018.46 107933 4= 46 mg 70 641.63 ni.oi 5a9 43 741 N «2."

Lo~ lev~ 4-wo usq 53081 85281 00799 80730 134820 147170 1311Off 178800 134290 144480

a~ rom oq q 87278 0~ 1821116 81750 71820 137400 118219 127~ 187220 loMo i lom

Unk pftø (Us~ Gel 722.76 617.74 a28.60 86380 a" 10 =0.79 1246.60 1070.00 1140.00 1324881 1209.384

Tc*ai v~ . Tfødm~ E~ 494240 832000 827615 871427 912574 670020 807810 ~ 0 071040 &»»0 "4020

inc,~ ~ P~ 4121" alm ell7U 814716 8~14 110,48116 673388 672~ 041371 86~ 841111t*

m "C~Ø ~o WW ~a. b4d k~ b~ g~.

8~: Dw~ob E~ Pram~ 9~ oM 0&r4Øo~ T« 8~d.

l

44

Table 5: COMPARATIVE TRADE STATISTICS (% of GDP)

Total Expons Imports Manuf. Exports Manuf. Growhl(1990) (1990) (1990) (1980-90)

Bangladesh 8 17 6 2.8

India 8 10 5 7.1

Pakistan 16 21 11 7.7

Sri Lanka 30 40 14 6.3

Thailand 38 54 24 8.9

Malaysia 79 79 35 8.8

Indonesia 24 20 9 12.5

" Average annual growth rate of the manufacturing sector.

Source: World Development Report, 1992.

45

Table 6: THE CHANGING STRUCTURE OF IMPORT TAXATION AND PROTECTION(In Percentage of Import Value, Unweighted)

Fiscal Measure Agrcuk:u Mining Mafacturing EconomywidYear Mean SIDev,. Mean SI&Y. Mean S/Der. Ma S/De.

1988/89 Total 105 77 54 30 94 58 94 591989/90 Total 97 69 53 31 93 57 92 571990/91 Total 92 59 56 30 91 53 90 531991/92 NPR 61 42 32 25 59 40 59 40

Cn.Taxkl A -a -W MTotal 65 51 85 82

1992/93 NPR 49 31 33 26 50 32 50 32Cn.Tax I J2 M MTotal 51 52 73 72

Until FY91 total imot taxation comprised customs duty (CD), import sales tax (ST), regulatory duty,development surcharge (DS), and L/C-cum-permit fee (LF). These together yield an unweighted meannominal protection rate (NPR) which is somewhat overstated as allowance is not made for domestic exciseduty which was then imposed on some products. Protection may have been much higher for some activitiesdue to non-tariff import controls (see Table 7) but lower for others due to widespread smugglingencouraged by the controls and/or high tariffs. Another import levy, advance income tax (AT is notcounted here as it is theoretically credited on tax returns.

The NPR is calculated on the basis of only for CD and LF from FY92, when the DS was discontinued andthe ST and most excises were replaced by trade-neutral VAT and supplementary duty. Among theseconmmtion taxes (Cn.Tax), the flat 15 percent VAT rate is adjusted here to the import value base.

Textiles comprised a notable exception to trade neutrality in FY92, being subject to VAT only on imports.The Government intends to remove this distortion, and has done so partially in FY93 through thereimposition of a 2.5 percent excise on domestic product If allowance were made for this exception, thetable's mean NPR for manufacturing would be significantly higher in FY92 and somewhat so in the currentyear.

NO: All mean rates shown in the table are unweighted by imports or domestic production. The economywidemeans are averaged across about 9000 tariff lines.

Source: World Bank staff calculations from data provided by the National Board of Revenue.

46

Table 7: PROGRESSVE REMOVAL OF IMPORT CONTROIS

Number of Sharm of Controlled

Controlled Items Items to Total(HS-8 level) Import Categories

(%)

FY88 2,306 39.5

FY89 1,907 32.7

FY90 1,525 26.1

FY91 1,257 21.5

FY92 1,103 18.9

FY93 584 10.0

Source: World Bank stafE based on Government of Bangladesh figures

Table 8: COMPARATIVE POSITION OF CLASSIFIED LOANS(1989-1991)

(In Crore Taka)

Amr G=s6d Ader_ _ _ _ _owow M

LasM lAr der agremnwa Agi Twd a/A

Oswedme (%)

rive s eak raw Sub- De=Wa Bad Drk for 5 yry.skndard orasw

NCB's 1989 897.95 1183.28 587.70 291.01 2959.95 28.561990 109.99 1051.99 887.14 174.86 3263.98 27.54

1991 983.76 907.72 1259.94 166.46 3314.88 26.67

Privatized Banks 1989 144.84 120.32 229.68 48.60 543.44 39.37

1990 192.67 182.80 182.65 64.22 622.34 41.82

1991 148.10 214.71 205.13 77.98 645.92 36.79

Private Local Banks 1989 265.72 172.65 25.79 - 464.16 17.83

1990 275.41 155.97 64.90 - 496.28 16.04

1991 316.02 236.16 127.99 - 680.18 16.02

Private Foreign Banks 1989 109.23 51.06 22.24 - 182.53 18.60

1990 110.49 105.46 48.05 - 264.00 20.68

1991 89.26 136.62 52.67 - 383.35 27.17

Grand Total 1989 1417.74 1527.32 865.41 339.61 4150.08 27.07

1990 1628.56 1496.22 1182.74 339.08 4646.60 26.24

1991 1466.76 1385.51 1641.22 244.41 4737.90 25.20

Source: Bangladesh Bank

Table 9. Synpsis of Problems Undestying LAeses of Selected Public Enterpeiss(Net losses are in Year FY91)

Textile Mills Corp. Jute Corporation Chittapong Water and Sewerage Authority Inland Water Transport Corp.

Low fixed prices, low capacity utilization, Price support operations in the face of System losses about 50%, problems of water Outdated fleet, some vesselscompetition from smuggled cloth (through garment stagnant export prices, stock piles increased unaccounted for similar to those in PDB, over 60 years old, highindustry) and of yearn, overstaffing by mor than wfrom, 250,000 bales in FY90 to 915,000 public taps (588 in number) run 24 hours a fmquency of vessel disasters,15%S, wage costs absorb 95 % of value added, bales in FY92, commercial bank financing for day functioning as open pipes, accounts fare pilferage and irregularitics

raw jute purchases reduced to 1k 250 million receivables 9.8 months of total billings of in collection system, lowin FY92 from 11 1560 million earlier. which half is due from Government and public tariffs.

corporations, tariff levels low, over-staffing by(Net loss: Tk 540 millio) more than 50%.

(Net Loss: Tk 1.4 billion)(Net loss: Tk 57 million)

(Net loss: Tk 116 million)

SteAl and Engineering Corp. Oil, Gas and Minerals Corp. Railway Biman Airlines

Markets for products drying up, competition fi Transmission and distribution lines developed Ticketefs travel particularly on brach lie Two ATP aircraft grounded forimports and domestic private sector, overstaffing by but expected demand for gas sale not realized services, passenger. tariffs low, operation of 8 months. $1 million paid bymore than 10%. because of slowness in Government approval uneconomic routes, inability to compete with Biman for not taking delivery

of projects, projected demand end 1991 is 48 private trucks because of poo service and of third ATP aircraft, highmillion cubic feet but only 5 million cubic high loss rate and pilferage of cargo moved, purchase prices paid, domesticfeet commissioned so far, projects chosen on protracted delays in wagons awaiting crossing fares underpriced by aboutnonT-economic grounds, heavy interest burden. of Jamuns River, excessive nber of 30%, heavy debt service

workshops, yards and stations, over-staffing obligations.by momr than 50%.

(Not loss: 1k 205 milliost) (FY90 Net Loss: Tk 272 million) (Net loss: Tk 1.5 billion) (Net loss: Tk 843 million)

Jute Mills Corp. Power Development Doard Shipping Corporation Road Transportation Corp.

Run-down equipment, over-pricsd raw materia.1 (raw Revenues frm 25-30% of power produced Inefficient operation of fleet, stiff competition Tickereso travel, fare pilferagejute) but stagnant expon prices, restriction on mill lost from collusion between employees and from foreign and domestic shipping lines, by crew and staff, operation ofclosure and on downsizing of capacity, heavy customers (improper billing, illegal adverse effects of Gulf war and cyclones, uneconomic utes as publicinterest burden (Tk 700 million in FY92) on connections, incorrect metering, and large aniounts of account receivables, heavy service, costs of fuel, wages,commercial batik debts, overstaffing by more than inadequate collections), high levels of debt service obligations (rK 420 million a tires and spares 25 %-75 %25 %, wage coa represent 166 % of value added. accounts receivables (6.3 months) weak year). higher than in private Sector,

financial mantagent and accounting, and damage to busses duringstrong trade union opposition to reform, political disturbances.

(Net loss: IM 3.u billion)(Net loss: $ 2.3 billion)

(Net loss: Tkl100 milion) (Net lose: Tk 231miliom)

o t 111sagiolesh Pines SwItblm so atowth, Womd "Ak, sAsh Ip apr Np. 12724-IdD