t NI 7544BD

BangladeshManufacturing Public Enterprise Reform

Amp* 3, 1369

Asia Cowntry Depatment I

FOR OFFICIAL USE ONLY

This document has a restricted distribution and may be used by recipientsOnlY in the Perkomance of thei official duties. its contens may not otherwisebe disclosed without World Bank authoization.

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CUUCr DQUVALIU

The external value of the Bangladesh Taka (.Tk) is fixed in relation to a basketof reference currencies, with the US Dollar serving as the intervention currency.The official exchange rate on January 1, 1989 was Tk 32.27 per US Dollar.

US$1 - Tk 32.37Tk 1 = US$0.031

In this report. USS is sometimes abbreviated to S.

MEASURES

1 lakh = 100,0001 crore = 10 million

FISCAL YEAR (FY)

July 1 - June 30

FOR OFFIIAL us ONLY

List of Abbreviations and Acronyms Used

AIW - Autonomous Bodies WingADP - Annual Development Plan

BCIC - Bangladesh Chemical Industries CorporationBFIDC - Bangladesh Forest Industries Development CorporationBJMC - Bangladesh Jute Mills CorporationBMR - Balancing, Modernization, and Rehabilitat'onBSEC - Bangladesh Steel and Engineering CorporationBSFIC - Bangladesh Sugar and Food Industries CorporationBTMC - Bangladesh Textile Mills Corporation

CCPE - Council Committee on Public EnterprisesCPC - Council for Public CorporationsCONCOPE - Consultative Committee of Public Enterprises

DFI - Dev_lopment Finance Institution

ECNEC - Executive Committee of National Economic Council

GEMCO - General Electric Manufacturing CompanyGOB - Government of Bangladesh

I-B - Investment Corporation of Bangladesh

MOF - Ministry of FinanceMOI - Ministry of IndustriesMPE - Manufacturing Public Enterprises

NCB - Nationalized Commercial BankNPE - Non-financial Public Enterprises

PE - Public EnterpriseP.O. 27 - Presidential Order 27

SABRE - System Of Autonomous Bodies Reporting and Evaluation

TFYP - Third Five Year Plan

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

TITLE: MANUFACTURING PUBLIC ENTERPRISE REFORM

COUNTRY: BANGLADESH

REGION: ASIA COUNTRY DEPARTMENT I

SECTOR: COUNTRY ECONOMIC

REPORT TYPE CLASSIF MM/YY LANGUAGES7654-BD CER Restricted 08 89 English

PUBDATE: 8908

ABSTRACT: Bangladesh has had a remarkable record of public enterprise reformsrelative to most developing countries. Government reversed its pro-nationalization policies in the 1980s, putting more emphasis on therole of the private sector. Denationalization reduced the publicholding of fixed manufacturing assets from 92Z in 1972 to less tLian40Z in 1988, and controls on private investment were relaxed.However, improvements in the performance of the remaining publicenterprises have been limited. In most cases, production hasstagnated or declined, and with persistent financial losses, theenterprises make little contribution to resource mobilization; theydepend on the financial institutions and the Government budget forsupport. This report focuses on the generic or sector-wide factorsthat underlie the poor performance. It emphasizes the need tobroaden the approach to reforms and expand the L.Lmited partialdivestment program currently being implemented. Given that some ofthe enterprises are likely to remain in the public domain for awhile, the report indicates priority areas of reform to fostercommercial orientation and improve performance. These include thesystem of public enterprise management and institutional control,over-employment and employee compensation policies, financing anddividend policies, and direct intervention in input and outputmarkets.

BANGLADESH:

Manufacturing Public Enterprise Reform

Table of Contents

PageCountry Data

Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . i

Chapter I - Introduction and Background . . . . . . . . . . . . . 1Evolution of PEs .... . . . . . . . . . . . . . . . . . . 1Budgetary Allocations . . . . . . . . . . . . . . . . . . . 3MPE Performance . . . . . . . . . . . . . . . . . . . . . . 5

Chapter II - Objectives of Reforms and the Role of Privatization . 8Objectives for Reforms and Policy Agenda . . . . . . . . . . 8The Role of Privatization ... . . . . . . . . . . . . . . 11

Chapter III - Institutional Development. . . . . . . . . . . . . . 18The System of MPE Management and Control . . . . . . . . . . 18Improving the Selection of High Level Executives . . . . . . 23

Chapter IV - Financial Aspects of MPE Reform . . . . . . . . . . . 25Financial Policies . . . . . . . . . . . . . . . . . . . . . 25MPE Financial Structure ... . . . . . . . . . . . . . . . 25Financing Policies . . . . . . . . . . . . . . . . . . . . 28Dividend Distribution . . . . . . . . . . . . . . . . . . . 30Other Financial Issues . . . . . . . . . . . . . . . . . . 31

Chapter V - Selected Efficiency Issues .32Trade Policies . . . . . . . . . . . . . . . . . . . . . . . 32Interventionist Policies . . . . . . . . . . . . . . . . . . 33Input Market Distortions . . . . . . . . . . . . . . . . . . 36

Chapter VI - MPE Employment and Compensation ... . . . . . . . . 38Level and Structure of MPE Employment . . . . . . . . . . . 38Labor Laws and MPE Employment . . . . . . . . . . . . . . . 39Employment Reform .... . . . . . . . . . . . . . . . . . 41Employee Compensation Policy . . . . . . . . . . . . . . . 43Union and Management Relations . . . . . . . . . . . . . . . 49

Chapter VII - Policy Implementation and Risks. . . . . . . . . . . 50

References . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Appendices . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

This report is based on a mission that visited Bangladesh from July 29 to August12, 1988. The mission consisted of A. Agbonyitor (mission leader), B. Drum, R.Islam, S. Kikeri, S. Malik, S. Nizamuddin, and A. Rab. Ms. R. Archer providedsecretarial support.

List of Text Tables

PageTable 1.1: MANUFACTURING PUBLIC ENTERPRISES . . . . . . . . . . 2Table 1.2: ACTUAL MPE BUDGETARY ALLOCATIONS . . . . . . . . . . 3Table 1.3: MANUFACTURING INVESTMENT . . . . . . . . . . . . . . 4Table 1.4: SELECTED MPE PRODUCTION . . . . . . . . . . . . . . . 5Table 1.5: NET PROFITS (NEGATIVE: LOSSES) OF MPEs: FY76-FY89 . 6

Table 2.1: BANGLADESH: MANUFACTURING ENTERPRISES PARTIALLYDIVESTED .... . . . . . . . . . . . . . . . 13

Table 2.2: ENTERPRISES UNDER CONSIDERATION FOR PARTIAx. (492)DIVESTMENT IN FY90 . . . . . . . . . . . . . .

Table 4.1: CAPITAL RESTRUCTURING OF MPEs: FY73-7Y88 . . . . . . 27Table 4.2: MPEs DIVIDEND PAYMENTS AND EQUITIES: FY86-FY88 . . . 29

Table 5.1: ADMINISTERED PRICES . . . . . . . . . . . . . . . . . 34

Table 6.1: MPE EMPLOYMENT: FY89 . . . . . . . . . . . . . . . . 38Table 6.2: TRENDS IN COMPENSATION COST . . . . . . . . . . . . . 43Table 6.3: TRENDS IN NOMINAL AND REAL CASH COMPENSATION OF EMPLOYEES

OF PUBLIC CORPORATIONS. . . . . . . . . . . . . 46Table 6.4: TRENDS IN NOMINAL AND REAL CASH COMPENSATION OF WORKERS:

FY78-FY89 . . . . . . . . . . . . . . . . . . . 47

Table 7.1: MPE REFORMS .................. .. . 53

pag 1 of 2

aml POPUIATIO (1983) 2U1Zfl (1935)143,990 -M2 100.6 miLlion 69 por b 2 of total area

Rate of Growtbh 2.41 1,062 par km2 of cultivable lead

ICNLSON HAu (l993) ownL;E i1Crude birth 9ate (per '000) 39.0 Population per physciianr 3,900

Crude Death Rate (per '000) 15.0 Population per hospital bed: 3,600

Infant MortalLty (per '000 llve births) 125.0

iNCS IDISTREND?IOU (1902) DIUTT!0R t LA UUSNIP (1978)

X of national income, highest quLntl10: 42 X os by top 10X of inomts 492 of national income , lowest quintle0: 12 2 oned by fialleat lOX of wners: 2

ACChSS TO PIPfD MATZI (1900) ACCESS TO &llKECRCITT (1980)X of population - urban: 26 2 of population - urban: 3.5S of population - rural: 40 S of population - rural:

NURI2TION (1963) EDUCATIONCalorle intake as I of requlrement: 84 Adult literacy rate (Z) (1980181) 29S

Per capita protoln intake (Urea): )42 PrLmary school enrolLment (2) (1986) 60S

GNP PfR CAPITA IN 1986: USS160 /J

GROSS DOMESTIC PRODUCT (1987/88) ANNUAL RATE OF GROWTH (t, constant prices)

mill USS S FY75-80 FY81-85 F S6-88

GDP at Market Prices 19,323 100 7.5 3.8 3.5

Gross DomestLe Investment 2,319 12 0.1

Gross National Saving 1,217 6

Current Account Balance -1,112 -6

Exports of Goods, fob 1,231 6 4.7 2.5 13.5

Imports of Goods, cif -2,987 -15 6.2 1.1 2.7

OUTPUT. LABOR FORE. AND PRODUCTIVITY IN 1987188

Value Added Lk Labor Force /e V. A. Per Worker Ld.j -L USS I rLI _L L

Agrlculture 8,884 46.0 16.8 39 529 78

Industry 2,632 13.6 3.1 11 849 125

Services 7.809 40.4 8 6 30 908 134

Total/Average 19,325 100.0 28.3 100 678 100

CENTRAL GOVERNMENT FINANCE LI(bill. Take X of GDp

Ms IFY82 FY88

Current Revenues 53.26 8.8 8.8

Current Expenditures 49.19 4./ 8L0

Current Surplus 4.07 4.1 0.8

Capital ExpendLtures 50.08 12.7 8.3

External Assistance (net) 44.22 7.6 7.2

LI World Bank Atlas methodology base 1983-85.

Lb A:. market prices.

/ Civilian labor forceg 1983/84 data. S.ct,ral distribution data shovn are extrapolated from

available data on dlstributLon of *eployec. persons.

/d 1983184 data./a Provisional.

- Not available.

- Not applicable.

Page 2 of 2

COUNTRY DATA - NANOLADZSI

oNtr. CREDIT AND PRICZS Ju i 1980 June 1981 Jurnc 1982 June 1983 June 1984 JuBIne. 1 if_nj1 Jun- !987 June 1988

(billion Take outstanding, end of period)

)IMMA and QUail MOsey 34.3 41.3 45.5 59.0 33.9 10S.3 123.4 138.5 164.1

Bank Credit to Public

a-etor 25.4 36.9 43.9 44.4 50.0 55.7 65.1 64.0 65.1

.- dit to Private

Sector 14.3 17.6 23.6 31.0 49.1 68.9 83.6 59.6 108.9

(Percentages or Indox Nwurbers)

Money and Quasi Moy

as S of CDP 17.3 17.8 17.2 20.5 24.0 25.3 26.7 25.7 27.6

General Price Index

(1973/74-100)/a 226.6 255.0 296.5 325.9 357.5 396.6 436.0 481.2 536.0

Annual percentage

changes in:

General Price Index /a 18.5 12.5 16.3 9.9 9.7 10.9 9.9 10.4 11.4

Bank credit to Public

Sector 39.6 45.3 19.0 -1.1 12.6 11.4 16.9 -1.7 1.7

Bank credit to Private

Sector 30.0 23.1 34.0 31.3 58.4 40.3 21.3 7.2 21.5

BALANCE OF PAY ENTS MERCEA1DISE EKPORTS (1987/88)

(mill. US$)

1980/81 1987/88 mill. US X

LKports of Goods, fob 711 1,231 Rav jute 81 7

-orts of Goods, c&f -2 533 2.987 Jute goods 301 24

Trade Gap (deftirt - -) -1,822 -1,756 Tea 39 3

Non-factor servLces, net 38 -11 Leather 147 12

Workers' Remittances 379 788 Fish & shrimps 145 12

Other Factor Payments (net) -23 -133 Garments 434 35

Current Account Balance -1,428 -1,112 Others 84 7

Direct ForeLin Investment - - Total 1,231 100

Net fLT Borrowing 502 621

(Disbursements) 584 818

(Amortization) 82 197 LXTERNAL DEBT. June 1988

mL11. US$

Capital Grants 563 823

IMF facilitLes, net 193 -18 PublLc Debt, Lncl. Guaranteed Private Debt 9,080

Ot.L-r Capital, net 146 -170 Non-Guaranteed Private Debt

Total Outstanding & Disbursed 9,080

Ch.nge in Reserves i- - increase) 24 -144

DEBT SERVICE RATIO FOR 1987188

Gross Reserves (end of year) 251 896 2

Public Debt, Inl. Guaranteed Private Debt 16.5

RATE OF EXCEANGE (June 30, 1989) Non-Guaranteed Private Debt

Total 16.5

US$1.00 - Taka 32.27

IBRD/IDA LENDING. December 1987 (millLon US$)

IBRD IDA

Outstanding & Disbursed 65.0 2,985.0

Undisbursed - 1 363.9

Outstanding, ncl. Undisbursed 65.0 4,348.9

- not available.

August 1989

EXECUTIVE SUMMARY

Background

1. Manufacturing public enterprises (MPEs) were created at the endof the Independence War when Government appropriated abandoned non-Bengaliunits, Bangladeshi-owned enterprises and enterprises under the erstwhile EastPakistan Industrial Development Corporation. This gave Government control ofover 800 MPEs and raised the public share of the fixed assets of themanufacturing sector from 342 in 1969-70 to 92S in 1972. Subsequently, with achange in the political regime, Government reversed its policy and privatizedmore than half of the MPEs by 1986. The MPEs now consist of 160 odd units,organised under six corporations: BJMC for jute goods, BTMC for textiles, BCICfor chemical goods, BSFIC for sugar and food industries, BSEC for steel andengineering and BFIDC for for3st products. These account for about 402 offixed assets and 20? of employment in the modern manufacturing sector. TheMPEs currently absorb about 13Z of the outstanding advances of theNationalized Commercial Banks (NCBs), and account for about 152 of rerchandizeexports.

2. MPE production has generally stagnated, except for fast growth inurea output. Most of the enterprises have shown poor financial performance,with losses totalling Tk. 4.5 billion in FY81-FY89. Consequently, MPEs havebecome dependent on allocations from the Annual Development Program (ADP) andfinancing from the NCBs. Outstanding NCB advances to the MPEs amounted to overTk. 10 billion at the end of FY87 compared to Tk. 1.8 billion in PY82, withBJMC accounting for most of the increase. In addition, GOB has provided cashinfusion, conversion of debt to equity and grants to sustain operations.Investment financing from internal resources is negligible, amounting to lessthan 10% in FY88 and an estimated 6? in FY89 of total investment financingrequirements.

3. Because of continued poor financial performance, MPEs have falleninto a vicious circle as losses necessitate more borrowing, raising debt andinterest charges, reducing net earnings and causing even more borrowing. Thesehave eroded debt to equity ratios to a range between 83:17 (for BSEC) and164:-64 (for BJMC), compared to the desired rates between 60:40 and 67:33.Some MPEs, such as BJMC, have negative net-worth, and most have debtsconcentrated in short-term instruments with high interest costs. Thus, theMPEs impose a burden on the ADP and financial institutions, competing forresources, but making little contribution to resource mobilization.

4. External factors, including world price fluctuations andinfrastructural bottlenecks (e.g. power failure), have adverse effects on theMPEs. But the main reasons for the poor performance are: inability to followprecise performance objectives and standard commercial practices; insufficientmanagerial autonomy and accountability; over-employment and centralizedcontrol over pay determination; inadequate access to raw materials to expandcapacity utilization; inefficiencies relating to price controls andintervention in input markets; weak financial structure and inadequateinstitutional capacity to effect and sustain policy implementation.

Policy Objectives And Key Proposals For Reform

ObJectives For Reform And Broad Policy Agenda

5. The officially stated objectives of MP3 investment in Bangladeshare to produce inputs to support agricultural development, meet ase basicconsumer goods needs and contribute to export growth. In addition, the HPEsare to make contributions to resource mobilization and employment creation.But apart from progress in some fertilizer enterprises, MPE performance hasbeen poor. Accordingly, reforms have been influenced largely by the need toremove the inefficiencies that inhibit the achievement of performanceobjectives. One major source of inefficiency relates to direct state ownershipand controls which have enabled Government to intervene directly in enterprisemanagerial decisions; the other major source relates to restrictive internaland external trade policies and regulations that impede competitive public andprivate sector production. Though there is general recognition in Bangladeshof the need for reforms to enhance the autonomy of the MPEs and improve theirefficiency, the mode and extent of such an autonomy is controversial. Thereare those who advocate complete divestment as the only means to improveperformance: some propose partial divestment and institutional reforms tulimit direct Government interventions in enterprise operations; others preferthe relaxation of restrictive commerci-l pO.icies to create a competitiveenvironment for both MPEs and their private sector counterparts. Actually,Government reforms have tended to be eclectic, emphasizing privatization andinvolving the other options.

6. MPE Classification. Currently, GOB is implementing reformsinvolving the sale of shares of profitable MPEs to the private sector (para10-14), but there are no clear policies concerning the vast majority of theMPEs, about 80Z, which are financially unprofitable. Since these enterprisesare not attractive for private investors, improving their performance wouldinvolve the use of other instruments beyond that of privatization. Someenterprises which are not profitable at present would need restructuring tomake them profitable; subsequently, some of these enterprises would bedivested; others, however, are likely to remain in the public sector in theforseeable future. Efficient allocation of MPE investment resources forbalancing, modernization and rehabilitation (BMR) requires a classificationscheme which will use both economic and financial criteria to differentiatebetween the potentially viable and non-viable enterprises. The scheme wouldinvolve listing enterprises according to those which are commercially viableand would have their objectives best realized in the private sectnir; those ofa strategic nature to be retained by Government; and those of little or nostrategic importance and with limited prospects for viability, and thus shouldbe phased ot-t. The proposed classification to be implemented by eachcorporation would be a basic component of an MPE reform strategy. It wouldunderpin the choice of the right mix of instruments - divestment, closure, BMRinvestment, performance contract, management contract and financialrestructuring - for improving MPE efficiency.

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7. Efforts to improve the performance of manufacturing enterprisesremaining in the public sector must emphasize commercial orientation. Thiswould require decentralizing the overlapping controls of various Governmentdivisions (para 15-24); improving financial plalming (para 25-28); eliminatingpreferential access to markets (para 29-35) and redacing overemployment (para35-41). Difficult decisions must be made to resolve conflicts that limitefficient MPE resource use. For example, in the case of jute goods production,there is a conflict between the use of the enterprises as employment centersand the efficiency requirements of a competitive manufacturing exportindustry. Performance objectives must separate commercial from social servicefunctions for the MPEs. Where enterprises are directed to deliver socialservices because of broader development objectives, GOB should assume explicitbudgetary responsibility for the costs of such services. As pact of promotingefficient MPE operations, a program for phasing out the inherently uneconomicenterprises needs to be developed and implemented.

8. Jute - A Special Problem. The current divestment program excludesthe jute mills which accounted for about 802 (over Tk 1.0 billion) of MPElosses in FY88. The losses erode the ability of the jute mills to remaincompetitive in export markets, which absorb 90? of the output. The sale ofshares of BJMC enterprises is not feasible, since very few mills meet theprofitability criterion considered necessary for enlisting public confidencein the share offers. While the recent closure of six inefficient private millsis inevitable for eliminating excess capacity in the industry, the maintenanceof the inefficient public units with cash infusion distorts the policyenvironment for adjusting jute production capacity effectively. There arespecial problems facing the jute industry. These include unstable world marketzonditions, growing substitution of synthetic fibre, excess capacity and-'ownward rigidity of employment and wage costs, volatility of raw jute prices..id the inability of producers to pass on these costs to consumers.

9. Government should aim at restructuring the potentially viablemills to improve the viability of the industry and make the PE unitsattractive for participating in the partial divestment program. The jutereport which was prepared by the Bank and discussed with GOB in July 1986 hasbeen reviewed by a Government committee and recommendations have beensubmitted to GOB; however, proposals for reform focus on only the short termliquiidity issues. The strategy for restructuring outlined in the report,including consolidating capacity in the more efficient mills; changing productmix; and phasing out the uneconomic enterprises, remains appropriate forimproving efficiency. Jute goods policy must deal with the thorny problem ofover-employment. Though Bangladesh is a labor abundant country, productivityis low relative to competitors, such as India, Thailand and China; the lowproductivity and over-employment result in wage costs exceeding value added.Proposals for employment and wage reform are discussed below (para 35-41).

The Role Of Ptivatization

10. Privatization With Liberalization (FY82-FY86). Among the variousinstruments, Bangladesh has used mainly privatization for MPE reforms. GOBimplemented an accelerated privatization program which reduced the publicsector significantly during FY82-FY86. The privatization was combined with

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some deregulation of private investment, relaxation of import controls,flexible exchange rate policies and export incentives etc. The reformscontributed tr' improving the policy environment with beneficial effects on theprivate sector. Excess employment was reduced in the privatized units as theywere reorganised; and maintenance, m,aterial purchases and inventory managementwere improved. There are some outstanding issues, such as debt recovery fronthe new owners, which are yet to be resolved. However, the refonms wereaccompanied by the revitalization of private investment. Some inherentlytnefficient privatized units closed doivu, but new activities also emerged. Theexpansion of garments activities from $7 million exports in FY82 to over $430million in FY88, for examnle, would have been difficult if the nationalizationpolicies and regulations which exciuded private participation in textilemanufacturing hat not been reversed. Apart from the contribution of chemicalgoods, manufacturing growth estimated at about 31 during FY81-FY88 originatedessentially from the private sector.

11. Currcnt Divestment Policies. Currently, GOB is implementing apartial divestment progrun under the Denationalization Amendment Ordinance ofJune 1987. Forty-nine percent of the shares of profitable enterprises underMOI are being sold to the private sector with 34Z to the geneLal public and15Z to employees. The sale of only 49Z shares was prescribed under the revisedIndustrial Policy of 1986 and is considered a practical compromise to enlistemployee support for starting the process. The fifty-one percent of sharesretained by GOB will be transferred to the corporation, reconstituted into aholding corporation. The enterprises will have more autonomy under theenterprise Board which will comprise only private sector and corporationappointees. The corporation will appoint five of the nine member enterpriseBoard; the general public will apioint three, and employees will appoint oneif they buy at least 122 of the shares allocated to them. Eleven MPEs wer'!divested in Fy88 and FY89, and nine more are listed for FY90. Public responseto the share offers weakened in FY89 as some shares were under-subscribed.

12. Improving The Current Divestment Program. While the on-goingdivestment program is in the right direction, its scope is limited andimplementation is fragmented. Implementation covers only tha corporations(BCIC, BSEC and BSFIC) controlled by MOI, excluding the jute and textilemills, which together accounted for 86Z of all MPE losses in FY88. Thefollowing measures are suggested for improving and expanding the program.

13. First, the approach to selecting enterprises for divestmentneeds to be re-assessed. GOB's stated policy is to choose only the profitableenterprises for divestment in order to enlist public confidence in the shareoffers. However, the selection is based on financial criteria, assuming astatic incentive regime. Thus, the long-term economic viability of particularindustries has not been assessed. Despite some recent trade reforms, someentefprises (e.g. Chittagong Steel) continue to be protected by high tradebarriers, including high tariffs, quantitative restrictions and activeenforcement of anti-smuggling laws. There are plans for furtherliberalization, and this will be phased to provide for a more stableadjustment process. To anticipate the efficiency effects of these furtherreforms, there is need to adopt both economic and financial criteria inchoosing the enterprises to be divested under a more liberal regime. Second,

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the method of valuing and allocating shares and continued GOB majority controlof the partially divested enterprises should be reviewed. Share prices valuedon the basis ef net-worth, future capital structure and projectedprofitability have tended to increase rapidly within a few weeks in the stockmarket. This is accompanied by over-subscription. A lottery system, supervisedby MOI and representatives of MOP and the Investeent Corporation of Bangladesh(ICB), is then used to allocate the over-subscribed shares. In the case ofUsmania Glass Company, for example, the lottery allocation resulted in arefund of Tk. 32.5 million to unsuccessftil applicants. Given the highincidence of over-subscription, the current policy of divesting only 49Zshares needs to be reviewed so that more sloires could be offered to reduce the512 Government majority control. Also, though under-valuation is a difficultproblem even for markets with tested valuation and forecasting techniques, thesystematic pattern can be minimized by making greater allowance for futuremarket values in the valuation procedures.

14. Third, the scope of the divestment needs to be expanded beyondjust the corpczations controlled by MOI, including particularly the textilemills. There is already discussion in the Ministry of Textiles about completedivestiture of previously private Bangladeshi-owned mills which werenationalized at Independence and are still being held by BTMC. This policycould be expanded to include partial divestment for other units under BMTC asis currently being done by MOI. In add'tion, other instruments for involvingthe private sector in MPE management could be adopted. Block shares could besold to private investors particularly if they can bring special managementexpertise, improved technology and external marketing skills to improveperformance.

Institutional Development

15. Despite the propvsals for expanding the divestment program,institutional reform is important for improving the management and performanceof enterprises likely to remain in the public sector for in the forseeablefuture; it is also relevant for the non-manufacturing PEs, such as energy,which is reserved for the public sector, and for air and rail transportationPEs, which are Government monopolies. The main weaknesses of the currentinstitutional arrangements are lack of clearly defined roles for the variouslevels in the structure and the resulting overlapping controls over the MPEs;also, there is the need to improve the selection of high level executives.

16. Reforming The System For MPE Management And Control. Since theirinception, a major problem in PE management has been the allocation ofresponsibilities among the political authorities, line ministries,corporations and enterprises. The corporations do not own shares in the PEs,but administer them on behalf of Government. However, GOB often bypassescorporations and intervenes directly in enterprise management. This hasresulted in three levels of control over the enterprises. Government controlsthe appointment of high executives and major cost variables. Ministriescontrol bureaucratic procedures, and corporations control management andoperations, leaving the enterprises little initiative and managerialresponsibility. GOB is aware that the overlapping responsibilities are notconducive to sound management. The controls discourage enterprising managers,

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as they shift responsibility and accountability to higher levels of authority;they also restrict managerial flexibility relative to competitors in theprivate sector.

17. Recommendations for reform have been submitted to Governmentunder the Guidelines (1976) for public enterprise autonomy and the report ofthe Zaman Comittee (1983) on the Re-organisation of the Public StatutoryCorporations which examined the syst,m of MPE management and control. TheGuidelines proposed measures to loosen the system and establish clearer linesof authority and responsibility among the various hierarchies. The Zamanreport recommended, among other things, limiting the direct role of Governmentby selling MPE shares to the private sector and forming holding corporations.Though Government accepted most of the recommendations, they are yet to befully implemented. Holding corporations are being established in the energysector; but their formation for the MPEs is still pending. While the variousGovernment reports have identified the weaknesses of the current system,potential conflicts concerning the recommendations must be resolved inchoosing measures to correct the weaknesses. The proposals in the Guidelineswhich maintain Government co:trol of employment and employee compensationdecisions, for example, are likely to frustrate the objective of the holdingcorporations to limit such bureaucratic and regulatory influences. Whilerecognizing the need to be sensitive to the prerogative of the state, effortsto pursue commercial objectives would require minimum direct Government(political and bureaucratic) involvement in enterprise operations. Thus, asholding corporations are established, the functions of Ministries would needto be focussed more on policy and away from operational issues.

18. GOB recently announced its intention to implement aspects of therecommendations. An action program to facilitate implementation should bedesigned and put into effect. The recommendations aim at relaxing two mainsources of MPE control. One source of control is in the appointment of chiefexecutives and Boards of corporations and enterprises. Currently, this isccicentrated at the highest executive levels of Government. The implementationof the Guidelines will reconstitute the system for making these appointments.Since corporations are o-wned completely by the state, national executiveauthorities would appoint the chief executives and members of the holdingcorporation Boards. In turn, the holding corporations and private shareholderswould appoint the chief executives and members of the enterprise Boards.Another source of control is in the supervision and monitoring relationships.These would also be decentralized; Government would monitor the corporations;the corporations would monitor the perfomance of the individual enterprisesindirectly through budget and performance guidelines; and the enterprisemanagers would have authority for daily decisions on resource use.

19. Performance Monitoring and Evaluation. Performance monitoring andevaluation would assume greater importance for enforcing accountability asdirect controls are relaxed. Yet, GOB has no meaningful formal system fordoing this. Reviews of annual performance, including comments on financialperformance by MOF, are carried out by the Executive Committee of the NationalEconomic Council. In most cases, annual reports are years in arrears andaudited accounts are out of date. Large and growing claims by PEs on resourceswith little returns prompted GOB to initiate a study of the existing

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accounting, financial management and reporting mechanisms. A three-phasedproject on the 'Development of Performance Evaluation and FinancialManagement Information Systems for Autonomous Bodies' was launched in 1984under the supervision of the ABW of MIOF. During the first phase, a System forReporting and Evaluation was also developed and used on experimental basis toprepare the budget for ten large corporations; a monitoring cell was alsocreated. The second phase involving a pilot study using sick units to developperformance indicators and a performance contract system has started afterdelays due to inadequate staffing. The performance contract defines the roleof the enterprise, Government and relevant agencies, and determinesperformance targets for the enterprise in the context of those soles.Evaluation under the contract involves the submission of achievement reportsand audited accounts and the ratWng of performance by the monitoring cell. Oneperformance contract was signed in FY87 and three in FY88; twelve more areexpected during FY89-FY91. The third phase of the project would involveexpanding the system to all PEs.

20. The performance contract project could be improved. First,including only 'sick' enterprises and those which have commercial objectivesin the project may be excluding units which could potentially benefit. Inother countries, performance contracts are often used for non-commercial PEs.Korea, for example, applies it to strategic industries, such as publicutilities, transportation, energy, chemicals, and others whose performance hasspill-over effects on other sectors. Second, there has been a tendency todepend on Government te' provide preferential access to markets. The contractof the North Bengal Paper Mill, for example, resulted in a commitment byGovernment to improve raw material supply from the state sugar mills.Contracts do not include adequate incentives to motivate managers, apart froma discretionary fund for giving incentives to employees. Third, theperformance contract process is skill-intensive and time consuning. Given thelarge number of enterprises, it is unlikely that coverage will be extended toall enterprises in the near future. Therefore, GOB should strengthen thetraditional methods of evaluation, such as timely internal and externalaudits.

21. A CPC Secretariat. The Council for Public Corporations (CPC) wascreated in 1986 as the highest authority concerning PE management and policyin Bangladesh. It has as ex-officio members the Ministers of Finance, Energy,Commerce, Planning and Industries. Other Ministers are co-opted if mattersconcerning corporations under them are being discussed. The Prime Minister,who is also the Minister of Industries, is the chairman. The CPC has providedan inter-ministerial forum for deliberating on PE sector-wide issues, and itscollective decisions have served to limit the intervention of individualMinistries in the affairs of the corporations. Since its inception, the CPChas made decisions on important PE management issues, including liberalizingoutput pricing; approving the second phase of the performance contract projectfor developing a performance evaluation system; and framing rules on the termsof service for high level management.

22. Despite having major responsibilities, the CPC L.as no permanentsecretariat. This has caused delays in the performance of important tasks. Forexample, the CPC is often unable to provide budget guidelines to the PEs six

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months before the start of the fiscal year as legislated. Government hasenacted regulations for the Autonomous Bodies Wing (ABW) of MOP to providesecretarial assistance to the CPC. In this capacity, the ABW has been activein committee work and preparing policy papers for the CPC. But the ABW is notadequately staffed to perform these tasks in addition to on-going projects andits normal budget review functions. There is general recognition in Bangladeshabout establishing a technical secretariat for the CPC although the role andauthority of such an entity is a sublact of debate, epecially given proposalsto form holding corporations and the need to avoid creating new bureaucraticlayers over the MPEs.

23. Improving The Selection Of High Level Executives. Many officialsin Bangladesh point to poor management as an important reason for poor MPEperformance. Bengali entrepreneurship has been concentrated in commerce,owning only 18Z of modern manufacturing sector fixed assets at Independence.Thus, the industrial managerial pool shrank, following the departure of non-Bangladeshi managers who owned 48Z of fixed manufacturing assets. Thisresulted in the appointment of inexperienced staff to managerial positions.The President appoints all chief executives, and the screening process doesnot emphasize professional skills. The guidelines for selection state thatpersons eligible for Chairman, Managing Director, Members and Directors shallbe appointed from senior managerial executives of statutory organizations andnationa]ized corporations; serving officers of the Government and the ArmedForces; retired officers of the Government and the Armed Forces; and membersof the public with specialized qualifications.

24. As Government controls on MPE operations are relaxed, thecompetence of high level executives would become more critical for improvingperformance at corporation and enterprise levels. Training and more effectivescreening of appointments with emphasis on professional skills could be usedtc raise the quality of high level officers. The selection process should leadto a short list of screened candidates from which the final Presidentialappointment would be made at the corporation level. Similarly, appointments atthe enterprise level would be made by the corporation and other shareholders.

Financing Policies

25. Credit Policies. Differential access and laxity in creditscreening have contributed to sustaining unprofitable enterprises. Some ofthese credit policy issues are to be addressed under the Program for FinancialSector Reforms. While the current excess liquidity of the NCBs does notsuggest that the private sector is being crowded out, the dependence of thePEs on these banks at government behest has not encouraged the strict loanscreening standards which the private banks apply. Private borrowers, forexar"ple, tend to obtain working capital on the 'pledge" of stock; this enablesthe bank to enforce credit discipline by monitoring the use of raw materialsand following up on recovery. MPEs, on the other hand, tend to obtain creditfrom the NCBs on 'trust", as current laws restrict the pledg.ng of Governmentassets.

26. Financial Restructuring. GOB has made efforts to revamp MPEfinancial structure by cash infusion, conversion of debt into equity and

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grants totalling over Tk 9 billion between FY81-FY88. Despite these efforts,the performance of most of the enterprises did not improve because thefinancial restructuring was not accompanied by measures to improve efficiency.In view of the ineffectiveness of previous efforts, the case for continuedfinancial support is justified only in the context of measures that willenhance the capacity for generating surpluses. Financial restruicturing needsto be used selectively for enterprises which promise acceptable rates ofreturn after debt relief, and in conjunction with measures to improveefficiency and financial planning. It should aim at eliminating weaknesses inthe capital base of otherwise economic enterprises. As proposed by the Bank'sFertilizer Report, priority should be given to restructuring the urea plants.This should include BMR investment and relaxation of pricing controls andmonopoly production to promote external competitiveness.

27. Dividend Policies. There are no announced dividend policies. MPEdividend contributions are negotiated with MOF during the budget process. Theprocess undermines PE financial independence since dividend payments hardlytake account of working capital and long-term liquidity needs. The tendency toclaim as much as possible from the few surplus units while continuing supportfor the losing ones does not encourage the generation of profits. The need foran incentive oriented dividend policy is accentuated by the proposal to formholding corporations which would control some enterprises owned partially bythe private sector. This is likely to lead to cross-subsidies to sustain thedeficit units. Important aspects of dividend policies are how much shouldbe paid to Governmert and how policies should be formulated. In principle,dividend contributions and policies must relate to the instabilities of theindustry, and should provide for retained earnings that will sustain financialliquidity even with revenue fluctuations. The imposition of a fixed dividendcoefficient on all enterprises is, therefore, unrealistic since the jutemills, for example, require higher reserves to contain external priceinstabilities. By international indicators dividends vary between 25Z and 75Zof after-tax profits. For Bangladesh the report of the Special Committe forfinancial improvement recommended payment of 15Z return on equity; but thishas not been implemented. Actual contributions range between zero and 44X onequity.

28. There should be different policies for the enterprises and forthe corporations. At the enterprise level, dividend policies should aim atmaintaining the confidence of private shareholders in the on-goingprivatization program. The enterprise Board should have autonomy in managingthe unit's finances. Tax rates on profits should be the same as for theprivate sector, and the enterprise Board should decide how much to pay onequities. The provision in the New Industrial Policy requiring the Governmentto retain majority control of MPEs should be changed to give the corporations,like other shareholders, the option of selling their shares. In return, theenterprises should depend on the financial institutions, not the ADP, fortheir financing. It is important for promoting financial discipline thatcorporations do riot perceive shares they hold on Government behalf as gifts.Corporations, like other shareholders, should bear the costs of state-ownedshares sold to them. Where corporations simply hold and manage the shares onbehalf of the state, GOB should establish the size of dividend contributionsfrom such shares towards Government revenues. Dividend policies should limit

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cross-subsidies from surplus to deficit units. There should be limits oncross-lending among units under the corporation; and credit, if any, fromsurplus to deficit units should be at comparable market terms and rates.

Selected Efficiency Issues

; 29. The main efficiency issues discussed here are interventionistpolicies that limit competition between the private sector and the MPEs. MPEshave monopoly in producing certain goods and preferred access to some inputs

* markets. Also there are price cot:trols on selected MP! outputs.

30. Interventionist Policies. HPEs have monopoly production of certaingoods, including fertilizer; and until recently, administered prices areimposed by the Cabinet and line Ministiries on some items, such as sugar,urea, newsprint, paper, TSP and DDT, considered basic consumer and producergoods. GOB is reviewing the pricing policy to limit the price controls to onlyonly ferti.izer and sugar; by the end of FY90, the sugar price will also bedecontrolled. The interventions have resulted in maintaining inefficientproduction and given rise to rent-seeking activities. The domestic ex-factoryprice of sugar, for example, has been kept at about double the world pricethrough 1002 import duty and quantitative import restrictions which result inperiodic shortages. Though economically viable sugar mills are oftenfinancially fragile in many developing countries, the Bangladesh PE sugarmills have no comparative advantage under current circumstances; there isserious doubt about the prospects for economic viability in the forseeablefuture. The small-scale private sector, on the other hand, is economic andmore efficient. Yet, Government policies give the PE sugar mills preferentialaccess to raw cane and restrict sales to the private manufacturers. Statemonopolies in manufacturing are not necessary for supplying targeted goods. Analternative option is to allow competitive access to markets for all producersand encourage the participation of the private manufacturers in producing thetargeted goods. These changes in policy might cause the output of the PEs tofall; but private production would expand, imports would rise, rent-seekingactivities would contract; and the flow of goods would improve to the benefitof consumers.

31. Maintaining inefficient production has both economic and financingcosts. TSP producton, for example, is uncompetitive relative to world prices,and is financially unstable, often requiring support; TSP retail prices arelower than ex-factory prices and tend to be subsidized implicitly by -urpluseson urea. For urea, recent increases in the world price have eliminatedimplicit subsidies; the uniform administered price is competitive for someplants (e.g. Ghorasal), though it is below the production costs of the highcost plants. There is a comparative advantage in urea production, and giventhe domestic demand constraints on industrial production, this edge needs tobe sustained by expanding production in the efficient plants and followingpolicies that could motivate managerial responsiveness to internationalmarkets. For example, administered ex-factory prices should be determined onthe basis of international prices. Producing in the inefficient enterpriseswould require explicit Government budgetary support to finance the high costs.Currently, GOB bears little direct budgetary responsibility for financing thesubsidies resulting from its interventionist policies, except for newsprint.

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The Expert Committe on PE output pricing appointed by Government has affirmedthe policy of direct budgetary financing for MPE losses arising from pursuingGovernment policies, but this has yet to be fully implemented.

32. There are minimum prices for all MPEs. Minimum prices have thepotential to restrict exports in the case of jute and limit effective internalcompetition for the other goods. For jute goods, including carpet backingcloth, hessian and sacking, the minimum prices are determined in reference toCulcutta prices and are applied to both private and public producers.Ministerial approval is required for sales below the minimum, but corporationshave authority to increase prices within a lOX margin. The minimum prices forexport items are designed to discourage the under-invoicing of exports. Sinceactual export prices are determined by world market conditions, the minimumprices define the lowest rates exporters have to declare in reporting foreign

: exchange receipts to the central bank; however, there are exemptions in casesof large sales. BJMC does not find the minimum prices binding, though theprivate sector finds them restrictive for small exports. For othercorporations, the minimum prices tend to inhibit sales relative to the privatesector and often result in the accumulation of unplanned stocks.

33. Distortions In Input Markets. Government interventions in rawmaterial purchases contribute to inefficient production costs, inhibitingeffective competition between the MPEs and the private sector. Raw materialpurchases by MPEs through commodity aid and barter trade sources tend to bemore expensive relative tu the competitive international market costs incurredby private textile producers. BTMC, for example, pays higher costs for cottonbecause of the higher costs of materials from aid and barter trade sourceswhich accounted for 56Z of purchases in FY87. During that period, a bale of 1-1/16 inch cotton cost cif Tk. 8.83 on competitive purchase from Sudan; Tk.11.86 by grant finance; and Tk. 16.68 by barter trade. The estimated extracosts of these trade agreements to BTMC range from Tk. 16 million in FY85 toTk. 116 million in FY87. The main issue is to relax controls on materialpurchases; in addition discounts are required on imports from aid and bartertrade sources to price the goods in relation to competitive internationalmarket costs.

34. MPEs are also used to implement agricultural marketing policies tofacilitate the purchase of locally produced raw materials. These policies blurthe distinction between the commercial rationale for raw material purchasesand those dictated by agricultural development and social policy objectives,making corporations bear the cost of performing such fu.ctions. In addition tothe case for sugar discussed above, Government policy for raw jute marketinghas been enforced partly through pressure on BJMC to procure raw jute fromdistributors, instead of directly from the farmers. Such policies often leadBJMC to maintain higher raw material stocks than necessary for commercialpurposes. The burden of the costs of this policy should be addressed in thecontext of jute sector reforms.

Employment And Compensation Reform

35. Employment and compensation problems are thorny as they areconsidered sensitive socially and politically; but given the downward rigidity

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of employee compensation and its large share in value added, improvement inMPE performance requires measures that will reduce over-employment andrestrain employee compensation costs.

36. MPE Employment. HPEs account for abou_ 202 of modern manufacturingemployment, totalling 233,000 in FY89, excluding temporary'and substituteworkers. The employment system distinguishes between workers (mainly unskilledlabor), staff (mainly clerical) and officers (mainly managerial). About halfof the employees are in BJHC. The employment situation is characterized byvacant positions for highly skilled jobs, over-employment relative tosanctioned positions at worker and staff levels and seasonal labor shortagesduring periods of peak agricultural activity. Estimates of over-employment onthe basis of required labor load for one shift vary between 202 and 302 in thejute mills and between 102 and 202 for other enterprises. The main reasons forthe over-employment include pressure on Government to create jobs and lack ofmanagement control over hiring decisions. Efforts to reduce MPE employment,such as the 1984 Enam Committee report which recommended mergers andreductions in officially sanctioned posts, have had very limited results.

37. GOB might consider two approaches which have not been emphasizedin the previous efforts to reduce over-employment. The first is to develop aredeployment program for the seriously affected corporations. The programwould include retraining to fill existing vacancies at high skill levels,severance pay schemes and the _evelopr.ent of self-employment opportunities. Aretirement age for workers should be introduced (retirement age for staff is57), and the current freeze on employment should be combined with (i)attrition at skill levels where actual employment exceeds sanctioned positionsand (ii) reduction in the numbers of sanctioned positions. Secondly, GOBshould give the enterprises responsibility for employment decisions.

38. Financing Retrenchment. Severance pay would cushion the socialdistress generated from retrenchment. But its desirability depends criticallyon the financing costs, the extent to which the system succeeds in keeping thebeneficiaries from being re-employed subsequently in the public sector and theability of PE managers to resist hiring new replacements. For hese reasons,severance pay should be used with caution, focussing on partially divestedenterprises where new managers have control over hiring, employees who areclose to retirement, and uneconomic enterprises to be closed down. Theimplementation of an affordable severance pay scheme would require anassessment of options for reducing over-employment, the number of employeesaffected and the total financing costs. The current provisions in the laborlaws for a severance package are fairly liberal. Retrenchment costs for BSFICalone, for example, could total over $100 million. Given the weak financialposition of the MPEs, over generous awards need to be avoided since they wouldcreate a precedent, limiting the number of beneficiaries. To financeretrenchment costs, a fund for labor reform should be established usingbudgetary contributions and PE surpluses.

39. Restructuring Employee Compensation. MPE employees are paid undertwo different pay schemes. The National Pay Commission (NPC) structure appliesto both the civil service and MPE staff, while workers are paid under theIndustrial Worker's Wage and Productivity Commission (IWWPC) structure. Though

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MPE and government employees share the same salary structure, the latter areentitled to public housing, which has much higher value if available than ahousing allowance. The wage increases awarded in 1985 restored the real valueof cash compensation to its 1978 level for the officer grades and improved itsomewhat for the higher level grades. However, these have since deteriorated,especially for middle management and junior level staff. The compensationstructure has serious weaknesses: the centralization of wage and salarydetermination has denied managers and unions bargaining authority; awards donot relate to performance; and pay increases are granted without reference tothe financial condition of the enterprises.

40. There is realization in Bangladesh of the need for a pay structurethat would attract, motivate and retain able employees. Discussion hascentered on delinking MPEs from the civil service and IWWPC pay schemes andbringing all MPE employees under a single pay commission. The feasibility ofthese reforms would depend on at least two factors. First is the tendency ofGovernr.-nt to view disparities in cash compensation as socially inequitableand politically risky, while allowing disparities in total compensationthrough mostly inefficient inkind benefits. The second is the financialperformance of the PEs. Employees would resist reforms if they were to lead tolower remuneration. To ensure that delinking MPE compensation from the civilservice and IWVPC structures does not result in the escalation of labor costsand larger losses, reforms should be linked to profitability. Payrestructuring needs to be pursued over the long term as part of an overallstrategy to improve performance. Redeployment and reduction in over-employmentshould precede compensation reforms, and the adoption of a new compensationstructure should be selective, starting with enterprises currently undergoingdivestment. In the medium-term, reforms could be directed at removingdistortions in the compensation structure. The compression in the structure ofcash remuneration and the erosion in the real value of compensation,particularly for middle-level managers should be offset by more regularrevision in cash payments.

41. The Incentive Bonus Scheme. Considering that compensationrestructuring would take some time to achieve, the incentive bonus system isthe only instrument available for reducing disparities and linking performanceto rewards. The major incentive schemes are based mainly on production, sales,cost reduction and profits. There are also some minor incentive bonuses, suchas festival bonus and merit increments, which are more in the nature ofregular compensation benefits. In addition, there are workers' profitparticipation and welfare funds, which are statutory requirements. Incentiveschemes related to production targets apply only to enterprise employees,excluding management and supervisory staff at regional and head offices ofcorporations. The existing incentive system needs to be reviewed to includeproductivity related targets and incorporate performance goals for m.anagers.In addition, the current system could be improved by (i) determining theaggregate bonus in relation to the performance indicator, instead of thecurrent method which makes awards proportional to basic pay and tends to beopen-ended and (ii) extending the award to both enterprise and corporationemployees.

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Policy Implementation and Risks

Priorities

42. As summarized in Table 7.1, the main proposals for improving MPEperformance include privatization; institutional development; reforms topromote KPE financial independence; liberalizing commercial policies; reducingover-employment; and restructuring the compensation system. The first priorityshould be given to privatization to expand the process to other corporations,reduce the 512 Government majority shares and adopt other instruments,including the relaxation of trade restrictions, to expand the role of theprivate sector. Substantive changes should be introduced to give the divestedenterprises control over resource use. GOB should initiate work on theclassification scheme to aid the selection of appropriate instruments forreforms. The classification scheme should give high priority to assessing theindividual jute mills to provide the basis for implementing the Jute Reportwhich has already been discussed with Government. The next priority should begiven to establishing holding corporations and decentralizing the system ofMPE management; this will make it easier for the enterprises remaining in thepublic sector to pursue commercial objectives. GOB should emphasize thedevelopment of redeployment and retrenchment programs for enterprises underBJMC and BTMC.

Approach To Implementing Reforms And Risks

43. Bangladesh has had a remarkalle record in PE reforms relativeto most developing countries. GOB has reversed its former policy ofnationalization and is putting more emphasis on the role of the privatesector. The size of the MPE sector was reduced significantly and controls onprivate investment were relaxed. However, there has been relatively lesssuccess in effecting changes to improve the performance of the remaining MPEs.In most cases, Government has been aware of the problems and has appointedExpert Committees to examine them and suggest recommendations for reform, butimplementation has often been delayed or frustrated by various factors.

44. It is necessary to take account of the relation between generic(sector-wide) and specific enterprise (sub-sector) issues in implementingpolicies. Inadequate attention to this issue has contributed to frustratingthe implementation of reforms in Bangladesh. Some corporations, such as BTMC,have had difficulty in liberalizing output prices for individual enterpriseswhen price controls were being maintained at the sector level for all MPEs.SimilaLly, because the extent of enterprise authority has not been defined,contracts being signed under the on-going Performance Contract Project excludeoperational autonomy (e.g. in hiring). This report has focussed mainly ongeneric issues, but some proposals are meaningful only when applied at theenterprise level; while others have both generic and sub-sector implications.Table 7.1 outlines the links between generic and specific enterprise reforms.Broad policy changes to relax controls by applying privatization or limitingthe direct role of Government in operational decisions are generic.Institutional reform is also a sector-wide issue. Establishing policies ondividend distribution, investment financing and guidelines for financialrestructuring are generic; but undertaking capital restructuring, including

the choice of the right mix of cash infusion, debt conversion, grants andmeasures to improve efficiency would depend on the situation of eachenterprise. Similarly, while the (stablishment of a retirement age is relevantfor all MPEs, the design and iaplementation of attrition, redeployment andretrenchment programs need to be done at the enterprise level.

45. The approach to implementation should promote mutual re-inforcement between generic and specific sub-sector policies. This issuerelates to the choice of vehicle for effecting reforms. Generic reforms, forexample, could be pursued more conveniently in a framework that involvesreviewing broad policies to promote more efficient resource use and growth. Inthis context, aspects of this report complement work underway on tax reformsand public expenditure issues aimed at improving economy-wide resourcemobilization and allocation. Other aspects of this report could feed intospecific corporation or enterprise reforms to test the implementation ofgeneric policies. Also, some proposals could be applied first to specificenterprises, and experiences gained could then be extended to other relevantcorporations and enterprises.

46. Limitations And Risks. There is a general sentiment that employeeresistance is an important determinant of the feasibility of reforms inBangladesh. Effective follow-up on policies is likely to be easier in agrowing economy, as this will provide new job opportunities and lessen thesocial distress from proposed redeployment and retrenchment programs. In Lhecurrent situation of low levels of incomes, weak domestic demand and rawmaterial shortages, a cautious relaxation of these supply and demandconstraints to promote growth would provide a more favorable environment forreforms. Even so, resistance to change due to friction and the politicizationof redeployment and employee compensation issues would have to be contained,although the strength of unions is often over-stated and can be used to glossover management weaknesses. GOB has made efforts to enlist union support forsome specific policies, such as partial divestment, by allocating employees15% shares. In addition to these, there is the need for resources to supportthe redeployment and retrenchment costs.

47. The Role Of Donors. Donor support can be instrumental for theeffective implementation of reforms, particularly through ensuring consistentapproaches in tackling strategic issues, providing technical assistance tostrengthen institutions and to train staff, and financing viable investments.The on-going sale of MPE shares has dwelt mainly on relatively small-scaleunits. Financial support for BMR type investments to improve the profitabilityof the potentially viable large-scale enterprises would aid the expansion ofthe partia. divestment program. The implementation of redeployment andseverance pay schemes would require substantial financing, especially giventhe weak position of the MPEs. Thus, a fund for financing retrenchment costsmay need to be established to implement labor reforms, and donors might wishto support this ?ffort.

CHAPTER I

INTRODUCTION AND BACIGROUND

Introduction

1.01 Non-financial Public Enterprises (NPEs) account for about 35? to40Z of the annual development program (ADP). Currently, the energy publicenterprises (PEs) have the largest share of NPE fixed assets with 47X,followed by the manufacturing public enterprises (MPEs) with 422, andtransport with 10?. The energy corporations receive about 20? of publicinvestment and account for essentially 1002 of commercial energy and 402 oftotal energy requirements. The MPEs are important for export performance; thejute mills, for example, accounted for 202-252 of merchandize exports in FY82and about 15? in FY88. Relative to the private sector, the MPEs control about40Z of the fixed assets and employ 20? of labor in manufactur4 ng.

EvolutioL Of PEs

1.02 Public enterpri;es were created in Bangladesh after Independencein 1972, following the Presidential Order (PO 27) under which Governmentappropriated abandoned non-Bengali units; units held by the erstwhile EastPakistan Industrial Development Corporation (EPIDC); and all Bangladeshi-ownedunits in cotton, textiles, jute and sugar manufacturing. These togetherconstituted over 800 industrial PEs, organized under eleven corporations,accounting for about 90? of output in the modern manufacturing sector.Initially, the private sector was excluded completely from jute, textiles,sugar manufacturing, jute export trade and enterprises with fixed assetsexceeding Tk. 1.5 million.

1.03 During FY75-FY81, Government implemented piecemeal reformsinvolving mainly the privatization of small-scale enterprises. This wasfollowed by fundamental changes in policy when a new Government assumed powerin 1982. The new Government reversed the pro-nationalization approach toindustrialization by introducing the New Industrial Policy (1982), the RevisedIndustrial Policy (1986) and trade liberalization measures which expanded therole of the private sector. The list of industries reserved exclusively forthe PEs was narrowed down to military goods; electricity, excluding standbygeneration; mechanized forest extraction; telecommunication; air transport,excluding cargo and railways; atomic energy; and currency printing andminting. Government enacted the Public Enterprises (Management Coordination)Ordinance, and launched a Management Information System and a PerformanceEvaluation Project to improve MPE performance. An accelerated privatizationprogram was implemented during FY82-FY86. This involved (i) denationalization;that is, the return of previously private Bangladeshi units to originalowners, and (ii) divestment by selling abandoned and EPIDC units to theprivate sector, Under the new policies, approximately 38? share of jute goodsproduction capacity, 50? of capacity in textiles, 42 of fixed assets in steel,122 of fixed assets in sugar industries and 1OZ for Chemical industries weredivested.

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Table 1.1: MANUPACTURING PUBLIC ENTERPRISES (FY88)

Share of Share ofNumber of Industrial Fixed FY89 Share of

Corporation Units Capacity Assets Employment Production(Z) (X) (000) (Z)

BJMC /a 38 62 - 119.6 Jute woods (63)

BTMC /b 43 45-50 30 45.4 cloth (4)yarn (45-50)

BCIC 23 - 90 26.8 Cement (100)Fertilizer (100)Paper (80)

BSEC 21 - 96 14.1 Basic steel(excludingrolling) (100)Water vehic. (36)Bicycles (47)Radio and TV (20)

BSFIC 25 _ 88 26.7 Refin. sugar(100)

BFIDC 14 - - 3.4 MechanizedForestry (100)

TOTAL 164 /c - 40 233.0 40 to 50

/a Shares of various products by BJMC Mills relative to the private sectormills are Hession 62Z, Sacking 611 and CBC 68Z.

/b 451 weaving capacity and 55? spinning capacity. Share ratios expressedrelative to private modern manufacturing sector.

/c Include eleven enterprises with 49Z private ownership.

Sources: Autonomous Bodies Reporting System, MOF.

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1.04 The privatization left the MPEs in control of some 160enterprises by 1986 (800 in 1972), including monopoly production of refinedsugar, fertilizer, basic steel (excluding rolling) and cement. These remainingMPEs are organized under six corporations (Table 1.1). The Bangladesh JuteMills Corporation (BJMC) with 38 enterprises is under the Ministry of Jute;The Bangladesh Textile Mills Corporation (BTMC) with 43 units is under theMinistry of Textiles; the Bangladesh Chemical Industries Corporation (BCIC)with 23 enterprises, the Bangladesh Steel Mills Corporation (BSEC) with 21 andthe Bangladesh Sugar and Food Industries Corporation (BSFIC) with 25 are underthe Ministry of Industries (MOI). The Bangladesh Forest Industries DevelopmentCorporation (BFIDC) under the Ministry of Agriculture is the smallest with 14enterprises, accounting for only 52 of MPE output.

Budgetary Allocations

Table 1.2

Actual MPE Budgetary AllocationsTk Million

FY81 FY82 FY83 FY84 FY85 FY86 FY87 FY88*

Total allocation 2776 2700 2470 2336 2491 5369 6969 5559Fertilizer share (2) 52 25 40 46 49 71 72 69MPE share of ADP (Z) 12 11 9 8 8 16 16 11

Notes: * = Budget Estimates.Sources: Ministry of Finance, Planning Commissijn.

1.05 MPEs depend mainly on the ADP and external aid to financeinvestments. Internal resources accounted for less than '02 in FY88 and anestimated 6Z in FY89 of total investment financing requirements. The share ofMPE allocations from the ADP (Table 1.2) has risen from 112 in FY82 to about162 in FY86-FY87, but this is due to the sharp increabe in investments forfertilizer. MPE investments have increased at an average annual rate of 222 inreal terms (Table 1.3) during FY81-FY87, due mainly to new capacity expansionin the urea plants. The share of allocations for non-fertilizer activities hasdeclined from 482 in FY81 to around 302 currently. Because of low capacityutilization as discussed below, GOB's investment in non-fertilizer activitieshas been mainly in the form of balancing, modernization and rehabilitation.This has tended to fluctuate, but has remained below the FY82 level. Thecomposition of total MPE investment has changed in favor of the private sectorand the share of non-fertilizer declined from 192 in FY81 to a low of 82 inFY85, rising to 122 in FY88. Thus, the trend of investment in non-fertilizerMPEs is consistent with GOB's policy of restricting the public sector in theseindustries and promoting the expansion of private investment.

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Table 1. 3

Manufacturing InvestmentTk Hillion (Constant 1981 Values)*

GrowthFY81 FY82 FY83 FY84 PY85 FY86 FY87 (Z)

HPEs 1144 1610 1302 690 1006 2056 4271 22Fertilizer 595 409 521 319 493 1460 3075Non-Fertilizer 549 1201 781 371 513 596 1196

Private 1704 1915 2536 3532 5346 5138 5156 18

TOTAL 2848 3525 3838 4222 6352 7194 9427 20

Composition Of Investment (1)

MPEs 40 46 34 16 16 29 45Fertilizer 21 12 14 8 8 20 33Non-Fertilizer 19 34 20 8 8 9 12

Private 60 54 66 84 84 71 55

TOTAL 100 100 100 1OC 100 100 100

Sources: BBS, MOF, Aid Disbursements and Staff Estimates.

*= Domestic capital goods output is deflated by the Bangladeshi capital goods priceindex, BBS. Imported capital goods are deflated by the manufacturing unit valueindex of exporting countries (World Bank, IECCM) and the Bangladesh exchange rateindex. The secondary exchange rate is applied to imports through the WES market;all other imports are converted using the official exch-nge rate.

MPE Performance

1.06 Production. Growth occurred mainly in fertilizer production whichexpanded at over 301 a year during FY82-1Y88. Non-fertilizer production, onthe other hand, has remained stagnant or declined (Table 1.4) even afterdiscounting for the fall in fixed assets that rebulted from privatization.Actual outputs relative to targets for BTMC, for example, were 78Z for yarnand 732 for cloth in FY87. The small recovery of about 42 in yarn productionduring FY87-FY8S was due to external factors, such as more effectiveenforcement of anti-smuggling laws. Similarly, the recovery of refined sugarproduction by BSFIC during the same period was at the expense of the privatesector, which has limited access to raw materials. The general stagnation inoutput is due to both supply and demand constraints on MPE activities. Thesugar mills, for example, have had low capacity utilization of about 401 inFY85-86, rising to 651 in FY87-FY88 because of inadequate supply of rawmaterials. Since FY84, BTMC has experienced decreases in capacity utilizationand losses in the productivities of labor, looms and spindles. Despiteexpansion in spinning capacity, production of yarn by BTMC fell; averagecapacity utilization in spinning declined from about 801 to 701, and annualspindle productivity decreased between FY84-FY88, due mostly to power failure,machinery breakdown, lack of spare parts, shortage of raw materials andabsent-..ism. In the case of BJHC, unsteady external demand and growingsubstitution of synthetics for jute account mostly for the output stagnation.Also, slow growth in agriculture and the resulting low incomes and sluggishdomestic demand constrain industrial production.

Table 1.4

Selected MPE Production

FY82 FY83 FY84 FY85 FY86 FY87 FY88

Fertilizer ('000 M.Tons) 478 589 816 807 952 992 1409Sugar ('000 M.Tons) 202 181 151 88 83 182 178Steel ('000 M.Tons) 109 47 72 101 96 82 70Cement ('000 M.Tons) 326 305 286 240 292 310 310Jute Goods ('000 M.Tons) 587 339 338 327 275 332 326

No. of Mills (a) 77 40 40 38 38 38 38Textl: Yarn('000 M.Tons) 43 29 29 29 25 28 27

Cloth('000 Meters) 79 66 36 37 34 35 38No. of Mills(a) 56 38 39 43 43 43 43

Notes: (a) Reduction reflects denationalization of mills.

Sources: MOI, BBS, Planning Commission.

Table 1.6

Net Profits (Negative: Lono-s) */ of MPEs - FY76-FY89(Current Tk Million)

FY79-FY84 FY86-89Annual Annual FY76 FY79 F780 FY81 FY82 FY83 FY34 F796 FY28 FY97 FYfU FYn

Average Average Roviosd

BThC b/ -96 -144 36 46 -171 -183 -422 34 121 42 -519 -227 -as s9

BJKC b/ 103 -1097 - - 780 265 -462 240 -296 -1442 -168 -419 -103l -962

sCiC 129 160 -266 23 -23 56 71 369 273 161 15 -56 23 a00

BSEC -28 -16 79 111 147 124 -120 -273 -154 -29 -62 24 -26 17

8SFIC 299 -103 21 16 40 390 469 442 437 -242 -273 -265 26 236

BFIDC 14 61 -1 -18 1 10 12 30 46 Ss 68 14 6 67

Total 421 -1148 -131 177 774 662 -462 842 430 -1477 -2224 -926 -1033 -298

*/ Not profit before tax (after depreciation and after inter-nt).b/ Accounts of the mills that reomined in the public sector as of 1982/83.

Source.: FY86-FY89: Monitoring Cell, Ministry of Finance (Autonomous Bodies Budgets of various years) and various corporations.

FY76-FY84: For BTMC Figures: BTMC (Paper titled 'Bangladesh Textile Mills Corporation' by BTMC Chair.mo,AKM Muslehuddin in the CONCOPE Journal).

For Other Corporations' Figures for FY76-FY82: I8RO Report No. 4822, Bangladesh Economic Trendoand Devolopment Administration, February 24, 1984.

FY83-FY84: Surinder K. Malik, 'Bangladesh: Public Industrial Enterprinse., November 1966.*xcept for BSFIC which provided figures separately and 8FIDC the figures on which were taken from the CONCOPE Journal.

1.07 Financial Performance. Appraisals based on balancing, modernizationand rehabilitation (BMR) investments suggest that most e 7terprises, except afew in sugar, paper and steel, are economically viable.1 A few uneconomicunits have been financially profitable because of high trade barriers. Most ofthe enterprises which are economically viable have, nevertheless, shown poorfinancial performance. Total surpluses of Tk. 1.5 billion in FY81-FY84 havedeclined to losses of Tk. 5.96 billion in FY85-FY89 (able 1.5). Even publicprofitability represented by the ratio of operating surplus (before tax,depreciation, interest cost and contribution to workers' profit participationfund) to assets was between 2.51 and 41 during FY86-FY88 which was below thecost of capital. Less than 201 of the enterprises made profits consistently inFY85-FY88. BJMC incurred most of the losses, accounting for 802 (Tk. 1.03billion) of the total deficits in FY88. Only 3 of the 38 jute PEs made profitsin FY88, due mainly to world price fluctuations and the downward rigidity oflabor costs which accounted for over 1002 of value added. The performance ofBCIC has deteriorated with profits declining steadily between FY83 and FY87because of increased raw material and power costs and output losses frommaintenance problems; it improved slightly in FY88 and FY89 with more thanhalf of the enterprises making profits. Twelve of the 43 BTMC enterprises madeprofits, 5 of them consistently, in FY85-FY88; total losses from all the BTMCunits have declined because of lower zaw material costs and improvement incapacity utilization. BSFIC showed marginal profits for only 3 of its 16 sugarmills during the latter 1980s. About half of the 21 enterprises under BSECmade profits during FY86-FY88; however, Chittagong Steel and Eastern Cablestogether accounted for 552 to 70Z of the profits.

1.08 Because of the persistent losses, internal savings are low andsome corporations, such as BJMC, have negative net-worth. This has causeddependence on allocations from the ADP and financing from the NCBs. Inaddition, Government provides cash infusion, debt conversion and grants tosustain MPE operations. Outstanding advances to MPEs, about 13Z of total NCBadvances, amounted to over Tk. 10 billion in FY87 compared to Tk. 7.8 billionin FY82, with BJMC accounting for most of the increase. Thus, the MPEs imposea burden on the ADP and the financial institutions, competing for resources,but making little contribution to resource mobilization. Apart from externalfactors, including world price fluctuations, raw material shortages andinfrastructural bottlenecks, such as power failure, the poor financialperformance is attributed mainly to factors inherent in Government control.These include irnrecise performance objectives and little use of standardcommercial practices; insufficient managerial autonomy and accountability;inefficiencies related to over-employment and centralized determination ofprices and employee compensation; and inadequate institutional capacity tosustain policy implementation.

/ Rationality and Viability of Public Industrial Investment Program Und?rthe Third Plan (W"rld Bank,1987). About 85Z of the investments, incl.dingthose in fertilizer and textiles, are economically viable with the lowestrates of return of 142 and others over 202; estimated economic rates ofreturn are less than 22 for North Bengal Paper, Chittagong Steel, Us.ianiaGlass and Sylhet Paper.

CHAPTER II

ODJICTIVMS OF REFORMS AND THE ROLE OF PRIVATIZATION

Objectives For Reforms And Broad Policy Agenda

2.01. The officially stated objectives of MPE investment in Bangladeshare to produce inputs to support agricultural development, meet some basicconsumer goods needs and contribute to export grovth. In addition, the MPEsare to make contributions to resource mobilization and employment creation.However, except for the expanded production of fertilizer noted earlier, thefulfillment of these objectives has been frustrated by various factors. Twobasic sources of inefficiency underlie poor MPE performance in Bangladesh. Onesource of inefficiency relates to direct state ownership and controls whichhave enabled Government to intervene directly in enterprise operationaldecisions. The second source relates to restrictive external and internalcommercial policies and regulations that impede competitive resourceallocation for both public and private enterprises. Though there is generalrecognition of the need to enhance MPE autonomy and improve efficiency inBangladesh, the mode and extent of such an autonomy is controversial. Thereare those who advocate complete divestment as the only means to improveperformance; some propose partial divestment and institutional reforms toexpand managerial flexibility; others prefer the relaxation of restrictivepolicies and regulations to create a competitive environment for the MPEs andtheir private sector counterparts. Actually, Government reforms have tended tobe eclectic, emphasizing privatization and involving the other options.

2.02. Currently GOB is implementing a partial divestment programinvolving the sale of the shares of profitable enterprises to the privatesector (para 2.08-2.18), but there are no clear policies for the vast majorityof the enterprises, about 80Z, which are not financially profitable. As thedivestment of the profitable enterprises progresses, what to do about theunprofitable ones would become more urgent. Competing demands of other sectorson Government resources underline the need to formulate a broad action programto improve their performance.

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2.03. Classification Scheme. Improving the performance of most MPEs mustinvolve the use of other 'nstruments beyond that of privatization, since theseenterprises are not attractive for share offers. Some enterprises which arenot profitable at present would need restructuring to improve their chancesfor profitability; subsequently, some of these enterprises would be divested;others, however, are likely to remain in the public sector in the foreseeablefuture. Efficient allocation of MPE investment resources for balancingmodernization and rehabilitation requires a classification scheme. Theclassification would involve using financial and economic criteria to separatethe potentially profitable from the unprofitable enterprises. The corporationswould have responsibility for classifying the MPEs according to the type ofaction required to improve performance. An appropriate scheme might classifyenterprises according to those of a strategic nature to be retained in thepublic sector; those of a purely commercial nature which would have theirobjectives best realized in the private sector; and those of no strategicimportance and with no prospects of viability which should be phased out. Thelack of classification may have led to much wasted effort to improve theperformance of MPEs under the performance contract project, as in the case ofenterprises (e.g. General Electric Manufacturing Company) which suspendedparticipation because of chronic problems. The Classification scheme would bepart of an overall strategy for implementing MPE reforms. It would underpinthe choice of the appropriate mix of instruments - divestment,commercialization, closure, BMR investment, performance contract and financialrestructuring - for improving MPE performance.

2.04. Efforts to improve profitability would need to emphasizecommercial orientation. This would require relaxing the overlapping controlsof various Government divisions (chapter III); improving financial planning(chapter IV); promoting competitive access to markets (chapter V); andreducing overemployment and employee compensation costs (chapter VI).Difficult decisions must be made to resolve conflicts in policy thatperpetuate inefficient production. In the case of jute goods, for example,there is a conflict between the use of the jute mills as employment centersand the efficiency requirements of a competitive manufacturing exportindustry. Performance objectives must separate commercial from social servicefunctions. Clearer objectives would provide the basis for determiningperformance targets and giving managers meaningful responsibility fordecisions and accountability for results. Where enterprises are directed toperform social services because of broader development objectives, GOB mustassume the explicit budgetary responsibilities for the costs of such services.As part of promoting efficiency, a program for phasing out the inherentlyuneconomic enterprises needs to be developed and implemented. Policy optionsfor phasing out the uneconomic units would include the use of market forces,budget withdrawal, liquidation or sale of assets.

2.05. Jute - A Special Problem. Recent reforms have excluded the jutemills. The scope for partially divesting the PE jute mills by selling sharesis limited, since few of them meet the profitability criterion considerednecessary for enlisting public confidence in share offers. Only three PE jutemills generated profits in FY88. The performance of the jute mills continuesto deteriorate with persistent losses. In FY38, for example, BJMC accountedfor about 80Z (Tk. 1.03 billion) of MPE losses, with 40Z coming from the

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Adamjee Mill alone. The losses erode the capacity of the jute goods industryto maintain a competitive edge in the export markets which absorb about 90Z ofthe output. The jute goods industry faces difficult problems. These includegrowing substitution of synthetic for jute fibre, and fluctuations in both rawjute and jute goods prices and inability to pass on these costs to consumers.The consequent demand stagnation and excess capacity has been combined withdownward rigidity of employment and employee compensation costs. Thus, losseshave persisted, eroding BJMC's equity and weakening its financial structure.These together make jute goods industry problems difficult relative to theother MPEs. Because of the liquidity problems, the jute goods industry hasbenefitted from concessionary interest rates and loan rescheduling. However,while some six inefficient private jute enterprises, including Gawsia, W.Rahman, M. Rahman, Allied, Ashraf and Sothana, have closed down, GOB hasmaintained the operation of almost all its mills through cash infusion, grantsand debt conversion. The closure of the private jute mills is inevitable foradjusting the excess capacity in the industry; but the sustained operation ofthe inefficient BJMC's enterprises through financing support distorts thepolicy environment for eliminating the excess capacity.

2.06. There is need to restructure the potentially profitable mills toimprove the viability of the industry and make the PE mills attractive forparticipation in the divestment program. The Jute Report prepared by the Bankand discussed with GOB in July 1986 has been reviewed by a committee, andrecommendations hpve been submitted to Goveri-ment. In May 1989, Governmenttook a decision concerning the jute report and an.Lounced new policiesregar4ing jute manufacturing activities. Essentially, the new policies addressthe immediate-run liquidity crisis facing the jute mills. Under thesepolicies there will be (a) subsidies on export prices at the rates of 1OZ forSacking, i5Z for Hessian, and 20Z for CBC; mills would be expected to meetproduction sbandards determined on the basis of the average performance of the10 best for each group of public and private sector mills; (b) non-performingmills will lose 25Z of the subsidy benefits each year and will be closed downin the third year of nonperformance; (c) all outstanding loans incurred withbanks during FY85-FY89 will be frozen with a three-year moratorium startingFY90 during which Government will pay the interest, and the total debt willthen be paid in ten years with 102 interest; interest on new loans will be at14% with 5% drawback on exports; (d) a committee will be established todevelop criteria for selecting mills for rehabilitation, and assistance willbe sought from the Bank and other donors to implement the BMR programs.

2.07 Government is aware that the new policies do not address the moredifficult problems relating to overemployment and excess capacity in the jutemills. Therefore, it is considering a strategy for restructuring the industryby consolidating capacity in the efficient enterprises, adjusting product mixand gradually phasing out the uneconomic units. Jute sector reforms must dealwith the thorny over-employment problem to sustain a competitive exportindustry. Though Bangladesh has abundant labor, the efficiency of productionis low relative to other countries, such as India, Thailand and Pakistan. InFY87, for example, production per loom hour for BJMC was 6.92 lbs for hessian,18.45 lbs for sacking and 14.60 lbs foir CBC compared to 10.13 lbs, 23.10 lbsand 18.50 lbs respectively for India. While Indian wages are relativelyhigher, the low productivity and over-employment have led to excesses of labor

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costs over value added. Policies for employment reform, includingredeployment, pay restructuring, retrenchment, attrition and severance payschemes are discussed in chapter VI.

The Role Of Privatization

2.08. Privatization And Liberalization (PY82-FY86). Among the variousinstruments, Bangladesh has used mainly privatization for MPE reforms. GOBimplemented a complete privatization program which reduced the size of thepublic sector significantly during FY82-FY86. This transferred fixedindustrial assets from Government to private hands without changingsignificantly the distribution of ownership within the Bangladeshi privatesector. Before nationalization in 1972, the state's share of fixedmanufacturing assets was 342; private Bengali ownership was 182, with 48t fornon-Bengalis. The share of Government increased to about 90Z following thenationalization policies of the 1970s, but it declined to about 4OZ afterdenationalization. A significant aspect of the privatization involved thereturn of enterprises to previous Bengali owners. In the case of abandonedenterprises, preference in acquisition was given to registered workercooperatives; but they acquired only about 40 small enterprises with littleimpact on asset redistribution. In addition to divestment, measures wereintroduced to deregulate private investment sanctioning procedures, relax someimport controls and provide export incentives.

2.09. The reforms contributed to improving the policy environment withbeneficial effects on private sector industrial activities. Maintenance,material purchases and inventory management were improved; and despiteresistance from labor unions, ov7 remployment was reduced in the privatizedunits as they were reorganized.2 The privatization was instrumental ingiving clear signals about stated Government intentions to reverse formernationalization policies and allow private participation in industry. Togetherwith the export incentive s, relaxation of controls on investment and imports,and other deregulation,37 the privatization was accompanied by the revival ofprivate sector confidence as indicated by the expansion of private investment(para 1.05). Some inherently inefficient enterprises were closed down afterdivestment, but new activities also emerged. The emergence of garmentsproduction, for example, would have been difficult if nationalization policiesand regulations which excluded the private sector completely from the textile

21 There are also indications of improved maintenance and procurementpractices in the privatized units. Employment decreased by 4Z in thsprivatized units with most job losses occurring at officet and stafflevels; employment of workers increased in some jute mills. SeeMonitoring The Performance of Public Corporations (TIP Report, 1986);Prospects and Policy Issues for the Jute Sector (World Bank, June 1986);Mansurul Ameen, A Study of Divestiture in Bangladesh (March 1987);S.H. Chishty, Privatization in Developing Countries, The Experience ofBangladesh (February 1985).

31 See Bangladesh CEM FY87, FY88 ana FY89 for details of the industrialreforms.

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manufacturing had not been reversed. With reforms, investment in garmentsexpanded from 88 units in FY82 to over 700 in FY88; and garment exports rosefrom $7 million in FY82 to over $430 million in FY88. Estimated averagemanufacturing growth of about 32 during FY81-FY88 understates actualperformance because of the quality of the data; even so the private sPertcr,apart from chemical goods, accounted essentially for the growth.

2.10. An outstanding issue concerning the FY82-FY86 privatizationprogram relates to the effects on credit recovery from the new buyers. It wasthought at the time that speedy action was critical for overcoming oppositionand sustaining momentum in effecting the implementation of reforms.- Becauseof this, disagreements on important issues, such as the value of assets andliabilities of the enterprises and the assignment of responsibility for theliabilities, were not fully settled prior to the transfer of ownership to theprivate sector. The major sources of disputes were costs due to devaluation onthe loans incurred in foreign currency, interest penalties on loan default andunpaid bills incurred during the nationalization period. GOB has taken stepsto relieve the new owners of some of the burden of these liabilities. Forexample, an exchange rate fluctuation scheme was set up to provide protectionagainst exchange rate risk; and a credit recovery program, including a reviewof the operation of the development finance institutions was introduced.However, the inability to resolve the problem has contributed to loan defaultamong the new owners. While the enforcement of debt recovery is necessary forpromoting credit discipline, it is important for acccss to credit andinvestment expansion in the textile industry that steps be taken to reachagreement on the issue.

2.11. Current Divestment Policies. MPE reform entered its current phasewith the introduction of a partial divestment program under theDenationalization Amendment Ordinance of June 1987. Currently, theimplementation of this program is confined to MOI, covering selectedenterprises of BCIC, BSEC and BSFIC. Under the program, only financiallyprofitable enterprises will be divested. The share offering is limited toBangladeshi investors. Forty-nine percent shares are allocated to the privatesector, 342 to the general public and 15; to the PE employees. Governmentretains the remaining 512 shares which will be transferred to the corporationto be reconstituted into a holding corporation wholly owned by the state. Thedivested enterprises will have more managerial autonomy through the enterpriseBoard which will have nine members: five of the nine Board members will beappointed by the corporation, not by GOB as in the past; three will beappointed by the general public and one by employees if they acquire at least122 of the 15Z shares allocated to them.

4/ See Tawfiq Chowdhury, Privatization of State Enterprises in Bangladesh,1979-84 (September 1987); Klaus Lorch, Privatization And Its Longer-TermEffects, A Case Study of the Textile Industry in Bangladesh (HarvardUniversity Center for Business and Government, april 1988); ClaireHumphrey, Privatization in Bangladesh (USAID 188).

Table 2.1

Bangladesh: Manufacturing Enterprises Partially Divested---------------------------------------------------------- __------------

(Tk. '000)

3 ofRevalued Total Paid Government Public Offoring to Total OfferingNet Worth Up Capitol Shares Offering Employees Subecribed

1967/88

Uemanis Class Sheet Factory Ltd. 167,000 36,000 17,860 11,900 5,250 267

Eastern Cables Ltd. 332,400 200,000 102,000 68,000 30,000 106

Dhaka Vegotable Oil Industries, Ltd. 293,300 86,000 43,360 28,900 12,750 159

Kohinoor Chemical Co. Ltd. 162,800 60,000 26,500 17,000 7,500 804 LA)

Atlas (Bangladesh) Ltd. 30,000 10,000 5,100 3,400 1,500 1,114

Zeal Bangla Sugar Mills Ltd. 148,207 60,000 30,800 20,400 9,000 69

198S/89

Eagle Box Ltd. 67,633 5,000 2,560 1,700 750 438

Renurick Ltd. 120,600 20,000 10,200 6,S00 3,000 129

Metalex Ltd. 40,979 6,000 2,660 1,700 750 5s8

SUBSCRIPTIONS EXPECTED TO BE CLOSED BY JUNE 30, 1989

Kushtis Sugar Ltd.Chittagong CemntPanchagark Sugar Ltd.National Tubes Ltd.

Source: Ministry of Industries, Disinvestment Wing

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Table 2.2Enterprises Under Consideration ForPartial (49Z) Divestment in FY90

Enterprise Corporation

Shyampur Sugar Mill BSFIC

North Bengal Paper Mill BCIC

Faridpur Sugar Mill BSFIC

General Electric Co. Ltd. BSEC

Meher Industries BSEC

Khulna Shipyard BSEC

Bangladesh Insulator and Sanitary Works Ltd. BCIC

Sylhet Pulp and Paper Ltd. BCIC

Polash Urea Fertilizer Ltd. BCIC

2.12. The initial public response to the share offers appearedsatisfactory. Six enterprises were divested by FY88 (Table 2.1) and five morein FY89); nine more enterprises are listed for partial privatization in FY90(Table 2.2). The total share capital of the six enterprises divested in FY88amounted to Tk. 440 million (approximately $14 million). Of the sharesallocated to the general public from Usmania Glass, for example, privateindividuals account for 83Z of the subscriptions, and private financial.institutions account for 13k Share offers, apart from those of the sugarmills, have been over-subscrIDed by, for example, 106Z for Eastern Cables and11142 for Atlas Bangladesh Ltd. A lottery system is being used to allocate theover-subscribed shares, and share prices have increased in the Stock Market.5-

2.13. While the partial privatization program continued in FY89, thesubscription to share offers was mixed. The response of workers to the 15%shares allocated to them was poor, and some shares were under-subscribed. Thelevel of activity was low relative to FY88; the total amount of shares off-

5/ Share prices in March 17, 1989 were, for example, Tk. 229 for DhakaVegetable; Usmania Glass, Tk. 210; Kohinoor Chemical Tk. 141; EasternCables Tk. 134, each compared the initial sale price of Tk. 100.

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loaded declined, and GOB appointed a committee to investigate the problem. Amajor reason for the lower subscriptions is the poor profit potential of theenterprises. The disruptive effects of recent natural disasters, such asfloods, drought, etc., and the overcrowding of the stock market bysimultaneous share offers are also contributing factors. The share offerswhich have not generated much interest among investors are the sugar mills(Table 2.1), which are economically unviable and financially fragile even withhigh protection and preferential access to raw material markets. Similarly,many of the eiL.'erprises planned for divestment in FY90 (Table 2.2) are sugarand paper mills, Polash Urea and General Electric; these are of doubtfuleconomic viability and are also financially weak. Though the list ofenterprises is reviewed prior to actual share offers, a more rigorousclassification scheme involving the use of both financial and economicviability criteria would be more reliable in screening the profitableenterprises and helping to define appropriate instruments for reform. Also,GOB plans to adhere more closely to the policy of phased floating of shares toenable the rather thin stock market to absorb the offers effectively.

2.14. Improving The Current Divestment Program. The Revised IndustrialPolicy of 1986 restricts the current reform process, allowing shares up toonly 49Z to be unloaded. In the view of many Bangladeshi officials, thispartial rather than complete divestment is a necessary compromise to enlistthe support of employees for starting the reform process. While the reformsare in the right direction, their scope is limited and implementation isfragmented. There are no clear policies concerning the vast majority of theMPEs which are currently in the unprofitable category and, therefore, notattractive to investors. Implementation, so far, covers only the corporationsunder MOI, excluding BJMC and BTMC which together accounted for 872 of all MPElosses in FY86 and 86Z in FY88. The program has led to qualitative changes inenterprise management because of private sector representation on EnterpriseBoards, reducing somewhat the direct control of Government; however,substantive changes in managerial authority have been limited. There have beenno significant improvements in performance as needed to promote publicconfidence in the process. Loopholes in the existing laws, such as PublicOrder 27, which established the public enterprises still give higher levelauthorities power to intervene in operational decisions. These loopholes couldbe closed by selling more shares to reduce the state's majority holding, butGOB is addressing the problem through legal reforms.

2.15. The main measures being developed by the Government include (a)amendments to the Company Act of 1913 which would enable the partiallydivested ernterprises to operate more like limited liability entities withdiminished direct bureaucratic controls and enhanced authority for theEnterprise Boards; a bill concerning these changes has already been draftedand is being reviewed by the Law Ministry; (b) over the long-term and inparallel with the partial divestment program, MOI is working towardsestablishing a Commission for Privatization which will engage in complete(10OZ) divestiture for selected PEs; and (c) a stock ownership plan toovercome the resistance of employees to reforLs through financial support toacquire shares allocated to them. The idea of a Commission which is in theformative stage will involve the selling of assets of selected non-manufacturing units and unprofitable MPEs to the highest bidders. MOI has

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issued a position paper on the issue and is seeking assistance from USAID andother donor agencies to finance equipment purchases and consultants. Theproposed Commission will identify areas for further deregulaticn anddivestiture, suggest strategy and establish priorities for action. TheProposed Commission would be useful to the extent it serves to broaden thescope of reforms to other sector corporations. It should be pointed out,however, that Bangladesh has acquired experience and institutional resourcesin privatization since the 1970s. Some of the institutions include theDivestment Board, which is the final decision-making authority on divestingenterprises approved by the Cabinet; the Tender Committee for examining thevalidity of bids; and the Working Group to examine the valuation of assets,shares, etc., and make recommendations for disposition. The experience ofthese institutions and earlier privatization should guide current efforts topromote further divestment. In the mean time, given expected long delays ineffecting the implementation of reform proposals, the following measures aresuggested for improving the partial divestment program.

2.16. First, the approach to selecting enterprises for divestment shouldbe re-assessed. GOB's stated policy is to choose only the profitableenterprises for divestment to enlist public confidence in the reform programand promote the use of the stock exchange for resource mobilization. However,the selection is based on financial criteria, assuming a static incentiveregime. Thus, t0e long-term viability of particular industries has not beenassessed. Despize recent trade liberalization (para 5.02), some enterprises,such as Usmania Glass and Chittagong Steel, continue to be protected byrelatively high trade barriers, including quantitative import controls, hightariffs and more effective enforcement of anti-smuggling laws. Currently, GOBis considering further liberalization measures. To anticipate the efficiencyeffects of these trade reforms, there is need to adopt both financial andeconomic criteria in choosing the profitable enterprises to increase Lhechances that divested units will be profitable under a more liberal traderegime.

2.17. Second, the method of valuing and allocating shares and GOB'smajority control of the partially divested enterprises should be reviewed. Themethod of valuation is based on revaluing net-worth and assessing the futureprofitability and projected ability to provide adequate dividends. Followingthe selection of an enterprise for privatization, a valuation report isprepared by independent auditors. MOI sends the valuation report and auditedfinancial statements for the last three years to the Investment Corporation ofBangladesh (ICB). ICB screens the report, undertakes its own valuation andrecommends a share value calculated and issued at par value of Tk. 100; thevaluation calculates the number of shares, not their face value. Shares areoffered in blocks of Tk 500; Tk 1,000; Tk 1,500; Tk 2,000 and Tk 2,500; andallocation priority is given to applicants in the smaller size categories.Share prices have tended to increase rapidly within weeks of the initialsales. This is accompanied by over-subscription and a lottery system.supervised by MOI and representatives of MOF and ICB, is then usee to allocatethe over-subscribed shares. In the case of Usmania Glass, for example, thevalue of applications was Tk. 44.4 million for shares valued at Tk. 11.9million; this resulted in a refund of Tk. 32.5 million to unsuccessfulapplicants. Share price under-valuation is a difficult problem even for

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financial markets with tested share price valuation and forecastingtechniques. However, the systematic pattern may be reduced by incorporatingfuture market value into the valuation procedures. Also, given the highincidence of over-subscription, more shares could be sold to reduce the 512Government majority control.

2.18. Third, the scope of the divestment program needs to be expanded.Other instruments for involving the private sector in MPE management could beadopted. Block shares of large-scale enterprises could be sold to privateinvestors, particularly if they can bring special management expertise,improved technology and rxternal markets to improve performance. This mayinvolve offering shares to Non-Bangladeshi investors. GOB has used managementcontracts in an attempt to improve the performance of Machine Tools Factory.This approach could be reviewed and extended to giving the contractingpartners managerial authority, including decisions over input use and costcontrol. GOB should promote privatization at the early project stage byengaging in more joint public-private financing of new ventures. Lastly, whilethis is considered politically difficult, substantive privatization wouldrequire that partial divestment be extended beyond 49Z share offers and justthe corporations controlled by MOI to the textile mills. There is alreadydiscussion in the Ministry of Textiles about permitting complete divestitureof previously private Bangladeshi-owned mills which were nationalized atIndependence and still being held by BTMC. This policy could be expanded toinclude partial divestment for other BTMC units as currently being done byMCI.

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CHAPTER III

INSTITUTIONAL D4VCLOPHfNT

3.01. Despite proposals for expanding divestment outlined in the earliersections of this report, institutional development is important because of theneed to improve the management of MPEs likely to remain in the public domainin the foreseeable future. These institutional issues also affect enterprisesin energy, which is reserved fur the public sector and PEs in air and railtransportation which are state monopolies. The major institutions concernedwith PE management and policy include the Council Committee on PublicEnterprises (CCPE) with the President as Chairman; the Council for PublicCorporations (CPC); the Consultative Committee on Public Enterprises (CONCOPE)and the Autonomous Bodies Wing (ABW) of MOF. The CCPE is one of severalcabinet committees that advise the President, and its role is limited to PEissues. The CPC is the main authority for deciding PE policy and managementreform issues (para 3.08-3.11). CONCOPE, a voluntary association of PEs tocoordinate management decisions, is a non-governmental body, but hasinfluenced PE policies through informal channels and access to decision makingauthorities. The ABW conzerns mainly with financing issues and budget reviewfor the PEs; it is also currently developing the performance monitoring andevaluation system. The basic weaknesses of current institutional arrangementsare lack of clearly defined roles at various levels of the structure,overlapping controls and inadequate capacity to formu'late and effect policyimplementation. Also, there is a need to improve the method of selecting highlevel executives.

The System Of MPE Management And Control

3.02. Since their inception, a major PE management problem has been theallocation of responsibilities and related accountability among the politicalauthorities, line ministries, corporations and enterprises. Most of the PEsregistered as limited liability companies under the Company Act of 1913 werebrought under the Presidential Order (P.O. 27) which established the PE sectorin Bangladesh. The P.O. 27 left the powers of the chairmen and directors ofcorporations to be determined by Government. Government owned the PEs; thecorporations held no shares, but simply acted as agents in administering theenterprises. Government, neverthelesf, often bypassed corporations andintervened directly in enterprise af airs. This has resulted in threehierarchies of controls over the enterprises. Government controls theappointment of high executives and intervenes in operational decisions,including employment, procurement, output pricing and even approval of travelrequests. Ministries control bureaucratic procedures; and corporations, as defacto Head Offices, control operations, leaving enterprises little flexibilityand initiative. Enterprise level managers do not have adequate autonomy overbasic operational decisions, such as production planning, procurement orrecruitment. The corporation provides production plans for each enterprise;though these plans are drawn in consultation with the enterprise levelmanagement, they tend to be restrictive as changes in response to marketsignals require the approval from the corporation. The procurement of raw

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cotton, for example, is done by the Marketing Directorate of BTMC, andenterprise managers are restricted in the purchase of spare parts. A managercan procure spare parts up to Tk. 5,00tJ through cash purchase; Tk. 20,000through local tender; and Tk. 500,000 through press tender, provided the priceof an item does not exceed Tk. 50,000. The authority for cash purchase islimiting and the tendering procedures are so cumbersome that timelyprocurements are rare.

3.03. Relaxing The System Of Overlapping Controls. GOB is aware that theoverlapping responsibilities are not conducive to sound management. Thecontrols hardly contribute to motivating enterprising managers, as they shiftresponsibility and accountability to higher levels of authority. They alsorestrict managerial flexibility relative to the counterparts in the privatesector. Recommendations for reform have already been submitted to Governmentunder the Guidelines (1976) for PE autonomy and the Zaman Committee (1983) onthe Re-organization Of Public Statutory Organisations which examined thesystem of MPE management. The Guidelines proposed measures to loosen thecontrols and establish clearer lines of responsibility among the varioushierarchies. The Zaman report recommended, among other things, limiting thedirect role of GovernLment by forming holding corporations to own the PEshares. Government accepted most of the recommendations and is in the processof implementing some of them. Holding corporations a-e being established inthe energy sector; the sale of MPE shares to the private sector is inprogress, but the formation of holding corporations for the MPEs is pending.While the various committees have identified the weaknesses of the currentsystem, Government has to choose a consistent set of recommendations that willcorrect the weaknesses. Potential conflicts pertaining to the recommendationsof the Guidelines, the holding corporation concept and the role of theMinistries must be resolved in reforming the institutional structure for MPEmanagement. For example, the proposals in the Guidelines which maintainGovernment control of employment and employee compensation are likely tofrustrate the objective of the holding corporations to limit such regulatoryand bureaucratic influences and promote the corporate culture necessary forpursuing commercial objectives. Thus, as holding corporations are established,the functions of the Ministries would need to be focussed on policy issues.Reforms should aim at developing a system in which the political authoritiesand Ministries retain broad policy and supervisory role over corporations; inturn, the holding corporations should undertake strategic planning andindividual enterprise performance monitoring, leaving the enterprises todetermine day to day operational decisions without direct intervention fromthe higher level bodies. While recognizing the need to be sensitive to theprerogative of the state, credible measures to promote commercial orientationunder the proposed holding corporations would require minimum directGovernment involvement in enterprise operations.

3.04. GOB recently announced its intention to implement recommendationsconcerning the Guidelines and the formation of holding corporations; an actionprogram to follow up on implementation should be formulated. Reforms shouldrelax two main sources of control over the MPEs. One source of control is inthe appointment of chief executives and Boards of holding corporations andenterprises, which is currently decided at the highest executive level ofGovernment. The other source of control involves reporting relationships,

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authority for supervision and performance monitoring. The implementation ofproposed recommendations will seconstitute the system for appointments.Government including Ministrias would restrict their representation to theholding corporation by appointing the high executives of the corporations, thecorporation Boards and the Board chairmen. The holding corporations andprivate sector shareholders would control the appointment of enterprise levelchief executives and Boards. In turn, the holding corporation would limit someof its functions, such as purchases, personnel decisions, product mix,pricing, and others that interfere with enterprise level decision making. Thesystem of monitoring would also be decentralized. GOB would monitor theperformance of the corporations; the corporations would monitor and evaluatethe performance of the individual enterprises. As discussed in chapters IV-VI,reforms should give the enterprises authority over operational decisions,including use of inputs, dividend distribution, output pricing etc.

3.05. Performance Evaluation. As controls on management are relaxed,performance monitoring and evaluation will assume greater importance forenforcing accountability. Yet, GOB has no meaningful formal system formonitoring and evaluating PE performance. Reviews of annual performance,including comments on the financial performance by the MOF, are carried out bythe Executive Committee of the National Economic Council (ECNEC). Theperformance targets are set without the policy conditions fot achieving them,as decisions ,n major cost and production variables are controlled byGovernment. Annual performance reports provide little feedback into planningand monitoring because they are often two to three years in arrears, despitethe provisions requiring corporations to submit audited accounts at the end ofeach financial year.

3.06. Large and growing claims by the PEs on national budgets and theNCBs with little returns prompted GOB to set up a Management InformationSystems cell in the ABW. GOB also initiated a study of the existingaccounting, financial management and reporting mechanisms, and started thedevelopment of a system for performance evaluation. A project for the"Development of Performance Evaluation and Financial Management InformationSystems" for Autonomous Bodies was launched in 1984. This three-phased projectis being assisted by UNDP with the UN Department of Technical Cooperation forDevelopment as the executing agency. Implementation is through a monitoringcell under the ABW. The first phase of the project (April 1984 - June 1986)involved the development of a data collection system and the creation of adata base for PEs, using uniform concepts and financial and accountingtechniques. The ABW has been developing a Management information System (MIS);a monitoring cell has been established; and design, testing and implementationof the system and training of the officers of the monitoring cell has beenundertaken. The System for Autonomous Bodies Reporting and Evaluation wasdeveloped and used on experimental basis to prepare budgets for ten largecorporations for FY86/87. The second phase of this project involving thedevelopment of performance indicators through pilot performance contracts withsick enterprises has started after delays caused by staffing problems. Thissecond phase involves establishing a monitoring committee comprising therepresentatives of the enterprise, corporation, line ministry, the monitoringcell and relevant agencies whose cooperation is critical for improving theperformance of the enterprise. The performance contract defines the roles of

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the enterprise, Government and other influencing agencies, and determinesperformance targets in the context of these roles. Performance evaluationunder the contract involves the submission of actual achievement report andaudited accounts to the monitoring cell; the monitoring cell then prepares anevaluation report rating the performance of the enterprise. One performancecontract was signed in FY87 and three in FY88; twelve more are expected duringFY89-FY91. The final phase of the project would involve expanding the systemto all PEs.

3.07. The following are proposed for improving the development of theperformance evaluation system. First, including only 'sick' enterprises andunits which have commercial objectives in the performance contract project isleading to resource waste in the case of enterprises which are unable tobenefit from the program and have suspended participation. This may also beexcluding enterprises which could potentially benefit. Performance contractsare normally used for non-comercial PEs. Korea, for example, focusses it onstrategic industries, such as public utilities, transportation, energy,chemicals and others whose performance has spill-over effects on othersectors. Selecting PEs which have potential to be viable is more likely togenerate confidence in the development of the system. The scope of the projectneeds to be reviewed to emphasize the non-commercial and potentially viablePEs. Second, there has been a tendency to depend more on Government to providepreferential access to markets. The contract of the North Bengal Paper Mill,for example, resulted in a commitment by Government to improve the supply ofbagasse, the main raw material, from the state sugar mills. Contracts do notinclude incentives to improve managerial performance, apart from adiscretionary fund for giving incentives to employe's. These weaknesses of theproject need to be changed. Lastly, the performance contract project is timeconsuming and skill-intensive. Given the large number of enterprises, theextension of coverage to all PEs in the near future is unlikely. Therefore,while continuing development of the project, GOB should also emphasize andimprove the traditional methods of evaluation, such as timely internal andexternal audits.

3.08. A CPC Secretariat. The CPC was established under the ManagementCoordination Ordinance in 1986. The Ordinance is patterned along the lines ofthe Korean Government Invested Enterprises Management Act of 1982, providingfor management by objectives, including a post-evaluation system. The CPC isthe highest inter-ministerial authority on matters concerning the managementof the PEs, having as ex-officio members the Ministers of Finance, Planning,Industries, Energy and Commerce. Other Ministers are co-opted if mattersconcerning corporations under them are being discussed. The Prime Minister,who is also the Minister of Industries, acts as its Chairman. The functions ofthe CPC as stated under the Management Coordination Ordinance are to (i)formulate general policy guidelines for public corporations; (ii) formulateguidelines for the preparation of management objectives and budgets ofcorporations; (iii) approve production targets, profits and performancecriteria, declaration of dividends or contribution of profits to Government(iv) evaluate periodically and monitor the performance of corporations, and dosuch things as it considers necessary for ensuring coordination and bettermanagement of the corporations. Because of its inter-ministerial composition,the CPC has served as a forum for deliberating and deciding on PE sector-wide

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issues and its collective decisions have served to limit intervention byindividual Ministries in the affairs of the corporations. Since its inception,the CPC has made decisions on important PE management issues, includingliberalizing output pricing; approving the second phase of the performancecontract project for developing a performance evaluation system; and framingrules on the terms of service for high level management.

3.09. Despite having major responsibilities, the CPC has no permanentsecretariat. This has caused delays in the performance of important tasks. Forexample, the CPC is unable to provide budget guidelines to the PEs six monthsbefore the start of the fiscal year as required by the Ordinance. Governmenthas enacted regulations for the ABW of MOF to provide secretarial assistanceto the CPC. In this capacity, the ABW has been active in committee work (e.g.Experts Committee on Pricing) and preparing policy papers for the CPC. But theABW is not adequately staffed to perform these tasks in addition to the on-going projects and its normal budget review functions. There has beendiscussion in Bangladesh of the need to establish a full-time technicalsecretariat for the CPC. It would give the Council the staffing support tooversee the reform process and guide the implementation of proposals. It wouldhave the capacity to present the CPC with the analysis of proposals and theflexibility to sub-contract work when necessary; it would perform keyfunctions, such as policy studies, planning and budgeting, managing theinformation system and evaluating performance.

3.10. A permanent CPC secretariat may provide the capacity needed forpolicy formulation in the medium term; but in the long term, such asecretariat is likely to create a new bureaucratic layer over the MPEs.Considering the need to avoid duplicating agencies, a new CPC Secretariatraises issues about its role relative to the existing ABW and its regulatoryauthority over the proposed holding corporations. A debate has ensued inBangladesh as to the form and authority of such an entity. Some would like tostrengthen the ABW to take on additional responsibilities for the CPC; others,on the other hand, prefer a new entity located outside the MOF to give it moreclout to implement policy and the flexibility to maintain a pay structure thatwould attract the highly skilled staff it requires. Though GOB has decided totransfer the Secretariat's responsibilities to the Prime Minister's office,the unit has not been formed, and the ABW has continued to provide assistancefrom its existing resources. It is relevant to compare the CPC secretariat tosimilar units in Pakistan and Korea. The Expert Advisory Cell attached to theMinistry of Production in Pakistan has diverse responsibilities, includingdesign, development and implementation of performance monitoring andevaluation; maintaining the data base; and representing the Government innegotiating with PEs. In Korea, the Public Enterprise Evaluation Bureaulocated in the Ministry of Economic Planning serves as a permanent secretariatfor PE affairs, reporting directly to the Chairman of the ManagementEvaluation Council. For Bangladesh, a major consideration is to ensure thatthe traditional budget review functions and the new policy and managementreform functions are performed in one agency. This would limit the paralysislikely to result from coordinating over-lapping functions of differentagencies and avoid creating just another bureaucratic layer over the MPEs. Inaddition, there should be continuity in the work already in progress in theABW.

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3.11. The formation of holding corporations and emphasis on commercialorientation will require the support of the financial management informationsystem and more budget review functions of the AB. Thus, high priority shouldbe given to strengthening the ABW, focussing on resolving the staffingproblems that have delayed the work. Its structure could be expanded by addingunits with full-time responsibilities for key functions mentioned above (para3.09). To relax the staffing constraints, the hiring of additional personnelfor 52 positions, including expatriate staff, has been approved. There areadvantages in reconstituting the ANW instead of creating a new technicalsecretariat. The ABW is already involved in the traditional budget review forPEs; it has developed the MIS and has established a monitoring cell, and theexisting staff has gained some experience from the process. In the mediumterm, the CPC already has authority under the Management CoordinationOrdinance to appoint a committee of experts to provide it with support andassist with policy refoms.

Improving The Selection Of High Level Executives

3.12. Officials in Bangladesh point to poor management as a major reasonfor poor MPE performance. There is shortage of high level industrialmanagerial skills, Bengali enterprise has been concentrated mainly in commerceand cottage industries. Thus, the departure at the end of the Independence Warof non-Bengalis, who controlled 482 of the modern sector industrial fixedassets,6 reduced the pool cf industrial managers. The shrinkage of the pooland the appropriation of private sector units, which raised the PE share offixed industrial assets, led to the appointment of inexperienced staff tomanagerial positions. This was exacerbated by the flight of professionals fromthe MPE sector in frustration over Government interference in PE operationalaffairs. There are also complex factors relating to the centralization ofcompensation and the resulting distortion of the incentive system, andmismatch between skill shortages and the orientation of the formal andinformal educational systems. Turn-over was high: the General Manager forNorth Bengal Paper Mill, for example, changed twelve times in twenty years.This climate motivated managers to pass on difficult problems. The managementselection process is based on eligibility criteria without clear skillrequirements. All chief executives of MPEs are appointed by the top politicalleadership, and the guidelines for the selection process issued in January1988 state that persons eligible for Chairman, Managing Director, Members andDirectors shall be appointed from (a) senior managerial executives ofstatutory organizations and nationalized corporations; (b) serving officers ofthe Government and the Armed Forces; (c) retired officers of the Governmentand the Armed Forces; and (d) members of the public with specializedqualifications.

3.13. As noted above, industrial entrepreneurial development involvescomplex social issues, including educational systems, which are beyond thecompass of industrial policies alone. Yet as Government controls on PEoperational autonomy are relaxed, the quality of high level executives would

61 State ownership of fixed industrial assets at the time was 342, with 18Zfor the private Bangladeshi sector.

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become more critical for competent management. For this reason, there is needto initroduce an incentive bonus system for managers (para 6.15-6.16) andemphasize professional skills and training for screening the selection of highexecutives at the corporation and enterprise levels. In addition, theselection criteria will include institutional guidelines for conducting thescreening process. This is an issue in which sensitivity to Governmentprerogative is recognized. In the proposed process, a short list of candidateswho meet the selection criteria can then be used by the political authoritiesto make final decision to ensure that appointments at the corporation levelmeet some professional skill standards. The corporation and privateshareholders will make appointments at the enterprise level in a similarscreening process. GOB also sees the need for a TA program which willstrengthen short-term training and improve the skills of high levelexecutives.

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CHAPTER IV

FINANCIAL ASPECTS OF MP1 3FO3M

Financial Policies

4.01 Financing obtained from NCB advances and ADP allocations haveprovided continued support to MPEs, despite the persistent losses and littledividends. While the excess liquidity position of the NCBs does not suggestthat these advances have crowded out the private sector, MPE dependence on ADPallocations compete with expenditure allocations for social and economicservices and local currency funding for other sectors. This chapter discussespolicies concerning financial restructuring, investment financing and dividenddistribution aimed at promoting MPE financial independence.

MPE Financial Structure

4.02 Because of poor financial performance, MPEs have fallen into avicious circle as losses necessitate borrowing, raising debts and interestcharges, reducing net earnings and liouidity, and causing even more borrowing.Consequently, MPE financial structure is highly leveraged with debt-equityratios in the range of 83:17 (BSEC) to 164:-64 (BJMC), compared to theGovernment desired rates between 60:40 and 67:33. Most of MPE debts are inshort-term instruments, constituting relative to long-term debt 85Z for BJMCand 71% for BTMC, declining to 32Z for BCIC. BJMC and BSFIC often havenegative incomes even before interest payments, while the other corporationshardly generate enough income to cover interest costs. In FY88, for example,the ratio of interest payment to net income (including operating surplus; non-operating surplus and subsidies) was over 100Z for each of BTMC, BCIC andBSEC, with a low of 27Z for BFIDC.

4.03 Previous Restructuring Efforts. Government has used BMRinvestments and financial restructuring to improve MPE performance. BTMC, forexample, has undertaken BMR programs for 20 textile enterprises since 1979.Evidence from a sample of four mills which participated in the BMR programillustrates its impact on improving performance. Compared to the pre-BMRperiod, annual average production increased by between 19% and 21? in threemills and decreased by 0.61 in one mill. Increases in production resulted morefrom the increased productivity of new equipment, not necessari]y from highercapacity utilization. For the four enterprises evaluated, averr.ge spindleproductivity per shift increased by 162 to 21?, and the levelf. of raw materialwastage decreased by over 252. All the four mills were incurring losses priorto the BMR. One enterprise started generating profits, and two reduced theirlosses after the program; the other enterprise made more losses because ofstagnant production and the heavy interest burden due to debt incurred fromthe BMR process. Though the BMR program improved technical capacity, this wasnot harnessed effectively to improve both production and financialprofitability, as systemic problems relating to power failure and labor costs,for example, continued to frustrate performance.

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4.04 GOB has also made efforts to revamp MPE financial structure bycash infusion, grants and conversion of debt to equity. The cumulative cost ofthese efforts up to FY88 for the five leading corporations totalled Tk 12.8billion, with BJHC alone responcible for 37Z (Table 4.1). In addition, debtrescheduling and interest write-off were adopted to ease MPE liquidityproblems. Portions of NCB advances to BJMC and the private jute mills were,for example, 'segregated' for moratorium to achieve feasible repaymentschedules. Despite the efforts, most of the enterprises involved, exceptEastern Cables and National Tubes, did not show subsequent meaningfulfinancial improvement. Sylhet Pulp and Paper Hills continue to make heavylosses despite the write-off of Tk 476 million. Similarly, restructuring forChittagong Dry Dock with Tk. 710 debt conversion and cash infusion; BangladeshMachine Tools Factory with Tk. 800 million; and General Electric Manufacturingwith Tk. 496 million did not produce the desired improvement because it wasnot accompanied by measures to improve efficiency.

4.05 Selective Financial Restructuring. In view of the lack of successof most of previous efforts, the case for continued support is justified onlyin the context of measures that will improve viability. For enterprises whichare uneconomic, simply changing the capital structure with cash infusion addslittle to the value of production and the generation of surpluses in thefuture. Policy actions need to distinguish between annual subsidies tomaintain PE production for equity and broader development considerations andthe use of financial restructuring to eliminate the weak capital structure ofenterprises which are otherwise economically viable. Financial restructuringshould be used selectively and focussed on enterprises which have anunfavorable debt repayment profile, but are potentially viable and likely tomake acceptable returns after debt relief.

4.06 Potential candidates for financial restructuring include thefertilizer plants and appropriately classified BTMC and BSEC units. For thefertilizer plants, this should include conversion of debt into equity andgrant, and a new urea ex-factory pricing policy based on internationalcompetitive prices. Fertilizer has become important in MPE investmentportfolio, accounting for 60Z of new capacity expansion under the Third-Five-Year Plan. The cost overruns due to delays in completing the projects, outputlosses from maintenance problems and inefficient pricing have contributed todistortions in the financial structure, resulting in gaps between economic andfinancial viability. Examples include Ashuganj Urea which is financiallyuncompetitive because of high capital costs; Chittagong Urea which has lowoperating costs relative to other plants, bu7 has high capital costs due toexchange rate appreciation and Polash Urea-

71 See Fertilizer Report (World Bank 1938).

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Table 4.1

Capital Restructuring of MPEs: FY73-FY88(Figures in Tk Million)

----------------------------------------------------------------- __-------

Debt Converted Grant Equity Totalinto Equity Infusion

______________________________.___________________________________________BTMC

FY79-FY8O 333.9 0.0 0.0 333.9FY81-FY85 512.7 0.0 1105.2 1617.9FY86-FY88 200.7 0.0 405.9 606.6

Total 1047.3 0.0 1151.1 2558.4

BJF'CFY73-FY80 876.9 784.5 800.0 2461.4FY81-FY85 231.0 a/ 0.0 1468.8 1699.8FY86-FY88 0.0 0.0 510.0 510.0

.-- - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - _ _ _ _ _ _ _Total 1107.9 784.5 2778.8 4671.2

BCIC FY73-FY80 --- --- 175.0 175.0FY82-FY85 1085.4 51C.0 35.5 1630.9FY86-FY88 457.3 --- 8.4 465.7

Total 1542.7 510.0 218.9 2271.6

BSECFY78-FY80 207.0 0.0 164.7 371.7FY81-FY85 821.8 17.3 238.9 1078.0FY86-FY88 605.3 53.1 290.0 948.4

Total 1634.1 70.4 693.6 2398.1

BSFICFY73-FY80 157.6 53.8 0.0 211.4FY81-FY85 41.1 152.8 b/ 10.5 204.4FY86-FY88 356.0 0.0 0.0 356.0

Total 554.7 206.6 10.5 771.8

All 5 CorporationsFY73-FY80 1575.4 838.3 1139.7 3553.4FY81-FY85 2692.0 680.1 2858.9 6231.0FY86-FY88 1619.3 53.1 1214.3 2886.7

Total 5886.7 1571.5 5212.9 12671.1

a/ Spread over the period, FY81-FY87; no breakdown up to FY85 available.b/ Spread over up to FY88

Source: Respective sector corporations.

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Financing Policies

4.07 Because of nonexistent internal savings, self-financing isnegligible. MPE investments are financed mainly through the ADP. The foreignexchange component comes from external aid for on-lending to the MPEs at 12.52(11.52 for small and export industries) interest vith a repayment period of 20years and a grace period of 5 years (15 and 3 years for small industries). Thelocal currency part which often constitutes equity investment is obtained at11.52 interest. While lending rates tend to be similar for both public andprivate sector producers in jute, there is a complex set of special creditprograma which differ by industry, the stage of production, scale ofoperation, export potential and rural or urban location. Scheduled bankadvances to MPEs guaranteed by Government, for example, carry concessionaryinterest charges of 4.52 to 10.75Z, compared to the normal rates of 92 forexport industries, 162 for qhort-term credit, and 11.5Z to 12.52 on long-termloans to industry. Lending to HPEs under this guaranteed debenture scheme isabout Tk. 900 million, excluding over Tk. 9 billion of outstanding NCBadvances provided under Government behest. The exemptions and governmentpressure have provided advantages in the evaluation of MPE credit applicationsrelative to the private sector. The NCBs tend to consider MPEe as less risky,thereby relaxing loan screening conditions and assisting to sustainunprofitable PEs. Financial institutions tend to provide credit to the privatesector on "pledge' of stock which enables the banks to enforce financialdiscipline by monitoring the use of raw material inventories and Lollowing upon credit recovery. For the MPEs, such credit is provided on 'trust' ascurrent laws restrict the pledging of Government assets.

4.08 A prerequisite for reforming lending practices for MPEs is togive the NCBs autonomy in credit rationing. This issue is being addressedunder the Program for Financial Sector Reform. Government is taking steps topromote MPE financial independence. A Policy Order (April 1988) has beenannounced to diversify MPE investment sources and limit dependence on the ADPand scheduled banks by reducing credit guarantees and promoting self-financingand joint MPE ventures with the private sector. There is also a proposal tolink ADP disbursements to loan repayments; but this seems inappropriate, sinceit is likely to delay the implementation of even economically viable projects.The relevant issue is to pursue policies that would deny financing for theeconomically unviable enterprises, while facilitating disbursements for theviable ones. Policies which require public institutions to maintain depositswith the NCBs should be relaxed to enhance deposit acquisition and lendingcapacity of the private commercial banks as they have low excess liquidityrelative to the NCBs.

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Table 4.2

MPEs' Dividend Payments and Equities: FY86-FY88(Figures in Tk Million)

----------------------------------------------------------------- __------

Actual Actual Revised Budget1985/86 1986187 1987/88 1988/898

------------------------------------------------------------ __-----------

BTMC1. Dividend 0.0 0.0 0.0 0.02. Equity 501.0 427.0 435.0 562.03. Dividend as 2 of Equity 0.0 0.0 0.0 0.0

BJMC1. Dividend 0.0 0.0 0.0 0.02. Equity -2774.0 -2965.0 -4003.0 -4985.03. Dividend as 2 of Equity N.E. N.E. N.E. N.E.

BCIC1. Dividend Lv...2 50.4 50.0 100.02. Equity 4912.0 5457.0 6646.0 6893.03. Dividend as Z of Equity 2.1 0.9 0.8 1.7

BSEC1. Dividend 10.0 0.0 10.0 10.02. Equity 1281.0 1798.0 1908.0 2018.03. Dividend as Z of Equity 0.8 0.0 0.5 0.5

BSFIC1. Dividend 0.0 0.0 10.0 31.02. Equity 343.0 248.0 201.0 349.03. Dividend as Z of Equity 0.0 0.0 5.0 8.9

BFIDC1. Dividend 5.0 6.0 7.5 7.52. Equit 35.5 -1.3.0 17.0 37.03. Dividend as Z of Equity 14.1 N.E. 44.1 20.6

All Industrial PEs1. Dividend 116.2 56.4 77.5 148.52. Equity 4299.0 4952.0 5204.0 4874.03. Dividend as Z of Equity 2.7 1.1 1.5 3.0

--------------------------------------------------------------------- __--

N.E. = Negative Equity.Source: Monitoring Cell, MOF.

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Dividend Distribution

4.09 The Need For Dividend Policy. There is no announced policy ondividend distribution probably because there is little to distribute. Dividendcontributions from the profitable enterprises are negotiated with MOF duringthe budgeting process. This approach tends to undermine MPE financialindependence since dividend payments hardly take account of working capitaland long-term liquidity needs. The tendency to extract as much as possiblefrom the surplus units while continuing to support the non-performing onesmost likely does not encourage the generation of profits. The need for anincentive oriented dividend policy is underlined by the on-going partialdivestment program which plans to transfer the 511 Government shares to thecorporation, reconstituted as a holding corporation. The proposed structure islikely to encourage cross-subsidization among enterprises, while dampeningsurplus generation as dividend payments go directly to the holding corporationinstead of to MOF.

4.10 Dividend Policies. Important aspects of dividend policies are howmuch should be paid to Government and how pol_cies should be formulated. Inprinciple, dividend contributions and policies must relate to theinstabilities of the industry and should provide for retained earnings tosustain financial liquidity even with revenue fluctuations. The imposition ofa fixed dividend coefficient on all enterprises is, therefore, unrealisticsince the jute mills, for example, require higher reserves to contain externalprice fluctuations. By international indicators, dividends vary between 25Zand 75Z of after-tax profits. For Bangladesh, the report of the SpecialCormnittee on Financial Improvement recommended a minimum 15? return on equityas dividend payment; this was not implemented. Actual payments were betweenzero and 44Z of equity during FY86-FY8b.

4.11 GOB should follow different dividend policies for the enterprisesand for the corporations. At the enterprise level, dividend policies shouldaim at maintaining the confidence of th; private shareholders in the on-goingdivestment program. The enterprise Board should have autonomy in managing theunit's finances and should determine dividend distribution after payment ofprofit tax. The tax rates on profits should be the same as for the privatesector. The provisions in the New Industrial Policy requiring Government toretain 51? majority control should be reviewed to give the corporations, likeother shareholders, the option of selling their shares. In return, GOB shouldlimit ADP financing and credit guarantees for these enterprises. It isimportant for promoting financial discipline that corporations do not perceiveshares they hold on behalf of Government as gifts. Therefore, GOB shouldformulate dividend policies at the corporation level, establishing the termsfsr transferring shares to the corporation and the amount of contribution ofthe various corporations towards revenues. Policies should set limits oncross-subsidies from surplus to deficit units under the corporation. Theyshould also limit lending from surplus to deficit units; credit, if any, fromsurplus to deficit units should be at comparable market re,:es and terms.

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Other Financial Issues

4.12 The system of public accounting and auditing also contributes toMPE financial weaknesses. The costs of infrastructural investments, such asroads, schools and worker housing are often not clearly distinguished fromdirectly productive investment in plant, machinery and equipment. Depreciationallowances computed on historical costs are often not adequate to covercapital replacement costs. The accounting practices overstate revenues as theymask differences between accrued and realized earnings. Audit reports, oftenyears in arrears, provide little feedback into current financial plans. Allthese make it difficult to appreciate the magnitude of liquidity and otherfinancing problems. Proposed masures for institutional development, budgettarget preparation and performance monitoring and evaluation .re relevant forcorrecting these problems.

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CHAPTER V

SELCTED EFFICIENCY ISSUES

5.01 Efficiency issues constitute a necessary component of measures forimproving industrial performance through effective resource allocation andcost control. The main efficiency issues relate to the influences of the traderegime on industrial activity and internal. commercial policies that impedecompetition between HPEs and the private sector. These internal commercialpolicies concern Government interventions through MPE monopoly production andcontrols over output prices and inpvt markets.

Trade Policies

5.02 Trade Liberalization. The influence of trade reform on PEviability is relevant in view of the complex nature of the trade regimeinvolving high tariffs, quantitative controls, duty drawback system and exportbenefits. The restrictions and incentives often differ by sector, product andurban or rural location of industry, making data requirements for estimatingeffective protection very demanding. GOB has implemented some reforms toliberalize the trade regime. Of the 69 restricted industrial importsidentified in the Import Policy Order of FY87, for example, 17Z were removedin FY88. The negative list of import items related to textile, steel andengineering goods was reduced by about 42, and tariffs on these goods werelowered. However, the economy continues to depend substantially onquantitative import controls for promoting industrial activity. MPE financialperformance, poor as it is, is being helped by these controls. Someenterprises in sugar production, steel and glass, for example, are protectedby high barriers. GOB is considering reforms in two phases to liberalize thetrade regime further. The first phase would involve replacing the quantitativecontrols with tariffs for all items, except those related to religion, socialwelfare objectives and national security. In the second phase, the resultingtariff system will be rationalized by simplifying the structure and improvingits administration. The proposed phased approach to trade liberalizatior willprovide scope for stable MPE adjustment. Even so the units which have beenfinancially viable mainly because of high protection are likely to decline.The potential effects of trade reform on continued viability may beanticipated by adopting more sound BMR investment appraisal methods.Weaknesses in appraisal techniques, such as using domestic rather than borderpricos to value tradeable outputs and inputs, need to be corrected throughworkshops and training programs.

5.03 Exchange Rate Policy. GOB has adopted a flexible exchange ratepolicy combining devaluation, increased surcharge on imports, and theexpansion of the Wage Earners' Scheme (WES) market which has an exchange rateabove the official rate. With adjustments in the official rate, the premiumbetween the official rate and the WES rate narrowed from 152 in early 1984 to9.51 in September 1986, declining further to about 2X by January 1989. Theproportion of Cash-Import-Licence financing for capital goods imports forLarge- and Medium-Scale Industries declined as WES shares Increased from 52?

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in FY84 to over 95Z in FY88. GOB is considering improving aid utilization andpromoting a unified exchange rate management by using the WES market fordisbursing commodity aid. Under the proposed system, foreign aid disbursementswill be used to cover the Letters of Credit of importers eligible for thecommodity aid program. Alternatively, Bangladesh Bank may cover eligibleimports directly from its own foreign exchange reserves and claimreimbursement retroactively from the donors. The proposed system would make iteasier to provide access to raw materials for both public and privateenterprises at comparable prices and eliminate distortions due to differentialraw materials costs as discussed below (para 5.12 - 5.13).

Interventionist Policies

5.04. In the early 1980s, PE pricing policies involved the use ofelaborate controls to insulate consumers from rising producer costs. Thiscontributed to HPE financial losses as output prices did not keep pace withthe growing costs of imported intermediate and capital goods. As these lossescontinued, reforms were introduced to relax the controls. Government appointedan Expert Committee on Pricing Policy for Public Enterprises which issued areport in 1987 recommending the establishment of a Pricing Committee for eachcorporation under the Ministry of Industries. :rt also recommended (i)competitive pricing based on international prices for some internationallytraded goods and goods facing private domestic competition and (ii)administered prices for selected consumer and producer goods; in addition,there are minimum prices below which enterprises cannot reduce prices withoutrules on all MPEs.

5.05. Existing policies allow MPE monopoly production of some targetedproducts and provide preferred access to input markets for some enterprises.Until recently, the cabinet and line ministries retained administrativepricing for sugar, the main product of BSFIC, and for urea, TSP, DDT,newsprint and paper, which together constitute over 90Z of BCIC's output. Theadministered prices are determined on the basis of costs of sales plus a fixedreturn on equity. Government deems it necessary to control fertilizer pricesmainly because fertilizer is produced by a domestic monopoly and itsconsumption is considered to be demand constrained. Sugar transactions, on theother hand, are considered supply-constrained. The purpose of the pricecontrols is to promote access to these targeted goods at affordable prices,but in some instances, the direct Government intervention in production withadministered prices and import controls have resulted in maintaininginefficient activities. The domestic price of sugar, for example, ismaintained at about double the world price through Tk. 6000 tariff per metricton, 10OZ import duty, 20Z sales tax, 6? development surcharge andquantitative restrictions on sugar importation. In addition, interventionistpolicies have been extended to the raw material market to give the inefficientPE sugar mills preferred access to inputs and restrict the pzivate sectormanufacturers (para 5.14-5.15). These interventions and consequent periodicshortages have encouraged rent-seeking activities at high cost to consumers,inhibiting the achievement of the objective of enhancing access to targetedgoods.

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Table 5.1Administered Prices

(constant 1985 USS per ton)

Bangladesh World Prices (fob)Ex-factory 1986 1987 1988 AverageAug. 1988

Urea 93 90 89 107 95TSP (cif) 214 102 106 110 106Sugar 396 113 114 160 129Newsprint 307 - 398 435 417DDT 2,277 2,171 2,193 2,275 2,213

Sources: World Bank, BCIC, WHO.

rn'_e consumer needs continue to grow, the production of the PE sugar millsnas declined from 202000 metric tons in FY82 to 178000 metric tons in FY88even with the import controls.

5.06. Government is considering measures to liberalize the restrictiveMPE pricing policies. Administered pricing will be restricted to onlyfertilizer and refined sugar, and the other items (newsprint, paper, and DDT)will be dropped; by FY91, sugar will be dropped from the admin4.stered list.The controls on fertilizer distribution are also being reiaxed to curb themonopsony power of the Bangladesh Agricultural Development Corporation andallow private wholesale purchases of fertilizer directly from the factories;earlier reforms already allow the private sector in fertilizer retailing. Inaddition to these new policy developments, the strategy for achievingGovernment objectives concerning these targeted goods needs to be reviewed.Since direct Government production and use of restrictive policies have hadlimited success, the ideal policy would be to move towards dismantling thestate monopoly production of targeted goods, but this may not be politicallyfeasible. GOB should, however, encourage the participation of the moreefficient small-scale private sector in the supply of targeted goods and relaxthe quantitative import controls. These changes in policy might cause the PEoutput to decline; but the small-scale private sector would expand, importswould rise, rent-seeking activities would decline, and the flow of goods wouldimprove for the benefit of consumers.

5.07. Maintaining uneconomic production has efficiency and subsidycosts. Administered prices have a tendency to insulate domestic ex-factoryprices from the effects of international market movements, inhibiting themanagerial flexibility necessary for engendering external competitiveness.They also drive a wedge between financial and economic viability, creating the

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need to finance any resulting subsidies. TSP production, for example, isuncompetitive relative to world prices. Despite high es-factory prices andrecent decline in input costs, the financial viability of TSP production isfragile and often requires support. In addition, the retail price of TSP iskept below the ex-factory price and is subsidized implicitly from surpluses onurea. GOB does not bear direct responsibility for the subsidies arising fromits administered pricing policy, except for newsprint. Even for newsprint, theex-factory price per ton of Tk 13,750 in FY88 ($307 in constant 1985 values)added to GOB subsidies and import duty rebates together result in arealization price of Tk. 17,340 (a400 constant 1985 US values), which isslightly lower than the average fob price of $417 (Table 5.1). The ExpertCommittee on PE output pricing has affirmed the policy of making the subsidiesresulting from these interventionist policies the explicit responsibility ofGovernment, but this has yet to be fully implemented.

5.08. Bangladesh has comparative advantage in the production of urea.The uniform ex-factory administered price of Tk. 4025 per ton is calculatedfrom the average cost of all urea plants, excluding Chittagong Urea, plusabout 52 margin. Implicit subsidies on the administered ex-factory price forurea have been eliminated by recent adjustments in world prices. The currentex-factory price is competitive for some plants, such as Ghorasal Urea; but itis lower than the production costs of the high cost plants, includingAshuganj, Polash and Chittagong. Currently, the suggested urea retail price ofTk. 4800 (US$153) does not carry a subsidy either, though it is low relativeto neighboring countries such as India ($179) and Nepal ($178). Ureaproduction has export potential; therefore Government policies shouldemphasize expanding production in the efficient plants, while graduallyphasing out the inefficient ones. Given that low domestic demand constrainsindustrial production in Bangladesh, policies should motivate productionefficiency and external competitiveness by promoting managerial responsivenessto international markets. For example, the method for determining administeredex-factory prices should be based on international prices.

5.09. An important issue in MPE output pricing is the effect of naturalgas price on production costs. Natural gas, the main raw material and energysource for key industries, such as urea, is produced by a monopoly. Recentincreases in the price of natural gas by over 50Z have contributed to raisingthe costs of urea and reducing profits. However, the current price is Tk.28.54 mcf, which is still below the long-run marginal cost of Tk. 29.28 forsupplying the urea plants. Since the actual price and the long-run marginalcost of natural gas are now very close, future price increases have to bemarginal to limit cost increases and improve the chances for the competitiveproduction of urea.

5.10. There are minimum pricing policies for the major jute goods,including carpet backing cloth (CBC), hessian and sacking for both private andpublic sector producers. These minimum prices are determined in reference toCulcutta prices. The other corporations have adopted minimum prices based on acost-plus formula and taking into account the prices of private producers.Ministerial approval is required for sales below the minimum, thoughcorporations have authority to increase prices within a 10? margin. Minimumprices have the potential to restrict exports in the case of jute and limit

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effective internal competition for the other goods. For the jute goods, theminimum prices are designed to discourage the under-invoicing of exports.Since actual export prices are determined by international market conditions,the minimum prices define the lowest rates exporters must declare in reportingforeign exchange receipts to the central bank. However, there are exemptionsfor large sales. BJHC does not find the minimum prices binding, though theprivate sector finds them restrictive for small exports.

5.11. While reforms have expanded the role of the corporation in outputpricing, managerial responsibility at the enterprise level is yet to beachieved. As part of measures to promote MPE financial independence, GOBshould consider phasing out the minimum price restrictions. This would providea level playing field for effective competition with the domestic privatesector. The implementation of policies should start with the enterprises whichare being partially divested.

Input Market Distortions

5.12. GOB's policies influence MPE raw material costs through commodityaid programs and bilateral trsde arrangements that result in higher importp,.ices relative to private producers. Also, preferential access to rawmaterial markets for MPEs and other controls on input purchases sustaininefficient production for the MPEs and undermine competition with theirprivate sector counterparts.

5.13. Commodity Imports. There are differences in raw material costs,depending on the source of financing. Relative to the private sector, PEtextile mills pay higher costs for cotton because of the higher costs ofcommodities from aid and barter trade sources relative to those obtained atcompetitive international prices. In FY87, for example, raw cotton obtainedfrom aid and barter trade sources accounted for 562 of BTMC purchases. Duringthat period a bale of 1-1/16 inch cotton cost (cif) Tk 8.83 on competitivepurchase from Sudan, Tk 11.86 by aid, and Tk 16.68 by barter trade. Since theprivate sector obtains its cotton at competitive world prices, the costdifferences undermine the competitiveness of BTMC. The estimated extra costsof these trade agreements to BTMC range from Tk. 16 million in FY85 to Tk. 116million in FY87; had the extra costs been avoided, profits would have risen byTk. 201 million during FY86-FY88. As pointed out earlier, GOB is considering aproposal to channel the sale of commodity aid through the WES market (para5.05). The proposal will contribute to limiting cost differences due to thesource of financing for raw material imports. Howevez, discounts on the costsof aid and barter trade imports would be needed to eliminate disparitiesrelative to the private sector where tied aid results in higher raw materialcosts for the MPEs. More importantly, MPEs need to have authority overpurchasing decisions and take steps to improve market information. BTMC, forexample, should program raw material purchases to take advantage of low pricesduring the harvesting period in the exporting countries.

5.14. Preferred Markets. GOB's policies discriminate against the privatesector by providing the MPEs preferred access to raw material markets. Asnoted earlier in the case of sugar, GOB has banned the sale of raw cane, themain raw material, to the private sector manufacturers. These private

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manufacturers use raw cane to produce gur, a sugar substitute, in competitionwith the PE sugar mills. The restriction was introduced because purchases ofraw cane by the private manufacturers, especially those using power drivenmachines, increased sharply in FY85-FY86, causing a decline in raw materialsales to the PE sugar mills and reducing capacity utilization and productionby about 50Z during the period. The ban has been imposed in the mill zones;that is, designated areas around the PE sugar mills vhere farmers benefit fromcredit and input programs for raw cane production. Sugar production by the PEmills recovered significantly in FY87-7Y88, but has remained below earlier1980 levels.

5.15. Government policies on raw cane marketing sidestep the relevantefficiency issues. Economically viable sugar enterprises are often financiallyunstable in many developing countries because of world price fluctuations andincreasing use of sugar substitutes. In Bangladesh, however, the PE sugarmills have no comparative advantage under present circumstances. An evaluationof a rehabilitation project for a sample of PE sugar mills, includingRajshahi, Rangpur and Thakurgaon, indicates that production in the type ofmills used by the PE sector is uneconomic; there is serious doubt about theprospects for economic profitability in the foreseeable future. The small-scale private sector competitors, on the other hand, are economic andrelatively cost effective, but inadequate supply of raw materials has limitedtheir activities. GOB should give low priority to investing in new capacityfor the PE sugar mills and liberalize the controls on raw material marketing.

5.16. Inventory Control - Jute. Government policies for sustaining thefarmers in producing raw jute and the activities of the Bangladesh JuteCorporation are enforced partly through pressure on BJMC to procure raw jutefrom distributors, instead of directly from the farmers even where this may berelatively less expensive. These policies often lead BJMC to carry higher rawmaterial inventories than necessary for commercial purposes. This issue needsto be reviewed in the context of jute sector reform policies (para 2.09-2.11)in order to separate the commercial rationale for BJMC's raw materialpurchases from those dictated by social policies and agricultural developmentobjectives. To promote competitiveness with the domestic private sector andin external markets, raw material purchases by BJMC should be motivated bystandard commercial practices.

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CHAPTER VI

MPY DIPLOYMCNT AND COMPENSATION

6.01 MPE employment and compensation problems have significant impacton industrial expansion in Bangladesh because of the effects of labor costs onMPE financial performance, the coercive influence of employment policies onprivate sector employers and the spill-over effects of PE labor relationsproblems on the private sector. These problems relating to over-employment,centralized pay determination and labor-management relations are verydifficult and sensitive socially and politically. But given the downwardrigidity of labor compensation and its large share in value added, improvementin MPE performance requires measures that will contribute to reducing over-employment and adjusting production costs.

Table 6.1

MPE Employment: FY89

Number of Number of Number of Total Staff/WorkersOfficers Staff Workers Employment Ratio 81

BJMC 4462 13332 101880 119674 0.13BTMC 1265 6449 37695 45409 0.16BCIC 3903 7650 15235 26788 0.45BSFIC 2241 12466 12029 26736 1.01BSEC 2170 3964 7952 14086 0.45Total 14141 43426 175144 232711 0.24

Level And Structure Of MPE Employwent

6.02 MPEs account for about 207 of the modern manufacturing sectoremploymen , totalling 233,000 in FY89, excluding temporary and substituteworkers.- BJMC alone accounts for about 512 of the employment (Table 6.1).The employment system distinguishes among workers (mainly unskilled labor),staff (mainly clerical) and officers (managerial positions). Workers accountfor 75Z of all employees; staff, 18.72 and officers, 6.3Z. The vast majorityof employees (987) are at the enterprise level, and 27 at the head offices.Despite poor financial performance, overall MPE employment increased at anaverage rate of 27, while the employment of factory workers decreased by 17during FY87-FY89.

8/ At the Enterprise level only.

9/ Temporary and casual workers account for 4Z in FY86 and 67 in FY87 ofBTMC employees. For BJMC estimates vary between 107 and 207.

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6.03 One major problem confronting the MPEs is severe over-employmentat low skill levels, combined with vacant positions for high skill jobs andlabor shortages during the peak of agricultural activity. sersonnel positionsare sanctioned on the basis of installed capacity, sometimes for three shiftoperations, and sanctioned posts are filled regardless of actual production.Actual employment often exceeds sanctioned positions, even with under-utilization of capacity. The nanm Comuuittee which was set up in 1982 to studythe staffing and organization of PEs pointed out that an unsystematicexpansion of PR employment had occurred, and that more sanctioned posts werecreated than necessary at the lower skill levels. Estimates of over-employmentvary across enterprises. BJMC estimates over-employment on the basis ofrequired labor load in one shift at between 202 to 302 in a standard jute millsize, and estimates range between 102 and 202 for other enterprises. Therelatively capital intensive PEs under BCIC and BSEC, on the other hand, haveless over-employment. The main reasons for the over-employment are the socialand political pressures on government to create jobs. Generally low incomelevels, high job security and the scarcity of alternative employmentopportunities make public employees a comparatively privileged group with highstakes in maintaining the status quo. The case of Adamjee Jute Mill whichaccounts for 40X of BJMC losses in FY88 illustrates the po'nt. Despitefinancial losses, Adamjee has about 40,000 employees, witn 160,000 dependents.Facilities include accommodation, dispensaries, canteens, mosques, schools,ration shops, and so on, for 25,000 permanent employees. There is a ferventopposition to reforms that threaten job security and benefits because so muchis at stake, and the alternatives are less attractive. Labor at the mills is,therefore, highly organized. There are three registered and 26 unregisteredunions with the capacity to enlist political pressure to thwart reforms likelyto reduce employment and benefits. The excess employment is perpetuated by thelack of retirement age for workers, creating more pressure to maintain a largework force, even for the financially weak enterprises.

Labor Laws And MPE Employment

6.04 One reason often cited for the persistent over-employment isinadequate labor policy and laws to guide hiring and redeployment, and lack ofeffective managerial authority over these decisions. Officially, however,managers have autonomy to pursue flexible employment policies. The proceduresfor termination, lay-off, dismissal and retrenchment as laid down in theEmployment of Labor (Standing Orders) Act of 1965 and its amendments givemanagers scope to reduce the work force under specified circumstances. Thesalient features of these procedures are the following:

(i) Termination Of Employment. The employer may terminate theservices of a permanent worker "without an assigned reason' byproviding four months notice (or pay in lieu thereof) and thirtydays pay for every completed year of service. Workers dismissedin this fashion, except registered union officers, do not haverecourse to the grievance procedures provided under the Act (see vbelow).

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(ii) Lay-offs As A Consequence Of Work Stoppage. In situationsbeyond managerial control, such as breakdown of machinery or powerfailure, workers may be laid-off after three days of workstoppage. One half of basic wage and fringe benefits are providedfor the first 45 days of lay-off and one fourth for subsequentlay-offs of fifteen days or more. Laid-off workers are kept on thepayroll for a certain time period so that they are easily re-absorbed when the work stoppage is lifted. If the workers are nolonger needed after this time period the employer may formallyretrench them with full retrenchment benefits (see (iv)).

(iii) Dismissal For Misconduct. The employer must inform theworker of intended action for misconduct, including theft, fraud,habitual absence and late attendance, disorderly behavior, neglectof work and resorting to go-slows. The worker may be dismissed ifhe does not resl.nd to the intended action or if misconduct isestablished following grievance procedures, in which case he maybe paid at the rate of fourteen days wages for every completedyear of service. In cases of go-slows or illegal strikes, theemployer may dismiss workers after obtaining permission from theLabor Court.

(iv) Retrenchment On Grounds Of Redundancy. To retrench a worker,an employer must give one month's notice in writing (or pay inlieu thereof) and severance pay equivalent to thirty days' wagesfor every completed year of service. Retrenchments must beconducted on the basis of seniority and any new employment withina year of retrenchment must first be offered to retrenchedworkers.

(v) Grievance Procedures. The Standing Orders Act also stipulatesgrievance procedures which apply to all types of dismissals,except those that have occurred under "termination of employment"(see (i) above). If the worker is dissatisfied with management'sdecision, the ispute may move to conciliators in the LaborDirectorate.101 The Government may refer the dispute to the LaborCourt if conciliation is unsuccessful.U'1 Alternatively, bothparties may consent to go to the Labor Court directly at theinitial stages of the dispute. In either case, the Labor Court'sdecision is final.

10/ The Labor Directorate currently has 260 staff. It has proposed anincrease in its staff, and Government is planning to expand andreorganize the Directorate.

Labor Courts comprised a judge, a representative from theemployers' association, a representative from labor, and one independentrepresentative. Members are appointed by the Ministry of Labor. Thereare 6 Labor Courts covering different jurisdictions.

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6.05 Notwithstanding the official provisions, the operation of thelabor code is often hampered by formal and informal rules rr,uiring theapproval of top Government officials. The Order (June 1987) grantingAdministrative Powers to Ministries, Corporations and Enterprises took awaysome of the management flexibility by subjecting PE hiring decisions to"allocations in the budget", and the 'overall employment policy of thegovernment'. PEs must obtain approval for creating new posts from thecorporation, while corporations must obtain approval from sector ministry andthe Ministries of Establishment and Finance. Personnel decisions, includingdismissal, demotion, removal, discharge, redress of grievances, overseastraining and union demands exceeding certain limits must receive the priorapproval of Government. Government has used the authority it retained underthe denationalization program of FY82-FY86 to intervene in the labor disputesof the privatized mills. Proposed reforms to relax the system of MPE controlsand enhance managerial autonomy at the enterprise level are discussed inchapter III (para 3.06-3.08).

Employment Reform

6.06 The Government has initiated discussion with the labor unions andthe employers to introduce reforms concerning three issues. These include (i)introduction of legal entry age into the work force and legal retirement agefor workers (staff and officers retire at 57); though the immediate effect ofthis reform on reducing over-employment would be marginal, it would supportmanagers who wish to use attrition to reduce overemployment over time; (ii)amendments to limit the participation of non-employees in the affairs ofunions and relax restrictions on the transfer of employees; the current lawallowing the participation of non-employees in union matters is believed tohave contributed to a contentious and chaotic labor relations environment andweakened the effectiveness of both managers and unions (para 6.17-6.i8); and(iii) a decision to monetize the health benefits of employees by convertingthe existing more or less open-ended commitment to employee health bills to afixed monthly cash payment. Progress concerning the first two proposed reformshas been slow as discussions have yet to pass the Tripartite Committee ofworkers, employers and Government as legally required before amendments tolabor laws they can be submitted to parliament.

6.07 Divestment And Employment Reform. The proposed reforms noted abovedo not address directly the difficult problem of overemployment mainly becauseof concerns about fierce employee resistance. One reason for employeeresistance to MPE reforms is the loss in jobs and accumulated benefits thatoccurred in some of the enterprises which were privatized previously. Underthe divestment program of the early 1980s, Government assumed directresponsibility for the accumulated benefits of the employees of abandonedenterprises, while the new owners assumed those responsibilities for theemployees of previously Bengali-owned units. Also, all employees of privatizedunits were to retain their jobs under the new owners for at least one year.Even with these measures, some of the privatized units subsequently closed

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down without being able to fulfill stated obligations to employees.I21 Stepshave been taken to enlist labor support for the on-going partial divestmentprogram. Fifteen percent of MPE share offerings are allocated to employees;they would elect one representative to the Enterprise Board if they buy atleast 12Z of the allocated shares, and unsold shares of the 15Z allocationwould be reserved for employees for up to 3 years. In addition, the precedenceset in the earlier reforms of maintaining employees of divested units on thepayroll for at least one year will be observed. The initial worker response tothese measures was poor. Though share participation has increased with the useof publicity campaigns, most of the 152 share allocations, except for UsmaniaGlass, are under-subscribed. Government should consider using employee shareoffers as part of the incentive bonus programs (para 6.15-6.16).

6.08 Redeployment And Retraining. In previous attempts to reduce PEover-employment, the Enam Committee recommended mergers of divisions andreduction in the number of officially sanctioned posts. Effectiveimplementation of the Enam report was derailed with the outbreak of laborunrest in 1984, though government has made efforts to limit over-employmentby, for example, freezing employment in the jute and textile mills. The impactof efforts to address the problem through the freeze and retrenchment in somesmall PEs (e.g. Karnaphuli Jute Mill) has been marginal. Thus, measuresadditional to the freeze on employment are required to achieve significantreduction in over-employment.

6.09 It is recommended that GOB develop a program for redeployment. Theprogram should include retraining, severance pay schemes and the developmentof alternative self-employment opportunities. Retraining should focus onassisting workers making job transition and providing skills to fill existingvacancies for high skill jobs. GOB should take advantage of the existingtraining facilities, such as at BTMC, and develop new ones. With introductionof a retirement age for workers, gradual reductions in overemployment shouldbe directed at the skill levels where employment exceeds sanctioned positions,and the numbers of sanctioned positions should be reduced by limitingbudgetary allocations for supporting them. The conversion of temporary workersto permanent status would need to be restricted. Since, as mentioned earlier,over-employment is a thorny problem, any realistic reforms should includemeasures to mitigate the social distress by offering severance pay schemes tothose affected.

6.10 Financing Retrenchment. Severance pay would cushion the socialdistress from retrenchment. However, its desirability depends critically onthe financing costs, the extent to which the system succeeds in keeping thebeneficiaries from being re-employed in the public sector and the ability ofmanagers to resist hiring new replacements. In view of the weak financialposition of the MPEs, severance pay schemes need to be applied with caution.They should focus on divested enterprises where new managers have control overemployment, employees who are close to retirement and uneconomic enterprises

12/ Six of the 37 privatized mills (Gawsia, M Rahman, W. Rahman, Allied,Asraf, and Sothana) are closed down.

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which will be closed down. Implementing an affordable severance pay schemewould require an assessment of over-staffing, options for its reduction andthe financing costs. The current provision in the labor laws for a severancepackage consist of 3 months retrenchment benefit, one month pay for each yearof service and payment for unexpired leave. This would, for a worker with 10years service, require between Tk 18,000 to Tk 20,000 (approximately $600).However, most MPEs are over twenty years old, and retrenchment costs for BSFICalone could total over $100 million. Given the high costs, severance payschemes are likely to have limited application. Over-generous awards should beavoided, since they tend to create a precedence, limiting the number ofbeneficiaries. To finance thesi costs, a fund for labor reform may need to beestablished.

Employee Compensation Policy

Table 6.2

Trends In Compensation Cost 13/(Tk million)

Provisional Revised Actual RevisedActual FY85 Estimate FY86 FY87 Estimate FY88

BJMC 1973 2419 2766 3005(1642) (128Z) (96?) (118Z)

BTMC 619 776 864 899(572) (79Z) (76Z) (71Z)

BCIC 617 933 924 1032(28Z) (31Z) (36Z) (342)

BSFIC 394 459 689 778(148?) (87Z) (89Z) (72Z)

BSEC 380 468 498 584(57Z) (52?) (60Z) (58Z)

Total 3978 4897 5726 6253(74Z) (72Z) (70Z) (71Z)

6.11 A notable feature of the MPE compensation system is the use of twodifferent pay structures: the Industrial Workers' Wage and ProductivityCommission (IWWPC) structure is applied to workers, and the National PayCommission (NPC) structure is applied to both MPE staff and governmentemployees. The compensation package is reviewed periodically, and the currentstructure known as the Modified New Scale (MNS) established in 1985 has 20

13 Figures in parentheses represent the share of total compensation cost invalue added. The compensation cost includes basic pay and allowances ofofficers, staff and workers in corporation head offices and enterprises.

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basic salary grades. The major components of cash compensation are the basicsalary plus allowances for house rent, dearness, medical costs, conveyance andfestival bonus. Though MPE And government employees share basically the samesalary structure, the latter are entitled to public housing, Ahich has muchhigher rental value if available than housing allowance. Thus, including thefringe benefits, a government employee with access to public housing is paidconsiderably more than the counterpart in the MPE sector.

6.12 A major limit on MPE competitiveness is labor costs, which havethe ratio of total compensation to value added often close to or exceeding1002, particularly for BJMC, BTMC and BSFIC (Table 6.2). The enhancementawarded under the MNS in 1985 essentially restored the real value of cashcompensation to the FY78 level for the officer grades, MNS 1-9, and improvedit for the lower level staff, MNS 10-20 (Table 6.3). However, these have sincedeteriorated at all levels, except for the highest two grades. Currently, realcompensation is marginally above the FY78 level for senior management, due tohouse rent allowances introduced in FY88; it has deteriorated for middlemanagement and junior level staff, and has improved relat ve to FY78 for thelow level staff, MNS 15 and 20. Similarly, for workers - paid under theIWWPC scheme, the adjustments in FY85 restored real cash compensation to theFY78 level, with deterioration in FY88. The current compensation structure hasserious weaknesses. There is erosion in the real value of cash compensation atmiddle management level; total remuneration is lower for the MPEs relative tothe counterpart in government with access to housing; pay determination iscentralized at the highest level of government, and standard increases areawarded irrespective of performance. These features of the compensation systen.have denied unions and PE managers bargaining authority and resulted inincreases in employee compensation costs which ignore the financial conditionsof specific enterprises. Many officials in Bangladesh point out that thecentralization of MPE employee compensation decisions at the highest levels ofGovernment has politicized the pay determination process unnecessarLly, aspolitical parties champion higher wages and benefits to elicit labor support.

6.13 Wage And Salary Restructuring. There is recognition in Bangladesh,as indicated by the concerns of CONCOPE, of the need for a compensationstructure that would attract, motivate and retain able managers and employees.It would give MPE managers influence over labor costs decisions and enableemployees and managers to bargain on both compensation and job securityissues. Current discussions about ccmpensation reform, therefore, dwell ondelinking MPE compensation from the NPC and IWWPC pay structures, bringing allMPE employees under one pay commission, and allowing negotiations betweencorporations and employees on pay determination. The feasibility of reformingMPE compensation structure would depend on at least two major factors. Thefirst is the tendency of Government to perceive disparities in cashcompensations as socially inequitable and politically risky, while allowingdisparities in total compensation through mostly inefficient inkind benefits.The second factor is the financial performance of the MPEs themselves.

14/ For workers who get in-kind benefits such as housing and limited medicalfacilities, total compensation would be higher than cash compensation,even as the trend declines in real terms.

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Employees would resist pay reforms if they were to result in lowerremuneration. On the other nand, for enterprises which already have employeecompensation costs exceeding value added, reduction in remuneration isrequired to improve profitability. To ensure that reforms do not result in theescalation of labor costs and more losses, pay reform policies should belinked to promoting profitability. The development and implementation ofredeployment programs and reduction in over-employment should precedecompensation reforms in order to limit increases in labor costs. Policies onthe closure of inherently uneconomic enterprises and the financing of losseswould need to be instituted to limit the dependence on the NCBs for supportingincreases in compensation costs.

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Table 6.8

Trence In Nominal and Real Cash Compensation of-----------------------------------------------

Eoployee. of Public Corporations 1/________________________________

(Take per month)

Salary Scale FY73 FYOJ FY90 FY66 FYS9 2/

MW4 1: ChairmanNominal compenoction S760 4210 9000 12170 12420

Real compensation 2011 1280 2027 2264 2109

Index of real compensation (FY78 a 100) lO0 64 101 112 106

MNS2: DirectorNominal compeonstion 3893 4023 8665 10913 11161

Real compensation 19. 27 2021 1393

Index of real compensation (FY78 a 100) 100 64 101 106 99

MNS3: Goneral ManagerNominal compensation 8218 3848 7702 6816 8630Reol compensation 1712 1109 1736 1640 1448

Index of real compensation (FY78 z 100) 100 a6 101 90 86

MNSS: Manager

Nominal compensation 2743 3173 6423 7001 7176

Roal compensation 1459 964 1447 1296 1219

Index of real compenstion (FY78 = 100) 100 66 99 89 64

MNS9: OfficerNominal compensation 1490 1620 3081 4012 4109Real compensation 793 663 829 743 696Index of real coapennstion (FY78 = 100) 100 70 106 94 66

MNS16: Staff

Nominal compensation 672 877 1961 2124 2172Real compensation 364 291 488 432 402Index of real compensation (FY76 a 100) 100 76 127 118 105

MNS20: Staff

Nominal compensation 406 561 1261 1847 1376

Real compencstion 231 183 311 274 256

Index of real compensation (FY76 = 100) 100 79 138 119 110

MNS1/MNS9 2.6 2.3 2.4 3.0 8.3

MNS1/MNS2O 9.3 7.6 7.2 9.0 9.0

1/ Including compensation of of7icers and staff employed in onterprisesunder the monagement of corporations.

2/ Estimated of real compensation assume the projected FY89 inflationrate to be the soa as the FY66 level. Consumer prico indox formiddle income group (Dhaka, Chittagong, Khulno) is used to deflate

nominal compensation for iNS 1, 2, 3, 6, 9; in case of NNS 16 A 20,the consumer price index for non-gazetted employees is usod.

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Table 6.4

Trends In Nominal and Real Cash Compenoation of Workers: FY78-FY99 1/---------------------..---------------------------------------------

(Take per month)

Wag. Scale FY78 FY6U FY80 FY66 FY89

rade INominal co m psation 483 601 1122 1223 1252Real comp nsation 296 2gm 320 290 278Index of real compensation (FY76 a 100) 100 80 106 99 94

Grade 5

Nominal co p nsation 696 764 las 1513 15S0Real compensation 360 300 395 859 844Index of real compensation (FY78 = 100) 100 79 104 94 91

Grade 8Nominal compensation 762 968 1722 1694 1982Real compensation 479 876 491 446 429Index of real compensation (FY78 = 100) 100 78 103 93 90

Grade 12

Nominal compensation 876 1109 1963 2160 2205Real compensation 668 486 669 609 490Index of real compensation (FY78 = 100) 100 78 100 91 88

Grade 16Nominal compensation 1072 1380 2367 2696 2682Real compensation 683 629 674 816 592Index of real compensation (FY78 = 100) 100 77 99 90 87

Enhanced wages and allowancos awarded in 1986, following therecommendations of the IWWPC, were suffi:ient to compensate for the rise

in the cost of living since FY78 and essentially restored realcompensation at the FY78 level for the highost wage grades (grades 12and 16) and also resulted in some improvement at middle and lower levels(grades 1, 6 and 8).

1/ The cost of living of industrial workers at Chittagong, Narayanganjand Khulrn is used to deflate nominal compensation.

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6.14 For most enterprises, GOB needs to aim at pay restructuring overthe long-term as part of overall strategy to promote profitability. Since mostof the MPEs are unprofitable, the introduction of a new compensation structurewould have to be selective, starting with the partially divested enterprises.In the medium-term, reforms could be directed at removing distortions in thecompensation structure. The erosion in the real value of cash compensation,particularly for middle-level managers, should be off-set by more regularrevisions in nominal compensation; the compression in the structure of cashremuneration should be reduced, possibly by monetizing a few fringe benefits.

6.15 The Incentive Bonus Scheme. Considering that compensationrestructuring would take some time to achieve, the incentive bonus is the onlyinstrument available for reducing disparities and linking performance torewards. Since the formal introduction of the incentive bonus scheme for theMPEs in FY77, it has undergone revision in 1983 and 1986. The major incentiveschemes are based on one or more of four indicators, namely production, sales,profits and cost reduction. There are also some minor incentive bonuses, suchas festival bonus and merit increments, which are more in the nature ofregular compensation benefits. In addition, there are the workers' profitparticipation and welfare funds which are statutory requirements. A commonincentive scheme introduced in July 1986 currently exists for BCIC and BSEC.The scheme attaches a high weight to production and muLh less weight to salesand profits. BTMC's scheme based initially on production was revised in 1982to include sales, but it has not been effective in motivating performance asonly 3 mills were eligible for the bonus in FY87. BJMC's current bonus basedon production and cost-reduction has not motivated performance either; fewmills qualified for awards despite a review of the system in 1986. BSFIC'sscheme introduced in 1987, consisting of production and profit bonuses, has 13of 16 sugar mills qualifving for awards in FY88. However, the cost of thebonus is high; it is awarded at 65Z capacity, and the sugar mills continue tomake losses.

6.16 The effectiveness of the incentive system in motivatingperformance depends critically on the prime performance criterion. Existingsystems based on gross production are appealing to workers because they ignoreexogenous market shocks and are easy to monitor. However, given the poorfinancial performance and over-employment, feasible incentive schemes wouldultimately have to be based on criteria which reflect commercial viability,such as the rate of return on investment and, therefore, would have to beaffordable. Steps need to be taken to improve the existing system byemphasizing new indicators, such as labor productivity, profits and costreduction. The National Center for Monitoring Labor Productivity which hasbeen transferred from the Ministry of Labor to MOI can serve in theintroduction of the labor productivity criterion. In addition, the followingmeasures would improve the current system. The current method which makes thebonus a proportion of basic salaries and wages involves open-ended commitmentson the enterprise. It should be changed by adopting a method which willdetermine the aggregate bonus in relation to the performance indicator inorder to limit the total cost of the bonus. Also, the bonus system should beextended to corporation employees and enterprise level managers.

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Unions And Management Relations

6.17 Recent episodes of go-slows, strikes and other labor actions havestrained industrial relations and created a perception of disruptions inproduction in Bangladesh. In reality, the situation is more complex. Forexample, the number of labor disputes at the disposal of the Labor Directorateand the Labor Courts have increased steadily from 5,606 in 1985 to 5,918 in1986 and to 6.238 in 1987; but the number of employees involved in thoseactions declined from 198,118 to 105,977 and to 88,170. On the other hand, thenumber of man days lost fluctuated from 284,920 to 2,079,671 to 159,653 duringthe same period. Difficulties in the labor situation are attributed to thefragmentation and chaotic nature of the labor movement, the extremepoliticization of employment and pay decisions and amendments to the laborcode which have weakened management vis-a-vis the unions. The labor lawprovides for up to three registered unions in any enterprise; however, thereare often several more unregistered ones. There are 18 national federationswith over 3,000 registered plant unions and several unregistered ones.Adamjee, for example, has 3 registered and 26 unregistered unions. The unionsvary in strength; they tend to be stronger in the labor-intensive and largerenterprises located in the urban areas and weaker in the smaller, relativelycapital intensive or rural enterprises. Since compensation decisions arecentrally controlled, official bargaining is confined to inkind benefits,raising the frequency of disputes.

6.18 Recent amendments to the labor code, particularly the SKOPagreement of 1984, 15 have raised concerns about the erosion of managementresponsibilities. The key concessions under SKOP include the following:(i) any worker who is dismissed, discharged, terminated, retrenched, resigns,retires or is out of service for whatever reason is eligible for being electedto the executive committee of a trade union; (ii) an executive of a tradeunion cannot be transferred to another position without his consent; (iii) theissue of reinstatement of all workers and employees who lost their jobs afterimposition of Hartial Law was to be reviewed; and (iv) an inquiry was to bemade into divested enterprises which subsequently closed down and measureswould be taken to reopen them. Other demands concerned increases in wages,dearness allowance and festival bonus. The implementation of the SKOPagreement has been inhibited by questions about its legality, as for example,only plant level collective bargaining agents may make demands on MPEmanagement or Government.

5/ SKOP is an acronym for Bengali version of "united front', an associationof different labor federations.

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CHAPTER VII

POLICY DCPLUMENTATION AND UISES

Priorities

7.01 The sumary of the main proposals for improving MPE performanceis presented in Table 7.1. These include privatization; institutionaldevelopment; reforms in financial policies to promote MPE financialindependence; liberalizing internal and external trade; reducing over-employment; and restructuring employee compensation. The first priority shouldbe given to privatization. GOB should expand the scope of existing divestmentpolicies by offering more shares to reduce Government majority control andextending the process to other corporations which are currently excluded,especially BTMC. Substantive changes need to be introduced to give thedivested enterprises managerial authority over resource use, including controlover dividend policies, employment, employee compensation and output pricing,etc. GOB should undertake a classification scheme to aid the selection of theprofitable enterprises for divestment and for broadening the scope of reforms.The classification should give high priority to assessing the feasibility ofindividual mills under BJMC to provide the basis for implementing therecommendations of the Jute Report which has already been discussed with GOB.Next in priority, is institutional development, particularly the establishmentof holding corporations for the MPEs and strengthening the ABW.

7.02 The other proposals for reform provide a menu of measures whichcould be used to promote commercialization to improve the profitability of theMPEs and make them attractive for divestment. The relevance of these measuresto particular enterprises would depend on the main factors that underlie theirpoor performance. In implementing measures to limit cost increases and improvethe chances for financial viability, the reduction in over-employment andrestraints on raw material cost increases should precede compensation reformand financial restructuring. GOB should emphasize the development andimplementation of redeployment and retrenchment programs for improvingperformance especially for the jute and textile mills.

Policy Implementation And Risks

7.03 Approach To Implementing Reforms. Bangladesh has had a remarkablerecord in PE reforms relative to most developing countries. GOB reversed itspro-nationalization policies in the 1980s, putting more emphasis on the roleof the private sector. The size of the MPE sector was reduced significantlyand controls on private investment were relaxed. However, Government has hadrelatively less success in effecting changes in the performance of theremaining MPEs. In most cases, GOB has been aware of the problems and hasappointed Expert Committees to suggest recommendations for reforms, but actualimplementation has often been frustrated by various factors.

7.04 It is necessary to take account of the relation between generic(sector-wide) and specific enterprise (sub-sector) issues in implementing

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policies. A lack of attention to this issue has contributed to delaying andfrustrating the implementation of reforms in Bangladesh. Some corporations,such as BTMC, have had difficulty in liberalizing output prices, when pricecontrols were still being maintained at the sectoral level for all MPEs.Similarly, because the extent of enterprise authority has not been defined,contracts being signed under the on-going Performance Contract Project excludeoperational control over key variable, including hiring and output pricing.This report has focussed on generic issues, but some proposals are meaningfulonly when applied at the enterprise level; while others have both generic andspecific sub-sector implications. Table 7.1 outlines the links between genericand specific enterprise measures. Proposals to limit direct Governmentintervention in MPE operational decisions and provide more flexible managementby applying privatization or relaxing the system of overlapping controls aregeneric. Institutional reform is also a sector-wide issue, since it isnecessary for limiting bureaucratic influence over the operation of all PEt,including the non-manufacturing ones. Policies on dividend distribution,investment financing and guidelines for financial restructuring apply to allenterprises; but undertaking capital restructuring, including the choice ofthe right mix of cash infusion, debt conversion, grants and measures toimprove efficiency would depend on the situation of the specific enterprise.The provision of guidelines for classification is also a generic issue, thoughthe actual classification needs to be done at the corporation level.Similarly, while the establishment of a retirement age applies to all MPEs,the determination of over-employment, use of attrition and development ofredeployment and retrenchment programs could be done effectively only at theenterprise and corporation levels.

7.05 The approach to implementation of reforms should promote mutualreinforcement between generic policies and specific sub-sector measures. Thisissue relates to the choice of vehicle for effecting proposed policy reforms.Generic reforms, for example, could be pursued more conveniently in aframework that involves reviewing broad policies to promote more efficientresource use and growth. In this context, aspects of this report complementwork underway on tax reforms and public expenditure issues aimed at improvingeconomy-wide resource mobilization and allocation. Other aspects of the reportcould feed into specific corporation or enterprise reforms to test theimplementation of generic policies. Also, reforms could be implemented firstat the enterprise or corporation level, and experiences gained in such casescould be used in formulating sector-wide policies or channelled intoredesigning new sub-sector measures.

7.06 Limitations And Risks. There is a general sentiment that employeeresistance is an important determinant of the feasibility of reforms.Effective follow-up on policies is likely to be easier in a growing economy,as this will provide new job opportunities and lessen the social distress fromproposed redeployment and retrenchment programs. Currently, low productivityin agriculture is contributing to inadequate supplies of raw materials (e.g.raw cane) and weak domestic demand for manufactured goods. Thus, a cautiousrelaxation of these supply and demand constraints would provide a morefavorable environment for reforms. Even so, resistance to change due tofriction and the politicization of redeployment and employee compensationissues would have to be contained, although the strength of unions is often

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over-stated and can be used to gloss over management weaknesses. GOB has madeefforts to enlist employee support for some specific policies, such as partialdivestment by allocating them 152 shares. In addition to these, there is theneed for resources to finance the redeployment and retrenchment costs.

7.07 The Role of Donors. Donor support will be instrumental foreffective implementation of reforms, particularly through ensuring consistentapproaches to tackling issues, providing technical assistance, and financingviable investments. The implementation of redeployment and severance payschemes would require strengthening training programs through technicalassistance and financing retrenchment costs. Given the weak position of theMPEs, a fund for financing retrenchment costs may need to be established toimplement labor reforms and donors might consider contributing to this effort.The on-going partial divestment program has emphasized small-scale and medium-size enterprises with assets which can be easily absorbed by the stock market.Also, very few of the larger enterprises meet GOB's profitability criterionfor making share offers and enlisting public confidence in the process. As thepartial divestment program progresses and the list of the profitableenterprises is exhausted, donor support would be crucial for financing therestructuring of the potentially profitable large-scale enterprises, improvingtheir profitability and enabling them to offer shares to expand the divestmentprogram.

7.08 Further Work. Further work is being planned to examine some of theissues discussed here for selected enterprises. This will provide the chanceto discuss in more details measures that will support commercializationpolicies. More work could also be done on generic issues; some poterntial areasinclude MPE investment screening and processing, joint public-privateinvestment policies, and international competitive cost approach to ex-factorypricing.

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Table 7.1

MPE Reforms

Sunary Of Generic And Specific Policies

Enterprise SpecificPolicy Objective Generic Policy Policy

I. Privatization

Expand Private Review policy on 51Z Offer more shares toparticipation and GOB majority control reduce GOB control.improve performance. of MPEs.

--ditto-- Expand divestment to Extend process to BTMCall MPEs and improve and larger scalethe use other enterprises.instruments (e.g.management contracts,sale of block shares).

--ditto-- Formulate financial Appraise and selectand economic criteria individual enterprisesfor selecting viable for divestment.MPEs for divestment.

--ditto-- Develop guidelines for Each Corporation toMPE classification. classify MPEs using

specified guidelines;list units to beretained, phased outor restructured fordivestment.

Limit systematic Review method of valuing Authorize ICB tounder-valuation of share prices to assess and improveshare prices. incorporate future market method for valuing

value. shares.

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Enterprise specificPolicy Objective Generic Policy Policy

II. Institutional Development

Reduce over-lapping Formulate action Establish enterprisecontrols and promote program to establish control over resourcemanagerial initiative holding corporations use, give corporationand commercial (HC) and decentralize authority to monitororientation. system of MPE enterprise performance

controls. HC to and let Governmentcontrol corporate monitor corporation.decisions. Emphasizethe policy role ofMinistries.

--ditto-- Decentralize system of GOB restructureappointing corporation corporation Boards andand enterprise CEOs appoint CEOs,and Boards. corporation and share

holders restructureenterprise Boards andappoint CEOs.

Facilitate policy Strengthen ABW to doformulation and effective policy andimplementation. budget review and

financial MIS.

Enforce Hire skilled staff and Establish performanceaccountability; develop system for objectives, guidelinesmonitor and improve performance monitoring and targets betweenperformance. and evaluation. corporation and

Strengthen internal enterprise.and external auditingpractices.

Promote efficient MPE Introduce professional Short-term trainingmanagement. skills in screening for high level

the selection of high executives.level executives.

Close legal loopholes Study MPE charterslimiting the and GOB ordinances

Facilitate policy implementation of to identify legalimplementation. policies. loopholes limiting

policy implementation.

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Enterprise SpecificPolicy Oblective Generic Policy Policy

III. Financial Policy

Promote financial Establish guidelines Determineperformance and for transfer of GOB corporation'sfinancial shares to corporations contribution to GOBindependence. and limit cross- revenues.

subsidization bycorporation.

Give enterprise Board Enterprise Board to--ditto-- authority for units determine dividend

finances. policy and dividenddistribution.

--ditto-- Formulate criteria for Choose mix ofselective financial instruments (BMR,restructuring. efficiency measures,

debt conversion,grants, etc.) torestructure MPEs.

Provide guidelines and Determine method of--ditto-- policy for phasing out closure (e.g. sale of

uneconomic assets, withdrawal ofenterprises. financing etc.) and

phase out uneconomicenterprises.

Review MPE accounting Determine manner of--ditto-- practices. computing capital

depreciation, valuingliquid assets, etc.

Restrict ADP financing--ditto-- and loan guarantees

for partially divestedMPEs.

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Enterprise SpecificPolicy Obiective Generic Policy Policy

IV. Employment And Compensation Reform

Reduce over-employmwnt Establish retirement Use attrition toand employee age for workers. reduce over-compensation costs. employment.

--ditto-- Review MPE sector Give MPEs authoritypolicies on hiring, for hiring and laborfiring, etc. use decisions

--ditto-- Formulate policy on Freeze hiring foremployment freeze in over-employed skilledthe public sector. levels.

--ditto-- Establish agency, Determineprograms and policies over-employment,for redeployment and retrenchment options,retrenchment. retrenchment costs and

re-training schemes.

Promote labor Delink MPE pay from Allow pay bargainingproductivity and NPC and IWWPC and put between corporationscontrol production all MPE employees and unions.costs. under one pay

commis s ion.

--ditto-- Review compensationstructure to correctpay compression.

--ditto-- Link bonus to Establish enterpriseproductivity. level bonus schemes.

Promote efficient Establish incentive Introduce awards forresource use. scheme for managers and cost control.

head office personnel.

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Enterprise SpecificPolicy Oblective Generic Policy Policy

V. Output Pricing Policies

Promote efficient Remove price controls Give MPE managersoutput pricing, on non-sensitive and output pricing

non-monopoly goods. authority.

--ditto-- Phase out minimum --ditto--price rules.

--ditto-- Link administered Establish formula forprices to determining specificinternational prices. output prices (e.g.

urea, sugar).

VI. Raw M3terial Purchasing Policy

Expand raw material Abolish controls on Formulate andsupply to increase raw material prices. implement policies tocapacity utilization. promote raw cane

production.

Expand raw material Abolish preferred raw --ditto--supply and promote material markets forefficient production MPEs.for MPEs and privatesector.

Reduce raw material Give enterprises Allow BJMC enterprisesand inventory costs. autonomy in buying and to choose raw jute

managing material buying decisions andinventories. inventory levels.

Reduce costs and Use WES market topromote competition allocate commodity aidwith private sector. and give discounts on

raw materials from aidand barter tradesources to sell atcompetitiveinternational costs.

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References

Ameen, Mansural; A Study of Divestment of Industries in Bangladesh. Mimeo,March 1987.

Berg, E. and Shirley, Mary; Divestiture in Developing Countries. World BankDiscussion Papers, June 1987.

Chishty, Shamaul H.; Privatization in Developing Countries: Experience ofBangladesh. February 1985.

Chowdhury, Tawfiq; Privatization of State Enterprises in Bangladesh (1979-84),September 1987.

Humphrey, Claire; Privatization in Bangladesh. USAID, May 1987.

Malik, Surinder; Bangladesh, Public Sector Industrial Enterprises. Mimeo,November 1985.

Mirza and Barue; Bangladesh, Divestment of Public Sector Industries. IFCReport, 1986.

Nellis, John; Contract-Plans: An Assessment of Their Utility as PerformanceImprovement Mechanisms in Public Enterprises.

Park, Young; A System for Evaluating the Performance of Government-InvestedEnterprises in the Republic of Korea. World Bank Discussion Paper,November 1986.

Rab, Abdur; Financial Issues in the Reform of Public Enterprises. 1988.

Ramamurti, Ravi; Bangladesh, Development and Application of the PerformanceContracting System. April 1986.

Rashid, Mohammed; Public Enterprises in Bangladesh: A Survey.

Shirley, M.; Managing State-Owned Enterprises. World Bank Staff WorkingPapers, No. 577, 1983.

Sobhan, R. and Ahmad. M.; Bangladesh, Public Enterprise in an IntermediateRegime. BIDS, 1980.

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Official Documents

GOB, Autonomous Bodies Budget, FY86-FY89.

GOB, Guidelines to Public Enterprise Autonomy, 1976.

GOB, Industrial Enterprises (Nationalization Amendment) Ordinance, June 1987.

GOB, News Industrial Policy, 1982.

GOB, Proposals for Amending the Company Act of 1913.

GOB, Presidential Order No. 27 Bangladesh Industrial Enterprises, 1972.

GOB, The Public Enterprise (Management Coordination) Ordinance, July 1986.

GOB, Report of the Expert Committee Constituted for Laying Down the Objectivesand Determining the Formula for Calculating of Cost of Production andFixation of Selling Price, February 1987.

GOB, Zaman Committee Report on the Reorganization of the Public StatutoryCorporations, July 1983.

GOB, Revised Industrial Policy, 1986.

UNDP, Development of Management Information System and Performance Evaluationfor Public enterprises in Bangladesh, December 1986.

UNDP, Development of Performance Evaluation and Financial ManagementInformation System for Autonomous Bodies in Bangladesh (Phase II).

World Bank, Bangladesh Country Economic Memorandum, 1987, 1988, 1989.

World Bank, Bangladesh Fertilizer Report, 1988.

World Bank, Bangladesh: Prospects and Policy Issues in the Jute Sector,June 1986.

World Bank, Bangladesh: Program for Financial Sector Reform, December 1987.

World Bank, Techniques of Privatization of State-Owned Enterprises.

World Bank, Bangladesh: Rationality and Viability of Public IndustrialInvestment Program under the Third Five-Year Plan, 1987.

Wotld Bank, Bangladesh: Industrial Public Enterprise Reform Issues, 1987.

World Bank, Competition Policies for Industrializing Countries.

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APPENDICES

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Appendix I

Net Profits (Losses) of Individual Enterprisesof BTMC: 1984/85 - 1987/88(Figures in Lakh Taka)

------------------------------------------------------------------ __------

Si. 1984-85 1985-86 1986-87 1987-88No. Name of the Mills (Prov.)--------------------------------------------------------------- __---------

1. Amin Textiles 139.98 15.56 61.32 27.312. Ahmed Bawany Textile 38.11 (397.74) (54.25) (110.48)3. Bangladesh Textile (0.65) (255.86) (176.14) (152.43)4. Barisal Textile (122.45) (335.58) (225.15) (153.62)5. Bengal Textile 51.86 (41.23) (3.17) (67.41)6. Chisty Textile 21.4 14.75) (30.36) (65.06)7. Chittaranjan Cotton 181.99 (85.35) (26.76) (88.19)8. Darwani Textile 35.53 (58.37) 163.2 115.229. Dhaka Cotton 40.33 (175.07) (104.39) (124.08)10. Dinajpur Textile 18.74 (267.92) (18.14) (88.00)1;. Dost Textile 66.27 (92.64) 22.83 4.312. Fine Cotton 25.88 10.38 5.28 60.1913. Khulna Textile (18.95) (189.93) (146.55) (165.53)14. Kishoregonj Textile (35.77) (302.16) (216.42) (169.41)15. Kokil Textile 10.31 (118.08) (62.48) (136.49)16. Kohinoor Spg. 0.24 (200.73) (124.44) (92.05)17. Kurigram Textile - - (83.35) (91.20)18. Luxmi Narayan Cotton 95.76 (46.14) 42.82 50.3319. Madaripur Textile (220.96) (287.40) (320.05) (217.44)20. Meghna Textile 73.92 (89.18) (11.15) (85.61)21. Monno Textile (Old) 47.03 (63.03) 61.68 (46.80)22. Mono Textile (New) 1.51 11.05 28.2 56.7223. Magura Textile - (203.48) (198.32) (208.24)24. National Cotton (107.99) (361.52) (154.12) (228.73)25. Noakhali Textile (208.32) (473.28) (257.49) (230.08)26. Olympia Textile (45.88) (359.74) (238.64) (297.84)27. Orient Textile (8.88) (28.00) 2.97 (43.84)28. Quaderia Textile (5.65) (69.92) (5.99) (45.91)29. Rajshahi Textile 6.58 (43.17) (52.14) (38.05)30. Rangamati Textile (134.11) (232.05) (201.19) (131.43)31. R.R. Textile 186.61 (68.35) 104.05 (16.18)32. Satrang Textile 37.77 (67.82) (7.89) (44.07)33. Sharmin Textile (75.01) (209.85) (189.04) (153.43)34. Sunderban Textile 232.19 278.18 353.59 201.5535. Sylhet Textile (18.07) (246.18) (98.44) (153.32)36. Tangail Cotton (Old) 35.15 (99.17) (44.62) 7.28)37. Tangail Cotton (New) (20.79) (132.51) (23.76) 9.1438. Zeenat Textile (89.31) (234.80) (88.36) (17.17)39. Paylon Industries 174.16 46.93 58.95 116.3140. Karilin Silh (22.18) (52.80) (57.72) (84.45)41. Valika Woolen 56.2 32.3 33.16 38.4242. Engineering Industries 0.8 (5.72) - (2.06)43. Zofine Fabrics (21.66) (31.86) (25.08) (23.60)

…-- -- --- -- -- -- --- -- - -- - -- --- -- -- --- --- -- -- -- --- -- - --- -- --- - -- __ - - -- - - -- - --Total 421.79 (5626.98) (2307.55) (310.99)

…-- - - - - - - - - - - - - - - - - - - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -_ _ - - - - - - - - - - - - -_

-62-Appendix II

FY87 Net Profits (Losses) and Previous Years' Profit(Loss) Balances of Individual Enterprises of BJMC(Absolute Figures in Taka Lakh)

FY87 Profit (I) As X (1+11) As %Profit Balance of Tot I of To *I

I II

Dhaka Zone:

Baw (1814 (1668.8 (3.18 2.90Mgnwar (1'14.0 (16. 32.72 2.07Lifh at a(67.4 19e61 1: 1.017Latif ; wany IJo:7 317.7O 0 (( .02 .18

Meb run 0.6 (2420) .0 (.39)mJnP ing (9159 (256.6) (438) (2.07)

Sub-Total (656.6) (10196.3) (16.64) '17.66)

Khulna Zone:

Cresent (139.0) 3127.0 3.32 (6.28Poop4 los1141.5)06 11749.0 (338) (3.08PJJM 119.9 1848.0 2.86 (2.47Star (237.7 ) 2222.8 6.67 (3.98Daulatpur (33.2 (324.0 0.79 .5Aloem (48.3 441.0 116 279Carpting (121.3 (151.4 2.89 (.6Eastrn (68.6 (776.9 1.35 .383

JTI. ~ ~ ~ ~ (02.3 R186 Si 4.83 (1.97Purbachal 6~55.3 1163.9 1.32

Rajshahi (34.7 (426.4 0.83 ((.76Qaumi 44.0 (278.0 1.05 (.00

Sub-Total (908.0) (16538.9) (21.61) (28.21)

Chittagong Zone:

Am;in (297.3) (4957.4 67.09)BDCF (232 0) (1093.3 12 14Karnafuli 160.22 2629.8 3 e82) 437Gul Ahmed 152.1 1259.8 3:63 (1.79.Hafiz Jute 37.3 (309.1 0.89 (.44

R.R. 92.6 1123.6 0.22 R.80Hafiz Textile 19.1 (661.4 0.46 (.8eFKCF (231.1) (921.6) (6.61) (f 8Amin (0.1.d~~~~ (O 7~~~ ~:(1.8GaIfrs Habib 2.2 31:4 92 ( $01 .402Mills Furnish 13.4 (14.3 0.33 oo

Sub-Total (867.7) (14060.8) (16.93) (23.81)

Adamjee Zone:

Adam' -e(1938.0B (18621 .6 (46.23) (30 01)A.8B1 C' (24.6 (238.9 (0.68 (.42

Sub-Total (1962.6) (18688.5) (46.82) (30.43)

Total of all (4191.7) (67654.6) (100.00) (100.00)Zones

Total of FY87 profit & previous years' profitbalance = (618468.2)

Source of basic figures: BJMC,

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Appendix III

Net Profits (Losses) of Individual Enterprises

of BCIC: FY86-FY87(Figures in Taka Lakh)

FY86 FY86 FY87Accummulated Year's Year's

Profit Balance Profit Profit

SFCL 2577.7 2615.8 1856.9UFFL 5200.2 1664.8 910.3NGFF 1922.2 356.7 264.4PUFF - - (804.1)

TSP (880.9) (103.7) 225.1KPM (942.4) 27.0 102.0KNM (827.2) (561.6) (989.4)NBPM (1807.6) (745.5) (1051.2)SPPM (1916.6) (143-9) (295.5)KRC (2327.6) (1609.8) (1012.5)KHBM 21.3 2.9 9.3EAGLE 25.0 2.6 1.8Chha Cement 108.8 28.7 19.3TLMP (197.6) (108.7) (51.9)

Ctg. Cement (1100.1) 71.0 243.8CCC (1013.2) (269.7) 10.2KCC 122.5 292.5 22.4KBM 90.6 30.0 (264.7)Usmania 115.1 62.4 201.5BISF (181.0) 11.8 53.8BWCMP (43.1) 6.0 (5.0)KSL (38.0) 0.7 0.6UJALA (369.2) (93.3) 1.1LIRA 116.3 16.6 3.3

Total 1344.7 1553.3 (548.8)

Source: BCIC Annual Reports for FY86 and FY87.

-64-

AWgndlx IV

Not Profits (Losses) of I riedIIal Enterpr Ismof BSEC: FY8B-FY89(F1g.res In Taka Lakh)

FY86 FY87 FY88 FY89Actual Actual Actual Revlsed

CS) 803 504 930 559National Tubes 66 115 55 (11)Progati (175) 453 844 739Eastern Cables 525 632 383 223GEM 6 (2) (183) (285)BWTF (531) (666) (752) (764)Atlas 175 17 30 39BDP 298 254 (428) (166)Gazi Wares 152 42 117 80National Tubes 135 170 270 271Bangladesh Can 7 5 43 35Mehar 50 111 105 81Metalex 56 34 5 (10)Bangladesh Cycle (59) (120) (157) (75)Dhaka Steel - (32) - (15)Prantik (116) (48) - (25)Omality Iron - (14) (201) (36)

Bangladesh Blade (96) (95) (88) (38)Dockyard & Engineerlng (260) (358) (267) (243)Khulna Shipyard (258) (20B) (94) (75)Chittagong Dry Dock (128) (140) (343) (209)

Total (96) 153 (260) 172

Note: Totals In FY86 and FY87 here differ slgnificantly from the

figures compiled for all the enterprIses together asreported In Table 1.5.

Sources: FY87-FY89: Monitoring Cell, Ministry of Flnance.FY86: BSEC EnterprIse Profile.

-65-

Appendix V

Not Profits (Loosses of Individual Enterpriseof SFIC- FYOS-FYS

(Figure in Take Lakh)

FY8S FYN6 FY87 FY86 FY09Actual Actual Actual Revised Estimte

i ~~~~Sugar Group

PTS"g 2A°lSTSL 417.6 249 1.7RSM ~ 262.) (292.7SHSN 119.8 (220.6RJSM 85.1 (8.1NBSM 0.8 (28.3JSIA (159.7) (;22 1C&CO (486747) (196.3 283.2 a/ 416.0 a/ 444.4 a/KSM 5.7 41

ZBSM (46.1) 20.4KCSM (210.9 (220.1)OSM (62.6) (65.5)FSM (16.0) 58.8NSM - (868.1)

Sub-Total (2026.0) (3305.8) (2742.0) b/ (653.0) b/ 2217.0 b/

Refinery Group

DVOIL 74.1 630.6 721.9 1264.6 684.0

Fish Group

AAL (60.9) - - - -

-------------------------------------------------------------------------

FY85 FY86 FY87 FY88 FY89Actual Actual Actual Revised Estimate

------------------------------------------------------------ __-----------

Engineering Group

RJACo 34.8 45.8CMTP (16.3) (19 2)

Sub-Total 19.5 26.1

Oil Crushing

GNOM (14.1) (15.7)HOM (14.6) (13.6)

Sub-Total (28.7) (29.3) 29.7 b/ 30.6 b/ 34.8 b/

Bread A Cold Storage

MBL (1068) (107.2)CSD (34.5 3(84BCS(M) (4.1 (8.2)

Sub-Total (144.9) (193.8)Total (2156.9) (2972.1) (689.1)b/ 1464.0 b/ 3784.3 b/

Total Interest 610.6 1398.3 2361.0 1473.0 1630.0

Total Net (2155.9) (2972.1) (2651.0) 279.7 2368.1

a/ Spirit and alcohol only.b/ Operating profit.

Note: Trade Group entorprises and research institute SRTI are omitted.

Sources: FY85 and FY86: BSFIC Annual Reports; other years:Monitoring Cell, Ministry of Finance.

-66-

Append in VI

Financial Structure of Corporations: FYS4-FY09(Fig9res in Taka Million)

193/64 1964/66 166/66 l_6/U7 Rev i . 1967Y/U Budget 1910/69

Amount S Amunt U Amount S Amt I Amount I Amount U

1. Eauity 614.00 18.57 374.00 10.49 501.00 10.U6 427.00 9.06 4i5.00 6.30 562.00 9.052. Long-term debt 1221.00 26.99 175.00 4.90 1192.00 25.17 1100.00 23.34 1370.00 26.20 L947.00 31.303. Short-term dabt 2689.00 9.44 8015.00 64.60 8043.00 U4.26 8165.00 67.60 6432.00 65.80 3704.00 59.32

Total Funds 4524.00 100.00 3564. 00 W.99 4736.00 100.00 4712.00 100.00 5o27.0t 100.00 6213.00 9.e97

Debt: Equity U6.4:13.6 *9.6:10.4 *9.4:10.6 90.9:9.1 91.7:8.3 91.9:9.1

BJmc

1. Equity 739.00 13.64 -421.00 -6.09 -2774.00 -41.10 -265.00 -48.56 -4005.00 -57.30 -4986.00 -63.962. Long-term debt 1573.00 29.00 1569.00 23.00 1512.00 22.40 1606.00 24.69 1606.00 23.00 1731.00 22.203. Short-ter. debt 3106.00 57.30 5743S00 5.10 6006.00 118.70 7664.00 10.90 9364.00 154.80 11046.00 141.75

Totel Funds 5418.00 99.94 6911.00 100.01 6744.00 100.00 6505.00 100.01 6909.00 100.00 77M4.00 99.99

Debt:Equity 86.4:13.6 106.1:-6.1 141.1:-41.1 145.6:-45.6 157.3:-57.3 1U:-64

BCIC

1 Equi ty 4814.00 24.90 4904.00 20.20 4912.00 17.90 5457.00 16.90 6544.00 17.40 6893.00 14.602 Lono-term debt 7972.00 41.30 12349.00 50.90 15120.00 55.10 17565.00 54.30 21366.00 55.90 25067.00 53.703 Short-term debt 6509.00 33.70 7005.00 28.90 7432.00 27.10 9336.00 26.90 10210.00 26.70 14680.00 31.50

T.,t.l Funds 19295.00 99.90 24255.00 100.00 27464.00 100.10 32360.00 100.10 36242.00 100.00 46640.00 100.00

D:)bt:Equit.y 75.1:24.9 79.8:20.2 82.1:17.9 53.1:16.9 82.6:17.4 85.2:14.8

FSEC

1. Eq.ity 1257.00 15.10 623.CO 7.00 1281.00 12.70 1795.00 16.40 1906.00 16.60 2018.00 16.602 Long-tar, debt 3047.00 36450 4140.00 46.30 4026.00 40.10 3998.00 36.40 .3804.00 33.00 3615.30 29.803 Short-term debt 4033.00 46.C) 4183.00 46.60 4741.00 47.20 5163.00 47.20 5807.00 60.40 6488.00 83.50

Total Fund- 8337.00 100.00 8946.00 100.10 10048.00 100.00 10979.00 100.00 11519.00 100.00 12121.00 99.90

Oabt.Eq.ity 84.9:15.1 93.7 87.3:12.7 a3.6:16.4 63.4:16.6 63.4:16.6

BSFIC

I Equity 817.00 31.00 S80.00 16.90 26).00 6.20 126.00 2.60 301.00 6.90 349.00 6.902 Long-to.. debt 885.00 33.40 1172.00 34.20 1771.00 42.40 1800.00 38.00 1666.00 32.80 22W0.00 38.103 Short-tar. debt 941.00 35.60 1666.00 48.90 2142.00 51.40 2619.00 59.40 3105.00 61.30 3299.00 55.90

Total FuMnd 2643.00 100.00 3418 00 100 00 4173.00 100.00 4745.00 100.00 5072.00 100.00 9 88.00 99.90

Debt Ea. ty 52:48 67:33 87:13 93:07 65:15 94.1:5.9

DoIDC

1 Eq.;ty n.S. - 35.50 2.40 -13.00 -0.80 17.00 0.90 37.00 1.902 Long-tarm debt M.a. 725.10 48.60 392.00 64.60 944.00 52.40 939.00 48.603 Short-term debt n.a. 726.40 4.t0l 755.00 44.20 641.00 44.70 949.00 49.30

; tal Fund; n.s. - 1492.00 100.00 1634.00 100.00 1602.00 100.00 1925.00 100.00

Debt Equity 97.6:2.4 100.8:-0. 99.1:0.9 98.1:1.9

A : Industriel Corporations

1 Equ:ty 8241.00 20.50 6377.00 13.SO 4298.50 7.90 49S2.00 8.10 5204.00 7.60 4874.00 6.002. Long-term debt 14697.00 36.50 19318.00 40.90 24263.10 44.50 26927.00 44.20 31027.00 45.00 35549.00 44.103 Short-term debt 17278.00 43.00 21517.00 45.60 26002.40 47.70 29048.00 47.70 32671.00 47.40 4016.00 49.60

40216.00 100.00 47212.00 100.00 54544.00 100.10 60927.00 100.00 8902.00 100.00 80W59100 99.90

Debt Eq-ty 79 5:20.5 86 5:13.5 QV.1 7 9 91.u:7.9 92.4:7 6 94:6= ==_=== ..... ==.=.==. =_= ........ ........... - =t. = ..... .... ... .; ... a=. _s.r ........ --e._==-=ae=X==

Sou.ce mon tor.ng Cell. Ministry of Finance.bCIF, 8SFIC

-67-

Appendix VII

Sch:dulad ank.' Adivances 0.,tstndinn to MPEo - PF -FY07(Tako 14i lIon)

June 196 Dec. 196 De. 167

Sonali Bank n.. 911.6 6 611.1Janata Bank n.s n.e. 6. Jc

6.6 t1Aerani Bank 594.7 n.e. 643.3 aJ

Total 2162.9

8J"CSonIli Bank na. 1067.5 1J24.1Jin to Sank n.s. n.s. 1497.0Agreni Sank 1146.6 na. 1316.1 1/

Tote 1 4137.2

8cICSonali Bank na. 112.6 "9.2Jsnata Sank n.e. n.a. 377.1Agrani Sank 515.7 na. 274.6 a/

Tota 750.9

BSECSoncli Bank na. 450.1 464.7Janata Bank n.. n.. 820.4Agrani Bank 282.5 n.e. 302.3 a/

Tota l 1607.4

BSFICSonali Bank n.e. 514.0 467.6Janata Bank n.a. n.e. 150.4Agrani Bank 69.1 n.e. 70.1 a/

Total 63. 1

All 5 CorporationsSonali Bank n.e. 3059.8 3235.1Janata Bank n.e. n.s. 3525.0Agrani Bank 2016.1 n.s. 2606.4 a/

Tota l 9366.5...... , .. ................

n.a. = not available.

a/ E.clud.s loans o6tstanding on deantu,se whicch stood atTk 2843.6 million.

Source: Bangladesh Bank.

-68-

Appendix VIII (a)

Gross Savings of UPEs: FY86-FY89(Figures In Tk Million)

----------------------------------------------------------------- __----

Actual Actual Revi*ed Budget1986/86 1986/67 1967/63 1966/69

STMC -284 -41 -62 236BJmC -1461 -297 -906 -846SCIC 1129 1078 1225 1672BSEC -39 93 17 68BSFIC -171 -159 109 309BFIDC 63 31 36 47-----------------------------------------------------------------------

Total -763 685 399 1468-------------------------------------------------------------------- __-

Appendix VIII (b)

MPEs' Direct Tax Payments and DiroctSubsidy Receipts: FY86-FY89(Figures in Tk Million)

----------------------------------------------------------------- __----

Actual Actual R-vised Budget1986/86 1966/87 1987/88 1988/89

Direct Tax Payments

BTMC 6.4 20.0 13.6 34.4BJMC 0.6 0.7 0 0BCIC 60.1 31.6 6.0 9.9BSEC 96.1 65.9 88.0 97.18SFIC 29.3 32.9 64.9 133.3BFIDC 18.6 8.6 38.7 40.4

------------------------------------------------------------------- __--

Total 200.9 169.7 211.2 316.1

Drect Subsidy Receipts */_________________________

BTMC 360.7 163.6 92.3 -BJMC 260.0 30.0 230.0 -BCIC 80.4 637.1 93.4 -BSEC 706.3 160.0 93.1 -BSFIC 0 b/ 0 b/ 3569.8 b/ -BFIDC - - -

Total 1386.4 880.7 4068.6

*/ Consists of subsidies or granto advanced through government budgetprovisions, ADP loans converted into equity and cash infusions forcapital restructuring in consideration of PEs' financialdifficulties. Excludes benefits accrued to PEs throughrescheduling of PE debt to government and due to intor-stconcessions allowed on such dobt. As only direct subsidl*s arenoted here, indirect subsidies such as export subsidies areexcluded.

b/ Excludes parts of Tk 113.5 million which was extended as a grantduring FY81-FYSS for intensive cane develooment.

Sources: Monitoring Coll MOF.

-69-

Appendix IX___________

Schoduled Banks' Advane.o Outstanding to MPEson Government - Guaranted Debentures(Figure. in Take Million)

---------------------------------------------------------------

Loans up to Lins up toDe. 31, 1967 May 31, 1996

BTMCSonali Bank n.e. 32.6Janata Bank 54.0 54.0Agrani Bank - -

Totel 66.6

BJmCSonali Bank na. 46.4Janata Bank

BJMC head office 40.0 */ 40.0 a/BJMC enterprises 58.9 b/ 56.9 b/

Agrani Bank n.e. 66.7----------------------------------------------------------------

Total 198.0

sCICSonali Bank na. 212.6Janata Bank 143.0 143.0Agrani Bank - -

Total 365.6

BSECSonaii Bank na. 71.4Janata Bank 82.0 82.0Agrani Bank na. 60.0

Total 203.4

BSFICSonali Bank na. 7.5Janata Bank 0.06 0.06Agrani Bank - -

----------------------------------------------------------------

Total 7.65

All 6 CorporationsSonali Bank na. 369.6Janata Bank 376.96 376.96Agrani Bank na. 106.7

------------------------------------------------ _,---------------

Total 861.16

na. = not available.

a/ Loan amount advanced up to April 1, 1974.b/ Loan amount advanced up to April 20, 1974.

Source: Banking Wing, Ministry of Financo.

Appendix X -TO-

(a) Scheduled Bank's Advances Outstanding to HPEs: June 1982-December 1987(Figures in Tk Million)

June 1982 June 1983 June 1984 June 1985 June 1986 Dec. 1987/a

BTMC 2385 2189 2230 2713 2192 2183BJMC 2452 1930 1911 4323 5162 4137BCIC 744 681 762 978 1286 751BSEC 1519 1636 1331 1925 1798 1607BSFIC 744 490 119 372 461 688

Total 7844 6926 6353 10311 10899 9366

/a This year's figures exclude Agrani Bank's advances outstanding toindustrial corporations of debentures which stood at Tk 2844 millionas of end 1987. This is reported by only Agrani Bank.

Source: Bangladesh Bank.

(b) MPE's Interest Payments: FY86-FY89(Figures in Tk Million)

Actual 1985/86 Actual 1986/87 Actual 1987/88 Budget 1988/89Amount 2 of Amount Z of Amount Z of Amount Z of

Income Income Income Income

BTMC 380 Neg. Income 336 296 319 135 353 83BJMC 766 Neg. Income 431 3239 489 Neg. Income 568 Neg. IncomeBCIC 778 81 887 95 1102 113 2020 118BSEC 259 125 270 89 349 105 354 93BSFIC 135 Nleg. Income 236 Neg. Income 147 81 163 33BFIDC 21 26 30 66 25 27 25 26

Total 2339 3475 2190 158 2431 191 3483 129

Source: Monitoring Cell, MOF.