ECN220: Economy of Bangladesh

Comparative Performance of State Owned Enterprises in Bangladesh

Aninda Mustafa ID#1120560

The government of Pakistan used the state-owned enterprises mainly for the development of the economic condition of West Pakistan during the period between 1958 and 1970. The private sector received little government patronage in East Pakistan, where the public sector investment was, however, relatively larger than in West Pakistan. The public sector of the economy of Pakistan in the early post-partition years between 1947 and 1950 covered communication network, power, irrigation, defence and social service sectors like education and health.

Following the independence of Bangladesh in 1971, major changes were made in the ownership structure of the enterprises of industrial, commercial and financial sectors. Through nationalisation, the government gained control over 86% of the total industrial assets in the country. The government took over all the units of the industries abandoned by West Pakistani and other non-Bengali owners and nationalised them. The government also nationalised all industrial units owned by Bangladeshi citizens in the three major sectors, namely cotton textile, jute and jute manufacturing and sugar manufacturing.

In July 1972, the government imposed ceiling on private investment. The limit set for private investment in small industrial units was Tk 2.5 million, which was later enhanced to Tk 3.5 million including the investment of profits, and simultaneously, the government preserved the right to nationalise any private enterprise whenever felt necessary. The strategy did not work well and within two-three years of nationalisation, the state-owned enterprises started experiencing severe deterioration in productivity and profitability largely due to management inefficiency, corruption and an ideological conflict between personal ambitions of the policy makers, managers and employees and the national interest.

In 1976, the government brought further changes in the national development strategy and encouraged state-sponsored private industrial development. The industrial policy was again revised and offered concession to both local and foreign private investors. Most reserved sectors for state investments were made open for joint participation of public and private enterprises. The government abolished the provision of moratorium on nationalisation, formulated policies to promote private capital and encourage competition between public and private sector enterprises. The public enterprises were restructured through merging some public corporations and creating a few new enterprises. The new goals included revitalisation of the private sector, increase in efficiency of the public sector management, organisation of efficient import substitution, production of exportables, and restriction on monopoly in production, employment generation, and development of skills and technology. All these were included in the government’s industrial policy declared in 1982. This policy clearly demonstrated the intention of the government towards

Box 1.1: Non-Financial Public Enterprises

Sector No. of Enterprises

Title of Enterprises (Non-financial)

Industry 6Bangladesh Textile Mills Corporation (BTMC), Bangladesh Steel &

Engineering Corporation (BSEC), Bangladesh Sugar & Food Industries Corporation (BSFIC), Bangladesh Chemical Industries Corporation (BCIC)

Bangladesh Forest Industries Development Corporation (BFIDC), Bangladesh Jute Mills Corporation (BJMC).

Power, gas and water

7Bangladesh Oil, Gas & Mineral Resources Corporation, Bangladesh Power Development Board (BPDB), Dhaka Power Distribution Company (DPDC),

Dhaka Water and Sewerage Authority (WASA), Chittagong Water and Sewerage Authority, Rajshahi Water and Sewerage Authority and Khulna

Water and Sewerage Authority.

Transport and communication

7Bangladesh Shipping Corporation (BSC), Bangladesh Inland Water

Transport Corporation (BIWTC), Bangladesh Road Transport Corporation (BRTC), Chittagong Port Authority, Mongla Port Authority, Mongla Dock

Worker’sManagement Board, Bangladesh Land Port Authority.

Trade 3Bangladesh Petroleum Corporation (BPC), Bangladesh Jute Corporation

(BJC), Trading Corporation of Bangladesh (TCB).

Agriculture 2Bangladesh Fisheries Development Corporation (BFDC), Bangladesh

Agriculture Development Corporation (BADC).

Construction 5Rajdhani Unnayan Kartipaksha (RAJUK), Chittagong Development Authority (CDA), Rajshahi Development Authority (RDA), Khulna Development Authority (KDA) and National Housing Authority.

Service 17

Bangladesh Muktijoddha Kalyan Trust, Bangladesh Film Development Corporation (BFDC), Bangladesh Parjatan Corporation (BPC), Bangladesh Small and Cottage Industries Corporation (BSCIC),

Bangladesh Civil Aviation Authority, Bangladesh Inland Water Transport Authority (BIWTA), Rural Electrification Board (REB), Bangladesh Export

Processing Zone Authority (BEPZA), Bangladesh Handloom Board, Bangladesh Sericulture Board, Bangladesh Water Development Board

(BWDB), Bangladesh Tea Board, Bangladesh Telecommunication Regulatory Commission (BTRC), Export Promotion Bureau (EPB),

Bangladesh Sericulture Research Institute, Bangladesh Bridge Authority and Bangladesh Energy Regulatory Commission

Comparative Growth of SOE and National Income

The study of the state owned enterprises in Bangladesh reveals the struggling side of the public sector. All indicators of performance suggest that SOEs have deteriorated financially a long time ago, and has been guilty of being noticeably unproductive in recent years. For example, their contribution to GDP, which averaged about 2 per cent of GDP over mid-1990s, has declined to far less than 1 per cent in recent years. The major manufacturing and utilities SOEs contributed to less that 0.8% absolute increase in GDP during the early 2000s.

During FY 2006-07, the total operating revenue of all existing SOEs stood at Tk. 33,179 crore which rose to Tk. 78,369.25 crore in FY 2010-11 with an annual growth rate of 23.97 percent. During this period, the value of purchase of goods and services increased by 27.25 percent. According to the production cost, the amount of value addition in FY 2006-07 stood at Tk. 2,611 crore which significantly decreased to Tk. -1,780 crore during FY 2010-11 resulting in a decreased growth rate of value addition by -26.71 percent. During FY 2006-07, the operating deficit of the SOEs was Tk. 1,572 crore while it increased to an operating deficit of Tk. 8,096.40 crore in FY 2010-11. Table 2.1 shows the growth rate of revenue, value addition and production income of non-financial SOEs during FY 2006-07 to FY 2010-11.

Recent data shows a comparative fall in production in almost all sectors. Urea production by BCIC fell from 18.78 lakh mt. from 2004-05 to 11 lakh mt. in 2011-12. Yarn production by BTMC fell from 130.31 lakh kg to 49.44 lakh kg in the same time period. There was also decrease in production of sugar and TSP, with BJMC and BSEC the only two SOEs to have higher production levels than 5 years ago.

Table 2.1: Growth Rate of Revenue, Value Addition and Production Income of Non-financial SOEs (2006-07to 2010-11)(In Crore Taka)

2006-07 2007-08 2008-09 2009-10 2010-11 Growth Rate from 2006-07

to 2010-11Operating revenue 33,179 20,018 39,547 64,958 78,369.25 23.97

Purchased goods and services

30,567 12,406 31,142 55,622 80,149.71 27.25

Value Addition 2,611 7,612 8,405 9,336 -1,780 -26.71

-4000

-3500

-3000

-2500

-2000

-1500

-1000

-500

0

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

Fig. 2.2 Net Profit/Loss of all SOEs in Bangladesh

On the other hand, the Gross National Income (GNI) of Bangladesh has increased tremendously over the last 40 years. After gaining independence from Pakistan, the state of the economy was weak and most of the people were relatively poor. The war had taken its toll on the nation and its people. GNI at that point in time stood at a meager figure, less than 10 billion dollars. Fast forward to 2012 and the GNI of Bangladesh has shot up to almost 140 billion dollars. It must be mentioned that during this period the population of Bangladesh has also grown to a massive 154 million from about 70 thousand at that time. However, during that time the productivity of the people as well as the private sector went through radical changes. Technological advances and increase in knowledge has led to productivity in the private sector to be far more superior.

Privatization

In 1974, in an effort to check the accentuating crisis, the government took initiative to revise the investment policy making greater room for private enterprises in the economy. In the revised investment policy of 1974, only 18 sectors were reserved for the public sector and the remaining sectors were kept open for private investment and the ceiling for private investment was raised to Tk 30 million. The new policy opened scope for foreign private investment in the country. Provisions were made to compensate the owners in the event of nationalisation and the moratorium on nationalisation was extended from ten to fifteen years.

The Second Five-year Plan for 1980-85 was revised and the allocation for private sector industry was enhanced from 25% in 1980-81 to 59.4% in 1981-82. The few sectors kept reserved for state-owned enterprises were air transport, telecommunication, nuclear energy, power, and defence goods. All other sectors and kinds of industries were made open for private investment without any ceiling. The major capital intensive public sectors such as jute and cotton textile, sugar, paper, steel, shipbuilding, heavy electricals, minerals, and oil and gas were also made open for either public or private investment or for partnership of both. To facilitate private investment, the government disinvested more than 390 units of industrial, commercial and financial sectors. To help promote share market and to accumulate required funds, the government unloaded 49% of the shares of some public sector enterprises.

Comparison of Government Investment and Private Investment

It can be argued that allowing private sector investment has mostly fuelled Bangladesh’s economic growth. When FDI was restarted in 1975 along with the privatization efforts in the 80s and 90s led to huge amounts of spending in the private sector. However, a study by Mahmood, Hasan and Sobhan done 3 years after privatization of SOEs showed that there was not much difference in performance before and after. However, it could be argued that the study was done too soon for the companies to achieve any significant results. Another study, conducted by Binayak Sen, showed how during 1985-91, 74% of the Textile mills in private sector were loss making enterprises. The number was 62% for the nationalized sector.

When we look at the scenario today it is a completely different one. Whereas most SOEs are corrupt, inefficient and lethargic the private industries have led by example. G.S Sahota of the World Bank evaluated that productivity does not depend on ownership, but on managerial efficiency. It is possible that most of the public sector industries in Bangladesh are completely managerially inefficient.

Table 14.2 shows us a breakdown of investment in the country from 2001 onwards, both domestic and from foreign sources. In 2003-04, total private investment was Taka 161901 billion. Over the years that figure has increased to Taka 878932 billion in FY 2011-12. That is an overall growth of almost 443% in 10 years. On the other hand, if we look at table 14.1, we can see that total government grants/subsidies to SOEs have increased from 385.84 Crore Taka in 2003-04 to 1187.65 Crore Taka in 2010-11. Even though this figure shows an overall increase in government spending in the public industries, it does not show a clear picture. In the year 2003-04, private investment was 517 billion Taka and public investment only 186 billion Taka. In the same period private investment consisted of 17.2% of GDP while public investment only 6.2%. In 2005-06, private investment increased to 18% but public investment fell to 6% of GDP. In FY 2011-12, this figure stood at 20.04% for private investment and 6.50% for public investment.

As a result, we can see from the data that over the last 10 years, Bangladesh has encountered different levels of growth for its public and private sectors. While the private sector has flourished, the SOEs have staggered to keep up and play a defining role in the country’s growth. The charts in the following pages (Fig. 3.1-3.4) show the performance of SOEs. It is clear for all to see their failure both financially and productively. Fig 3.1 shows that all SOEs in the manufacturing sector made annual losses from 2003-2006 except BSEC and BFIDC. In Fig. 3.2 we see that all SOEs in the transport sector made large losses in the same period of time. Utility providing SOEs also made significant losses in all years except for FY2002-03. The last chart shows us that there were large loans also taken by the SOEs, most notably by BJMC for an amount of over Taka 500 crore.

-400-350-300-250-200-150-100

-500

50

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

BTMC BSEC BSFIC BCIC BFIDC BJMC

-643.03-512.71-551.36

-413.37 -359.77-532.7

-833.86-1000

-800

-600

-400

-200

0

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

Manufacturing SOCs

Manufacturing SOCs

Table-14.1 Government Grant/Subsidy during FY 2003-04 to 2010-11(In Crore Taka)

Organizations

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2010-11(Revised

BJMC 33.03 29.57 100.00 34.99 34.99 34.45 65.12 94.24 155.74BIWTC 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50 0.50RDA 0.10 0.09 0.12 0.13 0.15 0.15 0.20 0.20 0.20BFFWT 16.25 16.44 18.19 18.29 27.70 44.53 61.16 78.40 74.05BIWTA 27.86 31.88 52.19 50.54 42.45 82.49 98.24 140.56 153.56BSCIC 21.50 22.51 26.5 28.50 36.98 39.96 47.74 62.21 64.53REB 8.00 8.00 8.00 8.00 8.00 8.00 8.00 8.00 2.68BHB 4.50 4.61 7.99 7.43 7.43 - - - -BSB 4.30 4.26 3.97 4.32 6.29 8.89 10.4 13.85 13.85EPB 4.00 10.00 12.00 11.00 12.30 13.81 13.81 16.00 16.50BADC 35.00 42.00 58.62 66.50 86.62 155.00 204.27 239.19 279.30BWDB 230.80 251.83 279.01 228.24 228.24 571.62 645.74 531.66 671.78BERC - - 0.54 0.77 1.00 0.00 0.00 0.00 0.00BSRTI - - - 1.44 1.6 1.79 1.42 2.84 3.00Total 385.84 421.69 567.63 460.69 494.25 961.19 1156.6 1187.65 1435.69Fig. 3.1: Net Profit/Loss of SOEs in Manufacturing

Sector (In crore Taka)Fig. 3.2 :Net Profit/Loss of All Transport and

Commercial Sector SOEs (In crore Taka)

Problems of State Owned Enterprises and Concluding Remarks

There are many shortcomings and constraints in the structure of control and management of the state-owned enterprises in Bangladesh. Generally speaking, there are four hierarchical levels in the control supervision structure. At the bottom is the enterprise level control involving internal management matters. At the next tier is the corporation control involving supervision, coordination among units, and delegated policy matters. At the third tier is the ministerial control of bureaucratic nature, involving evaluation, coordination amongst ministries and non-delegated policy matters. Finally, at the top is the political control exercised by the minister and the government involving major policy issues.

At the bottom is the individual enterprise, which is the ultimate object of control and supervision. The enterprises have no policy-making options as they operate within approved budgets, plans, policies and norms. Even when there is an enterprise management board, they limit themselves to routine operational matters and refer everything to the corporation. This resulted from the absence of mutual trust, lack of professionalism and the uncertain and changing state of informal

-700-600-500-400-300-200-100

0100200300

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07

0

100

200

300

400

500

600

BTMC BSEC BSFIC BCIC BFIDC BJMC

Classified loan

Fig. 3.3: Net Profit/Loss of All Utility SOEs (In crore Taka)

Fig. 3.4: Classified Loan of Mfg. Sector SOEs (crore taka)

authority and accountability. Above the enterprises are the statutory corporations. The basic function of these juridical bodies as defined in presidential order/ordinances/acts of parliament is to supervise, coordinate and direct the enterprises.

These bodies control and supervise the enterprises directly and contribute towards coordination between enterprises in matters of foreign procurement, personnel, marketing, disposal of surplus, or arrangement of finance. But the statutory corporations are heavily dependent on ministerial decisions. In most matters of policy and in certain matters of operations, they do not enjoy any autonomy. However, the statutory corporation can move on matters of policy on their own behalf and on behalf of the enterprises under them. The third tier is the ministry, which retains all control over the policy matters, which they define in consultations with other ministries, after scrutiny of papers prepared by the corporations. The fourth tier, the minister, who is a people’s representative or a guardian of the public interest, often gets involved in small details of day to day administration rather than the policy issues. The minister, however, conducts review meetings, pilots policy proposals in the cabinet and responds to parliamentary scrutiny on behalf of the enterprises and corporations.

Overall, this comparative study of state owned enterprises in Bangladesh reveals a harsh reality. It has been very difficult for public industries and institutions to succeed. Managerial inefficiency, corruption, red-tape and lack of organization have led to huge financial losses over the years as well as the struggle to cope up with the private sector. After the independence of Bangladesh, Hussein Mohammad Ershad rescued state owned enterprises by allowing liberalization. Maybe the time has come again for Bangladesh to allow privatization in a larger scale for most of its remaining public industries. This will allow them to be more efficient and competitive and put the people’s money into better use.

References: 1. Bangladesh Economic Review 20122. Banglapedia 3. Various Statistical Appendices