Insights: BangladeshWith contributions from: Tawfiq Ali, Martin Bendrich, Sakhawat Hussain, Wolfgang Leim, Markus Löning, Christof Gabriel Maetze, Alexander Mondorf, H.E. Dr Thomas Prinz, Dr Atiur Rahman, Alexander Rost, H.E. Muhammad Ali Sorcar

Financial Institutions: Partnership meets expertise

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Foreword: On-the-ground knowledge and transparency key to developmentChristof Gabriel Maetze

Trade volumes between Germany and Bangladesh have risen steadily for yearsH.E. Dr Thomas Prinz

An emerging middle income countryH.E. Muhammad Ali Sorcar

The role of the banking sector in the economic development of BangladeshDr Atiur Rahman

Structural bottlenecks hamper growth potentialWolfgang Leim

A banker's viewAlexander Mondorf, Alexander Rost

Labour conditions in BangladeshMarkus Löning

Business activities in low-wage countries: evaluating sustainability risks Martin Bendrich

From ship breaking to shipbuilding Sakhawat Hussain

My Bangladesh Tawfiq Ali

2 I Contents

Contents I 3

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From the field: experiences on the groundTrützschler GmbH & Co. KG, Siemens Bangladesh Ltd., MAN Diesel & Turbo SE

Disclaimer and legal notice

Bangladesh’s economic journey has been remarkable, overcoming a host of challenges including fragile political environments, labour strikes, insufficient infrastructure, and persistent natural disasters. Indeed, over the last decade, healthy growth rates of around 6 % a year have been maintained, and Bangladesh recently attained lower-mid-dle-income country status well ahead of the predicted time.The country has also made progress with respect to its social develop-ment. Millions have been lifted out of poverty, and inequality has been reduced by social spending – with advances in water, food and energy security. The central bank plays a key part in this, noted for its strong regulation, coupled with a focus on socially-responsible and sustainable finance – an ethos that Commerzbank shares.

Yet the country still has a way to go in its development. One pressing task is to modernise its national infrastructure in the face of an urban-ising population. Additionally, expanding Bangladesh’s economic base should become a priority, through a broadening of its export trade, and development of higher-end manufacturing and tertiary-sector services. If supported with adequate employment and innovation, Bangladesh’s large, young labour force – over half of the population is under 25 – represents a strong demographic advantage for the future.

With the right focus, there is no doubt that Bangladesh can compete with other emerging economies such as Vietnam and Thailand to be-come a significant economic power. But this requires securing foreign direct investment and facilitating international trade.

As a dedicated international trade bank, we at Commerzbank see it as our role to help smooth this progress. Indeed, we have been working with Bangladesh since 1972 and maintain a representative office in the capital, Dhaka, since 2013. It is our view that Bangladesh’s further success will only come about through partnership – harnessing the skills and expertise of local banks with the payments and documentary infrastructure as well as global reach of banks such as Commerzbank. This allows companies exporting to Bangladesh to manage the inherent payment risks involved in such trade. At the same time, it ensures that the country is able to import the capital resources it needs for develop-ment of the economy.

On-the-ground knowledge and transparency key to development

4 I Foreword

Christof Gabriel Maetze

Member of the Executive Management Board

Of course, such international financial networks also provide a wealth of opportunities for companies across the globe to engage with Bangla-desh. We are delighted to see German-Bangladesh relations continue to go from strength to strength, having enjoyed a long history of diplomatic and commercial cooperation since Bangladesh’s independence. Indeed, Germany is now a crucial trade partner, being the second-largest desti-nation for Bangladesh’s exports, and in turn a source of much machin-ery and technical know-how. In particular, the latter two are something we are proud to have contributed to.

Further global economic integration will be helped, however, by addi-tional transparency regarding the country’s trading and investment land-scape. Indeed, in such environments it is essential to be familiar with the risks. It is for this reason that we decided to produce this comprehensive study, which draws on the experience of some of the region’s leading in-dividuals to promote understanding of the country and the region from a wide range of perspectives – economic, commercial, political, diplomatic and social. We are delighted that such a wide-array of respected experts have kindly agreed to contribute to this report: their insights really are invaluable.

As Bangladesh continues to develop, we are dedicated to playing a cen-tral role in the story. We hope that you find the study to be an informa-tive and stimulating read.

Christof Gabriel Maetze Member of the Executive Management Board

Foreword I 5

6 I Trade volumes between Germany and Bangladesh have risen steadily for years

Trade volumes between Germany and Bangladesh have risen steadily for years

Bangladesh and Germany have enjoyed good and friendly bilateral rela-tions since shortly after Bangladesh achieved independence. Following Bangladesh’s victory in the independence war, Germany was one of the first countries to officially recognise the People’s Republic. There-after, German Development Cooperation began to provide Bangladesh with technical and financial support. At the time of its independence, Bangladesh suffered from extreme poverty, institutional inexperience and administrative weaknesses. Floods (1973) and famine (1974) caused the deaths of hundreds of thousands and shaped an image of Bangla-desh abroad that still prevails to an extent today. Since those early years, however, the country has made tremendous progress.

To cite just a few impressive examples: Bangladesh can boast the third-strongest progress in the Human Development Index in the period since 1980, having halved the number of people living below the nation-al poverty line since 2005. Child mortality has decreased by 76 % since 1990 to 35 per 1,000 live births. In addition, average life expectancy has today reached 70.3 years.

We are proud that the German Development Cooperation, represent-ed by GIZ, KfW, DEG and BGR (Federal Institute for Geosciences and Natural Resources) and many NGO initiatives were able to contribute to these great achievements. GIZ, KfW and the German Red Cross have built more than 450 cyclone shelters in the southern regions of the country. Private initiatives like the German Doctors are providing med-ical care, education and self-development opportunities for thousands of people. Our official development cooperation currently focuses on climate change, renewable energy and energy efficiency, as well as good governance.

H.E. Dr Thomas Prinz

Ambassador to Bangladesh, German Embassy Dhaka

Trade volumes between Germany and Bangladesh have risen steadily for years I 7

Germany is, moreover, well-known for its university education. Around 1,500 young Bangladeshis start their Bachelor’s, Master’s or PhD studies in Germany every year.

Equally important is bilateral trade. Trade vol-umes between Germany and Bangladesh have risen steadily for years and reached around EUR 4.4 billion in 2014. As the second-largest export market for Bangladesh, Germany is a crucial partner for the country’s economy and politics. While the main exports from Bangladesh to Germany are textile products of the ready-made garment (RMG) sector, Germany mainly exports machinery as well as electro-technical and chemicals products to Bangladesh.

For Bangladesh, the time has come to take a closer look at other economic sectors beyond RMG and labour migration. There is huge

potential in manpower-intensive IT services and pharmaceutical industries, as well as in shipbuilding. Growing population mobility, increasing interconnectivity with neighbouring countries and the availability of reliable, fast internet and telecommunication infrastruc-ture in all parts of the country have created new business opportunities. Furthermore, the growing middle class is eager to purchase the latest consumer products. As a result, the economy has been growing by more than 6 % annually for more than a decade.

Yet there remain tremendous challenges, with corruption and nepotism among the main root causes of many of them. The rapid urbanisation process, growing population, regularly-erupting political violence and the weakness of democratic institutions are some of them. However, it is a promising feature of this country that the people of Bangladesh are dedicated to development and progress. They are continuously working to make the best out of what is given. That is why we should join their efforts to continue and deepen our cooperation.

The political relations form an important framework for that. The visits of the German Foreign Minister Steinmeier (21.09.2015) and of Federal Minister of Economic Cooperation and Development Dr Müller (06.-08.10.2015) as well as the planned visit by the Honorable Foreign Minister Ali in Germany are proof of our close political cooperation.

8 I An emerging middle income country

An emerging middle income country

The development landscape of Bangladesh has presented the world with a development puzzle: intriguing in its intensity, bold in its aspi-ration, and yet the target milestones are realistically achievable. It is a sizable country with the world’s highest population density among countries of 10 million or more inhabitants, a fact that continues to defy the naysayers, with its people showing great flexibility in adapta-tion and innovation in management. Against all odds, the country has been doing better than most in the region in every significant social indicator.

Bangladeshi citizens have a longer average lifespan than most of their neighbours. The country has achieved some of the largest reductions ever seen anywhere in curbing deaths among infants, children and women giving birth. It has lifted millions out of poverty and maintained sustained economic growth. The reduction of poverty, the most difficult development challenge of our times, has shown remarkable progress in Bangladesh. The poverty level has plunged from 57 % in 1991 to below 25 % in 2014. More importantly, the poverty reduction strategy in Bangladesh has achieved the rare success of benefiting the extreme poor most. The swiftness of achievement and the persistent pattern led the Department for International Development (DFID) and USAID to es-timate that extreme poverty may come down to almost zero (2.4 %) by 2030. The country’s attainment of UN Millennium Development Goals is quoted in development circles as an example of how so much can be done with so little. The political leadership of the present government has been given well-earned credit for maintaining basic social spending despite competing priorities.

A combination of well-thought-out policies and sustained effort in their implementation has achieved unprecedented outcomes in many other sectors. Take, for instance, the flagship achievement of the status of women. This has its signature written everywhere, from the top leadership to the grassroots level. The 2014 Global Gender Gap Report, issued by the World Economic Forum (WEF), notes that Bangladesh has climbed up to 68th position, jumping 23 places from 91st position over the last eight years. The report attributes this achievement to the partic-ipation of women in both politics and the workforce. This performance is head and shoulders above any other South Asian economy.

H.E. Muhammad Ali Sorcar

Ambassador of Bangladesh to Germany

It is thus not a sound bite that the govern-ment of Prime Minister Sheikh Hasina set the overarching goal of Bangladesh becoming a middle-income country by 2021, the year of the 50th anniversary of its independence. The vision has been pragmatic. Employing its own method, the World Bank reclassified Bang-ladesh as a lower-middle-income country on 1 July 2015. Even before this was published, Bangladesh had already set out its vision to 2041, with the target of becoming a peaceful, prosperous and developed nation, elevating itself from a middle-income country. With Bangladesh rapidly becoming a hotspot for future investment in the areas of manufactur-ing, infrastructure, education and technology, this bold long-term vision appears a realistic target. In the quest to achieve this feat, the right milieu of international and bilateral co-

operation in the political, economic and trade sectors is a prime requirement.

Right from the inception of Bangladesh as an independent state, Germany has proven an invaluable development partner, with the potential for cooperation poised to expand further in the coming years. German cooper-ation will become increasingly important as Bangladesh pushes to diversify its economy to more value-added products. The Bangladeshi embassy in Berlin is maintaining its contacts with both public and private sectors and, from the feedback it receives, has developed great confidence that German know-how, the country’s friendly disposition and its affirmed willingness to cooperate will turn out to be one of the key components in Bangladesh’s journey towards 2041.

An emerging middle income country I 9

An emerging middle income country

10 I The Role of Banking Sector in Economic Development of Bangladesh

The role of the banking sector in the economic development of Bangladesh

Mandated by its charter to support output and employment growth, be-sides controlling inflation and protecting monetary and financial stabil-ity, Bangladesh Bank (BB) stepped in to impart a deliberate directional bias in financing flows away from speculative and sustainability-harming uses towards inclusive financing of ‘green’ output activities. To this end BB is pursuing a host of concerted initiatives drawn up consultatively with financial intermediaries and target client bases in the relevant mar-ket segments. An ongoing campaign of ingraining a socially responsible corporate ethos is helping instill the right motivations in support of the policy initiatives. The motivating, consultative approach has drawn all banks and financial institutions in Bangladesh into enthusiastic engage-ment in the various initiatives – with their innovations of cost-efficient new modes of reaching out to their new client bases with financial services. Environmentally sustainable approaches of rapid poverty erad-ication by narrowing down inequalities in advancement opportunities, food security and energy security are our support priorities in promoting inclusive, sustainable financing via our banking system on three broad fronts, viz., agricultural, SMEs, and ‘green’ projects including renewa-ble energy generation, waste treatment, adoption of low carbon output options, and so forth.

Fiscal and monetary prudence coupled with development policies sup-portive of inclusive, sustainable growth have kept Bangladesh's econ-omy on a sustained and decade-long spell of six-plus percent annual average real GDP growth – with stable downward-edging Consumer Price Inflation (CPI), low fiscal deficits, and domestic currency strength upheld by rising foreign exchange reserves. The 6.5 % real GDP growth for FY15 estimated by Bangladesh Bureau of Statistics (BBS) against 6.1 % of the previous fiscal year is impressive even if attained during pre- and post-election political unrest. Despite this resilience, recent modest export growth due to lingering demand slack in traditional advanced markets has been compensated by robust domestic demand- driven output activities, supported by workers’ remittance inflows and by inclusive financing of Micro, Small and Medium Enterprises. This inclusive and socially responsible financing by the Bangladesh banking community has helped stem widening of the consumption GINI index; poverty decline has speeded up, and a number of Millennium Develop-ment Goals (MDGs) have been attained well ahead of time.

Dr Atiur Rahman

Governor of Bangladesh Bank

To sustain a persistent growth momentum, Bangladesh is maintaining a most welcoming regime for FDI and FPI inflows, such as: up to 100 % freely permissible foreign ownership for FDI in the industrial sector and FPI in the local equity and bond markets; freely repatriable post-tax profit or dividends earned by non-residents and disinvestment proceeds along with capital gains; tax holidays, import tariff waivers/concessions on capital goods and serviced industrial zones and many more. Besides man-ufacturing, the infrastructure sector along with software and IT enabled services are promising areas for foreign investors in Bangladesh.

Comfortable BOP position supported by robust workers’ remittanc-es and capital inflows are keeping foreign exchange reserves on an uptrend, now around US$25bn, equivalent to over six months’ import payments, and covering about 24 % of broad money base. The gov-ernment’s fiscal deficit, at 4 % of GDP in FY14, is likely to be around the same level in FY15. Sustained macroeconomic stability and strong gains in external sector viability are keeping Bangladesh’s sovereign credit ratings at levels (Moody’s Ba3, S&P, Fitch BB-, all with stable outlook) typical of much higher-income comparators.

The Role of Banking Sector in Economic Development of Bangladesh I 11

12 I Structural bottlenecks hamper growth potential

India and Uzbekistan. The economy is thus susceptible to strong fluctuations in world market prices.

The second major pillar is the "export" of labour in the form of guest workers, mainly to Saudi Arabia, the United Arab Emirates and the USA. The return remittances of the estimated eight million migrant labourers are an important source of foreign exchange and a support for domestic demand. Moreover, they make a significant contribution to the current account surplus. Last year the remittances amounted to just under 10 % of the gross domestic product. A third pillar, above all con-sidering the weak state finances, is constituted by the credit programmes of the International Monetary Fund, the World Bank and regional development banks. All in all, Bangladesh thus enjoys a comfortable position regarding currency reserves and import cover.

In view of its low level of integration into the world economy and an underdeveloped financial system, Bangladesh does not exploit its growth potential. Moreover, structural problems are becoming apparent in many areas. For instance, there is a great need for investment in the hitherto-inadequate

In terms of land area, Bangladesh is less than half the size of Germa-ny. However, with just under 160 million inhabitants, the country is one of the world’s most densely populated states. At the same time, Bangladesh is one of the poorest countries in Asia. Yet the demo-graphic factor could be an advantage for the country: the population is growing by a good 1 %, and more than half of it is under 25 years of age. Against this background, the economy is still suffering from many structural weaknesses.

In the past 10 years the economy has grown substantially at rates of about 6 %. It thus proved itself robust enough to cope well with the regular floods to which the country, in the delta of three rivers, is exposed. Moreover, the dampening effect of the 2008/2009 financial crisis remained limited because of the fact that the financial market is still poorly developed. Finally, in the last few years the recurring – at times massive – strikes and the political disturbances, some of them violent, have not yet had any sustained deceleration effects on macroeconomic output.

The export-oriented textile industry, which was promoted by the government after inde-pendence from Pakistan was gained in 1971, is still the backbone of industry. The economy thus has a rather one-sided focus. The sector contributes more than 80 % to the total export earnings. Here the wage-intensive clothing and textile industry can fall back on an abun-dant supply of cheap labour. The main export markets are the USA and Europe, particularly Germany, thanks also to customs facilitations. However, production is very import-intensive. Bangladesh has to import almost all of its raw cotton and, after China, is the world’s second largest importer of cotton, primarily from

Structural bottlenecks hamper growth potential

Wolfgang Leim

Country Analyst Commerzbank AG

Structural bottlenecks hamper growth potential I 13

and unreliable electrical power and energy supply, as well as in sanitary facilities. The poor transport infrastructure requires the expansion of roads, ports and railway lines. The level of education is low. Just under half of the employed population works in the agricultural sector, which now contributes only less than a sixth to the country’s added value. Moreover, the deep conflict between the governing party and the opposition is paralysing the necessary political reform efforts. The political environment is fragile; recurring massive strikes and violent street disturbances interrupt production and im-portant transport routes.

In future it will be important to gear the economy and foreign trade to a broader foundation, not least in order to create jobs for the young and better- qualified population. This by no means implies that the growth model of the textile industry has to give up its strong position. Even if wages pick up in Bangladesh, the difference between them and those of the countries competing here will still be big enough to keep the sector attractive. But Bang-ladesh has only few natural resources – so new export-oriented growth sectors, supported by for-eign direct investments, can be found in pharma-ceutical production, the IT sector and shipbuilding. All in all, in a positive scenario for the economy, this could give Bangladesh a new growth spurt.

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

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2010 2011 2012 2013 2014

Current Account Balance in USD bn

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Remittances

Balance on services & primary income

Trade balance

Current account

14 I A banker's view

Today, hearing the name Bangladesh continues to conjure up images of dire poverty, devastat-ing floods, poor working conditions in sweat-shops or the ship breaking yards of Chittagong. And yet the country can pride itself on an impressive growth path, in particular since the restoration of democracy in 1991. There has been no shortage of challenges that the country has had to overcome, and indeed will have to cope with in the future. However, the fact that Bangladesh has already overcome a host of challenges is something that is overshadowed by the more negative images that dominate perceptions of the country.

Bangladesh’s strengths are often given in-sufficient attention and little tribute is paid to them, even though they have made significant contributions to the country’s growth path and resulted in remarkable improvement in social indicators.

Demography is without a doubt the country’s key strength. With over 160 million inhabit-ants, half of whom are below the age of 25, the country has a seemingly endless supply of

labour. On the one hand, this should ensure that the ready-made garment (RMG) industry can remain competitive for years to come. On the other, with labourers effectively being the country’s second-largest export, Bangladesh benefits from steady workers’ remittance inflows that support millions of families within Bangladesh. Not only do the remittances of more than eight million migrant workers stim-ulate domestic demand; they have also resulted in the country building up significant foreign currency reserves in excess of USD 25bn, representing more than eight months worth of imports.

A people faced with constant hardship, in par-ticular the challenges caused by floods and po-litical unrest, have developed a survival instinct characterised by industriousness and innova-tion. Testimony to this manifests itself in two organisations to which Bangladesh is home. Specifically, Grameen Bank, the first provider of microfinance, as well as the Bangladesh Rural Advancement Committee (commonly known as BRAC), the world’s largest developmental non-governmental organisation in the world.

A banker’s view

Attaining independence can give any country a difficult start as far as its growth and development are concerned, and Bangladesh has proven no exception. Emerging from the struggles of a bloody war for independence in 1971, the first decades of independence were marked by political coups as well as floods and famine that did little to lighten the path of the newly independent nation. Bangladesh was as a consequence a late entrant onto the stage of emerging markets, and its image continues to be dominated by many of the attributes that characterised its early years as a nation.

Alexander Mondorf

Relationship Manager Indian Subcontinent & ASEAN Commerzbank AG

Alexander Rost

Regional Head IndianSubcontinent & ASEANCommerzbank AG

Few developing countries can pride themselves on having domestically fostered such successful agents for helping the poorest of the poor.

Furthermore, in spite of political unrest bringing the country to a near complete standstill on a regular basis, the economy can look back on steady growth in the range of 6 – 7 % annually over the last decade.

In addition to the above factors, Dr. Atiur Rahman (one of the world’s few central bank governors with a background in developmental eco-nomics, and recently rewarded for his work by being named Asia’s Best Central Banker) and Bangladesh Bank have relentlessly focused on mak-ing the most of the remittance inflows by prioritising financial inclusion and ensuring the stability of the country’s financial system.

Looking back on the last few decades, the question remains as to what path Bangladesh will take next.

Developing the country’s infrastructure (its roads, railways, ports and power sector) will play a vital role in ensuring continued development. This should also attract further foreign investment, particularly that required for the much-needed diversification of the economy away from the dominant RMG sector. The RMG sector currently accounts for around 80 per cent of the country’s export proceeds, a share that cannot be sustainable in the long run. Some examples of diversification can already be seen. For example, the country has progressed from being a nation known for ship breaking to becoming a player in the inter-national shipbuilding sector. In addition, the relatively new domestic pharmaceutical sector is already supplying most domestic consumer needs. However, more of this sort of activity is needed as the further development of the economy will only be achieved through increased diversification.

Ultimately, political stability and a focus on eradicating corruption will be the key to ensuring that these goals are achieved and that Bangla-desh will be able to cement its status as a middle-income country, which it achieved in July 2015. It should also see Bangladesh continue to shed the images that dominate people's perception of the country.

Commerzbank itself has been active as a partner to the banks of Bang-ladesh since 1972. Our activities have focused on taking risk off the

A banker's view I 15

16 I A banker's view

shoulders of suppliers to Bangladesh across various sectors, including machinery and other capital goods, as well as raw materials and com-modities. While this has mostly been centred on short-term financing, mostly in the form of discounted letters of credit, we have also begun venturing into facilitating the long-term financing of capital goods under the cover of export credit agencies. In particular, the latter should reduce the country’s dependence on multilateral institutions for its long-term financing needs and allow its banks and corporates to build a track record as reliable partners in this field.

In our activities and related risk assessment of the country, we strong-ly rely on our large network of partner banks in Bangladesh, which is among the largest of any foreign bank. Another cornerstone of our ex-pertise in the country is our representative office in Dhaka. Since open-ing in 2013, aside from acting as the eyes and ears of Commerzbank on the ground in Dhaka, it has also formed the key link between Commerzbank and the correspondent relationships we maintain within the banking sector. Our activities are also not solely restricted to cater-ing to the financing needs of the local banks. Realising the importance of a strong banking sector, we have also been very active in offering training to our correspondents' staff. In 2015 alone, we accommodated over 500 bankers in various training seminars.

Commerzbank can look back on over 40 years of cooperation with Bang-ladesh and will endeavour to continue this work, whichever route the country takes over the coming years.

Labour conditions in Bangladesh I 17

Labour conditions in Bangladesh

Since the collapse of the Rana Plaza building, people have asked me whether they should stop doing business with Bangladesh al-together. Nobody wants to be held accountable for poor fire safety, collapsing buildings, the lack of health protection in workplaces or child labour. Financial and reputational risks seem to be very high when doing business with Bangladesh.

What is the current situation?Poor working conditions can be found in most parts of the economy. International standards to protect the workforce as laid down in ILO con-ventions are usually not met. Not even Bangla-desh’s national laws are properly implemented.

Child labour can be found in agriculture, poultry breeding, fish processing, the garment sector and the leather industry, as well as in shoe production. Children are involved in jute processing, the production of candles, soap and furniture. They work in the salt industry, the production of asbestos, bitumen, tiles and ship breaking. The US Department of Labor has published a report about slave labour among children aged between 5 and 17 in the produc-tion of dried fish.

In 2013, the situation in Bangladesh’s gar-ment industry attracted a lot of international attention. Around four million people work in this industry, 80 % of them women. In many cases, they are not even being paid the official minimum wage of 62 euros per month. Work-ing hours are often extended to 12 hours or longer at very short or even no notice. Written contracts are virtually unknown and health and safety protection in the workplace is rare. Maternity leave before or after birth is usually not granted. Anyone attempting to found a

union risks threats and violence at the hands of hired thugs.

When the Rana Plaza building collapsed on 24 April 2013, the world became aware of the dire situation of fire and building safety at many production sites in Bangladesh. 1,134 people died and more than 2,000 were injured in this accident. It may have been the worst incident but it certainly wasn’t the only one. 117 people died and more than 200 were injured just a year before when the Tazreen factory building in Dhaka burnt down. Only a few days after the collapse of Rana Plaza, eight people died in an-other factory fire. These are only three in a long series of incidents in Bangladesh’s factories.

Shaheen Dill-Riaz's 2007 movie “Eisenfresser” (iron eaters) shines a light on the situation of Bangladesh’s ship breaking industry. Workers break ships on the beaches around Chittagong with hardly any appropriate tools. Tanks are not cleaned and no checks are carried out to see whether flammable or other dangerous chem-icals can still be found on board before work begins. Hardly any of the men wear protective clothing and appropriate tools are unavailable. Before entering certain parts of a vessel, the men lower a chicken on a string into the void. If the chicken doesn’t die within a few minutes the men will start going down into the ship.

Markus LöningFederal Government Commissioner for Human Rights Policy and Humanitarian Aid from 2010 to 2014

18 I Labour conditions in Bangladesh

On average, one person dies every week. The most common causes of fatal accidents include falling steel parts or explosions ignited by welding torches. Children are sent into parts of the ships that are hard for grown men to reach. Although about half the workforce is illiterate, hardly any training takes place.

Are state institutions doing their job?Compared to European standards, Bangla-desh’s government institutions are clearly un-derdeveloped. State administration, the judicial system and democratic institutions can best be described as corrupt, inefficient and prone to nepotism. There are some good labour laws – like the official minimum wage or the right to found a union – but they are rarely implement-ed by state institutions. State inspections of factories usually involve identifying problems that are immediately overlooked as soon as bribes are handed out to the inspectors. Trans-parency International ranked Bangladesh 146 out of 176 countries in its most recent corrup-tion perception index.

Nonetheless, remarkable progress has been achieved in recent years. Child mortality is lower than ever before and significantly more children are attending school. Poverty has been halved since the year 2000. Media and civil society are free to criticise and investi-gate state institutions. Entrepreneurs, foreign investors and global trade are steadily driving economic growth at a rate of 5-6 % a year. Goldman Sachs has rated Bangladesh as one of the “next eleven” countries that have the potential to catch up with the leading emerg-ing economies in growth, per capita income and economic importance. .

Have working conditions improved since the collapse of Rana Plaza?Some serious improvements have been initiated. Just a few weeks after the Rana Plaza incident, the minimum wage was raised from 35 to 62 euros a month. The right to found unions has been strengthened and the International Labour Organization (ILO) has initiated its “Better Work Programme”. 26 garment retailers from the US have founded the “Alliance for Bangladesh Worker Safety” and 180 mainly European companies, together with the ILO, fashion labels, factory owners and unions have launched the “Accord on Fire and Building Safety”. The Accord aims to im-prove the building safety of factories through regular on-site inspections. Dozens of factories have been closed or remodelled. Around 2,000 of the 5,000 factories in Bangladesh have so far been inspected. 65,000 problems have been reported, of which about one third have already been remedied.

Even if the questions of a living wage, written contracts, health protection in the workplace and freedom to form a union have yet to be resolved, the improvements in building safety represent a major step forward for Bangla-desh’s garment industry. Obviously the picture is mixed. Some companies see good standards as a market advantage, while a second group of companies is giving in to pressure from their customers. A third group of company owners see their business model threatened by inspec-tions and simply refuse to cooperate with the Accord. Unfortunately, the Bangladesh govern-ment is not really backing an improvement in labour standards, even in the face of consid-erable pressure from the EU Commission, EU governments and global retailers.

Labour conditions in Bangladesh I 19

Bangladesh’s industry must meet the challeng-es of a very competitive global marketplace. This means improving quality and produc-tivity through increased investment, but also requires a workforce that is well trained and motivated by good labour conditions. This ap-plies to the shipbuilding industry, which needs to push the development from ship breaking to shipbuilding, as much as to the ready-made garment, chemical and pharmaceutical indus-tries.

Withdrawing from Bangladesh would help nei-ther companies nor the workforce. For many people in Bangladesh, low-paid jobs represent a first step out of poverty. Stopping trade and investment would deprive them of the chance to improve their lives. For women, a job in the garment industry is very often the only way to earn any income at all. Nobel Peace Prize laureate Muhammad Yunus once told me that “even this bad situation already constitutes an improvement for many women”.

Bangladesh needs foreign direct investment and international trade to keep its growth rates at the current level. It is the only way for the country to successfully fight poverty among its growing population.

How can companies responsibly engage in business with Bangladesh?My suggestion to companies is to be aware of the risks and to take necessary precautions. Get expert advice on identifying and managing risks that may be specific to your business. No responsible company can afford to be involved in child labour, collapsing factory buildings or horrific labour conditions. Media attention and pressure from corporate clients or consumers

is too great to even consider taking such risks. Reporting and transparency regulations have just been tightened by the EU.

But it is possible to find suitable partners in Bangladesh that do respect international standards for labour, building and fire safety. Many more companies are on their way to achieving these standards. So your require-ments should not only concern the price and quality of what you intend to purchase. Include good labour standards and fire- and building safety in your request, and make clear why this is important to your company. Suppliers that want to stay in business should understand that this is not just a moral imper-ative: it is also a decisive economic question for European companies.

Strong and responsible business ties will serve the interests of Western companies as much as the people of Bangladesh.

Jobs versus poverty or unfair conditions for millions of people in production? These posi-tions often seem irreconcilable. Bangladesh’s textile industry is undoubtedly a major sector of the economy and a key employer, making a vital contribution towards the economic pro-gress of a country plagued by poverty. But how can ethically responsible textile production be achieved under the country’s local conditions?

The example of Bangladesh shows clearly that weighing up opportunities and risks is becom-ing increasingly important, especially when it comes to business activities in developing countries and emerging markets. In this con-text, evaluating and upholding sustainability aspects plays a fundamental role.

Evaluating environmental and social criteria as part of risk managementCommerzbank is committed to the principle of corporate responsibility. Sound values, binding codes of conduct and exacting commitments represent the cornerstones of our business activities and also define their limits. Sustain-ability criteria are therefore an integral part of our risk management at Commerzbank, and represent a key instrument for containing potential risks.

As part of our reputational risk management process, we evaluate all business transactions, products and customer relationships where sustainability has a high priority. The focus here is on ethical, social and environmentally sensitive issues. These are thoroughly re-searched, analysed and evaluated according to a differentiated approach, which can lead to the rejection of a particular transaction or the termination of a business relationship.

Commerzbank signed the United Nations Global Compact in 2006 and is committed to honouring and safeguarding human rights. In defining these terms, Commerzbank refers to the internationally accepted human and labour rights as defined in the Universal Declaration of Human Rights, the ILO core labour stand-ards and other documents. We are also guided by the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights.

The Reputational Risk Management depart-ment deals with an average of 5,000 customer, business and product evaluation requests each year. The requests come from market units that need to investigate whether a specific transac-tion or customer relationship complies with the

Business activities in low-wage countries: evaluating sustaina-bility risks

Successful business relationships and a sustainable and responsible corporate policy are not mutually exclusive.

20 I Business activities in low-wage countries – evaluating sustainability risks

Martin BendrichHead of Reputational Risk Management Commerzbank AG

Business activities in low-wage countries – evaluating sustainability risks I 21

bank’s guidelines. This method of evaluation has been firmly estab-lished within the bank for several years, thanks to the close cooperation between the various divisions, clearly defined processes and employee awareness. It provides a binding framework of guidance on how to deal with business operations relating to sensitive issues for employees whose work brings them into contact with such aspects.

Commerzbank finances around one third of Germany’s foreign trade. By virtue of its far-sighted reputational risk management and com-mitment to upholding fundamental principles of human rights, Commerzbank is in a position to help export companies to seize the opportunities that up-and-coming countries like Bangladesh offer, while avoiding risks to its own reputation.

Today, more than 200 ships are dismantled in Bangladesh annually, making it the third- largest shipbreaking nation in the world. Even though the ship breaking industry employs around 200,000 people and annually extracts about three million tons of high-quality, low-cost steel that the country requires for its devel-opment, the industry is well known for a gener-al lack of regulations, as well as poor working conditions and environmental standards.

However, what is little-known is that the country has seen the development of a number of shipyards capable of building ships of up to 12,000 deadweight tonnage (DWT): that is, ves-sels significantly larger than those required for domestic purposes. One of the leading names in this sector is Western Marine Shipyard Limited.

While it was not directly involved in the breaking of ships, the company traces its origins back to this business, having started life purchasing old machinery such as engines and generators from scrap vessels for reselling back in 1994. Within just six years, Western Marine had progressed from merely reselling machinery to regenerating and reengineering the machinery, to offering maintenance and

repairs, to building entirely new ships for the domestic market. This represented a remarka-ble achievement within a relatively short period of time. Today, the Chittagong-based company has a workforce of over 3,500, making it the largest shipyard in Bangladesh.

Western Marine’s success story continued in 2008,

when the company signed a contract with the German firm Grona Shipping GmbH for building eight 5200DWT Multi-Purpose Carrier ships. This contract was a milestone for Western Marine as well as for the industry in Bangladesh, and remains to date the largest shipbuilding project ever awarded. To manage the challenge of successfully completing the project, the company joined hands with their German partner East Wind Project Manage-ment GmbH (EWPM), also a long-standing client of Commerzbank AG.

While there was some prior history in the field of shipbuilding, this had been restricted to small inland vessels, and local experience in quality steel shipbuilding, especially at a level suitable for exports and in line with international standards, was almost non-exist-

From ship breaking to shipbuilding

Bangladesh is a growing economy with a vibrant culture and a land full of opportunities. In 1960, following a severe cyclone, the Greek ship M D Alpine was stranded on the shores of Sitakunda, Chittagong. It could not be refloated and so remained there for several years. In 1965, Chittagong Steel House bought the ship and had it scrapped. It took years to scrap the vessel, but the work gave birth to the ship breaking industry in Bangladesh.

22 I From Shipbreaking to Shipbuilding

Sakhawat Hussain

Managing Director Shipyard

From Shipbreaking to Shipbuilding I 23

ent. This was not just restricted to the capabil-ities of the shipbuilding industry itself, but also applied to local banks and government bodies that were not familiar with the needs of this industry.

EWPM collaborated with Western Marine in not only acting as the company’s agent within Europe, maintaining close contact with the buy-er of the vessels, but also provided extensive support in the field of supply chain manage-ment and in sourcing the technical expertise required to manage an immensely complex project. Not least, EWPM involved Commer-zbank AG in the project by providing advice to Western Marine’s local banks and accommo-dating the required counter guarantees that needed to be issued as part of the project.

By 2012, the last two vessels under the Grona project were delivered to the buyer. Upon com-pletion, the ships received certification without requiring any additional changes, indicating that they had been built to the required high standards. In fact, according to one technical inspector, the last four vessels delivered “could have been made in Europe”.

The project was a showcase for the industry in Bangladesh. By demonstrating the technical engineering excellence that Bangladesh can of-fer, it gave the country an entry onto the world stage of international shipbuilding. Western Marine has since been present at a number of trade fairs around the world and its current order book includes orders from European and African countries. Slowly but surely, Bangla-desh is building a track record in demonstrat-ing its ability to execute complex, high-value projects for exports.

The success of Western Marine and the Grona project is a prime example of the potential that Bangladesh holds. Namely, that a country primarily known for low-skilled manual labour is able to complete highly complex projects to international standards within a very short period of time. Diversification is key to the further development of the country’s econ-omy and the success of Western Marine has demonstrated that Bangladesh possesses the knowledge transfer mechanisms required for the economy to further diversify.

In 2012, the International Tribunal for the Law of the Sea issued a judgement on the maritime boundaries within the Bay of Bengal, awarding Bangladesh exclusive rights to a sig-nificant area of the sea. As a consequence of this, the government of Bangladesh launched the Blue Economy initiative, prioritising the development of the country’s offshore sector. As Bangladesh develops this industry fur-ther, Western Marine is well-positioned as an expert partner for both domestic and foreign developers venturing into new industries with-in Bangladesh.

24 I My Bangladesh

I have been working for Commerzbank in Bangladesh since 2012. Having experienced different countries during my life, including spending some years in Canada, I made the decision to return to my home country to be closer to my family. This step enabled me to support our resilient and hard working people by bringing my know-how to the market. I worked for several foreign banks in this mar-ket before finally joining Commerzbank. With constant traffic jams, bad air quality and frequent hartals (strikes), daily life in Dhaka poses many challenges. This is compensated by the daily interaction with people on the street and with clients. These encounters are characterised by politeness and friendliness. It is a pleasure to see the country and its people progress and prosper and to be a part of this.

Our country definitely has more to offer than meets the eye. One can find beautiful land-scapes outside the cities. The country is bless-ed by plentiful rainfall and an annual flood that helps it enjoy very fertile soil and an extensive network of rivers that is advantageous to agri-culture and inland communication. In Bangla-desh you will find the Sundarbans mangroves housing the world-renowned Bengal Tiger and the longest sea beach in the world at Cox’s Bazar. And, of course, the serene beauty of the greater Sylhet and hill districts on the eastern side of the country.

Bangladesh has its own unique challenges, such as overpopulation, poor infrastructure, corruption, political instability and slow imple-mentation of economic reforms. I am confi-dent, however, that these challenges can be overcome in the medium term with the help of constantly increasing governance in the

country and improved utilisation of the massive workforce, sustained by a population in which more than 65 % of people are aged between 15 and 65. After all, as a nation, we are very resilient and adaptable and have repeatedly proven this by sustaining steady economic growth.

Bangladesh is a very rich country in terms of its centuries-old culture and heritage. We are the only nation that has fought and paid with lives for establishing the mother tongue as the official language in 1952. The UN has declared 21 February as the International Mother Lan-guage Day, celebrated annually worldwide to promote awareness of linguistic and cultural diversity and multilingualism. The Bengali New Year is celebrated on 14 April every year in a very colourful manner with great enthu-siasm across the whole nation. Bengalis are known to be connoisseurs of good food, and food is always an important element in any social or cultural event.

For my family and me, it will always remain our first choice as a place to live..

My Bangladesh

Tawfiq Ali

Senior Representative,Bangladesh, Commerzbank AG

From the field: experiences on the ground I 25

From the field: experiences on the ground

Trützschler GmbH & Co. KG

We have been a system supplier of equipment for the preparation of cotton and synthetic fibres for the

spinning process since 1888. Although it is a major producer of textiles, Bangladesh does not have raw

materials of its own. To reduce its dependency on imported fabrics and knits, Bangladesh’s textile indus-

try has made substantial investments in spinning mills over the last 15 years. With a local technical team

that currently consists of 25 employees, we are helping to expand production capacities in the country by

assisting with maintenance and repairs and with training workers.

The level of security offered by letters of credit used to pay for our large deliveries is difficult to deter-

mine given the high number of banks active in foreign trade. We have a reliable partner in Commerzbank,

which is able to give us clear perspectives and insights, and helps both us and our customers to conduct

our transactions in a competent and highly committed manner.

Trützschler GmbH & Co. KG

Peter SchellenSales Director

MAN Diesel & Turbo SE

Karlheinz GamplHead of Group Finance

MAN Diesel &Turbo SE,

In Bangladesh there is a great shortage of electricity, which leads to frequent power cuts. Power require-

ments are to be met not only by larger, but also smaller, decentralised power stations (50 – 100 MW).

Diesel or gas engines are appropriate power generators here. They are quick to construct, and the cost of

capital is relatively low. Engines are a time-tested technology: they are low in consumption and can react

quickly and flexibly to load fluctuations.

As a rule, project companies are founded for the construction of such power stations. The loans are repaid

via revenue from the sale of electricity to the state-owned energy authority within the scope of a long-term

PPA (Power Purchase Agreement). In most cases MAN Diesel & Turbo SE (MDT) acts as a subcontractor to

a local (regional) power station constructor here. The MAN share amounts to approx. USD 20-40 million.

Payment to MDT is normally made in the form of a confirmed documentary credit, opened by smaller local

banks, which in most cases must show an after-sight period of 360 days. For delivery periods of approxi-

mately eight months from the time when the agreement becomes effective, we are therefore talking about

documentary credit terms of at least 20 months.

This calls for banks that are in a position to confirm L/C amounts of up to USD 20-40 million on smaller

local banks for a period of more than 20 months and also accept (whilst maintaining a confirmation com-

mitment) the possibility of the scheduled dates being postponed by some months. Here Commerzbank has

proven itself a competent and reliable partner. The local presence is a further advantage.

26 I From the field: experiences on the ground

Siemens in Bangladesh: being in the right

place at the right time

For over 165 years, the Siemens name has been

synonymous with internationality and worldwide

presence. It was this mission that led Siemens

to first set foot in Bangladesh, way back in

1956, with its X-Ray machines business. Having

contributed in setting up signalling systems for

the railways in 1962 and the first power plant

in 1967, Siemens began partnering earnestly in

nation-building. Since 1973, Siemens has been

steadily growing its operation by participating

in every infrastructure development initiative

in electrification, communication, industry and

healthcare.

With its long presence in the country and having

adapted to the local business environment,

Siemens is well-placed to exploit the available

opportunities. With renewed focus on the compa-

ny’s expertise in all aspects of electrification, the

core business gels perfectly with the opportu-

nities in Bangladesh. From power generation

to power transmission, power distribution and

smart grid to the efficient application of electri-

cal energy – in every one of these interrelated

fields, electrification, automation and digitisation

are the key business drivers for Siemens. The

integrated setup not only enables Siemens to

leverage the opportunities in individual market

segments; it also allows the company to exploit

the potential at their interfaces.

Siemens will soon become the biggest contrib-

utor to the base load power generation capacity

in the country thanks to the company’s recent

successes in setting up most of the gas-based

power generation in Bangladesh with its

efficient, cutting-edge gas turbine technology.

Importing power from neighbouring India was

made possible with the use of Siemens technol-

ogy in back-to-back, high-voltage DC transmis-

sion. Siemens is currently setting up most of

the transmission systems with gas-insulated

switchgear technology at all 132KV, 220KV

and 400KV levels. Siemens has already equipped

the Dhaka and Chittagong distribution utilities

with the latest technologies and is currently

extending power distribution to the rural electri-

fication utility.

Siemens automation solutions are today the

backbone of most of Bangladesh’s steel, cement,

F&B, pharmaceutical, textiles and paper indus-

tries. The efficiency, flexibility and productivity

requirements of these industries are being met

with the cutting-edge technologies of Siemens

automation portfolio. With the right support set

up in Bangladesh, Siemens is looking forward

to contributing to the new FDI-based projects

expected in sectors like automotive, which will

usher in a new phase of industrialisation.

Foreign aid and private investments in health -

care are expected to exceed USD 300 million

in the next five years and will enable Siemens

to strengthen its position further in several seg-

ments of the healthcare business.

What can work better?

In spite of a promising business outlook in

Bangladesh, it has apparently fallen into a GDP

growth trap of around 6 %. Although this is not

a trivial achievement, it is time to break this

barrier and get into the 8-9 % slot. Removal of

red tape, single window approvals, reforms in

import policies and customs regulations, indirect

taxation and forex transaction regulations are

considered to be of prime importance by Sie-

mens to capitalise on the growth opportunities.

Though human capital is one of the key strengths

of the country, competency-development

measures need to be prioritised by increasing

interaction between academia and industry. The

financial and banking systems need to be more

robust. Siemens is looking for ECA-backed pro-

ject-financing partners help meet this challenge

and is on course to successfully close a deal with

a leading healthcare diagnostics chain to supply

high-end medical imaging equipment with

financing from Commerzbank.

Siemens Bangladesh Ltd.

Indranil LahiriManaging Director & CEO

Disclaimer and legal notice I 27

Disclaimer

This draft was compiled and issued by Commerzbank AG, Frankfurt am Main, and/or the group companies (Commerzbank) mentioned in this

draft. This draft is intended for professional and institutional customers.

This draft is based on data and/or information which Commerzbank considers to be reliable. Commerzbank assumes no responsibility, however,

for the truthfulness and/or accuracy of this data. This draft does not constitute a proposal, invitation or recommendation to purchase or sell

bonds, derivatives, etc. and should not be used either in its entirety or in part as a source of information in the context of a contract or any

other type of obligation. It is intended solely for informational purposes. The evaluations contained within this document correspond to our best

possible assessment at the time of writing, but can differ without warning at any time.

Commerzbank reserves the right to use this draft for business purposes prior to publication and/or release to customers, i.e. to carry out trans-

actions, for example, on the basis of this draft. Commerzbank shall not be bound by the evaluations contained within this draft in the course of

its business activities. This draft may also cover bonds, derivatives, etc. from issuers with which Commerzbank holds a customer relationship.

Commerzbank assumes no responsibility or liability for costs, losses or damages resulting from or in connection with the use of this draft or a

part thereof.

The following should be observed outside of Germany:

United Kingdom: This draft is distributed by Commerzbank AG, London. Commerzbank is regulated by the FSA in the implementation of its

investment business in the UK. Commerzbank is a member of the London Stock Exchange.

United States: Commerz Capital Markets Corporation (a subsidiary of Commerzbank AG) has assumed responsibility for the distribution of the

applicable regulations.

© 2015

This draft or any part thereof may not be reproduced or disseminated by you without the permission of Commerzbank.

Legal notice

Publisher:

Commerzbank AG

Financial Institutions

60261 Frankfurt am Main

Germany

Editing:

Muamer Mesak, Alexander Mondorf, Alexander Rost

Last updated:

September 2015

Commerzbank AG

Financial Institutions

60261 Frankfurt am Main

Germany

www.fi.commerzbank.com

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