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Tuesday, April 5, 2016

Foreign direct investment: Bangladesh perspective

Dilwar H Choudhury from Virginia, USA

  • Depending on how a country positions itself, Foreign Direct Investment (FDI) may remain a myth or it can become a reality. Being a third world country is no barrier to FDI, but third world behaviour pattern is certainly a hindrance to it. FDI is sought by every country, rich or not rich. Bangladesh is no exception. Recently, there has been a great deal of activities in Bangladesh for attracting FDI and Diaspora investments. Most recent initiative was a Road Show in UK organised by the Board of Investment. Sometime back, speaking at a local event Governor of Bangladesh Bank Dr Atiar Rahman wondered why FDI inflow had been so poor despite Bangladesh being a low-wage manufacturing hub.

These events and observations prompted me to inquire into the myths and realities of FDI. To my mind attracting foreign investment in a country is equivalent of marketing the country itself in the first place. Just as consumers buy products reflecting not on a single feature of the product, an investor also invests, relying not on a single advantage available in a country. Similar to a person's character traits, every country has some core values that draws or repels an investor. Such core values of the country may be broadly summarised as: a) levels of personal freedom, b) accounting standards, practices and applications, c) legal and justice system.

This thought process takes me several years back to my job as a banker in an international bank in UK. It was 1991 and the first Persian Gulf War had just begun. Iraq was attacked by allied forces. UK was one of the associates of the alliance. As the war intensified, a large number of wealthy Iraqis fled from Iraq and the great majority of them landed in UK with big amount of money. Our bank received large Iraqi funds of all times. It was paradoxical that Iraqis would be coming in a body to invest their fortune in an enemy country. Many Iraqis were interviewed by the British journalists to know the reasons behind their choice. Almost all of them said they had moved to UK because of the personal freedom they enjoyed there. Once in UK, they enjoyed the same freedom any other person living there would have, not discriminated nor undermined. Historically, the urge for personal freedom had driven people from one land to another. The American immigrants moved from Europe to avoid religious persecution and economic discrimination. Mindset of modern FDI sponsors had changed very little. They not only bring a mass of capital and entrepreneur skills, but also demand safety and security. The sense of security is not just the overwhelming presence of law enforcers and cc cameras but also the very perception of freedom and security. A country under autocratic rule may provide ample physical security but not the mental freedom. That is why, you would notice that FDI does not flow so easily to a land under autocratic rule, however favourable the cost of labour might be. If personal freedom is denied, every other advantage becomes irrelevant. After the recent Paris carnage, 80 per cent of hotel booking dropped in France. Urge for freedom looms large in every human mind wherever they might be living.

The second most important factor for FDI is accounting transparency. The accounting principles of the country should provide for punishment of financial misrepresentation, accounting manipulation, scam and fraud. Take for example, the US company Enron's account manipulation and also the participation of accounting firm Arthur Andersen LLP in the scam. When the scam came to light, erring personnel were indicted and both Enron and its accountants were brought to justice. Bernard Madoff was sentenced to 150 years in jail for his capital market scam in Wall Street, New York. The corporate weight of Enron, business standing of Arthur Andersen LLP, Madoff's influence in financial circle could not help them to hide their misdeeds. United Kingdom also maintains similar financial discipline. Robert Maxwell, a British billionaire and Member of Parliament, committed suicide in 1991 when his pension fund fraud was revealed by the auditors. His Jewish connections and media influence could not be of any help.

How do we fair in Bangladesh in this field? The principal fraudsters of Oriental Bank got away with their crimes. The accounting firm which audited and certified the accounts of Oriental Bank is still in business with impunity. The scam leaders of Hall Mark Group and the ringleaders of BASIC Bank fraud are still at large. These are not discrete incidence in Bangladesh financial market; rather speak expressively of the overall financial mismanagements, inadequacy of regulatory control and lack of application of law. Financial crimes can never be totally eliminated but nothing prevents one from bringing the perpetrators to justice. These incidences put most of our financial statement into question and investors are unable to rely on financials of the companies they invested in or planned to invest. All FDI investors do not come to set up a new industry. They may look for private equity investment in an existing firm. These investors would always look for an accounting standard to rely upon.

As regards diaspora investment we see a far more dismal picture. Dhaka Regency Hotel & Resort Ltd. is a conglomerate of more than 100 diaspora investors. There have been allegations of widespread accounting irregularities within the hotel managements.  United Airways (BD) Ltd. is another conglomerate of over 100 diaspora investors. The company also had gone public and raised substantial amount of funds from the market through public issue. The company is now reeling with huge debt and near zero asset level with dwindling revenue. There is no process in place to make the management accountable for the dubious dealings that led to company's present position. These events, only to name a few, discourage the diaspora investors who contribute significant amount of capital, play a passive role in managing the affairs of the company and expect fair returns on investment. In our country, when a company fails the investors have no recourse against the wrong doers. These are the inadequacies of our accounting and legal system.

The third aspect is presence of an upright legal and justice system. In all orderly managed countries, legal reform is a constant and dynamic process. When Herstatt Bank of Germany collapsed due to overexposure in FE Open Position and settlement failures, the law relating to bank's Open Position was changed overnight and many other jurisdictions adapted the process. After the failure of BCCI bank, there had been a change in financial reporting process in UK and USA. Many other jurisdictions carefully emulated the process in their own system.

What I mean is that financial crisis, scam, fraud, deception will happen but legal reforms to prevent them should not wait. There had been Hall Mark fraud, BASIC Bank Scam and rampant wilful credit default by influential borrowers. But appropriate legal reforms were not initiated to prevent recurrence of such swindling. Our justice system was also not geared up to contain and defeat these fraudsters. FDI usually comes from residents of and companies in developed countries which have a robust legal base to deal with the scammers. People familiar with these best practices would be unwilling to venture in a poorly regulated jurisdiction.

The Financial Express in its September 03, 2015 issue reported that David Meale, Charge d'affiars of US Embassy, Dhaka, told his business audience in a meeting of AmCham on September 02, 2015 that Bangladesh had great potential for FDI and his country's investors were interested to invest in Bangladesh in power, infrastructure, leather, pharmaceuticals and IT. However, bureaucratic delays, poor infrastructures and lack of adequate legal provisions for alternative dispute resolutions are some of the major roadblocks.

However, it's not entirely a gloomy outlook. Bangladesh has set some great examples by adapting robust compliance procedures in ready-made garments (RMG) factories after Rana Plaza debacle. By adapting international best practices of business transactions, Bangladesh can move from one scale of acceptance to the next higher level. All we need is a change of mind and when this happens, foreign investors themselves would discover their trail to Bangladesh.

The writer, a former banker, now lives in Virginia, USA. dilwar1940@gmail.com


Source:  The Financial Express, 26 November 2015

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