Professional Documents
Culture Documents
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Thoughts on Economics
Vol. 20, No. 02
32
Privatization in Bangladesh
1. Introduction
Privatization has been advocated in the development literatures as the gateway
of the growth and development of the countries all around the globe.
Despite the phenomenal expansion of privatization programs, the results
have been different from one country to another. Some could achieve the
desired goals and some failed enormously. The reasons of their failure
include structural constraints, inappropriate policy guidelines, imposed
instruction and ineffective implementation strategies. However, the
World Bank and the IMF have been gearing up the campaign of
privatization for less developed countries (LDCs) to stimulate their
growth and development. The LDCs doing otherwise are sometimes
debarred from crucial concessionary finance from these organizations
and other northern aid donors. Some LDCs have adopted privatization
programs of their own volition. Others have grudgingly done so owing
to the pressure from the governments of industrialized countries through
international donor agencies.
Privatization is, in reality, a component of structural programs based on
notions of economic liberalization, free trade, competition and limited
government intervention. World Bank claims that privatization brings
more transparent accounting and improved economic performance and
facilitates development goals such as increased investment, GDP,
productivity and employment. The central theme of this paper is to
examine the implications of privatization for the overall development of
Bangladesh. What is meant by privatization? What are the approaches of
privatization? Is privatization conducive for development of a country?
What are Bangladeshs strategies for development through privatization?
Are these policies effective? These are a few issues that are addressed in
the present chapter.
2. Understanding Privatization
2.1. Definition of Privatization
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Privatization in Bangladesh
As a result of higher political and currency risk, asset sales are more common
in developing countries. Voucher privatization has mainly been used in the
transition economies of Central and Eastern Europe, such as Russia, Poland,
the Czech Republic, and Slovakia. A very substantial benefit to share or asset
sale privatizations is that bidders compete to offer the state the highest price,
creating revenues for the state to redistribute in addition to new tax revenue.
Voucher privatizations, on the other hand, would be a genuine return of assets
into the hands of the general population, and create a real sense of
participation and inclusion. Vouchers, like all other private properties, could
then be sold if preferred.
2.4. Islamic Perspective of Privatization
The theory of privatization as outlined in this article does not necessarily mean
that the authors recommend development strategy based on sole privatization
which, as some critics may warn, leads to old stereotyped capitalism. Nor does
this write-up tends to advocate vulgar nationalization which, as some scholars
may observe, opens up classical socialism. The present thesis does not prevent
the utilization of the benefits of privatization in a usual course of action. The
secret of success of any development effort lies in the balanced paradigm
between the two extremes. This is closer to an Islamic approach regarding the
issue. In theory, Islam recognizes individual ownership that legitimizes
privatization schemes. Islam is not opposed to group (country-wide)
ownership which may not oppose anti-privatization premises in certain
circumstances. Under an Islamic framework, there is a room for flexibility of
promoting privatization in some sectors and at the same time operating public
enterprises in other sectors. The political leaders and the decision makers may
take advantage of this broadness of Islamic theory to frame the policy options
for different sectors of a country.
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Whenever these enterprises are sold to the real entrepreneur class, a qualitative
change takes place in the management.
Second, privatization creates competition among industrial units which
reduces the production cost and thus increases consumer welfare.
Third, Privatization helps the economy acquire modern technology. In the
developing and least developed countries, the industrial sector suffers
seriously from the technological backwardness.
Fourth, privatization can stop the wastage of scarce resources of LDCs to
subsidize their loss bearing SOEs and allow them to use these resources to
develop infrastructure, which has far reaching implications for economic
development.
Fifth, in order to subsidize loss-bearing SOEs, government has to face huge
budgetary deficit each year which fuels inflation in the economy and becomes
obstacle to economic growth. Adoption of the strategy of privatization can
help the economy get rid of such budgetary pressure and attain macroeconomic stability consequently.
Sixth, privatization can ensure decision making for purely economic
rationality rather than from political ground or personal ego at enterprise level.
Seventh, in the private sectors, the managers are supposed to have quick
decision making ability under uncertainty and risk as well as commercial
prudence as opposed to their counterparts working in the SOEs.
Eighth, trade unions are strong hurdles to make SOEs more productive and
efficient, which can comfortably be handled in a private enterprise.
Ninth, as globalization of the world economy is taking place the economy
should be made more market oriented. The privatization is in a right move to
this end.
Tenth, in order to revive the banking sector, which has been badly ravaged by
the rampant borrowing of the SOEs, there is no alternative to shift the
responsibility of SOEs, at least of loss bearing ones from the shoulder of the
government.
3.2. For and Against Privatization
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Privatization in Bangladesh
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Privatization in Bangladesh
4. Privatization in Bangladesh
4.1. Bangladeshs Approach to Privatization
The government of Bangladesh embarked upon privatization programs and
public sector reforms following the pressures from international
financial institutions and other donor agencies such as the World Bank
and IMF. Although their policies may mimic reforms in the developed
economies, they failed in realizing the development goals of LDCs and
thus nothing exception could they bring to Bangladesh.
After liberation in 1971, Bangladesh inherited an economy dominated by
private sectors. The new government, led by Sheikh Mujibur Rahman
was committed to socialism and nationalized the heavy industries that
were previously run privately. It also faced an industrial ownership
vacuum as fleeing West Pakistanis abandoned their industrial and
commercial companies. The situation included all abandoned property
within programs of state ownership of industry, agricultural selfsufficiency, import substitution, and industrialization based on state
intervention and central planning. However, the inefficiency of running
those firms adversely affected public investment and in effect, their
losses consumed 30% of annual project aid.8
Not surprisingly, this scenario strengthened the hands of the adversaries of the
public sectors.
A military coup overthrew the sheikh Mujib Government on 15 August 1975.
In the meantime several military coups and counter coups took place. Three
months later, General Ziaur Rahman came to power who assumed full control
of the country in 1977. His government initiated liberal economic policies
leading to some small (Bengali-owned) companies being returned to their
owners. A Disinvestment Board was established that resulted in the onset of
255 SOEs including abandoned and vested properties being divested or
privatized.
In 1982 General Ershad overthrew the Bangladesh Nationalist Party (BNP)
Government. The vulnerable Ershad Government solicited Western support by
adopting their recommendations through privatizing SOEs. Donor agencies
tried to make loan facilities that were conditional upon the massive
privatization by the government. Consequently 27 textile mills and 33 Jute
mills were privatized within a year. Nevertheless, until 1986, the scope of
privatization remained limited. The quantity of privatization was large but they
were mainly small factories and mills, for example they provided less than Tk.
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The finding of this study is similar to those of the World Bank reports. CCCG
is one of the most successful privatized companies in Bangladesh. After
privatization, sales rose by more than two times, profit by nine times higher,
and ROA increased almost fourfold. CCCGs shares with a face value of
Tk.100 stood at Tk. 1071.25 on November 3, 2001, which is unusually high
according to SEC records.12
4.2.2. The Eagle Box & Carton Manufacturing Company Limited (EBCM)
EBCM was established as private company in 1961 to produce packaging
materials for industrial and commercial concerns. It was nationalized in 1972,
and partially privatized in 1998 as a listed public limited company. It has been
profitable as a SOE. Tenders for the government shares were invited in 1992
and the company was handed over to the successful bidders, a family, in
December 1994.
The World Bank (1997) Claimed that Between 1994 and 1995, the annual
turnover... dropped by 20%, sales revenues fell by 25% and thus losses
increased tremendously.13 The new owners retrenched 25% of the employees
to increase efficiency and lower costs. The entrepreneurs carried out massive
repair and maintenance projects to restore the productive capacity and were
instituting expansion programs to reverse the loss-making trend to the
company with an expectation that they would see profits in the near future.14
EBCM reduced its workforce in a significant way and reduced costs by cutting
workers wages. The company account reveals that since a significant number
of work force was casually appointed, the trade union influence upon
management were virtually absent under private ownership as casual workers
were not allowed to be members of trade unions.15
4.2.3. Dhaka Vegetable Oil Industries Limited (DVOI)
DVOI was unproductive and unsound though the company made profits until
1990-91 mainly because it enjoyed government protection. After acute
financial problems began in 1990-91 following the removal of protection and
it faced competition in the market, the company had to sell oil at below the
production cost. The new owners took possession of the company in April
1993. The first challenge was to resume production at the factory. In the first
two months the private owners were able to generate profits of Tk. 2.8 million.
Though this was not enough to cover the losses incurred earlier in the year
under state control, it was a marked improvement nonetheless. The new
ownership tried to reverse the loss-making trend of the company initially, but
was not able to increase its revenues and profits in the initial years. Political
unrest and social instability during 1995-96 had deterred production. Also, the
withdrawal of the government protection resulted in the decline of the
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companys market share, though it maintained its command over the retail
market. In addition, higher competition forced a 37% fall in its capacity.
The World Bank report notes that at the time of privatization the government
had retrenched about 100 employees under the Golden Handshake plan
financed by ADB. The new system retrenched another 100 employees, paying
the due compensation, so that the labor force would be more different. In
contrast, audited reports filed with the Dhaka Stock Exchange during private
ownership indicate only a marginal reduction in DVOIs workforce.
4.2.4. Bangladesh Cycle Industries Limited (BCI)
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Sinha Textile was sold to a family in 1994 which was registered as a private
limited company and renamed Shasrmin Textile (ST). Whether regular
audited accounting reports existed in the documentation cell of the
company could not be confirmed as internet access of this company was
denied. The firm is well known to professional accountants as they
employ a large number of professional accountants, though the companys
accountability or transparency was not improved. The World Bank
discloses that HM had been closed since its privatization in 1994, and
remained unable to resume operations because of legal problems. The
World Bank report concedes that the research on HM was based on
insufficient, and in some cases, inaccurate information. Adequate
cooperation of the concerned entrepreneurs could not be obtained.
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their private owners so that many profitable SOEs lost their profitability status
after disinvestment.21
5.2. Prospective Sectors for Privatization
Despite above problems, there are a number of potential sectors for
privatization in Bangladesh some of which are mentioned below:
Power Sector
In view of the gradual widening of demand-supply gap, the government
opened up investment in power generation, transmission and distribution to
the private sector. Significant private foreign investment was envisaged for
power generation. It needs to be mentioned that Power Development Board
(PDB) signed initial agreements for setting up Barge-Mounted Power Plants
with the following international companies.22
a) Smith Co-generation International- 100W
b) New England Power Company-100W
c) Wartsila Power Development Ltd-100W
d) Westmont Offshore 100 MW
Natural Gas and Oil Exploration
National Petroleum Policy which came into force from July 1993 had already
attracted foreign investment in oil and gas exploration and development. Five
international oil companies signed production sharing contracts for exploration
and development of hydrocarbon.23 The five companies are:
a) Occidental Exploration of Bangladesh Ltd.
b) Cairn Energy PLC and Holland Sea Search Bangladesh
c) Redwood Oakland
d) United Meridian International Corporation (UMIC)
Tele Communication
Telecom services used to be provided exclusively by Bangladesh Telephone
and Telegraph Board (BTTB)-a government functionary. The recent revolution
in information technology has opened up a new era for private investment in
the telecom sector. In the meantime, the following two private companies are
operating in rural telecom sector:
a) Bangladesh Rural Tele Communication Authority
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b) Sheba
For mobile telephone, the following private companies have been allowed to
operate:
a) Pacific Bangladesh Telephone Ltd
b) Grameen Telephone
c) Sheba
d) Telecom Malaysia International Ltd.
e) Warid Telecom
f) Aktel/Robi
Transport Sector
Some studies conducted in the recent past on sectoral reform identified
suitable privatization prospects in both the Road and Highways and in Inland
Water Transport sectors. Contracting out the present operations and
maintenance functions of these organizations is an immediate possibility.
Besides private shipping liners and vessel services are in full operation in the
country, with no restrictions whatsoever.24
Port and Container Handing
There are quite bright prospects of private sector participation in improving
port services in Mongla and Chittagong and in handling container services in
the ports and other areas. Reforms are made continuously and may move to
effective performances once the appropriate strategies are adopted.25
Aviation and Tourism
Serious reforms have taken place in the civil aviation sector by allowing
operation of private sector airlines in the domestic services. Tourism sector is
fully open for the private sector to operate. Aviation services that were
domestically offered have now crossed the boundary of the country. For
example, GMG airlines are now providing overseas services also.
Banking and Insurance
The government undertook financial sector reform programs in the nineties.
Private Banks and insurance companies with a few exceptions were
functioning creditably. The Uttara, Pubali and Rupali Banks which were
formally owned by the Government were later on proposed to be privatized.
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6. Conclusion
The preceding discussion provides some important lessons for the students of
Bangladesh studies. The problems inherent in policy formulation of
privatization and its implementation strategies have been clearly spelled out.
One thing which is to be mentioned here is that mere understanding the pros
and cons of the issues would not provide us much benefits. We need to avoid
debating whether privatized enterprises have done well or not. In the current
climate, even profit yielding SOEs are being threatened with privatization.
There is a little incentive for those units that are still under public ownership to
improve their performance. Since the privatization process may be more
protracted than was once contemplated, a policy of indiscriminate
privatization could thus not only lead to mounting claims on the exchequer but
would accentuate the disincentives for any prospective buyers.
In order to make the privatization efforts a success, an indigenously designed
pragmatic policy needs to be undertaken. Any policy towards privatization
should be based on the intention of improving our economic sectors rather
than implementing the ideologically-driven agenda. Moreover, the policy
prescriptions of external sources including donor agencies, pressure groups
and political lobbyists should be handled with great care and caution. The
prospective sectors for privatization identified on the basis of reality must be
given appropriate attention. In this context, the cooperation between the
government and non-government organizations is of utmost importance.
REFERENCES
Maxim Boycko, Andrei Shleifer and Robert W. Vishny, A Theory of Privatization, The Economic
Journal, Vol. 106, No. 435, March 1996, PP. 309-319.
2
Islam, Nurul, Development Planning in Bangladesh: A Study in Political Economy, Dhaka University
Press Ltd., Dhaka, P. 17.
4
http://en.wikipedia.org/wiki/Privatization, op.cit.
ibid.
ibid.
Accounting for privatization in Bangladesh: Testing World Bank Claims, op.cit, April 05, 2007, P. 4.
ibid, P. 6.
Sobhan, Rehman (ed.), Privatization in Bangladesh: An Agenda in Search of a Policy, UPL and CPD,
Dhaka, 2005.
10
11
12
ibid, P.7.
13
14
15
ibid.
19
ibid, P.5.
20
Raihan , Selim, Disinvestment of Profitable SOEs: Reviewing the argument for Privatisation, in Rehman Sobhan (ed.),
op.cit.
21
ibid.
22
Sectors for Privatization, available at, www.bangladeshnews.com, Date of access May 01, 2007.
23
ibid.
24
25
ibid.