Foreign investment in cold-chain infrastructure: Bangladesh needs a sound logistics policy

Bangladesh needs to have a sound logistics policy to attract foreign investors and engage the private sector to invest in developing cold-chain infrastructure which will increase agriculture exports and help position Bangladesh as a regional hub.

At the same time, the market should be opened for the private sector and allow them to invest which will in turn reduce the government's budget pressure and help improve Bangladesh's overall logistic offer. 

Saad El Jai, Project Manager and Economist at LixCap, a US-based global advisory firm, spoke in depth about Bangladesh's cold-chain infrastructure during an interview with The Business Standard. LixCap provides blended finance, investment, and business advisory services to emerging markets. At present LixCap is also working with several private companies in Bangladesh.

He also addressed the regulatory challenges to develop a network of third-party logistic bonded warehouses to handle imports, lack of cross-docking facilities at major trading hubs (Chittagong port and Dhaka airport) for perishable goods, high import duty on equipment used in cold chain logistics, and limited access to Inland Container Depots (ICD) for Bangladeshi imports of perishable products as major reasons that cause Bangladesh to lag in cold-chain infrastructure development. 

What is your assessment of cold storage infrastructure in Bangladesh?

Well, cold storage infrastructure in Bangladesh is like any other country at an early development stage. Bangladesh is an emerging economy that has had a relatively stable political environment over the last 10 to 15 years. So now the economy is growing and demand is increasing substantially. Imports of perishable products are increasing, and exports even more so.

The cold storage industry is shifting from what it was before to what is needed right now and what it will be in the future. So before what you had was old storage for basic crops - potato storage mainly. That's why when you look at the member list of the Bangladesh Cold Storage Association, they have roughly 400 members. A large number of them are active while some are non-active and within those that are active, I would say 90 to 95% are all potato storage companies.

A few of them are now diversifying to other crops or opening multipurpose cold storage facilities or multi-products and multipurpose cold storage facilities; these are going to grow.

This is where the opportunity is for Bangladesh in the next 5 to 10 years, in these types of cold storage facilities. Note that we need to refer to the cold logistics of today and tomorrow not just as storage but as the cold chain in general. Cold chain is the storage plus transportation, distribution and value-added services. So when you look at the cold chain situation in Bangladesh, it is nascent and it represents a mine full of profitable investment opportunities.

Do you think that the government can play some role in attracting foreign investment here?

We need clear policies and regulations. Right now the policies are in a working stage so we need to have the right things in them.

Having the policy out is not the only important thing but we need to make sure that all the stakeholder consultancies have been done, everybody has been heard, and the important things have been agreed upon and prioritised.

So in the policy that is in the works right now, there are a few things that need to be adjusted. We need to free up the market and allow the private sector to play its role. Currently, the government has several cold chain assets in the economy. This is important because the government needs to secure some aspects like food supply or vital crops.

The government needs to take care of that and create reserves but there is also a parallel space for the private sector to operate. The issue is that the current policies and regulations do not give free reign to the private sector to act, especially in and around major trading hubs where demand is present. 

I'll give you one example - say I have a third-party logistics company that offers logistic services to other companies and I want to have a bonded warehouse to handle my client's imports. The policy for bonded warehouses in Bangladesh does not allow third-party logistic operators to have a bonded warehouse for imports as well as exports.

If I am an importer, for example, an RMG company and want to have a bonded warehouse, I can have it. But if I am a logistics company and I want to offer my services to everybody, I cannot have a bonded warehouse right now for imports.

If you have a bonded warehouse that can take any product and both imports and exports, then you can reduce pressure on the ports.

What challenges do foreign investors face when investing in cold-chain infrastructure?

It's a very long process to get the licence for a cold chain facility. I have heard that you need to talk to 16 different entities before you can get your permission to run. You need to talk to certain entities for construction and operation. Maybe there needs to be some centralisation or reduction of these redundancies.

Another policy is to harmonise import tariffs and this may be more impactful. Right now, some of the equipment that is used in cold storage are taxed as if they are luxury products and they have high import tariffs.

Through efforts from the Bangladesh Trade Facilitation Project, the import tariffs for some equipment used in cold storage facilities have been reduced (e.g. chillers). But still, there are other cases, freezers that are still subject to very high import duty. For example, while ice cream companies can get the freezers for very low import duty, cold storage companies cannot and that's something we need to harmonise.

We need to consider that the equipment I'm importing will be used to create jobs for people, improve logistics, and help the economy. So we are asking to level the field for everybody.

One last thing that I can mention is the Inland Container Depots (ICDs), right now they have a limitation in terms of imported products that they are able to handle. While they can handle all exports, you can send any export products you want into an ICD, it's not a problem. But for imported products, you can only send 37 or 38 products into an ICD as those are the ones that are allowed by the National Board of Revenue (NBR). Unfortunately, none of these products are perishable and this constitutes a hurdle for the development of cold chain facilities (e.g. cross docking facilities) inside ICDs.

So why would you put a limitation? Open the field and let ICDs take as many products as they want. For example, within ICDs, there should be a cross-docking facility that is state-of-the-art and allows for the handling, short-term storage, and movement of goods both ways - import and export. 

I think there is such a facility in Terminal 3 but we are unsure about its size or design, however it is promising. It will lower pressure on the BADC cold storage facility outside the airport or the existing import and export villages inside the airport. If space is made available inside Hazrat Shahjalal International Airport, a state-of-the-art cold chain facility for cross-docking and temporary storage could easily be financed through BOT (Build, Operate, Transfer), DBFOT (Design, Build, Finance, Operate and Transfer) or any other type of PPP contract. In this case, all our imports and exports of perishable products, such as fruits, vegetables, pharmaceuticals and premium meat can be handled properly. Pharmaceutical products and vaccines are of critical importance.

These need to be handled with care and there is an opportunity for the private sector to finance and operate. This outlet will not cost the government anything because the private sector will invest, and the government will generate money through the lease of the facility, additional revenue taxes, and reduction in product wastage.

In Ethiopia, for example, there are state-of-the-art facilities that are being invested in and operated by the private sector. It's a very lucrative business but only if you give the right space inside the airport. Then it will increase trade and make it efficient.

LixCap's expertise in blended finance and knowledge of challenging markets help our clients achieve development outcomes through market-based investment and financing. How can LixCap contribute to Bangladesh?

We are open to collaborating with the private and public sectors in Bangladesh. Our expertise is in project development, so finance, design, engineering as well as putting together the right stakeholders so that not only the development but also the operations of the project can go as smoothly as possible.

We can also work with the government. We are currently working with the government of Burundi in Central East Africa. We are putting a cross-docking facility and some storage capacity inside the main airport in Burundi. We are also putting another cross-docking and cold storage facility inside the airport in Cotonou, Benin. We have already developed one in the port of Tangier, Morocco and are assisting one of our clients in setting up a USD 70 million network of cold storage facilities in Central Morocco and Senegal.

In Bangladesh, we are working with several private-sector companies. Each one of them has projects, some focused on ports, some on the airport or on land border crossings like Benapole. 

We just need clear policies and regulations and enforcement of these regulations. Luckily, Bangladesh is making good progress on that front by committing to issue a sound Logistics Policy.