The importance of policy support to attract foreign investors
Despite incentives to attract foreign investment, Bangladesh struggles with implementation gaps due to infrastructure issues, regulatory hurdles, and procedural delays
Foreign investment in 2024, as per BIDA's data, stands at $41.46 million across 48 projects, while joint ventures account for $38.19 million from 44 projects. Local investment during this period totals Tk382.10 crore for 620 projects. However, these are all registered figures, and a significant proportion may not see implementation.
There is often a substantial gap between registered and implemented investment projects. After registering with BIDA's OSS, many investors do not return to follow through. Understanding the reasons behind this gap between agreed and implemented investments is crucial to addressing the issue.
Bangladesh's overall investment scenario remains unsatisfactory, with foreign investment and FDI falling short of expectations. Despite policies and incentives being announced, and numerous delegations visiting the country with apparent interest, not all commitments materialise.
While some FDI has been attracted to the power and electricity sectors, job creation has been minimal. Bangladesh needs investment in diversified sectors that can generate employment and facilitate technology transfer.
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Land-related challenges have been a recurring issue. The government has announced 100 economic zones, some privately owned and others state-controlled. Although private zones are making some progress, government zones are lagging. Investors are ready to some extent, but the infrastructure—such as gas, water, and electricity—remains incomplete.
Meanwhile, BEPZA's lands are fully saturated, with no horizontal expansion possible. Some factories are now expanding vertically. In the Mirersorai SEZ, some areas leased to BEPZA are operational and ready for export, but the core areas are still waiting for significant progress.
One of the primary requirements for sustaining foreign direct investment (FDI) in Bangladesh is an efficient labour force. Along with this, several challenges have been identified by investors, and one of the most frequently mentioned is the repatriation of profits. Foreign investors are required to repatriate their earnings in four ways: salaries, dividends, royalties, technical service fees, technical assistance fees, technical knowhow fees, and equity.
The salary of foreign employees, as per company agreements, is regulated by BIDA. Bangladesh Bank allows the repatriation of up to 80% of a foreign employee's salary. However, according to foreign investors, the entire salary must be remitted through a Bangladesh Bank account. They have expressed the need for a more flexible approach, aligned with double taxation avoidance treaties. This could be linked to foreign companies seeking to conceal portions of salaries to avoid tax-related issues. In some cases, the misalignment between income tax policies and repatriation rules makes foreign investors uncomfortable.
Repatriation of royalties, technical know-how services, fees, and assistance are also challenging areas. According to Bangladesh Bank's Foreign Exchange Transaction Guidelines (Volume 1, Chapter 10, Section 25), the limit for repatriating technology transfer costs without approval is 6% of annual sales. Anything above this requires prior approval from the sponsoring authority and Bangladesh Bank.
The Bangladesh Investment Development Authority Act 2016 (Clause 18) and BIDA's Handbook also stipulate that payments to overseas entities for technical services require endorsement from the relevant authorities. Additionally, as per BIDA's guidelines, investors can remit up to 6% of the C&F value of imported machinery for new projects to cover royalties, technical knowhow, and assistance fees. However, clearer alignment between these acts and guidelines is necessary to signal confidence to investors.
Equity transfers primarily occur in FDI reinvestments, which is a positive sign, as it indicates investors' willingness to stay in the country. However, new investments in diversified sectors are equally important, and for this, policies need to be clear and consistent to attract these funds.
Although there is no restriction on dividend repatriation, the process is not smooth. Investors face difficulties due to the shortage of foreign currency. Additionally, foreign investors are restricted from raising funds from local banks within their first three years of establishment, which depends on the authorised dealer (AD) bank's decisions.
Another issue investors face is the significant duplication in documentation requirements for visa recommendations and work permits from BIDA. For example, office permits, board resolutions, passports, CVs, and photos need to be submitted multiple times. Simplifying these policies could improve the overall investor experience.
Banks also present procedural challenges, with requirements varying between institutions. Although a list of required documents is published, banks often request additional materials. For instance, foreign companies cannot transfer funds without opening a bank account. Moreover, under the National Board of Revenue's (NBR) provisions, companies must disburse salaries over Tk20,000 through banks, as outlined in Section 30(I) of the Income Tax Ordinance 1984 and the Income Tax Act 2023 (Section 55-Ta).
Work permits are another grey area. While BIDA does not define a specific residency period, the Income Tax Act 2023 requires foreign employees to stay in Bangladesh for more than 183 days to qualify as residents. This discrepancy between BIDA's guidelines and the Income Tax Act complicates compliance. In addition, the Foreign Exchange Regulations Act permits repatriation through direct transfers, but in cases of multiple-country transactions, Bangladesh Bank must approve the process.
Exit issues are also frequently discussed by foreign investors. Listed companies can exit by selling shares at the existing market price through the Non-Resident Investors Taka Account (NITA). However, for unlisted companies, repatriation of sales proceeds requires Bangladesh Bank's prior approval, based on the fair value of shares. According to paragraph 3(B), Chapter 9 of the Foreign Exchange Transaction Guidelines 2018 (GEET), the fair value is calculated using three methods: net asset value, market value, and discounted cash flow, depending on the company's nature. Auditing and determining the fair value take time, and clearer policy guidelines would help build investor confidence.
The process of securing overseas loans from parent companies is another concern. For loans exceeding one year, investors need approval from both BIDA and Bangladesh Bank. However, the approval process is often lengthy due to board meetings only being held monthly. Delegating authority to authorised dealers (ADs) could streamline this process, while interest rates could be determined by market conditions.
Bangladesh's exit mechanisms allow for two pathways—voluntary and legal. The Bangladesh Bank follows due processes under the Company Act, but local consultants often misguide companies through the exit process, particularly in matters related to taxation. This misinformation, especially from third parties aiming to increase their profits, discourages investors.
In most cases, foreign investors come to Bangladesh for project and technical assistance. Branch offices are profit-oriented and typically do not engage with Bangladesh Bank unless necessary. The terms and conditions for branch offices are determined by BIDA, while for companies, Bangladesh Bank and the Registrar of Joint Stock Companies are involved.
Project-related expenses are another area of concern, as these outflows are often not reflected in financial statements, which creates problems during taxation. Equity money should not remain uncashed. To address these issues, Bangladesh Bank, BIDA, and other relevant organisations must work in a coordinated manner.
Although the policies appear investor-friendly on paper, their practical implementation leaves much to be desired. The mindset of investment promotion agencies and regulators needs to be more supportive, focusing on understanding and addressing investors' needs to provide timely and transparent public support services.
Ferdaus Ara Begum is the CEO of Business Initiative Leading Development (BUILD), a public-private dialogue platform.
Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions and views of The Business Standard.
