Transcript Slide 1

South Asia
Intra-Regional Opportunities and Challenges
Debapriya Bhattacharya
Executive Director
Centre for Policy Dialogue (CPD)
Bangladesh
Presented at:
Fostering Trade through Private-Public Dialogue
Expert Meeting on Regional Integration in Asia
New Delhi, India
28-29 March 2007
CONTENT
 The Logic and Experience of Intra-Regional
Investment
 FDI Regime in South Asia & Intra-Regional
Investment
 Intra-Regional Investment in Bangladesh
 Proposed TATA Investment in Bangladesh: A
Case of Intra-Regional Investment
 Intra-Regional Investment: Policy Issues
2
1. THE LOGIC AND EXPERIENCE OF INTRA-REGIONAL INVESTMENT
 Regional economic integration accelerates liberalization,
deregulation and privatisation policies across economies,
markets and sectors, ensuring implementation of common
trade policies, standards of treatment, reduced differences in
business practices and regulations, administrative procedures
and business support measures.
 Consequently, flow of investment heightens between
economies of a region by decreasing information, adaptation
and transaction costs of trade.
 Thus, economic integration flattens differences between
member states in production factors like wages, interest rates,
economic policies and so on, influencing the flows of intraregional investments.
3
1. THE LOGIC AND EXPERIENCE OF INTRA-REGIONAL INVESTMENT
 Intra-regional investments can take place in two forms, either
as vertical investment or as horizontal investment.
 In vertical investment, different stages of production is
localized in different economies to take advantage of the
differences in factor prices, producing for both the domestic
market and the source country market.
 As for the horizontal investment, different production facilities
are placed in different economies to take advantage of the
local markets as well as the local production factors, mostly
targeting the domestic market.
4
1. THE LOGIC AND EXPERIENCE OF INTRA-REGIONAL INVESTMENT
 Intra-regional investment within Asia has picked up rapidly in
recent times as large multinational firms diversified across the
region and new regional production networks and channels
for intra-regional investment are being created.
 According to the World Investment Report 2006, intra-regional
investments in South, East and South-East Asia have grown
over the last few years. Currently it accounts for almost half of
the total FDI inflows to the region. However, the phenomenon
is prominent between and within East Asia and South-East
Asia.
 Japan and Hong Kong (China) have been the forerunners in
this process during 1990-2002.
5
1. THE LOGIC AND EXPERIENCE OF INTRA-REGIONAL INVESTMENT
 Hong Kong (China), Singapore, Taiwan Province of China, the
Republic of Korea, China and Malaysia are leading investors
in East Asia and South-East Asia. Most investments from East
Asia went to the relatively high-income South-East Asian
countries.
 The largest FDI flows have been within East Asia and they
had been rising until recently, largely dominated by China as a
key destination.
 Intra-ASEAN investment accounted for 13 per cent of
cumulative FDI flows in this region between 1995 and 2004,
with Singapore as the leading investor.
6
2. FDI REGIME IN SOUTH ASIA & INTRA-REGIONAL INVESTMENT
 South Asian countries have liberalised investment regime in varying
degrees since the mid-1980s to attract more investment by the
private sector in all major sectors.
 South Asian countries have liberalised major manufacturing and
service sectors for foreign investors with the expectation of largescale investment, mainly in a) export-oriented industries, b)
industries in the Export Processing Zones (EPZs), c) high
technology products that will be either import substitute or exportoriented.
 But within South Asia, intra-regional investment flows have not been
significant compared with other regions of Asia. FDI flows between
South-East Asia and South Asia as well as East Asia and South Asia
have been less significant by far as those between East Asia and
South-East Asia.
7
2. FDI REGIME IN SOUTH ASIA & INTRA-REGIONAL INVESTMENT
 Nevertheless, liberalisation of FDI regime in South Asia has
positively contributed to significant increase in overall flow of
foreign investment to the region, rising from a mere US$ 0.2
billion in 1980-85 to US$1.7 billion in 1991-96 and US$ 9.8
billion in 2005. But the major share of the inflow went to India
(68%) while India and Pakistan jointly holds 90% of the total
inflow in South Asia in 2005 (WIR 2006).
 Whether the developing countries of South Asia can follow
the countries of other subregions of Asia in the process of
intra-regional investment will depend on their capability to
pursue deep integration and economic connectivity, as
Integrated regional economies with minimum border barriers
provide enterprises with the opportunity to reorganize their
economic activities on various geographical scales.
8
2. FDI REGIME IN SOUTH ASIA & INTRA-REGIONAL INVESTMENT
Hosts of FDI
Sources of FDI
Intra regional FDI (US$ million)
India
India
Pakistan
Sri Lanka
Bangladesh
Nepal
n.a.
6.0 (2.6%)
0.99 (0.2%)
5.1 (51%)
(0.6%)
0.59 (0.1%)
(0.03%)
0.52 (0.1%)
n.a.
Pakistan
n.a.
Sri Lanka
(0.01%)
n.a.
Bangladesh
0.59 (0.01%)
0.79 (0.08%)
0.41 (0.18%)
Nepal
n.a.
n.a.
n.a.
n.a.
Share of South Asia
0.04%
n.a.
2.1%
0.4%
n.a.
37.6%
Source: IPS (2000), World Investment Report (2003), Bangladesh Bank (2006), Board of Investment
(2007), Moazzem K. (2006).
Note: Figures in parenthesis indicates percentage share of total FDI inflow to the respective country.
* Data represents different sources and different time periods and may not be always
comparable.
 Only India has been investing to some extent among the South Asian
countries within the region, investments directing mainly towards Sri Lanka
and Nepal. 2.6% foreign investment in Sri Lanka has been coming from
India, while for Nepal, Indian investments contribute to the extent of 51%.
9
3. INTRA-REGIONAL INVESTMENT IN BANGLADESH
 With the advent of economic liberalisation in Bangladesh
since late 1980s, inflow of FDI registered an upward trend
from a very low base.
 Total FDI inflow increased from US$ 92 million in 1995 to
US$ 579 million in 2000 and reached to 845 million in
2005. In 2006, however, this amount went down to US$
490.27 million, which could be due to the political unrest
prevailing in the country at that moment.
 Most of the FDIs in Bangladesh are coming from extraregional sources. However, the share of South Asian FDIs
in the total inflow has shown upward trend during the last
decade, increasing from 1.55% (US$ 1.4 mln) in 1995 to
1.60% (US$ 9.3 mln) in 2000 and reaching 3.82 (US$ 32.3
mln) per cent in 2005.
10
3. INTRA-REGIONAL INVESTMENT IN BANGLADESH
FDI inflow in Bangladesh from South Asian Sources
FDI Source
1995
2000
2005
2006
India
0.3 (19)
8.4 (91)
2.7 (8)
1 (47)
Pakistan
1.2 (81)
0.8 (9)
25.5 (79)
0.6 (28)
Sri Lanka
0
0.1 (1)
4.1 (13)
0.5 (25)
Nepal
0
0
0.1 (0.2)
0
Bhutan
0
0
0
0
Maldives
0
0
0
0
1.4
9.3
32.3
2.1
Global Total
92.3
578.6
845.3
490.3
Share of South Asia in Global
Total of Bangladesh (%)
1.55
1.6
3.82
0.43
South Asia Total
Source: Compiled from enterprise survey conducted by Statistics Department, Bangladesh Bank.
• Within the total investment coming from the South Asia region to
Bangladesh, Pakistan was the single largest source (79%) in 2005
(US$ 25.5 mln), while Indian investment of US$ 1 mln was the single
largest source (47%) in 2006 .
11
3. INTRA-REGIONAL INVESTMENT IN BANGLADESH
FDI Inflow 2006: Distribution by sectors
(Million US$)
Sectors
Sources
Agri &
Food
Industry
Service
Misc
Total
0.52
0
2.1
South Asia
Total
0.15
1.43
India
0.15
0.84
0.99
0.59
0.59
Pakistan
Sri Lanka
0.52
0.52
Nepal
Bhutan
Maldives
Global Total
Share of
South
Asia in
Global
Total
5.32
2.70%
15.76
9.10%
469.1
0.10%
Source: Compiled from Board of Investment (BOI).
0.1
0%
490.27
0.40%
• South Asia contributed
a negligible share of
0.4% in total FDI inflow
in 2006 (US$ 2.1 mln)
• South Asian FDI mainly
directed towards the
industrial sector
(chemical and
engineering) with US$
1.43 million.
• This is reflected in the
share of South Asia in
the global total,
12
consisting 9.10 per cent.
3. INTRA-REGIONAL INVESTMENT IN BANGLADESH
Major Intra-Regional Investments in Bangladesh (Implemented/Under Implementation)
Investment
Name of Projects
Sector
Local (mln
Tk.)
Foreign (mln
US$)
Employment
Investing
Country
1
Delta Brac Housing Finance
Corporation Ltd
Services
1,300.00
23.64
53
India
2
STS Holding Limited
Services
830.00
17.30
700
Sri Lanka
3
Cosmopolitan Industries (Pvt.)
Ltd
Textiles
650.00
10.00
3,850
India
4
American & Efird Bangladesh
Ltd
Textiles
427.50
7.44
151
Sri Lanka
5
Bangladesh Fertilizers & Agro
Chemicals Ltd.
Chemical
300.00
7.50
50
India
6
Marico Bangladesh Ltd.
Chemical
162.39
2.39
103
India
7
Nilkamal Padma Plastic Pvt. Ltd
Chemical
160.75
2.80
128
India
8
ACI Godrej Agrovet Private Ltd.
Agro-based
153.95
2.44
114
India
9
Nandan Park Ltd
Services
150.00
2.61
195
India
10
Asian Paints (Bangladesh)
Limited
Chemical
141.49
2.57
105
India
Source: Board of Investment
13
3. INTRA-REGIONAL INVESTMENT IN BANGLADESH
FDI Inflow in EPZs of Bangladesh: Distribution by
Sources
(Million US$)
2004-05
2005-06
Cumulative total
(as on Jan 07)
South Asia Total in
Bangladesh
0.80
1.90
11.90
India
0.46
1.29
6.30
Pakistan
0.34
0.61
5.10
Source
Sri Lanka
Nepal
0.50
Bhutan
Maldives
Global Total
Share of South Asia
in Global Total
(%) of
Bangladesh
101.02
81.12
878.62
0.79
2.34
1.35
Source: Compiled from BEPZA
• The share of FDI from
South Asia increased
in FY 2006 compared
to FY 2005.
• India and Pakistan
contributes almost the
total South Asian FDI
inflow in EPZ.
• The South Asian FDI
inflow share is more in
the EPZs than that in
the DTA.
14
3. INTRA-REGIONAL INVESTMENT IN BANGLADESH
Cumulative South Asian FDI Inflow in EPZs: Distribution by Sectors (as on Jan 07)
(Mln US$)
Sectors
Source
South Asia Total
India
Agro-based
Manufacturing
Total
RMG
Misc/NEC
Total
2.17
3.21
2.32
6.51
11.89
1.67 (77)
2.97 (93)
2.08 (90)
1.65 (25)
6.29 (53)
0.24 (7)
0.24 (10)
4.86 (75)
5.10 (43)
Pakistan
Sri Lanka
Nepal
0.50 (23)
0.50 (4)
Bhutan
Maldives
Global Total
Share of South Asia in
Global Total (%)
2.96
422.80
270.78
453.86
879.62
73.31
0.76
0.86
1.43
1.35
Source: BEPZA
Note: Figures in parenthesis indicates percentage share of South Asian total
• For the Agro-based sector, South Asian sources contributes the most (73.3% of the global
total). But the region contributes only 1.35% of the total foreign investment in the EPZs.
• 53% of the cumulative South Asian investments in the EPZs of Bangladesh has been 15
made by India and 43% by Pakistan.
3. INTRA-REGIONAL INVESTMENT IN BANGLADESH
FDI Inflow: Distribution of Sanctioned Units in EPZ by Sources
2004-05
2005-06
Cumulative total (as on Jan 07)
South Asia Total
7
7
42
India
5
5
28
Pakistan
1
1
7
Sri Lanka
Nepal
5
1
1
2
33
25
288
21.21
28.00
14.58
Bhutan
Maldives
Global Total
Share of South Asia in Global
Total
Source: BEPZA
 During 2005-06, 7 out of 25 sanction units at the EPZs came from the South
Asian sources (5 from India, 1 from Pakistan and 1 from Nepal)
 Out of the cumulative total of 288 sanction units made to the EPZs till January
2007, 42 has been invested by the South Asian countries (India 28, Pakistan 7,
16
Sri Lanka 5 and Nepal 2)
4. PROPOSED TATA INVESTMENT IN BANGLADESH:
A CASE OF INTRA-REGIONAL INVESTMENT
 TATA submitted an expression of interest with the Bangladesh Board
of Investment (BoI) in October, 2004. TATA’s US$2 billion proposal
included Steel Plant, Fertilizer, Coal Mine and Electricity.
 After a long negotiation, a revised offer was submitted on April 30,
2006 amounting US$3 billion.
 TATA group proposed a relatively higher gas price and some new
package benefits in its revised proposal like share in the coal mining,
initiatives under social corporate responsibility (CSR) - hospital, training
institutes, etc.
 Bangladesh Government would guarantee the supply of gas.
 The previous government formed a secretary-level government
negotiation committee that gave its report to the high powered
ministerial committee
 The ministerial committee was to place the proposal to the cabinet
while the following elected government was to take the final
decision. This did not happen.
17
4. TATA’S REVISED PROPOSAL AT A GLANCE
Industry
Investment
(mil. $)
Capacity
Location
Market
Required Gas
(TCF)
Steel
1200
2.4 MTPA
Domestic &
Export
0.97
Fertilizer
600
1.0 MTPA
Domestic &
Export
0.64
600
475 MW
Pabna
(Northern
BGD)
Sangu
(Southern
BGD)
Pabna
(Northern
BGD)
Dinajpur
(Northern
BGD)
Domestic &
Steel
0.53
Domestic &
Coal Mine
-
250-300 MW
Electricity
(500 MW if
needed)
Coal
600
6.0 MTPA
Dinajpur
(Northern
BGD)
Domestic &
Electricity
-
Total
3000
-
-
-
2.14
18
4. TATA PROPOSAL: MAJOR DEBATES
Gas Price
 Proposed gas pricing is based on product linked gas pricing
formula (based on Urea and HR coil)
 Gas price will vary in range of $2 - $4 / MMBTU
 Initial period (1-6 years) floor price is $1.50 / MMBTU
 The local experts think that the pricing should be based on the
international oil price rather than the finished goods price
 The initial floor price is too low than the market price.
 One estimate shows that the highest proposed gas price from
Tata is $4/mcf. This price of Tata would cause loss of $9,765
million ($4.65/mcf).
 The loss would be $15,015 million if we consider the minimum
price of $1.50.
19
4. TATA PROPOSAL: MAJOR DEBATES
Gas Price
 According to a suggestion by the secretary level committee, the
gas price would not have any upper limit and will be fixed on the
basis of price fluctuation of the steel and fertiliser in the
international market.
 In this case there would be no upper limit for the gas prices, but
there would always remain to lower ceiling.
 The gas price would never go down below the gazetted prices
for the local industries and secondly, the price would never be
below the government's average purchase rate of gas from the
international oil companies (IOCs).
 Under the formula, as per present market rates of fertiliser, the
price of gas per unit would be $ 3.70 for fertiliser plant while
about $ 3.30 for steel plant.
20
 Price of gas for steel will be paid in local currency.
4. TATA PROPOSAL: MAJOR DEBATES
Gas Security
 The guarantee for gas supply is reduced to 10 years.
 Expert opinion is that it should be for five years. Then a
revision should be done.
 The secretary level committee suggested a ring-fencing
formula in supplying gas to TATA, which means Petrobangla
will supply gas to TATA from a dedicated gas field at its
convenience.
21
4. TATA PROPOSAL: MAJOR DEBATES
Coal Mine Lease
 For coal mining TATA offered joint venture (JV) with Petrobangla
(90:10).
 TATA will arrange 10 percent financing of Petrobangla also. TATA had
proposed to develop 6 MTPA open cast mine at Barapukuria. It had
proposed not to disturb existing underground works during the tenure
of the existing contract (up to 2011).
 The open cast coal mining system is
environmentally unsustainable in Bangladesh.
considered
to
be
 Question is raised why Petrobangla (and GOB) would allow 90 per
cent ownership of an asset exclusively owned by Bangladesh.
 The secretary level negotiation committee suggested the government
to ask the Tata to pay $ 250 million for the Barapukuria coal mine
project as such amount had already been spent on the project.
22
4. TATA PROPOSAL: MAJOR DEBATES
Equity Participation
 One of the striking feature of the revised proposal is to offer up
to 10 per cent of equity of each project company to GOB at par
and to provide for placing of equity on the Dhaka / Chittagong
stock exchange subject to market conditions.
 The critics remark the ownership of government should be
much higher than that.
 Subsequently, the secretary level committee suggested that
TATA should give 10 per cent equity share of the project free of
cost to the Bangladesh government.
23
4. TATA PROPOSAL: LATEST STATUS
• On July 10, 2006 the TATA Group suspended the negotiation
of its $ 3 billion investment proposal in Bangladesh due to
"indecision of the Bangladesh government".
• The TATA officials and BoI executives have started to revive
the current proposal recently. Whether the Caretaker
Government in Bangladesh will consider it to be its priority
task is to be seen.
• Regarding investment proposal of the TATA group, the new
CTG may constitute a high-powered competent committee
which, building on outcomes of earlier rounds of negotiations,
should recommend best possible economic price for natural
gas to be supplied, and to settle other issues.
24
5. INTRA-REGIONAL INVESTMENT: POLICY ISSUES
 Investment potential in South Asian countries emerges from
resource availability, access to market, strategic locational
advantage and technological aspects.
 Under a common investment framework, investment
potentials of all South Asian countries could be developed in a
coordinated manner.
 Unfortunately there are a number of challenges that exists as
barriers to build strategic partnership among the countries
within the region.
5. INTRA-REGIONAL INVESTMENT: POLICY ISSUES
Apart from the general problems related to investment in other
regions, the obstacles with the South Asian countries also
contain some distinguishing features.
Regulatory Barriers
 Absence of a harmonized trade regime discourages investment
in South Asia. Even signing an FTA would not necessarily ensure
a higher level of intra-regional trade because of the diversified set
of requirements. These include different kinds of standardization
and certification processes, different custom rules and
regulations, different tax laws and regulations and duty
structures.

Thus, harmonization of the rules and procedures and mutual
recognition of the rules and standards are some of the essential
means for enhancing intra-regional investment in South Asia.
Prior consultation in the case of imposing countervailing duty and
antidumping duty is also required.
5. INTRA-REGIONAL INVESTMENT: POLICY ISSUES
Restriction over Outward Flow in South Asian
Countries
 Outward FDI flow from India and Pakistan is
controlled (restricted by means of minimum
holding periods, classes of investors etc) and
partly restricted (prohibited without permission) in
countries like Sri Lanka and Bangladesh.
 Without further liberalising the investment regimes
(at least within), the region will barely be able to
benefit from any industrial restructuring or trade.
5. INTRA-REGIONAL INVESTMENT: POLICY ISSUES
Compliance with SAFTA
 The objective of creation of SAFTA is to “strengthen intraSAARC economic cooperation to maximize the realization of
the people’s potential for trade and the development of their
people.”
 Regional economic integration in South Asia could work as a
catalyst in improving intra-regional investment and generate
billions of dollars of new income, employment, trade helping
the region in its fight against poverty.
 Studies have shown that removal of tariff and non-tariff
barriers would increase intra-regional trade by 1.6 times the
existing level. (Source: The Daily Star, February 19 2006)
 SAFTA was signed in 2004 but trade still remains stagnant
mainly because of the existing political barriers between India
and Pakistan.
5. INTRA-REGIONAL INVESTMENT: POLICY ISSUES
Compliance with SAFTA
 SAFTA’s current foreign trade is only 0.8 per
cent of the total global exports and 1.3 per
cent of world imports.
 Intra-SAARC trade is only 5.3 per cent of
overall exports of the region.
 Current bilateral official trade between India
and Pakistan adds up to $ 1.35 billion.
5. INTRA-REGIONAL INVESTMENT: POLICY ISSUES
Regional and Bilateral Investment Treaties
 At present, three Bilateral Treaties exist in the
South Asian region between Bangladesh-Pakistan,
Pakistan-Sri Lanka and Sri Lanka-India.
 The recent initiative in signing a Regional
Investment Treaty has not been fulfilled due to the
reluctance of countries within the block in opening
all sectors for intra-regional and extra-regional
investment.
5. INTRA-REGIONAL INVESTMENT: POLICY ISSUES
Countries that have concluded BITs with South Asia and South East Asia
(as of 1 June, 2006)
Developed Countries
Developing Countries
Western
Europe
United
States
Other
Developed
countries
Africa
Asia
and
the
Pacific
Latin
America
and the
Caribbean
Central
And
Eastern
Europe
T
O
T
A
L
Bangladesh
10
1
1
-
13 (1)
-
5
25
India
19
-
2
7
21 (1)
1
6
57
Pakistan
14
-
2
4
26 (2)
-
4
48
Sri Lanka
12
1
2
1
11 (2)
-
3
25
Nepal
3
-
-
1
-
-
1
4
Countries
South Asia
Source: UNCTAD 2006
31
5. INTRA-REGIONAL INVESTMENT: POLICY ISSUES
 Implementation of the Regional Trade Agreements
in South Asia can significantly give rise to intraregional investment.
 Signing of a Regional Investment Treaty and
Double Taxation Treaties among the countries will
be an important step to remove the obstacles to
investment.
 There is no confined evidence that shows that
developing countries can make massive gains
from BITs. In order to gain from BITs between the
countries in South Asia, fast track trade
liberalization (in form of reduction in tariff and nontariff barriers) must be sought under SAFTA.
5. INTRA-REGIONAL INVESTMENT: POLICY ISSUES
Infrastructural Connectivity
 The South Asian countries are yet to build on their
infrastructural facilities in order to operationalize intraregional investment initiatives. Regional transport
network, power grid, existence of and access to all ports
by regional investors are some of the necessary
elements in order to foster intra-regional investment.
 Studies have shown that:
The cost of industrial land is highest in Dhaka ($64/sq.m).
Difficult to find suitable land for setting up industrial plant.
The cost of utilities for business is highest in Colombo.
The port’s in South Asia are about 15-20 percent more
expensive than the Chinese ports.
5. INTRA-REGIONAL INVESTMENT: POLICY ISSUES
 In order to improve infrastructure at the regional level, major industrial
restructuring and large scale common projects need to be undertaken.
These projects can then be implemented by South Asian Development
Fund (SADF) set up under SAARC in order to promote industrial,
infrastructural, institutional and human resource development.
Existence of small and large economies in the regional block
 There is no specific trend as far as the benefits received by
small and large economies of different trading blocks are
concerned. Among the South East Asian countries, FDI to the
smaller economies have been observed to go down, while
similar kinds of benefits were shared by the countries in
NAFTA.
 Concurrently, there is an apprehension that the smaller
economies in South Asia would not receive much benefit from
intra-regional investment.
5. INTRA-REGIONAL INVESTMENT: POLICY ISSUES
Mindset
 There are large differences between the size of the
economies which sometimes can become a
psychological barrier towards the smaller economies.
 Reluctance of India as well as other states in opening
up their economies to other neighbors is another
barrier towards intra-regional investment.
 Lack of appreciation for each other regarding the steps
and policies initiated by member countries in the block
leads to information failure between the countries.
THANK YOU