Local Consultative Group Sub-Group: Private Sector Development

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Reginald Berry
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1 Local Consultative Group Sub-Group: Private Sector Development Subject: Private Sector Development Issues for Bangladesh Development Forum 2002 The process of accelerating pro-poor growth encompasses issues relating to good governance, social and economic development, and an environment that enables the poor to participate actively in and benefit from the development process. The LCG Private Sector Development sub-group (LCG-PSD) assumes that other issues relating to governance, social development, and macro-economic development will be covered in various ways in the Bangladesh Development Forum meeting. Although we do not attempt to treat it as a separate issue, we would like to flag poor law and order, including widespread extortionist practices, as a significant problem which creates a general sense of insecurity in the mind of the public, deters entrepreneurs from expanding or opening businesses, and increases the cost of doing business in Bangladesh. This paper highlights five interrelated issues that are felt to be critical to private sector development and pro-poor economic growth in Bangladesh. If addressed effectively, they also embody significant opportunities to improve governance and expand participation of the population in the national economy. All of these issues are discussed in greater detail and from different perspectives in the World Bank's Policy Briefs. They all entail identifying an appropriate role for Government in "facilitating private sector development in a competitive environment" Information and Communications Technology for Development The unprecedented development of information and communications technologies (ICTs), both hardware and software, has created enormous opportunities for developing countries for social and economic development. Many countries have already created significant employment opportunities for an appropriately educated workforce, and expanded export earnings. Bangladesh is already far behind its competitors, and risks missing altogether the opportunity of creating a thriving ICT sector if it does not respond very soon. The real impact of ICT in Bangladesh would be in two areas: enhancing competitiveness of Bangladeshi enterprises in domestic and international markets, and in e-governance. Application of appropriate ICTs leads to higher productivity of enterprises competing in both local and international markets, which is especially crucial at times of recession. Although there are many near-term opportunities for creation and expansion of ICT-related businesses, experience in other countries suggests that the potential for impact of ICT applications on productivity and growth in other, non-ict, sectors, is ever greater. To the extent that ICT access can be widely distributed throughout the Bangladeshi population, it also holds the potential to facilitate a broadening base of political and economic empowerment through improved and transparent access to Government services, educational opportunities, networking and advocacy, and information of use to small businesses. 1 Asia Development Bank, Proceedings of a High-Level Workshop on Strategic Issues and Potential Response Initiatives in the Finance, Industry and Trade Sectors", November 2001

2 2 E-governance can improve transparency and reduce corruption in the public sector, while improving public services for the masses. 2 One example of e-governance would be application of ICTs in land administration. ICT itself has the potential to become an important sector in terms of software development, human resources development, and provision of ICT-enabled services. A few ICT firms have already somehow managed to export software despite limited human resources, extremely poor infrastructure (telecom connectivity), lack of an appropriate legal basis for electronic transactions, an overall low level of computerization both in public and private sectors, and other daunting challenges. The long-term prospects for the ICT sector hinge on two factors: high quality formal and informal education at all levels, and excellent telecommunications infrastructure. Immediate steps are needed to create a legal environment for electronic transactions, human resources development, fast development of telecom infrastructure (see issue #2 below), and application of computer technology in both public and private sectors. Most importantly, the Government must set limits for its own interventions through a collaborative and transparent dialogue with other stakeholders. Additional information on the ICT sector in Bangladesh is available at 2. Deregulation of Telecommunication Sector It is significant that poor telecommunications is singled out as one of the key impediments to Bangladesh s economic growth in at least three of the World Bank Policy Briefs. 3 Bangladesh is the poorest country in terms of teledensity (0.4 fixed phones per 100 people) in South Asia and one of the poorest in the world. The impact of poor teledensity denies people the very basic service of communication, hinders development of the private sector (both IT and non-it), discourages foreign investment, and impedes access of the population to the Internet and other ICT-based services. ICT will never become a "thrust sector in the absence of good telephone connectivity. The acute problem is manifested in huge unmet demand. It takes years to get a phone line and is extremely expensive (greatly exacerbated by corruption). Bangladesh thereby becomes an expensive place to do business and loses it competitiveness. The root problem is a restriction on private investment in the telecom sector, other than cell phones. The Bangladesh Telephone and Telegraph Board (BTTB), as the monopolistic service provider, has succumbed to corrupt practices and protectionist policies. An example of a monopolistic attitude is reflected in the recently formulated terms and conditions for Internet Services Providers (ISPs) by the Ministry of Post & Telecom, designed clearly to protect BTTB's interests (Annex A). A small breathing space has been created by an emerging cell phone industry, which in only five years has already exceeded the number of BTTB lines. Unfortunately, not all cell phones have access to BTTB landlines, and cell phones are permitted to provide voice service only. Several major policy decisions are overdue: making the regulatory body (the newly formed TRC) independent to act as true regulator of the sector (key to the success of telecom de-regulation); allowing private investment in all segments of the telecom sector; privatizing BTTB; and creating a legal environment that allows interconnectivity among all operators irrespective of technology. Once teledensity is increased via liberalization, evidence from other countries shows that the GOB s revenue will increase, and any loss of jobs of the current BTTB personnel will be more 2 See draft World Bank Policy Brief #2, pp World Bank draft Policy Brief #2, p.8; Policy Brief # 4, pp.8-9; and Policy Brief #3, p.2.

3 3 than compensated by new jobs created within the emerging telecommunication industry. BTTB personnel will be in great demand in the industry. Unlike in other sectors, telecommunications reform creates jobs immediately after privatization/deregulation. 3. Reforming the Financial Sector A number of surveys have cited limited access to finance is as the single most critical problem faced by the private sector in Bangladesh. The fact that more than 35% of the portfolio of the banking sector is classified (non-performing) is a good indicator of the sorry state of the sector. The weaknesses in the financial system combine to limit entrepreneurs access to credit and hinder efforts to create employment. As stated in the World Bank Policy Brief #5 (p.1), the weak and inefficient financial system is limiting access to credit, raising interest rates, and acting as a serious drag on economic growth. Increasing the soundness of the financial sector is therefore a priority for both growth and poverty reduction". From entrepreneurs' point of view, poor governance within the banks and unrealistic collateral requirements limit their access to credit. In principle, the LCG-PSD concurs with the diagnosis in the Policy Brief that three main problems of the financial sector of Bangladesh are a weak central bank, poor governance (including inadequate financial disclosure), and a deficient legal framework. The Sub-group also generally agrees with the recommendations of the World Bank paper, many of which are aimed at improving governance and accountability within the sector. 4. Privatization of State-Owned Enterprises The LCG-PSD as a general pr inciple advocates that the GOB should be out of the business of providing goods and services that can be efficiently produced by the private sector. State -owned enterprises (SOEs) were acquired through nationalization policy, as well as taking over abandoned enterprises in the aftermath of the war of independence. These enterprises managed by public sector agencies range from public utilities to manufacturing, and typically fall under the scope of private ownership and management. Most of the enterprises are loss-making, and, as is well documented in Policy Brief #3, are a huge drag on the national economy. They often crowd out private investment, reduce overall industry productivity and competitiveness, and represent a drain on increasingly scarce fiscal resources that the country can ill afford. They are also a drag on the nationalized commercial banks, which are used by the GOB to keep these SOEs afloat. The LCG-PSD would like to see GOB privatize all SOEs in a transparent manner. Intermediate steps such as a clear-cut road map for improving performance should be instituted as appropriate. 5. Performance of Ports This issue was raised at the Bangladesh Development Forum of 2000, but unfortunately remains valid today. The information below is largely excerpted from Annex 17 of the Forum 2000 proceedings. Efficient air and seaports are essential infrastructure for international trade. Bangladesh's international markets in manufacturing and agriculture are greatly constrained by limitations at the Chittagong Port and Dhaka airport. Looking forward, even a modest growth in international trade will result in a major increase in demand for port services. Chittagong Port handles nearly 90% of all sea-borne trade, highlighting its importance to the economy of Bangladesh. Major issues are port congestion, labor problems and pollution management. Port congestion is largely a factor of the physical constraints of the present facilities, including inadequate container-handling capacity, which increases time in port and costs. Strikes by the many trade unions at the Chittagong Port continue to interfere with operations. To set the stage for improved export performance, high priority should be given to bringing large-scale new

4 4 investments to the port, tackling the difficult institutional and labor issues, and improving port operations--including customs services. Dhaka s Zia International Airport serves as Bangladesh s window to the world for international travelers, as well as the national air hub and as an important air cargo facility. Air cargo is very important for Bangladeshi thrust sectors such as high-value agribusiness and ICT industries. Overall cargo capacity is inadequate with Bangladesh Biman Airlines. Airport off-loading and cooling facilities need to be enhanced. Lowering the costs of operations at the airport remains critical for improving competitiveness.

5 5 Annex A: Terms and conditions for ISP License GOVERNMENT OF BANGLADESH MINISTRY OF POST AND TELECOM No: PT/Sec-5/ISP LICENCE FOR PROVIDING INTERNET SERVICE (Excluding voice Communication) 1. For any relocation of the VSAT installation and internet facilities from its existing location to any other location within the same multi-exchange area of BTTB, prior permission of MOPT will have be taken and a shifting fee/charge for the purpose will have to paid to MOPT. The shifting charge will be an amount equivalent to US $ 1,000 in Taka at the exchange rate prevailing at that time. 2. Separate License will have be taken for providing Internet Service in a new location other than the same multi-exchange area of BTTB. 3. The ISP shall pay an amount equivalent to US $3,500 in Taka as yearly License fee to MOPT. The amount will be payable as Demand Draft or Pay Order in the name of Secretary, MOPT. 4. By obtaining this License the ISP may take VSAT connection of any bandwidth from the enlisted VSAT Providers of MOPT. 5. The ISP will inform the MOPT about the speed of the VSAT connection and will pay a yearly fee for VSAT speed, The yearly fee for VSAT speed of 64 KBPS will be Taka 50,000.00, for 128 will Taka 100,000.00, 256 will be Taka 200,000.00, 512 will be 300, and for 01 MBPS and higher will be 4,00, This will be in addition to the yearly License fee of the US $ 3, as mentioned in condition above. 6. The ISP will not sub-lease its facilities to any one. However, the bandwidth of VSAT can be subleased only with prior approval of MOPT and subject to the following conditions: A. Prior permission from the MOPT will have to taken for the sublease. B. A fee of US $ 2,000 or an amount equivalent in BD Taka at the prevailing rate will have to be paid at the time of application for the sub-lease. C. With the renewal of the ISP License, permission will also have to be renewed for the sublease and a fee of US $ will have to be paid. D. The ISP will have to submit to MOPT, the list of equipment and other facilities used by the sub-leasee before leasing out the bandwidth of the VSAT or any other information as may be requirement. The ISP will also provide to the MOPT the detailed particulars of the sub-lessee like address of owners, users, etc. E. The MOPT will have the right to inspect the facilities of the sub-lessee at any time. F. The sub-leasee will under no circumstance further sublease the subleased facilities to anyone. Any violation of this condition will be result in the immediate cancellation of the ISP license. 7. The ISP will submit a statement of the VSAT equipment, Internet server and software to be used in its operation and take necessary clearance/no objection certificate from MOPT for the equipment to be

6 6 imported. The ISP will submit a quarterly report on its operation, and shall also submit upon request by the MOPT, such information relating to the ISP as may be required. 8. The MOPT or its authorized representatives shall have free access to the ISP operation center and other facilities used by the ISP. Subscriber's facility may also be inspected by MOPT or its authorized representatives at any time. The MOPT or its authorized representatives will also have the right to monitor all Internet facilities including server and software. 9. The ISP will under no circumstances allow voice communication in its Internet Service as provided for under this License. If the ISP illegally allows voice communication in its Internet Service, the ISP License will be cancelled immediately and all equipment of the ISP will be confiscated. The ISP will also pay a penalty as may be fixed by MOPT and the penalty will not be less than 5,00, (Taka five hundred thousand). 10. No service/activity (particularly voice transmission) other than those authorized by the License will be allowed and any such unauthorized Services. 11. The ISP will not provide Internet Service to any commercial organization engaged in the business of public phone or fax. 12. The ISP will not provide Internet Service through radio link without the prior approval of the MOPT. 13. For Operation of Internet Service provided under this License, the ISP will use the facilities of Bangladesh Telegraph & Telephone & Telephone Board (BTTB) only and not that of any other telecom operator. 14. The ISP will make a separate Operational Agreement with Bangladesh Telegraph and Telephone Board for telephone lines/e-1 connection to be used in its internet Service arrangement within 3 (three) weeks from the date of issue of this License and will inform the MOPT of having done so within 7 (seven) days of signing of the Operational Agreement with BTTB. 15. The ISP will have to take E-1 connection or dedicated internet connection for its Internet Service arrangement as and when BTTB can provide the same. The ISP will then have to bear the expenses for this purpose. The number of telephones or E-1 connection of the ISP will be directly proportional to the VSAT speed. For each 64 KBPS speed, the number of E-1 will be 1 (one) or 10 (ten) number of telephones without outgoing facilities. 16. This License will be valid for a period of 01 year only from the date mentioned in condition 15 above. 17. This License will be valid for a period of 1 year only from 05/10/2001. The validity of the License will be automatically expiring after the aforesaid date. Before expiry the License will have to be renewed by the ISP by paying the yearly License and other fees. The validity of this License will expire and the License will stand automatically cancelled, if it is not renewed before the expiry date. All facilities of BTTB provided under this License to the ISP will then automatically be discontinued by BTTB. No further notice in this regard will be given by MOPT or BTTB to the ISP. 18. The renewal of the License wills neither be automatic nor be a matter of right. The MOPT will reserve the right to issue as well as the right to renew the License. 19. For every renewal of the License after the expiry date, the ISP will have to satisfy the MOPT, in writing the reasons for failure of renewal of the License in time. The ISP will also pay penalty of Taka 1000 per day of delay in renewal up to 15 days and Taka 2000 per day of delay in renewal after 15 days. 20. The MOPT may change any condition of the License as and when necessary without assigning any reasons thereof. 21. The MOPT will have the right to cancel this License without assigning any reason thereof.

Strengthening Telecommunications

Discussion Draft Strengthening Telecommunications There is need for significant reform in the telecommunications sector in the Philippines, despite the progress that has been made over recent years. The