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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.
Centre for Policy Dialogue (CPD)
Fostering Trade through Private-Public Dialogue
Expert Meeting on Regional Integration in Asia
New Delhi, India
28-29 March 2007
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.
FDI inflow in Bangladesh from South Asian Sources
Source: Compiled from enterprise survey conducted by Statistics Department, Bangladesh Bank.
FDI Inflow 2006: Distribution by sectors
Source: Compiled from Board of Investment (BOI).
Major Intra-Regional Investments in Bangladesh (Implemented/Under Implementation)
Source: Board of Investment
FDI Inflow in EPZs of Bangladesh: Distribution by Sources
Source: Compiled from BEPZA
Cumulative South Asian FDI Inflow in EPZs: Distribution by Sectors (as on Jan 07)
Note: Figures in parenthesis indicates percentage share of South Asian total
FDI Inflow: Distribution of Sanctioned Unitsin EPZby Sources
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.
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.
Price of gas for steel will be paid in local currency.
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.
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 considered to be environmentally unsustainable in Bangladesh.
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.
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.
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.
Apart from the general problems related to investment in other regions, the obstacles with the South Asian countries also contain some distinguishing features.
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.
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.
Compliance with SAFTA
The objective of creation of SAFTA is to “strengthen intra-SAARC 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.
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.
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.
Source: UNCTAD 2006
Implementation of the Regional Trade Agreements in South Asia can significantly give rise to intra-regional 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 non-tariff barriers) must be sought under SAFTA.
The South Asian countries are yet to build on their infrastructural facilities in order to operationalize intra-regional 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.
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.
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.