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PROJECT INFORMATION DOCUMENT (PID)
NEGOTIATIONS STAGE
Report No.: AB580
Project Name
Region
Sector
Project ID
Borrower(s)
Implementing Agency
Environment Category
Safeguard Classification
Date PID Prepared
Date of Appraisal
Authorization
Date of Board Approval
Enterprise Growth & Bank Modernization
SOUTH ASIA
Other industry (25%);Banking (25%);General finance sector
(25%);Agro-industry (25%)
P081969
BANGLADESH MINISTRY OF FINANCE
Finance Division
Ministry of Finance
Building No 6
Bangladesh Secretariat
Bangladesh
Dhaka 1000
Tel: 880-2-8617450
[email protected]
[ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined)
[ ] S1 [X] S2 [ ] S3 [ ] SF [ ] TBD (to be determined)
December 29, 2003
December 15, 2003
June 08, 2004
1. Country and Sector Background
Country Background: Bangladesh continues its fight against poverty by maintaining a
satisfactory overall macroeconomic framework that has steadily improved over the past decade –
with only a moderate setback following the floods of 1998. Annual real GDP growth has
averaged 5 percent since FY95. The Central government deficit has remained within a range of
4 to 5 percent of GDP (3.5 percent on 6/30/03) although the overall fiscal deficit, including
consolidated SOE losses, is slightly higher. These deficit levels appear to be sustainable given
that GDP is growing at 5 percent. Inflation, which has averaged around 6 percent a year since
FY95, fell to under 5.2 percent in FY03.
Although Bangladesh’s macroeconomic fundamentals look sound, vulnerabilities exist. Inflation
has picked up owing mainly to higher import prices. Also starting from 2005 the lifting of
Multi-Fiber Agreement (MFA)1 quotas is expected to pose significant risks to the economic
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During the past 40 years, world textile trade has been in large part governed by the Multi Fiber Agreement (MFA)
and its predecessor agreements. However, starting in 2005, in accordance with World Trade Organization (WTO)
obligations and the Agreement on Textile and Clothing (ATC), the restrictions imposed by these previous
agreements must finally end. The new global trade rules that WTO members agreed to follow, and specifically, the
elimination of quotas in the textile/clothing industry are certainly going to have important implications for world
textile and cotton trade. (EFFECTS OF MFA QUOTA ELIMINATION: DECLINING U.S. COTTON EXPORTS TO MEXICO, Jose E. Lopez
and Jaime E. Malaga, Texas Tech University, Lubbock, TX)
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outlook of the country. The IMF forecast that the country’s trade balance will deteriorate from a
negative $3.6 billion in 2004/05 to a negative $7.7 billion in 2006/07 in the post-MFA era
without policy adjustment.
Financial Sector Background. The government has been maintaining financial sector reforms
as a priority in its economic reform program. Therefore, in spite of serious political opposition
and resistance from vested interests it has continued to implement measures, albeit at a slow
pace, to bring about dynamism and efficiency in the banking sector in Bangladesh. The
strengthening of Bangladesh Bank (BB) is viewed as a pre-requisite for ensuring a sound,
efficient and competitive banking sector. Moreover, The Finance Division of the Government
has set up a Working Group headed by a Deputy Governor and including members from the
Finance and Planning Divisions and the Ministry of Law to oversee and monitor the NCB
reforms. Meanwhile, the government, as part of its reform strategy, has taken measures to
contain losses in the NCBs, curb the flows of new bad loans and strengthen management of
NCBs. All the NCBs were required in 2003 to enter into a Memorandum of Understanding with
the BB under which net new lending by the NCBs has been limited to 5 percent of their net loan
portfolios at the end of FY03 and must be directed only to credit worthy borrowers. The
Government to seek IDA support for its NCB reform efforts, with the ultimate objective of
reducing public sector ownership of the financial sector assets.
SOE Sector Background: One of the legacies that have continued since Bangladesh’s
independence is the nationalization of the industrial and financial sectors. However, the result of
such sweeping nationalization has not been good, and the SOE’s have proven to be costly for the
entire economy and their performance has been consistently poor, contributing less than 1
percent of GDP in FY2000. Net SOE losses averaged $160 million (Tk 9 billion) annually
during FY91-02, reaching a record level of US$ 440 million (Tk 25 billion) in FY01. The present
Government is keen to reduce the state ownership of banking and manufacturing sector assets.
In line with this changed policy, the Government closed down the largest jute mill in the world –
the loss-making Adamjee Jute Mills Ltd. – and retired its 25,700 workers. This program will
continue with the help of the financial and technical support proposed under this project.
State of Small Enterprise development. While Bangladesh has a well developed micro finance
and (developing) micro enterprise industry – small and medium scale enterprises (SMEs) are not
well covered by financial services and business development services (BDS). This is an
important area for support as this is an employment generating class of businesses which can
assist the Government in achieving its more immediate employment and growth objectives. The
Bangladesh Investment Climate Assessment (ICA) and a recent survey on micro, small, and
medium enterprises (MSMEs) led by DFID shows that access to finance is a major constraint
faced by this sector. The near absence of formal banking sector in MSME lending is an
important issue that needs to be addressed.
The Government as part of its strategy has been taking steps to reduce the fiscal hemorrhage by
closing/ privatizing the SOEs and bring reforms in the financial sector by reforming the NCBs.
The Government has also been making efforts to increase employment opportunities through
development of the SME sector. All these actions are critical for private sector development, a
cornerstone of the country’s poverty reduction strategy.
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Key issues that constrain achievement of desired results in the sector.
Privatization. Privatization efforts till 2001 had been discouraging. The Privatization
Commission (PC) has since been trying to sell off enterprises on its list through a tendering
process and has started to advertise these enterprises for sale without their long-term liabilities.
Despite these efforts, progress remains slow and the results are limited. Pace of privatization
also gets stalled because of litigation in the courts. The pace of privatization has to get
accelerated.
Negative Impact from Perception of Job loss and De-industrialization resulting from
Closures. Given the poor response to its privatization effort, the Government has also decided to
take more visible and bolder steps to close down some of the bigger and more difficult loss
making manufacturing SOEs and retiring off workers through its Voluntary Separation Scheme
(VRS) program. While the VRS compensates the retiring worker, the closure of the SOEs has,
however, resulted in substantial job losses within a short period of time. To sustain the reform
program it will be important to take steps that will help generate employment over the short to
medium term through scaling up growth in SMEs and also converting some of the closed assets
into private enterprises.
Growth of Smaller SMEs. Faster employment growth could best take place by scaling up the
growth of the SMEs and also converting some of the closed assets of the SOEs into private
enterprises that meet present day market demand. The smaller SMEs are perceived as risky by
the banks and hence they lack both access to finance and to business development services
(BDS). This is a market failure which will require SME focussed banks that would be ready to
assume such risks and have operating procedures conducive to such lending.
The Nationalized Commercial Banks (NCBs). The poor state of the NCBs and their negative
impact on the financial sector as a whole has caused the Government to push for reforms in these
institutions. The political economy of moving forward with banking reform will, nonetheless,
remain an important challenge for the policy makers in Government. This project will help with
this reform process.
Sector issues to be addressed by the project and strategic choices:
This project will support the Government’s policy of reducing, and eliminating over time, its
ownership of assets in the real and financial sectors of the economy. Such a policy, which will
ultimately help in reducing the fiscal deficit through reduction and elimination of losses, will
also foster private sector development and growth through more productive use of SOE assets. It
will also lead to changes in the Government’s policy on privatization and closure of SOEs,
ensuring a proper safety net for retired employees, and the policy on NCBs. The institutional
reforms supported under the project relate to the strengthening of the Privatization Commission
(PC), the Board of Investment (BOI), the Bangladesh Export Processing Zones Authority
(BEPZA), and the Bangladesh Small and Cottage Industries Corporation (BSCIC), which are all
involved in the actual implementation of the new policy.
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These will be achieved through the following instruments:
Privatization and Closures. There is broad-based support for the GOB to urgently downsize its
SOE sector, through privatization and closure of loss-making units. After the present
Government came to power in October 2001, it amended the privatization policy in an effort to
make the PC more dynamic. In order to remove various remaining bottlenecks the Government
is now reviewing a new regulation proposed by the PC – a salient feature of which is a provision
for liquidation when repeated bidding does not result in a satisfactory response.
Voluntary Separation Scheme (VRS). Given the poor response to its privatization effort, the
Government has also decided to take more visible and bolder steps to close down some of the
bigger and more difficult loss making SOEs and retire off workers under its VRS program. The
closures had been preceded by a transparent and efficient pay-off to workers under a well
established and accepted VRS program. However, this requires additional support to the
workers in the form of retrenchment counseling and retraining. It is estimated that it takes only
three years to repay the costs of these VRS schemes – when measured against the on going
losses which are incurred by keeping these SOE's operational
Retraining and Counseling of Retired Workers. To overcome negative impacts from VRS it
is important to have retraining and counseling for the retired workers, so that they can adjust
themselves in a more productive environment. To help with this process it is important
undertake social tracking of the workers. DFID, as co-financier of this project, has already
undertaken a tracking survey of workers that have taken VRS and will continue to provide
resources for these activities.
Government efforts to convert closed SOEs into productive assets through refurbishment
of some strategically determined remaining assets of loss making SOE’s. For a long time,
prime sites like the land at Chittagong Steel Mills (about 200 acres), Adamjee Jute Mills (310
acres) has remained unutilized. Quickly re-establishing key assets such as these for productive
purposes will be key in helping the Government meet its objectives of increased growth and
employment creation. The Government has now decided to convert Chittagong Steel Mills
(CSM) into an Export Processing Zone (EPZ) and has handed this facility over to the BEPZA. It
has also decided to convert Adamjee Jute Mills, Chittagong Chemical Complex, and the Khulna
Newsprint Mill premises into Industrial Parks, and steps are underway for BSCIC to implement
this.
Enterprise Growth (with an emphasis on SME Development). To sustain the reform program
it will be important to take steps that will help generate employment over the short to medium
term, especially through scaling up growth in the SME sector. In Bangladesh there are financial
institutions that are already lending to this group of enterprises. Three such institutions are
BRAC Bank, BASIC Bank, and MIDAS financing. There are other financial institutions that
could also be eligible. This market will have to be activated so that more of these enterprises
come to the formal financial institutions.
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Institutional Strengthening for privatization and growth acceleration. For sustaining
growth there will be support for capacity building of the PC, BOI, BEPZA, and BSCIC.
NCB Reforms. A program to address the problems facing NCBs has now been identified and is
being initiated under this project. Moreover, the Government has given its approval for the
appointment of a sales advisor to privatize the Rupali Bank, which accounts for 6 percent of total
banking system assets. The government has also agreed to seek management support for Agrani
Bank, Sonali Bank and Janata Bank.
2. Objectives
Project development objective: The objectives of the project are: (i) to trigger employment
generation through private sector enterprise growth and urgently needed reforms within the State
Owned Enterprises (SOEs)– as part of a wider reform of rolling back state ownership and control
within the economy; and (ii) to help Bangladesh implement its banking sector reform program
aimed at achieving a competitive private banking system by a staged withdrawal through
corporatization leading to divestment of a substantial shareholding in Rupali, Agrani, and Janata,
and to divestment of a minority shareholding in Sonali.
3. Rationale for Bank Involvement
The proposed operation supports the Government’s program of reducing its involvement in the
real and financial sectors of the economy. The Government’s initiative was primarily prompted
by its plan to stem continuing losses in the state-owned sectors after realizing the beneficial
impact of Adamjee closure on the fiscal budget. The ease with which the Adamjee closure was
handled by the Government encouraged it to expand the program quickly to maintain the
momentum. However, to forestall the possibility of a slowdown in implementation due to a lack
of: fiscal resources, IDA support is justified for financing: (i) technical know-how on
refurbishment and conversion of physical assets to more productive uses; (ii) expertise to counter
public perception of unemployment and de-industrialization; and (iii) resources to restructure
and privatize the NCBs,
This project is the second phase of a larger SOE reform effort that was initially supported under
the 2003 Development Support Credit (DSC). Assuming on-going Government commitment to
the reforms, a third phase of SOE privatization/liquidation would be supported under DSC II.
Under all three operations, over 100 manufacturing enterprises would be removed from the
public sector and over 100,000 workers retired under VRS schemes. It is therefore based upon a
medium-term program of institution building and institutional reform – whose sustainability will
be supported by accompanying specific investments.
The enterprise growth component of the project will address the constraining factor of access to
finance for the “missing middle” -- those between micro enterprises and the larger of the
MSMEs. This need is reflected in the Investment Climate Assessment (ICA) as well as in
DFID’s survey on MSMEs. The 2002 Bank/Fund FSAP also highlighted the embryonic state of
the non-bank financial system, which amounts to less than 6 percent of GDP, and the deficient
legal and institutional framework that hinder the system’s development.
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4. Description
The proposed project has seven main sub-components – in three main areas of support for
Enterprise Growth and Bank Modernization. These include (a) an Enterprise Growth Support
component; (b) a longer term program of adjustment in support of sustained economic growth;
and (c) a program of banking reform.
By Component:
Enterprise Growth Support Component
(a) Small Enterprise Development. This component seeks to support the development of the
small enterprise sector by addressing the constrains that hinder access to finance by this sector
of entrepreneurs. There are clearly other constraints to small enterprise development including
the legal framework, availability of skilled manpower, access to uninterrupted power and
business development services. However, this project focuses on what one recent survey
identifies as the top constraint - access to finance - while providing linkages to other Government
and donor interventions that address the other impediments to small enterprise development. It
was decided during the project preparation stage that it would be best to establish a Small
Enterprise Fund (SEF) at the Bangladesh Bank. The SEF will be a refinancing facility where
funds will be on-lent to SME- focused banks to help scale up their small enterprise portfolio.
(b) Refurbishment of some Strategic Remaining Assets of Loss Making SOE’s. This will
help in converting some of the key closed assets into productive uses will be crucially important
in meeting the Government’s objectives of increased investment and employment creation over
the short to medium term. This component will cover costs of refurbishment of these assets.
Four prominent sites – Adamjee Jute Mills, Chittagong Steel Mills, Chittagong Chemical
Complex, and Khulna Newsprint Mill have been identified for support.
(c) Institutional Strengthening. The project supports capacity building within the PC, the
BOI, the BEPZA, and the BSCIC.
The Longer Term Program of Adjustment in Support of Sustained Economic Growth.
(d)
Support to Voluntary Retirement Schemes. Is designed to cover the VRS costs to the
Government of a second tranche of about 95 enterprises slated for closure/ privatization over
2002-03 to 2007-08. The proposed project will cover the retrenchment costs of workers .
(e)
Retraining and Counseling Services for Retired Staff of SOEs. Undertaking social
tracking and providing adequate counseling and re-training support to retired workers are also
important social priorities. This part of the project will be funded by DFID. DFID has also
undertaken exit surveys of retired workers from two Jute Mills, and will continue to fund
tracking surveys in future under this project. To ensure that the retraining schemes and
counseling services have the desired impact, the proposed project intends to apply innovative
methods to support transitioning these workers into alternative jobs or self employment.
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A Program of Banking Reform
(f)
Resolution of the Problems of the Nationalized Commercial Banks (NCB’s). The
proposed project is designed to support the government’s initial reforms envisaged in these
Nationalized Commercial Banks. These include: the privatization of Rupali Bank; hiring an
external management team at Agrani Bank to contain losses; and the introduction of
management experts at Sonali and Janata Banks to improve operational performance. The “endgame” for Rupali, Agrani, and Janata is a fundamental change in their existing governance
arrangements through the implementation of the Resolution Plans – and their movement out of
the public sector. In the case of Sonali, the “end-game” is to bring it to the point where a
minority shareholding can be divested over the medium-term.
Additional Support
(g)
Public Awareness, Monitoring and Evaluation. The Government will need to develop
an improved information campaign to convince the public of the overall benefits of its ongoing
reform efforts. In addition, this component of the project will support monitoring and evaluation
of the costs and benefits of the reform agenda – including the, already commenced, social
tracking exercise, so as to be able to adjust and adapt the program appropriately in response to
overall indications of the program’s direction.
5. Financing
Source:
BORROWER/RECIPIENT
INTERNATIONAL DEVELOPMENT ASSOCIATION
UK: BRITISH DEPARTMENT FOR INTERNATIONAL
DEVELOPMENT (DFID)
($m.)
142.00
250.00
88.00
Total
480.00
6. Implementation
The Bank will work closely with the International Monetary Fund and DFID in the
implementation of the various components of the project. DFID will also be a co-financier
(GBP50.0 million) of the proposed operation.
The Project will be managed and supervised by the Finance Division. However, the TA
components relevant to PC, BOI, BEPZA, and BSCIC will be executed by those agencies –
under the general oversight of the Finance Division. The NCB reforms will be jointly supervised
by Bangladesh bank and the Finance Division.
7. Sustainability
The current government is strongly committed to SOE reform as demonstrated by the bold steps
that it has already taken without up-front assistance from the donor community. It is also
committed to the NCB reform under the IMF’s Poverty Reduction and Growth Facility (PRGF)
and has spelt out its financial policies and structural reform program in its Memorandum of
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Economic and Financial Policies. There is every reason to believe that it will continue to support
the SOE privatization program and the NCB reform agenda – as these have largely been
internalized as Government of Bangladesh policies. For sustainability reasons it will be
important to ensure that a political backlash is not created as SOEs close.
8. Lessons Learned from Past Operations in the Country/Sector.
The following lessons learned from previous projects have been reflected in the project design:
a) Sustainable banking sector reforms require that the autonomy and technical capability
of the central bank be enhanced.
b) Sequencing is important for the success of reforms.
c) Legal framework reforms are critical to ensure successful implementation.
d) Forcing reforms from outside is not sustainable.
e) Re-capitalizing commercial banks without fundamental reforms in ownership and
governance structures is unlikely to be sustainable.
f) Project components that are pre-designed and are already under implementation have
a greater chance of success.
g) Lessons from the retraining program under the Jute Sector Adjustment Credit are
helping in the design of the retraining and counseling component.
9. Contact point
Contact: G. M. Khurshid Alam
Title: Sr. PSD Specialist
Email: [email protected]
Or
Shamsuddin Ahmad
Title: Sr. Financial Sector Specialist
Email: [email protected]
Tel: (880-2) 966-9301
Fax: (880-2) 861-3220
10. For more information contact:
The InfoShop
The World Bank
1818 H Street, NW
Washington, D.C. 20433
Telephone: (202) 458-5454
Fax: (202) 522-1500
Web: http://www.worldbank.org/infoshop
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