BEZA’s fiscal incentives to attract foreign investment in economic zones: Challenges

The Bangladesh Economic Zones Authority (BEZA) has recently submitted to the Prime Minister for approval a plan for providing generous fiscal incentives to attract foreign direct investment (FDI) in special economic zones (SEZs) in Bangladesh (Daily Star, 27 April 2020). International economic climate in the post-Covid-19 is likely to be localised/nationalised rather than globalised, marked by nationalist lobbying pressure and cut-throat economic diplomacy. In this climate a forward-looking enterprising plan for FDI in SEZs is a welcoming initiative. However, the proposed fiscal incentives appear to be a new race to the bottom – a strategy that has not succeeded in the past and there is guarantee that it will succeed in the aftermath of the Covid-19. The global FDI market is fiercely competitive in which states compete against each other to attract, not police, FDIs. Liberalised entry screening and deregulated operation of FDIs with attractive fiscal incentives often shape the FDI law and policy in most states. The BEZA plan mirrors the existing neo-liberal FDI policy and is likely to face some challenges. 

BEZA proposes to allow foreign investors to bring used machineries to establish factories in SEZs. In this age of rapid development of high-tech based machineries and constantly evolving technology, production and/or processing processes have radically changed with increasingly sophisticated product at a very competitive cost of production. In international trade, one of the major barriers faced by many third world countries is their uncompetitive and qualitatively inferior products and/or processing produced by their old machineries and outdated technology. The lion share of their comparative advantage due to cheap labour in sweatshop conditions is eaten by the comparatively higher cost of production. This explains why most host states now require modern machineries and cutting-edge technology transfer as one of the criteria of 'national economic benefit test' in their FDI entry screening. Depreciated, used, and second-hand machineries in SEZs may not be producing and/or processing efficiently in a cost-effective manner in the long run. Foreign investors will be able to establish factories at a cheaper cost and make profit not so much from cost-efficient production but from cheap labourers who will bear the full brunt by way of lower wages and working conditions to keep inefficient machineries somewhat operational to save their jobs. Bangladesh may well be deprived of new machineries and transfer of new technology to its economy. 

By way of fiscal incentives, BEZA proposes to offer 100% corporate tax waiver for 10 years, total VAT waiver on land leasing for factories, and 50% cost for central effluent treatment plants in SEZs. Fiscal incentives to attract FDIs are already provided in Income Tax Ordinance 1984, Export Processing Zones Act 1980, Industrial Policy Act 2005, Economic Zones Act 2010, and National Industrial Policies. FDI incentives in Bangladesh often suffer from a lack of cost-benefit analysis to prevent revenue losses and capital control risks. Tax holidays have been a major cause of consecutive revenue losses as a result of their rampant abuses by corporations taking advantage of long duration, lacklustre control, and administrative corruption. The existence of these incentives, particularly various direct and indirect tax incentives, leads to huge tax expenditure often outweighing the expected revenue. This is inevitable in BEZA plan, which must provide a mechanism to guard against any corporate abuses of incentives. A review and monitoring body to oversee fiscal incentives, expenditure, and revenue may be rewarding to produce periodic reports for public scrutiny in parliament.

Serving national interest must be paramount in allowing FDIs for SEZs. To avoid arbitrary and non-transparent decision-making, BEZA should develop a screening and approval manual with a list of 'national interest test' criteria in line with the directives of Foreign Private Investment (Promotion and Protection) Act 1980 (s3). These criteria should be made public, readily available to prospective investors, and used to determine national net economic benefits and policy conformity. It is important to determine in advance whether a proposed FDI (a) is new or borrowed capital from banks in Bangladesh under FDI concessionary loans, (b) transfers new technology to the Bangladesh economy, (c) generates new employment and local capacity-building, (d) offers reasonable revenue-earnings, (e) has the potential for trade in local raw materials and exports, (f) will repatriate or reinvest FDI earnings in Bangladesh, and (g)  complies with the Constitution and laws/policies concerning the environment, global warming, occupational health & safety, taxation, labour, security, defence, heritage, and natural resource exploitation. FDIs inimical to national interest must not be allowed to enter and operate.

FDIs for SEZs must be compliant with the sustainable development goal of Bangladesh. The liberalised FDI policy has failed to be a catalyst for sustainable development in many third world countries. This failure led the UN Secretary-General to caution that FDI 'growth did not translate into an equivalent expansion in productive capacity in [host] countries' and urged states to follow the Addis Ababa Action Agenda 2015 'for reorienting FDI towards sustainable development' (2016 World Investment Report). The pre-eminence of a participatory and inclusive sustainable development is also reiterated in The World Investment Report 2019 on 'special economic zones'. It is not apparent in the BEZA incentive plan as to how it would contribute to achieve the Sustainable Development Goals of Bangladesh in a participatory and inclusive manner. A sustainable development focused regulatory regime for incoming FDIs in SEZs is necessary. A blankly incentivised increase in inward FDI flow would not necessarily protect the sustainable developmental goal. Regulation towards maximising net national economic benefit and incentivised liberalisation of FDIs for SEZs must co-exist pragmatically for balancing the competing interests of foreign investors and Bangladesh.

Bangladesh is a member of the WTO. The BEZA plan needs to consider the obligations of Bangladesh under the WTO Agreement on Trade Related Investment Measures (TRIMs) which imposes restrictions on trade in goods and services. Bangladesh may be prevented from imposing conditions requiring FDIs in SEZs to export their products, buy raw materials from local markets, and employ local unskilled, semi-skilled labourers, and skilled technicians, which would be considered discriminatory barriers to FDIs in violation of the TRIMs Agreement.

The BEZA plan talks about increased employment opportunities for Bangladeshis but does not explain how it will deal with the restrictions under the WTO TRIMs Agreement. This challenge needs to be addressed in advance to protect its interest in any potential dispute. BEZA must not loose sight on the ongoing negotiations for a multilateral investment facilitation agreement within the WTO, which may also impact on its plan. Bangladesh has not been very successful in investor-state dispute settlements (ISDS). Its performance in international arbitrations, notably the Niko and Saipem, has not been reviewed yet to learn lessons to improve performance in future arbitrations. BEZA must guard against potential compensation liability should any dispute emerge in the future. Opting for domestic ISDS and international arbitration as a last resort after exhausting domestic remedies should be preferred.

The open policies and generous incentives provided under the existing FDI laws and policies of Bangladesh coupled with its cheap labour are widely recognised. Additional incentives may not be the real barriers to inbound FDI flow in SEZs. It is some internal impediments and non-commercial risks that often restrain foreign investors and addressing these impediments and risks would perhaps be more rewarding than aggressive incentives to attract FDIs for SEZs.

The writer is Professor of Law and Director, Higher Degree Research (PhD & M Phil), Macquarie University, Sydney, Australia.