Haque, AKM Masudul --- "Privatisation in Bangladesh; A Case of Placing the Cart Before the Horse" [2002] UWSLawRw 6; (2002) 6(1) University of Western Sydney Law Review 124

This paper aims to discuss the process of privatisation in Bangladesh, its imperatives and the importance of legal frameworks to the process. The analysis will involve reference to historical, political, social and economic factors that have contributed to the emergence of public enterprises and the later privatisation of industries. It examines the demands government makes upon the constitutional and legal systems in seeking to achieve its objectives, how these systems respond and problems created for the government by their responses. It also examines the continuing role of government in issues of control and accountability.

The paper argues that privatisation has not achieved desirable results in Bangladesh, because a conscious legal and institutional framework supportive of privatisation is lacking. The laws and judicial system remain very poorly adapted to facilitating the effective operation of private business, including monitoring, regulation and speedy redress of wrong doings and administrative incompetence. Privatisation, like nationalisation, remains a policy imposed by the executive without public debate or the participation of the parliament.

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Privatisation[1] is an expression of both political values and economic principles. Politically it emphasises private ownership and the fostering of an entrepreneurial culture. Economically, privatisation is often associated with improvements in competitiveness and efficiency of industries, the introduction of more effective regulatory structures, and a significant source of revenue for the state[2] . Proponents of privatisation argue that in addition to its tangible economic benefits, privatisation redefines the role of the state and constraints it to a supporter of the market. It is this more than anything else which represents the radical character of privatisation[3] .

The ‘New Right’[4] has championed privatisation as definitive refutation of socialist theory. Wiltshire writes, ‘It is almost as if privatisation is seen as the result of the fact as well as the proof that the socialists were wrong and if action can be taken to prevent the reappearance of their doctrines and practices so much the better’[5] . In line with these ideas the World Bank and other international financial agencies are providing technical support and financial assistance to accelerate the process of privatisation in various countries.

A review of the annual reports of various public corporations in Bangladesh and other developing countries reveals that most public enterprises[6] are not making expected profits[7] . According to the World Bank (IBRD) the problem is economic inefficiency, leading to a general financial burden which retards development. Hence, increasingly, the call is for ‘privatisation’, on the presumption that subjecting public enterprises to the discipline of the market, will per se, make them more efficient[8] .

In the last twenty five years, Bangladesh has privatised over a thousand public enterprises. While there has been a reasonable amount of published research[9] on the performance of post privatised enterprises, some such research shows clear indications of ideological bias and most has failed to take proper account of the legal and regulatory framework of privatisation[10] . It is difficult to obtain useful comparable data from the private sector and public sector data, though reasonably comprehensive, is also of doubtful reliability. Sometimes there are contradictory statistics produced by various government agencies and it is almost impossible to compare performance of enterprises both before and after privatisation.

It seems that the implications of privatisation have rarely been thought through, especially in relation to standards of services, prices, costs, cross-subsidisation, competitiveness, safety, social obligations, and many other components of 'public interest'. Implications for the private and public sectors and the importance of designing democratic institutions and reforming the legal system to match the free market economy have largely been neglected resulting in 'dysfunctional privatisation'[11] in Bangladesh.

Nationalisation in Bangladesh and dominance of public enterprises

The following discussion, though based on historical material, will help explain the public policy dynamics of nationalisation and privatisation and the role of law.

In Bangladesh, as in most developing countries, the state has played a leading role in development, especially in the industrial sector. During British rule (1757-1947) public enterprises had largely been confined to providing public and quasi-public goods in the form of communications, transportation, and limited banking facilities and certain defence establishments[12] . During the Pakistani rule (August 1947 - December 1971), virtually all developmental activities were carried on, directly or indirectly, by the state. Economic, including rural development, was heavily subsidised from the state budget. Public enterprises were created in the development of power, gas, water supply, communications, drainage[13] and in the industrial and financial sectors.

The prevailing ideology was that the state should take the lead where private entrepreneurs were incapable or unwilling to take the risk, with publicly developed enterprises later transferred to a willing private party. Public projects were financed by the World Bank and other aid donors and the World Bank and Asian Development Bank (ADB) played a dominant role in channelling funds through the Development Funding Institutions (DFI) to promote private entrepreneurship in Bangladesh. This reflected the Pakistan government’s strategy during the 1960s to actively encourage the emergence of state-sponsored entrepreneurs with a stake in the economy. At this time, private sector Bengali participation in the jute industry (the leading industry inherited by Bangladesh) was catalysed by the East Pakistan Industrial Development Corporation (EPIDC), a public enterprise responsible for industrialisation, which invested its equity in joint ventures with a number of first generation Bengali entrepreneurs. The DFIs also provided term loans to assist this process. As a consequence, a five million dollar jute mill could be vested in a prospective Bengali businessman whose own stake amounted to an investment of barely 10 percent of the total cost[14] .

During the Bangladesh Liberation War (26 March - 16 December, 1971) Pakistani businessmen began pulling out of Bangladesh for fear of possible massacre, leaving only a few entrepreneurs in Bangladesh after the war. In this exodus, top management were joined by middle managers, foremen and even skilled workmen. As a result, a major part[15] of the private sector in Bangladesh, especially industrial and other trading enterprises owned by non-Bengalis, came to a standstill. In the field of trade only physical assets and bank liabilities remained; the bulk of capital was tied up in the knowledge and experience of the entrepreneurs who had disappeared. Completely new sources of supply had to be found to make up for traditional imports from Pakistan, such as cotton and textiles, oil seeds, fine rice and cement. Above all, Bangladesh lacked access to international markets, as well as financial resources and skilled manpower. Many of the Bengali-owned enterprises also remained closed for various reasons[16] .

The immediate task in the industrial sector was to resume production, provide employment and income to workers, supply goods and services to consumers, and find access to foreign exchange to meet import bills through exports of accumulated stock at abandoned enterprises. The preamble of the Industrial Investment Policy for 1972 - 73 aptly described the situation. It stated:

Private investors would only have been persuaded to purchase abandoned industrial enterprises if the government was ready to compensate them for losses and to contribute to the rehabilitation of such enterprises.

The massive government help and intervention required to get abandoned industrial enterprises back into working condition would have mirrored the policies of the period of the Pakistani rule, generating widespread public concerns. And after liberation, the idea of transfer or sale of abandoned enterprises to prospective Bengali buyers was vehemently opposed by trade union leaders, students and political parties participating in the liberation war[18] as one of the stated principles of the Awami League government that led the independence of Bangladesh was socialism[19] . Many with investable funds did not have entrepreneurial ability or interest; they were interested in quick turnover and the prospect of high profits, and remained mainly in trading and speculative ventures. Immediately after liberation, the nascent private industrialists were few in number, ill organised and mostly on the defensive, given their passive role in the Liberation War.

The government, on the first independence day (26^th March 1972), ultimately, announced its decision to nationalise major industries[20] . The government also nationalised twelve commercial banks and set up six banking organisations with the entire assets and liabilities of each bank vested in the government[21] . New corporations were established or converted from old ones as inherited in the public sector. Although the government nationalised large scale industries, the marketing and distribution systems were left in the private sector.

In the industrial sector, the government dismantled the EPIDC and instead created ten sector corporations[22] to operate the abandoned enterprises with fixed assets of more than Tk. 2.5 million, the existing enterprises of the EPIDC and the nationalised industrial enterprises owned by Bangladeshi owners. Some abandoned enterprises were placed under two newly created public corporations, Freedom Fighters Welfare Trust (Mukti Joddha Kalyan Trust) and Armed Forces Welfare Trust (Sena Kalyan Sangstha)[23] .

During the first year after liberation, 38 new public corporations were established, in addition to the 20 established during the Pakistani rule. This growth in public enterprises took place in the name of building a socialist society in Bangladesh. While announcing nationalisation, the Prime Minister declared:

It was clear that socialist ideology played an important part in the nationalisation of industries though given the situation it was also a pragmatic decision. Whatever role ideology played behind nationalisation in Bangladesh, the government became directly responsible for productive activity, in contrast to the old regulatory and promotional responsibilities. Public ownership on a large scale and diverse industrial activities gave rise to a monopoly situation. This tended to make almost the entire industrial sector into a single unit, merging the problems of the firm with the problems of the economy.

The Nationalisation Order was followed by the government’s declaration of Investment Policy[25] , imposing limits or ceilings on private investment. New private investment was to be allowed in units with assets of no more than Tk. 2.5 million, which could grow up to Tk. 3.5 million through reinvestment of profits. It is important to note that while there was a limit on the size of an individual enterprise, there was no limit on the number of units a particular individual or group of individuals could own. Such investment opportunities as existed within the limit of Tk. 2.5 million, combined with investments in the smaller abandoned units which were available for purchase by the private investors, were large enough, at that time, to absorb all private savings seeking such investment outlets[26] .

During 1973-75 the government licensed 172 enterprises with fixed assets per unit up to Tk. 2.5 millions; about half of total investment sanctioned was limited to assets below Tk.1 million. During 1973-74 about 700 applications for loans were received by the financial institutions for investment within the ceiling[27] .

During 1973 -74 there was increasing pressure for an upward revision of the ceiling on private investment and for allowing a larger role for foreign investment, especially in collaboration with domestic private enterprise. By 1974, a number of factors had contributed to an accumulation of surplus funds in private hands. This accumulation of surplus funds was possible through high profits earned in domestic and import trading activities, including trade in contraband goods and smuggling of jute and other goods across the border.

The pressure for raising the ceiling on private investment exerted by the new rich within Bangladesh was strongly and consistently supported by donor countries and foreign-aid agencies. The World Bank recommended raising the ceiling to Tk. 10 million or removing it altogether[28] . The government was under huge pressure to revert to the pre-liberation policy of ‘sponsored capitalism’: where the state would provide concessional financial and fiscal facilities to allow private investors to invest, to reap large gains, to gain initial experience (if necessary with government subsidies) and then grow in size and power[29] .

The new investment policy[30] raised the ceiling of private investment from Tk. 2.5 million to Tk. 30 million. Private foreign investors were allowed to enter into partnership with domestic private investors, mainly in projects where a ‘technological and managerial gap existed’[31] . Finally, the moratorium on nationalisation was extended from ten to fifteen years and fair and equitable compensation was guaranteed in the event of subsequent nationalisation.

The prevailing economic stagnation, rapid inflation and a severe famine in the third quarter of 1974 resulted in the unpopularity of the party in power. The army and the bureaucracy were unhappy, because of their subordinate role to the politicians, which was contrary to the long experience of the Pakistani era. In the face of decreasing public support, the government became more and more autocratic. The labour movements and opposition political views were crushed through Special Powers Act, 1974 and a declaration of emergency[32] . As time passed, the emerging rich, which was weak at the time of independence gained strength and the civil and military bureaucracy gradually consolidated. In order to consolidate political power and to satisfy different pressure groups, the government amended the basic structure of the constitution[33] in 1975.

The President exercised his powers in accordance with the amendments to establish a one party state from February 1975, in which party cadres and bureaucracy, including the army, were to be integrated under one unified leadership and control. The Communist Party and the National Awami Party (pro Moscow group) joined the newly formed single political party with the President as balancing force between them. All but three newspapers were banned and many political opponents were detained without charge.

Some programmes of the newly formed lone political party, ‘BAKSAL’ (Bangladesh Krishak Sramik Awami League) were viewed by the new rich as inimical to their further development. Right wingers of BAKSAL supported by some foreign countries conspired with a small section of the army to eliminate President Mujib. Analysing the political developments in Bangladesh, Hamza Alavi[34] wrote in 1973:

On the 15th August 1975, President Mujib and his family members were killed by a group of military officers.

Declaration of martial law: the acceleration of the decline of public enterprises

The military installed a new President, Khondker Mustaque Ahmed, known as a rightist within BAKSAL In the subsequent months there were two military coups. Khondker Mustaque Ahmed was removed from the office of the President. The country was placed under martial law and the Constitution was first suspended and later amended by martial law regulations. The suspension and the amendments of the Constitution by the martial law authority violated the provisions of the Constitution [35] .

The military government, established after the coup on 7th November 1975 under the leadership of Gen. Ziaur Rahman, opted for a much greater role for the private sector. The industrial policy was revised in order to increase the boundaries of private investment while cutting the size of public enterprises[36] . Industries previously reserved for the public sector were thrown open to joint participation of public and private enterprises. Various policies to promote private capitalism were vigorously pursued; for example, up to 70 percent of the total cost of establishing an enterprise was provided by state- owned financial enterprises. In order to legalise ‘black money’, the industrial policy declared that ‘those who would disclose such funds would be allowed to retain the same without any questioning by the government’[37] . An amount of Tk.1.3 billion black money was declared by different individuals to the taxation authorities[38] .

The Revised Industrial Policy (RIP) of 1975 raised the ceiling of private investment further to Tk. 100 million. Both local and foreign investors were allowed to participate with the public sector in setting up industries falling within the reserved list. Although a major share was to be retained by public corporations, management contracts could be given to private investors on considerations of ‘economy, technology and management’. Tax holidays and other incentives introduced by the previous government were extended, and the stock exchange was reactivated. The government also decided to disinvest some industrial units, which were placed under public corporations.

The RIP of 1975 contrasted with the policy of the previous government in not containing any reference to socialism. The industrial policy announced in May 1977 limited the participation of the public sector to eight categories of industries and announced a concurrent list of nine categories which were open to both public and private sector. This marked the end of nationalisation and the beginning of rapid expansion of the private sector.

By 1976 - 77 the private sector was getting an edge over the public sector. The Bangladesh Shilpa Bank (a public enterprise) sanctioned 90 percent of its loans to the private sector in 1976-77 compared with 17 percent in 1974-75 and 20 percent in 1973-74[39] .

Some of the other benefits granted to the local business community included: rebates on payment of custom duties for import of capital equipment and raw materials, writing off interest accumulated over the principal borrowed, policies protecting the domestic market against foreign competition, etc. There was a reduction of up to 75 percent in rates of various fees charged by public financial institutions for private sector investment. The Investment Corporation of Bangladesh (ICB) was set up in 1976 to provide institutional support to the stock market. The Presidential Adviser in charge of the Ministry of Commerce emphatically declared that the government aimed at ‘a reduction of the public sector and expansion of the private sector’[40] .

During Zia's rule the bureaucracy, and the military in particular, started gaining the upper hand in the ruling coalition by directly controlling state power, which was utilised to strengthen its economic power through various legal and illegal means of state patronage and judicious use of the spoils system. Proximity to the ruling power structure and the ruling party brought opportunities to earn lucrative premiums from the process of distribution of the substantial international aid/grants, issue of permits, licences, quotas and from bribery. A further decimation of the public enterprises was a convenient and politically expedient means for Zia’s government to further its group interests through various means of patronage and use of the spoils system. Thus, expansion of public enterprises in the industrial sector was considered to be hindering the interests of the ruling elites.

General Ershad’s regime: further decrease in public enterprises.

After Zia was killed by a rival group in the army in May 1981 the civilian Vice-President, Justice Abdus Satter, was elected President by a substantial margin. However, on 24^th March, 1982 Gen. Ershad (Chief of Army) promulgated martial law throughout the country, and the President was forced to resign. Gen. Ershad became the Chief Martial Law Administrator (CMLA) with all legislative, executive and judicial powers vested in him. He also had the power to nominate a President for the republic[41] . The Constitution was suspended and Parliament was dissolved.

The New Industrial Policy (NIP 1982) announced in June 1982 aimed, among other things, to expand manufacturing with the increased participation of the private sector[42] . According to the new policy, exclusive public sector investment was limited to seven sectors[43] including basic, heavy and strategic industries and the areas where both public and private sector could set up new industries were expanded. The existing size of the public sector corporations was to be reduced by disinvesting the industrial units abandoned by non-Bengali owners. Shares of public sector enterprises were to be made available for public subscription retaining the majority share with the corporation. Provision was also made to appoint management contractors to run some of the bigger industrial enterprises in the public sector. The jute and textile mills were returned to their former Bangladeshi owners.

By 1982 state patronage had resulted in a dramatic increase in the number of millionaires in the society[44] . In line with the interests of this group, able to take advantage of privatisation, and responding to the World Bank pressure[45] the New Industrial Policy of 1982 (NIP) announced concrete steps for the growth of the private sector. Those included, an increase in monetary incentives, such as reduced personal and company taxes, increased tax exemption and simplification of procedures to establish an enterprise, and concessionary interest rates on loans for industries in less developed areas.

Measures taken to develop the institutional framework to facilitate the growth of private enterprises included: a) banks and insurance companies were allowed in the private sector, b) Industrial Promotion Development Company (IDPC) with 30 percent of its shares held by government set up for promoting private industries, c) leasing companies allowed for the procurement and leasing of equipment to potential investors, d) the Exchange Fluctuation Burden Absorption Scheme (EFAS) devised in 1983 for protecting foreign currency loans from the adverse effects of exchange rate fluctuation, e) bonded warehouse facilities allowed to export oriented industries, and f) a high-powered monitoring committee set up to review the bottlenecks arising out of tariff anomalies and suggest remedial measures. The Second Five Year Plan 1980-85 was revised in May 1983 with an emphasis on ‘allow[ing] [the] private sector to have a more pronounced role ...’[46] . Encouragement of private investment had become one of the main economic objectives of the government.

In the same manner as Zia, Ershad promulgated a martial law order exonerating the holders of illegal money from any civil or criminal liabilities on their declaration of the amount[47] . The government denationalised a number of banks and industrial units. By June 1983, 185 nationalised industrial units were disinvested. Nationalisation in Bangladesh thus virtually ceased before the end of 1983[48] . The government also permitted the establishment of new private banks. A number of army officers were appointed as chairmen of various public corporations.

In 1986 the government announced a Revised Industrial Policy (RIP). Amongst many objectives, the policy aimed at effecting the growth of industries with increased emphasis on private sector participation and limiting the role of the public sector to the establishment of strategic and heavy industries[49] . However, the industrial policy pointed out that in areas where investment was considered desirable, but private investment might not be forthcoming, the public sector could set up industries either by themselves or jointly with the private sector, which could be transferred to private entrepreneurs in due course. The RIP emphasised the conversion of individual enterprises into public limited companies and corporations into holding companies in appropriate cases. It also emphasised the off loading of 49 percent of shares in public enterprises.

The RIP emphasised the predominant role of the private sector and declared concrete steps in boosting it. Outside of the reserved list private sector investment was kept open without any ceiling and with the least of formalities for registration/sanction. There was provision for private investment outside the reserved list in joint collaboration with the public sector corporations. The RIP directed the assistance and promotion of local industries with comparative advantage through tariff rationalisation and appropriate fiscal measures. Above all, private investors were allowed to invest their own resources without government permission.

In order to accelerate increased private investment in industry, the government shifted its role from regulation to promotion and assistance and to this end established a Board of Investment in January 1989 to deal with all matters relating to the establishment and operation of industrial units. The Board was headed by the President himself. One of the major functions of the board is to provide capital to create infrastructural facilities for industries.

Once martial law was withdrawn and a facade of democracy established, the opposition to Ershad’s rule grew and in 1990 Ershad had to resign, handing over power to the Chief Justice of the country. The interim government held country wide general election in February 1991. The widow of the late Gen. Zia, Khaleda Zia supported by the fundamentalist Jamat-e-Islami formed the government. Thus, Khaleda Zia became the Prime Minister of the country[50] . In terms of economic philosophy and the composition of the party, Khaleda Zia’s BNP and Ershad’s Jatiyo Party did not differ in any substantial manner. She continued Ershad’s policy of privatisation and the encouragement of the private sector. The only difference was that BNP supporters were the beneficiaries of generous financial and other assistance during this time, while during Ershad’s time it was his supporters. During the BNP’s rule (1991-1996) only 13 industries were privatised.

The Awami League won a majority and formed the government after the general election of 12 June 1996. It revitalised the Privatisation Board which announced a programme of transferring 32 enterprises to their former private owners. However during its five years rule only 16 units have actually been transferred. In July 1999 the government announced its industrial policy[51] , with 17 various objectives in mind. The policy made it amply clear that the ‘private sector will be the prime mover’ of future industrial development of Bangladesh’ and that the government is ‘committed to attain this goal[52] .’ One of the objectives of the policy is ‘to permit public undertaking only in those industrial activities where public sector involvement is essential to facilitate the growth of the private sector and/or where there are overriding social concerns to be accommodated[53] .’

Privatisation in Bangladesh

Although the first Awami League government after independence nationalised Bengali owned jute, textile mills, banks and insurance companies, it took various measures to strengthen the nascent private sector. The government, as early as 26 March 1972, in its industrial policy announcement, declared its decision to divest itself of enterprises with less than Tk. 1.5 million in fixed assets. (the rate of exchange at that time being 1 US $= Taka (Tk) 18.8001; the current open market exchange rate is around Tk 57-58).

The Bangladesh Industrial Enterprises (Nationalisation) Order 1972 being President's Order 27 of 1972 (P.O. 27) was promulgated and 11 sector corporations were created to control and manage the abandoned enterprises owned by former EPIDC along with 75 nationalised Bengali owned jute and textile mills. Out of the 725 abandoned industrial enterprises, 263 were placed under newly created public sector corporations. Subsequently 77 units were deleted from the list of the abandoned enterprises, 163 were returned to their owners and 14 more considered commercial concerns. The remaining 311 enterprises were placed under the management boards in various regions of the country.

Thus 464 abandoned enterprises were kept outside the Nationalisation Order 1972 and earmarked for divestment. Divestment of these enterprises started in May 1972 and by September 1978, 211 units of this category were divested. Thus, nationalisation of industries not only expanded the public sector, but by the same token it burdened the government with the task of divesting itself of 464 units.

The public corporation form rather than government departmental form was chosen as the form of management of state-owned enterprises. Inherent in this form of organisation is the separation of the day-to day operation and management of the business from the direct control of the owner, the state. However, the government retains the power to appoint and dismiss the board of the corporation. In other countries, like Australia, this process of corporatisation proved a vital preparatory stage of privatisation, because the structural characteristics of the public corporation owe much to the company analogy with its separation of ownership and control and the resulting emergence of management as a vocation in the general interest, transcending the particular interests in the enterprise. Thus, ‘its operating environment is supposed to be akin to the private sector but its ownership and accountability requirements remain public[54] .’ The enterprises placed under the administration of public sector corporations maintained their separate legal personality. Thus, in effect, the corporations were holding companies. Even the courts in Bangladesh in most cases applied rules by analogy from the private sector in deciding public sector cases[55] . However, there are, relatively, fewer rules to deal with administrative behaviour of public enterprises. But because the regulations focus mostly on procedure rather than outcome, they have facilitated bribery and corruption on the part of the bureaucrats, ostensibly monitoring compliance.

Public corporations have a separate legal personality which means that, like any other private party, they can sue and be sued in their own names, and as such do not enjoy the immunity as do government departments. However, no public corporation has ever sued another public corporation[56] .

Disputes between public enterprises are resolved out of court through informal channels at the intervention of relevant ministries. Thus despite the fact that millions of Taka had not been paid to Telephone and Telegraph Board, Dhaka Electric Supply, Titas Gas and Distribution, and Water and Sewerage Authority by various public enterprises no legal action nor any disconnection of services followed[57] . Such practice of bias towards public enterprises is discriminatory against the private sector. Although informal settlement reduces the load on courts and saves both money and time, in the context of Bangladesh, it de-emphasises the importance of legal procedures and concepts, and limits the scope of the courts to influence the development of legal doctrines in the relevant fields. The resolution of disputes between two public enterprises is considered by the government a matter of public policy rather than of law and reflects a view that a court dispute between two public enterprises would create a bad image for the government. Thus, reliance on informal settlement of disputes over emphasises the importance of different plans of government over existing applicable rules of law and the mode of their interpretation. This practice is also not congenial to the working of democracy and good governance, because it lacks transparency and accountability, and the role of the legal system in bringing about change through rules and institutions and providing legitimacy for the exercise of state functions is generally put in jeopardy[58] . The failure to develop effective legal procedures in line with these corporate structures has left the legal system quite unprepared to deal with these problems.

As previously discussed, even though government pursued a policy of nationalization, there has always been a policy of encouraging more private sector investment for the industrialisation of the country. The first Awami League government started rolling back the frontiers of public sector while subsequent governments accelerated the process of rolling back. The difference was that the Awami League government used political rhetoric of socialism while subsequent governments made public pronouncements about privatisation.

However, privatisation as a declared public policy tool came into effect after the overthrow of the Awami League government by a military coup. In December 1975, Zia's military regime decided to divest some of the abandoned enterprises earlier placed under public corporations[59] . According to the criteria laid down by the Zia government, only those units which were comparatively small in size, uneconomical/unprofitable for the public sector corporations to run, and or located in remote areas were to be privatised[60] . The following table will show the sector wise number of enterprises listed for privatisation in 1977.

Sector	No of enterprises listed for privatisation in 1977-78
Jute	6
Textile	3
Chemicals	38
Sugar and Food	17
Steel and Engineering	15
Wood Products	4
Total	83

The stated objective of privatisation was to streamline and improve the operative efficiency of management of the remaining public enterprises and to reactivate and invigorate the private sector[62] . Side by side with the decision to privatise, a decision to return the specialised textile units to their former Bangladeshi owners was also taken. Later the government decided to return the jute twine mills to their former Bangladeshi owners and to divest the abandoned jute twine mills. In order to implement the decisions of the government the PO 27 of 1972 was amended by a Martial Law Order (being the Bangladesh Industrial Enterprises (Nationalisation) (Amendment) Order 1976). These decisions had special significance because jute and textile mills were considered by the Awami League government as the hard core public sector. Furthermore, the return of the nationalised jute and textile mills to their former Bengali owners was considered by the government as a measure to create confidence in the minds of future investors about the security of their investment.

By September 1978 along with returning former Bengali owned nationalised jute and textile mills to their original owners, total of 211 abandoned enterprises were privatised through public sale. With the divestiture undertaken by Gen. Zia the structure of ownership in the industrial sector in 1981-82 was as follows:

Thus during Zia's rule the public sector was still dominant although its size decreased from 92 percent - 69.1 percent. Correspondingly, the size of private sector ownership of the industrial sector grew from 7 percent - 28.4 percent.

During Gen. Ershad's regime (March 1982 - December 1990), the government sought to expand further the private sector while reducing the size of the public sector[63] . It confined the activities of public sector industries to seven categories of industries[64] and sought to reduce the size of the sector corporations. Thus, the government changed the method of initiating new projects and allowed the private sector to invest in areas that were formerly the exclusive domain of the state. By a process of attrition, over time the state expected to control fewer and fewer transactions.

The off-loading of public sector enterprises to the private sector was connected with private savings and their mobilisation. Private capital accumulation in Bangladesh was mostly the product of corruption, state sponsorship, proximity to administration, etc[65] . There was a huge amount of money illegally earned in private hands which remained unutilised. Therefore, in order to invigorate the private sector by bringing unutilised (‘black-money’) funds into the economy, the government promulgated Martial Law Ordinances exonerating those who disclosed such funds from criminal liabilities, provided such funds were used for new investments or purchase of disinvested units[66] .

Within a year the military government of Ershad had almost completed the privatisation of remaining abandoned enterprises. It further widened the scope of privatisation in the following directions[67] :

The following table shows the total number of enterprises privatised (only those which were placed under the public sector corporations).

Corporation[68]	Units before privatisation	Units Before 1982	Privatised Between 1982-90	Total
BCIC	88	51	12	63
BSFIC	68	31	15	46
BSEC	64	22	13	35
BJMC	79	5	32	37
BTMC	60	4	28	32
BFIDC	22	3	1	4
TOTAL	381	116	101	217

Between 1976 and 1989 a total of 217 enterprises were privatised. These constituted 56.9 percent of the total of 381 enterprises originally placed under the six public sector corporations. Of the total of 217 privatised enterprises, 116 were privatised during December 1975 - May 1982, i.e., by the government of Gen. Zia. The remaining 101 were privatised within 16 months after July 1982, i.e., after Gen Ershad came to power through a military coup. After the fall of Ershad regime, the pace of privatisation slowed considerably. During BNP rule from 1991-96 only 13 industries were privatised. The present government, elected to office in June 1996, announced a programme of transferring 32 enterprises to private ownership. However, only six units have actually been transferred to their previous owners[69] .

From the above discussion, it is clear that Sheikh Mujib started the process of privatisation. However, privatisation as a public policy has been adopted by military governments, especially during Ershad's military rule (1982-1 991). Subsequent civilian governments have continually reemphasised the need for privatisation with very little progress in actual divestment of state owned enterprises[70] . Ershad's success in terms of the number of enterprises divested within a short period of time was possible because of the extraordinary freedom enjoyed by the military government and also by the unitary character of the Bangladeshi State. The public policies adopted by military governments were free from constitutional and other legal constraints. The Military rule was able to cope with the inevitable social disruption caused by privatisation resulting in massive unemployment. Because of Military rule, trade unions had minimal success.

Under the circumstances of military rule, law did not serve to hold officials accountable for their actions. Law was merely an instrument through which government exercised authority. Elections held under martial law simply gave a façade of democracy. The role of law and other governmental institutions was confined to legitimizing the actions of the government. The legislature and judiciary were subservient to the executive, resulting in their failure as institutions to impose meaningful limits on the exercise of bureaucratic discretion. Over the years an elaborate system of administrative control over private business was established. Like many other developing countries, establishment of a private business is treated as an element of a system of capacity control and requires substantive approval by government agencies[71] . This preoccupation with procedure often resulted in unnecessary delays and increased project costs. Webb rightly mentions that, ‘as controls become more pervasive, so does the impetus to avoid those controls’[72] . In the wake of such pervasive regulations private businesses often diverted their operations into the ‘informal’ sector in order to bypass such regulations and controls by resorting to corruption/bribery.

Techniques used in Bangladesh for privatisation

Privatisation encompasses many different techniques and does not follow any single model[73] . It has taken different forms in different countries. Some states have resorted predominantly to the sale of shares to the general public, while others have sold shares or assets of public enterprises mainly to single buyers, and many have resorted to both. A number of governments also have used ‘non-sale’ privatisation or what might be called ‘privatisation of management’ such as management contracts and leases. There are first time privatisations of public enterprises originally established by the government, and there are many reprivatisations[74] . The most commonly used methods of privatisation are: public offering of shares, private sale of shares, new private investment in an existing public enterprise, sale of government or public enterprise assets, fragmentation (or break up into component parts) management or employee buyout, and lease and management contract.

The legal form of organisation of public enterprises heavily influences the necessary mechanical steps for the transfer of their ownership and, therefore, also to a large extent the ease with which the process of privatisation can be implemented. For instance, a public limited company whose shares are already being traded requires a relatively simple privatisation process, consisting only of offering additional blocks of shares currently held by the state to the general public through the stock exchange. At the other end of the spectrum would be a public enterprise set up as a statutory corporation or a government department. Neither could be privatised in their current form but need to be transformed into a stock corporation subject to the ordinary company laws of the country, so that shares can be offered to the private sector. Legislation is necessary in such cases and personnel may need to be transferred from state to private employment regimes.

In the case of Bangladesh, the following methods were used for privatisation, the sale of enterprises (mostly abandoned ones), the return of jute and textile mills to their former Bangladeshi owners, and the partial offering of shares and assignment of management contracts to private parties.

Sale of public enterprises

A list of industries offered for sale was first prepared by the Ministry of Industry and a floor price called the ‘National Reserve Price’ (NRP) was fixed by the government.[75] It was not made public how the NRP was calculated. Only a consolidated figure was quoted.

Tenders were then invited for the sale of enterprises. The NRP was taken as the basis for considering whether prices offered by bidders was acceptable. An enterprise was supposed to be sold to the highest bidder, provided that bid was equal to or higher than the NRP.

The sale procedure did not attempt to curb market concentration. Two adverse consequences for the distribution of wealth followed from this. First, buyers came from the wealthy section of the community. Second, if the buyer was an enterprise in the same line, ownership concentration in that sector increased. Since Bangladesh is dominated by a handful of big private groups, such concentration affected consumers. Indeed, 70 percent of buyers were already active in the sector. In retrospect, it now seems that the sale procedure was promotive of cartelisation, hampering competition and the fair play of market forces. The sale of public enterprises thus promoted the concentration of capital in a few hands.

Since the method of sale was the private bid rather than the public float, public disclosure of information through a full prospectus did not occur in all cases. Indeed, the process was shrouded in secrecy resulting in the spread of rumours about wide spread corruption and manipulation of the process[76] . Privatisation took place away from the public gaze, with no national debate and a minimum of information, even for the workforce involved. To treat such fundamental economic change as purely a private matter is to outrage even the most attenuated conception of democratic accountability.

It is thus evident that the bidder paid only between one fifth and one fourth of the NRP. Interviews carried out in connection with this research among government and public corporations officials, trade union activists and businessmen indicate that the NRP was fixed far below the actual market price. Above all enterprises were sold on easy terms, e.g., the terms of repayment etc. The new owners had to take all liabilities. Clare Humphrey writes, ‘They [new owners] accepted the government's deal with no intention of paying back the loans[77] ‘. Nonpayment of these loans remains a problem.

Return of public enterprises to former Bangladeshi owners

The government through the Ministry of Industries and Commerce notification no. JD/IC/TJM-1/82 dated 27.9.82 decided to transfer all the shares in nationalised industrial enterprises to their former Bangladeshi shareholders and published a list of industrial enterprises. In pursuance of the second proviso to clause (2) of Article 4 of the P.O. 27 of 1972 the government made offers to the persons entitled to receive payment of compensation under Article 9 of the said Order to sell on the terms and conditions to the respective shareholdings in such industrial enterprises as on the date of nationalisation.

Before nationalisation, these enterprises were incorporated under the Companies Act 1913 as joint stock companies. The government notification laid down the terms and conditions for the transfer of shares to their former owners.

The price fixed for each such share remained the same as worked out at the time of payment of compensation. (GOB Notification JD/IC/TJM - 1/82, dated 27.9.82) In cases where the Bangladeshi shareholders had held less than 51 percent of the shares, they were required to buy additional shares to enable them to acquire controlling shares of 50 percent or more, before the actual transfer of management[78] . But the additional shares were to be sold on the basis of revaluation[79] . As to the payment of the original shares held, the purchasers were required to pay 51 percent of the total value immediately and the remaining 49 percent within a period of one year[80] . For the additional shares the purchaser was allowed to pay 10 percent of the full value immediately and the rest within a period of five years in 10 half yearly instalments. In case of failure to pay in due time the purchaser was liable to pay on the defaulted instalment a penal interest @2 percent above the contracted rate[81] . Thus in the name of privatisation, the government disposed of public property giving benefits to a few individuals.

If the former owners refused to purchase the shares offered, the shares were to be offered to other private investors. In the absence of sufficient response from private buyers the government reserved the right to sell them to financial institutions like BSB, BSRS, ICB, insurance companies, etc. which held shares in the mills prior to nationalisation[82] . The new shareholders were not allowed to sell their shares within the period of encumbrancy without prior approval of the government[83] .

The new management was required to accept the full liabilities of the company on the same terms and conditions as existed on the day of transfer[84] . It also was required to take over all staff and workers in employment on the day of transfer along with liabilities for service benefits[85] . In addition it was required to take over an agreed number of officers and staff, employed by the corporation, likely to be declared surplus after transfer of the mills to the previous shareholders from the corporation. Termination and retrenchment within a period of 1 year was forbidden[86] .

Thus, although many of the enterprises privatised were not strictly subject to regulation after privatisation, the mantle of former public enterprise status persisted and a regulation against termination and retrenchment of labour was forced on them, although there was no regulation against closure. The Ministry of Industry and Commerce notification involved was very much a skeleton structure and little provision was made as regards the design of privatised companies.

For uninterrupted operation of the enterprise the government reserved the right to form the first Board of Directors. This Board was to be a temporary one functioning for a period not exceeding one year or till a new Board of Directors was elected in accordance with the Articles and Memorandum of the company, whichever is earlier[87] .

In case of the violation of any of the sales terms the government reserved the right to intervene in the affairs of the company[88] . But the government notification did not spell out the measures the government could take in the event of violation of any of the terms, which effectively meant the government retained a wide discretion to act in such circumstances.

Partial offerings of shares

The government in its NIP 1982 and RIP 1986 decided to convert the public sector corporations into holding corporations and the enterprises under them into subsidiaries, and then to off load 49 percent of the shares, i.e., the holding corporations were to keep 51 percent of the shares in subsidiaries. The introduction of the holding company structure was seen as a preparatory step towards the future transfer of enterprises to the private sector and a step to infuse private enterprise culture within the public enterprises. The holding company by serving as a buffer between the government and subsidiary companies could provide a high degree of autonomy to the subsidiaries. It was also expected that this form would be able to protect the operating subsidiary companies from undue political interference. By standing between policy makers (the government) and implementers (management of the subsidiary companies) it was, theoretically, in a position to allow a sharper distinction to be made between policy and operations. The holding corporation form, at least theoretically, provided solutions to the basic organisational dilemma of public enterprises, i.e., to reconcile autonomy with public accountability. It could serve as a tool for the effective evaluation and monitoring of the performance of the enterprises and for a greater decentralisation of operations, while keeping the operations of an enterprise at 'arms length' from the government and promoting decentralised decision making within the enterprise.

Some comments on privatisation in Bangladesh

Privatisation was once advocated as a necessary condition for efficiency. However, researches undertaken in Bangladesh and elsewhere clearly suggest that it is quite difficult, if not impossible, to measure the extent of performance improvement only as a result of change of ownership. Christopher Adam, William Cavendish and Percy Mistry[89] approached the relationship between public and private enterprises and rejected the notion that the differences in enterprise performance under public and private ownership are necessarily intrinsic. Rather, they argued ‘that such differences are grounded in the disparity between objective functions of public and private sector owners and the different forms of agency relationships the ownership structures engender’[90] . There was a World Bank sponsored review of the industrial sector in Bangladesh (covering both public and private industrial enterprises) for the period 1972-86 undertaken by G.S. Sahota[91] . His review showed that industry-wise labour productivity depends on managerial efficiency and not on ownership[92] .

Research on the relative performance of public and private enterprises in Bangladesh indicates a mixed result. Even the World Bank came to similar conclusions. ‘This exercise (privatisation), however, has had mixed results: a number of privatised enterprises were closed down and several others have faced continuing problems ...’[93] The Canadian International Development Agency at Dhaka undertook a study in late 1986 and early 1987. In terms of profitability CIDA’s sample indicated a net loss in the post-divestment period in comparison with predivestment[94] . The government of Bangladesh in 1993 conducted a survey of 498 privatised enterprises and found that out of these 498, only 224 enterprises were in operation. Of the remaining 274 enterprises 133 had been closed down and 141 were not traceable[95] . Sen's study[96] of textile mills show that 74 percent of the privatised textile mills made losses for at least five years out of seven years from 1985-91. During this period the comparable data of public sector textile mills was 62 percent. State owned jute mills transferred to the private sector were also not profitable and faced large default problems. They have sought, and are seeking special support from the government to help them become profitable. In some privatised jute mills the government still retains partial ownership (up to 49 percent). While the government is quite eager to hand over the remaining 49 percent, this has met with resistance from the new owners.

There are allegations of fixing the prices of privatised enterprises much below the market value[97] . Even with gross under-market valuation, substantial amounts of the purchase prices have remained unpaid by private purchasers[98] . Often the new owners took loans from public financial institutions against the purchased enterprise in addition to the amount loaned to the enterprise since its birth. In this regard it should be noted that in Bangladesh a large proportion of capital has come from loans from public financial institutions[99] . Thus the real stake of the new investor was a minor fraction of the total capital outlay, yet the investor was in control of its use. Since the selling price was fixed much below the actual market value of the enterprise sold, several entrepreneurs got back their investment with profit, by just selling the plant and machinery, finished goods, spare parts, accessories and raw materials. Thus the investor had the scope to profit from the situation, while the risk of loss was relatively small. Once the investors got their investment back with profit, some even made the enterprise ‘sick’. Above all, many privatised enterprises were stripped of saleable assets then closed by the new private management. The losers were the creditors, mainly public financial institutions[100] and the workers who lost employment. There also was a decline in the level of employment in enterprises that continued to operate[101] .

Referring to the privatisation of 22 textile mills in 1982-83, Ramanadham notes that privatisation was carried out ‘at the cost of the long term interest of the economy[102] .’ He further quotes Lorch, who undertook a study of privatisation of textile mills in Bangladesh sponsored by UNDP, that ‘the objectives of a privatisation policy are sacrificed for the effectiveness of its implementation: the means prevail over the ends[103] .’

The Weekly Bichitra in its leading article concluded that selling public enterprises by tender or other means created only new owners of industries without establishing new industries[104] . Since the private sector was occupied with buying the already established enterprises, there was little incentive to take the trouble to establish new ones. Consequently, privatisation actually hampered further industrialisation of the country. The government even conceded that production declined in some privatised enterprises[105] . However, the privatisation of public enterprises reduced government's burden through reducing subsidies paid to ailing public enterprises.

After privatisation the contribution towards the national exchequer from these enterprises declined because of tax evasion. Even if a public enterprise suffered losses it still contributed more to the national exchequer by way of tax than many of the profitable private enterprise, because the private sector in Bangladesh in collaboration with bureaucrats are widely known as manipulating tax[106] . The private sector has more opportunity and incentive to meddle with accounts, whereas public sector management has little chance and has no incentive to do so. Indeed, tax evasion has become almost synonymous with private enterprise in Bangladesh. There are many allegations of manipulation of electric, water and telephone bills in conjunction with corrupt officials. ‘The private sector, on the one hand distrusts government and is constantly frustrated by bureaucracy. On the other hand, it constantly looks to the public sector for guidance and support[107] ‘. Humphrey further mentions that, ‘It is easy to launder money, since the government makes no more than a token effort to monitor firms after divestiture, other than for direct collection on the original loan[108] .’Because of privatisation there was a transfer of a large quantum of public assets to the ownership and control of what at most amount to 217 families, (if one assumes one family controls one enterprise). This concentration of wealth in a few hands, in a country where only a few are rich while the vast majority live below the poverty line, will surely give rise to social tension and violence in future.

In spite of the limited success of the privatisation programme in Bangladesh, it is expected by the government that the policy of privatisation will in time show positive results. Most of the government officials interviewed by the author tried to defend the privatisation policy on theoretical grounds and cited the examples of other countries, mostly industrialised ones and the newly emerging Asian industrialised countries. The protagonists of privatisation have failed to provide any empirical evidence for the success of privatisation in Bangladesh. How far the experience of developed countries with a substantially greater level of socio-economic and political development will benefit Bangladesh is very questionable.

Although, privatised enterprises so far have failed to show any dramatic results, undoubtedly there is a sense of competition between the public and private sector mills after privatisation. Before privatisation it was difficult for the government to evaluate properly the performance of public enterprises since it could not compare the results.

However optimistic policy makers are, judging from the present facts one has to agree with the remark of a trade union leader in BSEC (interviewed by me in 1991) that ‘privatisation in Bangladesh is nothing but the looting of public property.’ Privatisation was possible because of the government policy of generous financial assistance from public financial institutions to a chosen few people.

It would thus appear that massive privatisation programmes of successive governments have been an act of faith rather than a result of pragmatism in public policy. Of course, it may also be said that when the government in 1972 nationalised industrial enterprises it did not consider its actual ability to manage the over stretched public sector. It is not a coincidence that in the past the changes in public policies in Bangladesh generally occurred through executive orders rather than by well debated Acts of Parliament. Policies were always imposed from above. The nationalisation and privatisation policies are no exceptions.

In Bangladesh privatisation was carried out without taking into account the ‘surrounding’ factors, especially law, judicial and administrative institutions and their capability to enforce law, affecting performance of enterprises. Other considerations and environmental factors affecting enterprise performance have also to be addressed as part of a comprehensive package of reform measures in order to achieve positive and constant results from a privatisation policy. Humphrey writes:

In particular, such reform must extend to poorly designed legislation and cumbersome and inefficient legal procedures most dating back to colonial times, that impede effective development of private production, regulation, redress and accountability.

It must be kept in mind that public enterprises transferred to the private sector either through disinvestment of public assets or through investment funds provided by public financial institutions should, from the social point of view, be regarded as part of the public domain. Thus the efficient and socially optimal use of these assets must remain as much a concern of the public as is the case with public sector assets.

One of the most crucial ‘surrounding factors’ effecting enterprise performance is, of course, the legal system, and it currently stands in need of quite radical reform, with clumsy and outdated laws and procedures, inadequate and overloaded court facilities, poorly trained judges and law officers, and inadequate legal education, leading to huge delays in the administration of justice. In particular, judges fail to clamp down upon the indiscriminate issuing of injunctions and endless pursuit of adjournments by lawyers, paid by the number of their court appearances, which make it difficult for commercial transactions to proceed. Such inefficiencies and delays have undermined public faith in the system, with the costs of court action so high that many abandon their legitimate legal claims and pursue alternative channels of redress. This includes the use of gangsters, or ‘mastans’, hired by the business community or by individuals to enforce their property rights. Businesses at home and overseas are put off by the courts’ slowness and unpredictability in enforcing contracts.

‘The regulatory regime in Bangladesh has the following adverse features: first, the regulations are pervasive and unnecessary; second they are often vague and discretionary; third, enforcement is weak and extraordinary; fourth, process for making regulations is flawed; and fifth, regulators and operators are same, in many instances[110] .’

Future prospects

In spite of governments' desire actively to pursue policies of privatisation, many enterprises will remain in the public domain for a long time, because the absorption capacity of the private investors in Bangladesh is not large enough to permit total divestiture.

Moreover, sectors of traditional state monopolies like electricity, water, telecommunications, railways, arms and ammunition, defence industry, post, etc. are likely to remain substantially in the public domain for a long time for a number of practical and public policy reasons. The private sector in Bangladesh lacks experience to run them. There is no plan to privatise large banks and government-owned insurance corporations. Thus, for good or ill, public enterprises in one or another form will be around for a long time. In any case, they will continue to play a meaningful role in the economy. Because of this the efficiency and effectiveness of public enterprises will largely determine the efficiency and effectiveness of the national economy and the success or failure of national development plans, which in turn will affect the improvement in the living standards of the people.

It is therefore worthwhile to improve the performance of the remaining public sector enterprises, rather than to simply allow them to be carried away by the gusty winds of privatisation. Indeed, the issue of proper management of remaining public enterprises is more important than the current debate on the size of public and private sectors. In the interest of the country it is necessary to assure that whatever enterprises remain in the public domain be accountable, responsible, responsive and well-managed. There is a need to review the present holding companies structure and if necessary to devise a more satisfactory means of public ownership. It requires the urgent attention of public lawyers and management experts.

This is more so, because public ownership by itself is no guarantee of good corporate management practice, which is more crucial than opting for either public or private ownership, because neither public nor private ownership automatically brings efficiency. Above all, public ownership is not opposed to increased efficiency, though it is not a pre-requisite.

A realistic public policy should recognise where private alternatives might work better, and, by the same token, where new forms of public provision may ameliorate endemic shortcomings of the markets. Most of all, it must recognise that markets are not natural creations, they are always legally and politically structured. Hence the choice is not public or private, but which of many possible mixes of public or private structure works best. Indeed, the real debate should be changed from public versus private enterprises to the issues of how to improve corporate management in Bangladesh and empowering the Registrar of Joint Stock Companies to monitor both public and private enterprises registered as a company. After all, liberalisation is a creation of the state itself and therefore requires state intervention to keep it in operation[111] .

Once competitive conditions are seen as requiring deliberate creation and policing, this raises the question of accountability of the regulators who undertake this task. The method of public ownership through a holding company format neglected broader issues of accountability and participation. Other problems also remain unresolved, in particular, the pervasive difficulties of reconciling the positive role of government with the autonomy of public enterprises.

It is quite legitimate for the government as the owner of public enterprises to use them as instruments of its economic and public policies, but government interventions must be transparent. It would be impracticable to suggest that public enterprises could be and should be made completely autonomous and independent from government’s supervision. The real problem is not one of minimising or avoiding government supervision and guidance, but rather that government intervention is often not based on established rules. Often the interference is not related to efficient functioning or for achieving the objectives of the enterprises. Public enterprises are used as a convenient means of rewarding political allies or for purposes of personal gain.

The task therefore is to establish the institutional means to ensure openness, which will bring a sense of accountability. The starting point for this should be the recognition that dialogue between public enterprises and government is inevitable and that mutual recognition of a division of responsibilities is only likely to occur through such dialogue.

Some form of outside scrutiny of corporate planning and performance would be needed to prevent a convenient symbiosis between the interests involved. Bad economic performance of public corporations indicates a need to review the present management structure and mechanisms available for measurement and publicity, for example, through a more coherent arrangement for efficiency auditing. Improved relations can be brought about through a freer flow of information between public enterprises and government at the planning stage. The implication is that planning should be taken as a joint activity within which mutual commitments can be established.

Incoherent and confused relations with government and an absence of meaningful outside scrutiny of public enterprises is likely to affect performance negatively. In this sense, the author is in total agreement with Freedman’s view that ‘institutional legitimacy is an indispensable condition for institutional effectiveness[112] ‘. Accountability and other forms of democratic legitimacy should not be considered as mere optional extras, but essential for the success of public ownership. Reforms in investment decisions, in the assignment of extra enterprise obligations, in the rules of operations, in monitoring and performance evaluation, and in the exercise of relationships with the government, are needed.

A number of reforms are possible, which do not depend upon transfer of ownership. They include establishing a more ‘arms length’ relationship between government and public enterprises, allowing direct access to the capital market, shortening time horizons for pricing decisions, introducing independent regulatory commissions to control tariffs, changing managerial incentive structures, etc.

Conclusion

Since independence, successive governments have tried to attract private investment into the economy and have been progressively restricting the growth of a large public sector. Instead of creating purely publicly owned enterprises in the industrial sector, the emphasis has been either on private sector development or on joint ventures with the private sector. Even foreign participation has been encouraged. The desire of the country to industrialise is quite understandable. Indeed, government undertook many promotional activities. In spite of all these efforts and for various obvious reasons, the public sector is still quite big.

Efforts to infuse commercialism into the public enterprises in order to create a free market economy have not as yet shown any spectacular results. Total privatisation, in the narrower sense, i.e., complete withdrawal of the state from producing goods, cannot be undertaken. Moreover, there was little public debate/discussion of the issues surrounding the role of public and private enterprises which could have enhanced understanding of the underlying problems and legitimacy of the reforms. Yet, public enterprises and privatisation should be regarded as means rather than ends: means to achieving greater public welfare.

Since total privatisation is impossible, over enthusiasm for privatisation must not divert the attention of policy makers from the more important task of instituting necessary structural, policy, and management reforms, so that public enterprises can operate with efficiency, productivity and profitability. Under the circumstances, privatisation should not denote mere transfer of ownership from the state to the private sector, but the introduction of better market mechanisms, like allowing the management of public enterprises to raise their own finance and not depend on injections from the treasury, to decide on new investments, to fix prices of their products, and to generally operate more autonomously, guided by provisions of company law, other relevant laws and the memorandum and articles of association of the respective enterprises. There is a clear need to create appropriate systems of incentives and to encourage decision-makers to take more risks and demonstrate an entrepreneurial spirit rather than preoccupied with procedures. If they are not functioning efficiently then in appropriate cases they should be liquidated rather than inefficiently privatised.

It is doubtful what privatisation, by way of mere transfer of public enterprises to the private sector, can achieve without instituting necessary reforms, including establishing a proper system and recognition of property rights, effective separation of the judiciary from the executive, the establishment of the rule of law, and a judicial system not subservient to the executive with capabilities to dispense speedy justice. The bureaucracy is still powerful and the private sector relies on the bureaucracy and the public sector for its continued development. Privatisation dependent upon state patronage without institutions and means to control the growth of monopoly (in order to ensure standards and the quality of services provided to consumers) may turn out to be of enormous social and economic cost.

Privatisation should not be looked at so much as a retreat by the state, but rather as a shift in modes of intervention from ownership to regulation. The expected overall benefits of privatisation (e.g. Overall efficiency of enterprises and economy at large, increasing competition in the market, producing goods at a cheaper cost resulting in greater consumer choice at a lesser price, smaller government etc) are to a large extent, conditioned upon proper institutional arrangements. In order to achieve these perceived goals of privatisation, necessary legal reforms must be introduced including overhaul of the age old colonial laws inherited by Bangladesh. The reformed legal system must provide a body of laws and institutions which will help risk taking and hence competitive behaviour by the private sector and support the flow of domestic and foreign capital into the private sector. It must also facilitate the exercise by the state of its regulatory functions in a way which will ensure consideration of the costs and benefits of new regulatory proposals and enhance transparency and accountability.

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[*] Lecturer, School of Law, University of Western Sydney. I am grateful to my colleague Dr Scott Mann for his valuable comments on the earlier draft.

[1] Privatisation is a socio-economic and legal process through which private entrepreneurs are induced to participate in public enterprises. The term ‘privatisation’ has been used in the literature to refer to a number of developments (Ramanadham mentions that fifteen connotations of privatisation were used in an European symposium, [for details see, Ramanadham, Privatisation in Developing Countries,1989, p.62] such as the break up of the monopoly of a public enterprise, the contracting out specific activities to the private sector by public agencies (e.g. cleaning and laundry services in British hospitals, rubbish collection in municipalities) and contracting out the management of a public enterprises to a private company (quite common in some developing countries). As a process, it denotes reducing the roles of government, while increasing those of the private sector, in activities or asset ownership. (Savas, Privatisation: The Key to Better Government, 1987, p.1) In its narrow sense, however, privatisation means partial and full transfer of public sector enterprises from state ownership to total, majority or minority private ownership or to public control. It goes beyond the simple transfer of ownership to cover, as well, leases and management contracts. At the broadest level, privatisation refers to the introduction of market forces into an economy, usually with respect to public enterprises. (Ramanadham, The Economics of Public Enterprise, 1991, p.397). Thus privatisation encompasses the general reassignment of property rights from the state to the individual, contracting out the delivery of public services to the private sector or cut backs in state activities to allow greater room for private initiatives. The paper will not deal with the theoretical and general broad debate because they are well covered in the existing literature on privatisation. [See, e.g., Berg and Shirley, Divestiture of State-Owned Enterprises in LDC, 1985; Vickers and Yarrow, Privatisation and the Natural Monopolies, 1985; Shirley, Managing State-Owned Enterprises, 1985; Kay, Mayer and Thompson (ed),Privatisation and Regulation - The UK Experience, 1986; Cook and Kirkpatrick (eds), Privatisation in Less Developed Countries, 1988; Ramanadham (ed), Privatisation in Developed Countries, 1989; Ramanadham, The Economics of Public Enterprise, 1991 (especially last two chapters); Gayle and Goodrich (eds), Privatisation and Deregulation in Global Perspective, 1990].

[4] The New Right has returned to the laissez-faire political economy of Adam Smith legacy for guidance as to the motivation and behaviour of economic man. The ‘New Right’ draws its inspiration from an incoherent combination of neoclassical theoretical tools and Austrian School of politico-economic theory. See the works of writers like, Daniel Moynihan; Robert Nisbet; Martin Diamind; Daniel Bell; Natham Glazer; Irving Kristol; Samuel Huntington; Aaron Wildavsky; Seymour Lipset; Zbigniew Brzezinsky etc. For a detail study of ‘New Right', their intellectual history and significance see Steinfels, The Neoconservatives: The men who are changing America's politics, 1979.

[5] Wiltshire, Privatisation: The British Experience - An Australian Perspective, 1987, p.7. Other writers have also made similar conclusion, e.g., Pirie, in a publication of the Adam Smith Institute, writes, ‘Each piece of privatisation can ... permanently diminish the overall scope of state involvement in the economy.’ Pirie, Privatisation in Theory and Practice, 1985.

[6] According to a meeting of experts at Tangier (Morocco) from the 15-19 December 1980 on the Concept, definition and classification of public enterprises, a public enterprise is an organisation which is:

owned by public authorities including central, state or local authorities, to the extent of fifty percent or more, is under the top managerial control of the owning public authorities, such as public control including, inter alia, the right to appoint management and to formulate critical policy decisions, is established for the achievement of a defined set of public purposes, which may be multidimensional in character, and is consequently placed under a system of public accountability, is engaged in activities of a business character, involves the basic idea of investment and returns and which markets its outputs in the shape of goods and services.

‘Report of the Expert Group Meeting at Tangier’ in Fernandes and Scherl (ed), Seeking the Personality of Public Enterprises into the Concept, Definition and Classification of Public Enterprises, 1981, p. 24.

[7] In the year 1996-97 the total losses of public manufacturing enterprises were Tk 8,231 million (US $175 million) and the total losses of all public enterprises were Tk. 14,117 million ($300 million). In the year 1997-98 the total losses of public manufacturing enterprises were Tk 5,489 million ($116 million) and the total losses of all public enterprises were Tk 7,549 million ($160 million). Monitoring Cell, Ministry of Finance, Government of Bangladesh, 1998.

Public enterprises borrowed Tk 16,585 million ($352 million) in 1996-97, and in 1997-98 borrowed Tk 18,531 ($394million) from state owned banks. In December 1997, the outstanding loans of public enterprises amounted to nearly Tk 42,987 million ($915 million) of which Tk 15,057 million ($320 million) was overdue. Derived from Bangladesh Bank, 1998.

[9] See for example, Sobhan and Ahsan:1984; Ameen:1987; IBRD:1985; 1989; 1994; 1995; Humphrey:1990; Chowdhury:1990; Dowla:1997; Sobhan:1997; Sen:1997; Sobhan, Akash and Akram (ed):1998; Akram:1998; Akash and Sobhan:1999.

[10] For example, researchers of CPD alleged that the data on public enterprises loss are magnified by the World Bank researchers to justify privatisation policy, which it follows as a matter of faith rather than pragmatism. The World Bank data and study have been questioned by a number of researchers at a policy dialogue in Dhaka on 2-3 November 1996 on the issue of Reform of State Owned Enterprises and Privatisation, jointly organised by the Center for Policy Dialogue (CPD) and the World Bank. The World Bank was represented by Mary W. Shirley, Director, Policy Research Division of the World Bank. (Shirley earlier coordinated the World Bank's very widely discussed report on privatisation, Bureaucrats in Business.

[12] For a discussion of public enterprises during the British rule in India, see Dutt:1950

[13] For detail of growth of public enterprises in Bangladesh see Haque: 1992: chapters 1 and 2; Haque: 1996.

[15] Pakistan government followed a deliberate policy of discrimination against Bangladesh. As a result, at the time of independence 47 percent of the fixed assets of the modern industrial sector were controlled by non-Bengali entrepreneurs. Many of these were themselves part of large business houses with their headquarters in Pakistan, so the policy making and records were located in Pakistan. An estimated 41 percent of the total fixed assets in the modern industrial sector in Bangladesh were controlled by these business conglomerates. Among the non-conglomerate enterprises many were one unit ventures where the assets, management and policy making were located in Bangladesh even though the proprietors were Pakistani. 70 percent of the bank deposits were in banks owned and based in Pakistan. In the same way, trade (both foreign and domestic), had been dominated by non-Bengalis. The bulk of inter-province trade, which accounted for 48 percent of Bangladesh's foreign trade in 1969 - 70, was in non-Bengali hands. The figures quoted are cited from Yusuf: 1985.

[16] Owners of the Bengali owned enterprises operating during the Liberation War was seen as ‘collaborators’ of the Pakistani Army, many remained partially closed during the War but after War workers demanded full wages for the period of the War, many enterprises were partially damaged.

[17] Bangladesh Gazette Extraordinary, Industrial Investment Policy for 1972 - 73.

[18] The youths and the workers were militant, as the memories of political subjugation, economic exploitation and disparity in economic and industrial development under free enterprise policy of the Pakistan government, were vivid, which resulted in the concentration of wealth in the hands of 22 Pakistani families. There was a general feeling that industrial enterprises had been set up at the expense and through exploitation of the people of Bangladesh and henceforth they should belong to the people. For a detail study on the concentration of wealth in Pakistan, see White: 1974.

The general Secretary of pro-government trade union ‘Sramik League’ declared, ‘A section of Bengali capitalist class is conspiring to buy the factories left by their original owners at nominal prices ... We do not believe in private property and we are determined to uproot any budding capitalist at the birth.’ Extract from the speech of M A Mannan, General Secretary, Jatiyo Sramik League, on 1.1. 72, The Bangladesh Observer, 2.1.72.

[19] The four principles for which Awami League fought stood for were nationalism, democracy, socialism and secularism. These principles were later enshrined in the constitution of the country. However, during subsequent military rules the principles of socialism and secularism were diluted and somewhat abandoned.

[20] See The Bangladesh Industrial Enterprises (Nationalisation) Order 1972, P.O. 27 of 1972.

[23] There were 50 public corporations, of which 13 dealt with industrial enterprises, 11 with the financial and insurance sector, 9 with transport and tourism, 7 with agriculture and water resources, 4 with the energy sector, 4 with area development and spatial planning, and 2 for trading. These corporations varied in their nature and purpose; some were natural monopolies (e.g., the energy sector, public utilities, area development and spatial planning), others were commercial in nature, and some public enterprises were organised as departmental undertakings (e.g., public health and hospitals, railways, posts, telephone and telegraph, etc). For a detail see, Haque M, Critical Reflections on Law and Public Enterprises in Bangladesh, unpublished PhD thesis submitted to the School of Law at the Warwick University, 1991.

[24] The speech of the Prime Minister was reported in all national dailies of 28.3.72.

[30] Government of Bangladesh, Ministry of Industries, Revised Investment Policy 1974.

[32] For details of the provisions of the Special Powers Act 1974, see Bangladesh Gazette Extraordinary, 1974. For detailed analysis of the declaration of emergency, see Bari: 1985: Chapter 1.

[33] See The Bangladesh Constitution Fourth Amendment. This amendment changed the fundamental character of the Constitution. It replaced parliamentary democracy with a presidential one, limited judicial power to enforce fundamental rights, conferred on the President the power to veto a Bill passed by the parliament, and gave the President the power to declare Bangladesh a ‘One-party’ state.

[34] Alavi H, ‘The State in Post Colonial Societies: Pakistan and Bangladesh’ in Gough and Sharma (ed), Imperialism and Revolution in South Asia, p.172, 1973.

[35] The attitude of Bangladesh judiciary on this is clearly expressed in Anwar Hossain Chowdhury v Bangladesh [1989 BLD (spl) 1]. The court used ‘basic structure theory’.

[36] It was a pragmatic decision considering that by 1975 due to state patronage a group of Bangladeshi acquired sufficient wealth to enter into manufacturing sector. This group needed accommodation within the economy with their newly amassed wealth. Even during Mujib's rule there was a gradual shift of accommodating this group as evident from the New Industrial Policy of 1974. It opened up areas of private sector investment while continued its formal rhetoric of socialism. It stated, ‘... in pursuance of the government commitment to the establishment of a socialist economy, the key sectors including the bulk of the industries are already in the public sector ... It is, however, considered conducive to the goal of rapid industrialisation and mobilisation of investment funds to afford scope to the private entrepreneurs to play an expanded role within the framework of a planned economy.’

[38] Commentators believed that the amount declared as a result of the Revised Industrial Policy 1975 was far short of all realistic assumptions regarding the undeclared volume of money in private hands through illegal patronage by the state. See Alam: 1977. By way of legalising the 'black money', the government rewarded those who made fortunes by a violation of laws in the context of a general state of deprivation in the economy. This was government participation in the violation of its own laws for private gains. However, since the state was an active participant in the formation of 'black money', it was natural on its part to legalise it. [Similar arguments are raised by Sobhan and Ahmad:1980]

[39] Government of Bangladesh, Ministry of Finance, Resume of the Financial Industries 1977 - 78, pp 71-72.

[41] Clause (b) of the Proclaimation of Martial Law says, ‘I may nominate any person as President of the country at any time and who shall enter upon the office of the President after taking oath before the Chief Justice of Bangladesh or any judge of the Supreme Court designated by me. I may rescind or cancel such nomination from time to time and nominate another person as the President of Bangladesh. The President so nominated by me shall be the head of the state and act on and in accordance with my advice as Chief Martial Law Administrator and perform such functions as assigned to him by me’. See the Proclamation of Martial Law 1982, op cit. The CMLA first nominated a judge of the Supreme Court, Mr. Justice Ahsanuddin Choudhury. The post of the President was subordinate to the CMLA. Within a year the appointed President was relieved of his post and the offices of the CMLA and the President were combined together

[43] They were, 1) arms, ammunition and sensitive defence equipment; 2) generation (excluding standby/captive generation), transmission and distribution of electricity; 3) forest plantation and mechanised extraction within the bounds of reserved forests; 4) telecommunications (two way light/high/very high/ultra high frequency transmission); 5) air transport (excluding cargo) and railways; 6) atomic energy; and 7) security printing (currency note) and minting. See, Ministry of Industry, Revised Industrial Policy 1986.

[50] The Prime Minister under the constitution was the leader of the Jatiyo Sangshad (the parliament) while the President was the chief executive of the republic with sweeping powers. On the 15 September 1991 a referendum was held and 84.42 percent of the votes cast were in favour of a change in the governmental system from a presidential to a parliamentary one.

[53] Ibid, Objectives 2.4. The 1999 policy contains a special chapter (Chapter VI) on Privatisation and State-owned Enterprises Reform. The chapter is reproduced below:

[54] Absolum,2000, ‘The Castle and the Corporation: Judicial Review of Government Business Enterprises’ in the Australian Business Law Review, Vol. 28, p.102

[55] See for example M.H.Chowdhury v General Manager, Titas Gas Transmission & Distribution Co Ltd, BSCR (Bangladesh Supreme Court Reporter) 1980 (SC) 373.

However, it is doubtful whether corporation form was chosen keeping in mind the ease to privatise in future. Bangladesh, being a former British colony, follows the common law system. Indeed, most laws in Bangladesh date from the British. In the absence of the Constitution and parliament, the need to have the abandoned industries running once more forced the policy makers to blindly replicate the British model of public corporation, widely known as Morrisonian model. In advocating the use of the public corporation form, Herbert Morrison sought a combination of public ownership, public accountability and business management for public ends. For details of the Morrisonian concept of public corporation see Morrison: 1933.

[56] In a meeting on 25.2.85 between the President Ershad and the Executive Committee of CONCOPE (Consultative Committee on Public Enterprises) it was decided to make efforts to settle inter corporation debts through CONCOPE. CONCOPE, VOL.3, No 1, 1985, p37.

[57] Learnt from interviews with various officials of these organisations who prefer to remain anonymous.

[58] Bangladesh had been ruled directly and indirectly by martial law for fifteen years out of its twenty nine years of existence, which means military directives made the major segments of the prevailing legal rules and institutions inoperative. Thus, already in the area of political and constitutional activity, the autonomy of the legal system has been eroded by frequent intervention by the armed forces. If the legal system is not used in the management of political and economic life, serious doubts are raised as to how it can survive as a viable system to regulate other sectors of a community. For instance, with the proclamation of martial law the Constitution was reduced to a position subordinate to the Proclamations issued by the Chief Martial Law Administrator. See the case of Khondoker Ehteshamuddin Ahmed @ Iqbal v Bangladesh and Others, 1981 BLD (AD) 107; also see the Pakistani case of State v Dosso, where it was observed by the court that ‘where a Constitution and the national legal order under it is disrupted by an abrupt political change not within the contemplation of the Constitution ... its legal effect is not only the destruction of the Constitution but also the validity of the national legal order.’ PLD 1958 SC533.

[65] For a detailed discussion of the emergence of nouveau riche class in Bangladesh, see Haque: 1991: chapters 1 and 2.

[66] How much of the legalised ‘black-money’ was invested in the industrial sector is unknown. But from discussions with various politicians, government officials, and bank officials in Bangladesh it appears very little of the amount was invested in the manufacturing sector. Haque discusses at some length about black money and the various Martial Law Ordinances exonerating persons who disclosed of and invested the money in Bangladesh., Haque:1992:chap.1.

[68] BCIC= Bangladesh Chemical Industries Corporation; BSFIC= Bangladesh Sugar and Food Industries Corporation; BSEC= Bangladesh Steel and Engineering Corporation; BJMC= Bangladesh Jute Industries Corporation; BTMC= Bangladesh Textile Mills Corporation; BFIDC = Bangladesh Forest Industries Corporation.

[70] Only 19 enterprises were privatised between 1991-00, whereas during first two years of Ershad's military rule 101 large public enterprises were divested. Generally, western academics and institutions, like World Bank, acknowledge the fact that ‘democratic governments are not normally associated with 'heroic' policy transformations.’ See Moran and Prosser: 1994:5; IBRD: 1995.

[73] For details of different techniques of privatisation see World Bank, Techniques of Privatisation of State-Owned Enterprises (Draft Report), Industry Department-Legal Department, July 1987.

[74] 'Reprivatisation' is used in the sense of transferring the privatised enterprise to new buyers who expect to provide more effective management and make it profitable

[75] For detail of sale/disinvestment of abandoned industrial enterprises see S.H. Chisty, 'Privatisation in Developing Countries: The Experience of Bangladesh', Conference on Privatisation, Asian Development Bank, Manila, January 31-February 1, 1985.

[76] Learnt from interviews connected with this research. See also Mutshuddy:85:19-28

[92] Non-Bangladeshi cases have generally confirmed such observation. See for example, Armstrong, M., Cowan, S. & Vickers, J. 1994. Regulatory Reform: Economic Analysis and the British Experience. MIT Press, Cambridge, Massachusetts. (Armstrong, Cowan & Vickers provide an extended critique of privatisation in the United Kingdom.)

Forsyth, P. & Hocking, R. 1980. ‘Property Rights and Efficiency in a Regulated Environment: The Case of Australian Airlines’, Economic Record, 56: 182-185. (Using the now defunct Australian Airlines as an example, Forsyth & Hocking suggest that managerial incentives appear to be more important than ownership in determining the efficiency of a firm.)

Giersche, H. (ed.) 1997. Privatisation at the End of the Century. Springer, Berlin.

(This collection of papers gives accounts and critiques of International Monetary Fund-sponsored privatisation programmes in the former-Soviet block countries.) King, S. & Pitchford, R. 1998. ‘Private or Public? A Taxonomy of Optimal Ownership and Management Regimes’, Department of Economics Research Paper, Department of Economics, University of Melbourne, No. 634. (King & Pitchford argue that in the case of enterprises ‘traditionally’ run by government, privatisation combined with a myriad of regulations to guard against severe market imperfections may be less desirable than public ownership.)

[98] The researches of BIDS and CPD argue that privatisation was carried out at a substantial social and economic cost. Their research show that owners of privatised enterprises are engaging in speculative commercial projects like housing and shopping complexes, and the divestiture programme of the government is hindering industrialisation of the country.

[100] From 1974-95 the Bangladesh Shilpa Bank, Bangladesh Shilpa Rin Sangstha, various government owned commercial banks and other DFI’s gave investment loans to the private sector totalling over Tk. 30 billion. About 13 billion Taka is yet to be collected from private sector. This figure is after the government has written off 5 billion Taka. This situation has created a liquidity crisis and there is a serious shortage of funds to finance future investment. (Gathered from interviews with various bank officials and also news items published in local dailies.

[101] The Bangladesh Times in its 18.2.87 edition quoting the Minister for Industries mentioned that 33,623 jobs were lost in jute industry alone between 1981-87.

[106] This is derived from my interviews in 1991 conducted in connection of my PhD research at the Warwick University with officials of Ministry of Industry, Corporations and Trade Union leaders. Almost every one expressed similar views although government officials tried to qualify their assertions in different ways.

[110] The World Bank, 1996, Government that Works, Reforming the Public Sector, Washington DC.

(a)	Reduction in the size of public sector corporations by disinvestment of abandoned/nationalised industries in a phased manner, irrespective of the question of profit or loss of the enterprises;
(b)	Privatisation of those enterprises that were established by the corporations with their resources/ADP funds, where such units were found to be unable to compete with the private sector or were incurring continuous losses.
(c)	Offloading of up to 49 percent of the shares of enterprises, managed by public sector corporations through public subscription or operation by the Investment Corporation of Bangladesh, in order to reactivate the share market;
(d)	Return of nationalised jute and textile mills to their former Bangladeshi owners/share holders in order to create a favourable investment climate and confidence in the minds of prospective entrepreneurs; and
(e)	Provision for appointment of management contractors to run some of the bigger industrial enterprises in the public sector.

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