Macro Economic Analysis On

Experience of Privatization in Bangladesh - 4 Case Studies

Submitted To

Sheikh Morshed Jahan Course Instructor: Macroeconomics G203

Date of Submission: February 28, 2005

Prepared By: Faisal Mahmud

Roll No. 01

Tanvir Bin Anwar

Roll No. 02

Ahmed Minhazul Arefin

Roll No. 59

Md. Parvez Hossain

Roll No. 64

Institute of Business Administration University of Dhaka

Table of Contents ABSTRACT.................................................................................................................... 1 OBJECTIVES................................................................................................................ 1 SCOPE........................................................................................................................... 1 METHODOLOGY........................................................................................................2 LIMITATIONS .............................................................................................................2 WHAT IS PRIVATIZATION? .....................................................................................3 THE OBJECTIVE OF PRIVATIZATION .................................................................3 BANGLADESH’S PRIVATIZATION POLICY..........................................................6 OBJECTIVES ...................................................................................................................................... 6 INSTITUTIONAL SETTING (CHANGE) ............................................................................................ 6 THE METHOD OF PRIVATIZATION ............................................................................................... 6 ESOP AND WORKERS PARTICIPATION IN PRIVATIZATION ..................................................... 7 PREPARATION FOR PRIVATIZATION AND VALUATION .............................................................. 7 TERMS AND CONDITIONS OF THE SALE ....................................................................................... 8 BANK GUARANTEES........................................................................................................................ 8 LAND USE CONSTRAINT ................................................................................................................. 9 MARKET VALUATION AND TENDERING...................................................................................... 9 THE PROCEEDS FROM PRIVATIZATION AND LABOR ISSUES ...................................................11 PRIVATIZATION OF MONOPOLIES AND REGULATORY FRAMEWORK....................................11 CASE STUDY 1: KOHINOOR CHEMICAL CO. (BD) LTD................................... 14 CASE STUDY 2: ZARINA COMPOSITE TEXTILES MILLS LTD. ...................... 16 CASE STUDY 3: MEGHNA CYCLES LTD. ............................................................. 19 CASE STUDY 4: DHAKA VEGETABLE OIL LTD. ................................................ 21 FIELD EXPERIENCES AND RECOMMENDATIONS ........................................ 22 RECOMMENDATIONS............................................................................................ 23 CONCLUSION ........................................................................................................... 24 REFERENCES ........................................................................................................... 25 APPENDIX ................................................................................................................. 26

Abstract

Objective

Scope

Abstract Efficiency and the proper utilization of resources has been the key to success for business. Throughout the past few decades many public and state owned enterprises have succumbed below break-even and many have incurred heavy loss; thus playing a major upset in the economy of the country by diminishing Net Domestic Product of Bangladesh. It is privatization that has come a long way to alleviate the situation. Many government organizations have been deteriorating standard and have lost efficiency for different reasons. As a result past couple of decades has seen a lot of changes in organization with the introduction of privatization. Privatization has proved out to be a boom in bringing out radical changes in the organization and thus increasing the GDP of many countries.

Objectives The study has the following objectives: ü To analyze the past growth and current development of Privatized sectors in Bangladesh ü To find out the possible issues which affect the implementation of Privatization. ü To find out the affect of Privatization upon economy. ü To find out the future prospects of the Privatization process and privatized organizations of our country. ü To come up with an effective set of recommendations.

Scope This study revolves basically around the Privatized Sectors in Bangladesh. This study also includes a study of the effects of Privatization over the economy but this potential is dealt with in a cursory matter, given the extent of study.

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Methodology

Limitations

Methodology 1. Collection and Evaluation of the Primary data a. Interviewing the officials of Privatization commission. b. Selective face to face interview with the designated executives of different companies. c. Interviewing the officials of different Privatized Factories.

2. Collection of secondary data a. Relevant printed materials from Privatization Commission. b. Materials and data from different Privatized Factories. c. Data from internet 3. Cross examination of the Primary data collected with available facts.

Limitations • There are a number of Privatized organizations which don’t function at all in spite of being privatized a long time ago and therefore not able to provide any data. • Though a huge effort was taken to encompass the whole privatization scenario, the reluctance of different organizations has created hindrance to our progress. • Many companies though privatized have no existence at all and no relevant address was found for collecting data. • The geographical displacement of different privatized organizations and the distance factor has worked against us to depict a finer scenario of the situation. • Because of the time constraint it is difficult to draw a complete picture on the matter and as a result, a few relevant things may be missing. • Some aspects of the report may be considered confidential by the factories and therefore may not have been revealed to us. • Seasonal situations may skip our attention in spite of the best effort made by us.

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What is PRIVATIZATION?

What is PRIVATIZATION? Generally, privatization is cast as the gradual process of disconnecting state owned enterprises or state provided services from government control and subsidies and replacing this duct with a conduit linked to market forces1. However, such a definition assumes the existence of a market centered economy with a private economic regime, which clearly is not the reality of many countries. Taking this factor into consideration, a more relevant and indeed, complete definition is one that goes further to characterize privatization as the entire process of expanding the sphere of the market through a host of regulations that create an enabling environment for free enterprise to operate as a strategy for sustainable economic development. In the context of the broader goals of human settlements and economic development, when properly conceived and implemented, privatization is envisaged to foster efficiency and encourage investment in infrastructure and services. In most cases, discussion on privatization generally refers to: a. reducing local government activity within a given service either by involving the participation of the private sector; or b. reducing local government ownership when (i) enterprises are divested to unregulated private ownership and (ii) local government agencies commercialized

The Objective of PRIVATIZATION 1. 2. 3. 4. 5. 6. 7. 8.

Greater efficiency Revealing the true and full cost of the service provided Promotion of technological advancement Development of capital markets Broadening the wealth and achieving widespread private ownerships in society Curbing inflation Raising extra-revenues for the government Eliminating hidden unemployment and reducing the power of public employee unions.

1

Moyo, S. (1995) "Martingales, Variance Decomposition and Efficient Frontiers. The Behavior of Stock Prices in Emerging Markets: A Co integration Approach" Ph.D. Dissertation, Howard University, Washington, DC.

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What is PRIVATIZATION?

Privatization can be done in many ways. There are 11 ways in total: 1. CONTRACTING-OUT: The government contracts out with the foreign profit as well as not- for profit organizations for the delivery of goods and services. Contracting-out is common especially in such services as public works and transportation, public safety services, health and human services, parks and recreations services etc. 2. FRANCHISING: The government gives a special monopoly privilege to a private firm to produce and supply some part of particular services. 3. DEREGULATION AND DECONTROL: Public regulation and public control are broad concepts in the sense that they define the various ways, in which government may intervene directly to the economic agent. All type of public controls are abolished. 4. USER CHARGES: (Higher education, health services, cable TV, electric power, likes that) some types of goods and services can be either provided free of charge and financed by taxes or by the imposition of a fee or user charges to the individuals who receive benefits. 5. GRANT SYSTEM: Grant and subsidies are financial or in-kind contributions to individuals or private firms by government. 6. VOUCHER SYSTEM: It is designed to encourage the consumption of particular goods and services by a particular class of consumers. Types of voucher system are; • • • • • • •

Tuition voucher Medicre/medicaid voucher Child care voucher Housing voucher Transportation voucher Food voucher Clothing voucher

7. MANAGEMENT CONTROL: Government may sometimes retain full ownership of public economic enterprises and/or other public facilities but transfer its management to a private firm.

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What is PRIVATIZATION?

8. LEASING: Local government rents its trucks to a private firm for the solid waste collection in the city. In this case, management and operation are carried out by the private firm. 9. JOINT VENTURE: Privatization encompasses all practices aiming to reduce the role and scope of the public sector and to increase private sector activities in the national economy. 10. BUILT-OPERATE-TRANSFER (BOT) SYSTEM: The system is quite simple and seeks to attract foreign capital. Direct foreign capital investment are encouraged to build infrastructure facilities, petroleum exploration station etc within the developing, at the end of contract, the facilities and establishment are transferred to the government. 11. NON-PROFIT ORGANIZATION: It is also called voluntary organization or philanthropic organization; also provide some public goods and services.

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Bangladesh s Privatization Policy

Bangladesh’s Privatization Policy

Objectives The stated objective of the authorities’ privatization policy is to increase the role of the private sector in order to accelerate economic development. The policy states that any public enterprise may be sold, irrespective of the size of its fixed asset, market share, or profitability. An implicit assumption of the policy is that the financial rate of return to capital in the private sector, Π PVT, is or shall be greater than the financial rate of return in the public sector, Π PUB. The authorities want to privatize because they assume that the social gains from private sector profits will be greater than the social gains from the public sector profits. The authorities expect that as the share of the private sector in the level of activity increases the rate of economic growth will rise.

Institutional Setting (change) The state has given the Privatization Board the authority for privatizing public enterprises in Bangladesh. In order to strengthen its program and to bring the overall process of privatization under a legal structure, the authorities introduced a Privatization Bill in the National Parliament for its approval on 11 July 2000. It was known as PRIVATIZATION ACT 2000. Under this act the Privatization Board was replaced by Privatization commission.

The Method of Privatization The policy states that the enterprises can be sold either by international tender or public offer of shares. The authorities are expected to use a variety of methods in privatization: International tendering, offloading of shares in the capital market, auctioning, negotiated sales, and so forth. The authorities have declared that they would prefer to use Employee Stock Option Program (ESOP) if the workers of the enterprise are willing to buy it. The actions of the authorities reveal that ESOP is used sparingly in addition to other methods

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Bangladesh s Privatization Policy

of privatization rather than as a substitute for convention modes and methods of privatization.

ESOP and Workers Participation in Privatization According to the authorities, an ESOP shall be attempted in the textile sector. If workers choose not to exercise ESOP, then other means of privatization shall be sought. The policy of attempting to apply ESOP is probably motivated by political expediency because it suggests that the authorities are eager to serve the interest of workers. However, the application of ESOP may be limited to few firms due to several reasons. Firstly, workers have neither the financial resources to buy enterprises nor access to working capital to operate an enterprise. Secondly, workers may not be interested in putting a bulk of their wealth in one asset. Thirdly, an enterprise may benefit from being bought by an outside strategic investor who brings in additional investment and managerial skills. Fourthly, workers need to have fairly democratic organization and a sophisticated knowledge base to operate firm effectively. Fifthly, while widespread ownership of equities might be desirable objective in itself, for effective corporate governance a strategic buyer or group needs to establish managerial control. ESOP would be appropriate only for sectors where most of the value added originates from simple, unskilled or semi-skilled, direct labor but the level of technology and capital required is low and the scale of operation relatively small. Since the objective of ESOP is to ensure workers’ support for privatization, the authorities may reserve some shares of enterprises to be divested for workers’ to buy at a discount. It can be argued that labor ownership of the firm may reduce political opposition to privatization.

Preparation for Privatization and Valuation The assets and the liabilities of the enterprises will be valued by a selected accounting firm, using one or more generally accepted accounting methods, subject to review by the authorities and, if necessary, revaluation by another selected accounting firm. The authorities will provide the valuation report and other relevant documents, including three years’ financial and performance data of the firm, to potential buyers.

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Bangladesh s Privatization Policy

The authorities should try to ensure that there is no collusion between the accounting firm and the potential buyer. Collusive practice would undermine the point of carrying forth the valuation exercise.

Terms and Conditions of the Sale The policy states that there shall be no provision for writing-off long-term debt of the enterprise that will be privatized. The buyer shall assume the long-term liabilities for the firm upon transfer. The short-term liabilities, such as claims of workers and incomes taxes, shall be assumed and be written-off by the state. If the value of the assets exceeds bank loans, then the buyer will have to pay the excess amount either in cash or within one year along with a simple interest rate of 10 percent. Short-term and long-term liabilities have to be clearly defined prior to privatization. A clear and consistent demarcation of liabilities needs to established and upheld. If, however, the state does write-off long-term debt following privatization, it will be a transfer to the buyer of the firm. The policy also states the buyer shall assume full legal responsibility for all pending court cases against the enterprise. There should be absolutely no scope for renegotiating the terms and the conditions of privatization after the sale. Scope for renegotiating creates opportunities for rent-seeking and gives advantages to privatized firms over other firms in the sector. Intended buyers will need to submit 2.5 percent of the bid price along the tender. The wining bidder must pay 22.5 percent within one month. The balance of 75 percent has to be paid within 5 years at half-yearly installments along with compounded interest of 9 percent per year. In case the buyer pays the entire amount within 30 days of signing of the agreement, there will be a 10 percent discount.

Bank Guarantees When the price is not paid in cash, the buyer is required to provide a bank guarantee. But a guarantee from a bank with poor asset quality, low profitability, and poor management is worth very little. If the bank guarantee is issued by a nationalized commercial bank, then ultimately it is the state that assumes the responsibility for the buyer’s credit. Such guarantees can have adverse effects by creating an incentive to default. Indeed, state bank’s guarantee may be contrary to the objective of privatization as the public indirectly 8

Bangladesh s Privatization Policy

ends up assuming the burden if the buyer defaults. If the bank guarantee is issued by private commercial banks with a record and propensity for insider loans, such guarantee would be of little value. Bank guarantees would be acceptable when the bank can assume the responsibility for default and has the financial ability to meet its obligations without recourse to the state exchequer. Only guarantees from financially solvent banks are reliable and trustworthy. If the authorities sell enterprises partly on credit, a strong mechanism for credit collection is required. Discipline in the banking and the nonbanking financial system is necessary for the success of the privatization policy because otherwise there will be both incentives and means for rent-seeking. Without proper incentives, buyers may borrow from banks against collateral of little value, refuse to repay bank loans, try to delay payments to the state, and so forth.

Land Use Constraint The policy states the land of the firm may be used only for industrial purposes. This provision may have been set to deter buyers from buying the enterprise for its land value rather than for operating the given enterprise as a manufacturing unit. This provision is unduly restrictive and may be inappropriate because service and circulation activities are complementary to manufacturing. For instance, it may be beneficial for a firm to establish an on-site sales or service center or storage facility for inventories and produced commodities. Such a binding constraint will reduce the sale price of the enterprise. Recently the authorities have stated that the land will be unbundled from public enterprises and sold separately. There is a tradeoff between the sale price of public enterprise and whether the surrounding property is unbundled. Unbundling the surrounding property and then selling the property at the market price is motivated by the desire to raise higher revenue from privatization. The benefit of unbundling the property is that it creates a good number of new industrial estates with considerable market value because of booming real estate market and the scarcity of suitable industrial plots in Bangladesh. The demerit of unbundling the adjacent property from the enterprise is that it restricts the scope for future expansion. It also requires the state to engage in more transactions incurring higher transaction costs.

Market Valuation and Tendering Generally the market price reflects the "value" of the firm, provided it is being valued in a well-functioning and informed market place, composed of a rather large number of 9

Bangladesh s Privatization Policy

agents. The authorities should, therefore, ensure that the tendering process is competitive and draws a large number of buyers. In the absence of a competitive environment there is scope for under valuation, particularly in a small group oligopoly market where the number of potential buyers is few and there may be structural features that enable collusive behavior. Under the present policy if the number of bidders is greater than or equal to three then the highest bid price will be accepted even if the amount offered and the long-term debt accepted is less than the net worth of the firm. If the number of bidders is less than three then the highest bid price, along with the long-term debt assumed by the bidder, will be accepted if and only if it is greater than the net worth of the firm. When the number of bidders is less than three but the bid price is lower than the net worth of the firm then it will be tendered again. In the second round of tendering, irrespective of the number of bidders, the highest bid price will be accepted even if it is lower than the net worth of the firm. This mechanism for the disposal of the firm can be improved. The tendering process used in public sector procurement and sales in Bangladesh is weak. The institutional mechanism for tendering can and should be made more effective by using a wide variety of practical and feasible auction techniques that have already been developed in the theoretical literature. The authorities can establish an appropriate reservation price for the firm to be privatized. If the bid price is lower than the reservation price, then the authorities can convert the public enterprise into a joint stock company and sell its shares. When a strategic buyer, who is willing to pay above the reservation price, is not forthcoming, the state can use initial public offer scheme. The policy has provisions for such procedures to be followed. The privatization policy assumes a developed, fairly competitive, and efficient capital market, including a market for corporate control. However, the flow of information for investors in the capital market is imperfect and incomplete. The firms’ accounting records and accounting and auditing standards are poor. Investors lack access to accurate material information and reliable data about firms. There are often delays in the publication of annual reports. The capital market regulations are lax and not properly implemented. The financial press is underdeveloped. The absence of investigative financial journalism makes it difficult to check and forestall insider trading and malpractice in the capital market. The reliability of information and data about firms in the capital market is poor. Thus, the highest bid price may not reflect the value of the firm in terms of economic fundamentals. The authorities should allow buyers to sell 10

Bangladesh s Privatization Policy

"privatization bonds" in the capital market to raise funds to buy enterprise. However, the state and the nationalized commercial banks must not underwrite or purchase bonds issued to finance the leveraged buyout of the public enterprise. In essence, there should not be any state subsidy to the buyer of the enterprise. The private sector must assume full financial and economic responsibility for running the enterprise. At present various non-government organizations have been able to pool the savings of lower income social groups through credit schemes and income generating activities. Some of these nongovernment organizations have developed managerial expertise, and experience in operating commercial ventures. These organizations might also be encouraged to participate in the privatization program.

The Proceeds from Privatization and Labor Issues Under present policy, the revenue from privatization accrues to the Government of Bangladesh. The proceeds should not be viewed as dividends but as sale of assets. The proceeds from privatization of enterprises may be used for addressing the problems arising from labor retrenchment due to privatization. As firms downsize under private ownership, many jobs will be abolished and some workers will be replaced. As a result, this will increase unemployment in the manufacturing sector because not all dismissed workers will be able to find jobs. The working class will oppose privatization unless its losses are compensated and privatization leads to the creation of new employment. Thus, funds from privatization should be used for (a) workers’ compensation (severance payments), and (b) labor training and relocation programs. Labor retraining program shall improve labor productivity. At present, there are only a limited number of vocational training institutes in Bangladesh. State policies should support vocational training and skill development programs because the country needs productive workers in many sectors.

Privatization of Monopolies and Regulatory Framework The present policy framework does not contain any mechanism for creating and enforcing regulatory and competition policies. If the authorities carry forth the privatization program, then the state would eventually also transfer public monopolies in utilities, infrastructure, and communications to the private sector. However, in order to ensure gains from privatizing in non-competitive sectors, industry regulations must be in place and be implemented rigorously to protect consumer interests and social objectives. 11

Bangladesh s Privatization Policy

Properly regulated monopolies and oligopolies transferred to the private sector have limited ability to abuse market power and are governed by a good set of incentives that promote improvement of productivity and service. For Bangladesh, privatization and private sector entry in monopolies and oligopolies should be accompanied with a strong, credible, transparent regulatory framework that limits the scope for abusing market power and appropriating rents.

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Case Study

Case Study Kohinoor Chemical Co. (BD) Ltd. Zarina Composite Textiles Mills Ltd. Meghna Cycles Ltd. Dhaka Vegetable oil Ltd.

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Case Study - Kohinoor Chemical Co. (BD) Ltd.

Case study 1: Kohinoor Chemical Co. (BD) Ltd. History Established in 1953, Kohinoor Chemical Co. (BD) Ltd. was a private company until 1970, as the company was closed at March 1971 and it remained closed till 1972. In 1972, Government of Bangladesh took control over it and put it under BCIC (Bangladesh Chemical Industries Corporation). 51% of the ownership was held by government and 49% shares were publicly held. It was privatized in 1993 with Orion Group buying 51% shares.

The Reasons behind Privatization Kohinoor Chemical faced huge loss from 1982 to 1993. Some reasons have been found behind it. According to Mr. S M Mushfiqur Rahman, executive-administration, mismanagement was primarily responsible for this situation. Government failed to reduce it. Dishonesty by top-level managers made the company a loosing concern. Corruption was spread out in each level of management. Excessive and unnecessary labor force made the situation worse.

The invasion of Orion Group Orion group found the company running with 1,500 workers with a very low efficiency. Products’ market shares went down and totally ineffective administration.

The Post Privatization Progress by Orion Group Orion group created huge change in Kohinoor Chemical. They are making profit from 1995. They put emphasis on some points to improve: 1. They ensure employee feedback. Management developed a good relationship with the employees and thus motivated them. 2. Management was careful in making job responsibilities for the employees and then made that clear to them.

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Case Study - Kohinoor Chemical Co. (BD) Ltd.

3. For the sake of profit, Orion group created a huge change in the operating procedure. They laid off two-third of employees and surprisingly resulting in doubled production. This was possible due to their planned procedure. 4. Orion group was very successful in creating its local market. They emphasized in making countrywide marketing depot. Now, they have 400 sales depots in Bangladesh. 5. Recently, Kohinoor has started exporting its product in India. Management is also seeking further market growth in Europe 6. Kohinoor had marketed their product under only one brand, named “Tibet”. After privatization, they introduced another brand, “Sandalina”. They are trying to make it popular worldwide. In the local market, Sandalina is the most expensive and luxurious soap. Because of its herbal extract, sandalina became popular in India too. 7. Considering the competitive market demand and increasing the market share as well as sales revenue, Kohinoor has already installed new soap plant, glycerin plant etc. It already started the production and marketing of the Tibet glycerin and Leader mosquito coil. Genstar shaving cream has 40% market share in the local market.

A Closer Look • • •

There are some points to consider. Kohinoor has a little amount of shareholders’ equity in comparison to its loan fund (only 11% approx.). The company has also an increasing amount of accounts payables. They can reduce their liability and then invest their current asset in long-term basis. The company paid 15% dividend to its shareholders in the year 2002-2003.2

Effect in National Economy • • •

2

Kohinoor ensured proper utilization of the human resources. They doubled production with one-third of the previous labor force. Kohinoor is also contributing in the export sector. It’s pleasant to see a Bangladeshi firm is competing in global market. In 2002-2003, Kohinoor has contributed tk. 17,348,817 to the national exchequer in the form of value added tax, advance income tax and supplementary duty and during the previous year the amount was tk. 139,913,855.

According to the 16th annual report. SEE Appendix 15

Case Study - Zarina Composite Textiles Mills Ltd.

Case study 2: Zarina Composite Textiles Mills Ltd. Formerly “Zinat Textiles Mills Ltd.”

History Zinat Textiles Mills Ltd remained as a private company till 1971. In 1972, Bangladesh government took over it and placed it was under BTMC (Bangladesh Textiles Mills corporaton). The factory remained closed from 1991 to 2001. Then it was privatized. Ananda group bought it and now it is controlled by the head office of Ananda group in Dhaka. No share is issued to public sector .

Inside Story Mrs. Laila Khondakar, manager-administration and Mr. Md. Masuduzzaman Chowdhury, commercial officer, briefed us about the reasons behind the shutting down of the company in 1991. Unnecessary and semiskilled employees led the company to the loss. Employees union played a vital role here. Union put the management in pressure. Management was compelled to continue with a large number of employees mostly unnecessary for the company. Company began to run in loss. And the company became a burden for the government Corruption entered in each and every sector of the company. Government had to pay salaries to the employees for long ten years when the company was closed. And at last, government got rid of it by passing the ownership to the private sector. Here also government had to negotiate with the union and paid golden handshake to many employees.

The Introduction of Ananda Group Ananda group made a strategy to improve the situation gradually. It was not easy for them to run the company. They faced various problems. As the company remained closed for several years, management had to find out new customers for their product. 3 years have passed. Ananda group located some local customers and selling their products to them to survive.

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Case Study - Zarina Composite Textiles Mills Ltd.

Another problem the authority found was weak infrastructure. Most of the machines were bought in 1952 which were really expensive to maintain. Scarcity of raw materials is also a major problem. Quality of raw materials of the local market is not up to the standard. So they had to import expensive raw materials form Pakistan, Cameroon and India.

What Ananda Group Accomplished Ananda group knew that it will not be very easy to run a company which remained closed for ten years. They have taken some quick steps: They took new employees and removed workers union. They are importing new plants very soon. Already three new rotors have come. New pay scale has been developed and increment system has been implemented. To minimize cost, the management is planning to operate the machine by gas. It’ll be lass expensive and consistent flow of electricity can be ensured by using gas generators.

Current Scenario After having much difficulty, now Zarina Composite Textiles Mills Ltd. is running in breakeven point. It doesn’t arrange AGM (annual general meeting) every year because it is a sister concern of Ananda group and the management goes through the financial statements. Recently, management took a plan to modernize the company. Budgeted total cost for this is 100 crore tk. “The company is going to start BMRE (Balancing modernizing rehabilitating equalizing) project” – said Mr. Masud. Islami Bank Bangladesh Ltd. is the major financer here.

Effect in Economy • •

Our economy is definitely affected by the privatization of Zinat Textiles Mills Ltd. These are as follows: Saving the loss: First of all, privatization saved the losses of the government. Now the company is running in break-even point but it is expecting to make a profit very soon.

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Case Study - Zarina Composite Textiles Mills Ltd.

• •

• •

Utilization of the resources: The resources of the company were kept unutilized for long ten hours. It’s a national loss. Making contribution in GDP: The company is producing a huge amount of final goods. Definitely, it contributes to our GDP. In July, 2004, the production department added value to 838500 cone raw materials.1 Increasing the living standard of the workers: The company is paying salary in a new and improved scale. It is also giving various compensations. Export: The company has already found some foreign customers and thus it can play a role in the export sector. 3

Future recommendations •

• • • •

3

The company should have some HR policies because they need to look over their employees. Previously, employees union caused a great harm. This can be a reason of the company’s not having HR policies. But the employees’ welfare should not be ignored. The company should try to increase export. It should also try to decrease the import of the raw materials. Management should be careful about the arrangement of AGM regularly. Arranging AGM infrequently is not a good sign of development. Plan of modernizing the company is a very good step. The company should be careful about the full success of this plan. The company faced corruptions earlier. So management should consider it as an important issue.

According to Statement of yarn received and delivery, July to Dec. 2004. SEE Appendix. 18

Case Study - Meghna Cycles Ltd.

Case study 3: Meghna Cycles Ltd. Formerly “Bangladesh Cycles Ltd.”

History In 1965, Prince Cycles Co. (today’s Meghna Cycles Ltd.) was established by some investors of Panjab. After 1971, Bangladesh government took over the company and named it Bangladesh Cycles Ltd. Government put it under BSRS. Panjabi investors were prudent and they identified some potential customers. So the business was running very well till 1975. After that, some factors led the company to loss. No modernization and overhauling were done before privatization and the company was loosing its customer. Then the government invited a tender and sold the company to Meghna group for 2 crore and 70 lac tk. (27,000,000). Then the success story begins.

The Introduction of Meghna Group BSRS was not very much concerned about the development of Bangladesh Cycles. They, in fact, missed the opportunity to develop a successful company. It was Meghna group who took the upper hand and went a long way to develop the barren project

The Accomplishment by Meghna Group 1. Meghna group developed a plan to develop the company gradually. They started with producing spokes only. Then they began producing rims and bearing. Then they identified British customers and began export cycles there without any brand name. Last year they exported 200,000 units of cycles to UK and earned 14,000,000 dollars. 2. Meghna doesn’t sell cycles in the local market. 90% of its buyers are from UK and others are from Germany, Ireland and France. 3. Mr. Mizanur Rahman Bhuiyan gave us information about their new project. He made a contract with John William Cane, a British customer. Under this contract, Meghna Cycles is going to double their export in UK. For this, they are installing new machines and investing 8-10 crore tk. For this they also employed Mr. Steven Walsh, a British consultant.

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Case Study - Meghna Cycles Ltd.

4. The company is going to start BMRE (Balancing modernizing rehabilitating equalizing) project.

Adverse Situation in Market Meghna is now facing unfavorable market situation. Price of cycle is falling while price of its major raw material, steel is increasing. But Major Halim Khan, executive officer said that management doesn’t want to increase price. They want to improve efficiency and decrease variable cost. Major Halim accepted that challenge and now is trying to decrease variable cost.

Effect in Economy • • •

•

The most noticeable effect it created is export. It earned millions of dollars and thus contributed a lot in our GDP. The company is investing approximately 8-10 crore tk. to meet their new sales contract and another 50 crore for BMRE project. Management is working to increase the living standard of the workers. WPPF has been arranged. Regular workers are now getting 1,500 tk. as a basic salary (excluding overtime). Casual labors are getting tk. 50 per session. For the government, the company was a loosing concern. And now we see the company is making profit and paying tax to the government. Definitely the purpose of privatization has been served.

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Case Study - Dhaka Vegetable oil Ltd.

Case study 4: Dhaka Vegetable oil Ltd. History Established in 1953, Dhaka Vegetable oil Ltd. was a private company until the liberation war. In 1972, Government of Bangladesh took control over it. At first the company attempted to utilize it as a going concern but failed to do so. At last, after being left over for many years, it was handed over to private hand in 1994.

The Post Privatization Situation This is as far as the picture of privatization unfolded, the one of the worst case in Bangladesh’s privatization history. In spite of being privatized a long time ago, the company is yet to recover from the losses it had incurred. The company has never ever taken off after privatization due to mismanagement and short sightedness of the owners of the company. The company is still to start its production as told by Mr. M. Siddiqur Rahman, the officer in charge.

Effect in Economy This is an utmost failure story of privatization. This has proven out to be the wastage of existing assets which are left over to rot. This has created a downward effect in GDP of our country as machineries and other assets are not utilized. Thus this is a perfect example how privatization can fail and offset the economy in a bad way. The lack of concern of the appropriate authority and the privatization board are some reasons behind it; as accomplishing a task is far difficult than to start it. This demands the appropriate concern of the government as well as the authority who take over the company.

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Field experiences and recommendations

Field Experiences and Recommendations Basically we concentrated on four companies from four different sectors. Chemicals sector Primary focus: Kohinoor Chemical Co. (BD) Ltd. Additional study: Kohinoor Battery Manufacturers Ltd. Light engineering sector Primary focus: Meghna Cycles Ltd. Additional study: Lira Industrial Enterprise Textiles sector Primary focus: Zarina Composite Textiles Mills Ltd. Additional study: Olympia Textile Mills Food sector Primary focus: Dhaka Vegetables Oil Besides this, we visited Nishat Jute Mills Ltd. from Jute sector. From these eight companies, we tried to figure out the total scenario. Four out of eight companies have been more or less successful. Companies like Lira Industrial Enterprise, Kohinoor Battery Manufacturers Ltd. and Dhaka Vegetables Oil do not even have minimum existence. Lira industrial Enterprise has been closed for seven years after privatization. They don’t even possess necessary papers and documents to start their operation. Kohinoor Battery is another failure story. Kohinoor Battery has been closed for ten years. “The owners of the company did not put concentration on running Kohinoor battery” – said Mr. Hekmatullah Yusuf, officer in-charge, Kohinoor Battery. Olympia Textile Mills is doing well. It was known as a sick organization. After privatization in 2001, it made noticeable improvement. Former Prime Minister Sheikh Hasina handed over the company to its employees. 814 employees out of 1700 arranged a co-operative fund and thus they bought the company. Other employees had been laid off through golden handshake. Now Olympia is producing only fiber. Though 20 machines

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Field experiences and recommendations

out of 150 are running, it is still making profit. Mr. S. N. Chowdhury was the chief accountant of Olympia Textile Mills during it was government owned. After privatization he became the General Manager of the company. According to him, the company is making profit because of the sincerity of the employees. The employees are the owners of the company. They take care of it. Thus we see a benefit of transferring authority to the employees. Nishat Jute Mills Ltd. is also running well as per government expectation. They have found some foreign customers for their products and making a good profit from them. They are also contributing to GDP by exporting their products. When we went to visit the company, a foreign buyer was in a visit. So the management refused to give us any type of information related with profit or operation due to time constraint.

Recommendations One thing is clear from the above discussions; all the privatized firms are not making expected profit. Government should do something in respect to this situation. Privatization commission has no relation or control over the companies. Mr. Abdul Ahad, Deputy Director, project department, feels the necessity of government to monitor and help the privatized companies for a certain period. Then it will be easy for them to develop the infrastructure. According to Mr. Ahad, a proposal was raised in the privatization commission to monitor the privatized companies at least for a certain period. Bureaucratic difficulty is also responsible for the failure of the privatized companies. Lira Industrial Enterprise did not get any types of documents or authority necessary to start operation in long seven years. Mr. Ahad thinks that government is not willing enough to help the privatized companies. They are only concerned about shortterm profit generation from handing over the companies. But the government seems less concerned about the benefit the nation can get in the long run, if the companies do well. Here are the some recommendations: • Privatization commission should monitor the companies. • Privatization commission should provide the companies with necessary documents and information to continue their operations. • A reporting system to the Privatization commission should be developed. • Government should help the companies to find out the former buyers. In this way it’ll be easy for the companies to overcome soon.

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Conclusion

Conclusion The criteria for successful privatization are as follows: (a) efficient use of capital and labor in production; (b) dynamic gains from drawing in additional investment from both domestic private sector investors and overseas investors; and (c) better macro-economic performance. The success of privatization of public enterprises is contingent upon not only proper valuation and competitive market for corporate control, but also a tough central bank, strong asset quality of financial institutions, well-functioning capital market, competitive labor market, and proper regulatory framework for monopolies and the financial system. The authorities need to pay close attention to policy factors and business environment required for improved post-privatization corporate performance. The objective of privatization policy should be to increase economic growth by better management of resources. Therefore, privatization policy would have to be accompanied by a set of policies that ensure that entrepreneurs profit from productive endeavors rather than at the expense of the public and the development of the country s financial system. The policy should not regard privatization as an end in itself but as means towards increasing efficiency and economic growth.

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References

References 1. Government of Bangladesh (1996). Privatization Policy. Dhaka, Bangladesh: Privatization Board, Government of Bangladesh. 2. Government of Bangladesh (1998a). Privatization in Bangladesh. Dhaka, Bangladesh: Privatization Board, Government of Bangladesh. 3. Government of Bangladesh (1998b). Privatization Policy in Bangladesh and Options. Dhaka, Bangladesh: Privatization Board, Government of Bangladesh. 4. Mahmood, Syed Akhtar (1999). "Privatization in Bangladesh: Some Critical Questions." 5. Business Info Bangladesh. Privatization Policy: Bangladesh. http://www.bizinfobangladesh.com/privatization_policy.php 6. Board of Investment, Bangladesh. Privatization Policy: Bangladesh. http://www.boibd.org/privatization.htm

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Appendix

Appendix

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