Privatization of Public Enterprises in Bangladesh

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Privatization of Public Enterprises in Bangladesh:
Problems and Prospects
By Tanweer Akram*
*Academic Address:
Department of Economics
Columbia University
New York, NY 10027
United States of America
JEL: L33
Dated: October 7, 1999
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Privatization of Public Enterprises in Bangladesh:
Problems and Prospects
The performance of the public enterprise sector in Bangladesh is poor. The inefficiency of public enterprises places a fiscal burden, diverts limited resources from growth-enhancing public spending to unproductive subsidies, and affects the country’s industrial competitiveness. This paper identifies the prospects, problems, and pitfalls of privatization program and policies in Bangladesh. Firstly, the stylized facts about public enterprises are provided and the basic issues in privatization policy as it relates to Bangladesh are discussed. Secondly, the preconditions for efficiency gains arising from privatization are evaluated. Thirdly, the role of public enterprises in the labor market in Bangladesh is examined. Finally, the political and the economic factors that can offset the potential efficiency gains from privatization in Bangladesh are critically analyzed. (JEL L33) 3

Privatization of Public Enterprises in Bangladesh:
Problems and Prospects
This paper examines the scope for gains from the privatization of public enterprises in Bangladesh. The paper discusses the main economic issues related to privatization of public enterprises. Bangladesh’s privatization programs and policies are placed in the context of its political economy.

Public enterprise activity is around 6 percent of the Gross Domestic Product (GDP) and their fixed assets represent 25 percent of Gross Fixed Capital Formation. Public enterprises operate in crucial industrial segments of the economy, particularly in manufacturing, and in providing infrastructure services. The net worth of public enterprises is approximately US$ 3.6 billion (approximately 14 percent of GDP). In 1996-97, the annual losses of the public sector approach US$ 250 million which is equivalent to 30 percent of the country’s annual project disbursement aid and nearly 1 percent of its Gross Domestic Product. 90 percent of the public enterprises have borrowed highly from the nationalized commercial banks. There are nearly 300 public enterprises. These firms are organized into 39 corporations which are umbrella entities; four nationalized banks; three insurance corporation; two agricultural bodies; and three development financial institutions. Public enterprises are dominant in the following sectors: Electricity, gas, and water; railway; airlines and civil aviation; petroleum; telecommunication; and banks and insurance. 80 percent of public enterprise assets are in the utilities and infrastructure such as power, gas, telecommunications, and transport.

There has been a long-term decline in the profits of public enterprises. The poor performance of public enterprises has direct and indirect costs. The public enterprises require budgetary support. They pose a serious threat to the financial security of the 4

nationalized commercial banks and, indeed, the financial system. There is also private costs of public enterprise failure. The inefficiency of public enterprises leads to higher production costs and lessens the competitiveness of Bangladeshi products in international markets. A good example of the inefficiency of public enterprise is the system-loss of electricity transmission. In general, public enterprises in Bangladesh earn either very low rates of economic profits or incur high losses. They are inefficient, their subsidization weakens its fiscal position and their poor performance adversely affects...
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