Asian Development Bank: Bangladesh Country Governance Assessment
DRAFT, December 2003
CHAPTER I
INTRODUCTION
A. Purpose of the Country Governance Assessment
1. Background
1.
This Country Governance Assessment (CGA) is intended to: (i) inform the Asian
Development Bank (ADB)’s governance strategy and program options in Bangladesh; (ii)
serve as a resource for the Government of Bangladesh (the Government) to enhance its
collaboration with ADB in strengthening governance to reduce poverty and promote
national economic growth and development; (iii) and contribute to the process of
information sharing and coordination between ADB and other development partners that
support governance reform.1 The assessment was conducted between March 2003 and
August 2003.
2.
ADB has commissioned CGAs in various formats since 1997. They are now
conducted as standard practice in the preparation of Country Strategy Papers (CSPs).
This report has benefited from ADB’s earlier CGA experience and the variety of
reference materials that ADB, the World Bank, and other international agencies have
produced as guidelines for governance assessment. While ADB has commissioned
occasional governance reviews in Bangladesh in the past, this is the first full CGA that it
has undertaken. It reflects ADB’s contributions to governance reform in Bangladesh to
date and its commitment to expand its role in the future, informed by ongoing research
and dialogue that will build on this preliminary work.
3.
The assessment draws on a combination of sources. It was primarily informed
by the wealth of existing literature on governance reform, including government policy
papers and task force reports (such as the Report of the Public Administration Reform
Commission (PARC);2 ADB policy papers, project documents, and country program
performance reviews; reports of the World Bank and other development partners
(including the World Bank’s recent Taming Leviathan: Reforming Governance in
Bangladesh3); and policy briefs prepared by the Centre for Policy Dialogue (CPD) and
other local organizations. The assessment was further informed by consultations with
public officials and representatives of the private sector, civil society, and donor
agencies. Time and resource limitations precluded the application of surveys or other
empirical research tools of the kind that have informed some governance assessments
by ADB in other countries. The report makes occasional note of issues that will benefit
from focused, follow-up research that was beyond the scope of this general assessment,
particularly in individual sectors of special interest to ADB.
ADB is committed to adopt OECD’s Harmonizing Donor Practices for Effective Aid Delivery and views
governance as a thematic area that can be effectively mainstreamed.
2 Government of Bangladesh (2000), Public Administration for 21st century – Report of the Public
Administration Reform Commission, three volumes, Dhaka.
3 The World Bank (2002), Taming Leviathan: Reforming Governance in Bangladesh, Washington, DC, The
World Bank.
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2. Importance of Good Governance to ADB and Its DMC Partners
4.
The quality of governance in the Developing Member Countries (DMCs) with
which ADB collaborates presents a combination of risk and opportunity for ADB in
pursuing its overarching objective of poverty reduction. ADB monitors the state of
governance in DMCs for a variety of purposes. These include: (i) understanding the
impact of governance on the poor; (ii) informing policy dialogue with DMC governments
on key governance issues of mutual interest; (iii) promoting public information sharing
and dialogue on governance reform; (iv) identifying risks and opportunities from the
governance perspective in priority sectors and projects; (v) developing indicators and
benchmarks for governance reform; (vi) identifying the relationship between public
governance and the private sector or civil society; and (vii) making informed decisions
regarding the size and composition of country program portfolios.4 CGAs provide a
broad overview of governance and some analysis of issues relevant to ADB country
strategies, guided by the CGA basic framework and additional areas of focus specified
by CGA managers.
This assessment augments the standard framework with
supplementary analyses of governance issues in six sectors of particular interest to ADB
(Chapters IX to XIV) and an overview of current donor work and coordinating
mechanisms in governance reform (Chapter XV).5 The sectoral governance analysis
presented in Chapters IX through XIV is not intended to provide an exhaustive review of
governance in these specialty areas; rather, the sector chapters aim to highlight key
governance challenges, ADB contributions to date, and issues and opportunities for
reform, as a basic resource for the targeted governance strategies and program
interventions to be developed by ADB sectoral specialists.
B. Guiding Considerations
1. Governance Defined
5.
ADB defines governance as “the manner in which power is exercised in the
management of a country’s economic and social resources for development.” As the
definition implies, the ADB concept of governance centers on the institutional
environment in which citizens interact among themselves and with government agencies
and officials, and the ingredients for effective development management.6 ADB
considers four mutually reinforcing elements of good governance as yardsticks in
assessing the quality of development management in a DMC: accountability,
participation, predictability; and transparency.7

Accountability: Good governance is dependent on public officials being accountable
for the actions or omissions of government agencies and performing their
responsibilities within the scope of the enabling laws from which their authority
derives. The accountability of public officials and agencies is best measured by
reference to clear and precise standards of performance and through the objective
4
Asian Development Bank (2003), Country Governance Assessment Review (Draft), at 2.
See Chapters IX through XIV (financial sector, small and medium enterprise development, education,
health, transport, and energy) and Chapter XV, Section A-4 (summary of donor activities in the field of
governance). The six sectors represent a sampling of areas of interest to ADB, as opposed to an
exhaustive list. Similarly, the review of donor activities is not exhaustive summary of the work of all donors
involved in governance programs.
6 Asian Development Bank (1995), Governance: Sound Development Management, at 3.
7 For a detailed elaboration of the four elements of good governance, see Ibid at 7-13.
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scrutiny of independent monitoring and oversight bodies representing the public and
private sectors.

Participation: Development initiatives are ultimately concerned with the quality of life
of citizens as primary beneficiaries, agents, and informed participants. Government
structures, policy-making procedures, and public decision-making mechanisms
should ideally extend ample space and opportunity for citizens, community
organizations, members of the private sector, and other stakeholders to inform the
design and implementation of public programs and projects.

Predictability: Relations between citizens and public institutions is dependent on the
fair and consistent application of laws, regulations, and policies. The predictable
application of regulatory provisions and policy directives through sound legal and
regulatory systems facilitates the rational assessment of business risks, thereby
lowering transaction costs and reducing the risk of arbitrariness in government
decision-making.

Transparency: To make informed decisions regarding their economic, legal, and
other interests, citizens depend on timely and accurate information on government
rules, regulations, and policies. Subject to reasonable limits, there should be a free
flow of information from government agencies to the general public, as well as
between all branches of government service and within individual public agencies.
6.
These four yardsticks—in particular, the principle of accountability—serve as a
central basis for this country governance assessment, supplemented by occasional
reference to best practice or relevant experience in other Asian countries in which ADB
works. The assessment further acknowledges and takes account of the value of clearly
defined objectives in designing, implementing, and monitoring the impact of governance
reform strategies, and the role of appropriate management incentives in advancing
governance reform initiatives.
7.
In accordance with its institutional charter and mandate, ADB focuses primarily
on the economic dimension of governance, while taking account of non-economic
factors that have demonstrable and direct economic effects.8 Accordingly, while this
report makes frequent reference to partisan tensions, human rights and security, a
deteriorating law and order situation, and other factors that affect the governance
environment, it focuses primarily on institutional and policy constraints to governance
reform and on relations between public institutions and other stakeholders—including
the private sector and civil society—as keys element in the process of redefining the
optimal role of the state.
2. Governance and Poverty Reduction
8.
ADB’s overarching goal of poverty reduction has particular significance in
Bangladesh, where a large percentage of the population lives below the poverty line. All
stakeholders, including public officials, local development practitioners, and the donor
community, are acutely aware of the grinding impact of poverty on the quality of life of
citizens, particularly women, minorities, and other marginalized groups. In recent years,
there has been a growing interest in the role governance in poverty reduction efforts. In
8
Ibid at 23.
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Bangladesh, it is recognized that the quality of governance weighs in the prospect of
achieving the economic growth trajectory required to meet ambitious national poverty
reduction goals set by the Government and its development partners.9
Good
governance is believed to benefit the poor directly through responsible and adequately
resourced local governance, quality education and public health services, and
opportunities for citizens to play an informed role in public decision-making. To this end,
ADB is especially concerned with systematic interventions that have a medium to longterm impact in reducing poverty by promoting policy reforms, assisting the development
of physical and institutional capacity, and designing projects and programs that better
address poverty.10 ADB governance strategy is guided by the view that:
Poverty is a deprivation of essential assets and opportunities to which
every human is entitled. Everyone should have access to basic
education and primary health services. Poor households have the right to
sustain themselves by their labor and be reasonably rewarded, as well as
having some protection from external shocks. Beyond income and basic
services, individuals and societies are also poor—and tend to remain
so—if they are not empowered to participate in making the decisions that
shape their lives.” [Emphasis added] 11
9.
The governance dimension of poverty reduction is reflected in the understanding
that poverty is more than a deprivation of material assets and entitlements. It deprives
the poor of opportunities to participate in public decision-making processes, including
local governance, formal legal dispute resolution, administrative procedures, and
resource allocation. Accordingly, the quality of governance is critical to poverty
reduction. Good governance helps to ensure participatory policy-making, sound
macroeconomic management, and transparent use of public funds. It also helps to
promote private sector growth, effective public service delivery, and adherence to the
rule of law.12 Since efficient delivery of basic services by the public sector is of
fundamental importance to the poor, weak governance has a disproportionately negative
impact on them. Accordingly, poverty reduction initiatives should combine national and
local-level governance elements. For example, public administration and expenditure
management at the national level must be strengthened to promote economic growth
and social development, while at the same time responsibility for provision of public
services should be devolved to the lowest appropriate level of government and steps
taken to enhance the capacity of local government bodies and officials to fulfill their
responsibilities.13
3. Governance Dimension of National Poverty Reduction Strategy
10.
The Government recently adopted an Interim National Poverty Reduction
Strategy (I-NPRS).14 The I-NPRS embodies many of the mutual commitments
9
It is generally accepted that economic growth must increase from its current level of 5.4 percent per annum
to a sustained level of at least seven to eight percent to meet national poverty reduction and associated
development targets.
10 Asian Development Bank (1999), Fighting Poverty in Asia and the Pacific, Manila, ADB, at 7.
11 Ibid at 1-2.
12 For an elaboration of the role of good governance in reducing poverty, see ADB (1999) Fighting Poverty.
13 Ibid.
14 Government of Bangladesh (2003), A National Strategy for Economic Growth, Poverty Reduction, and
Social Development. Economic Relations Division, Ministry of Finance.
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enshrined in the April 2002 Partnership Agreement on Poverty Reduction (Partnership
Agreement) between the Government and ADB.15 The Partnership Agreement reflects
joint commitment to the Government’s long-term goal of meeting or exceeding targets
set under “International Development Goals” established through World Summit
meetings in the 1990s. It also reflects a shared commitment to the Government’s
medium-term goals of halving the proportion of people living below the poverty line
nationwide by 2010, achieving universal primary education,16 and related improvements
in maternal and child health and gender equity. The Partnership Agreement further
underlines the importance of “pro-poor” economic growth through improvements in
agriculture, rural infrastructure, and the environment for small and medium enterprise
(SME) development.
11.
In addition, the Partnership Agreement reflects the importance of good
governance in the context of women’s empowerment, improved education and health
services, and giving voice to the poor through improvement in the institutional capacity of
local government. For its part, ADB is committed to facilitate the goals and objectives
enshrined in the Partnership Agreement, including the specific governance strategies of
corruption prevention, improved sectoral efficiency, participatory decision-making,
capacity building of local government, and improved financial management.
12.
ADB is firmly committed to assist the Government and other donor partners in to
achieve the goals set and principles enshrined in the I-NPRS, including the governance
dimension of poverty reduction. In fact, the I-NPRS elaborates on many of the goals
articulated in the earlier Partnership Agreement. Toward the overarching strategic goals
of poverty reduction and accelerated social development, the strategy sets a series of
targets to be met by 2015, guided by the need to increase the pace of poverty reduction
from 1.5 percent in the 1990s to 3.3 percent between 2000 and 2015, as well as to
achieve GDP growth of at least 7 percent per annum during the same period.17 While
the I-NPRS dedicates an entire section to the governance dimension of national poverty
reduction goals, the importance of stronger governance practices across all sectors is
implicit throughout the text.
13.
The I-NPRS underlines the need for participatory governance to strengthen the
voice of the poor, the importance of transparency and accountability in reforming and
deepening political institutions for pro-poor governance, and the value of independent
civic monitoring of strategy outcomes and the building of competitive pressure groups
around the reform agenda.
Specific governance objectives include: creating a
competitive environment across all segments of society, bolstered by the free flow of
information; establishing and enforcing clear rules and regulations for public sector
15
Government of Bangladesh and Asian Development Bank (2000), Partnership Agreement on Poverty
Reduction.
16 On a completion basis.
17 The targets include: eradication of hunger, chronic food insecurity, and extreme destitution; reduction in
number of people living below the poverty line by 50 percent; attainment universal primary education for all
girls and boys of primary school age; elimination of gender disparity in primary and secondary education;
reduction in infant and under five mortality rates by 65 percent, and eliminate gender disparity in child
mortality; reduction in the proportion of malnourished children under five by 50 percent and elimination of
gender disparity in child malnutrition; reduction in maternal mortality rate by 75 percent; access to
reproductive health services for all; substantial reduction (if not total elimination) of social violence against
the poor and other disadvantaged groups, especially violence against women and children; disaster
management; and prevention of environmental degradation for overcoming the persistence of deprivation (at
7-8)
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administration, supported by separation of power among the respective branches of
government and oversight arrangements; and promoting civil society voice and
participation, with a particular emphasis on the poor, women, and other disadvantaged
groups.
14.
Specific institutional reform priorities identified in the I-NPRS include
improvement in the oversight role of Parliament; greater judicial independence through
the establishment of separate Judicial Service and Judicial Pay Commissions; and
enhanced police capacity to deal with corruption, crime, and violence against women
through institutional reform and the introduction of civilian oversight mechanisms. The INPRS also calls for the framing and adoption of a “Citizens Charter” to enshrine the
rights of individuals to access public services (with an initial focus on primary health,
education, and reproductive health) and more efficient and accountable management of
public resources. Chapter XV of this report (Strategy) includes a summary of donor
concerns regarding the governance dimensions of the I-NPRS.
15.
Other development partners, including the United Kingdom’s Department for
International Development (DFID), have tied their country program strategies to poverty
reduction, in terms consistent with the goals of the I-NPRS. ADB welcomes its role in a
community of donors that share a common commitment to assist the Government of
Bangladesh and local civil society and private sector partners in reducing poverty
through strategies that include governance reform.
4. Basis for Assessing the Quality of Governance in Bangladesh
16.
It is important to ground an assessment of governance in Bangladesh in a
comparative baseline that will serve both as an immediate standard of measure and as a
basis for monitoring changes over time. In an age in which governments throughout the
world are working to improve standards of governance, with broad variations in the
respective standards from which they begin and in the financial and technical resources
on which they can draw, it would be unfair to compare present standards of governance
in Bangladesh with those of an industrialized nation that has substantial resources to
invest in reform efforts or a tradition of continuous democratic governance over many
generations.
17.
This report draws on a variety of assessment tools and guide questions
developed by ADB, the World Bank, and other agencies for application in the many
countries in which they work. In applying these tools in the Bangladesh context, the
report strives to take account of resource constraints and other factors. There are some
cases in which there is little to distinguish highest international standards from those
applicable in Bangladesh—for example, where Bangladesh is signatory to an
international covenant or convention to which specific domestic standards or obligations
attach. In other cases, resource and other constraints call for the application of
standards that measure present circumstances or the pace of progress on a more
modest scale. Most of the assessment tools applied in this report are qualitative, with
the majority reported in narrative descriptive terms rather than statistically or with the use
of tables or other comparative indicators. Unless expressly stated, the report assesses
the quality of governance according to standards that a nation whose economic
development, physical conditions, and other defining circumstances are comparable to
those of Bangladesh could be reasonably expected to meet.
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18.
Appendix I of the report presents some sample proxy measures of governance
reform in Bangladesh that may serve as simple tools in measuring the future progress of
governance reform initiatives. While these sample measures are both basic and
preliminary, it is hoped that they will contribute to the development of more sophisticated
monitoring and assessment tools on which the Government of Bangladesh, local
stakeholders, and the international donor agencies can collaborate.
C. Objective, Structure, and Conceptual Framework of the Report
1. Modest Objective
19.
Three points are clear on reflection of experience to date in governance reform in
Bangladesh: first, weak governance poses a serious impediment to poverty reduction
and broader development goals, with particularly severe implications for the poor,
women, and other marginalized groups; second, Bangladesh has served as a virtual
laboratory for the study of governance practices and the implementation of ambitious
reform initiatives since Independence; and third, substantial investments in many areas,
over many years, have secured only modest improvements in overall governance
standards. Can an additional assessment add further value to a field that is crowded
with investment, experience and insight, a mix of progress, regression, and static state,
and enduring commitment among champions of governance reform within government,
civil society, the private sector, and the donor community? This report is guided by the
modest objective of assisting ADB and the Government of Bangladesh to strengthen
governance in select area that will advance shared development goals and serve as
models and impetus for broader governance reform efforts, as well as to contribute to
improved coordination and information sharing between ADB and other development
partners. In particular, it aims to:

Assess the current state of governance in Bangladesh, with a focus on select
development management issues and select sectors of interest to ADB;

Provide general recommendations on priority governance reform opportunities in key
areas, with a particular focus on reform initiatives that will facilitate poverty reduction
and sustainable economic growth;

Identify areas of opportunity in which ADB is best placed to contribute, based on its
comparative capacity and ability to draw on relevant regional experience of potential
interest to Bangladesh.
2. Structure of the Report
20.
The report begins with an overview of governance in Bangladesh and an analysis
of the basic constitutional and institutional foundations of governance through the lens of
accountability. This is followed by analysis of the key development management issues
that comprise the core of ADB’s basic CGA framework (which are later characterized as
core governance issues), including public policy-making, planning, and regulatory
structures, public administration and local government, public financial management, law
and justice, the role of civil society, and corruption in the public sector. The report
continues with an overview of governance issues in six sectors of interest to ADB:
public finance, small and medium enterprise development, education, health, transport,
and energy. It concludes with a chapter on governance strategy, which reviews the
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current governance reform strategies of the Government, local policy institutions, and
the ADB and other development partners and provides recommendations on priority
governance reform opportunities through which ADB can collaborate with Government in
advancing common development goals and complementing the efforts of other
development partners and local champions of reform.
21.
Several chapters conclude with a discussion of issues and opportunities for
reform on which the collective efforts of the Government, civil society, the private sector,
and development partners are encouraged to focus. The recommendations are drawn
from a combination of research studies, earlier assessment reports, and policy reviews
that have been undertaken on governance, financial management and expenditure, and
related issues, as well as from consultation with different stakeholders. In most
instances, the recommendations reflect a consensus view of priority reform actions
among stakeholders. While ADB will not focus its future governance work on each of
the core areas and sectors covered in the assessment, the broad governance
environment and priority reform issues reviewed are relevant to all dimensions of ADB
work in Bangladesh.
3. Conceptual Framework
22.
The report makes frequent reference to two complementary approaches to
governance of particular relevance to the work of ADB in Bangladesh: core governance
and sectoral governance. To date, ADB support for governance reform in Bangladesh
has been undertaken primarily in the context of work in specific sectors, whether
expressly or implicitly. For several years, ADB sectoral governance initiatives tended to
address governance constraints that affected the pace and progress of work in a
particular sector, and its broader impact in other sectors, without necessarily
characterizing its interventions in the specific language of governance. Today, sectoral
program activities are more likely to include specific governance components and to
expressly describe particular issues and initiatives as governance related, including
reference to accountability, transparency, predictability, participation, or other yardstick
measures of the quality of governance. Regardless of the terms in which they are cast,
sectoral governance initiatives aim to facilitate local solutions to development
management problems that affect the pace and progress of ADB funded activities in
particular sectors, or slow the achievement of broader sectoral development objectives
to which the joint efforts of government, local stakeholders, ADB, and other development
partners contribute.
23.
Core governance initiatives address the overarching governance constraints that
affect multiple sectors. Examples include weak public financial management, corruption,
encroachments on judicial independence, or other constraints that undermine
accountability, transparency, public participation, and predictability in the context of
broad national development efforts. For practical purposes, there is often little to
distinguish the issues on which core and sectoral governance reform efforts focus. Core
governance strategies address overarching constraints that affect a variety of individual
sectors, whereas sectoral governance strategies focus on the manner in which one or
more overarching constraints affect a particular sector—such as the impact of weak
regulatory mechanisms, inadequate enforcement of laws, or corruption on the
performance of the energy sector. Moreover, core governance and sectoral governance
initiatives are mutually reinforcing. For example, progress in sectoral governance helps
to lay the groundwork for deeper core governance interventions by nurturing reform
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constituencies within individual sectors that can later be mobilized to address core
governance issues or provide models for replication at a higher level. In turn, core
governance achievements in corruption prevention or the stricter enforcement of laws
and regulations benefit reform efforts in a number of sectors. One of the principal
strategic recommendations of this report is that ADB pursue a governance reform
strategy that combines these two dimensions of governance: a primary focus on
sectoral governance interventions that build on goodwill relationships forged with
government partners and other stakeholders, and an expanding focus on select core
governance initiatives that target corruption and other constraints that affect
development management in all sectors. The report includes reference to certain
situations in which core and sectoral governance issues and interventions may be
combined in a single strategy, and others in which sectoral governance work has
progressed to a certain point from which continued progress will depend on
complementary core governance interventions, or vice-versa.
D. Overview of Governance in Bangladesh
24.
Despite repeated and prolonged contact with diverse peoples and religions, the
population of Bangladesh is remarkably homogeneous.
Ninety-nine percent of
Bangladeshis are ethnically Bengali and speak the modern Indo-Aryan language
Bengali, or Bangla. A small minority of the population (1 percent) are tribal peoples.
More than 85 percent of the population professes the religion of Islam. Hindus are the
next largest religious group, comprising 10 percent of the population. The remaining five
percent include tribal peoples, Christians, and Buddhists.
25.
The majority of the country's population lives in rural areas, where land is the
most highly valued productive resource. Population pressures have intensified the
competition for land, accelerating the fragmentation of landholdings among families (in
most cases land is divided equally among sons) and creating conditions in which citizens
have lost their entitlement to land through sale, extortion, encroachment, or
environmental degradation. Every year, the number of landless households increases,
and people migrate to the cities from rural areas in search of new economic
opportunities. Urban centers are growing at the rate of at least 6.5 percent per year.
Bangladesh's capital city, Dhaka, is approaching mega-city proportions, exacerbating the
already serious problems that exist. As a result, the country’s traditional agrarian base is
undergoing a massive and rapid transformation to a different economic foundation.
26.
Market oriented reform programs have brought steady economic growth for more
than a decade and general improvements in quality of life for most households. Despite
this progress, Bangladesh has made relatively limited development progress since
Independence, particularly by comparison to the newly industrialized countries of East
Asia. While Bangladesh has long faced a variety of social, geographic, and economic
challenges, it also has many potential advantages and every prospect of moving to a
more rapid and sustainable growth path that will have a socially and economically
transforming impact.
27.
Institutions of governance in Bangladesh have traditionally been dominated by a
core set of elites comprising the administrative bureaucracy, the political class, and the
military. In recent years, a robust civil society and growing middle class have joined
these traditional elites as key governance actors. The country’s modern civil society
includes a large number of non-governmental organizations (NGOs) that provide basic
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development services to local communities and the poor, joined in recent years by an
increasing number of civic-minded or public policy-oriented organizations. NGOs play a
particularly important role in providing services that would otherwise be left to the
Government or the private sector to deliver.
28.
The private sector is slowly developing. In some industries, such as ready-made
garments (RMG), energy, and domestic manufacturing, there have been windows of
opportunity for the business sector to assume a significant leadership role and to make
substantial contributions to economic growth. Despite these achievements, the private
sector continues to face constraints imposed by an overly bureaucratic regulatory
environment, subsidies and protections of state-owned enterprises that have yet to be
privatized, pervasive corruption, and an increasingly competitive regional and global
environment. Except in a few areas, such as the RMG industry, the domestic private
sector has yet to position itself particularly well for global competition. On the whole, the
private sector falls short of its potential role in influencing law, regulations, and
institutions in ways that would facilitate rapid economic expansion and job creation. Few
state owned enterprises (SOEs) are sufficiently profitable to interest domestic
industrialists, and despite a declared commitment at the highest levels of government,
privatization efforts have lagged, due in part to bureaucratic inertia. Public support for
privatization is constrained by vocal opposition of trade unions and workers and by the
perception that divestment is likely to benefit select interests rather than society broadly.
29.
The rapid rise of the RMG export sector in the past two decades has made the
industry a powerful force. The Bangladesh Garments Manufacturers and Exporters
Association (BGMEA) has over 2,000 members. The top companies dominate the
association, and with it the allocation of quotas for sales to the U.S. market. Newer
players must either purchase quotas from these dominant firms or confine their exports
to more competitive markets in Europe. The BGMEA leadership has been swift to
embrace industry changes that are necessary to retain access to the lucrative U.S.
market, but much of the manufacturing is contracted out to small firms on terms that do
not include labor or other protections. Particular concern is raised by the expiry of the
Multi Fiber Agreement (MFA) in December 2004, its implications for the RMG sector
(especially for the thousands of women employed in the sector, for whom employment
has brought unprecedented economic and social empowerment), and the pace and
uncertain resolve of actions taken by the Government and the industry to ensure that the
RMG sector remains competitive following expiry of the MFA.
30.
The information technology (IT) sector in Bangladesh is a relative island of
entrepreneurial dynamism, but most firms are resellers and distributors of imported
products, so the value addition is modest. The sector provides business and
employment opportunities for some of the country’s most talented young entrepreneurs,
and it reflects some of the best practices and most progressive outlooks in the business
community. The vision of a stronger IT sector and the growing success in software
exports have captured the attention of the Government, and this sector’s growing record
of communicating its policy priorities to government officials may serve as a model to
other export industries. As discussed in Chapter IV, the IT sector holds great potential
for a leadership role in the advancement of eGovernment applications.
31.
Despite a challenging business and regulatory environment, the success of some
local firms demonstrates that it is possible to prosper in Bangladesh. From the few
leading firms that apply cutting edge technology to meet the needs of export markets, it
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is a long step down to the average small manufacturing firm in Bangladesh. Such firms
generally use very simple methods, with only modest efforts to improve manufacturing
processes. While labor is an abundant resource of Bangladesh, the lack of skilled labor
in potential growth industries has kept productivity well below potential. When firms
invest in adequate training and make a determined effort to retain trained staff through
salary, in-service training, and other incentives, Bangladeshi workers are as productive
as those in any other rapidly developing country.
32.
In addition, certain inward-looking monopolistic policies and structures that deny
the private sector full opportunity to take advantage of the rapid globalization of markets
have a negative impact on the national economy. The continuing delay of governance
and economic reforms undermines the capacity of the private sector to establish and
expand export industries and to develop a more competitive domestic economy. While
business associations are a leading source of technology and management information
in many countries, most associations in Bangladesh fall short of their potential in helping
to influence regulatory and other reforms that will benefit commercial and industrial
interests and the economy as a whole. A few associations have distinguished
themselves by representing new or existing industries in which global linkages are a key
feature of business. These groups are often more dynamic, more interested in
developing new member services, and more motivated to work collectively as an
industry to represent policy priorities to relevant government agencies.
33.
One of the most promising development options for Bangladesh is exploitation of
its natural gas resources. While revenues from this source alone could potentially fund a
rapid move forward socially, economically, and in terms of regional and international
economic engagement, the optimism that first greeted steps to develop the natural gas
reserves on a large scale in the mid-1990s has been replaced by deep concern, with the
departure of several international companies that had planned to establish significant
operations and infrastructure in Bangladesh. Potential advances will only be realized if
gas revenues are carefully and appropriately invested to improve the country’s human
and physical infrastructure, through the guidance of sound governance institutions and
policies.
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CHAPTER II
ACCOUNTABILITY IN GOVERNANCE
A. Introduction
34.
While each of the four pillars of sound development management—
accountability, participation, predictability, and transparency—are important in their own
right and mutually reinforcing, accountability is arguably the most significant measure of
the quality of governance in a country. Bangladesh is no exception. Regardless of what
additional checks apply, public officials and institutions must ultimately be accountable
for their actions. Accountability is dependent on systems and processes that are
understood, accepted, and respected by all stakeholders; sanctions that are consistently
applied when public officials act in contravention of their legal responsibilities, and
incentives that will encourage public officials to fulfill their obligations to the highest
standard.
35.
This chapter examines the institutional foundations of governance in Bangladesh
through the overarching lens of accountability. The analysis is anchored in the concept
of vertical and horizontal accountability, articulated by the authors of The Self
Restraining State: Power and Accountability in New Democracies18 and cited by the
World Bank in Taming Leviathan.19 Vertical accountability involves a “differential power
relationship” in which the Executive can be compelled to act, forego planned action, or
be dismissed, while horizontal accountability involves situations in which no single
interest group commands exclusive authority. Weaknesses in vertical accountability are
reflected in the absence of effective mechanisms for citizens to influence executive or
other government actions between elections, while horizontal weaknesses are reflected
in the lack of accepted standards to which public decision makers are accountable or of
benchmarks that serve as a basis for monitoring and assessing their performance.
36.
The ideal accountability balance involves vertical oversight of executive action by
the electorate, formal horizontal checks on executive conduct by Parliament, the
Supreme Court, the Comptroller and Auditor General (C&AG), and other public
institutions, and informal horizontal checks by political parties, the private sector, the
media, and other interest groups. Horizontal accountability is dependent on systems
and processes that are understood and respected by all stakeholders, and that apply
strict sanctions when breaches occur.20 As the analysis that follows reveals, these
conditions are at best only beginning to emerge in Bangladesh. Accountability
mechanisms exist in principle, but they lack the compelling force necessary to hold
public officials and institutions fully accountable for their actions and omissions.
B. Constitutional Foundations of Governance
1. Bangladesh Constitution
37.
Bangladesh has a unitary Constitution that has been amended at several points
in its 31-year history. The original 1972 Constitution provided for a parliamentary form of
18
A. Schedler, Larry Diamond, and Marc Plattner, eds. (1999), The Self-Restraining State: Power and
Accountability in New Democracies, Boulder, Colorado, Lynne Rienner.
19 The World Bank (2002), Taming Leviathan: Reforming Governance in Bangladesh, at 21.
20 Ibid at 22.
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government. This was replaced by a presidential system in 1975, and restored following
the resignation of the second marshal law regime in 1991.
38.
Part X of the Constitution prescribes the conditions and procedures for
amendment. The Constitution may be amended by Act of Parliament, subject to the
approval of two-thirds of all Members of Parliament.21 Amendment of the Preamble to
the Constitution and Article 8 (fundamental principles), Article 48 (status and function of
the President), and Article 56 (status and appointment of Prime Minister and Ministers)
can only be effected on the basis of a national referendum, to be administered by the
President within seven days of referral of a proposed amendment. In practice,
constitutional amendments can be initiated by little more than a standard parliamentary
bill. Over the 31-year history of the Constitution, amendments based on standard
majority approval have been effected through a process that is largely indistinguishable
from ordinary legislation. Amendments since 1992 have redefined the basis of
government (from an original parliamentary system to a presidential system and back),
the socioeconomic framework of the State (from mixed economy to market economy),
and the sectarian status of the Republic (from secular to Islamic). Some constitutional
specialists have argued that the relative ease with which these and other significant
constitutional changes have been made undermines the political rights of citizens and
the obligation of the State to account for its actions. 22
2. Core Institutions of Governance
a. Parliament
39.
Bangladesh has a parliamentary system of government, with executive power
vested in the Prime Minister. The lawmaking powers of Parliament are prescribed in
Chapter II, while Chapter III specifies the procedures for making ordinances. The
national Parliament, or Jatiyo Sangsad, is a unicameral legislature with 300 directly
elected seats. In 1978, 30 additional seats were designated as reserved seats for
women selected by the party that held a majority of elected seats. This constitutional
provision expired in April 2001. To contest a seat in Parliament, a candidate must hold
Bangladeshi citizenship and be at least 25 years of age.23 Article 76 of the Constitution
provides for the appointment of various Standing Committees. Article 78 extends
immunity from legal action to Members of Parliament. The current (Eighth) Parliament
was elected in October 2001. The ruling Bangladesh Nationalist Party (BNP) holds
power through a coalition that includes the Jatiya Party and the Jamat e Islami Party.
The BNP holds 192 seats, the Awami League 62 seats, the Jamat e Islami 17 seats, and
the Jatiya Party 14 seats, with the balance of seats held by smaller parties and seven
independent Members.
b. Executive
40.
President: Following the resignation of the second martial law regime in 1991,
the newly elected Parliament voted to abolish the former presidential system. While the
21
Constitution, Article 142.
International IDEA and Department of Peace and Conflict Studies, University of Dhaka (2002), State of
Democracy in Bangladesh, Dhaka, Bangladesh, at 24-25.
22
24 Constitution,
Article 66.
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post of President was retained, the constitutional amendment resulted in the presidency
becoming a largely ceremonial office, with the President elected by Members of
Parliament. Although the President exercises several powers of appointment and
confirmation of laws, most actions are taken on the advice of the Prime Minister—with
the exception of the appointment of the Prime Minister and the Chief Justice.24 The
President serves for a term of five years, and no President may serve for more than two
successive terms. The President is prohibited from holding a seat in Parliament.25
41.
Prime Minister: As principal executive officer, the Prime Minister appoints and
heads a Cabinet that is collectively responsible to Parliament.26 Authority lies with the
Prime Minister to determine the number of Ministers and to select individual Ministers,
Ministers of State, and Deputy Ministers, who are formally appointed by the President.
Under the Constitution, the Prime minister is bound to resign or cease all official
functions if s/he loses a seat in Parliament or the support of the majority of Members.
The serving Prime Minister of Bangladesh is Begum Khaleda Zia of the BNP, who
succeeded Sheikh Hasina of the Awami League with the 2001 election.
42.
Ministries: The executive branch of government is organized on the basis of
Ministries and sub-ministerial Divisions. The Secretariat is responsible for policy and the
oversight and coordination of government departments, agencies, and district
administrations comprising divisions, districts, and thanas. A politically appointed
Minister heads each Ministry. While the majority of Ministers are elected Members of
Parliament, some may be appointed from outside Parliament. A Secretary or other
senior civil servant, whose functions include oversight of ministerial accounts, manages
the day-to-day affairs of a Ministry. At present, there are 38 Ministries and 53 Divisions,
which collectively employ over one million civil servants. Further analysis of the
composition and function of the Bangladesh civil service is provided in Chapter IV.
c. Judiciary
43.
Article 22 of the Constitution affirms the separation of the judiciary from executive
agencies of the State. Chapter I prescribes the structure and authority of the Appellate
and High Court Divisions of the Supreme Court, the procedures to be followed for the
appointment of judges of the Supreme Court, and the terms under which they serve.
Article 94(4) ensures the independence of the Supreme Court in performing its judicial
functions. Chapter II of the Constitution prescribes the structure and authority of the
subordinate courts, while Chapter III covers the structure and functions of administrative
tribunals. A detailed analysis of governance issues affecting the judiciary is presented in
Chapter VI of this report.
d. National government institutions
44.
Departments and Directorates transact the day-to-day business of government,
under the direction of the Secretariat and individual line ministries. Departments vary in
size, status within the institutional hierarchy of government, and function. The public
sector also includes a large number of industrial and other state corporations and
autonomous bodies. The majority of these are constituted as statutory organizations
24
Constitution, Article 48.
Constitution, Article 50.
26 Constitution, Article 55.
25
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under special Acts, Ordinances, and Presidential Orders. They include 220 state-owned
enterprises that are engaged in manufacturing and processing.
e. Local government institutions
45.
Article 59 of the Constitution entrusts local government to bodies "composed of
persons elected in accordance with law," while Article 60 provides that Parliament shall
confer power on local government bodies, including the power to impose taxes for local
purposes, to prepare budgets, and to maintain funds. The governance dimensions of
the local government structure and its relations with national government are discussed
in Chapter IV of this report.
46.
At present, there is only one operating tier of local government in rural areas, the
Union Parishad (UP), or union council, which is recognized as the oldest and most
enduring local government institution in Bangladesh. In July 2003 the Government took
steps to establish a new, non-elected tier of local government, the Gram Sarkar, which is
briefly discussed in Chapter IV. A different local government structure applies in urban
areas. The four largest urban centers are organized as City Corporations. Smaller
municipalities are called “paurishavas” or rural townships. There are approximately 180
paurishavas ranging in size from 15,000 to several hundred thousand people. Since
there are no intermediate levels of government between the paurishava and central
government, paurishavas relate directly and independently to the central government.
47.
The central government has control over planning, human resources, and budget
allocations for local government, both rural and urban. As a result, elected local
government bodies tend to be fairly weak and marginalized relative to the dominant
administrative authority of the central government. The lowest administrative units of the
central government bureaucracy operate at the thana level. At present, local
development spending decisions are made by the Thana Development and Coordination
Committee (TDCC). Although the TDCC is made up of UP Chairmen, in practice it is
dominated by central government officials of the Local Government Engineering
Department (LGED). Efforts to effect genuine decentralization at this level have had
only limited success. For example, the second marshal law regime introduced an
elected Upazila Parishad to which all central government agencies at the Thana level
were to have been accountable. Unfortunately, the Upazila Parishad was implemented
in such a way as to ensure that Upazila Chairmen were responsible to the ruling party
rather than local voters. The BNP government elected in 1991 chose to eliminate the 45
Upazila Parishad and vigorously opposed efforts of the successor Awami League
government to revive it.
f. Caretaker government
48.
The resignation of the second marshal law regime in 1991 left a vacuum in
oversight of the national parliamentary electoral process and the transaction of
government business during the election period. The issue was addressed by the
appointment of a Caretaker Government. The first caretaker administration managed
the affairs of state and presided over the democratic election, then relinquished power to
the democratically elected government. Following heated debate in the mid-1990s, the
Thirteenth Amendment of the Constitution made formal provision for the appointment of
a non-party Caretaker Government. The caretaker administration is headed by the most
recently retired Chief Justice of the Supreme Court of Bangladesh as Chief Adviser and
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administered by up to 10 Advisers that exercise the functional responsibilities of
Ministers. The Caretaker Government exercises full executive power of the Republic
between the dissolution of Parliament following the announcement of a national election
and the installation of the new government. Bangladesh has been well served by three
caretaker administrations, which have benefited from the leadership of distinguished
specialists as Advisers.
3. Political Dimension of Governance
a. Parties and political leadership
49.
Bangladesh has more than 50 political parties, the majority of which are urban
based with small constituencies. The two major political parties are the Bangladesh
Nationalist Party and the Awami League. Other important political parties include the
Jatiyo Party and the Jamate e Islami Party. The major parties have traditionally
maintained mass organizations that represent various groups, including workers,
students, farmers, and tradespersons.27 While the role of political parties is continuously
evolving, current party governance practices are perceived to be neither transparent nor
broadly participatory. Observers have called on parties to take a number of steps to
strengthen internal governance practices.
These include registration as formal
institutions, based on clearly specified criteria such as financial regulations and
accountability, internal party democracy, and participatory decision-making processes;
regulation and transparent disclosure of party finance; regular meetings; and collective
political call for amendment of Article 70 of the Constitution, which requires that an
elected Member of Parliament vacate his seat if he resigns from, or votes against, the
political party that nominated him as a candidate for election.28
b. Election administration
50.
The Election Commission is responsible for the conduct of elections of the
President, Parliament, and local government bodies.29 The Commission consists of a
Chief Election Commissioner and such other additional Commissioners as the President
directs. The Commission is administered by a Secretariat headed by a Secretary to the
Government. It operates through a network that includes a central headquarters in
Dhaka, five divisional headquarters managed by Deputy Election Commissioners, 83
Election Offices in 64 districts, and Thana Election Officers in all 448 upazilas (thanas).
The responsibilities of the Commission include supervision, direction, and control over
the preparation of electoral rolls. The process and procedures for holding parliamentary
elections are prescribed in the Representation of the People Order, 1972.
51.
Bangladesh is divided into 300 single territorial constituencies under the
Delimitation of Constituencies Ordinance, 1976. Article 121 of the Constitution provides
that there shall be one electoral roll for each constituency for purposes of election to
Parliament, while Article 122 provides that elections to Parliament shall be on the basis
of adult franchise (18 years of age).
27
See Kamal Siddiqui (1996), Towards Good Governance in Bangladesh: 50 Unpleasant Essays, Dhaka,
University Press Limited, at 5-6.
28 CPD (2003), Developing a Policy Agenda for Bangladesh: Civil Society’s Task Force Report 2001, Dhaka,
University Press Limited, at 358.
29 Constitution, Article 119.
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52.
The procedures for holding election of the President by Members of Parliament
are prescribed in the Presidential Elections Act, 1991 and the Presidential Election
Rules, 1991. The Election Commission is also responsible for elections for Union
Parishads, City Corporations, Pourashavas (municipal committees), and Hill District
Councils.30
4. Public Administration
53.
Bangladesh (and East Pakistan before it) inherited what remained of the colonial
administrative bureaucracy. Though most civil servants in Bangladesh returned to
Pakistan after Independence, the basic structure, procedures, and functions of the
bureaucracy remained largely intact. In exercising autonomous control over the
selection, placement, advancement, and discipline of civil servants, administrative
officials are shielded from and only partially accountable to political leaders, their
appointees, and the courts. The Prime Minister, Cabinet, and Parliament pass laws and
set broad guidelines on policy, while the line ministries have primary responsibility for
drafting laws. Accordingly, the bureaucracy is responsible for determining technically
detailed regulations for the implementation of laws, setting formal procedures for
implementing regulations and allocating resources, and exercising control over actual
administrative practices.
C. Public Accountability
1. Overview
54.
Public accountability is a central element of good governance. Its basic
principles include the consistent observance of legal and other standards in exercising
public decision-making authority; a clear chain of authority through which decisions can
be taken in an efficient and rational manner, and acceptance of prescribed standards by
which the performance of public officials and institutions is measured. For the purpose
of governance assessment, the core elements of accountability include: 31

Proven capacity of constitutional, statutory, and other formal oversight bodies to
monitor and enforce accountability;

Establishment of sound mechanisms for enhancing the accountability of executive
agencies;

Responsiveness of public officials and institutions to those whom they serve;

Integrity of corruption prevention efforts.
55.
Although Bangladesh has a series of constitutional and other mechanisms to
monitor and enforce accountability in public policy and decision-making, standards of
accountability tend to be weak in practice.
30
For further details, see the official website of the Election Commission (www.bd-ec.org) and Md. Saidur
Rahman (2001), Law on Election in Bangladesh, Dhaka, Rahman.
31 For further discussion of these foundation principles, see The World Bank (1996) Government that Works:
Reforming the Public Sector, Dhaka, University Press Limited, at 50.
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56.
Parliament has primary responsibility to monitor the performance and
accountability of executive agencies and officials. Article 76 of the Constitution creates a
set of principal parliamentary standing committees and confers on Parliament the
authority to establish and define the authority of additional committees. In addition to
Parliament, several other public institutions have authority to monitor the integrity of
executive decision-making.
57.
In addition to these formal oversight mechanisms, civil society has begun to
assume an active role in monitoring, reporting, and facilitating informed public dialogue
on the electoral process, the processes through which policies are made and laws
drafted and passed, the exercise of public decision-making authority, and the impact of
corruption. Beyond these and other initiatives taken to date, there is ample scope for
civil society to assume a broader and more vigorous oversight role in the future.
2. Institutional Transparency and Accountability
58.
To be scrutinized and ultimately held accountable for their prescribed
responsibilities and expected standards of performance, public agencies and officials
must be visible. This principle stands in marked contrast to the traditional practice of
public institutions and officials in Bangladesh. Since colonial times, the standard
practice has been for policies to be developed, laws to be drafted, and public decisions
to be taken behind closed doors, and for public officials to label almost every
government document as “secret,” “restricted,” or “confidential.”32 Specific laws and
rules make it a criminal offense for civil servants to disclose government information
without authorization. For example, the Official Secrets Act of 1923 and the Government
Servants Conduct Rules of 1979 bind civil servants to an oath of secrecy in every
dimension of their work. Some observers have suggest that, in the face of increasing
demand for greater transparency, public officials have held to the tradition view that
revealing too much information will be interpreted as a lack of knowledge or capacity on
their part.33
a. Parliament
59.
Immunity of Members of Parliament: Article 78 of the Constitution provides that
the validity of parliamentary proceedings shall not be questioned in any court, and that
Members of officers or Parliament shall not be subject to the jurisdiction of any court with
respect to the formal exercise of their authority as legislators. In addition, Members of
Parliament cannot be made party to court proceedings with respect to anything that they
say or any vote that they cast in Parliament or committee sessions, or any statements
attributed to them in reports published under the authority of Parliament.
60.
Committee Oversight: Parliament has a constitutional mandate to ensure that
the executive gives effect to laws and regulations, implements policies and programs in
accordance with stated goals and procedures, manages public resources in compliance
with budget authorization, and takes thorough account of the interests of the people. It
is constitutionally bound to appoint, from among its Members, a Public Accounts
Committee, a Committee of Privileges, and any other standing committees that the
32
33
The World Bank (1996), Government that Works, at 65.
Ibid at 65.
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Rules of Procedure of Parliament require.34 Parliament is further empowered to appoint
additional standing committees that may be tasked with examining draft bills and other
legislative proposals, reviewing the enforcement of laws and proposing enforcement
measures, investigating or inquiring into the administration of a Ministry, or requiring a
Ministry to furnish relevant information and/or to answer questions raised orally or in
writing.35 Rules 247 and 248 of the Rules of Procedure of Parliament specify the
procedures to be followed by standing committees. As noted in the Report of the Public
Administration Reform Commission (2000), interpretation of the Rules of Procedure has
been subject to considerable debate in recent times, especially with respect to
committee oversight of government ministries as prescribed in Article 76-(2)-(c) of the
Constitution.36
61.
Parliamentary Committees: The procedures for ordinary sessions of Parliament
include several important oversight mechanisms.
These include motions for
adjournment, call attention notices, scheduled discussions on matters of public
importance, question-and-answer sessions, and budget debate. Among these, the
committee system is, in principle, the most comprehensive and effective oversight
instrument. Since the Eighth Parliament was convened in 2001, partisan tensions have
prevented the establishment of all committees. The fully committee structure should
ideally include as many as 46 parliamentary committees, 38 of which perform oversight
functions. These include 35 Standing Committees, the Public Accounts Committee, the
Public Undertaking Committee, and the Estimates Committee.
62.
The parliamentary committee system is a relatively new innovation that was
introduced following the abolition of the Presidential system in 1991. With the
restoration of parliamentary democracy, many of the powers of the President were
simply transferred to the Prime Minister.37 Although Parliamentary Standing Committees
are now chaired by Members of Parliament from both opposition and treasury benches
rather than strictly by Ministers, the quality of committee review and dialogue is
ultimately dependent on the interest taken and time and energy invested by Members.
The value of Member oversight depends in turn on the quality of information and
research support services to which Members have access and the interest that they take
in such assistance. While donor investment in parliamentary development over the last
15 years has helped to strengthen the capacity and procedural efficiency of committees
and parliamentary research services,38 there is scope and need for continued
improvement. Parliamentary oversight functions are further constrained by the quality of
substantive debate on legislation and policy in Parliament. As further discussed in
Chapter III, most policy is formulated behind closed doors, with minimal legislative
debate on important national development issues.39
63.
The PARC report cited several factors that affect the oversight role of Parliament,
including the "rigidity" of relations between the Executive and Parliament. The situation
is exacerbated by the complexities and occasional overlap of ministerial functions, which
34
Constitution, Article 76-(1).
Constitution, Article 76-(2).
36 Government of Bangladesh (2000), Public Administration for 21 st Century: Report of the Public
Administration Reform Commission (Volume 1), at 113.
37 The World Bank (1996), Government That Works, at 51.
38 Since 1996, UNDP has been the principal supporter of parliamentary development initiatives in
Bangladesh.
39 The World Bank (1996), Government That Works, at 51.
35
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sometimes makes it difficult to determine which Ministry is responsible—and thus
accountable—for a particular function. The PARC report highlighted the performance
of the Public Accounts Committee (PAC) as an example of the challenges inherent in
parliamentary oversight. The PAC examines audit reports prepared by the Comptroller
and Auditor General (C&AG), then tables its findings and recommendations in
Parliament. PAC findings have tended to receive scant attention in Parliament, while the
recommendations provided have rarely been implemented in any significant way. As a
result, PAC scrutiny has little impact on the Executive. 40 This is discussed further in
Chapter V.
64.
The quality of PAC oversight also depends on the capacity and procedural
resolve of the C&AG in engaging the services of audit specialists, following international
standard audit procedures, resolving inconsistencies between relevant laws, rules, and
regulations, and preparing substantive recommendations. As a result, PAC and other
parliamentary committees apply standards of review that are at best cursory, falling far
short of the thorough investigation and reporting procedures that should ideally be
followed. The committee structure is further constrained by the tedious style in which
findings and recommendations are presented, which do little to stimulate interest and
thoughtful debate among Members of Parliament. Above all, committee oversight has
been compromised by the tendency of opposition Members to boycott sessions of
Parliament.41 From 1991 to 1996, the opposition Awami League was present in
Parliament for only 282 of 400 workings days, or 71 percent of the time. The BNP
opposition followed suit from 1996 to 2001 and was present for just 215 of 382 working
days, or 56 percent of the time.42
b. Office of Ombudsman
65.
Article 77 of the Constitution provides that Parliament may, by law, establish the
Office of Ombudsman to exercise such powers as Parliament determines—including
“the power to investigate any action taken by a Ministry, a public officer, or a statutory
public authority.” The reporting responsibilities of the Ombudsman would include
submission of an annual report to Parliament, detailing actions taken in performance of
its duties. An Ombudsman Act was passed in 1980, together with rules for the
appointment of the Ombudsman and the powers and functions to be exercised by the
office. Rule 6 of the Ombudsman Act prescribes the responsibilities and functions of the
Office of Ombudsman, which include investigation of any action taken by a Ministry, a
statutory public authority, or a public officer in any case where an individual complains
that he has sustained an injustice as a result of such action or that someone has unduly
benefited as a result.43
66.
Despite pledges made by successive governments, no definitive action has been
taken to establish the Office of Ombudsman. This experience underlines a point that
applies to other governance reform efforts in Bangladesh—the passage of enabling
legislation alone does not ensure that the desired reforms will be implemented. Lessons
drawn from countries that have formally established an Office of Ombudsman confirm
40
PARC Report (Volume 1), at 113-14.
Ibid at 114.
42 International IDEA and Department of Peace and Conflict Studies, University of Dhaka (2002), State of
Democracy in Bangladesh, at 24-25.
43The authority of the Ombudsman would supplement rather than substitute for other remedies available
under existing laws or administrative procedures.
41
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that the Ombudsman can play a very effective oversight role in monitoring the
performance and accountability of public agencies and officials. Certain issues will need
to be addressed if the Office of Ombudsman is established in Bangladesh. These
include the scope of jurisdiction—in particular, whether the role of the Ombudsman
would be limited to advising citizens on ways to efficiently navigate government rules
and procedures, or would include broader and potentially more sharp-toothed
responsibility to deal with public complaints.
67.
Reflecting on the potential scope of investigative authority with respect to public
complaints, Kamal Siddiqui has suggested that the types of public complaint to be
addressed by the Office of Ombudsman should be those in which citizens suffer as a
result of “bad administration in the hands of Ministries/Departments and public bodies”
as opposed to investigation of crimes or the conduct of certain public agencies for which
comprehensive complaint procedures already exist, such as Bangladesh Bank.44 The
PARC report underlined the importance of establishing the Office of Ombudsman and
similarly recommended that its initial focus be limited to a manageable set of priority
areas, including police, the service delivery sectors of government (with a particular
focus on health and education), land survey and records, licensing, registration, and
passports.45
c. Judiciary
68.
In the last decade, the Supreme Court of Bangladesh has demonstrated
increasing willingness to scrutinize the actions of lawmakers and executive agencies by
reference to constitutional standards and conditions. Article 26 of the Constitution
provides that laws that are inconsistent with the fundamental rights provisions of the
Constitution are void. Article 44 specifies the right to file a writ petition against a
violation of fundamental rights. Article 102 prescribes the authority of the High Court
Division to issue administrative writs equivalent to the traditional administrative remedies
of mandamus (directing a public agency or officer to perform an action that is required by
law), habeas corpus (ordering the release of a person who is unlawfully imprisoned),
certiorari (an order to produce the record of a case tried by an inferior court or tribunal, to
determine whether there have been irregularities), and prohibition (preventing an inferior
court or tribunal from exceeding its jurisdiction). The authority covers any application
brought by a person aggrieved, and empowers the High Court to give binding directions
or orders to “any person or authority, including any person performing any function in
connection with the affairs of the Republic.” The jurisprudence of the last decade
suggests that courts will further expand the scope of judicial review to include a broader
range of executive actions and activities. As discussed in detail in Chapter VI, judicial
oversight has recently extended to issues concerning executive encroachment on the
independence of the judiciary.
3. External Oversight Mechanisms
a. Media
69.
As a complement to the formal horizontal oversight mechanisms discussed in the
preceding sections, the media can play an important informal role in monitoring the
44
45
Kamal Siddiqui (1996), Towards Good Governance in Bangladesh: 50 Unpleasant Essays, at 107-09.
PARC Report (Volume 2), Report No. 4, at 15-24.
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performance and integrity of public institutions and officials. Bangladesh has a large and
active print and broadcast media, which has increased in size and sophistication in the
last decade. The print media includes several national Bangla and English language
newspapers with large circulations, together with a large number of regional newspapers
and periodicals. The electronic media includes a combination of state radio and
television corporations and newly licensed private stations. The print and broadcast
media enjoy considerable freedom and autonomy, while subtle elements of state control
continue to pervade the electronic media. The media has assumed an increasingly
active role in monitoring and reporting on public policy formulation and decision-making
processes, parliamentary sessions, court proceedings, and the activities of other public
institutions and in stimulating informed pubic dialogue on national development issues.
Beyond their primary role in print reporting, some national newspapers have
collaborated with local policy institutions in convening roundtable dialogues on national
development issues. These serve an important educational function, provide forums in
which stakeholders can share their interests and concerns, and produce thoughtful
analysis and recommendations for policy makers.
70.
Investments in the professional development of print and broadcast journalists
have helped to refine the investigative content and depth of analysis of media reporting.
Despite progress to date, there is considerable scope to further enhance the quality of
reporting on the performance and governance standards of public institutions and
officials. Future investments should ideally place particular emphasis on developing the
specialty investigative and reporting skills of print and broadcast journalists in the fields
of pubic administration and financial management, law and justice, corporate
governance, and other issues of prominence in the national governance reform agenda.
The role of the media in promoting improved governance is further discussed in Chapter
VII.
b. Civil society
71.
Bangladesh’s robust civil society has assumed an increasingly active role in
monitoring the performance and accountability of public institutions and officials. For
example, Transparency International Bangladesh conducts perception surveys and other
research on the incidence and impact of corruption. In the field of elections, NGOs and
other civil society members have played a lead role in developing local election
monitoring capacity, through coalition networks that can deploy trained monitors in every
polling station in the country on election day. As with media reporting, there is enormous
scope and potential for civil society to expand its monitoring role to include other
dimensions of governance and institutional performance, including Parliament, the
courts, the national budget process, and other dimensions of public financial
management.
c. Public service delivery
72.
The quality of public services is almost exclusively determined by those
responsible for their delivery, with few opportunities for ordinary citizens, interest groups,
or the private sector to inform the processes through which laws and regulations are
drafted and implemented, resources allocated, or other key development decisions
taken. As noted in a recent World Bank governance assessment, service beneficiaries
lack access to timely and reliable information and have no effective means to provide
feedback at the design stage or once the implementation of a policy decision begins. In
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turn, service providers have little incentive to respond to beneficiary feedback.46 Steps
should be taken to provide citizens with information on the role and functions of key
public institutions, new laws and regulations, and other topics that will equip them to
better engage with public institutions or to take advantage of public development efforts
that they would otherwise not be aware of.
d. Private business community
73.
The private business community in Bangladesh has traditionally tended to focus
on opportunities to improve efficiency, productivity, and profitability by understanding
and informing processes of governance, policy formulation, and public decision-making
through back-channel means. While successful business leaders have tended to avoid
prominent public roles, they have a deep understanding of governance processes and
the way in which public institutions and decision-making processes affect business
interests. In some Asian countries, business associations have assumed a more active
role in monitoring and facilitating dialogue on public decision-making and undertaking
corruption prevention initiatives in collaboration with civil society partners and the media.
There is potential for similar collaborative partnerships to promote improved governance
standards in Bangladesh.
e. Freedom of information
74.
Governance reform efforts should be grounded in an enabling environment that
simultaneously increases access to information and channels public demand for
improved performance of public institutions. Open, transparent, and accountable
government requires public access to information on government activities, debate, and
decision-making processes. Information in the public domain empowers the private
sector and civil society by mobilizing demand for fair and efficient governance. This
demand in turn prompts public sector responses that bring government closer to
citizens. Through citizen participation in decision-making processes and debate,
government becomes more responsive and less arbitrary, while officials are less able act
with impunity when their actions are open to public scrutiny.
75.
As noted earlier, a tradition of secrecy in public administration dating to colonial
times prevents the free flow of information on public policy, regulatory reforms, or other
matters of public interest to the business community and the public at large. The Official
Secrets Act, 1923, the Evidence Act, 1872, Rules of Business, 1975, and the
Government Service (Conduct) Rules 1979 collectively prohibit the disclosure of official
documents and information. The Official Secrets Act makes all disclosure and use of
official information a criminal offence, imposing criminal sanctions on public officials who
communicate information to unauthorized persons and those who receive information
with the knowledge or reasonable inference that the information is conveyed to them in
contravention of the Act.47 As noted in the PARC report, the cumulative effect of these
laws is to “create a legal regime for the administration to conceal truth and facts of public
importance from the people…[creating] considerable scope for ‘administrative discretion’
to camouflage…acts of omission and commission.” The report argues that, in an era of
information and communication technology, archaic laws that preserve a culture of
secrecy have lost their relevance and should be replaced by a Freedom of Information
46
47
The World Bank (2002), Taming Leviathan: Reforming Governance in Bangladesh, at 34-35.
Official Secrets Act, Section 5.
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law that extends unlimited public access to information on all but a narrow range of
issues in which disclosure would compromise the security of the state.48 The PARC
report includes a sample Freedom of Information bill.
48
PARC Report (Volume 1), at 17-26.
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CHAPTER III
POLICY-MAKING, PLANNING, AND REGULATION
A. Introduction
76.
The formal policy-making process in Bangladesh involves a sequenced
combination of executive and legislative roles, with minimal opportunities for public
participation or broad stakeholder inputs. Low levels of political consensus on major
national issues have impeded implementation of many of the key policy reforms
necessary for more rapid economic growth and poverty reduction. A pattern has
emerged in which policies are subject to revision or replacement with every change in
government, creating uncertainties for businesspersons, ordinary citizens, and the public
officials tasked with implementing policies and administering regulatory systems.
77.
Broad national-level planning and associated resource allocations involve a
traditional planning process whose present institutional structure dates back to the
founding of Bangladesh and reflects the special circumstances that prevailed at the time
of Independence. At that time, existing business enterprises and industries were owned
primarily by Pakistanis and there was relatively little entrepreneurial expertise in
Bangladesh to assume control of them. The Government of the time opted for a mixed
economy and decided to nationalize all abandoned enterprises, create a number of
public enterprises (especially in the economic sector), and extend its operations to the
service sector.
As a result, the Government’s roles and functions increased
substantially, and centralized planning was used to match resources with outcomes.
78.
Over time, the concept of central planning has lost much of its significance with
the increasing liberalization of the economy. After 1975, the Government began to
emphasize development of private initiatives in all sectors of national life and also opted
for the denationalization of different state owned enterprises. This period witnessed the
rise of a large number of non-governmental organizations (NGOs) that assumed an
increasingly active role in the development and service sectors, especially at the
grassroots level.
79.
The all-encompassing role of government had resulted in mismanagement and
overburdening of the administrative system. With liberalization, there was a delimited
role of government as provider of goods and services. While traditional Five-Year Plans
continue to be enacted, these are now merely indicative of expected targets for
achievement, with functional annual development plans adjusted so that targets can be
achieved. While the policy and regulatory frameworks have become important
instruments to guide overall economic behavior toward the achievement of planned
targets, most observers agree that these complex systems are no longer ideally suited to
the development and economic growth objectives of Bangladesh. The sections that
follow examine the current procedures and provide recommendations on steps to be
taken to introduce greater efficiency and transparency.
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B. Policy-making and Regulatory Process
1. Overview
a. Policy-making
80.
Policies in Bangladesh are implemented through legislation. Government policy
takes two forms:

Policy set by law, and agreed between the Executive and the Legislature. Any
national policy affecting individual rights or defining obligations for physical or legal
persons must be defined by law;

Policy set by government regulations as secondary and enabling legislation.
Government regulations can neither restrict nor exceed the matters and principles
specified in the parent law.
81.
Given the scope of legislated policies, any number of rules, regulations, decrees,
orders, decisions, guidelines, directions, or other documents of general application can
be formulated by Government and approved by the Cabinet to guide policy
implementation.
82.
The broad policy and regulatory framework must fall under the general direction
subsumed under an Act of Parliament. If such an Act does not exist with respect to a
particular policy to be initiated, then the policy must be ultimately ratified through
legislation. In such cases, it is usually the Cabinet that makes the decision to formulate
the new policy and entrusts the relevant Ministry to draft the policy document.
Sometimes a Ministry has special agencies or institutions delegated with the task of
policy making and coordination49.
83.
The relevant Ministry then forms a Task Force that is entrusted with formulating
the policy outline. This Task Force is comprised of senior Ministry staff acting under the
direction of the Secretary of the Ministry. The Task Force may include members from
other Ministries as well, if there is overlap in objectives or if outcomes can only be
achieved through inter-ministerial collaboration. The Task Force then deliberates over
the contents of the policy document, weighs the options, assesses the objectives, and
drafts the document on these bases. It may, on occasion, engage domestic or
international consultants to provide the background research framework for the
document, guided by the overall goals of the policy. Donor funding may sometimes be
used for technical assistance related to the formulation of the policy document in
accordance with the Task Force’s guidelines. The Task Force then finalizes the
document in line with the Ministry’s objectives.
84.
Once prepared, the draft policy document is sent to relevant Ministries for
clearance. This usually includes the Ministry of Law and the Ministry of Finance for
comments on all legal and financial implications. Other Ministries may also be
49
For example, the 21-member Bangladesh Rural Development Board (BRDB) [with the Minister for Local
Government, Rural Development and Cooperatives (RD&C) as Chairman and the Secretary, RD&C division
as the Vice-Chairman, along with senior representatives from various Ministries, Government agencies and
the cooperative movement], is the policy making authority for rural development, and is responsible for
formulating policies and for developing long-term plans.
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requested for comments if it is determined that the policy involves their scope of interest
as well. The draft is then revised accordingly. Several rounds of comments and
counter-comments may be involved before a consensus is reached. The revised
document is next sent for Cabinet review and approval. In the context of full Cabinet
review, other ministries have an opportunity to formally review and comment on the
proposed policy draft and to raise issues for clarification by the initiating Ministry.
Cabinet may summon external advisors to comment on the policy paper, but this rarely
happens as the final draft usually has already taken account of such comments and
incorporated whatever is politically feasible. Full Cabinet approval may involve further
comments and re-writing of the document.
85.
The revised policy document is next placed before the relevant Parliamentary
Committee. This Committee reviews the document and may require further revisions
before approving it. The document is then reviewed by the Parliamentary Standing
Committee on Law, with a particular focus on the legal dimensions and integrity of the
proposed draft. As noted in Chapter II, the internal working dynamics of the Committee
will determine the scope for debate and the weight that alternative views are given.
Following Standing Committee review and approval, the draft is passed to the Secretary
General of Parliament, who refers it to full Parliament as a Bill.50
86.
If the Bill is passed by a majority vote of Parliament, it is presented to the
President for assent into law. Under Article 80 of the Constitution, the President is
required to assent to the Bill within 15 days of receipt or—in the case of a Bill other than
a Money Bill—to return the Bill to Parliament with instructions that the Bill in its entirely,
or any specific provisions thereof, be reconsidered, together with any amendments
specified by the President. If the President does not issue such instructions within 15
days, he is deemed to have assented to the Bill on expiry of the review period and the
Bill passes into law. If the Bill is returned by the President for reconsideration and is
again passed by Parliament, with or without amendment, it is returned to the President
for his assent. In this case, the President is required to assent to the Bill within seven
days. If the President does not assent within seven days, he is deemed to have
assented and the Bill passes into law.
87.
Members of Parliament can initiate bills in their private member capacity. In this
case, a Member prepares the draft51 and passes it directly to the Parliamentary Standing
Committee on Law, with no intervening Cabinet review. The Standing Committee
follows the same procedure that applies to Bills passed from the Cabinet. If a Private
Member’s Bill is passed, it is referred to the relevant ministry for implementation. In
practice, few Private Members’ Bills are introduced in Parliament.
88.
The above framework is modified when national policies (such as the Industrial
Policy or the Export-Import Policy) are initiated or changed within the framework of an
existing Act of Parliament, when their contents accord with the broad provisions of the
Act. Once an Act exists permitting a particular policy formation or a revised policy
formulation, the relevant Ministry may initiate the policy change, and the final document
can become effective after Cabinet approval. The decision to formulate or revise a
Article 80-(1) of the Constitution specifies that: “every proposal in Parliament for making a law shall be
made in the form of a Bill.”
51 Private members often seek assistance from the concerned ministry, lawyers, NGOs, other members to
prepare the draft.
50
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policy may come from the Cabinet or from the Ministry itself. For example, the Power
and Energy Ministry is presently updating its Master Plan for the sector to take special
account of rural areas. The provisions of the revised plan may not need further
legislative approval if they fall under the general goals and objectives of the National
Energy Policy.
89.
The process of clearances outlined above is still in effect. The Ministry’s Task
Force prepares the document, which is cleared by the Ministry of Law and the Ministry of
Finance (when financial matters are involved), and other Ministries in the case of
crosscutting involvements. Once final clearances are obtained from the respective
involved Ministries, the policy is presented to the Cabinet for clearance. This may
happen straight away or, if the Cabinet has further comments, further revisions of the
draft will be necessary. The final version will then be cleared by the Cabinet and the
new or revised Policy comes into effect.
b. Regulatory framework
90.
The regulatory framework may likewise be initiated by the relevant Ministry or
agency within the Ministry. In some cases, there are special Regulatory Authorities that
are empowered to carry out the regulatory functions—for example the Bangladesh
Telecommunication Regulatory Commission (BTRC).52 Changes in the regulatory
regime may be made in accordance with the process described previously, provided that
the changes fall broadly within the provisions of a relevant Act. For example, frequent
Statutory Regulatory Orders (SROs) passed by the National Board of Revenue (NBR)
(under the Ministry of Commerce) can be implemented with Cabinet approval provided
that they fall under the general ruling of the Customs and Excise Act. The National
Environmental Policy Act of 1992 empowers the Department of Environment (DOE),
Ministry of Environment and Forests to assume legal authority and responsibilities for air
quality management in Bangladesh. It also permitted the DOE to phase out leaded
gasoline in 1999 without further parliamentary approval. The Telecommunication Act of
2001 permitted the BTRC to deregulate many telecommunication services, liberalize the
licensing process for private sector participation, formulate regulations detailing the
considerations to be made in developing the tariff structure, and approve or reject any
tariff proposal from any public or private service provider.
91.
In making changes in regulations or regulatory procedures, Ministries, their
agencies, or regulatory commissions usually engage consultants to work out the details
on licensing procedures, pricing and tariff, service obligations, dispute resolution
mechanisms, and related matters. In the absence of special conflicts that require
intervention by Ministries or vested private sector interests, consultants’ opinions are
usually accepted. In the ultimate analysis, regulatory bodies have to be guided by the
principles of objectivity, professionalism, fairness, and transparency. Over-regulation or
biased regulations may cause the nation to miss valuable opportunities.
52
Likewise, the Power and Energy Ministry has decided to establish a national Energy Regulatory Authority
to carry out regulatory functions such as issuing licenses to different agencies, creating and implementing
methodology for setting tariffs, reviewing the demands for energy/electricity, and investigating and resolving
customer complaints.
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2. Constraints on Policy-making and Implementation
92.
In principle, the process through which policies are initiated and eventually
passed into law provides ample scope for scrutiny and inputs by the staff of the
responsible Ministry, Cabinet, parliamentary committee, full Parliament, and the
President. In practice, several factors constrain the formulation and implementation of
policy-making.
a. Policy formulation and articulation by law or regulation
93.
The quality of policy formulation and the laws or regulations through which
policies are formally articulated is only as good as the research, stakeholder inputs, and
dialogue that inform them. Policy formulation within ministries is sometimes constrained
by the level of knowledge and capacity among those responsible. The same factors that
constrain the overall capacity and performance of the Bangladesh civil service affect
ministries in their individual capacity. These include limited professional development
opportunities, minimal performance incentives, and other factors that affect the
substance of policy development and review. The tendency is for senior ministry
officials to play a lead role in policy development, with fewer opportunities for mid-level
officials who may have a clearer understanding of the practical implications of policy
implementation to contribute to the formulation process. Similarly, there is no standard
practice for inviting inputs from technical or academic specialists in the particular field of
focus, or even thoroughly scrutinizing the research that already exists, although this
situation has begun to improve in recent times. Ultimately, any amount of technical input
in the process is only as good as the quality of understanding of those inputs and their
ultimate receptivity as far as the initiating ministry or the Government is concerned.
94.
Lack of inter-ministerial coordination in the early stages of policy formulation is
another factor that affects policy-making. In practice, though most policies have
elements and implications that touch on the interests of other ministries, there is a lack
of adequate inter-ministerial consultation. This often happens because other ministries
do not seriously invest time and interest in the initial deliberations of the initiating
ministry. As a result, inconsistencies arise that may only be discovered after a policy
has passed into law. Similarly, there is little opportunity for local government bodies to
inform national policy that will enhance local governance or center-grassroots
relationships.
95.
As noted in Chapter II, the role of Parliament in reviewing policy in the form of
draft bills at the Committee and full Member levels has been undermined by political
tensions that leave Parliament to operate at less than full Member capacity. Under the
present system, the executive branch is responsible to the Parliament and Members are
assumed to have sufficient voice in the design and formulation of public policy as
representatives of the people. In practice, Parliament is primarily concerned with
enacting legislation and ratifying decisions that the executive has already taken. As a
result, Members have no substantive role in policy formulation. The parliamentary
committees have so far failed to assume a vital role in scrutinizing various aspects of
government actions. Committee meetings are not held regularly and ministers in many
cases do not attend the meetings. In fact, policy issues often are not discussed in
Parliament. Even when they are discussed, opposition political parties tend to oppose
the ruling party as a matter of course, purely for the sake of opposition. Moreover,
boycotting of Parliament sessions has also become a regular practice of opposition
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political parties. This weakens Parliament’s authority to hold the executive accountable
to it. As a result, policies that do not have the full backing of all stakeholders are being
legislated in Parliament. Such policies have little permanence and are frequently
scrapped or revised when the Government changes. This practice has a negative effect
on businesses and citizen groups that are affected by such policy revisions.
96.
Beyond channels for official input, there are even fewer opportunities for ordinary
citizens, special interests groups, or others who will be affected by new or revised policy
to register their views and interests. Practices vary from one ministry to the next, but in
general the tradition persists for policies to be developed behind closed doors. Civil
society has responded to this gap through the inputs of organizations such as the Centre
for Policy Dialogue (CPD) and other organizations, which provide thoughtful policy briefs
and recommendations that are informed by broad stakeholder consultations.53 In
addition, the media has begun to assume an increasingly constructive role.54 While it is
difficult to measure the impact of such inputs, anecdotal evidence suggests that
informed engagement of this kind has a positive impact, such as recent developments in
the field of environmental conservation and resource management.
97.
Changing economic and social scenarios sometimes require new policies to be
framed and adopted, but there are often inordinate recognition and preparation delays
that create uncertainties or result in missed opportunities. For example, there is an
urgent need for a resettlement policy, which is now under consideration by the
Government. The absence of resettlement policy results in donors offering resettlement
packages in donor-financed projects that are not offered in wholly government-financed
projects. The resulting anomalies create delays in project negotiation.55
98.
The policy formation process is also delayed due to the lack of consensus among
all political parties and different stakeholders. For example, it has been recognized for
some time that there are constraints in the operating environment for micro-finance, with
impediments in the policy environment and weaknesses in the legal and regulatory
framework56. The main role the Government should play in the commercialization of
53
In this context, areas of involvement of civil society are policy analysis and advocacy, mobilization of
public opinion, active participation in the policy formulation process, applying pressure on government with
the help of the media, lobbying with development partners, and bridging the gap between citizens and
government. In recent years, civil society has made some limited but positive contributions towards
ensuring executive and administrative accountability. Unfortunately, some elements of civil society have
become politicized.
54 Currently, the print media is enjoying considerable freedom in Bangladesh. While newspapers bring
lapses of the executive to the notice of the public, thereby helping to make it more accountable, the
Government continues to exercise primary control over State-run electronic media.
55 For example, for persons affected by projects, the existing Government policy allows for compensation to
be paid to landowners only at rates stipulated under existing laws, while donors want compensation to be
paid to evicted landowners at higher rates, and also to affected squatters and other permanent residents or
businesses on Government land. The discrepancy results in large delays in the negotiation process.
56 It is well recognized that a secured transactions framework is of great importance in enabling MFIs to
move toward commercialization by reducing their credit risks and costs of lending. Lenders need a system
wherein claims against property can be created (legally defined), perfected (publicly registered), and
enforced. The more uncertain and expensive this process, the less willing MFIs may be to lend. Microcredit
clients are not able to take advantage of immovable property laws to collateralize their loan request,
because they lack such assets, and there is no legal basis at present on which to develop security interests
in movable property. However, great potential exists for further risk reduction and cost efficiency in MFI
operations if other forms of collateral, like movable collateral, are supported by the legal framework. USAID
has recently drafted a law for developing security interests in movable property and has submitted it to the
Ministry of Finance. Such a law, if enacted, would have the potential to decrease costs of lending for micro
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micro finance is to create an adequate legal, regulatory, and supervisory framework for
the industry. Notwithstanding the need, no comprehensive national policy for the
continued development of the industry has yet been articulated. Informed sources
believe that unless there is unanimous agreement among the political parties on the
question of monitoring NGO activities, no progress can be made in this direction.
99.
The question of consensus extends to other stakeholders as well, notably
Bangladesh Bank and a few large micro-finance institutions (MFIs). Bangladesh Bank
has always taken a fairly “hands-off” approach to the development of the micro-finance
industry; allowing it to innovate and grow with minimal government intervention;
however, as the MFIs grow and the environment changes, a legitimate need emerges for
some regulatory framework for micro finance.57 The substantial and increasing reliance
by NGOs on savings for onlending is a cause for concern, considering that these
institutions are placing clients’ life savings at risk without any form of prudent regulation
or supervision.58 The only legal options currently available to MFIs are to become a
commercial bank or to hold out hope of obtaining a special legal charter like that of
Grameen Bank. Bangladesh Bank, however, appears not to want MFIs to operate as
commercial banks or to allow any special cases. Consequently, in spite of the
Government’s directive to Bangladesh Bank in early 2003 to make recommendations on
the regulation and supervision of the activities of micro-finance operators, which would
input into the proposed policy to regulate micro-finance activities, Bangladesh Bank has
taken no action. It claims that its does not understand the rationale of the proposed
framework and requires further guidance from the Government.
100. Aware of Bangladesh Bank’s limited capacity to regulate and supervise
the existing commercial banks and with other concerns about government
intervention, the largest MFIs are also discouraging any attempt to create a legal
and regulatory framework for micro-finance within the central bank. The political
influence of a few large MFIs is inhibiting progress on regulation and supervision.
Their opposition is rationalized as resistance to bureaucracy and control.
Unfortunately, this argument is being made by institutions that are well endowed
with resources. A few medium-sized NGOs, which would be equally subject to
such bureaucracy but would have much to gain from the legitimacy conferred by
regulation, are showing greater interest in such regulation. Donor agencies
finance NGOs (by allowing borrowers to use nontraditional sources of collateral to access larger loans) and
allow private commercial bank entrance into the micro finance market. ADB’s pending Good Governance
technical assistance will strengthen governance and corruption prevention in the context of secured
transactions.
57 While Bangladesh Bank recently warned micro finance NGOs against mobilizing non-member savings, it
needs to do more to ensure the safety of member deposits. It has been suggested that Bangladesh Bank
could create a distinct legal tier for nonbank MFIs, with regulation and supervision either by a distinct unit
within Bangladesh Bank or by a third party having delegated supervisory authority. Bangladesh Bank would
be the most appropriate institution to regulate and supervise the few MFIs that might come under a new tier
of regulation. Given the difficulties that Bangladesh Bank still has in its supervision of the formal financial
sector, however, it is apparent that any role assigned to it would have to be undertaken only after substantial
capacity building to develop requisite understanding and professional expertise in micro finance.
58 Savings mobilization from the general public is not permitted except with the permission of Bangladesh
Bank. In practice, MFIs have compulsory savings from members built into their lending operations and the
law does not prohibit this. Net savings now account for approximately 30 percent of the revolving loan funds
of micro finance NGOs. This implies that these NGOs mobilize a significant amount of savings for onlending
and points to an urgent need to create a legal and regulatory framework for MFIs to undertake savings
mobilization in a legal and prudent way.
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should work with the Government to ensure an environment for micro-finance
that will facilitate the progress of MFIs toward financial sustainability, including
advising on the legal and regulatory framework.
101. Delays in policy making sometimes reflect a hesitancy or failure of
conviction on the part of the government in power. For example, despite
constitutional provisions and an unequivocal direction by the Appellate Division of
the Supreme Court of Bangladesh (discussed in further detail in Chapter VI), the
Government has not taken any concrete steps to ensure the independence of the
judiciary. A Bill that would effect the full separation is reportedly now pending in
the Parliament for enactment. Lack of action to separate the judiciary from
administration has accentuated bureaucratic authoritarianism and interference in
the judicial process, especially at the lower levels.
102. With respect to decentralization and local government, different
commissions and committees were constituted over the years to reform and
strengthen the role, structure and functions of local government institutions in
Bangladesh. To date, no significant attempt has been made to implement the
major recommendations of these reform commissions/committees. Almost all of
the major local government reform efforts have focused on secondary issues
such as the number and level of tiers, relationships between tiers, composition,
and distribution and share of functions among the tiers and central government.
This focus has neglected core issues of substance such as devolution of
authority, resource generation, and steps to be taken to empower local
government institutions to operate in an autonomous manner.
103. While there have been frequent policy changes and rearrangements of the
tiers of local government, these bodies are alleged to have been exploited by a
succession of governments as means for advancing partisan interests. Studies
reveal that local government bodies have never been self-governing in the true
sense of the term, but have always remained as extensions of the national
government with guided and limited local participation. Some of the more
progressive recommendations of the Local Government Commission, 1997 and
the Local Government Finance Committee, 1999 did not receive a place in the
subsequent Local Government Act that provide for a four-tier local government
system. In effect, the major reform attempts through local government legislation
failed to put in place a truly decentralized local government system.
104. Despite the call to mainstream women through gender specific policies,
gender issues have been largely neglected as a policy focus.
The
recommendations of various commissions/committees do not reflect any serious
concern for mainstreaming women in the administrative process; however, there
have been some minor efforts towards these ends through stray government
policies and affirmative actions.
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b. Policy implementation
105. The same constraints that affect the quality and substance of policy
formulation within initiating ministries also affect the implementation of policies
once they are adopted in law. Ministerial staff members play a key role in
directing and monitoring the implementation of policies. Ideally, implementation
should proceed through a chain of responsibility that provides mid-level officials
with the knowledge, capacity, and independent decision-making authority
necessary to fulfill their policy implementation responsibilities. These include topheavy management practices that concentrate decision-making authority among
senior officials and deprive mid-level officials of the information required to
perform their functions. Moreover, the existing arrangement of governmental
administration, under which the Ministry is responsible for policy formulation
while directorates, departments, statutory bodies, and field offices implement the
policies, causes implementation delays. The difficulty of drawing a demarcation
line between the policy decisions and the operational decisions, along with the
centralized tendency in administration complicates the disposal of cases and
causes delays in decision-making.59
106. Policy implementation is further constrained by the lack of information exchange
and coordination among a number of ministries or government agencies for which a
particular policy has implications. Although every ministry has designated “Council
Officers” who are responsible for inter-ministerial coordination, coordination is often very
difficult in practice.
107. Policy implementation is sometimes based on Action Plans that are meant to
guide actions consistent with the Policy. For example, the previous government initiated
the preparation of a “Plan of Action on National Agricultural Policy” by the Ministry of
Agriculture with technical assistance from the Food and Agricultural Organization (FAO)
of the United Nations. The draft Plan of Action was widely scrutinized and commented
on by the relevant donor local consultative groups and other researchers but the final
draft did not accommodate many of those comments. Thus while the Agricultural Policy
encourages private sector development, the content of the FAO recommendations were
largely tampered with in favor of prevailing government predilections for public sector
involvement. Implementation suffers if a new government has different views.
108. Planning and execution of development programs often suffer due to the lack of
neutral governance. Development programs are in many instances undertaken and
executed to serve the narrow party interest of the political party in power at the expense
of the national interest. When the power base changes, implementation of policies
initiated by the previous government immediately suffers. New policies are invoked to
serve new interests. While different political parties will naturally have different policies
and programs, there is a need for neutral governance as far as implementation of
development programs is concerned.
109. Administrative inaction with respect to policy implementation is often prompted by
partisan interests. Since Independence, a number of commissions and committees
59
CPD (2001), Policy brief on “Administrative Reform and Local Government,” CPD Task Force Report.
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have been constituted by different governments for administrative reform and
reorganization in accordance with their respective policy declarations. Lack of neutral
governance has led to a situation where the public administrative system has
implemented policies with speed or slackness depending on the interests of the ruling
party. Expectations of public officials regarding the permanence or transitory nature of a
particular policy also determine the speed of action. Bureaucratic norms of neutral
governance are followed to only a limited scale by the civil service. A number of socioeconomic and political factors have impeded the growth of an accountable administrative
structure in Bangladesh.
110. Delays and difficulties in policy implementation sometimes occur due to lack of
clear policy guidelines that take changing circumstances into account. Thus the
recognition of the emerging role of the private sector by the National Telecommunication
Policy of 1998 (NTP-98) permitted the Government to deregulate many services and
allow more competition in already liberalized areas. Experts now feel that, in view of
tremendous private sector response and the resistance to this by the erstwhile
government monopoly operator, it is imperative to develop explicit and unambiguous
policy guidelines regarding the extent of private sector participation, competition among
state-owned and private operators on a level-playing-field basis, the tariff structure, and
related matters. Without such guidelines, it will be difficult to realize the targets
envisaged by NTP-98. Also, the restructuring of the Bangladesh Telegraph and
Telephone Board (BTTB), the state-owned operator, considered in NTP-98, has yet to
occur and poses a constraint to rapid development of the sector60. The Bangladesh
Telecommunication Act 2001 reinforced the rationalization of private participation and
encouraged creation of an environment of competition. After more than a decade of
introduction of private operators in various telecommunication services, this Act allowed
the establishment of the Bangladesh Telecommunication Regulatory Commission
(BTRC) in 200261. Now policy matters are vested in the Ministry of Post and
Telecommunication, the operation of services and systems are vested in the incumbent
BTTB as well as a large number of private operators and service providers, and the
regulatory aspects are assigned to the BTTB. The Regulator, while answerable to
Parliament, needs to be an independent and neutral entity that pursues given objectives
without discriminating against anybody active in the field (private or public) and is equally
independent from government interference or dictates. The degree of this independence
from government is often questionable. Conflicts and delays result.
111. Finally, policy implementation is constrained by lack of adequate information
among ordinary citizens and stakeholders who a particular policy is intended to benefit
or otherwise affect. While new policies should ideally be introduced through information
campaigns, government bulletins, or other mechanisms that target citizens and
professionals or other intermediary agents who represent citizen interests with respect to
a particular policy, this only occurs to a very modest degree in Bangladesh. The print
media has assumed a more active role in reporting policy reforms, but further actions are
needed to ensure that citizens, and even mid-level officials, receive the information they
60
For example, the inability and unwillingness on the part of BTTB to provide interconnections of sufficient
capacity to the private operators is well known. The bilateral agreements in vogue are a strictly one-sided
arrangement imposed by BTTB on the private operators. BTRC has been actively considering this problem
and is currently working towards a resolution of the interconnection issue through consultation with
operators, stakeholders and interested persons.
61 The Telecom Act clearly stipulates the principles of tariff determination and prohibits discrimination of any
kind. It has given full authority to BTRC to approve or reject any tariff proposal from any of the operators.
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need to implement or arrange their affairs to take account of new policy reforms or
directives.
C. Planning Process
1. Overview
112. National development planning procedures were first introduced in the 1960s,
during the East Pakistan period. The current institutional planning structure was
established following independence, with the First Five-Year Plan (1973-78). Since then
there have been five others: a two-year plan (1978-80); the Second Five-Year Plan
(1980-85); the Third Five-Year Plan (1985-90); the Fourth Five-Year Plan (1990-95); and
the Fifth Five-Year Plan (1997-2002). The basic objectives of planned growth in
Bangladesh is defined by Article 15 of the Constitution as provision of basic needs for
the people in terms of food, clothing, shelter, education, health service, gainful
employment, reasonable recreation, and social security. With the overall liberalization of
the economy and the increasing role of the private sector in the development process,
the imperative of centrally planned development has gradually been eroded. The FiveYear Plans today serve as benchmarks for development against which yearly
development is assessed and planned in terms of the Annual Development Programs.
A three-year rolling plan to take account of actual ADP performance and correct for any
underachievement in the next year is now the standard.
113. The planning process involves the preparation of short-term (annual), medium
term (five-year) and perspective (15- to 20-year) plans. The Five-Year Plan is a desired
macro-level investment picture of the country. The Government seeks to mobilize
resources for obtaining the desired rate of growth through national development
planning. Targets are set for individual sector outputs on annual and five-year basis.
The Planning Commission makes forecasts on economic possibilities and advises the
Government on appropriate actions to attain those. The Annual Development Program
is prepared in the light of the Five-Year Plan and shows the total developmental
allocation for each sector together with a complete list of projects and allocation for each
project from local as well as external resources.
114. Planners determine general guidelines for the fulfillment of overall development
goals. These are then further broken up into specific sectoral objectives with
specification of attending resource allocation. Projects/programs are then devised and
individually appraised in the light of the overall guidelines and macroeconomic
parameters.
115. Planning at the national level involves the choice of objectives and the setting up
of targets and allocation of resources among various sectors. At the project level, it
covers preparation of investment programs for sectors and incorporation of these
programs through formulation and selection of appropriate investment projects. Major
aspects of the planning process include the formulation and design of the plan, ensuring
plan implementation, and evaluating plan performance. The process begins with a
review of the economy involving collection, compilation and analysis of relevant data by
the planners. The data is fed into an input-output matrix to get information regarding the
amount of inputs required by the various sectors, and to ensure consistency among the
sectoral demands and supplies. The broad socio-economic objectives of the plan,
chosen at the political level, are next translated into various quantifiable targets, and
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planners go back to the input-output matrix to match these targets with the resources
available. The final outcome is determined by technical, economic and institutional
feasibilities. Planners then allocate resources among the various sectors, formulating
development programs for each sector, keeping sectoral objectives in mind. The
formulation of sectoral development programs is generally done on an annual basis.
The ADP is basically the annual development budget of the Government. Project
formulation and selection is the next step in the process. The programs envisaged in the
sectoral plans are translated into reality through sectoral planning involving selection and
preparation of projects. The final steps in the planning process involve implementation
and monitoring of projects and evaluation of the plan/program and projects. Project
evaluation relates to comparing the objectives with the achievements, and identifying
discrepancies to obtain feedback for future plans and programs.
2. Role and Responsibilities of the Planning Commission
116. The apex body for the planning process is the Planning Commission with the
Prime Minister as Chairperson and the Finance or Planning Minister as ViceChairperson. The Planning Commission has five divisions—Programming, Agriculture,
Physical Infrastructure, Industry and Energy, and General Economics―each headed by
a Member.
117.
The responsibilities of the Planning Commission include, inter alia:

Preparing annual, five-year, and perspective national plans for the economic and
social development of the nation, in accordance with the socio-economic objectives
of the Government;

Preparing ADPs within the framework of the national Plan;

Periodic review of national development plan and study of its implications and impact
on the economy;

Continuous monitoring of plan implementation and evaluation of Plan performance;

Studying economic issues and conducting surveys and investigations required to
support effective planning and development;

Advising on the nature of the machinery for securing efficient execution of national
plans, annual programs and economic policies;

Allocating resources for achievement of aims and objectives of development plans;

Preparing sectoral plans and individual projects consistent with national plan
objectives;

Determining external aid requirements and negotiating with foreign governments and
organizations the total quantum and composition of foreign assistance;

Evaluating and reporting on external debts;
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
Reviewing the progress of implementation of approved projects.
3. Steps in the Planning Process
118. The National Economic Council (NEC) of the Planning Commission, with the
Prime Minister as Chairperson and all Cabinet members as members, gives preliminary
guidance for preparation of Five-Year Plans, ADPs and economic policy, and finalizes
and approves these. The NEC also reviews the implementation of the development
program. The Economic Relations Division (ERD) assesses the foreign exchange
requirements for the Five-Year and Annual Development Plans and negotiates economic
aid from foreign governments and organizations. In fulfilling its responsibilities, the
Planning Commission interacts with the Finance Division of the Ministry of Finance, the
ERD, and the Internal Resources Division (IRD), and receives support from the Statistics
Division, the Monitoring and Evaluation Division (IMED), the Bangladesh Institute of
Development Studies (BIDS), the Academy for Planning and Development, and
concerned Ministries.
119. In preparing a Five-Year Plan, the General Economics Division (GED) first
prepares a policy framework based on government decision with respect to desired
growth rate. It then evaluates the demand for resources by Ministries/Divisions and
matches these with resource availability as given by IRD and ERD. Having coordinated
the demand for and supply of resources, it prepares the sectoral plans. It then prepares
the Five-Year Plan by coordinating the sectoral plans. The Five-Year Plan is then
submitted to the NEC for approval.
120. In preparing the ADP, the Planning Commission first obtains resource estimates
from the “Resource Committee” whose members are the Secretaries of the Finance
Division, IRD and ERD, Member (Programming) and Member (GED) of the Planning
Commission, and the Governor, Bangladesh Bank. The Programming Division then
makes the sectoral allocation of resources in consultation with sectors and concerned
Ministries/Divisions. When the total outlay and objectives of the ADP along with sectoral
allocations are determined, the Planning Commission informs the different
Ministries/agencies who then prepare the development projects in the form of Project
Concept Papers (PCPs) and Project Proformas (PPs).
121. Development plans are implemented through project formulation and
implementation. Project formulation involves identification and selection of projects.
Relevant Ministries identify investment projects and technical assistance (TA) projects
on the basis of objectives of the Five-Year Plan. Proposed investment projects are
analyzed by the Planning Commission before approval by the authority concerned―the
State Minister for Planning in the case of projects not exceeding Taka 100 million, or the
Executive Committee of the National Economic Council (ECNEC) 62 in the case of
projects that exceed Taka 100 million. Proposed TA projects are also analyzed by the
Planning Commission before approval by the authority concerned―the Ministry for
projects not exceeding Taka 10 million, or the State Minister for Planning for those that
exceed Taka 10 million.
62
The ECNEC, with the Prime Minister as Chairperson and the Finance Minister as Alternative Chairperson,
considers and approves all investment projects exceeding Taka 100 million and reviews implementation of
projects.
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122. The process of project formulation and approval is as follows. Following project
identification based on Five-Year Plan program, a project concept paper (PCP) is
prepared by the implementing agency. The Ministry then sends it to the Planning
Commission after examination. PCPs are examined in a pre-ECNEC inter-Ministerial
meeting at the Planning Commission, and then revised following the decisions at this
meeting. The sponsoring Ministries then submit the revised PCPs to the relevant Sector
Division of the Planning Commission. If no further revisions are needed, the Sector
Division prepares a summary of the PCP, which it submits to the ECNEC
Secretariat/Planning Ministry for consideration and approval by ECNEC/Planning
Minister. The approved PCP forms the basis of the finalization of the PP by the
sponsoring Ministry. The Minister concerned then approves the PP on getting the
recommendation of the Departmental Project Evaluation Committee (DPEC). The
approved PP is then circulated to all concerned by the sponsoring Ministry.
123. Given all approved PCPs, the Planning Commission then finalizes the draft ADP
and sends it for approval by the NEC. The Finance Division prepares the Annual
Development Budget in the light of the ADP and submits this to Parliament for approval.
124. Following the planning process, and approval of the development program, the
management of public resources involves budget implementation, financial controls,
accounting, audit, reporting and evaluation. Specific rules and regulations guide each
step of the process. Throughout the year, the Implementation, Monitoring and
Evaluation Division (IMED) undertakes routine monitoring of projects, and prepares
quarterly overviews of expenditure and attainment of physical benchmarks which it
submits to the NEC. IMED also inspects the progress of ongoing projects, and
evaluates projects already implemented. The Budget Monitoring and Resource
Committee (BMRC), headed by the Minister of Finance, is the formal institutional
structure for coordination of the overall resources and expenditure programs of the
Government. The office of the Comptroller and Auditor-General is the supreme audit
institution of Bangladesh, and audits the accounts of all government departments/offices,
public authorities and public enterprises. The Audit Report is submitted to the President
for presentation to Parliament. The Audit Report is examined by the Public Accounts
Committee (Standing Committee of the Parliament).
125.
The planning process can be summed up as follows.

The Planning Commission conducts a review of the economy and does the
necessary input-output analysis;

The NEC is involved with the policy planning process;

The Planning Commission does the program planning in consultation with the
concerned Ministries/Divisions;

Departments/Directorates/Corporations do the project planning;

Evaluation of projects and ADP is done by IMED, and of the Five-Year Plan by the
Planning Commission.
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4. Improving the Efficiency of the Planning Process
126. The success of the country’s overall development efforts depends to a large
extent on effective and timely implementation of development projects. Institutional
inadequacies and procedural problems are major obstacles. Primary concerns raised
regarding enhancement of the efficacy of the Government’s development expenditure
relate to the quality of the projects included in the ADP and the prevalence of projects
outside ADP. Regarding quality of ADP, a number of projects included in the ADP are
not always justifiable by applying rigorous economic criteria. Many of the projects
promoted by partisan interests reflect felt needs of certain beneficiaries rather than being
justified in the national context. In the absence of a broad based, participatory, bottomup project planning process, the apprehension exists that powerful actors are able to
push through projects of their choice in select areas. Perceptions of this kind persist in
the absence of transparent mechanisms that allow public scrutiny of the projects before
they are included in the ADP. Thus, it is important to establish a system that involves
careful scrutiny, particularly the Parliamentary Standing Committees and local
government representatives, to ensure that the projects are demand-driven and are
designed on a cost-effective basis. Non-ADB projects carry the high risk of not being
compatible with the declared selection criteria, but they are often included in the ADP.
Accordingly, it is strongly argued that the practice of introducing non-ADP projects into
the budget should be discouraged.
127. The Government has taken several measures to ensure smooth implementation
of projects, including delegation of financial and administrative authority, simplified
procedures for project approval, issuing of procurement guidelines, appointment of
capable and full-time Project Directors, and avoidance of frequent transfers of involved
personnel. To ensure the quality of the ADP, the Government now undertakes pruning
exercises to discontinue projects with low rates of return. To ensure fuller utilization of
ADP funds, periodic review meetings are held at the Ministry and Planning Commission
level to review implementation progress, both in physical and financial terms. The
meetings identify implementation bottlenecks and recommend remedial measures.
Resources are also reallocated from slow moving to fast moving projects. While these
combined measures have improved utilization of ADP resources, the problem of
underutilization remains serious. Every effort should be made to correct this situation.
5. Local Government
128. Local government institutions are entitled to Annual Development Plan (ADP)
block grants from the national government. The local government regulations hold strict
instructions that the block grant must be used specifically in certain sectors determined
by the central government. This pre-determined sector allocation seriously limits the
scope of local level planning as well as the flexibility of local bodies to apply the financial
resources to satisfy the immediate needs of the community. This runs contrary to the
concept of functional autonomy of local government units. Studies reveal that the
overwhelming majority of Union Parishad Chairmen and Members lack knowledge and
understanding of the operational procedures and functions of these bodies and are also
unaware of the intricate rules as regards to budgeting, planning, and resource
management. This is due to the fact that very little effort has been taken over the years
to impart training in the relevant fields of local institutional operations to the elected
officials. The Monitoring & Evaluation Wing of the Local Government Department of the
Ministry of Local Government Rural Development and Cooperatives is legally
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responsible to ensure accountability and transparency of operations and functions of
local government units. It has been observed that the monitoring mechanisms of the
Monitoring & Evaluation wing are not very effective.
D. Legal And Regulatory System
1. Overview
129. A transparent, accountable, and predictable legal system is a key element of
good governance. Law should ideally serve as the principal mechanism through which a
government facilitates the effective functioning of the economy, by translating economic,
social, and other policies into predictable rules and sound regulatory systems. A rational
legal system, clear laws and regulations, and efficient administrative and judicial
institutions are core elements of a business environment that supports private
investment and economic development initiatives.63 While Bangladesh has a rich legal
tradition that combines traditional customary law and the colonial legacy of British
common law, the combination of sources and interpretations of law have made the legal
system remarkably complex. From the perspective of governance analysis and
assessment of investment risk, attention has tended to focus on the capacity of the
judicial system to resolve contractual or other disputes in a timely and efficient manner
and on the labyrinth of regulations, rules, and administrative procedures that challenge
investor confidence in the certainty of a particular legal course or the security of an
investment or legal obligation.
130. Many laws affecting investment in Bangladesh are old and outdated. For
example, insolvency laws that apply primarily to cases of individual insolvency are not
being used as a result of falsified assets and the non-collectable cross-indebtedness that
supports insolvent banks and companies. The Bankruptcy Act of 1997 has been only
marginally effective in addressing these problems.64 While certain laws are problematic,
most observers agree that the key problem is not one of bad law, but rather relates to
the enforcement of existing laws, contradictory overlaps between the various laws and
regulations that relate to a particular issues, or gaps in the legal or regulatory framework
governing particular matters of commercial or administrative importance. Despite
government commitment to reduce interference in private sector activities, regulations
continue to be issued and amended at a pace that makes it difficult to reconcile conflicts
and contradictions. The problem is compounded by the fact that many regulations are
not adequately publicized, even among the public agencies that are responsible for their
implementation. There is a need to make the administrative apparatus of government
more transparent and accountable.65
2. Regulatory Regime
131. In the chapters that follow, weaknesses in regulatory systems and structures and
in the scope or substance of specific regulations are frequently cited as key sectoral or
core governance constraints. Regulatory constraints take a variety of forms. In some
63
Foreign Investment Advisory Service (1992), Policy, Regulatory, and Incentive Regimes Affecting Private
Foreign and Domestic Investment in Bangladesh. Washington, DC, FIAS, at 7-9.
64 United States Trade Center (2003), Bangladesh Country Commercial Guide 2003-2004, U.S. Embassy,
Dhaka, at 31-32.
65 FIAS (1992), Policy, Regulatory, and Incentive Regimes; United States Trade Center (2003), Bangladesh
Country Commercial Guide 2003-2004, at 34.
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cases, problems are rooted in the absence or inadequacy of regulatory rules or
frameworks required to define rights and regulate relationships in a particular matter or
to implement a stated policy. In other cases, the opposite situation prevails, with
problems arising from the labyrinth of regulatory rules and directives through which the
Government asserts strict control in a particular area. The situation presents hurdles for
businesspersons and individual citizens who are dependent on a particular government
service, and raises bureaucratic impediments to efficient business transactions and
administrative mechanisms. Related problems include lack of consistency or rationale in
the enforcement of regulatory regimes, or inadequate or inconsistent enforcement of
regulatory provisions. In many instances, the regulations themselves lack sufficient
clarity. In others, interested citizens or businesspersons face difficulties in obtaining
copies of a relevant regulation. In some cases, even government officials who are
responsible for administering a particular regulatory regime do not receive copies of the
regulations, or are not provided with adequate information on or training in the
application of new regulations. In an environment of this kind, opportunities arise for
corruption to flourish, and the officials or agencies responsible for administering
regulatory systems hold inequitable advantages in their dealings with those who depend
on their assistance or favor.
132. Regulatory weaknesses, inefficiencies, and associated power advantages rank
among the primary governance constraints facing Bangladesh. For many years the
issue has attracted significant attention from reformers in government, domestic and
international investors, and the donor community. While encouraging progress has been
made in some areas, with improvements in existing regulations or regulatory structures
or the establishment of new systems on a stronger governance footing, regulatory
weaknesses pose a major constraint to domestic and international investment and the
achievement of the ambitious economic growth trajectory required to reduce poverty
within the timeframe set by the Interim National Poverty Reduction Strategy.
133. Regulatory reform calls for a combination of interventions that address all
dimensions of the problem, including stricter scrutiny and enforcement of existing
regulatory systems, greater transparency, improved access to information by citizens
and those responsible for the administration of various systems, and improvements in
the professional capacity of those who draft regulations and administer regulatory
regimes. The sectoral governance analyses presented in Chapters IX to XIV provide
examples of regulatory constraints and the steps that should be taken to address them.
Beyond the regulatory issues examined in other chapters, problems affecting the
registration and transfer of land pose a major impediment to economic growth and the
security and quality of life of citizens to a sweeping extent that arguably exceeds all
other regulatory constraints. Land regulation undermines economic growth and
development efforts in several sectors of particular importance to ADB, including small
and medium enterprise development. The following section summarizes some of the
key issues associated with land administration in Bangladesh.
a. Land Administration
134. The sale and mortgage of land is regulated by the Transfer of Property Act of
1882, the Stamp Act of 1882, and the Registration Act of 1908. In their present form, the
three acts defy practical and consistent implementation. No land can be transferred
without a complicated registration process on which stamp duties and registration fees
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must be paid.66 The proliferation of false title documents complicates both the purchase
and sale of land and the use of land to access credit. In addition, parties tend to avoid
the registration of mortgages, liens, and other encumbrances of land to avoid excessive
stamp duties and other charges. The complicated process of creating title and securing
other interests hampers the free transferability of title to land that should ideally stand as
a fundamental feature of a market economy. The Transfer of Property Act of 1882
provides that registered instruments, once registered, take effect from the date of
execution of the agreement and not the date of execution. Consequently, title is
uncertain until the registration process is completed. The rights of a bona fide purchaser
or mortgagee can be defeated by a title or interest that is purportedly created earlier but
registered subsequently.67
135. The most basic problem concerns the difficulty of ascertaining title to land and
the existence of any existing encumbrances. Records in many registration offices are in
a chaotic state, due to poor storage facilities and neglect on the part of registry officials.
The agro-based economy of Bangladesh makes land a critical issue for the majority of
the rural population. Legal disputes often arise about ownership of land, or entitlement to
water, trees, or other land resources. Particular cases often involve issues relating to
the transfer of title, falsification of documents, or encroachment upon neighboring land,
among others. Resolution of land title uncertainties could potentially reduce the volume
of cases before the courts by more than 50 percent, as well as reduce the incidence of
community violence, to which disputes involving land ownership or boundary issues
frequently give rise. While the problem is universally acknowledged and several studies
have been undertaken and pilot initiatives explored, no practical initiative has been taken
to resolve the problem of land registration and security of title. ADB sectoral governance
initiatives should be mindful of land and related security issues, and explore
opportunities to address them in the sectoral governance context, laying the groundwork
for future core governance initiatives.
66
A mortgage can be created without a registered instrument, through deposit of title deeds (known as an
“equitable mortgage”), without attracting the same level of stamp duties or registration fees that apply to the
purchase and sale of land. The disadvantage for the creditor is that there are no public records of
mortgages of this kind, so that it is impossible to determine prior mortgages with any certainty. Bankers
insist that registered mortgages are too expensive for their customers and thus accept mortgages by deposit
of title deeds to reduce the financial burden.
67 See FIAS (1992) Policy, Regulatory, and Incentive Regimes, at 14.
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CHAPTER IV
PUBLIC ADMINISTRATION AND LOCAL GOVERNMENT
A. Public Administration
136. Public administration has been a central focus of more than a dozen governance
studies undertaken by the Government of Bangladesh, local research and public policy
institutions, and the international donor community since Independence.68 Most studies
have reached similar conclusions regarding key issues and priority actions required for
public administrative reform. Recent studies, including the Public Administration Reform
Commission (PARC) and the World Bank’s 2002 Taming Leviathan: Reforming
Governance in Bangladesh,69 have drawn important lessons from past reform efforts. Of
particular significance, both reports have noted that one of the key challenges of public
administrative reform lies in understanding and taking account of the underlying social,
cultural, and political-economic factors that have shaped public administrative practices
in Bangladesh, and the manner in which citizens and public officials relate to one
another.
137. While progress has been made in some areas, including professional
development training for public officials, a succession of reports, recommendations, and
commitments by different governments have yet to achieve any significant reform of
administrative practices. Among the many factors to which this failure is attributed, most
observers agree that the two most significant factors are the failure of successive
governments, and the public service itself, to pursue reform commitments with genuine
resolve, and the tendency of new governments to reverse or abandon initiatives that
were taken by predecessor administrations, regardless of the time or resources invested
in good faith reform efforts.70 While the desire of a new government to chart its own
distinctive course is only natural, successive governments should give reform initiatives
that advance common governance reform goals every opportunity to take root, without
abandoning them as a matter of principle.
1. Growth of the Public Service
138. The Bangladesh public service is unavoidably large and complex. In serving the
needs of a population of almost 140 million people, it is bound to contend with
geographic, infrastructural, resource, and other constraints that would challenge the
most successful models of administrative governance. At the same time, with more than
one million civil servants on the government payroll the public service has crossed the
line between necessary size and unwieldy mass, sacrificing accountability, transparency,
and performance standards. The public service includes 38 ministries, 53 divisions, and
68
Examples include, inter alia: the Civil Administration Restoration Committee, 1971; the Administrative
Services Structure Reorganization Committee, 1972; the Secretaries Committee on Administrative
Development, 1985; the Administrative Reorganization Committee, 1993; the Administrative Reorganization
Committee, 1996; and the Public Administration Reforms Commission, 1997. For a summary of the
recommendations and follow-up outputs of these and other government commissions, see CPD (2003),
Developing a Policy Agenda for Bangladesh: Civil Society’s task Force Report 2001, Dhaka, University
Press Limited, at 326-28.
69 The World Bank (2002), Taming Leviathan: Reforming Governance in Bangladesh. See in particular
Chapter 2 (Obstacles to Governance Reform), at 11-20. See also PARC Report (Volume 1).
70 For further analysis see CPD (2003), Developing a Policy Agenda for Bangladesh: Civil Society’s Task
Force Report 2001, at 305.
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220 state-owned enterprises. The number of ministers was recently reduced from an alltime high of 60 to 53.
2. Historical Context
139. With independence from Pakistan, Bangladesh inherited the core elements of the
former colonial bureaucracy that had been in place in East Pakistan. The colonial
administration was primarily concerned with enforcement of law and order and revenue
collection. While it was scarcely accountable to the population at large, it was effective
in regulating public affairs through a system of top-down administrative accountability.
Over the years, the quality of public administration gradually degenerated across the
Subcontinent. The implications of this change affect the quality of governance in
modern Bangladesh.71
140. The Liberation War ravaged the nation’s physical and administrative
infrastructure. Following Independence, the Government of Bangladesh assumed a
principal role as agent for economic and social development—a course that made sound
practical sense in the circumstances. The challenge of development administration led
to government intervention in a variety of areas, with a particular focus on the economic
and service sectors. As principal provider of public services, the Government opted for a
mixed economy and created new public enterprises at a rapid pace. Thirty-two years
later, the bureaucracy continues to wield a strong hand in economic affairs, with core
regulatory functions that once defined the parameters of the bureaucracy now
accounting for just a fraction of the overall role of the State. The Government is active in
virtually every sector, including education, health, social welfare, public utilities,
transport, natural resource management, law and order, the electronic media,
commerce, and trade.
141. The all encompassing role of the State has persisted despite evidence that the
private sector and civil society can be especially effective in delivering social services or
performing other functions in certain sectors in which the Government maintains a
primary role. State-owned enterprises have repeatedly failed to achieve the efficiency
necessary to secure and sustain profits.72 The persistent presence of the State in
economic affairs further burdens an administrative system that would arguably operate
more efficiently if rational decisions were taken in delimiting sectors in which the State is
optimally positioned to play a lead role,73 or in redefining the role of State to place
increasing emphasis on regulatory functions and meeting the needs and expectations of
consumers, the private sector, and other stakeholders.
142. As noted in a 1996 World Bank report and reiterated in subsequent studies and
commission reports, there is a consensus view among citizens, civil society, the
domestic and international business communities, and international donors regarding the
weaknesses of a public administrative system that is overly centralized and bureaucratic,
secretive, inclined to emphasize process over practical efficiency, and non-transparent.
Weak administrative governance is cited among the primary factors that prevent
Rehman Sobhan, “Problems of Governance in South Asia: An Overview” in V.A. Pai Panandiker (2000),
Problems of Governance in South Asia, Delhi, Konark Publishers, at 16-17.
72 CPD (2001) Policy Brief on Administrative Reform and Local Government, at 3.
73 For example, the Government continues to play a prominent role in lending on a scale that places it only a
short distance behind commercial banks. See The World Bank (1996) Government that Works: Reforming
the Public Sector, at 1-3.
71
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Bangladesh from achieving the economic growth trajectory required to meet the goals
set by the Interim National Poverty Reduction Strategy. At the same time, there is an
emerging consensus that present day reform efforts should not aim to push the
Government from every sector, but rather should be guided by recognition that the
Government has important regulatory and other roles that complement the role of the
private sector and civil society. To this end, administrative reforms should aim to assist
government agencies and officials to strengthen their capacity and performance in
regulatory functions, facilitating collaborative working relationships between government
agencies and officials and prospective partners from the private sector and civil society
in addressing common issues, encouraging public participation in decision-making, and
otherwise responding to public needs and interests.
3. Key Governance Issues in Public Administration
143. The following sections discuss the factors that undermine the effectiveness of
public administration, as highlighted in the PARC report and other assessments.
a. Political changes outpace institutional reform
144. A permanent bureaucracy is bound to operate under the direction of different
governments at different times, so that changes of focus or style of management are
inevitable when a new administration comes to power. In Bangladesh, the tendency of
new governments to undo administrative changes introduced by their predecessors as a
matter of principle rather than practical expediency imposes an overarching constraint to
governance reform, sapping the momentum and continuity of reform efforts. In such an
environment, it is difficult for reform minded public officials to pursue good faith reform
efforts over the considerable length of time necessary to achieve desired results. The
burgeoning growth of the bureaucracy is perceived to have in turn created opportunities
for partisan interference in recruitment, promotion, and other administrative functions.74
b. Obligations of administrative officials
145. Administrative officials are bound to provide Ministers and Members of
Parliament with accurate, objective, and complete information in a timely manner, render
sound advice based on clear appraisal of options, implement ministerial decisions as
directed, and be accountable for their personal actions.75 While the Bangladesh civil
service includes many reform minded and superbly qualified officials, their reform efforts
are often frustrated by constraints within the system in which they operate. These
include resistance and obstruction by colleagues who are unsettled by change,
disregard for the intention of lawmakers, and poor responsiveness to citizen interests
and inputs. 76
c. Authoritarian culture
146. Some bureaucrats exercise their policy design and implementation powers in an
authoritarian manner that leaves little scope for democratic values in public
Rehman Sobhan, “Problems of Governance in South Asia: An Overview” in V.A. Pai Panandiker (2000),
Problems of Governance in South Asia, at 17.
75 CPD (2003) Developing a Policy Agenda for Bangladesh, at 308-09.
76 The World Bank (1996) Government that Works, at 6-7.
74
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administration. As a result, mid-level public officials complain that they are routinely
deprived of decision-making authority that would ensure greater efficiency and
responsiveness to citizen needs. Later analysis of governance constraints in the
education (Chapter XI) and health (Chapter XII) sectors includes examples of how senior
central government officials fail to recognize the independent decision-making authority
of mid-level colleagues based at the sub-national level, despite the fact that the latter
arguably have a better understanding of the needs and interests of communities and are
positioned to implement reforms that would reflect well on senior officials.
d. Minimal public demand for reform
147. Recent survey research reveals a considerable degree of public dissatisfaction
with the performance, accessibility, and integrity of public agencies and officials—
including a clear sense of what constitutes “acceptable” and “unacceptable” conduct on
the part of public officials. Beyond quiet disaffection, citizen concerns are rarely
expressed in public protest or calls for reform. Public perception studies indicate that
citizens have little confidence in the bureaucracy, yet experience has left most citizens
resigned to accept the situation, with little confidence in the prospect of change through
popular demand for reform. Some individuals are reluctant to criticize out of fear of
sanction, while others prefer to avoid the bureaucracy entirely by protecting their
interests, completing business transactions, or resolving legal or administrative disputes
through informal means. Observers have noted that some citizens associate corruption
and weak financial management with international donor funds. As a result, they appear
to be less troubled by the fact that bureaucrats are mismanaging “free” money rather
than actual public resources.77 To date, the private sector in Bangladesh has
maintained a fairly low profile with respect to administrative reform, providing back
channel inputs in certain situations but otherwise disinclined to take higher profile action.
e. Frustration on the part of public officials
148. Early assessments of the Bangladesh civil service tended to vilify public officials
as the primary source of weakness in public administration. While there are many
reports of obstruction on the part of public officials, recent studies have been much more
sensitive to the challenges faced by public officials, many of whom feel a deep sense of
frustration with the circumstances in which they work. Their concerns include low pay
and meager benefits; lack of training and other professional development opportunities;
inadequate information and guidance on their role and responsibilities, and deprivation
of authority by those senior to them. If the working environment were more conducive to
professional development and merit-based performance incentives, public officials could
be expected to perform their functions with a greater sense of commitment and integrity.
f. Delegation of decision-making authority
149. Secretariat Instructions prohibit interference by senior Ministry officials in the dayto-day operation of the departments that they oversee. Similarly, the Ministry of Finance
Office Memorandum (1985) delegates clear-cut financial management powers to
departments and subordinate offices. While the Instructions confer financial powers on
administrative heads at the divisional, district, and thana levels, the actual delegation of
administrative and financial powers is minimal, hindering efficient operations and
77
The World Bank (1996), Government that Works, at 4-7.
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prompting delays. Further inefficiencies result from the impractical but stubbornly
maintained requirement that routine non-policy decisions by mid-level officials are
subject to Ministry approval.78 It is generally perceived that senior officials maintain a
tight grip on decision-making, in some cases motivated by prospects of personal gain,
while in other cases based on a more benign concern that reform initiatives threaten
their professional security.
150. The efficient exercise of decision-making authority is further constrained by the
manner in which responsibilities are delegated within departments, public corporations,
and other subordinate offices, spanning national policy formulation through on-theground implementation at the local level. The withholding of delegated powers creates
breakdowns in policy guidance by ministries, long periods of indecision within
departments, and micro-management. For example, department heads are routinely
deprived of authority to manage staff or procure necessary supplies. Similar constraints
occur in state-owned enterprises. For example, officers are frequently required to seek
approval from the relevant ministry rather than from their boards. Ministerial oversight
frequently includes strict powers of approval over budgets, equipment lists, and payment
of employee bonuses. These and other inefficiencies in the exercise of authority
underline the need for incentive strategies that will encourage senior officials to delegate
full decision-making authority to their subordinates.
151. In some cases oversight practices contravene prescribed legal and regulatory
mandates designed to make administrative decision-making more efficient. To resolve
this issue, the Schedule of the Rules of Business concerning the distribution of powers
between Ministries, Divisions, Attached Departments, and other offices should be
reinstated as the basic guide to government operations, as recommended in the PARC
report. In addition, the Guidelines of 1976 that define the relationship between
government and state-owned corporations, and the Resolution of 1983 concerning
operational autonomy of state corporations, should be implemented. Rules that
constrain autonomy and efficiency in decision-making should be revised to make them
consistent with functions mandated by the Rules of Business and consolidated in a
single set of directives.79
g. Recruitment of public servants
152. The Bangladesh Civil Service comprises 29 cadres. Direct recruitment is
conducted by the Bangladesh Public Service Commission (PSC), through a purportedly
merit-based process that includes written tests, psychological assessment, and
interviews. Public servants surveyed in a recent World Bank study expressed the view
that recruitment is generally not merit based and that it tends to result in the selection of
unqualified, or less qualified, applicants over those that are optimally qualified for a
particular position.80
h. Filling vacancies in the public service
153.
Managers lack discretion to fill positions within their units based on personal
78
See PARC Report (Volume 1); The World Bank (1996) Government that Works; The World Bank (2002)
Taming Leviathan.
79 PARC Report (Volume 1)
80 The World Bank (2002), Bangladesh: Improving Governance for Reducing Poverty, Washington, DC, The
World Bank, at 36-37
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assessment and knowledge of actual needs. Capable managers are often frustrated by
partisan interference in their efforts to select the best-qualified individuals to fill particular
positions or to assemble teams that combine the ideal mix of skills required for a
particular task or objective.81
i. Entry-level and in-service training
154. There are three categories of training for public officials: (i) a compulsory, twomonth foundation course for officers of all 29 cadres on entry to the civil service; (ii) an
Advanced Course on Administration and Development (ACAD) for mid-level officers in
management positions; and (iii) a Senior Services Course (SSC) for officers of the rank
of Joint Secretary and higher. The latter two courses are conducted at the Bangladesh
Public Administration Training Centre (BPATC), based on curricula that are largely
outdated and by most accounts poorly taught. Courses are not custom tailored to the
needs of individuals or specific branches of the civil service, and little attention is given
to the special competency requirements of a particular position. With few on-the-job or
in-house training programs available, public officials must vacate their posts for the
duration of a training program. A 1999 ADB assessment found that training programs
tend to perpetuate the very institutional features that weaken performance and
undermine good governance principles, with an emphasis on tedious procedures rather
than streamlined approaches that would ensure greater efficiency in public
administration.82
155. The Public Administration Training Policy (PATP) aims to address these issues
by promoting administrative efficiency and optimal utilization of human resources.83 In
practice, the training of public officials is poorly planned and managed, while the actual
training that does occur is rarely taken seriously by participants. For example, a recent
World Bank study revealed that only 70 percent of civil servants polled were even aware
of the existence of in-service training programs.84 The previously referenced ADB study
presented the following recommendations for improvement of training standards and
procedures:85

BPATC should be developed as a premier training institute, with the aim of setting
high standards that other institutions will strive to achieve;

BPATC should continue to conduct ACAD and SSC courses for the same target
groups;

modular training courses in managerial competencies should be developed for
officers on an as-needed basis.

training institutions should provide pre- and post-training materials for self-learning
and in-service reference.

training institutions should be self-governing.
81
The World Bank (2002), Bangladesh: Improving Governance for Reducing Poverty, at 33-41.
Asian Development Bank (1999) cited in The World Bank (2003) Taming Leviathan, at 78.
83 Ministry of Establishment, Government of Bangladesh, Public Administration Training Policy.
84 The World Bank (2002), Bangladesh: Improving Governance for Reducing Poverty, at 37.
85 Cited in The World Bank (2003) Taming Leviathan, at 79; and in PARC Report (Volume 1), at 38.
82
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
public service training should incorporate comprehensive needs assessments and
evaluations, in-house training programs, and selection procedures to ensure that the
right individuals are selected for particular courses.
j. Transfer and investments in education
156. Transfer of public officials is a routine practice in public administration, with some
officials serving in a particular position for as little as one year before being transferred to
a new assignment that may have little connection to their earlier work. While rapid
promotion can be a positive step in advancing capable public servants to positions of
increasing responsibility, it is equally important to ensure that officials are given time to
develop the specialty skills and knowledge required to enhance the institutional capacity
of particular government agencies. Every donor agency can cite examples of
investments made in professional development training of promising public officials in
the expectation that they would draw on their acquired expertise through service in a
particular area for a reasonable length of time, only to find that they are transferred
within a matter of months to new positions whose responsibilities have no connection to
the specialty field in which they were trained. Training of this kind should be viewed in
part as an investment in the general human resource base of the nation, whose benefits
extend beyond the responsibilities of an individual at a specific point in time. At the
same time, it is not unreasonable to expect that those trained will have the opportunity to
use their specialized skills for a reasonable period of time. Among its many benefits,
development of specialty skills helps to address the criticism frequently leveled that the
public service is the domain of generalists, with few opportunities for technical
specialists.
k. Performance and promotion
157. The public service is further constrained by the absence of clear and consistent
systems of performance-based assessment and promotion.
The PARC report
highlighted the absence of a merit-based promotion system and condemned the role of
partisan pressure and influence in the professional advancement of public officials. Civil
servants polled in the previously cited World Bank study reported that influential
connections outweigh merit and performance, both in shaping the general professional
working atmosphere of public administration and in determining opportunities for
professional advancement.
The majority of officials perceived that personnel
management practices were neither transparent (79 percent), publicly announced (82
percent), nor fair (77 percent). They further perceived that no connection was drawn
between professional accountability, performance standards, and assessment.86
158. A welcome recent reform initiative selects public officials from the rank of Deputy
Secretaries for pre-promotion training, subject to attainment of at least an 80 percent
score on their Annual Confidential Report (ACR) and the requirement that those selected
have at least eight years of service remaining before retirement. Joint Secretaries are
selected on the basis of a minimum 85 percent ACR and a minimum of five years
remaining service. Those selected receive two and half months of training in
Bangladesh and the United Kingdom, and are eligible for promotion on successful
completion of the training program.87
86
87
The World Bank (2002), Bangladesh: Improving Governance for Reducing Poverty, at 37-39.
The World Bank (2002), Taming Leviathan, at 73.
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l. Salary and benefits
159. For many years, university graduates prized a public service career for the
combination of prestige and security that it offered. While base salaries were modest, a
civil service position included other benefits that promised lifetime professional security.
In recent years, civil service salaries have not kept pace with the earning potential of
career opportunities in the private sector. Moreover, adjustments in civil service salary
have reduced the ratio between the lowest pay of the lowest salary group to the lowest
pay of the highest group to as little as three percent at entry level and five percent at
retirement. Highest pay scales were reduced by 73 percent between 1969 and 1997.
Housing allowances, land allocation, and other benefits were added in an effort to offset
the real reduction in salaries, but many of these benefits could not be sustained over
time.88 As a result, it is generally acknowledged that the civil service no longer attracts
the same caliber of entry-level officials that it did in the past. Careful consideration
should be given to salary reform, mindful of the need to balance the prospect of
competitive salary increases with the corollary need to reduce the overall costs of public
administration.89
m. Efficiency
160. The PARC report also highlighted the inefficiencies that result from a
combination of governance constraints in public administration, including corruption.
The report cited a list of examples of weak financial management and impropriety in
government agencies, including misuse of food grain under “food-for-work” programs,
theft of electricity, water, and gas from public utilities, misuse of government vehicles
and telephones, and mismanagement of railway lands.90 As discussed in greater detail
in Chapter V, this problem is exacerbated by lack of clarity and accountability in budget
procedures and other elements of public financial management, including lack of
adequate consultation among ministries and inadequate procurement methods.
n. Resource constraints
161. Most public institutions at the national and local level face serious resource
constraints in fulfilling their basic public service delivery responsibilities. Anecdotal
evidence suggests that many agencies are compelled to supplement their operating
resources through other means in order to meet even modest standards of service
delivery. Those responsible for budget allocations at the national and individual agency
level face challenges in striking an appropriate balance between the efficient
management of modest resources and adequate service delivery. Public agencies
should ideally be financed through a combination of adequate budget allocations and
legitimate mechanisms to generate supplementary resources through certain fee-forservice functions, such as licensing or registration.
88
Ibid at 71-72.
See PARC Report (Volume 1).
90 Ibid.
89
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4. Issues and Opportunities for Reform
162. The numerous commissions, task forces, and assessment teams appointed to
review public administration and provide recommendations for reform have reached
similar conclusions in identifying primary issues and priority actions.
Among
government-led reform initiatives, the findings and recommendations of PARC provide a
clear list of priority actions that have yet to be pursued in a comprehensive and
determined manner.
163. For the Government of Bangladesh, ADB, and other development partners, it is
important to set a viable reform strategy that takes account of priority issues, lessons
learned from earlier reform efforts, and the underlying social and other factors that
constrain public sector reform efforts. Strategic options also raise issues of scale,
including choices in emphasis between: (i) reform efforts that focus on select
administrative issues or constraints that inhibit performance in individual sectors, taking
account the probability that successful interventions will set standards or serve as
models for addressing the broader administrative reform issues that affect many sectors;
or (ii) an alternative focus on higher-level issues, such as reform of overarching
recruitment practices or salary and benefit standards, that cut across all sectors. Among
the range of strategic options to be considered, the following are fundamental—both as
core governance initiatives and as key elements of sector specific governance reform
strategies.
a. Improved service delivery
164. The performance and integrity of public administration ultimately turns on the
capacity and resolve of public officials and agencies to deliver quality services to those
who depend on them. The growth of an increasingly competitive and service-minded
private sector has further underlined the poor service standards maintained by public
institutions. The challenge lies in nurturing a demand oriented service delivery culture
through a combination of merit-based recruitment, elimination of outside interference in
administrative decision-making, better training, appropriate compensation, performancebased professional review and advancement policies, independent exercise of delegated
authority, and greater sensitivity to the needs and interests of all stakeholders, including
the many branches of government with which individual public agencies engage. At the
very least, civil servants must have a clear understanding of their roles and
responsibilities and the performance standards to which they will be held accountable,
as well as the information, training, and other support that they require to fulfill their
professional responsibilities and meet the expectations placed on them. As a starting
point, the existing Code of Conduct of civil servants should be reviewed and updated to
more clearly define and publicize the standards of performance and accountability to
which public officials are to be held accountable.91
b. Investments in professional development
165. As the demands of public administration become increasingly complex, quality
preparatory and in-service training of public officials is essential. Human resource
capacity is especially important in the case of donor-funded development projects that
carry strict performance targets to which implementing agencies and responsible officials
91
CPD (2003), Developing a Policy Agenda for Bangladesh, at 318-19.
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are held accountable. For example, the potential of eGovernment and other information
technology applications to streamline public administration can only be realized if public
officials have the necessary skills to make use of new technologies. Sectoral
governance strategies should include special provision to train government counterparts,
which will serve as a model for broader investments in human resource development in
the public service.
c. Stimulate public demand for services
166. Years of experience in dealing with unresponsive public officials and paying
bribes to expedite performance have left many citizens disaffected, with little confidence
in their ability to secure reform through active demand for change. Public institutions do
not reform themselves. Like all governance initiatives, administrative reform efforts will
ultimately depend on the pressure exerted and goodwill collaborative support extended
by reform constituencies. This pressure may take a variety of forms. Examples include
enhanced media and civil society monitoring of the performance of public institutions and
officials; partnerships between the private sector and civil society to challenge corrupt
practices; and collaboration between public institutions and private sector or civil society
partners in pursuing common reform goals.
d. Reexamine and refine the role of the State
167. Successful public administrative reform does not depend solely on strengthening
existing systems, structures, performance standards, and incentives; it also calls for
broader reflection the role of the State. While the PARC report argued that the
Government is too involved in national development efforts, economic affairs, and
service delivery, it was careful to add that the solution is not for the State to abandon
every role that it has traditionally played, leaving the private sector or civil society to fill
its place. In reexamining the role of government, it is important to determine which
policy, regulatory, facilitating, or related functions are best performed by the State in a
parliamentary democracy; which functions can be efficiently shared with the private
sector, civil society, and other stakeholders; and which areas should be left exclusively
to non-governmental agents that are best equipped to manage them, freeing the
Government to focus on priority functions and responsibilities that lie within its
comparative strengths. Development partners can play an important role in facilitating
dialogue on choices of this kind, and in supporting experimental initiatives that broker
cooperative working relations between government, the private sector, and civil society
in defining new functions and responsibilities.
B. Local Government
168. Despite substantial investment of time and resources by successive
governments in restructuring the institutional framework of local government in
Bangladesh, weak local governance is continually cited among the major impediments to
poverty reduction and the empowerment of citizens and communities to participate in
decisions that affect their lives. With the exception of the Union Parishad, which is one
of the country’s oldest and most enduring elected institutions, the remainder of the local
governance structure has been subject to frequent policy and structural change. The
situation prompted Hossain Zillur Rahman to observe that “local government in
Bangladesh has been more an area of policy experimentation than of stable institutional
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development.”92 This section provides a general overview of the structure of local
government and the governance constraints that have prevented local government
institutions from meeting their potential capacity in development planning, public
decision-making, and the delivery of education, health and other basic social services
delivery, and extending opportunities for citizens and communities to play a more active
role in local decision-making.
1. Structure, Role, and Responsibilities of Local Government
a. Local government structure
169. Bangladesh is divided into six divisions, 64 districts, 448 upazilas (also known as
thanas), and 4,276 unions. A union ordinarily consists of ten to twelve villages and
includes approximately 20,000 to 25,000 citizens. In each union, a council called a
Union Parishad (UP) is elected to serve local needs. Under the current structure, in
effect since 1997, the UP consists of a Chairman and 12 members.
170. A UP constituency is divided into nine wards. Nine general members, one for
each ward, are directly elected by voters within the ward. These candidates can be
either male or female, although at present they tend to be almost exclusively male,
throughout the country. In addition, three UP seats are reserved for women, with each
reserved seat representing a combination of three wards. These women members are
directly elected among competing women candidates, rather than being appointed by
the UP Chairman, as was the case prior to 1997. The current arrangement means that
each reserved woman member represents three times as many constituents as each
general member.
171. The Chairman serves as chief executive of the UP and is directly elected by all
voters of the union. The Chairman can be male or female, although at present almost all
UP Chairmen are men. By virtue of his position, the Chairman is a highly visible and
influential member of the community. He also exercises considerable official authority,
moderating meetings, assigning committee and development project responsibilities to
members, authorizing expenditures, and engaging with officials at higher levels of
government.
172. The entire UP is elected for a term of five years. The formal responsibilities of
the UP include maintaining law and order, developing and maintaining roads, bridges,
culverts, and other local infrastructure, providing services in health, education,
agricultural extension, reforestation, relief distribution, and arbitration, excavating silted
public ponds, leasing out space in markets, and registering births, marriages, and
deaths.
173. The UP relates upward to the Upazila Nirbahi Officer (UNO), the appointed chief
administrative official at the next highest level of government. At the district level, the
Deputy Commissioner (DC), who is also an appointed official, has oversight of the UPs
in his area. At the national level, the UP comes under the auspices of the Ministry of
Local Government, Rural Development, and Cooperatives (MLGRDC). UP budgets are
92
Hossain Zillur Rahman and S. Aminul Islam (2002), Local Governance and Community Capacities:
Search for New Frontiers, Dhaka, University Press Limited, at 154.
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routinely scrutinized and must be approved by the UNO, DC, and Assistant Director of
the LGRDC. In addition, other national ministries often issue directives to the UPs on
various matters.
b. Role and responsibilities of the Union Parishad
174. The most important and widely known function of the UP is to utilize the modest
funds allotted to it to implement community development projects. Financial resources
come from various government sources. Funds from the Annual Development Program,
designed and coordinated by national government ministries and approved by
Parliament, are channeled through block grants to each upazila in the country. The
UNO and the Chairman of the Upazila Development Committee then disburse these
funds to the unions in their upazila according to certain criteria. Most unions receive
approximately one-third of their total revenue in this manner. UPs also collect taxes
from their constituents, which they share with the upazila and district level governments
on the basis of a percentage formula.
175. The UP role in development administration is restricted, often limited to the
selection of possible projects under nationally administered food aid grants. The UP is
also subject to bureaucratic supervision and guidance, including roles and relationships
specified in complex orders and circulars from different agencies and ministries. These
often contradict the original legal framework through which the legal authority of the UP
is derived.93
2. Challenges and Constraints
a. Member knowledge and capacity
176. One of the most basic obstacles to the efficient functioning of the UP is that
Members and Chairmen often have a limited understanding of their formal roles and
responsibilities. The Government provides very broad job descriptions that offer little
guidance to new Members.
While Members are eligible for a brief
government-sponsored training course conducted by the National Institute of Local
Government (NILG), the course tends to focus on rote functions like maintaining the
various registers rather than on the complex duties of representation and management.
Newly elected Members are dependent for information on more experienced UP
Members. For various reasons experienced Members are sometimes reluctant to share
the benefits of their experience. New women Members are at an even greater
disadvantage, because many of them have extremely limited knowledge of the
regulations, laws, budgeting processes, and other administrative procedures of the UP,
having focused on domestic affairs for most of their lives.
b. Constituent knowledge and inputs
177. Citizens whom the UP members and Chairmen represent also tend to be poorly
informed about the roles and responsibilities of the UP and the functions of local
government. Consequently, constituents do not understand how to hold officials
responsible for the actions or decisions that the latter take on behalf of the community,
how to participate fully in the decision-making process involving the expenditure of funds
93
CPD (2003), Developing a Policy Agenda for Bangladesh, at 313-14.
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or the adjudication of legal cases, or how to respond to unfair or negligent practices by
officials that adversely affect the welfare of their communities. Without this knowledge,
citizens have a very limited role in local public decision-making processes. In the last
five years NGOs and other civil society organizations have been active in raising
community awareness of local government functions and in facilitating dialogue and
collaborative working relations between UP Members and constituents.
c. Inadequate resources
178. Local government bodies are substantially under funded to meet the
development needs of constituents or to implement local reform initiatives. While the
Union Parishad is authorized to mobilize local resources through taxes, leasing of local
market space and water bodies, and other means, they are obliged to share these
resources with the central government (25 percent) and the Upazila (10 percent) and to
allocate a portion for the maintenance of local infrastructure. Once the various
entitlements are apportioned, the UP is left with approximately 50 percent of locally
mobilized resources. The situation is further complicated by the fact that the UNO
receives and holds funds mobilized by the UP in a UNO account. The funds are
subsequently disbursed to the UP in accordance with prescribed government guidelines.
The implication of this arrangement is that the UP lacks direct control over resources
that are actually raised within its jurisdiction.94 In addition, use of the Annual
Development Plan block grants are subject to central government prescription, leaving
minimal scope for local planning and response to constituent needs.95
d. Transparency and accountability
179. Another fundamental impediment to good governance at the local level is
pervasive lack of transparency in the formal operations of UPs. Local elected bodies
rarely comply with requirements to hold open meetings. Moreover, they tend not to
sponsor open planning sessions for the determination of budgets or work plans, or to
report these documents openly. This lack of transparency leads to a corresponding lack
of accountability in the processes of budgeting and planning development projects. This
gives rise to the perception that UP Members and Chairmen sometimes accept bribes to
choose some projects over others, or pocket a portion of funds meant to finance such
projects. Oversight of UP legal affairs by the Monitoring and Evaluation Wing of the
LGRDC is weak, while few UPs fulfill the requirement that budgets and major council
decisions be posted on public notice boards.96 In addition, there is a perception that
local power structures affect the performance of local government bodies.
e. Centralization
180. An additional constraint to good governance at the local level is the extremely
centralized form of government now in place. UPs derive their authority and a
substantial portion of their funds from national ministries whose effective reach to the
local level is constrained by intervening levels of government. For example, UPs must
submit their budgets and work plans for review and follow-up action by several
appointed officials at the upazila and district levels. As a result, the UNO and the
94
CPD (2003), Developing a Policy Agenda for Bangladesh, at 314.
Ibid at 314.
96 CPD (2003) Developing a Policy Agenda for Bangladesh, at 313-14.
95
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Chairman of the Upazila Development Committee have more de facto power over
development projects in unions than do the UPs themselves. Furthermore, because
many unions must compete amongst themselves for a share of the modest financial
resources available for local development, there is constant risk that pledges or
kickbacks may be demanded and pledged to ensure that a project is selected. The
central government can order inquiries into the affairs of local government institutions
and suspend them on suspicion of malfeasance or failure to fulfill their obligations. It
also exercises substantial financial and administrative control over local government
institutions, including scrutiny and approval of annual budgets and authority over the
appointment and payment of salaries of UP staff.97
181. The powers of central government authorities are prescribed in precise terms,
while those of local government bodies are vaguely defined. For example, the UP has a
general power to maintain law and order in the community, yet specific powers vest with
the centrally administered police and magistrates. A further challenge results from the
fact that the security and clerical staff who work at the UP level are hired by upazila level
officials. As a result, they have little motivation to follow the directions of the UP
Chairman. UPs are also subject to restrictive guidelines and regulations prescribed by
the upazila, district, and ministerial levels of government, and have little flexibility or
autonomy to be responsive to the concerns and needs of their communities.98
f. Further impediments to reform
182. While there has been much discussion of the need for reform actions that will
help to make local government more responsive and accountable to the needs of
citizens, relatively little progress has been made in addressing the constraints outlined
above, despite growing investments. In the 32 years since Independence, a succession
of policy and structural changes that affect local government have been made, including
frequent rearrangement of the various local government tiers. Regardless of the
prevailing policy or structural context, the one consistent feature of local government has
been the strict oversight exercised by central government. Consequently, local
government bodies have struggled to establish political and economic viability and to
earn the confidence of the communities that they are intended to serve.99
183. A major impediment to local government reform is the tension that exists
between central government officials (including local representatives of national
agencies) and local government bodies. Officials at the central level are perceived to
guard their traditional authority out of concern that devolution of decision-making
authority to those below them or to local government bodies will have negative
consequences, as opposed to the prospect that such delegation may bring positive
benefits that will complement and enhance the goals, performance, and status of central
officials.
184. In addition to this resistance at the central level, Hossain Zillur Rahman has
noted the absence of organized actors who are prepared to drive the local government
agenda as a consistent strategic goal. While important progress has been made in
97
Ibid at 314.
Hossain Zillur Rahman and S. Aminul Islam (2002), Local Governance and Community Capacities, at
157-58.
99 CPD (2003) Developing a Policy Agenda for Bangladesh, at 312-13.
98
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facilitating partnerships between local elected bodies and civil society, local-level
initiatives of this kind have yet to generate a broad and powerful grassroots demand for
reform. This underlines the importance of securing support for local government reform
among stakeholders at the grassroots, as well as among senior officials at the national
level.100
3. Issues and Opportunities for Reform
a. Commitment to local government reform
185. A succession of policy and structural changes to local government have
produced a labyrinth of options and alternatives, to such an extent that some observers
find it difficult to determine the precise structure of local government at any particular
point in time. The positive exception has been the continuity of the Union Parishad, on
which the majority of local development initiatives have focused. Current legal
enactments provide for a four-tier system, of which the Union Parishad is functional and
the sub-UP Gram Sarkar has been introduced from July 2003—in the face of
controversy that includes a case filed in the Supreme Court challenging the
constitutional validity of the Gram Sarkar. While there is general consensus on the value
of a two-tiered system of local government at the Upazila and Union Parishad level and
an interest on the part of development partners in supporting reform and development
efforts at both levels, debate has persisted to the point that the optimal solution may be
one to which there is sustained policy, resource, and other facilitating commitment on
the part of government, regardless of the actual structural details. The second critical
need is for the respective powers and functions of central government and local
government agencies to be clearly and comprehensively defined.101
b. Capacity development
186. Training programs to strengthen the capacity and confidence of UP Chairmen
and Members should be expanded, with a particular focus on enhancing the capacity of
responsible government agencies, including NILG, the Bangladesh Academy of Rural
Development (BARD), and the Rural Development Academy (RDA) to design and
conduct training programs and to produce information materials of benefit to local
government officials.102 Although substantial investments have been made in training
UP candidates and elected Members, with a particular emphasis on women Members, it
is important that training programs be followed-up by practical activities that support the
efforts of new Members to apply their training through specific activities. This is
especially important for women Members, who often face practical constraints in
contributing to the work of the UP—in some instances because male Members
intentionally schedule UP meetings in the evening or at other times when it is difficult for
women Members to participate.
187. Further investments should be made in studying the process through which
members of the Gram Sarkar are appointed and the composition of the newly formed
Gram Sarkar, and in identifying program activities that can prepare Gram Sarkar
100
Hossain Zillur Rahman and S. Aminul Islam (2002), Local Governance and Community Capacities, at
159.
101 CPD (2003), Developing a Policy Agenda for Bangladesh, at 322.
102 Ibid at 324.`
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Members to fulfill their responsibilities. There has been much debate on the factors that
motivated the establishment of the Gram Sarkar as new tier of local government, but
the Gram Sarkar is a political reality for the next several years, and may offer an
opportunity for a broader network of citizen members to engage in local development
efforts and for UP Members below the rank of Chairman to assume a more active role in
local governance, in their capacity as Gram Sarkar chair.
c. Financial independence
188. The existing system for the mobilization of local government funds should be
revised to ensure that locally mobilized resources remain with local government bodies
and that local government bodies retain the authority to utilize the funds as they wish,
subject to prescribed legal requirements and necessary oversight mechanisms. In
addition, local government bodies should receive a reasonable allocation of funds from
central government, based on strict criteria that ensure the equitable distribution of
resources among recipient local government units.103
d. Relations between different branches of government
189. Beyond the formal legal division of responsibilities and definition of relationships
between various local government tiers and central government, practical working
relations between government units should be monitored and documented to identify
and address issues at an early stage and to provide useful guidance to government
agencies and local stakeholders on how to make working relations more productive and
efficient. While this analysis has focused primarily on the role of the Union Parishad,
there is equal value in reform initiatives at the district and upazila level, including
attention to the relationship between the different tiers of government in promoting and
implementing the development activities in which the Government and donor partners
invest.
e. Accountability
190. Local government bodies should be subject to regular auditing and reporting
requirements to ensure that they meet their responsibilities. While firm legal action
should be taken in the case of corruption or other serious violation of duties, findings and
feedback should be provided to local government bodies in a good faith manner that
helps them to understand the nature and causes of problems identified and the practical
steps that can be taken to avoid such problems in the future.
f. Citizen awareness and collaborative working relations
191. Corollary investments in public awareness promotion should continue as a
complement to the training of UP Chairmen and Members. The benefits of professional
development training for local government officials will be greatest when citizens
understand the purpose and substance of reform initiatives and are able to articulately
register their interests and expectations with local government officials. Similarly, further
investments should be made to facilitate improved dialogue and collaboration between
local government bodies and the communities that they serve.
Public-private
partnership initiatives will assist local government officials to be more responsive to
103
CPD (2003), Developing a Policy Agenda for Bangladesh, at 322.
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citizen interests and demands, and help communities to present their interests in ways
that will capture the interest and secure the commitment of local officials. A promising
focal point for enhanced interaction between local government and citizens is to
strengthen the capacity of UP Members to perform their statutory “village court” function
in resolving legal disputes that provoke tensions within communities. While a few UPs
have assumed this dispute resolution function a good faith manner, the overall quality of
justice administered by village courts is inconsistent, and many UP Members do not
perform their legal dispute resolution functions at all.
g. Monitoring and assessment
192. In addition to the above described financial monitoring checks to ensure the
accountability of local government bodies, broader monitoring and assessment tools
should be introduced to monitor the pace and progress of local government reform
initiatives. Other countries in the region have developed innovative monitoring
mechanisms that apply rapid appraisal and other methodologies to assess the progress
of decentralization from the perspective of citizens and other direct beneficiaries and
local government bodies. These tools should be studied as potential models of informal,
horizontal accountability for adaptation in Bangladesh. A multi-year local government
development program conducted by Associates in Rural Development in collaboration
with the U.S. Agency for International Development (USAID) has undertaken a series of
baseline studies of local government, canvassing the views and expectations of citizens,
local government officials, and other stakeholders. This information has served as the
basis for program development, and will also serve as a valuable baseline for monitoring
improvements in local governance.
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CHAPTER V
PUBLIC FINANCIAL MANAGEMENT
A. Introduction
193. Efficient and properly accountable management of public funds and financial
institutions is a key element of good governance, closely associated with standards of
administrative governance discussed in the preceding chapter. Improvements in public
administration will contribute to improvements in public financial management. In this
sense, financial management tools are instruments that are ultimately dependent on
sound policy choices and on the principles of good governance that guide the
management of public financial affairs. Despite encouraging progress in public
administration and financial oversight, weak governance continues to affect the overall
quality of public financial management in Bangladesh.
194. Sound financial management encompasses four broad elements: (i)
maintenance of sustainable aggregate fiscal policies; (ii) allocation of resources in
accordance with the stated policies and priorities of government; (iii) appropriate use of
budgeted funds and assets; and (iv) adherence to internationally accepted accounting
practices and firm internal control measures.104 While the Government of Bangladesh
has achieved a sustainable fiscal balance and low budget deficit, lack of overall
coordination and efficiency in the three other financial management elements is a matter
of serious concern. This chapter reviews present standards of governance in revenue
administration, budget management, public expenditure management, public sector
accounting and auditing, and inter-governmental fiscal relations.
195. The Parliament of Bangladesh is the principal governing authority in matters of
public finance. Articles 80 to 92 of the Constitution (Legislative and Financial
Procedures) prescribe the oversight powers of Parliament. Any new laws or policy
changes with respect to revenue administration, budgeting, public expenditure, public
accounting, or auditing are subject to approval by Parliament. Executive responsibility
for the administration of public finances lies with the Ministry of Finance (MOF). The
constraints on efficiency and good governance in public financial management described
in the sections that follow are largely attributable to the centralization of responsibility in
the MOF. The responsibilities of the MOF encompass revenue collection, budget setting
and management, and preparation and auditing of public accounts, as well as oversight
of Bangladesh Bank and supervision of the banking system, non-bank financial
institutions, and the Securities and Exchange Commission (SEC).105
Although
centralization can, in some instances, help to facilitate effective coordination among
departments, this is not the case in Bangladesh, where excessive centralization
(including a degree of fragmentation among centralized control mechanisms) results in
inefficiency and weak internal control mechanisms.
104
The World Bank (2002), Taming Leviathan, at 39.
Ibid. at 39-40. The oversight responsibilities of the Ministry of Finance with respect to the banking
system, non-bank financial institutions, and Securities and Exchange Commission are discussed in Chapter
IX.
105
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B. Revenue Administration
196. This section reviews governance issues related to the collection of revenues by
the Government of Bangladesh. It is not concerned with tax policy per se, but rather
with the process by which the tax code is developed and approved, the way in which tax
collection operates, the directions in which the Government is proceeding, and the
extent to which Government initiatives will support an increase in revenue collection.
1. Origins of Revenue Collection
a. Role of Parliament in Revenue Administration
197. The clear authority of Parliament to levy taxes is a central element of legislative
democracy. Indeed, many of the milestone events in the emergence of democratic
systems in the last three hundred years involve efforts on the part of legislators to
establish that taxation cannot be arbitrary, but must originate with the representatives of
the people. While the power to levy taxes in Bangladesh clearly rests with Parliament,
and the Government cannot impose taxes that are not authorized in law, in reality
Parliament has very little role in the development of the tax system. Tax proposals are
developed within the Ministry of Finance and discussed in Cabinet, but they are not
subject to serious review by Parliament. The budget containing the tax measures to be
passed is essentially presented to Members of Parliament. There is a short time for
debate, but there are no technical hearings to assist Members to understand the details
of the proposed tax measures. While discussions may result in small revisions of the
original revenue proposals, there is no real process through which Members can study
and influence the revenue system in a significant way.
198. Parliament should ideally have an opportunity to express its views on key tax
policy issues: how much revenue is to be raised; what specific taxes are to be used and
how the tax burden is to be shared; the extent to which public services should be
subsidized; the extent to which users should pay for the services; the extent to which
capital expenditures should be paid for out of general revenue (the equity share of a
project); and to what extent resources should be borrowed either domestically or from
abroad. These are questions for Parliament that concern social attitudes and
expectations, responsibility to future generations, matters of efficiency and fairness, and
other issues that a revenue authority should not be asked to determine. Members of
Parliament lack the detailed knowledge necessary to seriously discuss issues of such
nature, and they are not provided with the resources needed to initiate research to help
them to better understand the issues. At this most fundamental level, there is a failure of
governance to ensure that key policy decisions are determined in the parliamentary
context, providing adequate time and resources for debate and discussion. The political
authorities and Parliament do not deal with the kinds of issues noted above. Instead, the
MOF as responsible technical Ministry determines the answers to most questions of this
kind.
199. The administration of the revenue system is another matter that should be the
responsibility of Parliament. The number of staff and their tasks and responsibilities are
proper matters for Parliament to discuss and determine through the appropriation
process, providing funds for the type of revenue administration that is desired.
Parliament is equally silent in this area and the intentions of the revenue authority are
not fully discussed.
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200. The reality of the present arrangement for revenue administration is as follows.
First, the revenue authority is essentially tasked with collecting more revenue. Within
this framework there may be tax policy objectives that limit the rates that can be
charged. The most important of these is the commitment of the Government to reduce
the import taxes as a percentage of the value of imported goods. Second, while
considerable effort is required to determine rate systems, the underlying perception of
the tax system is that it provides power to revenue officers to negotiate an amount to be
paid with taxpayers, which is then divided between the government and the revenue
officer. This arrangement arises in situations in which the filing system is complex, the
units of the revenue authority are unable to integrate information on a taxpayer, and the
relevant rules are unclear and subject to interpretation. In the circumstances, the
average taxpayer will do what he can to withhold information from revenue officers,
misrepresenting the actual financial position. Tax transactions are negotiated in this
context based on bargaining between the revenue officer and the taxpayer in a situation
of asymmetric information and limited knowledge on the part of the tax authority
regarding the business or the taxpayer. Third, Parliament has no serious role to play in
this. As a result, it effectively rubber-stamps the proposals of the executive department
with respect to rates or administration. The Government is clear on the point that it
wants more money to spend, and can justify this on the basis of long lists of things that
are required.
201. External observers of this situation have a natural tendency to apply their version
of rationality, which is generally based on the view that there should be more revenues
to support all of the important functions that Government is bound to perform. Absent
serious parliamentary consideration of the revenue position, the argument that more
revenues are needed is accepted with little debate. There is some consultation with the
business community and civil society about tax changes and other issues of interest, but
this tends to have little impact, undertaken more in the interest of good public relations
than to build a common basis for tax policy and tax administration.
202. By the standards of parliamentary democracy, the governance of the tax system
is not satisfactory, as there is no real initiative and guidance from Parliament and the
views of elected officials are not taken adequate account of.
Unless the revenue
system is built with the close support and involvement of the parliamentary authority, it is
difficult for a system to emerge that has the necessary attributes of fairness and sound
implementation.
b. Definitions
203. In the following discussion of revenue the term NBR taxes refer to those taxes
that are collected by the National Board of Revenue (NBR). These include import taxes
(custom, import VAT, and supplementary tax on imports) and local taxes (excise,
domestic VAT, and supplementary taxes on domestically produced goods). Direct tax is
used interchangeably with income tax. Domestic indirect taxes comprise excise taxes,
VAT levied on domestic production, and supplementary taxes on domestic production.
Import taxes comprise duties, VAT levied on imports, and supplementary duties on
imports. Non-NBR taxes are those collected by other organizations. The term other
revenue refers to revenues collected from a variety of different means.
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c. Organization
204. The Ministry of Finance has two resource departments: the Internal Resources
Department (IRD) and the External Resources Department (ERD). Within IRD there are
two major organizations: the NBR and the National Saving Directorate (NSD). NSD
operates a program of selling savings instruments to the public and providing the net
resources that are raised in this way to the Government. The NBR collects import taxes,
income taxes, and other indirect taxes on the domestic economy. NBR is a vast
organization and the different wings of customs, VAT, and income tax tend to run
independently.
205. NBR has worked over the years to modernize, attract good staff, and to carry out
its function of providing revenues to the Government. Its administration tends to be goal
oriented rather than process oriented. That is, targets are set for revenues and the
responsible officers work to meet those targets. They operate within the framework of
revenue codes and rates, but what is really important is the revenue target. In contrast,
one could enforce the rules set up in the tax code and collect whatever revenue
emerges. While this is the standard view of the revenue department in the minds of
most donors and technical advisers, it is not consistent with the corporate culture of
NBR. Within the Bangladesh system, the NBR approach is arguably more likely to raise
revenues than the rule following approach. This is an important, if unsettling, point for
governance to which reference is made elsewhere in this chapter.
206. Modernization of NBR is one of the prized goals of the reform program. There
are many examples of donor-funded initiatives that have aimed to achieve such reforms
in the name of good governance and to raise more revenues for the Government.
These reform programs have not been particularly successful in the past and, given the
corporate culture of NBR, future programs will need to take account of similar
challenges. The use of self-assessment for income tax returns is a case in point. This is
an idea that has been repeatedly promoted by reformers and perceived as “modern” and
sensible by senior civil servants, yet the concept is outside the worldview of an NBR tax
officer. In his view, the citizen is inclined to cheat and therefore it is his duty to counter
this. It will rarely occur to a tax officer that he can trust the citizen. This view accords
with the perception shared by many observers that relationships among Bangladeshis
with respect to finance are characterized by lack of trust. The view is reinforced by the
inclination of some individuals to avoid punishment for untruthful statements through
bribes. Of course most of the time people do tell the truth and do as they say, but the
perception is that one cannot trust the other person. The outcome of this is great
caution, a willingness to interpret the rules in one’s interest, and a tendency to doubt
interpretations proposed by others. This distrust undermines a rule-based organization.
Foreign companies react in a parallel fashion. Most aim to follow the rules and minimize
taxes within the rules, but the revenue officer typically does not share this view. If he
believes that the company is determined to cheat, the ultimate tax will be negotiated
rather than be determined on the basis of rules. It is this characteristic that makes
achievement of a change in corporate culture so difficult in NBR.
2. Structure of Revenues
207. The administrative source of revenues is presented in Table 1. NBR’s share is
roughly constant at 75 percent when the information is organized on a consistent basis.
Non-NBR taxes contribute about 5 percent of total revenues, while non-tax revenues
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account for an additional 20 percent. These ratios have remained relatively consistent in
the past five years.
208. Table 2 presents the NBR tax receipts over the past decade, divided among the
main categories. In FY 2001-2002, NBR collected more than Taka 200 billion. Of this
total amount, some 52 percent came from import taxes, 29 percent from domestic
indirect taxes, and 19 percent from income taxes. The import taxes were lower as a
share of revenues compared to the previous year, due to a very small increase in
imports.
Table 1
Domestic Revenue Sources
(Billion Taka)
Revenue
NBR Taxes [3]
Non-NBR Taxes [4]
Non-tax Revenue [4]
Total
1997/98
137 (74%)
9 (5%)
38 (21%)
184
1999/00
252 (74%)
11 (5%)
42 (21%)
204
2001/02
202 (77%) [2]
12 (5%) [2]
57 (19%) [1] / (19%) [2]
271 (264) [1]
Source: Various Budget Documents and Bangladesh Bank. The figures excludes National Savings
Directorate contribution.
[1] Comparable basis to earlier periods.
[2] Using base comparable to earlier periods
[3] Actuals
[4] Review budget
Table 2
NBR Tax Receipts
(Billion Taka)
Year
1991/92
1994/95
1997/98
2000/01
2001/02
Import
taxes [1]
40.42
(55)
60.8
(58)
80.06
(58)
100.36
(53)
104.85
(52)
Domestic
indirect
taxes [2]
18.95
(26)
27.7
(26)
35.99
(26)
50.89
(27)
57.98
(29)
Income tax
12.94
(18)
14.92
(14)
19.54
(14)
35.01
(19)
37.89
(19)
Other
1.17
(1)
1.81
(2)
1.9
(2)
1.49
(1)
1.53
(1)
Total
73.48
105.23
137.49
187.75
202.25
[1] Custom + Import VAT + Supplementary Duty on Imports
[2] Excise + Domestic VAT + Supplementary Duty on Domestic Production
3. NBR Revenue Sources
a. Income Tax
209. Income tax is collected from both individuals and from companies, with about 60
percent derived from companies and 40 percent from individuals. Income tax collects
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about 2 percent of the GDP from non-agricultural sources. A very rough calculation
indicates that, at present rates, the amount that should be collected is 60 percent more
than the actual amount.106 While this estimate is very rough, it indicates that better
administration should result in a considerable increase in revenue.
210. The performance of the income tax is difficult to determine. Administratively,
NBR will sometimes have taxes paid in advance so that a temporary increase can be
achieved, but this is not sustainable. The business community generally reports that the
tax administration is very difficult, that policies and rates change frequently, and that
rulings from tax officials are arbitrary and inconsistent. Tax regulations are perceived to
be ambiguous and subject to various interpretations. It is further perceived that most
companies resort to bribes of income tax authorities. In studies of the problems faced by
businesspersons, respondents have reported that income tax is not a problem and that
they have “arrangements” with tax officials.
211. Part of the problem is that the taxes on profits are actually quite high.
Consider an enterprise that has 100 units of value added, of which 40 units are labor
costs, 45 units are returns to capital, and 15 units are VAT. Of the capital, 25 represents
interest payments and depreciation. The tax base for the income tax is 20. Assuming
that the dividend distribution is 10, then the tax due is 7 (30 percent of 20 plus 10
percent of 10). Altogether, the enterprise pays 22 in taxes. Without the VAT, the
enterprise would have made 35 (15+20), so the effective tax on corporate profits is 63
percent. At such high effective rates, it can be expected that there will be widespread
efforts to avoid taxes. Good governance in this area must be matched with reasonable
rates. In the example, if the company is not listed then its tax due is 7.5 rather than 7, so
the point is the same.
212. Income tax rates applicable to individual are more reasonable and compliance
standards are likely to slowly improve.
213. The administrative approach that is being followed is to build increased effort
towards large taxpayers through the creation of a large taxpayers unit. The rationale for
this approach is that those who are paying the most must be the biggest problem so
more effort should be directed towards them. This approach is unlikely to succeed. The
tax system has to be built on broad-based participation at very low rates, with collection
done through the employer and no requirement to file tax returns for the next several
years.
Broad based participation at very low rates is a strategy that will fit the
reasonable prospect and parameters of governance reform in the present context.
b. Value Added Tax
214. The VAT system has worked quite well in Bangladesh, producing a considerable
amount of revenue. The local indirect taxes come to about 3 percent of non-agricultural
GDP. Using the estimate that 25 percent of the non-agricultural GDP can come under
the tax system, this means that VAT collections should be 3.75 percent; hence, a rough
estimate is that VAT can collect an additional 30 percent. Viewed in this way, the
106
Twenty-five percent of value added is in enterprises that can be taxed; 50 percent is labor costs that are
taxed on the average of 10 percent; 50 percent is return to capital that is taxed at the rate of 15 percent so
the taxes collected from the value added is 12.5 percent. Taking the share of the total value added that can
be taxed yields 3.1 percent of non-agricultural GDP.
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expansion of VAT depends on expanding the number of companies under VAT. This is
a slow process since much of the economic activity is in very small informal firms.
215. The VAT administration is much simpler than the income tax, so the only
recourse of the firm is to hide part of its revenue. This is perceived to occur frequently,
leaving VAT inspectors to negotiate an agreement. The difficulties with the VAT relate to
the administration of the system. This is discussed further below, but the essential point
is that the way VAT is implemented makes it effectively a sales tax with negotiated rates
by sector.
c. Import Related Taxes
216. Import related taxes are the most important source of revenue. The last decade
has seen a slight reduction of the dependency on import taxes, but not to any significant
degree. Table 3 indicates that the rate of tax collections from import has declined during
the past few years, but is still in the range 20-22 percent.
Table 3
Tax Effort
Year
1991-92
1994-95
1997-98
2000-01
2001-02
Import tax [1]
29%
26%
23%
20%
22%
Domestic indirect [2]
2.30%
2.60%
2.50%
2.70%
2.90%
Income tax [2]
2.60%
1.40%
1.40%
1.90%
1.90%
Source: Bangladesh Bank, Bangladesh Bureau of Statistics
[1] Percent of imports (cif)
[2] Percent of non-agricultural GDP at producer prices.
217. Customs is frequently reported as one of the most difficult problems that the
businessperson faces. Every import shipment must be examined to determine what it is,
how much is imported, and what the price of the import is. Customs is rightly suspicious
that the importer is trying to under invoice to reduce the amount of taxes that have to be
paid. Available information from recent work of the Pre-shipment Inspection (PSI)
companies indicates that there are many examples of under invoicing that have to be
corrected by the PSI inspector, consistent with the perception that there are systematic
efforts by importers to avoid customs duties.
218. The response of the Customs authorities over the years has been to try to sort
out these problems. This leads to continuous opportunities for negotiations on the three
points noted above. Classification is important since it can affect the tariff rate, and price
is also important. Quantity is reported to be less of a problem, with fewer corrections for
quantity by the PSI companies. When the PSI program began, the intent was to take
these matters out of the hands of the Customs authorities and have professional
inspectors do the valuations. The Clean Report of Findings (CRF) was to serve as the
basis for the customs inspection and there would be no intervention by Customs except
to audit the process.
Customs was consistently opposed to this program since it
deprived officials of the right to negotiate with importers. The importers were naturally
aware that the PSI system would reduce their ability to under invoice, so there was some
opposition by the business community to this program. In the event, Customs simply
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emasculated the program by refusing to honor the CRFs. This meant that the cost of
importing was increased, while at the same time the benefits of smooth customs
management and swift passage through the port were lost. Ultimately, it is not clear if
the importers are pleased with the outcome of the PSI program.
219. Two interesting observations can be made with respect to this situation. First,
the under valuation of imports is to a certain extent corrected by the actions of Customs
and the PSI work, but the import data is never corrected; thus the real value of imports is
somewhat greater than contained in the official data. Second, the expected sharp
increase in revenues expected from the PSI program was not achieved due to the
undermining of the program by Customs and perhaps by many of the importers. Review
of the PSI accounts and programs in other countries indicates that imports are probably
underreported by 10-15 percent and that customs revenues of about 20 to 25 percent
are lost.107
220. In this instance, governance considerations aimed to bring customs collection
into conformity with the rates that had been established, but such an outcome could not
be achieved. Customs officers would be largely deprived of the considerable amounts
that were reportedly being paid in negotiations. Many importers also resisted the
attempt to introduce the PSI systems as this would lead to higher import taxes. In this
context, it is not surprising that so much effort appears to have been made to prevent the
program from being effective.
4. Tax Administration
221. This section covers a number of points related to tax administration. The overall
conclusion reached is that the NBR is quite satisfied with its present performance and
structure. It is content with the revenue target and negotiated settlements that
characterize its work, and has tended to systematically reject rule-based administration.
This corporate culture is deeply entrenched. To change it will require determined
leadership with full political support over several years. A strong signal of progress will
be the success of the NBR introduction of a Large Taxpayer Unit that is to be based on a
single tax identification number that will cover all of the tax operations of the taxpayer.
Such a system will make individual negotiations with VAT, customs, and income tax
impossible.
a. Reconciliation of claimed and actual payments
222. There is some evidence that there is substantial forgery of tax payments made
and deposited at Bangladesh Bank.108 The manual systems used by the NBR make
reconciliation very difficult and effectively serve to create space for potential negotiation
with the taxpayer if necessary. The obvious solution is to increase the level of
computerization within NBR. While there have been numerous efforts to provide
computers to NBR, all have failed to lead to effective use of the computer systems. It is
obvious why this is so. Proper computerization would limit the negotiations that
characterize the tax system now and make such negotiations more dangerous for those
involved, which means that there is little interest in achieving this goal. There are
endless reasons why computerization cannot be accomplished rapidly, but the
107
108
Discussions with PSI companies
From discussions with tax accountants and lawyers
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fundamental one is that initially there must be an increase of resources to achieve
computerization. NBR cannot make such resources available. As a result, the
systematic computerization necessary to improve the tax administration has not taken
place and is certain to be difficult to implement.
b. Duty draw scheme
223. Another aspect of the customs system that should be noted is the operation of
the duty drawback scheme. Under this scheme an exporter can, upon showing proof of
export, obtain refunds of taxes paid on imports used in the production of the export
good. The system does not work well and there is potential for considerable abuse.
Users reports over the years are that side payments are necessary to obtain the refund.
As a result, this important support for export development is not meeting its potential as
NBR officers find it very difficult to actually return money to the business sector. In
fairness to NBR there is also considerable efforts by business to abuse the system,
exaggerating the import components.
c. VAT administration
224. The administration of the VAT system is another area where the practices that
have grown up over the years have undermined the potential for good governance. The
VAT is meant to be a self-enforcing system. The value added of a company is
determined by the difference between the value of its sales and the value of the inputs
that it purchases, excluding labor and capital. If one recorded all of the transactions that
a company made then the value added is readily calculated and the correct tax
assessed. In this system, if everyone is involved then all transactions are correct since
neither buyer nor seller will agree to a false invoice. In the application of the VAT in
Bangladesh, there is an announced VAT rate for different activities that is meant to
correspond to an approximation of the true rate. If these estimates of the rates were
correct then the sum of the rates up to a final transaction would total 15 percent.
225. The system of estimated VAT rates removes the self-enforcing nature of the VAT
and opens the door to endless negotiations. The main negotiation is the amount of
sales that have been made. Once that is done for a firm then the tax due follows
immediately from the stipulated value added to sales ratio. The NBR has been unwilling
to move towards a true VAT system that would be based on a computerized system and
the slow incorporation of companies into the VAT net, requiring that all transactions be
used to determine the value added. Such an approach would gradually lead to a tax
system that was fairer and that removed negotiations from determination of tax liability.
This requires a major computerization effort to implement and, as discussed above, this
has proved difficult to achieve.
d. Resolution of legal disputes
226. The revenue system is backed up by tribunals and access to the High Court for
disputes over taxes. This system works, but it is slow and the tribunals are far behind in
hearing cases. As discussed further in Chapter VI, judicial resources are very scarce
and whether it is good public policy to increase resources for tax cases is very uncertain,
particularly when there is so much delay in criminal cases.
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227. These examples of revenue administration all point to the same phenomena: a
tax collection agency that has developed its own style of action and is able to collect
resources within a procedure and framework that have come to be accepted. The basic
means of operation is what this analysis has termed a “negotiated tax” rather than a
rules-based tax. The activities of the tax authorities are consistent with this view.
5. Tax Administration of Non-NBR Revenues
228. Non-NBR revenues are quite limited. There are four types of revenues: (i)
vehicle fees; (ii) land taxes; (iii) stamp duties; and (iv) narcotics and liquor duty. The first
three types are reviewed here. The administration of vehicle fees presents no particular
problems and operates reasonably well, with revenues dependent on the number of new
vehicles registered. Land taxes represent a revenue source that would be able to
produce much more revenue if the land records were accurate and up to date.
Administration of these taxes is lax and payment is often only made when the owner
wishes to sell land. Large negotiated payments are involved as the true selling price of
the land is usually suppressed. Stamp duties are administered with reasonable integrity.
While few examples of counterfeit revenue stamps have come to light in recent years,
high stamp duties inhibit a transparent land market. The share of non-NBR tax receipts
as a proportion of total government revenues has been stable for the last few years.
6. Non-tax Revenues
229. This category comprises a collection of different items, none of which have a
clear governance dimension. For example, it includes the net proceeds of the
Bangladesh Telephone and Telegraph Board (BTTB). There are a number of issues
with respect to BTTB that are relevant to governance, but they are not discussed in this
revenue section. Non-tax revenue primarily consists of income earned by state-owned
enterprises (SOEs) and public services. 109 Although the share of non-tax revenue in
total revenue has increased in recent years, the actual rate of growth is slow and falls
short of government expectations. As reflected in Table 1, non-tax revenue accounts for
about 20 percent of total revenue. Inefficient and loss generating SOEs are the primary
cause of any shortfall in non-tax revenue collection.
7. Conclusions
230. There are two fundamental governance issues that emerge in the area of
government revenue:

Neither the tax code nor tax administration are subject to serious oversight and
review or broad-based inputs of the kind normally associated with a parliamentary
democracy. Parliament plays only a modest role in this process. Most decisions are
made at a technical level. Realistically, the issue of what kind of tax system
Bangladesh should have and how the burden should be distributed has never been
addressed in a broad, democratic way. It is arguable that the failure of the tax
system to emerge as fair and evenly administered reflects the fact that the political
109
Non-tax revenue includes: (i) dividend and profit of SOEs; (ii) interest; (iii) royalties and property income;
(iv) administrative fees and charges; (v) fines, penalties, and forfeiture; (vi) receipts for services rendered;
(vii) rents, leases, and recoveries; (viii) tolls and levies; (ix) non-commercial sales; (x) irrigation receipts; and
(xi) defense receipts.
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system has never faced the need of building a tax system. Left to domestic and
international technical specialists, the system that has resulted is problematic and
lacks real political support.

The NBR has a corporate culture that is built on administrative targets, collection
against these targets, and treating a considerable share of the collections as fees to
participants. This is not a system that is built on carefully enforced principles, rules,
and regulations. In more than a decade of effort to introduce a rule-based culture to
the NBR, little progress has been made and some observers would argue that it has
failed completely. While the efficient market hypothesis may argue that existing
practices reflect the wishes of society, a revenue system that is changed frequently,
contains many uncertainties with respect to rules, and applies record keeping
procedures that make internal accountability virtually impossible is not consistent
with the development of a modern industrial economy.
231. Establishment of a modern, rule-based tax system is a matter for parliamentary
consideration, with adequate opportunity for informed debate. Passing the annual
budget in Parliament is not sufficient to achieve genuine legislative engagement in policy
development and oversight. Modern revenue systems in Europe and the United States
were built under pressure of war and national survival, with the compulsion behind them
arising from deep within the political system. Since Independence, Bangladesh has
never faced a national revenue crisis of equal proportion.
C. Budget Management
1. Overview
232. The Finance Division of the Ministry of Finance is responsible for formulating and
administering the national budget. Two separate budgets are prepared by the MOF: the
development budget and the revenue (or recurrent) budget. The development budget
primarily consists of infrastructure and social development expenditures through the
Annual Development Program (ADP).
More than 46 percent of the FY2003
development budget is financed by foreign grants and loans.110 The revenue budget
comprises recurrent government expenditures, such as interest, salaries, pension
benefits, education, subsidies, transportation, and public administration. It is fully
financed by domestic sources. The revenue budget earns a surplus that is used to
finance part of the development program. (See Chart 1).
233. Preparation of the annual budget is a bottom-up procedure that begins with the
preparation of estimates by government agencies (primarily on an incremental basis
from the previous year’s approved budget) and culminates in the presentation of the
budget in Parliament by the Minister for Finance and its adoption by Parliament. Both
budgets must be approved by Parliament. The current system is constrained by serious
governance and other deficiencies that are described in the sections that follow.
a. Lack of macroeconomic focus
234. The budget is not prepared on the basis of a consistent macroeconomic and
long-term expenditure framework; rather, it is designed to achieve short-term objectives.
110
Ministry of Finance data accessed from www.theGovernmentfinance.org
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This process reflects the fact that successive governments have tended to be more
concerned about achieving results in the short run than with pursuing sound financial
management in the long run.
235. The first textbook concern of the budget process is to link the economic impact
(deficit) to the overall economic situation. This is very difficult in most developing
countries and in Bangladesh virtually impossible. The automatic stabilizers arising from
the tax systems do not really operate as collections of domestic taxes are only weakly
linked to output. What Parliament can establish and the fiscal authorities implement are
responsible fiscal management rules. These include:

Requirement that the revenue budget be completely covered by revenues and
that the surplus be used for development.

Requirement that utilities must charge fees to cover their costs. If the
Government wants subsides, these should be explicit and capped in the
aggregate.

Requirement for minimum contributors to development programs; thus a shortfall
in the surplus on the revenue budget results in a reduced development budget.
This criteria limits the size of the development budget.

Requirement that foreign debt has a ceiling and must foreign borrowing by the
Government receive parliamentary approval.

Requirement that operations and maintenance costs are fully incorporated in the
revenue budget.
236. Inconsistency between development and recurrent budgets: The development
and recurrent budgets are prepared separately in Bangladesh. The former estimates the
initial development cost of projects, while the latter estimates associated ongoing
expenditure. Since the two budgets are prepared separately, governments are often
burdened with unanticipated additional recurrent expenditures that they are unable to
meet. This situation affects many public institutions, and results in the underutilization of
certain public assets. For example, hospitals are constructed with funds from the
development budget, but may remain understaffed or inadequately supplied as a result
of decisions made on the recurrent budget. Similarly, schools often are underutilized as
a result of allocation decisions affecting the recurrent budget.111
237. Incremental budgeting: Preparation of the recurrent budget on an incremental
basis that begins with the previous year’s base increases expenditures. As a result,
certain non-discretionary components of expenditure, such as salaries and debt
servicing, take precedence over equally important expenditures on operations,
maintenance, supplies, and services.112 To date no corrective action has been taken to
solve this problem.
111
The World Bank (2002), Taming Leviathan: Reforming Governance in Bangladesh, Washington, DC. at
40.
112
Iid at 40.
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Chart 2: Composition of Budget Resources and Expenditure
Source: Finance Division, Ministry of Finance, Government of Bangladesh.
b. Diffuse budget allocation across too many projects
238. The development budget is thinly stretched over many ADP projects, which
represent the country’s principal physical and social infrastructure development
activities. This broad but shallow coverage spreads finite resources across many
activities while failing to allocate sufficient funds for the highest priority projects. This in
turn diminishes the efficiency of project implementation and the quality of the final
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product. For example, a recent World Bank review of roads and railways projects found
that ongoing projects can take as long as 11 or 12 years to complete at current levels of
funding. The situation is exacerbated by non-ADP projects that are undertaken as a
result of outside partisan pressures. While little effective action has been taken by the
Government to address this problem to date, donor agencies that provide loans for ADP
projects have encouraged the Government to prioritize infrastructure and social
development projects. While major donors such as the ADB, World Bank, and the IMF
can play a critical role in urging the Government to allocate budget resources on an
open and transparent priority basis;113 it is important to be realistic about democratic
systems. There is a natural tendency to generate an excess of projects without taking
adequate account of the revenue impact, and there will always be partisan pressure to
initiate new projects.
c. Management of assets, cash, and debt
239. Public management of assets, cash, and other resources in Bangladesh lacks
adequate transparency and accountability, creating opportunities for misappropriation
and reducing the effectiveness of the budget. The Comptroller and Auditor General
(C&AG) does not include debt in its audit reports. While the External Relations Division
of the Ministry of Finance provides Parliament with an annual update on external public
debt, there is no corresponding mechanism or practice for reporting domestic public
debt. The rudimentary present system of debt and cash management is inadequate to
meet the complexity of the task. Financial reporting is generally delayed. The
Government’s entire cash balance with Bangladesh Bank is treated as one account,
although separate accounts for each Chief Accounting Officer (CAO) are maintained
within the Government’s total financial balance. Inefficient cash management has
created the need for fluctuating government borrowing from Bangladesh Bank, resulting
in unnecessary interest costs to the Government. In addition, there are some
government guarantees for SOE supplier credits, which raises contingent liabilities;
however, to date more contingent liabilities have not cost the Government anything.
d. Monitoring and evaluation of budget implementation
240. The Implementation Monitoring and Evaluation Division (IMED) of the Ministry of
Planning is poorly equipped and inadequately staffed to fulfill its responsibilities in
monitoring implementation of the national budget. Moreover, combining the two roles of
implementation monitoring and evaluation within a single department creates
opportunities for collusion among public officials. As a result, IMED has been criticized
for poor implementation monitoring and biased evaluation that may conceal the
misappropriation of budgeted funds. On average, 1,200 new or ongoing projects are
provided for in the budget, of which only 200 are completed.114
241. Although certain actions have been taken to reform the process of monitoring
budget implementation and management, their effectiveness is unclear.
The
establishment of the Public Administration Reform Monitoring Commission, the Revenue
Commission, and the Public Expenditure Review Commission has laid the groundwork
for improved monitoring and reform initiatives. The three commissions are expected to
113
The World Bank (2002), Taming Leviathan, at 40.
The World Bank (2003), Unsustainable Public Sector Spending and Weak Governance, Chapter 2,
Section 3, (Web Version)
114
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improve the transparency and accountability of the budget implementation and
evaluation process and help to ensure that allocated public funds are properly used.
Problems have been encountered in establishing the commissions and some observers
have questioned the independence of those appointed to serve as members of the
commissions. Nevertheless, the work of the commissions can be enhanced by donor
support for the introduction of modern information technology systems and tools, such
as automated computerized accounting, budgeting, and tax administration. Technical
assistance of this kind will assist the commissions to effect reform of current
administrative systems, adapting international benchmark practices for application in
Bangladesh.
e. Inadequate parliamentary oversight
242. Effective independent scrutiny of the management of public finances is an
essential element of horizontal accountability and sound governance. While steps have
been taken in recent years to strengthen parliamentary oversight of the budget process,
further improvements are needed. The principal agents of parliamentary surveillance
are the Public Accounts Committee, Public Estimates Committee, and Public
Undertakings Committee, together with the 35 standing committees that oversee the
affairs of individual ministries. Committee proceedings tend to be dominated by senior
Members of the ruling party. Even backbench Members are perceived to be
occasionally hesitant to oppose decisions of senior Members, even if they do not agree
with the position taken on certain issues. Moreover, committee members are frequently
absent from meetings, while those in attendance often lack the information necessary to
fulfill their oversight functions.
243. Committee recommendations are rarely taken up in a diligent and timely manner,
especially where they concern investigation of the conduct of senior public officials. The
proceedings and actions of parliamentary committees are largely conducted behind
closed doors, with little media access, informed citizen understanding, or public demand
for greater transparency and accountability. These weaknesses were highlighted in the
report of the Public Administration Reform Commission.
The Commission
recommended the timely publication of committee reports, greater participation of
opposition Members of Parliament in administering committees, and participation by at
least one woman Member in each committee. Little progress has been made in
pressing the adoption of these recommendations to date. While donor agencies
underline the need for priority oversight reforms in their dialogue with the Government,
further efforts are required to secure political commitment to implement the
recommendations of PARC and other public administration and governance reviews.
2. Improving Budget Management:
244. A number of steps should be taken to improve budget management. These
recommendations reflect the consensus views of several recent studies:115
115
See PARC Report (Volumes I, II, and III); The World Bank (2002) Bangladesh: Financial Accountability
for Good Governance, Washington, DC, The World Bank; The World Bank (2002), Taming Leviathan; The
World Bank and Asian Development Bank (2003), Bangladesh Public Expenditure Review; CPD (2003),
Task Force Report on Budgetary Discipline and Fiscal Program.
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
The budget should be framed in accordance with a long-term macroeconomic focus
and medium-term expenditure framework that integrate aggregate fiscal, monetary
and external sectors. Strict criteria should be established for the review and
approval of ADP projects to ensure that projects are consistent with long-term
macroeconomic focus. Merging the relevant functions of the Ministry of Finance and
the Ministry of Planning116 could help to harmonize budget preparation and
implementation, provided that adequate control mechanisms are established to
prevent conflict of interest and collusion.

The process for managing cash, assets, and public debt should be streamlined to
restrict unanticipated interest burdens and to maintain sustainable fiscal expenditure.
Government expenditure reports should be publicized as a means of reducing
leakage through greater accountability in the management of public funds. Donor
agencies have an important role to play in guiding local partners in restructuring
management systems and procedures in accordance with benchmark international
practices. In turn, the media has an important informal horizontal accountability role
to play in raising public awareness of the nature and present state of public financial
management, which will place pressure on the Government to address weaknesses
in governance.

The public procurement process (discussed in detail below) should be restructured to
remedy current practices and resulting leakage and ensure that public funds are
utilized in a fair, accountable, and transparent manner. The bidding process should
be neutral, contracts should be awarded in a timely and transparent manner, and
procurement reports should be publicized. In addition, strong internal control
mechanisms should be put in place to track and monitor public resource use as a
first line of formal horizontal accountability. As discussed in greater detail below, the
Government of Bangladesh and the World Bank have recently taken steps to
strengthen public procurement procedures.

Audit functions should be established within all ministries and steps taken to
strengthen both the independence and authority of CAG and parliamentary oversight
mechanisms, as primary vertical accountability mechanisms.

The capacity of IMED to monitor project implementation and evaluate project
performance should be strengthened, while government officials should be
adequately trained to perform their duties. Adequate control mechanisms should be
instituted within IMED to resolve conflicts of interest and reduce corruption. These
steps will greatly enhance the efficiency of the entire public financial management
system. As discussed in further detail below, steps should be taken to strengthen
the Government’s existing staff training programs and control mechanisms.

Poor management of public finances is not strictly a function of managerial
weaknesses and archaic systems of budget preparation, monitoring, and control.
The reform of budgetary management procedures alone is insufficient to resolve the
problem. Broader governance issues affect decisions and outcomes. For example,
the policy, partisan, and personal interests of legislators and political leaders are
increasingly perceived to be at odds with demands for greater accountability and
transparency in the operation of government agencies, in the application of strict
116
See discussion of the national planning process in Chapter V.
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performance criteria in assessing the conduct of public officials, and in the
decentralization of decision-making authority. While the local media can help raise
public awareness of financial governance issues through scrutiny of government
actions, a sense of public apathy persists. Citizens seem reluctant to demand
reform, convinced that public officials are not prepared to listen to them. To address
this problem, reform efforts should aim to make public decision-making processes
more transparent to public scrutiny and understanding, while at the same time raising
the confidence and capacity of ordinary citizens and private sector interest groups to
take active steps in demanding and facilitating reform.
D. Public Expenditure Management
1. Overview
245. The Finance Division of the Ministry of Finance is responsible for administering
public expenditures. Major areas of expenditures include the Annual Development
Program, revenue expenditure, and procurement. Total public expenditures increased
from $2.32 billion in FY1991 to $6.71 billion in FY2001, reflecting a tripling in nominal
terms over a period of eleven years.117 Revenue expenditures118 account for the
majority of public expenditures (53 percent). Reversing this trend in government
spending in favor of development expenditure is one of the major challenges of public
financial management in Bangladesh. Key deficiencies in the current public expenditure
management system are discussed in the following sections.
a. Annual development program
246. As noted previously, the Annual Development Program comprises infrastructure
and social development projects undertaken by relevant ministries, with funding from the
national development budget and foreign grants. There are no strict economic criteria
for the review and acceptance of ADP. This results in the acceptance of many projects
that, by objective standards, would rank as low priority. This in turn reduces the
resources available for higher priority projects and ultimately hinders the entire national
development process. There is a perception that public officials frequently use their
influence to advance projects of personal interest that lack broader macroeconomic
focus or benefits. The approval of non-ADP projects has a similar effect in diverting
resources from priority projects. Increasingly the Government turns to domestic banks
to finance ADP projects, threatening long-term fiscal sustainability by committing the
Government to higher interest payments in future. This strategy also has a dampening
impact on economic growth in the private sector. Government borrowing effectively
reduces domestic capital available to the private sector. Economic theory and
experience to date suggest that the public sector is far less efficient in using capital to
create jobs. The dynamic impact is that lower growth implies foregone future tax
revenues and increases the need for government borrowing in future.
117
Government of Bangladesh, Finance Division, Ministry of Finance. National Budget. Data obtained from
www.theGovernmentfinance.org
118 The Government’s recurrent expenditure on public services, defense, health, education, public safety,
transportation, housing, communication, and social security is expensed as revenue expenditure under the
revenue budget. The sources of funds for this revenue expenditure are tax and non-tax revenues, and
government borrowing (bank and securities).
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247. This situation highlights the need for effective oversight mechanisms, including
parliamentary standing committees and new institutions or procedures for local
government representatives to exercise scrutiny to ensure that projects are demanddriven and designed and administered on a cost effective basis. To date the
Government has made only modest progress in establishing formal horizontal oversight
mechanisms of this kind. Moreover, the establishment and work of the Public Accounts
Committee, Public Undertaking Committee, and Public Estimates Committee and other
relevant vertical oversight bodies have been plagued by problems. Problem areas
include selection of members, resource allocation, and follow-up on recommendations.
Public hearings on proposed ADP projects have not been convened for key stakeholders
or general public input.
248. In June 2002, the Government established a Public Expenditure Review
Commission (PERC). The mandate of the Commission is to review expenditure
decisions, improve budget preparation, integration and implementation, introduce a
transparent and quality budgeting process with participation by a broad spectrum of
stakeholders, strengthen and rationalize internal control mechanisms, and establish
effective performance audit and evaluation mechanisms. Since its establishment, PERC
has focused primarily on rationalizing public expenditure under both the revenue and
development budgets.
249. Although it was expected that PERC recommendations would be taken account
of in the 2003-04 national budget, to date there has been no significant progress made
in reversing the trend in public expenditure towards development activities. In the
meantime, ADB, IMF, and other agencies are exerting pressure on the Government to
identify and more fully fund priority development projects. Continued donor pressure
should help to increase government accountability, reduce irregularities, and accelerate
the completion of priority ADPs.
b. Revenue expenditure119
250. The excess of revenue receipts over revenue expenditure is the revenue surplus,
which is used to finance ADP and other development expenditures. In recent years, the
revenue surplus has been increasing as a percentage of ADP (from 19.3 percent in FY
2001 to 31.1 percent in FY 2002, and to 34 percent in FY 2003, based on the revised
budget estimates). A revenue surplus of Taka 72.02 billion is projected for FY 2004.
This is 35.5 percent of the projected ADP of Taka 203 billion. Despite this increase, the
composition of revenue expenditures remains a source of concern for the Government.
Salary and allowances, subsidies and current transfers, and interest payments
comprised about 76 percent of the revenue expenditure in FY 2001 and FY 2002, and
increased to 79 percent in FY 2003, using the revised budget estimates. The FY 2004
budget projects this share at 75 percent; however, this is unlikely to be the case. A large
pool of redundant labor in various ministries and Government offices, sector
corporations and public enterprises, as well as occasional incidents in which salary
payments receipts are charged for non-existent employees, result in unnecessarily high
119
Recurrent expenditure on public services, defense, health, education, public safety, transportation,
communication, housing, recreation, culture, religious affairs, social security, and welfare, other sectoral
expenditure on local government and rural development, fuel and energy, agriculture, industrial and
economic services, and interest payments (domestic and foreign) are subsumed under the revenue budget.
The sources of funds for this revenue expenditure are tax and non-tax revenues, and government borrowing
(bank and securities).
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expenditure on salary and allowances. Continued subsidies for loss-making SOEs and
incremental interest payments on unplanned domestic loans cause additional fiscal
damage. While the Government plans to continue to privatize certain loss-making
SOEs, past experience would suggest that this process is unlikely to proceed at an
accelerated pace. The Government has taken certain steps to address the situation,
including expenditure restraint and more efficient revenue collection, as reflected in the
FY2003 budget. A recent healthy trend is observed with respect to the revenue budget
providing for Tk. 1.63 billion in the revised FY 2003 budget and Tk. 3.44 billion in the
FY2004 budget (as an addition to the normal growth in revenue expenditures) for repair
and maintenance of rural roads, highways, bridges and culverts, and public buildings.
These improvements should supplant unnecessary revenue expenditures rather than be
additional to them.
c. Procurement
251. Every year a substantial share of the national budget is spent on procurement of
assets and resources for government offices, projects, and services. Corruption and
bureaucratic inefficiency are perceived to be major impediments to time and cost
efficient procurement. The World Bank’s Country Procurement Assessment Report
(CPAR) identified the major deficiencies of the procurement process.120 These include:

the absence of a sound legal framework governing public sector procurement;

outdated procurement rules and procedures, which lead to the proliferation of diverse
rules and procedures among various agencies:

inadequate institutional capacity, resulting from the lack of trained professionals to
manage public procurement (as reflected in poor-quality bidding documents and bid
evaluation);

inordinate delays in completing the procurement process;

ineffective contract administration;

protracted bureaucratic procedures that create opportunities for corruption at various
points in the procurement process;

the absence of mechanisms for ensuring transparency and accountability in public
procurement.
252. The Government has begun to take action to address certain procurement
issues. For example, it has broadly endorsed the CPAR findings and has recently
undertaken a Public Procurement Reform Technical Assistance project with the
assistance of the International Development Association (IDA). In addition, the
Government has created the Central Procurement Technical Unit (CPTU) within IMED.
The CPTU is a permanent institution funded under the revenue budget. In principle, it is
adequately staffed and logistically structured to introduce procurement reforms based on
recommendations of the CPAR. The CPTU has no procurement or contracting functions
120
The World Bank (2003), Unsustainable Public Sector Spending and Weak Governance Report, Chapter
3, Section 70 (Web Version).
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at any level except for its own needs. It will provide technical and professional advice on
generic procurement issues referred to it. To preserve its primary policy guidance,
technical assistance, training, and oversight role, the CPTU will neither get involved in,
nor provide opinions on, any specific procurement evaluation or contract award. It is
mandated to observe a participatory consultative process involving government actors
and private sector stakeholders to build ownership and support for reforms. A series of
priority actions have been identified for improving procurement efficiency, transparency,
accountability, and management capacity, including the recent collaboration of the
Government and the World Bank on a new project to strengthen public procurement
procedures.121
2. Improving Public Expenditure Management:
253. To improve the current expenditure management process, a series of broad
supply- and demand-side policy reforms are required. Major structural issues to be
addressed in the short term to prevent further deterioration of the aggregate fiscal and
macroeconomic situation include:

Improving the quality of ADPs by instituting strict selection criteria so that the budget
for priority projects is not consumed by lower priority projects. A bottom-up demanddriven approach is necessary to select projects with the most economic and social
benefits.

Maintaining revenue expenditure at a sustainable level by cutting unnecessary
expenditures on salaries and allowances, and subsidies, and reducing interest
payments by taking less recourse to domestic borrowing. Although the Government
has lowered the interest rate and created a secondary market for government
securities to reduce interest expenses, steps of this kind are not long-term solutions.
Subsidies paid to cover losses by SOEs are a major drain on public expenditures.
The solution is to increase the technical and cost efficiency of these enterprises, or
alternatively to privatize them.

Setting prudential limits on the size of the budget deficit. Increasing recourse to
domestic borrowing to finance large budget deficits crowds out more efficient private
121
The World Bank, Public Procurement Reform Project, Project ID No. P075016, Approved May 2, 2002,
Closing Date November 30, 2005. For more information see: http://www4.worldbank.org/sprojects/Project.
asp?pid=P075016. The project description provides as follows: “The development objective of the project is
to increase efficiency, transparency, and accountability in the procurement of goods, works, and services by
government ministries, departments, statutory corporations, and other public bodies. Thus, the Public
Procurement Reform Project aims at supporting public procurement reform, by introducing appropriate rules
and procedures, building procurement management capacity, and establishing the mechanisms to improve
transparency. The project components will: 1) establish a Central Procurement Technical Unit (CPTU),
created as a permanent institution funded under revenue budget, at the Ministry of Planning, whose
responsibility will be to prod procurement reforms in line with the recommendations of the Country
Procurement Assessment Report (CPAR). CPTU may provide technical/professional advice, but shall not
provide opinion on procurement evaluations, or awards, in order to preserve its role as policy, technical
assistance, training, and oversight unit; 2) implement public procurement reforms, and, rules and
procedures, and help develop standard bidding documents in line with the CPAR recommendations, while
the CPTU will follow a participatory consultation process involving government, and private sector
stakeholders, to develop ownership, and support reforms; and, 3) improve procurement management
capacity by institutionalizing comprehensive, and regular training programs through selected institutions,
and, by establishing a monitoring and evaluation capacity at CPTU to monitor the procurement performance
of public entities.”
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investments by increasing interest rates. The Government should enact fiscal
responsibility and budgetary discipline legislation that would incorporate time-bound
fiscal deficit targets and set a limit on public debt.

Ongoing reform of the public procurement process to reduce leakage and accelerate
development activities. This will include the introduction of more efficient bidding
processes, the award of contracts to the most qualified bidders in a timely fashion,
and other ways of reducing bribery and the misuse of government resources. The
new Government of Bangladesh-World Bank project will address many of these
issues.

Streamlining the entire public expenditure system to improve budgetary discipline
and fiscal sustainability. More pressure from the parliamentary standing committees
is necessary to enhance stakeholder pressure for policy change. In addition, reform
initiatives to strengthen public financial management should be closely linked to
parallel efforts to strengthen public administration. Governance issues within public
financial management encompass policy setting, budget allocations, and the
responsible utilization of budgets once allocations are made.
E. Public Sector Accounting
1. Overview
254. Public sector accounting standards and practices in Bangladesh are outdated.
Modernization is necessary to establish more efficient and effective managerial functions
and to strengthen expenditure control by improving transparency in financial reporting.
The major deficiencies in public accounting systems include:
a. Cash-based accounting
255. The Government follows a cash-based accounting standard that recognizes
expenses only when actual cash is paid. In practice, expenses actually occur at the time
a work is placed, based on the commitment of resources. The practice underestimates
future expenses in the present fiscal year and complicates the budgeting process. In
earlier times, public accounting followed commitment-based accounting rules. This
practice was changed as a result of widespread abuse by accounting personnel,
although commitment-based (accrual) accounting is the mostly practiced accounting
standard in most developed countries, and internationally accepted as the best practice.
Many observers have called for the reintroduction of the previous commitment-based
accounting standards, together with adequate internal controls to prevent any recurrence
of the problems that plagued the earlier use of those standards.
b. Accuracy of accounts and bank reconciliation
256. Government accounts are often inaccurate, as evident from the major differences
between bank balances shown in the government balance sheet and those reflected in
Bangladesh Bank statements. According to a study conducted under the DFID-funded
RIBEC project, variations between cashbooks maintained by the Government and by
Bangladesh Bank can amount to millions of dollars, reflecting major losses and misuse
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of public funds.122 Public servants draw salaries on a cash-basis, leaving the accounting
system vulnerable to abuses that include fictitious people drawing salaries on a regular
basis. Further losses result from the manual payments of payroll, pension, and billing of
public utilities. To resolve this problem, regular bank reconciliation of accounts on the
basis of a computer-based system of automated accounting is required.
c. Omissions and misclassifications
257. In the absence of adequate control mechanisms, public expenditure accounts are
subject to intentional misclassification to conceal misappropriation of resources. Another
major misrepresentation occurs through the omission of foreign-assisted expenditure
from the consolidated monthly accounts. For example, an earlier RIBEC study found
that a large portion of foreign aid is not simultaneously recorded as development
expenditure and aid receipts.123 This is due to: (i) project directors failing to notify Chief
Accounting Officers (CAOs) and the Controller General of Accounts (CGA) of
expenditure from special accounts that are outside the government accounting system;
and (ii) the exclusion or late entry of direct project aid payments made by donor
agencies directly to contractors or consultants. Donor statements do not always
distinguish loans from grants, direct project aid from reimbursable project aid, or even
the specific projects for which disbursements have been made. To facilitate proper
financial reporting, donor disbursements must be promptly recorded. Support from both
government and donor agencies is necessary to resolve this problem.
d. Suspense accounts
258. Suspense accounts include funds earmarked for future use, which are outside
the official books of accounts. An additional reporting problem arises due to the volume
of payments in certain projects that are recorded under suspense accounts and not
cleared promptly as expenditure. These payments include legitimate expenditures for
stocks that have yet to be used or expenditures made on behalf of other divisions and
departments for which account codes are communicated at a later point. Such
expenditures are often illegitimate, with the suspense accounts charged in the budget of
the following fiscal year. This results in underestimation of project costs in the current
year.124
2. Improving Public Sector Accounting
259. Major reforms are necessary to achieve improved public accounting practices
and reporting. Priority actions include:

Computerization and automation of public accounting systems to prevent errors
resulting from large volume transactions, misclassification, omission, and
misrepresentation of accounts. A computerized public accounting system will,
among other things, facilitate improved records keeping and generation of timely
reports. In addition, it will also facilitate regular bank reconciliation, which will in turn
reduce irregularities in balances and misuse of resources.
122
Cited in The World Bank (2002), Bangladesh: Financial Accountability for Good Governance, at 31.
Ibid, at 31.
124 The World Bank (2002) Taming Leviathan: Reforming Governance in Bangladesh, at 44-45.
123
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
Reintroduction of a commitment-based accounting standard with firm internal control
mechanisms, which would accurately report actual public expenditures on a timely
basis.

Adequate training for government accounting personnel. Training programs should
ideally be results oriented and responsive to the specific needs of target
beneficiaries. This points to the need for specialized training, informed by careful
review of the responsibilities of those to be trained and the problems that they face,
as opposed to generic training.

Establishment of strong internal control, supervision, and oversight mechanisms to
ensure that set standards are maintained.
260. While the Government has taken measures to address some of these issues, the
effectiveness of these initiatives has yet to fully register. The standards of central
government accounts specified in the Accounts Code and the General Financial Rules,
Treasury Rules, and Subsidiary Rules have been consolidated. A comprehensive new
edition was published in 1998, with support from the RIBEC project. Beyond this
essential first step, no further rationalization or simplification has been completed. The
revision of codes and manuals should go beyond routine consolidation; it should ideally
lead to a complete overhaul of procedures that will lay the groundwork for modern
accounting systems. Under RIBEC, a new system of accounts classification had been
designed and implemented. To build on this excellent base of work, further actions are
required to ensure effective and timely reconciliation between expenditure transactions
recorded in the Government’s accounting system and cash transactions recorded by the
banking system. There is an opportunity to introduce these and other reforms in the
context of sectoral work by ADB and other development partners, which will help to
leverage broader core governance reform in public financial management.125
261. The RIBEC project has also established a Central Reconciliation Unit (CRU) in
the office of the CGA. Work of the RCU is sometimes slowed by the need to assure
employees and officers that their interests will not be compromised in the process of
restructuring and redefining employee duties and responsibilities. To implement the
reforms proposed by RIBEC, computerization needs to be extended at least as far as
the larger District Accounts Offices (DAOs). Four DAOs have been computerized to
date. Bangladesh Bank and Sonali Bank accounting systems also need to be
computerized. Bangladesh Bank check payment clearing system and check receipts
have been almost completely computerized. The computerization of cash receipts will
assist the process of reconciliation by providing data in electronic form on amounts
received directly by the Bank, as well as helping to reduce the problem of balance
differences and make resource utilization reporting more transparent.126
F. Public Sector Auditing
1. Overview
262. The Government’s existing systems of auditing and internal control fail to provide
adequate accountability for public expenditure. This is due to procedural flaws,
125
126
The World Bank (2002), Bangladesh: Financial Accountability for Good Governance, at 38.
The World Bank (2002), Bangladesh: Financial Accountability for Good Governance, at 31.
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overburdening of responsibilities, and the bureaucratic nature of the working
environment. The major issues include internal and external auditing.
a. Internal Audit
263. The function and responsibilities of government auditors tend to be vaguely and
narrowly defined, resulting in significant deviation in standards. Internal audit units exist
only in large ministries and major autonomous bodies and are primarily engaged in preaudit functions. There are no uniform policies on issues such as operational
independence, professional competence and training, scope and conduct of work,
involvement in risk management, reporting, or quality review. Moreover, there is no
central oversight of internal audit standards and performance audits are virtually
unknown. As a result, public sector transparency and accountability are weak and fail to
achieve desired public service results or to prevent leakage. There is a perception that
lack of internal control and accountability are especially serious in the case of SOEs,
resulting in losses that are subsidized by government.
b. External Audit
264. The external audit procedure involves simultaneous responsibility to account for
and subsequently audit expenditures incurred by government and financial and
administrative dependents in the executive branch. The Comptroller and Auditor
General (C&AG) is responsible for external audit of public entities and for ensuring
accountability to Parliament. Although C&AG is supposed to work independently, free of
outside influence, this is not the case in practice. For example, C&AG is dependant on
the approval of the Ministry of Finance and Ministry of Establishment for financing and
staffing decisions. Consequently, the C&AG office is understaffed, while existing
personnel lack the necessary training to fulfill their responsibilities. The capacity
problem reflects, in part, the practice of integrating accounts and audit cadre. An
individual may receive training in auditing and then be transferred to an accounts post.
In addition, there is little integration of training needs with audit planning.127 As a result
of these personnel limitations, only 16 to 25 percent of the C&AG’s allocated public
sectors are audited each year, while major areas of public activity, such as public
revenue, are not audited at all. Audit reports are filed in arrears and tend to be of limited
value in pursuing corrective actions. In addition, auditing practices tend to focus on
minute details of transactions that are largely input and compliance based. This practice
ignores effective control mechanisms, which in turn weakens incentives to comply with
government regulations and makes it difficult to impose management accountability on
performance. In addition, the practice has been for audit reports not to be publicized,
undermining the value of the entire audit function by discouraging public understanding
of this important financial oversight function.
2. Improving Public Sector Auditing and Internal Control
265. The primary action required to establish an effective auditing and internal control
environment is to separate the accounting and auditing functions, based on a clear
definition of the respective duties and responsibilities of accountants and auditors. The
C&AG should be given complete independence and the authority to independently hire
and train new employees to increase professional auditing capacity, subject to available
127
The World Bank-ADB (2002), Bangladesh: Financial Accountability for Good Governance, at 63-64.
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resources. The C&AG should also be given authority to appoint private auditing firms to
help accomplish the substantial task of auditing the entire public sector. This will help to
ensure that performance-based audits are completed in a timely manner and that
appropriate corrective actions are taken.
266. The Government has begun to recognize the need for systematic reform in the
C&AG office.
Three development projects are being implemented at present:
Strengthening the Office of the Comptroller and Auditor General (STAG); Reforms in
Government Audit (RIGA); and training programs by the Financial Management
Academy (FIMA). These projects cover major reform agendas, such as separating the
accounting and auditing functions, personnel training, and logistical support. RIGA and
FIMA are supported by DFID. Additional support from foreign donor agencies in
providing technical assistance for benchmark reforms will greatly enhance the impact of
reform efforts.
267.
Other priority actions include:

Establishment of independent internal control and audit departments in all ministries
and government entities to ensure that regulations are maintained and opportunities
for leakage or corruption are minimized. In their capacity as Principal Accounting
Officers (PAOs) of ministries, Secretaries must ensure that procedures are clearly
specified, personnel are adequately trained and supervised, and records are properly
managed, with the support of the CAO and Internal Audit Officer. While the
Government has emphasized improvement of the audit process, relatively little
attention has been paid to improving the material audited or to using audit feedback
as a basis for preventive or corrective actions.

Public dissemination of audit reports to increase transparency and accountability of
the public entities. The Government should encourage broader parliamentary
participation, which will include Members of Parliament representing all parties. To
date, few effective measures have been taken by any government to encourage or
facilitate broader participation by elected officials or the general public in reviewing
audit reports or campaigning for system reforms. The media has been the sole
source of public information regarding audit reports.
G. Inter-Governmental Fiscal Relations
1. Overview
268. Additional governance issues arise in the context of fiscal relations between
central and local government institutions. Local government institutions include the
following elected bodies: four city corporations (Dhaka, Chittagong, Khulna and
Rajshahi), 198 municipalities (pourashavas) and 4,472 Union Councils (Union
Parishads). According to a World Bank study conducted in 2000, local government
institutions spend approximately $86 million to $173 million in public funds each year. 128
A large percentage of local government revenue comes from central government. As
discussed in Chapter IV, a combination of factors contributes to the lack of independent
financial resources among local government institutions. These include: shortage of key
personnel; inadequate and outdated valuation of holdings for tax purposes; public
128
Ibid at 43.
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avoidance of tax payments due in part to the absence of linkages between payment of
tax and services provided; and narrow tax base, as identified in a 1997 World Bank
Local Government Commission report.129 Additional factors contribute to the perception
of widespread corruption and leakage in the financial management of local government
institutions.
a. Budgeting
269. Local government revenue budgeting is at times unrealistic, with actual collection
amounting to less than one-third of estimates. The revenue collection process is
inefficient and lacks adequate internal control and oversight mechanisms. There are
also indications of partisan influence in tax collection, assessment, procurement, and
recruitment, which results in large revenue deficits that must be financed by the central
government. For example, revenue collection by Rajshahi City Corporation in FY1997
was only 44 percent of current demands issued, and only 8 percent of mounting
arrears.130 In addition, the absence of computer-based accounting precludes variance
analysis of expenditure scenarios. As a result, the central government often faces
sudden unanticipated budgetary expenditures on local government institutions.
b. Accounting
270. As in the case of central government, the accounting system of local government
institutions is cash-based, manual, and considerably outdated. With the exception of
Dhaka City Corporation, accrual accounting methods are not used, resulting in late
reporting of expenses and underestimation of budgets for the coming year. The
situation also creates opportunities for corruption and misuse of resources. For
example, bill collection of public utility service providers under local government
institutions is consistently in arrears, which creates opportunities for uncollected bills to
be concealed. The situation results in financial losses to the central government, as it
has to subsidize any local government budgetary shortfall.
c. Auditing and internal control
271. To date, the central government has been reluctant to establish adequate
internal controls and audit requirements with respect to local government institutions. 131
Such systems should properly be a local initiative. The lack of control mechanisms
creates opportunities for corruption, as personnel are not accountable for their actions
and budgeting and accounting functions are combined in a single department.
Accountability is further weakened by delay in completing the external audit report by the
C&AG and failure to disseminate the report once it is submitted.
2. Improving Inter-governmental Fiscal Relations
272. To improve inter-governmental fiscal relations, steps should be taken to make
local government institutions more accountable and transparent to the central
government, Parliament, and the general public.
129
Ibid at 43.
Ibid at 44.
131 Currently, only Dhaka City Corporation has an internal audit unit.
130
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
Strong internal control mechanisms should be established in every local government
institution to prevent corruption and ensure that prescribed standards are
maintained. Internal and external audits should be completed, reported and
publicized on a timely basis. To implement these changes, internal audit units
should be established in all city corporations and larger municipalities. In addition,
Audit Committees comprising non-executive ward commissioners and other
designated officials should be established in city corporations and the larger
municipalities. In addition, audit procedures need to become be more performance
and system oriented, while feedback from audit reports should guide immediate
corrective actions.

The central government should play a more active role in the budgeting procedures
of local government institutions. Budgeting, accounting, and auditing divisions
should be separated to minimize the risk of corruption. Accounting should be on an
accrual basis and computerized to prevent errors and underestimation. Finally,
steps should be taken to make LGI revenue administration more efficient,
transparent, and free from partisan influence.

As noted in Chapter IV, direct and indirect central government control over local
government institutions has been exhaustive but largely ineffective to date. Although
the Government has been trying to improve control mechanisms (for example, by
mandating timely audit reports), further steps should be been taken to resolve
procedural flaws, such as separating accounting and budgeting functions in local
government institutions.
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CHAPTER VI
LAW AND JUSTICE
A. Judicial System132
1. Basic Structure
273. Part VI of the Bangladesh Constitution prescribes the basic structure of the
judicial system. Chapters I and II specify the composition, powers, and functions of the
Supreme Court and Subordinate Courts, respectively. Chapter III authorizes the
establishment of Subordinate Courts and grants the Supreme Court superintendence
and control over all subordinate courts and tribunals. Chart 1 presents a organizational
summary of the various branches of the judiciary described in the sections that follow.
a. Supreme Court of Bangladesh
274. The Supreme Court of Bangladesh, the highest court of the land, is composed of
two divisions: the Appellate Division, or final court of appeal; and the High Court
Division, which serves as final court of appeal for most matters and the court of original
jurisdiction for certain others. Each division performs separate functions, with separately
appointed judicial officers.
Article 94(4) of the Constitution guarantees the
independence of the Chief Justice and other judges of the Supreme Court.
275. Appellate Division: The Appellate Division has seven judges, including the Chief
Justice.133 It normally hears appeals from judgments, decrees, or sentences of the High
Court Division. There is no general right of appeal to the Appellate Division. With the
exception of cases falling within special circumstances specified in the Constitution, the
Appellate Division must first grant leave to appeal.134 Law declared by Appellate
Division binds the High Court Division, while that declared by the two superior divisions
of the High Court is binding on all subordinate courts.135 The Appellate Division is further
empowered to: (i) issue such directions, orders, decrees, or writs as may be necessary
for doing complete justice in any cause or matter pending before it; (ii) review any
judgment pronounced or order made by it; and (iii) exercise constitutional advisory
jurisdiction on matters of public importance referred to it by the President.
276. High Court Division: The High Court Division has four major categories of
general jurisdiction: civil, constitutional or writ, special statutory, and criminal. Its powers
encompass four broad areas: appellate, revisional, quashing of proceedings, and
matters of reference. There are currently 57 serving judges of the High Court Division.
They preside in two types of bench: a “Single Bench” of one judge and a “Divisional
132
This section incorporates the findings and recommendations of the Bangladesh component of a recent
study of judicial independence in Bangladesh, commissioned by The Asia Foundation as part of a ninecountry study on judicial independence that the Foundation conducted on behalf of ADB (Judicial
Independence Project, RETA No. 5987).
133 Until early 2002, the Appellate Division has five judges, including the Chief Justice. Previously five
judges sat as a single bench. With the membership enlarged to seven judges, the Appellate Division is
divided into two benches of four and three.
134 Per Article 103 of the Constitution, there is an automatic right of appeal where the High Court Division (i)
certifies that a case involves a substantial question of the law as to the interpretation of the Constitution, (ii)
imposes a sentence of death or life imprisonment, or (iii) imposes a punishment on person for contempt of
that division; or in such other cases as provided by Act of Parliament.
135 Constitution, Article 111.
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Bench” of two judges. Article 102 of the Constitution empowers the High Court Division
to issue certain directions and orders that are equivalent to the traditional writs of
prohibition, mandamus, certiorari, habeus corpus, and quo warrant.136
b. District and Sessions Court (Criminal Matters)
277. District and Sessions Judge: A District and Sessions Judge heads the judiciary
in each of the 64 administrative districts of Bangladesh.137 The District and Sessions
Court has jurisdiction to hear both civil and criminal cases and appeals. When a District
and Sessions Judge hears a criminal case or criminal appeal, he presides in the
capacity of District Sessions Judge. In this capacity, he may pass any sentence
authorized by law, subject to the requirement that death sentences be confirmed by the
High Court Division. In his capacity as District Sessions Judge, a District and Sessions
Court Judge also hears appeals in cases where an Assistant Sessions Judge has
passed a prison sentence of five years or more, and in all other cases where sentences
have been passed by a magistrate of the first class.
278. Additional Sessions Judge: Each District Court has several Additional District
and Sessions judges.138 For administrative purposes, they report to the District and
Sessions Judge, but they have the same sentencing power in criminal cases as the
District and Session Judge holds in his capacity District Sessions Judge. An Additional
Sessions Judge only disposes of cases sent to him by the District Sessions judge.
279. Assistant Sessions Judge: An Assistant Sessions Judge may pass any sentence
authorized by law except one of death, life imprisonment, or a term exceeding ten years
imprisonment. He may only try cases sent to him by a District Sessions judge, and has
authority to hear any appeal or revision arising from an order passed by a magistrate of
the first class.
280. Courts of Magistrate: There are three classes of magistrate: first, second, and
third. They have authority to try offences punishable by imprisonment up to five, three,
and two years, respectively. Metropolitan City Courts are staffed by a Chief Metropolitan
Magistrate, an additional Chief Metropolitan magistrate, and Metropolitan magistrates. In
each district there are District Magistrates and Additional District Magistrates, as well as
magistrates of the first, second, and third classes. Appeals against orders of conviction
and sentence passed by a magistrate of the second or third class are heard by the
District Magistrate or the Chief Metropolitan Magistrate. They may hear the appeal or
transfer it to the Additional District Magistrate or Additional Chief Metropolitan
magistrate.
281. District Sessions Judges, Additional Sessions Judges, and Assistant Sessions
Judges are members of the judicial service, which is jointly controlled and supervised by
the Ministry of Law, Justice, and Parliamentary Affairs (MLJPA) and the Supreme Court.
Magistrates are members of the administrative service, which is controlled and
supervised by the executive, through the Ministry of Establishment and Cabinet.
136
While the traditional nomenclature is no longer used, the powers of the High Court Division are
equivalent to the traditional writs.
137 Excepting three hill districts of the Chittagong Hill Tracts.
138 The number varies from one to ten, depending on the size and population of a particular district.
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c. District and Sessions Court (Civil Matters)
282. As noted previously, a District and Sessions Judge exercises a combination of
civil and criminal jurisdiction. In civil matters, he hears appeals from Joint District
Judges and Assistant District Judges. For civil matters, four judicial officers constitute a
District Court: the District Judge, the Additional District Judge, the Joint District judge,
and the Assistant Judge. A District Judge hears special categories of case (such as
bankruptcy or arbitration) in the first instance. In all other civil matters, the District Court
serves as the first court of appeal. The District Court has unlimited pecuniary jurisdiction
in all civil matters. District Judges tends not to try original suits; rather, they hear
appeals from decisions of Assistant Judge’s Courts. Between the courts of District and
Assistant District Judges there are intermediate levels of civil court: the courts of Joint
District Judge and Additional District Judge. Courts of Assistant Judge and Joint District
Judge are courts of first instance, with fixed pecuniary jurisdiction.
d. Special Courts
283. A number of courts and tribunals have special authority over select criminal, civil,
and other matters.
284. Criminal Matters: Courts of Special Judge have been created under the Criminal
Law Amendment Act, 1958 to try offences committed by public servants. These courts
presently operate in 13 of 64 districts, as well as in six Divisional Headquarters. Special
courts and tribunals have also been established under the Violence Against Women and
Children Act, 2000 and the Speedy Trial Court Act, 2002. The Acts provide for the
establishment of Special Tribunals consisting of Sessions Judges and magistrates,
respectively. These Special Tribunals operate in 27 or 64 districts. In the remaining
districts, Session Judges and Additional Session Judges are vested with power to try
cases. Special Tribunals also try offences under the Special Powers Act of 1974, the
preventive detention law that empowers the Government to arrest and detain any person
for a “prejudicial act” without necessity of charging the person detained with a specific
crime. The Children Act, 1974 provides for the establishment of one or more Juvenile
Courts to try offences committed by persons below the age of 16. The trial may be
original, appellate, or revisional, depending on the jurisdiction of the particular court
concerned.
285. Civil Matters: Special Courts with jurisdiction in civil matters include the Money
Loan Court, the Family Court, seven Labor Courts, and the Environment Court (which
has yet to be convened), the Rent Control Court, Small Cases Court, and the Village
Court function of the Union Parishad. The Money Loan Court is profiled in a case study
in Chapter IX.
286. Other Specialized Courts: Administrative tribunals are created by law under
authority of Article 117 of the Constitution. The tribunals resolve disputes that arise in
connection with the employment of government servants. Other specialized courts
include election tribunals, Electricity Courts, Marine Courts, and Traffic Courts. There
are estimated to be as many as 50 special courts in total.
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Chart 1
Bangladesh Judiciary
SUPREME COURT OF BANGLADESH
Appellate Division
(CJ+ Judges)

High Court Division
(Usually about 50 Judges)


DISTRICT AND SESSIONS COURT
SPECIAL COURTS AND TRIBUNALS
District and Session Judge (1 DSJ)
Additional District and Sessions Judge
(1-5 ADJ)
Joint District Judge (3-9 JDJ)
Senior Assistant Judge (2-9 SAJ)
Assistant Judge (5-11 AJ)
Civil:

Money Loan Court
Family Court
Bankruptcy Court
Administrative Tribunal
Labor Court
Environment Court
(and others)
Criminal:
Special Tribunal
Speedy Trial Court
Women and Children Suppression of
Oppression
Tribunal
(and others)
COURT OF MAGISTRATES
Magistrate of the first class
Magistrate second class
Magistrate of the third class
2. Budget, Finances, and Accountability
287. There is no separate budget for the judiciary in Bangladesh. For purposes of
budgetary allocation, the judiciary is treated as part of the MLJPA. The revenue budget
allocates funds for the day-to-day functioning of government ministries and departments,
while the development budget provides for new activities.139 With the exception of the
Supreme Court, the judicial budget is prepared by the MLJPA. In response to a directive
of the Masdar Hossain case, which is discussed in further detail below, there is now a
separate budget allocation for the Supreme Court.
a. Revenue budget
288. The budget for the judiciary has traditionally been quite low. For example, the
2001-02 revenue budget allocation was equivalent to only three percent of the defense
budget, or 0.36 percent of the total revenue budget. About two-thirds of the budget of
139
See earlier description in revenue and development budgets in Chapter V.
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the MLJPA is spent on the courts—equivalent to about ten cents per person per year.
The MLJPA earns substantial revenue resources for the Government through court fees,
registration fees, and associated charges, with earnings averaging 2.5 times
expenditures.
b. Development budget
289. The development budget process is initiated by estimating officers of the MLJPA.
While they claim to take requests for additional allocations into account, the perception is
that they rely primarily on past trends and figures. Estimates are countersigned by
controlling officers and forwarded to the Budget Wing of the Finance Division through the
Principal Accounting Officer. Specific time periods are set for forwarding different
estimates. The Budget Wing of the Ministry of Finance also obtains information from the
Comptroller General of the Accounts Office to check the accuracy of estimates. The
judiciary includes no non-judicial staff with a formal background in economics or
planning. Consequently, budgetary allocations are determined by officers of the
economic cadre of government who serve on deputation to the MLJPA, with little
opportunity for input by judges. The MLJPA is one of the lowest funded government
ministries, with construction and repair of court facilities constituting the primary
expenditure. Prior to the launch of the Legal and Judicial Capacity Building Project
supported by the World Bank and other donors (discussed in further detail below), the
development budget included almost no allocation for the. In the past three years, the
average development budget allocation for the judiciary was equivalent to approximately
0.25 percent of the total national revenue budget.
3. Appointment and Remuneration Of Judges
290. Procedures for the selection, appointment, and promotion of each category of
judicial officials (judges of the Supreme Court and the subordinate courts, and
magistrates) are different. To a certain extent, they are controlled and supervised by
different organs of the State.
a. Supreme Court
291. Selection and Appointment of Supreme Court Judges: At present there are 64
judges of the Supreme Court—57 in the High Court Division and seven in the Appellate
Division. The Chief Justice and other judges of the Supreme Court are appointed by the
President, pursuant to Article 95(1) of the Constitution. The Prime Minister provides
advice to the President on the appointment of subordinate judges. Until recently, the
tradition has been for a retiring Chief Justice to be succeeded by the most senior ranking
judge of the Appellate Division. Compulsory retirement at 65 has traditionally made the
chain of succession easy to determine.
292. While the Constitution specifies minimum qualifications for appointment to the
High Court, the actual process of selection is not transparent. The conventional
prerogative of the Chief Justice is to recommend names to the MLJPA. The Ministry in
turn consults with the Prime Minister, following which the names of proposed judges are
sent to the President for formal announcement. Candidates are typically drawn from
three categories: senior District judges, practicing lawyers of the Supreme Court, and
Deputy Attorney Generals. The MLJPA occasionally proposes names of prospective
candidates to the Chief Justice on an informal basis. Controversy arose in 1994 when
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the government reportedly announced a list of nine individuals for appointment to the
Supreme Court without consulting the Chief Justice. The Chief Justice allegedly made
discrete indications that he would not administer the oath of appointment and the legal
community rallied behind him. The Government is reported to have withdrawn the list
and asked the Chief Justice for his opinion.
293. Qualifications: Article 95 of the Constitution specifies minimum requirements and
qualifications for appointment of judges of the Supreme Court. Until recently, about 25
years of legal practice was considered the norm. Among career judges who began their
service as assistant judges, those who reach the Supreme Court are generally
appointed in their mid-50s. Recent trends have lowered this experience standard to
about 20 years, and a few judges have been appointed with even less experience.
Article 99 of the Constitution bars judges from working as lawyers after their
retirement.140 As a result, many of the most experienced lawyers are said to be reluctant
to accept an appointment to the Supreme Court because they would have only three or
four years of service before compulsory retirement. There have been a series of
amendments to Article 99, the most recent of which (Thirteenth Amendment, 1996)
authorizes a retired Supreme Court judge to serve as Chief Advisor or Advisor to the
Caretaker Government. An earlier amendment allows Supreme Court judges to hold
judicial and quasi-judicial posts following retirement. The situation creates a tension
between the value of engaging retired judges in functions that will take advantage of
their capacity and experience and concerns that post-retirement career prospects could
potentially give rise to conflicts of interest for serving judges.
294. Promotion: Judges of the Supreme Court are first appointed to the High Court
Division. For legal purposes, the later appointment of a High Court Judge to the
Appellate Division constitutes a new appointment. Usually the senior-most judge of the
High Court Division is promoted to the Appellate Division following the retirement of an
Appellate Court Judge. Recently there have been occasions when judges junior to the
senior-most judge were appointed ahead of the latter.
295. Removal: Article 96 of the Constitution prescribes detailed procedures for
removal of judges of the Supreme Court. The Supreme Judicial Council provided for in
Article 96 has not been formed and there is no record of any proceeding of such Council
with respect to the conduct of a judge.
b. Subordinate Court
296. Articles 114 to 116A of the Constitution prescribe procedures for the
establishment of subordinate courts, appointment of judges to subordinate courts,
control and discipline, and related matters. The subordinate courts include Courts of
District and Sessions Judges and Courts of Magistrates. A total of 746 subordinate
judges serve in the 61 District Courts of Bangladesh.
297. Selection and Appointment: To qualify for the post of Assistant Judge, one must
hold a bachelors degree in law. Recruitment examinations are administered by the
Public Service Commission (PSC).141 The last induction of judges by the PSC was in
140
Article 99 of the Constitution bars judges from working as lawyers following retirement from the bench.
The Public Service Commission is a constitutional body with the exclusive mandate of recruiting civil
servants for all cadre posts of government.
141
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298. The failure to recruit new judges in the last five years has been criticized by some
observers as indicative of a lack of planning for future needs. Not all judges recruited to
the judicial service are engaged in pure judicial functions. Due to the absence of a legal
service cadre in government, some judges are deputed to various ministries for a term of
three to five years before returning to active judicial service. At any given time, more
than 50 judges of different ranks are engaged by the executive branch of government.
Some observers point to the risk of judges in executive service becoming accustomed to
taking orders from senior bureaucrats, potentially undermining their independent style of
decision-making when they return to the bench.
299. Disciplinary Procedures: Subordinate court judges may be removed, dismissed,
demoted to a lower rank, or discharged on the basis of misconduct, corruption, or
inefficiency. Disciplinary proceedings are initiated by a judge senior to the individual in
question in the capacity of “inquiring officer.” The President issues a disciplinary order in
his capacity as appointing authority. The MLJPA and the Supreme Court jointly control
judges of the subordinate judiciary. The Supreme Court must approve any proposal of
transfer, promotion, and departmental action in the form of dismissal, removal, or
reduction in rank. In District Court, judges below the rank of District and Sessions
Judges are subject to the administrative authority of the District and Sessions judge.
c. Magistrates
300. Unlike judges, there is no process of direct recruitment for the post of magistrate.
Assistant Commissioners of the Bangladesh Civil Service (administration cadre) are
vested with magisterial power. They are recruited through an examination process
administered by the Public Service Commission. An Assistant Commissioner is initially
vested with powers of magistrate of the third class and advances to higher tiers with
experience. Magistrates perform dual functions, trying criminal cases as well as
performing administrative work such as renewing licenses or collecting revenues. This
administrative cadre handles most criminal cases, while the formal judiciary is concerned
with civil matters and grievous criminal offenses.
4. Tenure and Removal Mechanisms
301. Judges are subject to mandatory retirement age: 65 years for justices of the
Supreme Court and 57 years for subordinate judges. Article 96 of the Constitution
prescribes formal procedures for the removal of judges of the High Court Division. The
Supreme Judicial Council tasked with removal authority has never been appointed and
there is no record of a High Court judge being removed in recent years. The MLJPA and
the Supreme Court jointly control the professional career of subordinate judges. The
Ministry administers complaints against judges, with disciplinary orders subject to
confirmation by the Chief Justice. Formal disciplinary actions are rarely brought against
subordinate judges. It is unusual for more than one or two judges to be removed in any
given year, and there are few instances of administrative litigation by judges in response
to proceedings to remove them. Members of the Bar sometimes agree to collectively
boycott a judge if he or she is perceived to be corrupt or treats them disrespectfully. The
Ministry of Justice routinely investigates reports from the Bar regarding alleged
wrongdoing by a judge. An investigation typically concludes with the transfer of the
named judge.
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5. Remuneration
302. Subordinate Judiciary: Pay scales for the subordinate judiciary are tied to
general civil service standards. Judges enter at Level 8 (earning a monthly income of
Taka 4,800) and can advance to Level 3 (Taka 11,700) as District and Sessions Judges.
Judges of all ranks are entitled to free accommodation, for which a nominal seven
percent salary deduction is levied. If no official residence is available, a judge receives a
stipend equivalent to 35 to 50 percent of his salary as a rental allowance. Judges are
also entitled to limited medical benefits, while more senior members also receive
household support staff and transportation benefits. Pensions benefits are equivalent to
other members of the civil service, payable on compulsory retirement at age 57.
303. High Court Judges: A High Court judges earns Taka 20,000, pursuant to the
most recent amendment to the Supreme Court Judges (Remuneration and Privilege)
Act. In addition, he receives residential accommodation, use of chauffeur driven car,
free medical benefits for his entire family, and some household help.
6. Judicial Independence
a. Judicial review
304. Article 26 of the Constitution provides that laws that are inconsistent with
fundamental rights are void. Article 44 provides for the filing of a writ petition against a
fundamental rights violation as a right unto itself. As the cornerstone of judicial review,
Article 102 prescribes the right to petition the High Court Division for all conventional
writs of mandamus, habeus corpus, certiorari, and prohibition. In the early 1990s, the
Supreme Court began to assertively exercise its power of judicial review.
b. Independence of the judiciary
305. Three recent cases have enlarged the scope of judicial independence through
judicial review proceedings, although the principle of complete independence prescribed
in Article 22 has yet to be realized.
306. In Aftabuddin vs. Bangladesh142 the Appellate Division of the Supreme Court held
that, although control of the subordinate judiciary in matters of posting, promotion, leave,
and discipline is vested with the President, the constitutional provision regarding the
exercise of such control in consultation with the Supreme Court needs to be understood
and implemented literally, including the transfer of judicial officers. In Bangladesh vs.
Idrisur Rahman143 the Appellate Division upheld the contention that the appointment of
the Chief Metropolitan Magistrate of Dhaka, being a judicial post, should have been
made in consultation with the Supreme Court, as mandated by Article 116 of the
Constitution. The Court noted that Article 116 creates a “constitutional obligation to
consult the Supreme Court.”
142
143
48 (1996) DLR HCD 1.
51 (1999) DLR AD 163.
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307. The most recent decision of the Appellate Division in Secretary, Ministry of
Finance vs. Masdar Hossain144 articulated the difference between the executive and
judicial services of Bangladesh. The Appellate Court directed the Government to create
a separate Judicial Service Commission “with a majority of members from the Senior
Judiciary of the Supreme Court and the subordinate courts for recruitment to the judicial
service.” The Court further declared that, “in exercising control and discipline of persons
employed in the judicial services and magistrates exercising judicial functions under
Article 116, the views and opinion of the Supreme Court shall have primacy over those
of the Executive.” The Court also dismissed the contention that the Supreme Court
remains under the administrative control of the Government in financial matters. The
Court directed that the Government “shall not require the Supreme Court of Bangladesh
to seek [government] approval to incur any expenditure on any item from the funds
allocated to the Supreme Court in the annual budgets, provided that that the expenditure
incurred falls within the limit of the sanctioned budgets.” Finally, the Court held that
constitutional amendment was necessary to ensure the separation of the judiciary from
the executive branch: “If the Parliament so wished it can amend the Constitution to
make the separation more meaningful, pronounced, effective, and complete.”
308. The practice of appointing various classes of magistrate from the administrative
services remains the most serious impediment to independence of the judiciary. Unless
all criminal cases are brought within the jurisdiction of the subordinate judiciary, the risk
may arise that the executive branch and the Government will assert control and
influence over the criminal justice system. Article 22 of the Fundamental Principles of
State Policy mandates: “The State shall ensure the separation of the judiciary from the
executive organs of the State.”
Following the Masdar Hossain judgment, the
Government prepared a draft paper that indicated that as many as 12 articles of the
Constitution would need to be amended to effect the complete separation and
independence of the judiciary. Based on its independent review of the paper, the Law
Commission has suggested that the necessary reforms could be achieved through
amendment of Articles 95, 98, and 116.
309. Judicial independence is ultimately a parliamentary issue that requires the
support of at least 221 Members of Parliament to approve a constitutional amendment.
While the Government insists that the Masdar Hossain directives will be implemented
over time,145 at present there is little sense of resolve on the part of the Government to
effect the required constitutional changes. In the meantime, the Supreme Court has
become increasing assertive in steadily inhibiting the ability and power of the executive
branch to influence the functioning of the judiciary. Implementation of the Masdar
Hossain directives will lead to the functional independence of the judiciary through the
following reforms:

The judiciary would no longer be recruited and controlled by the same organization
(Public Service Commission); that is, the same rules cannot govern judicial service
and the executive branch as separate organs of the State.
144
52 (2000) DLR AD 82.
For example, the government has asked for extensions of the set time period for implementation of the
Masdar Hossain directives, on the basis that it requires many administrative and budgetary changes,
enactment of rules, and amendment of other laws.
145
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
Laws relevant to the services of the civil and administrative cadre would no longer be
applicable to the judicial cadre of the State.

A separate Judicial Services Commission would be established for the recruitment of
judicial officers.

The President would frame rules for appointment to the judicial service, under the
authority provided by Article 115 of Constitution.

The magistracy would be brought under the administrative control of the judiciary
and not the executive government.
310. The Appellate Court further directed in the Masdar Hossain judgment that there
should be a separate budgetary allocation for the Supreme Court. This change was
implemented in the 2000-01 budget.
7. Performance of the Judiciary
311. Current estimates suggest that there are approximately 3,500 petitions for leave
to appeal to the Appellate Division of the Supreme Court, while about 700 appeals are
pending before Appellate Division. At the end of 2000, there were 120,371 cases
pending before the High Court Division of the Supreme Court. Unofficial figures indicate
that there are currently 780 judges working in all tiers of the District Court, with another
800 magistrates conducting criminal cases.
312. The backlog of cases is constantly rising. At any given time, approximately
800,000 cases are pending at all levels of the judicial system. These include 400,000
civil cases and 200,000 criminal cases filed with the District and magistrate courts;
150,000 cases in the Supreme Court; and another 40,000 cases before the specialized
courts. Prior to the launch of the Legal and Judicial Capacity Building Project by the
World Bank, the Danish International Development Agency (Danida), and the Canadian
International Development Agency (CIDA), few concerted efforts had been taken to
reduce case backlog beyond judicial training initiatives, and there was little evidence that
the performance of the judicial system figured among the priority concerns of the
Government.
313. The Supreme Court has long been held in high regard and continues to enjoy the
highest reputation among all branches of the judiciary. Public perception studies
indicate that citizens believe that the subordinate courts (particularly courts of
magistrate) are prone to corruption.
For example, Transparency International
Bangladesh (TIB) has conducted two sample perception surveys on corruption in
different sectors, including the judiciary. The judiciary was second only to the police (at
89 percent versus 97 percent) among public institutions that are perceived as most
corrupt. In contrast, specific complaints of judicial corruption are almost non-existent,
which is attributed to fear of contempt actions. In general, ordinary citizens are hesitant
to seek justice though the formal judicial system unless alternative options to resolve a
dispute are exhausted. Legal issues involving contracts, business transactions, and
company matters are largely settled through arbitration and alternative dispute
resolution, as the courts are not seen as conducive to resolving financial disputes.
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314. With the passage of a Legal Aid Act in 2000, practical steps to establish a formal
public system of legal aid are beginning to be explored as a component of the Legal and
Judicial Capacity Building Project. At present, non-governmental organizations (NGOs)
continue to serve as principal providers of community legal services, comprising informal
education, legal counseling, representation in select cases, and facilitation of alternative
dispute resolution in various forms. Several organizations, including the Madaripur
Legal Aid Association (MLAA) and the Bangladesh Legal Aid and Services Trust
(BLAST) have been receiving donor support for programs of this kind for several years.
As in many countries, one of the primary challenges to conventional legal aid programs
is to secure adequate investment of time on the part of lawyers, whether on a pro bono
basis or in exchange for a modest honorarium. With so many lawyers struggling to earn
a modest income from the legal profession, it is often difficult to engage their services for
legal aid work, notwithstanding their commitment in principle to legal aid.
8. Reform Initiatives
315. In 2001 the Government of Bangladesh launched a seven-year Judicial and
Legal Capacity Building Project with principal support from the World Bank, CIDA, and
Danida. The project aims to improve the efficiency, effectiveness, and accountability of
the civil justice system and to increase access to justice, particularly for women. The
goals of the project are: (i) to enhance the physical and infrastructural resources of the
judiciary, by providing modern buildings and related facilities in one-third of the courts of
the country, together with the introduction of information technology; and (ii) to improve
case management and court administration. The project includes five main areas of
intervention, guided by the findings and recommendations of a diagnostic study: 146

reduction of excessive delay in the disposal of cases through the introduction of
efficient case management techniques, a computerized case classification and
records management system, improved management of physical and human
resources, upgraded court facilities, and alternative dispute resolution mechanisms.

enhanced capacity of the judiciary to plan and manage judicial affairs, through the
establishment of a efficient and effective administrative system and updating of
judicial budgeting and planning functions.

improved transparency and accountability in the judicial system through the
establishment of a judicial code of conduct, performance standards, and an improved
public service culture;

greater equity in judicial decision-making through legal aid and other support
services for the poor, women, and other marginalized groups;

increased access to the judiciary through improved information services, record
keeping, and publication of laws and case decisions.
316. The Project targets reforms in areas where current laws directly impede
commercial activity and environmental management, leave gaps that impede
146
The World Bank (2001), Project Appraisal Document on Proposed Legal and Judicial Capacity Building
Project, at 3-4.
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commercial actors, or depend on the courts and other institutions that prejudice their
effectiveness.147
317. The case management and court administration components of the project are
being implemented in five districts during the first three years of the project—two in the
first 18 months and expanding to three additional districts in the second 18 months. The
process will be repeated in additional districts during the final four years of the project.
CIDA funding supports the drafting wing of the Ministry of Law, Justice, and
Parliamentary Affairs and strengthening of the Law Commission. Danida funding covers
training and other activities of the Judicial Administration Training Institute (JATI).
9. Alternative Dispute Resolution
318. Given the limitations of the formal judicial system and the difficulties that the
average citizen encounters in accessing the formal system, many Bangladeshis rely on
local informal systems and processes to resolve conflicts. In the commercial sphere,
Bangladesh is a signatory to the International Convention for the Settlement of Disputes
and has acceded to the United Nations Convention for the Recognition and Enforcement
of Foreign Arbitral Awards.
a. Shalish
319. The practice of gathering village elders and concerned parties to resolve local
disputes has served as a primary means of preserving peace and justice at the local
level in Bangladesh. A shalish panel, which is generally exclusively male, does not have
fixed membership. Its size and structure depend entirely on the nature and gravity of the
issue before it. Sometimes, Chairmen and other members of the Union Parishad are
invited to preside over or participate in the proceedings. Local people have tremendous
faith in shalish as a timely, cost effective, and community-sanctioned mechanism for
settling disputes. The participatory nature of salish also allows community members to
learn from the experience of others and to devise strategies to deal with crises in their
own lives.
320. Although shalish members have the option of engaging in either mediation or
arbitration to reach a solution, most prefer arbitration. This method involves unilateral
decisions made by officiating members, whereas mediation engages opposing parties in
reaching mutually agreed solutions. In shalish the process is often marked by tension
and heated arguments. Although the decisions are not always fair and equitable, they
tend to carry a great deal of weight within the community because they are issued by
well-known and influential villagers; however, it is extremely difficult to enforce rulings if
the parties lack respect for traditional decision makers and refuse to comply.
321. The traditional shalish system has certain weaknesses that hinder the
dispensation of justice in some cases. Sometimes solutions are arbitrary and imposed
on reluctant disputants by powerful members of the community. Solutions of this kind
are based less on civil or other law than on subjective judgments designed to ensure the
continuity of their leadership, to strengthen their relational alliances, or to uphold
perceived cultural norms and biases. The shalish is also susceptible to manipulation by
147
Ibid at 5.
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criminal elements that are engaged by one party to intimate members of the panel or
otherwise disrupt the proceedings. Furthermore, because the traditional shalish tends to
be composed exclusively of male members, women are particularly vulnerable to
extreme judgments and harsh penalties.
b. Union Parishad (Village Court)
322. The Union Parishad is authorized to conduct arbitrations in rural areas in family
disputes under the Muslim Family Laws Ordinance 1961 (convening as a Conciliation
Council), and to settle petty civil and criminal disputes under the Village Court Ordinance
1976 (convening as a Village Court). In urban areas such disputes are settled under the
Conciliation of Disputes Ordinance 1979. Decisions at the UP administered Village
Court evolve through arbitration based on the opinion of the majority of members. The
Court constituted under this Ordinance has limited civil and criminal jurisdiction. It is
composed of a Chairman, who is generally the UP Chairman, and two representatives
from each party to the suit. Of the representatives, one from each side must be a
member of the UP. The other members may be individuals who enjoy the respect of the
community. The participation of women as members of the Village Court is rare. UP
Chairmen, who are often overwhelmed with many disparate responsibilities and little
governmental support, tend to view family disputes and other violations of law as having
low priority. Many UP Chairmen and members are poorly informed about the law, while
some are occasionally accused of acting in the interest of one or other party, raising
inferences of bias or undue interference.
B. Criminal Justice Administration
1. Overview
323. Article 31 of the Constitution guarantees the right of all citizens “to enjoy the
protection of the law, and to be treated in accordance with law, and only in accordance
with law.” It further provides that “no action detrimental to the life, liberty, body,
reputation, or property of any person shall be taken except in accordance with the law.”
Despite these assurances, the present state of public security and law enforcement raise
serious governance issues in Bangladesh. It is universally acknowledged that the public
security environment had significantly deteriorated in the last few years, with an increase
in robbery, extortion, assault and intimidation, and acid throwing, rape and other crimes
of violence against women. While the situation touches the lives of all citizens, its
implications are particularly serious for the poor, women, and other marginalized groups
that are more vulnerable to threats and intimidation and that have limited recourse to
legal assistance. The Bangladesh National Police has been criticized for failing to take
adequate steps to stem the tide of violence, while the Public Prosecution Service and
judiciary have in turn been criticized for failing to bring the few individuals who are
apprehended and formally charged with a crime to justice. The criminal justice
administration has recently responded to public complaints by expediting the trials of
several individuals charged with murder in high profile crime cases.
While
improvements in the present law and order environment will ultimately benefit from a
comprehensive assessment of all dimensions of criminal justice administration, spanning
the policy, public prosecution service, the courts, and correctional services, donor
attention is presently focused on police reform.
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2. Institutional Structure and Operations of the Police
324. The Bangladesh Police are a national force whose operations are directed from a
headquarters in Dhaka, with local police stations serving as principal units of service
delivery. It is headed by an Inspector General of the Police and operates under the
administrative oversight of the Ministry of Home Affairs. A recent UNDP report on
Human Security in Bangladesh confirms that, on the basis of manpower allocation, the
work of the police is primarily focused on maintaining public order. Sixty-three percent of
the police force is engaged in public order, versus 20 percent in investigation and
inquiries. In contrast, only one percent of police manpower is devoted to professional
development training. Police constables comprise 75 percent of the force, with less than
one percent of police officials engaged in management and administration.148
325. The UNDP research team conducted a milestone survey that compared the
experience of citizens and communities served by the police with that of the police
officers, including police awareness of human rights and human security laws. The
findings suggest that police responsiveness to the circumstances and needs of the poor
is very low. Police respondents indicated that this is due in part to the inability of the
poor to pay bribes demanded in exchange for attentive services. At the same time,
police respondents noted that they often face undue pressure from influential members
of the community to compromise the rights and interests of the poor.149 Additional
problems noted by the police include the burden of competing demands on their time,
the tendency of citizens to file false cases (such as false or exaggerated accusations of
violence by opponents in land disputes), lack of cooperation by forensic and other
agencies that are expected to assist in investigations, and inadequate professional
training.150
326. The professional capacity and performance of the National Police force is
undermined by many of the same issues that affect the public service generally, as
discussed in Chapter IV. These include irregularities in recruitment, promotion,
performance review, and other opportunities for advancement; lack of professional
training opportunities and other incentives; and lack of opportunity for civilian oversight
of police conduct and performance. While empirical research is necessary to compare
the formal police budget with the off-line resources required for the police to fulfill their
basic responsibilities, it is generally perceived that police operations are substantially
under-funded. With the largest share of available resources devoted to the maintenance
of law and order, the allocation of funds for supervision and accountability, human
resource development and planning, and entry-level and in-service training functions are
inadequate to raise professional standards.
327. The police and other law enforcement authorities are caught in a difficult
situation. On the one had, they are subject to sharp criticism for failing to take adequate
steps to contain a deteriorating law and order situation and for the manner in which they
implement controversial public security legislation that confers extensive powers of
arrest and detention on police, the constitutional validity of which has been challenged
148
United Nations Development Program (2002). Human Security in Bangladesh: In Search of Justice and
Dignity.
149 Ibid at 55-58.
150Ibid at 57-60.
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but never overturned. On they other hand, the police struggle to fulfill their duties in a
dangerous working environment, with inadequate resources, low compensation, and few
performance incentives. For most citizens, interaction with police in a community
represents their primary interface with the justice system, yet there are few opportunities
for citizens and local interest groups to engage in good faith dialogue with police on
common issues of concern, or to seek joint solutions to the problems that give rise to
strains in community-police relations.
328. While the present concentration of justice sector reform initiatives on civil law
makes perfect sense as a preliminary focus on which working relations will build, the
scale of public security and law enforcement challenges points to the need for increased
attention and resource commitments to address governance issues in criminal justice
administration, spanning police, public prosecution, the criminal courts, and correctional
services. A number of steps have been taken to increase focus on criminal justice. For
example, the United Kingdom Department for International Development (DFID) has
been engaged in dialogue with the Government in preparation for a community policing
program that aims to facilitate greater sensitivity to community needs and interests on
the part of police and improved relations between the police and the communities that
they serve. The Asia Foundation and other donor agencies are also exploring
opportunities to support the establishment of pilot community policing programs for
broader replication. In September 2003, UNDP commenced a large-scale study of the
police that is intended to inform program strategies for the institutional development of
the National Police. The World Bank has also expressed an interest in police reform.
C. Issues and Opportunities For Reform
329. An independent, efficient, and more accountable legal system is essential to
protect the rights and interests of citizens, investors, and public institutions and
agencies. After nearly a decade of frustrated efforts to expand successful early
investments in judicial training and capacity development, modest court computerization,
and other investments in formal justice sector reform, the launch of the Legal and
Judicial Capacity Building Project is a milestone initiative to which high expectations
attach, tempered by the understanding that justice sector reform is a long-term process
that will not turn on the basis of a single program activity. Building on the momentum set
by the Legal and Judicial Capacity Building Project, there are complementary
opportunities to be addressed in the formal justice sector, with a particular focus on
criminal justice administration. There is also a need to enhance citizen access to justice
at the grassroots through legal aid, community legal service delivery by civil society
organizations, legal empowerment, and alternative mechanisms for dispute resolution
that will help to reduce the burden on the formal justice system and to empower local
government bodies to assume a role in dispute resolution.
1. Judiciary
a. General
330. Implement the Masdar Hossain Directives: The Masdar Hossain judgment
provides a series of directives that, if implemented, will remove key constraints to judicial
independence. Of particular importance is the directive to establish a Judicial Service
Commission composed of judges of the Supreme Court and subordinate courts and
bureaucrats. While the Government has stated that rules are being framed for the
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appointment and function of the Judicial Service Commission, there has been no public
consultation on this matter to date. Technical assistance will be required to establish the
Commission. As a first step, Bangladesh should draw on the relevant experience of
other Asian countries that have established judicial commissions in similar
circumstances, with comparable resource constraints, as a source of important lessons
learned and models for potential replication in Bangladesh.
331. Human Resource Development: Beyond the important training elements of the
Legal and Judicial Capacity Building Project, there is a need to strengthen the
substantive capacity of judges at all levels, with particular emphasis on information
technology, intellectual property, new commercial mechanisms, and other areas that are
becoming increasingly important to economic development. Expanded judicial training
initiatives should be complemented by parallel development of law school curricula in
specialized areas and the expansion of continuing legal education opportunities for
members of the Bar.
b. Supreme Court
332
Transparency in the Selection and Appointment of Judges: Recent controversies
concerning the consultative process and lack of transparency in the judicial appointment
process underline the need for greater transparency. While no single approach is
correct, and the area is fraught with controversy, every effort should be made to ensure
that the processes followed are transparent and informed by relevant consultative inputs.
333. Legal Services of Government: Apart from the Ministry of Law, Justice, and
Parliamentary Affairs, there is no separate legal service wing within the Government.
Steps should be taken to establish a permanent, structurally organized career legal
service to provide legal advice, conduct litigation, draft legislation, and undertake other
legal business on behalf of the State.
334. Administrative Capacity: While the Supreme Court has been well served by
many of the subordinate judges deputed to perform administrative functions as registrars
as additional registrars of the Court, in fairness most judges lack the experience and
specialized knowledge required to design and implement administrative reforms,
including application of information technology. When the Judicial Service Commission
is established, the Supreme Court will be required to assume administrative functions on
a major scale, including direct supervision and control of the subordinate judiciary and
administration of the criminal justice system. To meet this challenge, the Court should
look beyond the traditional practice of engaging judges in administrative functions and
take steps to recruit professional managers and administrators.
c. Subordinate judiciary
335. Recruitment: As noted previously, there has been no recruitment of subordinate
judges for the last five years. While recruitment options are ultimately dependent on the
availability of resources, gaps of this kind create vacuums in capacity at certain levels
when judges retire in groups. Greater attention should be devoted to long-term human
resource planning and development, with particular attention to future economic
development needs and the demands that these will raise for specialty experience
among members of the judiciary.
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d. Empirical research, information, and data collection
336. While the design of the Legal and Judicial Capacity Building Project was
informed by a comprehensive diagnostic study and broad consultation with stakeholder.
Ongoing judicial development initiatives should likewise be informed by empirical
research that takes careful account of all details relating to judicial performance and the
needs, expectations, and motivations of stakeholders. Given the present scale of
investment in public sector judicial reform initiatives, donors should encourage and
facilitate the establishment of a local civil society organization or university-based center
with a specialty focus on the policy and practical dimensions of justice sector reform.
Organizations of this kind in several Asian countries have played an important role in
monitoring and reporting on the progress of justice sector development efforts and in
collaborating with courts, ministries of justice, and other public institutions in pursuing
common justice sector reform goals.
2. Community Legal Service Delivery and Legal Empowerment
337. The practical impact and success of justice sector reform initiatives is ultimately
dependent on their ability to advance the legal rights and entitlements and quality of life
of ordinary citizens. While the Legal and Judicial Capacity Building Project and other
public sector reform initiatives aim to advance the rights of the poor, women, and other
marginalized groups, it will take time for the benefits to extend to all levels of society
through a combination of improved access to justice and enhanced economic growth. In
the meantime, there is an urgent need to facilitate access to justice across all strata of
society through the work of civil society organizations that conduct community legal
service programs as stand-alone activities or as part of integrated community
development programs.
338. Government officials, affected populations, and NGOs involved in socioeconomic
development efforts often do not fully understand that the constraints that impede project
implementation or the full enjoyment of project benefits by intended beneficiary
populations have a legal dimension. For example, the affected groups may not be
aware that the laws and regulations that define the legal or administrative framework of a
development project prescribe the rights of citizens to participate in project design and
implementation or citizen entitlement to the resulting benefits.
339. While ignorance of the law is a crucial problem, even in those relatively few
instances where the disadvantaged and other citizens have a basic understanding of
their rights, other constraints frequently impede their enjoyment of them or their
participation in local decision-making. Such constraints include: lack of financial
resources; limited access to affordable legal; inadequate access to information on laws
and regulations; and the absence of effective legal institutions. The last category
includes the courts, which are typically located a considerable distance from those whom
they serve, plagued by delay, subject to cumbersome procedural regulations, and
susceptible to undue influence and corruption.
340. This situation has major implications for development projects in Bangladesh.
Project success largely depends on two factors. The first is that public institutions and
officials should responsibly exercise powers that affect the rights and interests of project
partner populations. In reality, accountability mechanisms that aim to make bureaucrats
and other officials act fairly, consistently, and honestly are often weak. The second
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factor essential for project success is the existence of opportunities for partner
populations to advance their rights and interests through informed participation in project
decision-making processes. Such opportunities have often existed more on paper than
in practice.
341. A recent study of Legal Empowerment for Supporting Governance,151 conducted
by The Asia Foundation on behalf of the Asian Development Bank (ADB), examined the
impact of legal empowerment—the use of law to increase the control that disadvantaged
populations exercise over their lives—in promoting good governance and reducing
poverty. The study adopted and endorsed the ADB’s view that “beyond [lack of] income
and basic services, individuals and societies are also poor—and tend to remain so—if
they are not empowered to participate in making the decisions that shape their lives.”152
342. Legal empowerment differs from other forms of empowerment in that it involves
the use of the law through training, counseling, representation in administrative
procedures, or other interventions. These activities are frequently combined with
initiatives that are not specifically law-oriented, such as community capacity or livelihood
development. Legal empowerment work typically involves both education and action.
The most successful legal empowerment initiatives go beyond simply educating citizens
or public officials about the law. They provide the disadvantaged with opportunities to
apply the knowledge or skills acquired to enforce their legal rights or improve their well
being, and strengthen the capacity of public officials by helping them to better
understand and exercise their legal decision-making authority and broader governance
functions. In this way, legal empowerment increases the benefits that citizens receive
from development initiatives whose success depends on the responsible exercise of
decision-making authority by public officials and on opportunities for citizens to
participate in related decision-making processes.
343. The regional legal empowerment study found that legal empowerment helps to
advance good governance and poverty reduction. In particular, the study found that
legal empowerment is most effective when it is pursued through broad, integrated
approaches that engage partner populations at the community level and when civil
society organizations work in cooperation with government agencies and officials. The
study recommended that legal empowerment work be incorporated in projects supported
by the ADB and other international development institutions.
3. Alternative Dispute Resolution
344. Alternative dispute resolution (ADR) has an important role to play in reducing the
backlog of cases with which the Bangladesh courts presently contend and in facilitating
time and cost effective alternatives to formal litigation. The Legal and Judicial Capacity
Building Project is facilitating court-administered mediation to relieve the present case
burden and streamline the disposition of future cases. As a complement to this work in
the formal justice sector, further investments are needed to promote equitable ADR at
151
See Asian Development Bank (2001), Legal Empowerment: Advancing Good Governance and Poverty
Reduction, in Law and Policy Reform at the Asian Development Bank, 2001 Edition.
152
Asian Development Bank (1999), Fighting Poverty in Asia and the Pacific: The Poverty Reduction
Strategy of the Asian Development Bank (1999), at p 3.
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the community level through a combination of support to civil society organizations and
initiatives to strengthen the statutory role of Union Parishads in resolving disputes.
345. Civil society organizations have taken a variety of approaches to community
ADR. Some organizations work within the context of the traditional shalish in providing
inputs and advice to enhance the legal knowledge and gender sensitivity of village
elders; others have established parallel structures that draw on the basic elements and
community acceptance of the shalish, while taking steps to ensure that the proceedings
take greater account of the needs of women and other marginalized groups. There is
merit in most approaches and work of this kind should be encouraged. In particular,
steps should be taken to draw on the experience of organizations such as the Madaripur
Legal Aid Association (MLAA) and others pioneers of community ADR to share their
experience with other organizations. Between 1995 and 2000, The Asia Foundation and
USAID supported training opportunities for more than 150 organizations to learn from
the experience of MLAA, Banchte Shekha, and Palli Shishu Foundation. There is
continued demand to assist other civil society organizations to introduce community
legal service and ADR programs.
4. Criminal Justice Reform
a. Police Reform
346. The deteriorating law and order situation underlines the need for criminal justice
reform as a core element of justice sector development efforts. The general
recommendations for public administrative reform presented in Chapter IV are applicable
to the National Police. Specific reform actions recommended by the UNDP Human
Security study include:153

Revising pay and benefits, job security, professional development training, and other
incentives;

Strengthening the capacity of the police to design, implement, and evaluate
professional entry-level and in-service trainings programs;

Introducing performance based assessment and promotion systems that reward high
standards of performance and professional integrity;

Taking exemplary punitive actions against police officers who are found guilty of
corruption, human rights abuse, or other breaches of conduct;

Establishing mechanisms for civilian oversight of police services.
b. Community Policing
347. Civil society organizations have begun to undertake some modest pilot programs
to facilitate improved civilian oversight of police conduct and opportunities for
communities and police to discuss their respective interests through informal dialogue.
153
United Nations Development Program (2002). Human Security in Bangladesh: In Search of Justice and
Dignity, at 66-68.
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Areas of focus to date have included police sensitivity to women’s rights and gender
considerations in investigating crimes of violence against women. Experience in other
countries suggests that there is significant potential to apply effective community policing
models to facilitate dialogue between communities and police on areas of common
interest.
348. The most successful community policing initiatives feature the establishment of
sustainable community-police partnerships, guided by a collaborative, problem-solving
approach that is responsive to the needs and expectations of the community as well as
taking account of issues of concern to police. Community policing strengthens the
capacity of civil society to monitor and contribute to improvements in police performance,
while at the same time helping police to more responsively interact with citizens. The
concept of partnership does not imply that civilians assume the role of the police, as
sometimes happens in situations in which policing responsibilities are shared between
community based security networks and police; rather, the police engage in active
consultation and collaboration with members of the communities that they serve in
designing and implementing solutions to crime, conflict, and quality of life issues in a
transparent, accountable, and participatory manner.
This collaborative working
relationship between citizens and police in turn facilitates consensus building, sharing of
responsibility, establishment of decision-making mechanisms, and reciprocal
accountability.
349. Community oriented policing strategies should ideally be guided by a two-fold
goal: first, to advance civic culture and good citizenship practices amongst police and
citizens alike; and second, to recast the police’s own approach to issues of security and
public order by effecting a shift from a reactive, and sometimes overly militaristic, mode
of policing in which citizens are potential enemies to a preventive policing in which
citizens are customers of police services. The concept of citizen-client combines the
political rights and prerogatives of citizenship with the rights and prerogatives of a client
of police services.
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CHAPTER VII
CIVIL SOCIETY
A. Civil Society
1. Defining Civil Society in Bangladesh
350. Civil society becomes more difficult to define as the currency and scope of use of
the term increases, not least in Bangladesh. While there is general agreement that civil
society comprises that part of society that is not under the direct control of the state, its
nature, composition, and role are subject to a range of views beyond this broad
definition. For some, civil society refers to an array of independent, voluntary groups,
associations, and institutions. In Bangladesh, there is a tendency to use the term
interchangeably with non-governmental organizations (NGOs). This is understandable
given the sheer number of local NGOs and the important role that they play in national
development. Although much of the discussion that follows focuses on governance
issues associated with the legal status, regulation, and role of NGOs, civil society in
Bangladesh actually encompasses a multitude of actors beyond NGOs.154
A
comprehensive list of civil society organizations (CSOs) includes development NGOs,
professional associations such as the Bangladesh Bar Council, the print and broadcast
media, community-based organizations (CBOs), women’s forums, local research
organizations and think tanks, student organizations, trade unions, and cultural groups
whose work helps to advance civil and political rights, equal access to justice, and the
rule of law, or the development of institutions of democracy, pluralism, and good
governance.
351. Neither CSOs nor NGOs are homogeneous. While pages could be devoted to
fine point distinctions without resolving the debate, for practical purposes it often difficult
to delineate significant differences. At the simplest level of taxonomy, CSOs tend to
focus on civil and political issues such as election monitoring or citizen participation in
public decision-making, while NGOs tend to concentrate on social and economic
development initiatives such as non-formal education, improved health service delivery,
and access to credit. Many NGOs are also beginning to engage in business
development and related activities. In recent years, there has been an increase in
individual organizations and civil society coalitions that focus on specific issues, such as
election monitoring or violence against women. Beyond these general distinctions the
lines blur, with the work of some civil society organizations spanning both poles and
working at virtually all points between.
352. However defined, civil society has played an important role in the history of East
Bengal from the East Pakistan period through modern times. It was active in the Bengali
language movement of the 1950s, the independence movement that led to the
establishment of Bangladesh in 1971, and the popular unrest that led to the collapse of
For a detailed discussion of civil society in Bangladesh, see Harry Blair (1997), “Civil Society, Democratic
Development and International Donors in Bangladesh”, mimeo; and K.W. Stiles (1999), “Democratic
Alliances: NGOs, Donors and Civil Society in Bangladesh”, mimeo. Cited in Asian Development Bank
(2001), Bangladesh: The State of Governance—A Report for the Asian Development Bank, Manila, at 2729. In Stiles’s view, civil society falls into two groups: conservative (business community) and progressive
(mass social movements). Blair delineates civil society as NGOs that are concerned with influencing state
policies and are autonomous from the state and political parties, excluding those that are concerned only
with service delivery, relief, or productivity functions.
154
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the second marshal law regime in 1991. Civil society plays an increasingly active role in
strengthening governance in Bangladesh, through education, monitoring, policy
advocacy, training of candidates, elected members, and government officials at the
national and local level, and facilitation of public-private dialogue on national
development issues. NGOs generally enjoy a high degree of public recognition and
support for their role in national development efforts. While the media continues to be
generally supportive of NGOs, there is scope for more thoughtful reporting on NGO
activities and their impact, and opportunities for NGOs to take a lead role in sharing
information on the nuances of their work.
353. Several issues arise in assessing the role and impact of civil society initiatives
through the lens of governance. They include the varying temper of relations between
government and civil society, which range from sharp divisions on certain issues to
excellent collaborative working relations in advancing common interests; partisan
political tensions within the NGO community and their implications for the work of civil
society; and efforts to strike an optimal balance between government regulation of
NGOs and other civil society organizations and the assumption of internal governance
responsibilities by civil society organizations. The following sections focus on current
governance issues affecting NGOs and the media.
2. Non-Governmental Organizations (NGOs)
a. Growth of the NGO sector
354. From its origins in the years immediately following Independence, the NGO
sector in Bangladesh has grown to enormous size and scope of activity. NGOs play a
central role in national development efforts, complementing government efforts to
promote national development and poverty reduction. The activities in which NGOs
engage include group formation, micro-credit, formal and non-formal education, health
and nutrition, maternal and child health, family planning, women's development,
agriculture, poultry and livestock, fisheries, forestry, environmental management and
resource conservation, water supply and sanitation, community legal service delivery
and alternative dispute resolution, land reform, and specialized services such as
telecommunications and banking.155 In 1994, NGOs were estimated to work in 78
percent of villages in Bangladesh, benefiting 24 million people. Nine years later, the
geographic outreach and beneficiary coverage of NGOs is even more extensive. 156
NGO development assistance models have proved so effective in Bangladesh that they
are now replicated in other developing countries throughout the world.
Some
Bangladeshi NGOs have even begun to implement programs or provide technical
assistance directly in other countries. Factors that have contributed to the growth of
NGOs include, inter alia: (i) the inability of Government to single-handedly meet the
challenges of development and poverty reduction; and (ii) the preference of development
partners to channel foreign assistance for certain activities through NGOs.157
155
The World Bank (1996), Pursuing Common Goals: Strengthening Relations between Government and
Development NGOs in Bangladesh, University Press Limited, Dhaka, at 5
156 Ibid at 2.
157 Ibid at 5-6.
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b. Relationship between the Government and NGOs
355. Subject to occasional differences in perspective or orientation, the respective
strengths and interests of Government and NGOs are in most instances complementary
and mutually reinforcing. The Government of Bangladesh has responsibility for overall
national development, while NGOs focus on specific development issues. Government
can raise funds through tax revenues and other sources, while NGOs are dependent on
contributions or income earning business initiatives. While the Government is bound by
rules and regulations to which it is held accountable, NGOs operations tend to be
considerably less formal and more flexible. 158 Given the structural differences between
Government and NGOs, it is important that their respective strengths be optimized
through complementary or joint initiatives.159
356. There are many instances of successful partnerships between Government and
NGOs in meeting common development goals in the fields of education, health and
family planning, resettlement, and disaster management.160 Working relations take a
variety of forms, including sub-contracting of NGO services by Government, joint
implementation, and government investment in NGO activities. In some cases, including
family planning, Government and NGOs occasionally exchange working areas, with
NGOs assuming temporary responsibility for development activities in an area formerly
managed by the Government, to increase performance, while government agencies
assume responsibility for program areas in which NGOs have developed working
relations with beneficiary communities. Government-NGO partnerships have been
particularly successful in the social sectors, including health and education, and less
successful in land, water, or forest resource management, where vested interests are
not always consistent with development goals.161
c. Composition
357. A survey of non-profit organizations conducted by the Bangladesh Bureau of
Statistics in 1996-97 classified them according to the following categories: professional
associations, trade unions, employees’ associations, non-governmental organizations,
voluntary organizations, religious institutions, clubs, cultural institutions, and others. The
report estimated that there were a total of 206,142 non-profit organizations, 92 percent
of which were religious organizations.162
d. Regulation of non-profit organizations
358. Non-profit organizations are regulated through a two-pronged legal framework
that combines laws governing the incorporation and legal status of non-profits and laws
that govern their relationship with government.
While there is no registration
requirement if an organization seeks neither legal status nor financial assistance from
government or external sources, in practice most non-profits pursue some form of legal
registration.163
158
Ibid at 2.
Ibid at 3.
160 Ibid at 16.
161 Ibid at 17.
162 Bangladesh Bureau of Statistics (1998), Report on Survey of Private, Non-Profit Institutions in
Bangladesh 1996-97.
163 The World Bank (1996), Pursuing Common Goals: Strengthening Relations between Government and
159
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359. Incorporation: The most commonly used laws for incorporation of non-profit
organizations are the Societies Registration Act of 1861164; the Trusts Act of 1882165; the
Cooperative Societies Act of 1925166; and the Companies Act of 1913167.168
360. Regulation of NGOs: Several laws and ordinances require NGOs to register with
government agencies regardless of their legal status. The majority of NGOs are covered
by the Voluntary Social Welfare Agencies (Regulation and Control) Ordinance. The
Ordinance imposes mandatory registration of voluntary associations that are established
to provide welfare services that benefit certain groups. As administrator of the
Ordinance, the Department of Social Welfare is authorized to suspend the governing
body of an NGO without right of appeal. The Foreign Donations (Voluntary Activities
Regulation) Ordinance 1978169 monitors and controls the flow of foreign funds to the
voluntary sector. No individual or organization can receive a foreign donation for any
voluntary activity without prior government approval.
To obtain approval, an
organization must first register with the NGO Affairs Bureau, then secure separate
approval for every individual donation.
The Foreign Contribution (Regulation)
Ordinance, 1982—an amendment to the Foreign Donations (Regulation) Ordinance
1978—expands the scope of the Ordinance to cover foreign contributions of any kind.
No citizen or organization is permitted to receive any foreign funds without prior
approval.
361. The provisions of both these ordinances were incorporated in the Constitution by
successive amendments. They empower the Government to monitor the flow of foreign
funds to the non-profit sector, while retaining capacity to regulate the actual flow of funds
and to prevent funds from reaching certain organizations whose activities are considered
detrimental to the interests of the State. The Ministry of Social Affairs recently reported
that, as of April 2003, nearly 27,000 NGOs are registered with the Directorate of Social
Services. Problems encountered in the application of the various laws largely arise
from the fact that the objectives of the traditional regulatory laws do not fit the objectives
of contemporary NGOs.170
362. NGO Affairs Bureau: The NGO Affairs Bureau was established in 1990 as onestop authority for the implementation and enforcement of laws that regulate NGOs.
Registration with the Bureau is compulsory for all organizations that receive foreign
Development NGOs in Bangladesh, Dhaka, University Press Limited, at 21.
164 The Societies Registration Act is the oldest and most common legal basis for incorporating civil
associations or charitable societies, including those engaged in the promotion of science or culture,
education, or medical services. Registration under the Act in administered by the Registrar of Societies,
under the Ministry of Commerce.
165 The Trusts Act is used by development NGOs as one of the most streamlined processes for attaining
legal status. It is administered by the Registrar of Trust or Magistrate, with no formal involvement by a
government agency.
166 The Cooperative Societies Act, created specifically for a specialized form of commercial entity, covers
some NGOs.
167 As amended 1994.
168 Although the Companies Act is primarily concerned with legal status for private trading companies,
sections 26 and 27 permit the registration of non-profit companies according to specified terms. The Act
covers development NGOs that engaged in commercial activities on a non-profit basis. It is administered by
Registrar of Joint Stock Companies under Ministry of Commerce.
169 As amended 1982.
170 The World Bank (1996), Pursuing Common Goals: Strengthening Relations between Government and
Development NGOs in Bangladesh, Dhaka, University Press Limited, at 22.
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funds. The responsibilities of the Bureau include, inter alia: registering NGOs;
processing and approving NGO project proposals and releasing funds; approving
appointments and terms of service of expatriate advisors or consultants; scrutinizing and
evaluating statements and reports filed by NGOs; coordinating, monitoring, inspecting,
and assessing NGO programs; and performing a variety of financial oversight and audit
functions. Approximately 1,591 NGOs are registered with the Bureau.
363. Registration with the Bureau is conditional on prior approval of the Ministry of
Home Affairs, as well as at least one additional ministry whose sectoral responsibilities
are sufficiently connected to the program focus of an applicant organization. Applicant
NGOs must submit a five-year plan, a separate project proposal for which foreign
funding is sought, and a letter of intent from the donor organization. Steps have been
taken over the last few years to reduce the procedural requirements for registration and
funding approval. While the registration process should in principle take only 45 days to
complete, in practice it typically requires several weeks or months.
Following
registration, a separate approval stage commences for the receipt of foreign funds. The
Bureau requires that approved funds be received through a designated bank account.
NGOs are further required to submit an annual audit report prepared by an auditor that is
included in the Bureau’s list of accredited firms. While these oversight mechanisms are
essential, present bureaucratic delays reduce the efficiency of NGO service delivery and
reduce the capacity of the NGO Affairs Bureau to assume a more strategic role in
national development.171
3. Internal Governance of NGOs
a. Overview
364. The program planning, implementation, management, and fundraising capacities
that have distinguished the work of NGOs in social service delivery and other functions
are not always matched by rigorous internal governance practices. While some
organizations strictly adhere to internal constitutional mandates, independent oversight
by diligent executive boards, and other internal governance standards that encompass
program management and financial compliance, others tend to operate on a more
informal institutional basis. Examples of concern to donors include centralization of
decision-making authority in a single, senior individual, with inadequate opportunities for
mid-level professional staff to prepare for future leadership roles through the exercise of
independent decision-making and professional development training. Weak internal
governance standards leave even the most capable organizations vulnerable to
allegations of financial impropriety. Even if an allegation proves baseless, the formal
investigation that it typically triggers at the instance of donor partners can interrupt the
work of an organization and the smaller local partner organizations that depend on the
larger organization for resources or technical guidance and deprive beneficiary
communities of services on which they depend. Improved internal governance
standards will help guard against problems of this kind.
365. With the exception of membership organizations, NGOs are not required by law
or by their articles of association to be accountable to the beneficiary communities or
other constituents whom they serve. While many NGOs place increasing emphasis on
consultation with beneficiaries, some organizations take the view that they are best
171
The World Bank (1996), Pursuing Common Goals, at 31.
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positioned to judge the needs of beneficiary communities without need for
consultation.172 As a hallmark of good governance, stakeholder consultation and inputs
in the program planning and decision-making of NGOs is the equivalent of citizen
participation in the work of public institutions, and should be emphasized by donors and
beneficiary communities in their respective dealings with NGOs.
b. Balancing independence and oversight
366. Successive governments have been generally supportive of the work of NGOs.
This support recognizes the leadership role that NGOs have played in development
assistance and social service delivery in particular areas. In some instances, NGOs
have actually enjoyed greater success than government in meeting desired development
goals, based on their efficiency, nimble responsiveness to program opportunities,
knowledge of the local working environment, and good faith working relations with
beneficiary communities. There are also many examples of successful partnerships
between government and NGOs. In some instances, government counterparts have
been content to let NGOs play a lead role in particular sectors, confident that they will
meet their objectives at high a standard and enable government agencies to concentrate
efforts and resources in complementary areas.
367. Since the establishment of the NGO Affairs Bureau, there has been a persistent
debate regarding the appropriate role of the State in regulating the NGO community.
The Government makes a convincing case for the importance of monitoring and
regulating a large civil society sector in which substantial donor and domestic
investments are made. The NGO community, in turn, makes a persuasive case for the
value of streamlining registration, reporting, and other oversight procedures to ensure
that regulatory requirements are efficiently met without unduly impeding the work of
NGOs. The international donor community has followed this debate with keen interest.
Donors have offered suggestions and inputs on the appropriate balance to be struck
between rigor and practical efficiency in the registration process, recognizing the
registration and oversight are essential but that overly bureaucratic procedures sap the
efficiency of NGO services. There is also a concern that what passes as registration
may in some cases be more of a blunt control over the activities of NGOs. Ultimately,
both Government and NGOs should be required to make certain concessions in the
interest of a productive working relationship from which they mutually benefit. The
adoption of sound internal governance standards by NGOs and other forms of selfregulation should strengthen the case for greater efficiency in regulatory and reporting
mechanisms, although there will always be a need for responsible government oversight
of the NGO sector.
368. In November 2001 a Cabinet Committee was appointed to prepare draft policy to
guide NGOs. While there has been considerable speculation regarding the content of
the draft recommendations, few details have reached the public domain to date. The
establishment of a Government-NGO Consultative Council (GNCC) in 1996 was
welcomed as a forum for open dialogue between government and NGOs on variety of
issues of common interest, including improvements in the enabling environment for NGO
activities. Little is heard of the GNCC today, although it could conceivably play an
important role in reducing current tensions within the NGO community and between
172
Ibid at 38.
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NGOs and the Government, as described below. The umbrella Association of
Development Agencies in Bangladesh (ADAB) adopted a Code of Ethics for NGO
members in 1994 that was well received by member organizations and donors. To date,
no universal Code of Ethics has been adopted to guide the internal governance of all
members of the NGO community.
c. Current tensions within the NGO community
369. For many years, NGOs addressed common sectoral issues and interests through
the coordinating role of ADAB. The core functions of ADAB include coordination, sector
monitoring, networking, liaison, and policy advocacy.173 The overall effectiveness of
ADAB was rarely disturbed by the kinds of minor tensions and rivalries that inevitably
occur among organizations that compete for a modest share of limited government and
donor resources. While NGOs continue to collaborate through ADAB and other
mechanisms, partisan tensions within the NGO community have reached unprecedented
levels in the last few years, with implications for the work of NGOs. A second umbrella
organization, the Federation of NGOs in Bangladesh (FNB), has recently emerged as a
product of these tensions. While the situation is highly sensitive, development partners
should encourage local efforts to reduce divisive tensions and to ensure that the good
work of the NGO community continues to benefit the poor, women, and other
disadvantaged groups.
4. The Role of NGOs in Promoting Good Governance
370. While NGOs continue to focus primarily on development assistance work, many
organizations are increasingly active in governance reform. Examples include election
monitoring and voter education, consumer protection, community legal services and
alternative dispute resolution, corruption prevention, environmental protection and
resource management, women’s rights and empowerment, and local governance.
Although there are many different approaches to governance reform, each one viable in
its own right, some of the most striking and successful governance work has been
undertaken by NGOs and community-based organizations that work in collaboration with
public institutions and make a determined effort to engage with public officials and to
understand the challenges that they face in meeting citizen demands and expectations.
This effort has led to program initiatives that forge collaborative linkages and improved
avenues of communication between citizens and communities and the public institutions
that serve them, particularly in the context of local government. Through their close
contact with beneficiary communities, NGOs have a clear understanding of the ways in
which governance constraints affect local development initiatives. They draw on this
knowledge in working with local branches of central government agencies and local
government bodies at the grassroots. Within the context of their day-to-day work,
several large NGOs have established policy or advocacy units that focus on the dynamic
of working relations with government and recommend steps to be taken to enhance
these collaborative relations.
371. It is impossible to define an appropriate balance between the objective informal,
horizontal accountability role of NGOs in monitoring the performance of public agencies
and good faith collaboration with government agencies and officials, since
173
Ibid at 33.
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circumstances and needs vary from case to case. Government agencies at all levels
have been criticized by civil society organizations on occasion for poor performance or
lack of transparency and accountability. Although objective scrutiny is important in
identifying weaknesses in development management, public institutions do not reform
themselves without constructive inputs from a broader community of stakeholders,
including civil society. Experience attests that civil society oversight functions such as
election monitoring, research on the impact of corruption, or efforts to enhance local
governance are particularly effective when they culminate in practical suggestions for
government counterparts. Thoughtful feedback and practical reform suggestions tend to
be much better received and acted upon by public officials and agencies than sharp
criticism alone. Suggestions and guidance of this kind have an important place in
corruption watch, court watch, and similar monitoring initiatives, independent budget
review, or other civil society functions that enhance informal, horizontal accountability.
5. Issue and Opportunities for Reform
372. NGOs have played an important role in national development efforts and will
continue to do so in future. The NGO sector has grown in size and complexity, which
poses a combination of external regulatory and internal governance challenges. NGOs
have a proven capacity to respond to issues and opportunities at a pace that
government agencies are often unable to match, drawing on their knowledge of local
issues and goodwill relations with beneficiary communities. While this feature will
continue to distinguish the work of NGOs, many organizations have reached a size and
funding level that calls for special attention to internal governance mechanisms and
procedures. As the NGO community continues to grow, the Government should in turn
review current registration and oversight procedures in consultation with the NGO
community and identify ways in which registration and oversight procedures can be
streamlined without compromising the essential regulatory role of the Government.
Donors are ideally positioned to play an objective, facilitating role in this dialogue.
a. Review and refinement of regulatory procedures
373. As a first priority, existing laws and regulations should be harmonized to remove
inconsistencies and introduce provisions that better reflect the nature and functions of
contemporary NGOs.174 Additional efforts should be taken to streamline the efficiency of
existing regulatory, monitoring, and reporting procedures and to help facilitate broader
regulatory reform initiatives. For example, steps should be taken to refine the existing
registration and oversight functions of the NGO Affairs Bureau and the requirements for
NGO reporting on activities for which foreign funds are received. The goal of this effort
should be to reduce present delays in the time taken to complete initial registration or to
secure subsequent approval for the receipt of foreign funds. Opportunities may be
explored to introduce eGovernment applications to facilitate greater transparency and
efficiency in NGO registration and approval procedures.
b. Internal governance
374. While internal governance reform of NGOs is properly a local initiative, there is
scope for development partners to encourage and help facilitate reform efforts through
dialogue, training, and other technical assistance. In conducting due diligence reviews
174
Ibid at 26.
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of prospective NGO partners, donors have long emphasized financial management and
other key institutional capacities. Recently, they have begun to focus on broader
institutional considerations such as gender policies. Donor considerations should
logically extend to a similar review of corporate governance practices, together with
positive, good faith feedback and suggestions to local partners on how to strengthen
internal governance structures and procedures. Donors whose support to NGOs
includes a combination of program assistance and institutional capacity development are
encouraged to place greater emphasis on internal governance procedures and to
provide the resources and technical support that local NGO partners need to strengthen
current practices. This will help to ensure the positive impact of donor contributions, as
well as assist NGO partners to diversify their funding bases through support from
multiple donors.
c. Promote NGO oversight role and collaborative initiatives
375. NGOs and other civil society organizations are ideally positioned to complement
formal mechanisms for monitoring public sector performance and accountability, as key
actors in a framework of vertical and horizontal accountability. The effective role of civil
society organizations in election monitoring and other coalition oversight functions, and
the credibility and respect that TIB has earned through objective reporting on the nature
and impact of corruption, are two examples of the many ways in which civil society helps
to promote accountability in development management. Similarly, civil society has
played an important role in facilitating improved governance practices in a variety of
areas, including consumer protection, access to justice, environmental conservation and
resource management, and local governance reform. Donors should expand their
support for civil society work in the field of governance, with a particular emphasis on
program activities that facilitate improved communication, coordination, and
collaboration between communities and government agencies, particularly at the local
government level.
376. Donors should be particularly conscious of differences in the capacities of large,
national-level NGOs involved in governance work and those of smaller organizations
that work at the grassroots. Collaborative linkages and efficient lines of communication
should be established between national-level organizations and counterparts working at
the community level. Activities may include the establishment of networks to facilitate
information flow, meet technical assistance needs, and otherwise nurture the capacity of
smaller organizations to engage in local governance reform, corruption prevention, and
other governance initiatives at the community level.
B. Media
1. Composition of the Media
a. Print media
377. The local print media has reached a size that is no longer easy to measure.
Current estimates provided by the State Minister of Information indicate that a total of
1,526 newspapers and periodicals are published on a regular basis. These include 346
dailies, 651 weeklies, 171 fortnightlies, 316 monthlies, and 42 quarterly journals. Most
print publications are privately owned. Under the Press and Publication Ordinance,
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1974, anyone who wishes to start a newspaper is required to obtain a declaration from a
District Commissioner.175
b. Radio
378. The State-owned Bangladesh Radio operates 11 stations. Three channels are
broadcast from the national transmission center in Dhaka, while other ten 10 stations are
based in major communities around the country. Total transmission per day is 170
hours, or an average of 15 hours per station, with a combination of music, drama, news,
and talk shows.176
c. Television
379. Television has traditionally been the exclusive domain of government.
Bangladesh Television operates two stations in Dhaka and Chittagong, and transmits
through 11 relay stations across the country. It broadcasts approximately 66 hours of
programming per day, combining domestic (70 to 75 percent) and foreign (25 to 30
percent) content.177 The first private television station was launched in 2000. Three
others followed, one of which was suspended by government order on the basis of
alleged irregularities in procurement actions. Households in Dhaka and other large cities
that can afford cable or satellite television service receive up to 60 programs from
around the world, including international cable news broadcasts.
2. Government Oversight of the Media
380. Article 39 of the Constitution guarantees freedom of expression and freedom of
the press, subject to any reasonable restrictions imposed by law. The print and
broadcast media are free to report news and opinion as they see fit, subject to certain
exceptions. Direct government control of the media is minimal, although the state
continues to indirectly regulate freedom of expression through the application of certain
laws.178 With the growth of the private sector, government advertising revenues are no
longer as important as they once were to the economic health of newspapers. While it
is perceived that advertising revenues were once used as an indirect means to ensure
that media reporting was not overly critical of government policy, the view today is that it
is no longer a significant factor. While a certain degree of government oversight
remains, particularly in the case of electronic media, the media enjoys greater freedom
today than at any point in the past. Most newspapers tend to endorse the broad policies
of the Government, but are prepared to publish editorial opinions or investigative reports
that speak candidly about particular policies or actions of government.
3. Substance in Media Reporting
381. While the print media is largely free, the substantive quality and content of
reporting varies significantly across the sector. News coverage and editorial opinions in
the leading Bangla and English-language dailies has become increasingly thoughtful.
Several newspapers have begun to publish feature articles on key governance issues
175
International IDEA and Department of Peace and Conflict Studies, University of Dhaka (2002), State of
Democracy in Bangladesh, at 110.
176 Ibid at 111-12.
177 Ibid at 112.
178 Criminal Penal Codes 500 and 501.
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and to convene roundtable forums in collaboration with civil society organizations.
These innovations reflect a growing appreciation of the role of the media in facilitating
informed public dialogue on important governance, economic development, and other
issues, and in assuming an informal, horizontal oversight function that contributes to
improved accountability of public institutions and officials. Unfortunately, the high
standards set in some quarters are not reflected throughout the media. As a result,
popular media reporting tends to focus on sensational issues and disturbing images of
crime, violence, or human suffering rather than thoughtful, objective analysis of issues.
382. In the last decade substantial investments have been made in professional
development training for print and broadcast journalists and editors by international
donor agencies and local media organizations.
Donor support has included
international, regional, and domestic training and exchange programs on general and
specialized reporting, including investigative journalism; technical assistance by
international media professionals and scholars; specialty training on strategies for
enhanced advertising revenues (in the expectation that increased revenues will facilitate
increased investment in professional development); and exposure of journalists to select
development, economic, or other issues.
383. The approval of private television networks has raised the standard of television
news coverage. This includes simple innovations such as the welcome shift from
traditional voice-over newsreel footage of senior government officials conducting their
daily schedule of public appearances, with no hint of substantive analysis, to
international standard reporting, feature stories, and news talk shows in which public
officials are interviewed and invited to comment on policy issues.
4. Issues and Opportunities for Reform
a. Freedom of information
384. The report of the Public Administration Reform Commission (PARC) underlined
the need to make public information more widely accessible by breaking with the
traditional classification of government information as state secrets. The PARC report
included proposed draft legislation for a Freedom of Information Act that would balance
the free flow of information with reasonable protection of certain categories of
information. As in other countries that have moved to enact FOI legislation, Bangladesh
should aim for the norm in which open flow and exchange of information is the standard
practice, to which certain restrictions may apply in special circumstances, reversing the
tradition norm that treats all information as confidential. Enactment of FOI legislation
would require corresponding revision or repeal of the Official Secrets Act, 1923 and the
Government Servants Conduct Rules, 1979.
b. Professional development training and media forums
385.
While donor assistance has had a positive impact on the quality and substance
of reporting, continued investment is needed. Professional development opportunities
should be extended to journalists and the editors who assign journalists to cover
particular issues and are positioned to influence the substance of reporting. There is a
particular need to develop the substantive knowledge and analytical capacity of
journalists in specialty governance issues, including law and justice, corruption, and
public financial management. Improvements in the substance of media reporting of
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governance issues will contribute to an environment of improved transparency,
accountability, and public participation in decision-making.
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CHAPTER VIII
CORRUPTION
A. Introduction
1. Bangladesh’s Experience with Corruption Prevention
386. This chapter reviews corruption in public administration. It identifies the
institutional and policy dimensions of corruption in Bangladesh and proposes a mix of
practical strategies for corruption prevention. The chapter begins by identifying the key
sources of corruption, the briefly describes the historical experience with corruption
prevention in Bangladesh. It concludes by presenting a potential framework for
corruption prevention efforts and discussing specific reform initiatives.
387. While there is no universally accepted definition of corruption, the ADB defines
the term in summary as “the abuse of public or private office for personal gain,” and
more comprehensively as “involv[ing] behavior on the part of officials in the public and
private sectors, in which they improperly and unlawfully enrich themselves and/or those
close to them, or induce others to do so, by misusing the position in which they are
placed.”179
For practical purposes, corruption embraces bribery, extortion,
embezzlement, nepotism, cronyism, and fraud—all of which are perceived to occur
within the public administration of Bangladesh.
388. Bangladesh is perceived to be one of the most corrupt countries in the world,
consistently scoring at or near the bottom of international perception surveys of
corruption. For example, it ranked last among nations surveyed in Transparency
International (TI)’s Corruption Perceptions Index in 2001, 2002, and 2003.180 Corruption
is perceived to occur in virtually every sector of government, at both national and local
levels.
389. While an understanding of corruption and the design and implementation of
effective strategies to reduce it will ultimately benefit from greater empirical study, there
is little debate concerning the negative impact of corruption in Bangladesh. Research
conducted by Transparency International Bangladesh (TIB) suggests that public officials
pocketed an estimated $728 million (roughly ten percent of the national budget) in
government funds in 440 cases of corruption in 2002.181 While this estimate is
significant in its own right, the consequences of corruption extend far beyond
deadweight loss of this kind. Corruption restrains markets by increasing capital costs
and driving away foreign investment. It increases transaction costs in both the public
and private sectors, cripples the judicial process, undermines law and order, depletes
fiscal resources, creates delays and deep inefficiencies in government, constrains
infrastructure development, reduces the impact of foreign assistance, and degrades
human capital. In addition, corruption undermines the development of good governance
standards in Bangladesh by eroding public confidence in public institutions and officials.
179
Asian Development Bank (1998), Anticorruption Policy, at 9-10.
Historical data for the Corruption Perceptions Index is available at www.transparency.org Bangladesh
ranked last among 102 countries surveyed in 2002 and last among 91 countries surveyed in 2001.
181 Transparency International Bangladesh, 4th News Scan Analysis, on http://www.ti-bangladesh.org.
180
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390. The prevalent economic basis for concern about corruption is that it tends to
have a negative impact on economic growth and investment, as well as on the overall
social welfare of citizens. A 1995 study by Paolo Martin provided empirical analysis of
the effects of corruption in focusing on the connection between corruption and
investment. The study suggested that if Bangladesh were to have improved the integrity
and efficiency of its bureaucracy by just one standard index deviation at that time, its
investment rate would have risen by five percent and its yearly GDP growth rate would
have increased by more than half a percent.182 The related prevalent political reason for
concern about corruption is that it can undermine the legitimacy and political stability of
regimes.
B. Sources and Incidence of Corruption in Government
1. Enabling Environment for Corruption
391. Corruption in Bangladesh can be traced to the early years following
Independence, when the country’s socialist government undertook a broad-scale
program of nationalization. Though the State no longer dominates the economy as it
once did, it continues to play a prominent role. The combined effects of inefficiency and
manipulation by vested interests within the public administration and low salaries and
professional incentives create opportunities for corruption to flourish. Other factors
underpin corruption in public administration. Though the following list is by no means
exhaustive, it is representative of the perceived key sources of corruption in government
functions today.
392. Financing of Political Parties: As in many developing countries, political parties
in Bangladesh must finance their activities entirely from private contributions. With no
effective regulation of the campaign finance process in the country, the perception is that
there are abundant opportunities for contributors and special interest groups to secure
influence over government decision-making.
Government officials enjoy almost
complete short-term job security, reducing their accountability to the general public.
Paradoxically, the same political environment means that officials sense a lack of longterm job security. This translates into reduced accountability and additional avenues of
financial influence.
393. Public Financial Management: Many of Bangladesh’s public institutions cannot
meet their expenditure obligations under official budget allocations. Reports suggest
that, as a result, government offices are frequently compelled to finance significant
portions of their activities through offline sources.183
This practice, lacking in
accountability, creates opportunities for corruption. Poor auditing and accounting
standards, coupled with weakness in associated watchdog organizations such as the
Paulo Mauro (1995), “Corruption, Country Risk, and Growth” in Quarterly Journal of EconomicsI, Volume
3, No. 442, at 687-712. Since the 1995 study, Mauro has conducted other extensive studies across
countries that further demonstrate that high levels of corruption are associated with lower levels of
investment as a share of GDP. Paolo Mauro (1997), “The Effects of Corruption on Growth, Investment, and
Government Expenditure: A Cross-Country Analysis” in Kimberly Elliot ed. (1997), Corruption in the World
Economy, Washington, DC, Institute for International Economics.
183 For example, at some police stations in the country, officers reportedly lack adequate government funds
to furnish their offices, and instead must use their own funds and those of people who seek assistance
simply to purchase office supplies and furniture. See Sabrina Karim and Aminul Islam, “Jobs Given, Why
Ask for a Seat?,” The Daily Star, Dec. 15, 2002.
182
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Comptroller and Auditor General, further enhance opportunities for officials to engage in
corrupt behavior.
394. Staffing and Politicization of the Civil Service: Several factors give rise to
corruption within the Bangladesh civil service. Salaries lag far behind comparable
positions in the private sector, while recruitment, appointment, and promotion
procedures emphasize patronage over merit, skewing incentives and encouraging rent
seeking behavior. While research increasingly suggests that salary increases will not
automatically reduce the incidence of corruption, there is doubt that many public
employees, particularly those in the lower ranks, face serious difficulties in maintaining a
reasonable standard of living for their families at their present salary levels. Outside
interference in the bureaucracy as a conduit of special interests is facilitated by a high
number of partisan appointments in the Civil Service. In addition, World Bank analysis
of civil service hiring indicates that recruits now appear to prefer positions in revenue
services to the traditionally more prestigious administrative and foreign services. 184 This
suggests that the civil service has begun to attract some individuals for whom rentearning potential is more important than considerations of public service, professional
pride, or prestige.
395. Regulatory Management and Quality: Regulations produced by ministries and
regulatory agencies frequently overlap and contradict one another and are often vaguely
or ambiguously worded. Moreover, regulations are often designed to empower the
government agency that issues them rather than to provide predictable and fair guidance
to those who are bound to observe regulations in their business or personal affairs. This
regulatory environment creates substantial scope for discretion in regulatory
enforcement by government officials, which is frequently abused.
396. Public Procurement Processes: As noted previously, the public procurement
process is perceived to be a center of corruption in Bangladesh. Deficiencies in the
procurement process that give rise to corruption include: an underdeveloped legal
framework governing public sector procurement; outdated, complex, and often
inconsistent procurement rules and procedures among various agencies; inadequate
human resource capacity (as reflected in poor quality bidding documents and bid
evaluation); and an absence of mechanisms for ensuring transparency and
accountability. 185 The current system accommodates nepotism, bribery, and intentional
delays in the bidding process. The Government has recently formulated a public
procurement regulation that, at the time of writing, is waiting to be vetted by the Ministry
of Law, Justice, and Parliamentary Affairs. This initiative is the product of a Public
Procurement Reform Project jointly undertaken by the Government and the World Bank.
The Project itself aims to improve efficiency, transparency, and accountability through: (i)
the establishment of a Central Procurement Technical Unit (CPTU) to provide
technical/professional assistance and stimulate procurement reforms; (ii) implementation
of procurement reforms and rules and procedures, and standardization of bidding
documents; and (iii) improvement of procurement management capacity through regular
training programs and the development of monitoring mechanisms within the CPTU.186
184
The World Bank (1996), Government that Works, at 68.
The World Bank (2003), Unsustainable Public Sector Spending and Weak Governance Report, Chapter
3, Section 70, web version.
186 Project information available at http://www4.worldbank.org/sprojects/Project.asp?pid=P075016.
185
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397. Lack of Judicial Independence: The authority of the judicial system is seriously
undermined by lack of structural independence. The lower tier magistracy, which is
responsible for trying criminal cases, is staffed by Assistant Commissioners of the
Bangladesh civil service. As members of the civil service, magistrates fall under the
administrative control of the executive and not the judiciary, which creates opportunities
for and inferences of external influence or interference. With the exception of the
Supreme Court, the judiciary does not have its own budgetary allocation; funding for the
courts is channeled through the Ministry of Law, Justice, and Parliamentary Affairs. As
a result, the courts have difficulty maintaining the perception of independence from the
political process, a critical component of effectiveness.
398. Official Secrecy: Public accountability is further undermined by the traditional
practice of closed-door policy development, legal drafting, and public decision-making,
as well as the official practice of classifying all government business as “Top Secret,”
“Secret,” “Confidential,” or “Restricted.” As a result of this classification system, official
information cannot be disclosed without authorization. Under the Official Secrets Act of
1923, unauthorized disclosure is a criminal offense.
2. Incidence of Corruption
399. Analyses of corruption often distinguish “petty” corruption from “grand’”
corruption. Petty corruption usually involves small sums of money paid to junior officials
to expedite administrative procedures by cutting through bureaucratic red tape and
streamlining registrations, license applications, or other transactions that would
otherwise take a long time to complete. Grand corruption, on the other hand, generally
refers to large-scale bribes to public officials to obtain lucrative business contracts. It is
generally perceived that corruption in Bangladesh spans petty through grand corruption.
400. For example, there are frequent allegations of petty corruption in the justice
sector. Police are perceived to routinely engage in illegal toll taking by demanding
payments from motorists to avoid citations for alleged traffic violations. False arrest and
extortion are also common. At many police stations, citizens are required to make illegal
payments simply to report a crime or to initiate an investigation. In the judicial sector,
there are reports of litigants being required to make unofficial payments to court staff,
officers of the court, or witnesses in order for their claims to proceed through the judicial
system. Although the Supreme Court continues to be held in high regard, survey reports
suggest that corruption is endemic within the lower judiciary.187
401. Declining public confidence in justice sector institutions reflects perceptions of
the high incidence of corruption, discouraging many potential litigants from pursuing
formal solutions to their legal problems. In a 1998 survey, 52 percent of respondents
perceived “heavy or malignant corruption” in the police force. Today, a full two-thirds of
households surveyed perceive this to be the case.188 Likewise, 57 percent of
households now perceive that the courts are burdened by “heavy corruption,” a 16-point
increase over 1998 survey results.189
187
See for example The World Bank (2002), Bangladesh: Improving Governance for Reducing Poverty, at
iv. See also Transparency International Bangladesh (1997), Survey on Corruption in Bangladesh, Phase 2;
December 1997, available at (http://www.ti-bangladesh.org/docs/survey/ phase2.htm).
188 The World Bank (2002), Bangladesh: Improving Governance for Reducing Poverty, at 5-7.
189 Ibid at 10.
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402. In addition to the justice sector, petty corruption figures prominently in other
areas. Extra payments made to gain admission to medical facilities and educational
institutions are reported to be routine, as are bribes for the connection and maintenance
of basic utilities.190 Citizens report that they are frequently required to pay bribes to gain
access to public transportation.191 Although the costs of petty corruption at the level of
individual transactions are low, the overall costs to the population are high. To the
extent that petty corruption interferes with delivery of basic services to the poor—as is
perceived to be the case with health and education—its consequences are substantial.
403. Grand corruption in Bangladesh is also a systemic problem that results in largescale losses of public revenues.
It figures prominently in the public procurement
process, where bribes and kickbacks in excess of 15 percent are perceived to be
common and tender assessment frequently leads to the selection of bids that are not the
most competitive. Grand corruption is also associated with the Customs Department,
where “speed money” is frequently reported as a means of expediting import valuation
and processing. In public works administration, it occurs in the form of over-invoicing of
materials and work completed. In the energy sector, frequent interruptions in the supply
of electricity in Dhaka and other major cities are perceived to reflect illegal, bribe-induced
diversions of electricity by officials of public utility companies, rather than the strained
capacity to which they are typically attributed.
C. Corruption Prevention
1. Experience to Date
404. As international survey rankings suggest, corruption prevention efforts have
achieved only modest impact in Bangladesh to date. There are a number of reasons for
this. The Government’s primary corruption prevention agent, the Bureau of AntiCorruption (BAC), is perceived as being handicapped by corrupt practices within its own
institutional structure.
Its effectiveness is further undermined by its structural
relationship to the executive. To initiate investigations and prosecutions, the BAC must
first obtain permission from the Prime Minister’s Office. As a result, few cases filed with
the BAC reach the court system, while those that do are often perceived to have been
brought forward at significant cost and to have been driven by suspect motives. In
addition, watchdog organizations—including the Public Accounts Committee (PAC) of
Parliament and the Office of the Comptroller and Auditor General (CA&G)—also lack the
structural authority to enforce their decisions.
405. The Government has achieved some notable successes in reducing corruption in
the public sector. For example, the 2001 elections were declared generally free and fair
by domestic monitors and international observers. In the justice sector, the Supreme
Court of Bangladesh is highly regarded for its integrity, impartiality, and transparency.
Other encouraging, but as yet incomplete, corruption prevention activities include the
recent engagement of independent audit firms to monitor tax evasion, the establishment
of parliamentary oversight committees to scrutinize public expenditure decisions, and
190
The British Broadcasting Corporation (BBC) recently reported on a 60-year old retired man who, having
refused to pay bribes as a matter of principle, waited 27 years for a household telephone connection.
Alistair Lawson, “The Phone Wait is Over,” June 23, 2003, available at (http://news.bbc.co.uk/
2/hi/south_asia/3014674.stm).
191 Transparency International Bangladesh (1997), Survey on Corruption in Bangladesh, Phase 2
(http://www.ti-bangladesh.org/docs/survey/phase2.htm
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recent, provisional approval of the establishment of an Independent Anti-Corruption
Commission (IACC), which is expected to assume many functions of the BAC. 192
2. Approaches to Corruption Prevention
406. There is a clear role for society as a whole—and for political leadership in
particular—in combating corruption. Comparative case studies suggest that the
development of a sound infrastructure to counter corruption comprising institutions, laws,
and regulations are most likely to result in lower levels of corruption when the
infrastructure is supported by unwavering political commitment.193
407. Economists often point to excessive state intervention and bureaucratic rents as
primary causes of corruption, while political scientists often view corruption as a
consequence of lack of accountability. Experience has demonstrated that neither
economic liberalization nor democratization efforts reduce corruption in and of
themselves. In the circumstances, something more than privatization is required to
reduce corruption and realize the benefits of a less corrupt society in the long term. For
example, regulatory capacity should be strengthened in key agencies as a starting point
and foundation for subsequent reforms. The behavior of market actors needs to be
constrained by a combination of government and business associations. Lessons
learned from other Asian countries suggest that strategies that strive for “pure virtue” in
public administration—such as sharp-toothed prosecution of past corrupt acts—are
neither realistic nor attainable. Corruption prevention initiatives should ideally be shaped
by pragmatic results rather than purely virtuous goals, with the aim of building a
functional state that serves citizen needs.
408. For example, drawing on experience from Bolivia and other countries, Robert
Klitgaard, Ronald MacLean-Abaroa, and Lindsey Parris have proposed that a pragmatic
approach to corruption in the context of municipal governance be guided by the following
principles: 194

Organize government efforts through coordination and targeting of focal points;

Pick ‘low-hanging fruit’—that is, choose problems that are relatively easy to fix and
most likely to serve as replicable models for broader reform initiatives that follow;

Align efforts with favorable national, international, private, and non-governmental
forces;

Break the culture of impunity by frying “big fish”—that is, bring senior public officials
to justice, rather than focusing legal actions on junior officials who bear legal
sanctions in lieu of those senior to them;
192
In July 2003, the Cabinet approved the draft Anti-Corruption Bill 2003, which provides for the creation of
an Independent Anti Corruption Commission. The draft bill is now before Parliament.
193 See Nathaniel Leff, “Economic Development Through Bureaucratic Corruption,” American Behavioral
Scientist, 8-14 (1964); and Alberto Ades and Rafael Di Tella, “The Causes and Consequences of
Corruption: A Review of Recent Empirical Contributions,” IDS Bulletin, Volume 27, No. 2, at 6-11 (1996).
194 Robert Klitgaard, Ronald MacLean-Abaroa, and H. Lindsey Parris (2000), Corrupt Cities: A Practical
Guide to Cure and Prevention, Oakland, California/Washington, DC, ICS Press/The World Bank, Chapter 5,
at 67-94.
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
Raise the profile of anti-corruption efforts through the media, education, and public
forums;

Do something good for government officials before seeming to attack them, based
on the logic that they will be more responsive to incentives than to sharp criticism;

Strengthen institutional capacity through a combination of “supply-side measures”
and, in particular, new systems of information and incentives;

Consider how an anticorruption campaign can secure broader and deeper changes
in government (such as client consultation, pay-for-performance, or well regulated
privatization initiatives).
409. Examples of popular corruption prevention techniques include: (i) reducing the
discretionary authority of bureaucrats and increasing levels of competition; (ii) improving
the enforcement machinery in corruption detection, apprehension, conviction, and penal
sanction; and (iii) raising the salaries of public officials and introducing performancebased incentives such as in-service training opportunities, merit-basic performance
review and promotion procedures, and opportunities for public officials to assume a
more active role in designing and implementing reform strategies.
410. Within this basic framework of action, experience affirms the value of targeting
key agencies and actors to develop and defend “clean” institutions and expand them
over time. Broader good governance and civil society agendas are useful, but the need
to achieve early, and in some instances discrete, success that emphasizes results over
rhetoric in establishing credibility is fundamental.
Sweeping reform efforts can
overwhelm government capacity and obscure priorities. In determining where to focus
efforts, there may be value in focusing on corruption prone agencies that are responsible
for generating revenues or with which the public most frequently interacts, such as public
utilities, licensing agencies, and health and educational institutions. It is also important
to develop strategies that will facilitate greater transparency in public decision-making,
procurement, and other actions, through a combination of independent watchdog
functions and incentives that encourage public officials to work in a more transparent
manner, including the acknowledgment and modest reward of fine performance and
demonstrated standards of integrity.
411. Civil society has played an important role in raising public awareness of
corruption and promoting open public dialogue on the issue in Bangladesh—in candid
terms that were rarely spoken a decade ago. From its origins in the mid-1990s, TIB has
played a particularly significant role in raising issues and understanding and in
stimulating higher public expectations regarding the standards of integrity to which public
officials and agencies should be held accountable. While TIB has taken the initiative of
extending its work beyond Dhaka through the establishment of “Communities of
Concerned Citizens,” and several media organizations have produced reports on
corruption, counter corruption efforts have yet to mobilize a broad national network of
organizations, particularly at the grassroots. In some Asian countries, including
Indonesia, the Philippines, and Thailand, broader civil society networks have been
established that link various organizations that share a common commitment to
corruption prevention. Examples include corruption prevention partnerships between the
private sector and civil society, establishment of umbrella organizations that coordinate
information sharing among organizations with a common interest in corruption
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prevention, and organizations whose research and program activities in select
communities have enhanced understanding of the particular forms that corruption takes
in different locations or contexts, which can be best addressed by specially designed
programs.
412. The Center for Policy Dialogue,195 among others, has emphasized that
considerable scope and opportunity exists for similar networking and collaborative
counter corruption initiatives in Bangladesh. In the last two decades, NGOs have been
very effective in incorporating new activities such as community legal service delivery or
election monitoring as components of integrated community development strategies.
They are encouraged to further expand the scope of their work to include informal
education and facilitation of dialogue on corruption, and to undertake program activities
that aim to reduce corruption as it occurs in the communities that they serve.
D. Issues and Opportunities for Reform
413. There are three interdependent strands upon which the Government is
encouraged to focus corruption prevention efforts. First, continued attention must be
paid to creating an efficient and transparent policy environment. Introduction of certain
economic policies, such as reduction of trade restrictions, subsidies and price controls,
and the further privatization of Bangladesh’s state-owned industries, will help to reduce
opportunities for corruption. Financial sector reforms of this kind are discussed in
Chapter V and Chapter IX.
414. Second, greater market orientation and reduced intervention are alone
insufficient to solve the problem of corruption. Institutional reforms deserve attention at
a level equal to or greater than the enabling policy environment. Public institutions
frequently lack the capacity to adequately address certain forms of corruption. In the
circumstances, resources should ideally be redeployed to certain existing regulatory and
oversight institutions, while concurrent steps are taken to establish new institutions such
as an Office of Ombudsman and an Independent Anti-Corruption Commission.
In
keeping with a central theme of this assessment, the Government is urged to target
areas of comparative advantage in making these resource allocation decisions. For
example, there is considerable scope for collaborative working relations between
government, civil society, and the private sector to address corruption through
approaches that have not been taken to date. Third, regulatory reforms should be
implemented to strengthen the transparency and predictability of regulations. Fourth, it
is suggested that approaches to corruption require a general shift in mindset to
emphasize prevention over enforcement. While preventive actions are critically
important, the creation of appropriate incentive structures within existing institutions are
likely to have a greater impact in reducing corruption within the public administration in
the long term, by focusing on the root causes rather than the case-by-case incidence of
corrupt practices.
195
CPD (2001), Policy Brief on Governance, Task Force on Governance (Draft Report), at 24.
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1. Policy Reforms
a. Campaign and political party finance reform
415. Comprehensive campaign finance reforms should be implemented to limit the
influence of special interests in the electoral process. Elements of this reform should
include caps on contributions and increased transparency in the fundraising process (for
example, regular publication of all contributions made to political parties). State
financing of elections should also be considered in principle, although it is acknowledged
that this would place a substantial burden on the national economy.
b. Amendment of Article 70 of the Constitution
416. Section 70 of the Constitution, which requires an elected Member of Parliament
to vacate his seat if he resigns from or votes against the political party that nominated
him as a candidate for election, should be repealed or amended.
c. Modification or repeal of the Official Secrets Act of 1923
417. The Official Secrets Act of 1923 should be modified or repealed to permit greater
transparency in government decision-making. Comprehensive freedom of information
and whistleblower legislation should also be enacted.
2. Institutional Reforms
a. Establishment of an Independent Anti-Corruption Commission
418. The Government should move forward with its plans to establish an IACC. A
draft enabling bill for the commission is now before Parliament. As it is currently
construed, the IACC would be empowered to investigate corruption-related allegations
and to pursue corruption charges against all officials, elected and appointed, at all levels,
without executive approval. Also under the Government’s plan, members of the IACC
would each serve a four year term, and could only be removed if a Supreme Judicial
Council indicts them. The Supreme Judicial Council would be comprised of the chief
justice and two senior members of the Appellate Division of the Supreme Court. It is
essential that the IACC receive adequate financial allocations to perform its substantial
responsibilities; anything less and the effectiveness of the IACC will be compromised.
This point is further discussed below in connection with ADB’s planned Good
Governance Technical Assistance, to be launched in late 2003
b. Establishment of the Office of Ombudsman
419. The Government’s historical experience with the concept of an Office of
Ombudsman is an example of how not to proceed with governance reform. Article 77 of
the Constitution provides for the creation of the Office of an Ombudsman with power to
investigate any actions taken by a Ministry, public officer, or statutory public authority.
An Ombudsman Act was passed in 1980, together with rules for the appointment of the
Ombudsman and the powers and functions to be exercised by the office. Beyond these
initial steps, implementing legislation for the Ombudsman Act has never been passed,
and thus the office has never been established. In addition to enacting such legislation,
the Ombudsman Act should be amended to provide for the creation of a network of
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Ombudsman units to serve as watchdogs over a number of government functions,
including the issuing of passports, building permits and other licenses, and land
registration. As with the IACC, the Office of the Ombudsman will require adequate
funding to fulfill its important oversight role.
c. Comprehensive civil service reform
420. A number of steps should be taken to reduce the incentives and opportunities for
corruption within the civil service. First, the existing Code of Conduct of civil servants
should be reviewed and updated to more clearly define standards of performance and
accountability. In the revised Code, promotion and other performance incentives196 and
disciplinary actions should be linked to service delivery. Second, the Government
should develop and implement new personnel management practices that are guided by
the aim of introducing greater transparency and fairness in pubic administration, as a
means of advancing its endorsement of the ADB-OECD Anti-Corruption Action Plan for
Asia and the Pacific. The new personnel management and compensation system that
scheduled for introduction in 2003 is expected to include monetization of all benefits,
merit-based promotion, and adoption of a manpower rationalization scheme.197 This is a
welcome and encouraging step.
d. Reform of the judiciary and enhanced judicial independence
421. The practice of appointing magistrates from the administrative service should be
phased out. A Judicial Service Commission (JSC) composed of judges of the Supreme
Court and subordinate courts and bureaucrats should be established, per the directives
of several recent Supreme Court rulings.198 Formation of a JSC, an advisory body to
the President, would function as a countervailing force to present practices in the
appointment, promotion, and disciplining of judges. In lieu of appointments by the
Ministry of Law and Parliamentary Affairs, competitive entry examinations to the judiciary
should be introduced. In addition, all branches of the judiciary should receive an
independent budget allocation. Subject to the broader consideration of reducing the
overall costs of public administration, judicial pay structure should be increased to help
insulate the judiciary from bribery and other forms of corruption. A Code of Conduct for
the judiciary, based in part on best practices of the Supreme Court, should also be
developed and adopted.
e. Reform of the public procurement system
422. Existing rules, regulations, and procurement procedures should be updated to
accord with international procurement standards. Full use should be made of
eGovernment technologies in the procurement process, including computerization of the
tendering process and of inventory control systems, to improve transparency. 199 As
noted previously, the Government and World Bank, through the Public Procurement
Reform Project, have recently drafted public procurement regulations designed to
promote greater transparency, accountability, and efficiency in the public procurement
196
For example, The World Bank has proposed the creation of a mechanism for fast-track promotions and
performance-based salary determination.
197 The World Bank-Asian Development Bank (2003), Public Expenditure Review, at 47.
198 See discussion of Masdar Hossain judgment in Chapter VI.
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process.200 These regulations, however, are awaiting action by the Ministry of Law,
Justice, and Parliamentary Affairs.
f. Strengthening the Office of the Comptroller and Auditor General
423. TIB has proposed a number of recommendations to promote transparency and
accountability (and thereby reduce opportunities for corruption) within the Office of the
C&AG.201 These changes include improved staff training, increased computerization of
auditing activities, implementation of performance audits to augment conventional
financial audits, implementation of punitive actions should responses to preliminary audit
observations not be provided, and improved procedures for the recruitment, promotion
and transfer of officers within the office. TIB has also recommended routine audits of the
C&AG by a reputed audit firm—a practice that the Government has already undertaken
with some positive effect in the area of tax administration.
g. Reducing corruption in development programs
424. Development partners are especially concerned about the impact of corruption
on the quality of ongoing development work in Bangladesh. Various steps can be taken
to address this issue, including open and candid dialogue between donors and the
counterpart public agencies with which they work at the sectoral and individual project
level on actions that can be taken to reduce corruption in the context of specific
development initiatives. Steps should also be taken to expand and strengthen the
application of independent, external performance audit mechanisms as a complement to
internal quality control measures. Performance audit mechanisms should extend
beyond basic financial auditing, assessing compliance and the effectiveness of current
practices against established procedures and standards at all phases in the project
management cycle (including survey, design, procurement, construction, and other
steps). They should also include strict standards for the enforcement of audit findings,
complemented by efforts to work with government counterparts to identify and resolve
weaknesses. These functions should ideally be linked to the work of the IACC, to
ensure that corruption control measures are effective and consistently applied across a
variety of sectors.
3. Regulatory Reforms
425. Regulations and administrative procedures across Government should be
streamlined to reduce bureaucratic discretion and opportunities for corruption. In
addition, regulatory impact assessments should be conducted to ensure that the new
regulations and amendments to existing regulations have a beneficial net effect and are
not simply a means of securing or transferring rents.
199
See the further discussion of eGovernment applications in Chapter XV.
Project information available at http://www4.worldbank.org/sprojects/Project.asp?pid=P075016 (visited
Aug. 13, 2003).
201 Transparency International Bangladesh (2002), Office of the Comptroller and Auditor General (CAG)
Working Paper.
200
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4. Partnerships in Corruption Prevention
426. The strategic challenge facing ADB and other development partners is to identify
select areas on which to focus and coordinate their corruption prevention work with
Government and local stakeholders. From ADB’s perspective, a corruption prevention
initiative should ideally combine: (i) economic and poverty impact, through focus on a
potentially dynamic segment of the economy in which corruption prevention activities
can stimulate economic growth and reduce poverty; (ii) systemic impact, by facilitating
private-public partnerships in corruption prevention; (iii) an effective institutional focus in
corruption prevention efforts; and (iv) a practical sectoral emphasis in which initial pilot
activities can lay the groundwork and secure leverage for more ambitious activities to
follow.
427. While a comprehensive corruption prevention strategy should ideally include
support for legal and other measures that will demonstrate the resolve of reform efforts
by bringing convicted offenders to justice, limited resources may be best applied in
helping to secure positive changes in the institutional culture of public agencies, through
incentive mechanisms that will discourage corrupt practices and instill and recognize
higher standards of professional integrity in public service.
428. ADB governance specialists have recently focused particular attention on the
secured financing202 sector and the establishment of an Independent Anti Corruption
Commission as a dual focus for a pilot corruption prevention initiative that will meet the
above criteria and lay the groundwork for additional work to follow. Secured financing
institutions that extend credit against movable property collateral (including non-bank
financial institutions like lease financing companies) are a small but growing part of the
credit market.203 SME entrepreneurs whose securable holdings tend to be moveable
property rather than land hold great potential in stimulating national economic growth.
Beyond the immediate benefits that debtors and creditors will derive from a reformed
secured transactions regime, there is a need to ensure that their dynamic impact on the
economy is not hindered by corruption. To this end, support for improved containment
of corruption through good governance in secured financing can help to promote
economic growth and reduce poverty in Bangladesh.204
429. A sound corruption prevention initiative should ideally address both the private
and public sector. ADB has found good potential to facilitate collaborative linkages
between private sector secured financing institutions and public sector anticorruption
efforts through the medium of secured financing. A reformed legal framework for
secured financing can advance systemic anticorruption efforts in several ways. For
example, enabling secured creditors to statutorily trace movable property collateral that
is converted into cash or other assets can foster the development of forensic accounting
202
Secured financing means financing against movable property collateral like equipment, vehicles, shares,
software, and other property that is not land.
203 Although the Bangladesh credit market is still over-dependent on bank credit (approximately 27 percent
of gross domestic product (GDP) as of FY2002) as compared with non-bank credit (approximately 3 percent
of GDP as of FY2002), there is substantial opportunity for growth of non-bank financial institutions as
indicated by the increasing number of such institutions that register under the Financial Institutions Act of
1993 and by the growth rate of leasing companies.
204 See Asian Development Bank (2003), Technical Assistance to the People’s Republic of Bangladesh for
Supporting Good Governance Initiatives, TAR: BAN 37017 (July 2003), at 1-2.
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capacity and benchmark forensic accounting in public sector corruption prevention under
legislation like the Anti Money Laundering Act adopted in 2002. In addition, greater
transparency in public registration and the introduction of self-enforcement mechanisms
as a time and cost efficient alternative to an overburdened formal judicial system can
drive private sector creditors and debtors away from non-transparent and corrupt
settlement methods. In addition, greater sensitivity of secured financing institutions to
corrupt transactions involving movable property through the application of self-regulatory
governance indicators (based on governance surveys) will make them more responsive
to initiatives to prevent public sector corruption, which may require swift disclosure of
bank accounts or freezing of accounts.205
430. As noted previously, the Bureau of Anti Corruption must seek permission from
the Prime Minister’s Office for investigations and prosecutions, which often results in
delays and raises the perception of partisan influence in anticorruption initiatives. There
is a need for a more credible institutional focus on public sector anticorruption that
provides for integrity, independence, and effectiveness—a role that can be best fulfilled
by an Independent Anti Corruption Commission. In addition, the development of a
credible anticorruption strategy should focus in operational terms on prevention of
corruption. This will require high-level support for corruption prevention operations
through the coordinated efforts of existing anticorruption agencies and sector-specific
implementation in line ministries.206 Further details of ADB’s plans for work in this area
are provided in Chapter XV.
5. Advancing eGovernment Applications
431. The challenges of governance reform in Bangladesh and the resulting constraints
on economic growth underline the urgent need for new approaches to corruption
prevention and broader governance reform. The experiences of other developing
countries have demonstrated that strategic and pragmatic applications of information
technology in government, also known as eGovernment, can be a powerful catalyst for
reform, in combination with other reform efforts. Despite welcome initiatives such as the
formation of a senior level Task Force on Information Technology and development of a
draft bill on information technology policy, the formulation and adoption of a National
Science and Technology Policy, few of the eGovernment initiatives undertaken in
Bangladesh to date have achieved significant progress. For Bangladesh to achieve the
benefits of eGovernment, there will need to be a new strategy for accelerating its
adoption, ideally through a combination of activities and partnerships targeting the
private sector, civil society, and government.
432. There is a clear consensus among reform-minded public officials and members
of the private sector, civil society, and the donor community that weak governance
undermines efforts to accelerate economic growth in Bangladesh. In recent years,
advocates of governance reform have recognized opportunities to increase transparency
and accountability and improve the business environment through the strategic
application of eGovernment. In part inspired by regional success stories, a group of
senior government officials have advocated for sweeping adoption of information
technology within government. Donor agencies have also suggested eGovernment as a
catalyst for broader reforms. For example, the World Bank’s Taming Leviathan:
205
206
Ibid at 1-4.
Ibid at 1-4.
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Reforming Governance in Bangladesh devotes a chapter to the potential for supporting
reform through eGovernment.
433. eGovernment presents an innovative approach to addressing the traditional
problems of governance. Across Asia, there is growing recognition that eGovernment
can lead to an improved business environment, greater citizen access to government
services and information, reduced levels of corruption, and significant improvements in
administrative efficiency. For example, when citizens and small businesses apply for
licenses or permits in Seoul, they now have the option of bypassing the corruption ridden
and time-consuming application process by utilizing the OPEN system, an online
eGovernment system for obtaining licenses and permits. Within two years following the
launch of the OPEN system, corruption in the application process was reduced from 38
percent to 6 percent of applications. In the Indian state of Andhra Pradesh, citizens can
now pay their utilities, apply for licenses, and complete most government related
transactions in one short visit to a computerized government center. Previously, the
simplest transactions required hours of waiting in line, as well as under-the-table
payments to expedite the process. In Bulacan Province in the Philippines, it is now
possible to calculate and submit property taxes online, avoiding corrupt and arduous
traditional processes. In each of these cases, eGovernment applications have had a
significant impact on citizens and businesses, dramatically reducing the time and
resources required to interact with government, lowering rates of corruption, and raising
public confidence in the integrity and efficiency of government.
434. In many cases, eGovernment has brought new momentum to the process of
government reform. Across Asia, many reform-minded government officials, NGOs, and
business leaders consider IT-related projects more viable and attractive than traditional
reform projects that have tended to prescribe sweeping institutional or systemic change
without practical points of focus. These advocates are beginning to incorporate
eGovernment into their strategies for reform. IT-related projects tend to have a more
broad-based appeal factor, as they increase the perception among citizens and business
that a government is modernizing and moving forward. Several leaders in the region
have capitalized on this perception by making eGovernment a central theme in their
agenda, and styling themselves as tech-savvy modern leaders.
As a result,
eGovernment has served as a catalyst and alternative to the resistance or apathy that
previously constrained reform programs.
435. Regional eGovernment initiatives to streamline and computerize government
functions have led to dramatic improvements in the business environment, especially for
small and medium enterprises. Traditionally, many Asian businesses have been
plagued by costly and time-consuming interactions with government, particularly those
required to obtain permits or to participate in the government procurement process.
eGovernment applications have increased the transparency of government procedures
and reduced the discretion of officials, thereby lowering the cost and reducing time
required for interacting with government and allowing business leaders and
entrepreneurs to focus on their business. eGovernment has also provided significant
benefits for citizens, especially in the context of utility payments, processing of
identification cards, and land valuation and registration by reducing costs and
streamlining administrative procedures that formerly demanded substantial time, energy,
and patience.
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436. The greatest opportunities for eGovernment may lie at the local level. Local
governments tend to have more frequent contact with businesses and citizens than do
higher levels of government. As a result, improving the efficiency and transparency of
local government should have a more immediate and far-reaching impact on citizens
and the business environment. Furthermore, the politics of implementation are often
simpler at the local level, as champions have greater autonomy and can often push
more through without the interference of partisan politics. Local governments in
Bangladesh are increasingly forced to find innovative and cost-effective mechanisms for
interacting with constituents and managing their operations. eGovernment provides an
opportunity to do more with less, improving the level of service, while reducing costs and
increasing transparency. Although resource flows to local government bodies are
modest, eGovernment applications can take account of resource constraints, as well as
assist local government officials to access alternative resources.
437. How does the prospect of eGovernment application in Bangladesh compare with
opportunities and experience in other Asian countries? Despite a series of discrete
efforts, the track record of information technology (IT) related projects in government has
been very modest. Anecdotal evidence suggests that most eGovernment projects have
suffered from a history of failures, which has left reformers frustrated and donors
hesitant to invest in new projects. Over the past 10 years, many initiatives have been
plagued by the same recurring challenges. Ironically, most of these challenges are not
technical in nature, but instead result from shortcomings in government leadership, and
pervasive corruption. They include:

Resistance by Vested Interests: Many powerful vested interests stand in the way of
real change in government. Collusion between private interests and public officials is
perceived to be pervasive in Bangladesh. Realizing that a new system will increase
transparency and reduce the unchecked exercise of discretion that often leads to
corruption, reform-minded policy-makers and government leaders have been
stymied in their attempts to implement IT-related projects.

Specific Bureaucratic Resistance: Given the low salaries of the Bangladeshi civil
service, there is a perception that many government workers depend on rent-seeking
opportunities to supplement their income. The majority of these workers lack IT
skills and fear that they will be replaced by IT-literate employees or made redundant
by labor saving technologies. As a result, civil servants often resist eGovernment
projects.
Since user acceptance and cooperation is so critical to system
implementation, IT projects are extremely vulnerable to bureaucratic resistance.
Examples from India, the Philippines, and Thailand have shown that many projects
will fail when the users passively resist the project, complaining that the system is not
working or that they do not understand it, and return to the old off-line procedures. In
some cases, active sabotage of projects can quickly lead to failure, as users enter
inaccurate data or damage equipment.

Lack of Experience and Understanding Among Government Managers: In
Bangladesh, very few government decision-makers have direct experience with IT.
Many of the government managers who are not IT literate are inherently skeptical of
IT-related projects and will consciously avoid them. Those who agree to support
eGovernment projects almost invariably lack experience in IT systems planning,
implementation, and management. This lack of experience leads to poor decisions
and failed projects. For example, more than 95 percent of spending in government
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IT projects goes to hardware purchase, while the remaining 5 percent covers
software, training, and systems implementation services. The standard rule of thumb
followed by leading systems implementers in the global IT industry is that IT budgets
should be allotted on the basis of approximately 33 percent for software, 33 percent
for hardware, and 33 percent for training and implementation services. The complex
issues and processes involved in implementing an IT system require experienced
leadership, especially given the unique challenges of government adoption of IT.
Most Bangladeshi government leaders lack the required experience. While this
expertise can often be hired from the private sector, most eGovernment projects lack
the funding to afford the most capable consultants who command commensurately
high professional fees.

Overly Ambitious Projects: Many IT-related projects in Bangladesh have failed
because they attempted to address an overwhelming set of challenges that could
have been avoided with a more modest or sequential implementation. Grand
projects often overwhelm the limited institutional capacities, as well as providing
countless opportunities for those who seek to impede the implementation process,
effectively making a difficult task impossible.

Perceptions of Corruption in the Procurement Process: Several eGovernment
projects in Bangladesh have become bogged down in the procurement process,
leading to wasted resources and project cancellation. The process tends to be
extremely lengthy, often taking more than a year to complete. As a result, most IT
projects, especially those undertaken by national government, are behind schedule,
over budget, and of significantly lower quality than originally planned.
438. What factors will help eGovernment to take root and prove its potential in
Bangladesh? Experience has proven that informed, committed, and effective leadership
is a critical ingredient for progress in eGovernment. Where leadership exists, it must be
sustained and nourished. Furthermore, there is a need to directly address the
constraints to eGovernment to create an environment that is more conducive to future
projects.
Most of the successful projects undertaken in the region share a set of
common features that provide important lessons and insights for future eGovernment
initiatives. They include:

Informed, Determined, and Committed Leadership: Almost invariably, successful IT
projects have been championed by a strong, committed leader, whose vision and
ability to build support within government, secure the necessary funding, and
manage the project from beginning to end has ensured the success of the initiative.
In most cases, the leader can articulate the vision for the project, while engaging a
core team of experienced project managers and IT specialists who can take the lead
in implementation. Most importantly, the project champion must have the influence
to ensure cooperation among the government workers who will use the system, as
well as secure essential high-level support. In most cases, successful initiatives
have been implemented by forward-looking leaders who had the power to insist upon
change in the face of objections and obstructions of an unappreciative civil service.

Collaborative working relations between government and the private sector:
Increasingly, successful eGovernment projects have involved close collaboration
with the private sector. This collaboration can range from decision-support to
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wholesale outsourcing of the project. Recent innovations in partnerships of this kind
include the Build-Operate-Transfer model, where the private sector partner develops
and initially implements the system at its own expense, generating revenue on a
transaction fee basis. After a few years, the project operation and ownership is
transferred to the government, usually with a transition period in which the private
sector partner works closely with those who will assume leadership of the project
within government. This model allows government to provide improved services and
greater transparency through eGovernment, without the required up-front
investment. It also allows the IT private sector to penetrate the frequently large
government market for software and IT-related services.

Manageable Scope: Most successful projects have been initiated on a limited scale,
and then scaled up in accordance with a reasonable and manageable schedule.
Targeted pilot projects often benefit from a limited user population (and thus, limited
potential for internal resistance), and early success on the basis of defined targets
and milestones. Once success has been established and benefits have been
documented, these projects are much more likely to withstand the stronger
opposition that is likely to emerge with increasing scope.

Avoid Highly Politicized or Overly Sensitive Areas: The right choice of initiative is as
important as the time and energy invested. Projects that focus on politically sensitive
roles of government or processes that are vulnerable to corruption will tend to meet
fierce political and bureaucratic resistance, dramatically reducing the chances of
success. Projects that take the “safer” route, by focusing on government processes
that are important in their own right but do not affect a critical mass of political
interests, tend to have better chances of survival. Likewise, projects that target a
process or function of government that is under the direct supervision of the project
champion tend to benefit from their immediate authority and strong influence.
439. With support from The Asia Foundation, the Bangladesh Enterprise Institute
(BEI) is presently conducting a study on experience in, and lessons learned from,
eGovernment initiatives in Bangladesh. The study will: (i) identify the recurring, critical
constraints to the adoption of eGovernment in Bangladesh, especially those challenges
that are non-technical in nature; (ii) determine the various factors that contributed to the
success of eGovernment projects that have met or exceeded their objectives; (iii)
provide an empirical basis for the design and implementation of new program strategies
for accelerating the adoption of eGovernment in Bangladesh, through a combination of
private sector, civil society, and government targeted activities and partnerships; (iv)
identify, motivate, and support eGoverment champions; and (v) provide
recommendations on eGovernment initiatives that offer greatest potential to build on
lessons learned from past experience. The study will be completed in February 2004,
with the final report to be published and disseminated among stakeholders in
government, civil society, the private sector, and the donor community. It is hoped that
the findings and recommendations will contribute to the ongoing design and
implementation of pilot eGoverment initiatives at the national and local level, and help to
facilitate collaborative partnerships between government, the private sector, and civil
society in strengthening governance and reducing corruption through the application of
eGovernment.
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CHAPTER IX
FINANCIAL SECTOR
A. Introduction
440. During the 1980s and 1990s, many developing countries came to accept one of
the key precepts of what is known as the “Washington Consensus,” which holds that the
liberalization of the domestic financial sector plays a critical role in accelerating
economic growth. Among the prescribed policy reforms, opening the banking sector to
competition and facilitating the development of private equities markets were viewed as
the most important steps to increase the efficiency of capital mobilization and allocation
processes and to reduce the risk of partisan interference in those processes. The Asian
financial crisis of the late 1990s, however, highlighted one aspect of the Washington
Consensus that had been largely neglected by the donors and technical specialists that
had provided assistance on financial sector reform and the policymakers and
bureaucrats that implemented the reforms—namely, that financial sector liberalization
actually increases the need for prudent regulatory oversight. Today, Bangladesh’s
financial sector reform agenda needs to reflect not only the importance of increasing
competition as means of enhancing capital allocation processes, but also the need for
improved governance of the sector, consistent with the optimal role of the State.207
441. The Government of Bangladesh has traditionally played a central role in the
financial sector. The period immediately following Independence saw large-scale
nationalization and imposition of state controls. This reflected global trends in
governance and a desire to rectify societal inequalities that had emerged while the
country was part of Pakistan. The system of controls and incentives established within
the state-owned corporations often were weak. As a result, these enterprises did not
attract much investment, the Government was unable to ensure proper management,
and society did not benefit from economic growth. Subsequent governments have
placed greater emphasis on market-based incentives and private sector development.
This change in policy resulted from a combination of donor-led structural adjustment
loans, the lack of tangible growth results from previous policies, and Government’s
desire to seek economic growth through private incentives. While deregulation and
liberalization initiatives since the 1980s have advanced the development of a marketbased economy, with particular impact in trade and agriculture, the grip and incentive
structure of state control remain strong.
442. This chapter reviews the role of the State in setting, implementing, and enforcing
governance principles to create a policy environment that is conducive to investment and
economic growth. State-owned enterprises and privatization receive specific attention in
a note at the end of the chapter, in recognition of the unique set of governance issues
that they raise. The chapter focuses on governance issues that are critical to reforming
the financial sector, including those that relate to enhanced competition and to defining
the optimal role of the State.
207
Proper governance also requires adequate protections for borrower and other stakeholders in the
system, but in Bangladesh, the need for greater investment and more efficient lending practices generates a
reform agenda that will focus, at least in the short term, on providing better protection (and incentives) for
those with capital, both domestic and foreign, who would invest their resources in Bangladesh.
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B. Financial Sector Overview
1. Governance Issues
443. The scope of governance in the financial sector requires some preliminary
discussion, as there are many dimensions to the relationships involved. Governance
considerations focus on the rules required for the correct operation of a market economy
and on the implementation of those rules. As it is impossible to write rules of sufficient
scope and detail to cover every contingency or possibility, a certain measure of trust
among those engaged in financial transactions must also exist. In addition to rules and
trust, it is important to understand the economic climate in Bangladesh. The civil
service, much of the academic community, and many political leaders have long
believed in some form of socialism. This includes Government ownership of much of the
capital and the importance of striving towards a more equitable distribution of wealth and
income. These aspirations are a product of the history of the Pakistan era, when
Bangladesh (then East Pakistan) was inequitably treated, business in Pakistan was
largely controlled by large, private sector interests in West Pakistan, and poverty and
deprivation in East Pakistan were attributed to the colonial mentality of West Pakistan
and the private sector interests that seemingly served as instruments of exploitation.
This resulted in a culturally deep-seated distrust of private businesspersons, whose
interests and motivations were regarded with suspicion, in the belief that they were
contrary to public welfare. With the birth of Bangladesh in 1971, the traditional elites had
little confidence in the notion that the private sector could make an important contribution
to the public good by maximizing profits and accelerating economic growth. Instead,
public dialogue tended to focus on how to control and direct private investors. While
these attitudes are changing, substantial change is a long-term process. Together with
the challenge of poverty, such attitudes stimulate a tendency on the part of
entrepreneurs and investors on the one hand, and public officials on the other hand, to
manipulate the rules. The state of governance in the financial sector is shaped by these
attitudes and viewpoints. Moreover, inequities in salary scales within society in general,
and in the financial sector in particular, create opportunities for corruption.
444. While commitment to a socialist style society has now been abandoned, the
legacy remains in a financial system in which more than half of the assets are owned by
Government financial institutions, the stock exchanges are dominated by a Government
owned intermediary (the Investment Corporation of Bangladesh), and the insurance
sector is dominated by Government owned companies. As discussed in greater detail
below, this legacy undermines good governance and underlines the need for thoughtful
reflection on the appropriate role of the State, based on comparative advantages and
other considerations.
445. A second historical legacy is the late emergence of Muslim Bengali private
entrepreneurship, both in the financial and non-financial sectors. A long history under
British colonial rule, Pakistan colonialism, and the socialist legacy of South Asia has
systematically suppressed Bengali entrepreneurship. Exploited by two centuries of
colonialism and capitalism and scorned by the emergent bureaucracy, entrepreneurship
has only recently begun to develop. From this perspective, private sector development
is barely more than 20 years old. The 1980s saw the start up of many industries, but
large enterprise was very limited. The first private banks were established in 1983, the
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stock market began to expand only in the early 1990s, and private, non-bank financial
institutions only began to emerge in 1993. The habits of work, trust, risk, and judgment
take time to develop and there is much to learn in this transition process.
446. The central concern of governance in a market economy is that price signals
must direct the use of resources, and the signals must accurately reflect costs and
demands. Governance is constrained when resources are not properly directed by price
signals and when the signals are “noisy” and do not reflect the underlying economic
reality. How do these issues influence governance? These introductory observations
focus on the banking sector and the capital markets and separately on loan recovery.

Critical issues of governance in the banking sector (including non-bank financial
institutions) deal with the linkage between the Board of Directors and bank
executives. Broadly, these issues bear on Bangladesh Bank, government owned
banks, and private banks. The principal-agent problem takes a different form in each
of these institutions. Related issues include asymmetric information between bank
and borrowers and the varying forms of insider information and corruption that arise
in different types of banks.

Loan recovery problems are central to the commercial banks. Governance issues in
this area reflect a combination of corruption and a weak legal system. While the
volume of bad debts in the banking sector is not large enough to significantly
threaten the stability of the economy, it poses a serious obstacle to growth. For
more than 15 years the problems concerning loan recovery have had a strong
negative impact on the financial sector and the economy. This core problem, central
to any competitive market economy, is the critical governance issue.
447. While policy issues are inevitably relevant to analysis, this review does not deal
with policy in the financial sector except insofar as it touches specifically on governance.
The neglect of many policy issues does not mean these are not important, but rather that
there is no specific governance dimension.
448. Governance is strongly influenced by the capacity to implement laws, policies,
and reform measures. In Bangladesh there are many good laws, rules, and regulations,
but promulgation does not ensure successful implementation. The Bangladesh financial
sector has many examples of governance measures that are not successfully
implemented. This review begins with a discussion of why implementation generally
fails. Improvement of governance is not a question of coming up with better rules, but
rather implementing what is to be undertaken. As an example, the Money Loan Act
1991 is discussed in Box 1.
449. Implementation failures arise from five causes: (i) failure to understand why
things are the way they are; (ii) failure to concentrate effort on the most critical issues;
(iii) failure to confront the motives of key stakeholders; (iv) failure to understand the risk
taking preferences of those whose behavior one seeks to change; and (v) failure to
balance the importance of growth with issues of governance. It is often the case that
steps to improve governance go too far in restricting prospects for growth. The optimal
balance should always be borne in mind.
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2. Structure of the Financial Sector
450. The financial sector comprises scheduled banks (93.2 percent), insurance
companies (2.6 percent), finance companies, or non-banking financial institutions (1.4
percent), micro finance companies (2.8 percent), and the securities markets
(capitalization is 4.8 percent of the assets of the financial sector). The bracketed figures
refer to the share of assets in the financial sector as of the end of 2001. The banking
sector is by far the largest part of the financial sector.
Box 1
Implementation Issues
Money Loan Court 1991
The first Money Loan Court Act was passed in 1991. The intention of the Act
was to improve the recovery of loans by ensuring prompt disposal of cases and
making the appeal process more difficult by requiring 50 percent of the amount
of the judgment be deposited as a precondition for appeal.
Implementation followed, and by 1995 the average time required for judgment
was five years. This has declined somewhat, but still significantly exceeds the
statutory requirement of six months.
The courts repeated waived the
requirement for partial deposit as a condition for appeal. Finally, although many
judgments ordering payment were made, with the banks succeeding in virtually
all cases, execution decrees came very slowly. One estimate based on data
supplied by the banks indicated that the waiting time could be as long as 100
years to obtain an Execution Decree. Even after the Execution Decree, seizure
and disposal of assets proved difficult and actual collections under law were
very limited.
According to the Ministry of Law, Justice, and Parliamentary Affairs, no
procedural manuals were prepared, no systematic monitoring was done of
progress, no training of judges was undertaken, and courts hearing such cases
generally had other duties. The lawyers working for the commercial banks
found that there was very limited success in collecting loans. While the
difficulties with the Act were well understood by 1996, no improvement in
implementation or in the Act itself could be achieved.
A new version of the Act was passed in 2003. This revised law tries to
strengthen the law and the process, and attempts to correct the shortcomings of
the earlier version of the law. Extensive training of lawyers and bankers has
taken place. It remains to be seen if implementation of the new law will be more
successful. Implementation requires not only the action of individual courts but
the support and attention of the entire judiciary working together to achieve the
purpose of this legislation. The first version of the law failed to achieve its
original purpose due to the weak implementation effort. While the Act was
technically well drafted, little attention was paid to the practical issues of
collecting the loans.
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451.
The banking sector comprises seven types of institutions:

Nationalized Commercial Banks (NCBs): There are three such banks established by
the Government, which serve as commercial banks in taking deposits and making
loans. One of the three, Sonali Bank, also acts as the agent of Bangladesh Bank in
fiscal affairs.

Government Owned Commercial Banks: There is one bank of this kind, Rupali
Bank, a limited company of which the Government holds the majority of shares.
Rupali is often called an NCB although its legal structure is different.

Specialized Development Banks for Industry: There are three of these banks. Two
are typical industrial credit banks, vestiges of the period when such banks were seen
as the means of financing industry. The third, BASIC, a bank for small industry, was
an accidental offshoot of the collapse of BCCI. BCCI, through the BCCI Foundation,
had started a bank for small enterprises, which the Government of Bangladesh took
over when BCCI collapse. This was restructured into BASIC.

Specialized Development Banks for Agriculture: There are two of these banks. The
current structure of agricultural banking is accidental. The Government set about
breaking up the Bangladesh Krishi Bank (BKB) into four separate parts, one for each
major region of the country. After the establishment of the bank for the northwest
(the Rajshahi Krishi Unnayan Bank, or RAKUB), the process stopped, leaving two
banks, with BKB covering all of the country except the northwest.

Traditional Private Domestic Banks: There are 25 of these banks. Two of them are
denationalized banks, while the others have received licenses to operate. The first
ones were established in 1983. While these are private banks, the Government
owns a substantial share of some of them. There may be significant foreign
ownership of some of these banks but the banks are not branches of international
banks.

Islamic Private Domestic Banks: There are five of these banks, which follow rules of
Islamic Banking. One has majority foreign ownership. Several of the traditional
private domestic banks are establishing Islamic banking branches or have facilities
within their banks for Islamic banking.

Foreign Banks:
As of June 2003, ten foreign banks operate branches in
Bangladesh. One of them is an Islamic bank.
452. The central bank, Bangladesh Bank, is responsible for the supervision of the
banking system. It is also responsible for the supervision of the non-bank financial
institutions. There are 26 finance companies registered with Bangladesh Bank. These
are largely involved in leasing operations, although several are house-lending
institutions, including one owned by the Government. Some of the finance companies
have extensive foreign ownership. There are numerous micro finance institutions that
provide very small loans to poor persons, usually women—largely within a group
responsibility framework.
453. The insurance industry is small, with about 60 companies. Roughly half of these
specialize in life insurance, while the other half specialize in non-life products. The
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Controller of Insurance in the Ministry of Commerce supervises the industry. The capital
market comprises two exchanges that trade more or less the same companies;
numerous brokerages, the Investment Corporation of Bangladesh (which now has three
subsidiary companies), and several merchant banks supervised by the Securities and
Exchange Commission.
454. The past decade has seen the expansion and diversification of the financial
system with the issuance of more than 20 licenses for commercial banks, an increase in
the number of insurance companies, the growth of micro credit, and the emergence of
finance companies. In addition, the equity market has expanded significantly, both in
terms of service companies but also in the capitalization of the market. There has been
a significant transformation in the diversity and privatization of the financial sector.
C. Banking
1. Bangladesh Bank
455. Bangladesh Bank has primary responsibility for supervision of the banking
system and of non-banking financial institutions, with the exception of merchant banks
that are regulated by the Securities and Exchange Commission. This section is not
concerned with monetary policy problems and other issues related to the management
of the economy, but rather focuses on the governance issues of central bank autonomy,
internal affairs, and supervision functions.
456. External assessments of Bangladesh Bank by international finance institutions
have, on balance, been unfavorable. The concerns focus on the failure of Bangladesh
Bank, over the last decade, to exercise its supervisory powers to improve the condition
of the commercial banking sector. During the first Financial Sector Adjustment Credit,
the focus within Bangladesh Bank was on bank supervision and regulation and the
development of improved procedures and means for implementing monetary policy. The
working assumption of the planners was that Bangladesh Bank was in reasonable
condition, so that the major structural reform effort would focus on the nationalized
commercial banks (NCBs).
This assessment has subsequently changed, with
acknowledgment of the need for a modernization program within Bangladesh Bank.
This program is about to be undertaken with support from the World Bank. In
interpreting the following discussion of Bangladesh Bank, it is important to bear in mind
that the new project to strengthen it is only just getting underway. Accordingly, it will
take some time before any significant changes arise from the modernization and
computerization activities to be undertaken in the next few years.
a. Central bank autonomy
457. Central bank autonomy has been a focus of discussion for many years. The
Government has generally been unwilling to relax its control over Bangladesh Bank.
This control function covers monetary policy, exchange rates, and supervisory actions.
The Ministry of Finance has long argued that Bangladesh Bank is not strong enough to
be autonomous. Recent amendments to Bangladesh Bank’s enabling legislation have
created, at least on paper, greater independence.
458. Monetary Policy: The central bank will always accommodate the financing
requirements of the Government. For example, it is outside the power of Bangladesh
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Bank to determine the permitted deficit of the Government. While governors of
Bangladesh Bank can advise on this point, it is a political question rather than a
technical one. The real question is how much of this debt Bangladesh Bank is prepared
to sell to the banking sector. Generally Bangladesh Bank has been able to determine
this without much interference from the Ministry of Finance; however, the Minister of
Finance generally argues for keeping interest rates (and hence the cost of debt) low.
While changes in the bank rate are normally cleared with the Ministry, they have little
impact on the economy.
459. Exchange Rate: The Ministry of Finance controls exchange rate decisions. With
the floating of the Taka the issue has changed and Bangladesh Bank will determine the
exchange rate through its policy of buying or selling foreign exchange reserves. It
remains to be seen whether this reserve management policy will be autonomous.
460. Personnel Compensation: The government continues to limit general rates of
compensation, while allowing contracts for some staff for limited periods. There is no
sign that the government will relax its control over the salary structure of Bangladesh
Bank.
461. Supervisory Actions: Over the years the Government has played a quiet role in
supervisory actions. For example, real actions against the NCBs have not been allowed.
Another example is the unwillingness of the Government to permit the takeover of
private banks that are insolvent. Only in the case of BCCI, when closure was forced by
external circumstances, was a bank closed down, restructured, and restarted (Eastern
Bank); however, during most of the last decade the senior management of Bangladesh
Bank has been supportive of closure, so there is a common view regarding the
management of the problem banks.
462. Responsibility to Parliament: At present the central bank has virtually no
relationship with Parliament. Parliament does not deal with Bangladesh Bank as an
autonomous entity, but rather treats it as part of the Ministry of Finance. It exercises no
supervision over the budget, personnel compensation, or policy actions of Bangladesh
Bank. Autonomy of the central bank is possible in a democratic system, but is achieved
only over a long period during which the bank actually uses its independent powers.
Even when there is autonomy there must be accountability to Parliament. As
Bangladesh Bank increases its independence from the Ministry of Finance mechanisms
must be developed for it to be held accountable. These matters have yet to be worked
out. Legislative changes are necessary, but are not alone sufficient to secure autonomy.
The major issues of autonomy lie in personnel policies and supervision of the banking
system, particularly the NCBs. While the outlook is not bright for the first issue,
prospects are better in the second area. With increases in the power and autonomy of
Bangladesh Bank over the past decade, there is good potential for further improvements
in the future.
b. Internal governance of the central bank
463. Financial Condition: Little attention has been paid in the past to the financial
condition of Bangladesh Bank. Formally, its position is precarious in the sense that
there are very large assets in the form of outstanding advances to the agricultural credit
banks. These advances have little chance of being repaid and application of prudential
guidelines may well conclude that these assets must be written down. An audit of
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Bangladesh Bank is presently being conducted on the basis of international standards.
This is actually more of a formal issue than a substantive issue as Bangladesh Bank
generates a great deal of surplus that is turned over to the Government. At the same
time, it illustrates a lack of attention to the reality of financial conditions—an attitude that
some perceive as pervasive in a civil service raised on the notion that government can
do anything that it wishes and does not have to restrain itself by adherence to principles.
The audit of Bangladesh Bank will provide the final word, but appropriate treatment of
the advances to the specialized banks are likely to undermine the capital of Bangladesh
Bank.
464. Personnel Problems:
Personnel problems are the most serious internal
governance issues that Bangladesh Bank faces. Over the years, a personnel system
has evolved that would undermine the capacity of any institution. Before describing this
in detail, it is worth noting that, despite this problematic system, Bangladesh Bank has
been able to attract many talented staff. Through the careful attention of senior
managers, capable individuals were promoted more rapidly and have advanced to
positions of influence, despite problematic personnel rules.
465. The senior staff of Bangladesh Bank, comprising the Governor and the Deputy
Governors, has generally been appointed as follows. The Governor is recruited from
outside the central bank, typically from the civil service and often with a background in
finance. In recent years there have been three serving Deputy Governors—two
promoted from within the Bank and one appointed from outside. The latter has typically
come from the civil service or from the banking sector. The current outside Deputy
Governor is from the private banking sector. This system has worked very well.
466. The personnel system features relatively little lateral entry at the university
graduate and higher levels and very considerable promotion from the clerical level. This
has resulted in a bank that has some excellent officers but also a large number that are
not of acceptable quality for a central bank.
This system evolved following
Independence as a response to the lack of well-educated and trained candidates.
Issues of social justice and fairness and a flight from competition promoted this system.
While the personnel system was designed to avoid partisan interference, it has actually
promoted it. Promotions are made largely on the basis of seniority, although Annual
Confidential Reports play an important role. These reports have been degraded by
“grade inflation,” with most persons receiving exceptional marks. This system provides
great power to the supervisor and in the late 1980s there were reports of corrupt
practices. Promotion of a large number of clerks resulted in an increasing number of
officers, many of whom were assigned to bank inspection work. One of the so-called
“dumping grounds” was the Bank Inspection Department. This undermined the quality
and depth of the inspection process and has left an enduring problem for strengthening
Bangladesh Bank.
467. While labor action is in principle banned at Bangladesh Bank, there are several
staff organizations that are organized along partisan lines. These organizations are
prepared for confrontation and to engage in struggle against one other or for some
abstract principles. Apart from partisan agitation, the associations are also determined
to prevent reduction in the number of jobs. Bangladesh Bank has increasingly assigned
staff to the branches, removing many persons from the Head Office. For most staff, an
assignment in one of the branches is a necessary condition for promotion to higher
management levels. The personnel system that has grown up is perceived to be
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corrupt, with allegations of outside interference in promotion and staff assignments.
While this is not unusual in Bangladeshi organizations, it is an important dimension of
Bangladesh Bank’s personnel problems.
468. In summary, Bangladesh Bank has a staff that lacks an adequate number of
officials with university degrees or higher levels of training. The seniority system makes
it difficult to build strong departments. Not only do the best people not come up for
appointment, it is difficult to place a person in a particular position and keep him or her
there for a long period to build the capacity of a department. Efforts to improve
governance, particularly with respect to supervision and inspection, are very difficult
since the quality staff required for such challenging assignments is not available.
469. Finally the compensation levels for central bank staff are insufficient. The
situation is getting worse as compensation in the private banks steadily rises. The
General Manager of a department in Bangladesh Bank may receive the equivalent of
Taka 20,000 per month (including transportation, housing, and medical care, all on a tax
free basis). This is equivalent to perhaps 15 percent of the compensation of a
comparable position in the private banking system. Such differences will undermine
Bangladesh Bank’s regulatory functions. The same situation applies in the Securities
and Exchange Commission (SEC) and in the government owned banks.
470. Corruption: The central bank is perceived to be relatively free of corruption. While
World Bank surveys suggest that this contrasts with other parts of the banking system,
corruption of some kind or other is generally believed to occur in some departments.
The vulnerability of inspection departments to corruption is the most serious. For
example, there is a perception that branch level inspections are often influenced by side
payments to the inspector. Since corruption of this kind is associated with encouraging
omissions or neglecting to notice something, it is relatively easy to effect as no positive
action is required. While corruption of some kind or other is perceived to occur in the
Personnel Department with respect to assignments, it is not particularly serious. For
much of the Bank there is no formal set of procedural manuals. This permits
considerable discretion in actions taken and creates opportunities for corruption. In sum,
while corruption occurs in Bangladesh Bank, it appears to be not sufficiently serious to
undermine the fundamental purpose and fabric of the institution.
471. Board of Directors: The role of the Board in the affairs of the central bank is
gradually strengthening. With monetary policy directed by the Ministry of Finance and
bank regulation and supervision either controlled openly in the case of the NCBs or
indirectly in the case of private banks, the Board has traditionally had little independent
role to play. While it has gradually been drawn closer to the center of things, the Board
still plays a relatively peripheral role, with little input in matters of significance, such as
the recent decision to float the taka. Policy matters are not really decided by the Board,
and particular cases are rarely referred to the Board for consideration. With the
revisions to the legislation governing the central bank passed in May 2003, it is possible
that the Board will emerge as a more powerful body and that bank policy will be
formulated by the Board rather than by central bank staff and the Ministry of Finance.
472. Training: The last issue of internal governance is staff training. The internal
training program for middle bank staff is not satisfactory and has not served as a strong
source of intellectual leadership over the last decade. Some observers have suggested
that training is often wasted in the central bank, since general managers designate for
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training those that are least able to make use of it. Some staff spend a lot of time
attending courses. There is a complete lack of connection between training, promotion,
and assignment, so that the training problems magnify the internal management issues
facing the bank.
c. Bank supervision and inspection
473. This section discusses the supervision of the financial system from the viewpoint
of central bank governance. The objective of supervision is to ensure that the banks and
non-banking financial institutions fulfill their intermediation responsibilities, protecting the
interests of depositors. There are three tools that Bangladesh Bank uses to carry out
this task:

reviewing the financial condition of a bank to identify problems as early as possible
and take appropriate action to prevent further difficulties;

ensuring that the quality of the loan portfolio is correctly assessed and that
appropriate provisions are made for non-performing loans;

ensuring that depositors are protected by a combination of deposit insurance and an
adequate level of capital.
474. In Bangladesh the central bank has concluded that the implementation problems
are so serious that detailed intervention in the affairs of the commercial banks is
necessary. This leads to a substantial number of regulations that deal with the functions
of the Boards, the management of large loans, and the management of bank director
borrowing. Details of this regulatory regime are discussed below in the section on
commercial banks.
475. Bangladesh Bank has managed the above three tasks with varying degrees of
success. It conducts both on-site and off-site inspection and provides regular CAMEL208
ratings to the Governor. The off-site inspection is adequately conducted but rests upon
the quality of the accounts and reports that come from the commercial banks. Generally
these are acceptable. The on-site inspections have greatly improved in the past decade
and Bangladesh Bank makes a serious effort to identify the problems that the banks
face.
476. The identification of non-performing loans works fairly well, although
implementation could certainly be improved. Bangladesh Bank’s review role requires
that a considerable effort be made to check a reasonable sample of loans and ensure
that the classification conforms to the criteria prescribed in the manual. This manual
needs to be reviewed and updated. Loan classification rests on either an automatic
criteria of non-payment of the loan or on an analysis of the borrower’s economic and
financial condition that leads the analyst to decide that the loan is unlikely to be repaid
and therefore needs to be classified. Although these considerations were introduced
from the outset of central bank inspection, the commercial banks were not able to use
such a method as the banks claim that they could not stand up against pressure from
the borrower, whereas in the automatic criteria procedure there is no room for judgment.
208
An acronym for the institution composite rating system sued by central bank regulators. The evaluation
is based on Capital, Asset Quality, Management, Earnings, and Liquidity.
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The central bank also was reluctant to introduce widespread judgment classifications by
its inspectors as these persons often did not have the training and experience to
understand the economics of the loan that the commercial bank was making. Despite
these caveats, Bangladesh Bank has put into place a system that identifies nonperforming loans. Over the years it has strengthened the criteria for classification.
477. Finally, Bangladesh Bank has introduced a system of basing capital
requirements on risk-weighted assets. While this follows international practice, it has
brought little change over the older system of 6 percent of the deposits. Indeed, for
many banks the new criteria reduced required capital. For new banks, the central bank
has raised the minimum capital from Taka 2 billion to Taka 10 billion. This increase has
an impact on many of the smaller private commercial banks that have fairly small
portfolios. The final line of defense for the depositor is the insurance scheme operated
by Bangladesh Bank. While the scheme has many management problems, the key
point is that Bangladesh Bank will take care of the depositors up to agreed limits. The
insurance fund exists only on paper and is under funded in the eyes of some observers,
although so far it has not needed to be accessed.
478. Despite the rather negative assessments made of Bangladesh Bank, in fact it
has made great progress over the past decade in the supervision and inspection area.
The problems the central bank relate less to its knowledge and understanding of the
condition of the banks as to its ability to do something about it. A series of Circulars
have been issued in the past year to improve the regulation of the commercial banks.
These include policy on large loans, rescheduling of loans, write-off of loans,
rescheduling of large loans, payments of dividends, establishment of an audit committee
at the level of the Board of Directors, capital adequacy, and loan classification. A few
additional comments on the central bank’s role are useful.
479. Private Banks: The main problems with the private banks are insider lending and
the inability of some of these banks to meet their capital requirements once provisions
were made for their non-performing loans. That is, if the required provisions were
enforced some of the private banks would become insolvent. On the first point,
Bangladesh Bank has gained control of insider lending and stopped it. While there is
perceived to be considerable interference by directors in the running of the banks, as
discussed below, the Directors of the private banks do not really borrow much money. If
they attempt to borrow through nominees, they run the risk of being caught and
removed.
480. The private banks are making considerable progress in reaching capital
adequacy. Some of the banks that were deemed as problems have emerged from that
category, while those that remain are making considerable progress. The central bank
decided, against the recommendations of various advisers and consultants, that it was
not a good idea to close down a bank and that good governance instead calls for
problem banks to be nursed back to health. There is a powerful argument that the
closure of any private bank would be destabilizing for the financial system, and
Bangladesh Bank strongly subscribes to this view. In any event, a more drastic approach
would not have received political support and, in fact, significant progress has been
made in this area.
481. Nationalized Commercial Banks: The NCBs present a completely different
problem for Bangladesh Bank. These banks are insolvent and show no sign of
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improvement. Making loans that should not be made is commonplace, but rests on
interference external to the NCB. There is widespread perception of corruption in the
lending process. Businesspersons regularly report that it is impossible to obtain a loan
from an NCB without paying a bribe. At the same time, bribes enable many
businesspersons to access credit without the bank making a proper appraisal of the
project, and with minimum scrutiny of required documents and over valuation of
collateral. These problems are further discussed in the section on commercial banking.
Bangladesh Bank has no effective power to control or limit these abuses.
482. There are tremendous shortfalls of capital required even without covering all of
the non-performing loan provisions. Unlike the private banks, the NCBs have not made
any great progress in the past decade. The NCBs are owned by the Government so it is
not clear what the central bank is expected to do. Any real change has to originate from
the Ministry of Finance. While the authority of Bangladesh Bank over the NCBs has
been enhanced, it is unlikely that the central bank will be able to make much progress in
improving these banks.
2. Commercial banks
483. There are three classes of commercial banks: the NCBs, the private commercial
banks, and the foreign commercial banks. The foreign commercial bank branches are
not discussed here. Three sections follow: private banks, NCBs, and lending.
Problems dealing with lending lie at the core of governance challenges facing the
financial sector, and the commercial banks in particular.
a. Private Banks
484. The key governance problem in the private banks is the interference of the
Directors in the day-to-day operations of the bank. Some private banks are privately
held, so there are no other owners, while others are listed and there is a minority
shareholding by the public. Ideally the Directors’ role is to set policy and leave the dayto-day operations of the bank to the management. Unlike the industrial sector, the
ownership by bank sponsors is spread around so that the unity of view of a family in
listed industrial corporations is not found on the bank Board. The governance problem is
more that direct intervention of Directors in trying to get something from the bank. There
are two main forms of interference: (i) getting loans sanctioned; and (ii) securing jobs for
people or promotions for existing staff. Most Directors are busy with these two activities.
Although direct loans to Directors are essentially under control, interference in loan
sanctioning is not. The extent of this is not really known, but the general view is that it is
done for the benefit of the Director. Bangladesh Bank is trying to limit this but such
limitation is almost impossible to enforce.
485. A recent central bank Circular sets out the responsibilities and duties of the
Chairman of the Board, the Board, advisers, and the Chief Executive in detail. 209 This
circular reiterates an earlier circular from 1996 that sought to establish such definitions.
It represents a serious attempt by Bangladesh Bank to untangle the interference in the
affairs of a commercial bank by the Board of Directors. The Circular asserts that
Directors cannot interfere in the loan approval process and establishes the Board’s
responsibility to determine policy. It certainly allows the Board to play some role in the
209
BRDB Circular 16, July 24, 2003.
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sanctioning of loans, particularly large loans. As an exercise in governance this Circular
reflects the fundamental issue facing the commercial banks. The previous effort to limit
Director interference failed due to unsatisfactory implementation by the central bank.
How will this new Circular be implemented? The central bank’s intention is to seek
compliance by requiring signed certification by the Directors that they have complied
with the Circular. In addition, the inspection procedures will seek to cover the
implementation of this circular. In effect, the battle defining the role of Directors is now
fully joined.
486. Interference in the employment and promotion of private bank staff is an area in
which Directors are active. There is typically constant pressure to employ relatives.
This is one of the factors that contribute to overstaffing, although the problem is less
severe in the private banks than in government banks. This interference erodes the
ability of the bank management to build a skilled labor force.
487. Nationalized Commercial Banks: The NCBs have reached a point at which
satisfactory performance is largely lacking. These banks are insolvent and have made
little or no progress in improving their performance over the past decade. Bangladesh
Bank has had no effective power over their actions. Their personnel policies are not
merit based and good officers have no trouble finding employment with the private banks
at salary increases of two to three times. Personnel management is subject to
interference by influential persons. These matters primarily concern assignments rather
than promotion. Most loans require a side payment that is variously reported but is
realistically of the order of two to three percent, effectively raising the interest rate by that
amount. There is constant interference by outsiders in the sanctioning of loans.
Managing Directors of the NCBs spend a substantial amount of their time receiving
orders or demands for loans or personnel actions. The NCBs are overstaffed and it has
proven impossible to build good staff. The accounts of the NCBs are masterpieces of
confusion and obscurity. Numerous attempts have been made to change some of these
conditions, but none have been successful.
488. The NCB culture is built on several premises: first, that banks have a dominant
social role to play and this is more important than the financial performance of the bank;
second, that lending to government owned enterprises is essential regardless of the
possibility of not being repaid; third, that the Government is responsible for the
depositor’s money and not the NCB; and fourth, that it is not possible for the bank to
operate on merit based programs either for loans, for branches, for personnel policies, or
for overall performance. Failure to perform is thus built into the very foundation of the
institutions.
Once the socialist foundation of the society was abandoned and
Bangladesh turned towards the market, the NCBs were basically driven towards the type
of institutions that are found today.
489. The central bank has not had any effective power over these banks until recently.
With the greater power obtained now, Bangladesh Bank is trying to do something about
the NCBs—primarily to place them in the problem bank category and to sign a
Memorandum of Understanding (MOU) limiting their freedom of action. The MOU
requires that the banks complete their accounts in a timely manner; that the International
Accounting Standard-30 (IAS-30) be followed in the preparation of the balance sheet
and profit-and-loss accounts; that the banks must come forward with a plan to cover the
outstanding unmet provision charges; that loans in 2003 will not exceed 105 percent of
the level on December 2002; and that there are restrictions on the size of loans to five
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percent of the bank’s paid up capital. This program will place NCBs in an interesting
position. With continuing rapid growth of their deposits, it will be necessary for them to
lend more and more in the inter-bank market to the private banks, so that the banking
sector will shift towards a structure in which deposits are being collected by the NCBs
and loans are being made by private banks. During the next year loan write-off will
provide some additional space for lending, but after the initial year shifting funds to the
PCBs will become more urgent. Only time will tell if Bangladesh Bank can enforce this.
490. In addition, the Government and the World Bank are working on a program to
improve the NCBs through a variety of approaches. This work is an important part of the
governance effort in the banking system. Ultimately, the only solution for the NCBs is
privatization. The Bangladesh political system cannot operate government owned
enterprises without massive partisan interference, as is clear for the NCB experience.
While it may be possible to have an occasional Managing Director who can run the bank
well, the system itself cannot be changed by gradual improvement. Privatization of the
NCBs is a long complicated process that the new World Bank supported program will
seek to initiate.
491. In summary, the governance of the NCBs has been poor. The internal and
external control over these financial institutions has not been sufficient to build solvent
banks that play a role as financial intermediaries. On the contrary, these institutions
have become expensive intermediaries that direct resources to low return projects. By
being allowed to remain insolvent, the banks have imposed a serious drag on the
economy.
c. Loan Recovery
492. The section focuses on the pervasive loan recovery problems faced by the
financial sector and governance problems that arise in the management of loans. The
conclusion is that the private banks are making considerable progress in improving loan
recovery, while NCBs are making little headway. Foreign banks are able to collect their
loans with reasonable success. As discussed in the section that follows, the
performance of the non-banking financial institutions in this regard is mixed, with some
doing well while other do poorly. Although the performance of loans is gradually
improving, the levels of non-performing loans are still too high. Notwithstanding the
challenges that remain, the prospects for improvement are reasonably good.
i. Loan performance
493. The best information available on loan performance is from reports on the
classification of loans. The banks are required to review their loans according to criteria
established by Bangladesh Bank and to determine which loans are non-performing.210 A
summary of this information is presented in the following tables, which show the
percentage and value of loans that are classified. The data presented deals with loans
net of interest that has not been paid on the classified loans.211 Loans are formally
classified according to the rules given in specific circulars BCD 34/89, BCD20/94 and
BRPD (December 16, 1998). The loan can be classified as “sub-standard,” “doubtful,”
210
This reports uses the term non-performing and classified as equivalent.
This is the most realistic measure of the bad loans since adding the interest that accumulates over the
years gives an impression of a greater degree of default than has actually taken place.
211
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or “bad” depending on how much the payment is in arrears or if the classifier believes
that there are other reasons to doubt that repayment will take place. When a loan is
classified, the interest that is due is not credited to income unless it is paid. The interest
that should be paid is put into an interest suspense account. The value of classified
loans can be given either by including the interest suspense or excluding it. Provisions
are taken against the net value of classified loans. The asset value of loans should be
reduced by the required classifications. Hence, the ratio of net classified loans to net
loans is the appropriate measure of the quality of the portfolio.
494. Table 1 indicates that for banks other than the specialized banks, the percentage
of the portfolio classified started at about 25 percent in 1989, rose to approximately 30
percent by 1998, and then declined to about 19 percent by the end of 2002. The data
reflects a high level of non-performing loans, with some improvement over the past four
years. Before interpreting this data, one has to bear in mind that periodic changes in the
definition of classified loans have been made. If the current rules for classification were
applied in 1989 and 1990, then the level of classified loans at the time would have
increased to more than 50 percent; hence, the non-performing loans have in reality
declined from about 50 percent of the portfolio to about 20 percent between 1998 and
2002. The performance of the commercial banking sector has improved significantly.
This is no cause for complacency, since the 20 percent level is still extremely high.
Within this data one can compare the NCBs (with 27 percent of their portfolio nonperforming) with the private banks (with 14 percent non-performing). While the NCBs
have shown some improvement, the private banks have done much better.
Table 1
Percentage of Portfolio Classified
Year
NCB
PCB
Foreign
Specialized
(SB)
1989
1994
1998
2002
26.2
26.5
32.9
27.1
23.9
37.4
27.3
13.5
18.1
5.8
3.0
1.3
n.a.
n.a.
49.2
42.1
Total
(excluding
SB)
25.1
28.7
28.8
19.0
Total
(including
SB)
n.a.
n.a.
31.4
21.4
Source: Bangladesh Bank
495. Tables 2 and 3 present the data in amounts rather than in percentage terms.
The total classified loans come to Taka 167 billion or 5.8 percent of GDP. Excluding the
specialized banks the amount of non-performing loans has increased by more than 100
percent. If one adjusts for changing definition, the amount is about 20 percent higher.
Thus although there has been an improvement in the share of the loan portfolio the
actual amount in real terms, after accounting for changes in definition, has still increased
by a substantial amount. Governance as seen from the perspective of the banks taking
responsibility for depositors’ funds is not satisfactory.
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Table 2
Value of Loans Classified
(Billion taka nominal)
Year
NCB
PCB
Foreign
Specialized
1989
1994
1998
2002
26.24
40.23
77.77
88.83
9.34
27.80
35.78
32.69
1.77
0.79
0.91
0.66
n.a.
n.a.
28.57
34.94
Total
(excluding
SB)
37.35
68.83
114.46
132.15
Total
(including
SB)
n.a.
n.a.
143.03
167.09
Source: Bangladesh Bank
Table 3
Value of Loans Classified
(Deflated to 1995/96 prices)
Year
1989
1994
1998
2002
NCB
31.61
41.91
68.21
72.26
PCB
11.25
28.96
31.39
26.58
Foreign
Specialized
2.13
0.82
0.80
0.54
n.a.
n.a.
25.06
28.41
Total
(excluding
SB)
44.99
71.69
100.4
99.38
Total
(including
SB)
n.a.
n.a.
125.46
127.78
Source: GDP deflator and Table 2
ii. Loan management
496. Why is there such difficulty in recovering loans? This section reviews four
aspects of the problem. As noted previously, the private banks are making steady
progress in improving loan portfolios. As the NCBs face more difficult problems, the
following points treat the NCB problem separately.
497. Legal Position: The court system has provided little support to lending
institutions. There are a number of reasons for this that have a direct bearing on
governance. There are two pieces of legislation that deal directly with the loan recovery
process. The first is the Money Loan Court Act, originally passed in 1990 and replaced
by a strengthened version in 2003. The second is the Bankruptcy Act, which was
passed in 1997. The Money Loan Court Act failed to achieve its purposes since the
support required to make it work was not forthcoming. The amount of judicial time
provided was insufficient, the technical training required to understand all of the issues
was not available, and detailed records of the progress of cases were not maintained. It
is a question of public policy whether the loan recovery cases should have some priority
within the legal system. Under the existing rules of the judicial system there is no such
preference. In fact, there is explicit provision that the oldest cases should take
preference.
498. As long as the Money Loan cases do not receive priority treatment, slow
disposition of cases is linked to the lack of resources in the judicial system. Again, it is
not clear if good governance would demand that priority be given to such cases ahead of
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other cases, such as criminal proceedings. Although the Money Loan Act requires
judgment in six months, the courts have not been able to deliver judgments on a timely
basis. There are different views regarding the time required to obtain a judgment.
Recent court data from the Legal and Judicial Capacity Building project indicates that the
average time for the initial trial case is 15 months in two of the District courts. The rate
of filing cases is faster than the rate of disposal, so that cases that are awaiting hearing
are increasing in number. Data from several years ago, based on bank records,
indicated that the average time required was 30 months. While there may have been
some improvement, the conclusion drawn is that the time required to reach a judgment
is more than six months. Money loan cases do not take longer than the average title
suit.
499. The difficulties arise from the process of appeal, revision, and execution. The
appeals can take a long time, as many of these have to go to the High Court.212 Appeal
times in the High Court are long, estimated at five years on average. While it was the
intention of the law to require that the borrower deposit 50 percent of the amount of the
judgment to initiate an appeal, this seems not to be generally honored—perhaps on the
basis that it contradicts the constitutional right to a first appeal.213 Moreover, the
execution case to implement the judgment takes a long time. Court data indicate that
execution cases take three to four years to reach instructions, while the time for
successful outcome of collection is unknown. Furthermore the procedures for seizing
assets and disposing of them are awkward.
500. Another report indicates that, as of March 2003, there were 40,000 cases
pending with the Money Loan Courts, worth a total of Taka 91.48 billion. Less than five
percent of total pending loans had been recovered. Of the pending cases, 22,000 have
been pending for over five years.214
501. There are currently two Bankruptcy Courts in Bangladesh, one in Dhaka and one
in Chittagong. As of December 2000, 177 lawsuits had been initiated in Dhaka, of which
97 cases had been settled. Of the settled cases, less than half resulted in a declaration
of bankruptcy. Ten government nominated receivers had yet to receive their money, in
part due to pressure on the administration from influential defaulters.215
502. Underlying the problems of loan collection is the question of collateral. The basic
collateral that is accepted by the banks is land. There are two problems with land as
collateral, as discussed in Chapter IV. The first involves disputes regarding ownership.
If land is to be taken as part of the collateral for the bank’s loan, there is every possibility
that there will be a dispute over the real ownership. Land cases take up most of the
legal system’s time. These disputes arise from the imperfect records that exist for land
ownership. Since ownership of this most important class of assets is uncertain, recovery
of a loan by taking possession of the land is very difficult. Second, the real value of the
land may be in dispute since it is not uncommon for the sale price to be higher than the
record price, since the stamp duties are so high on land transactions. Land valuation is
212
The choice depends on the size of the dispute. For cases with value above Taka 500,000, the case
proceeds to the High Court on appeal.
213 The courts are full of cases to delay payment called for by a judgment pending appeal. While good
governance suggests that this can be handled by requiring that the person deposit the money pending the
outcome of the appeal, this is not a popular approach.
214 The Daily Star, March 9 2003, “40,000 cases pending with Money Loan Courts.” Staff correspondent.
215 CPD (2001), Task Force Report on Financial Sector Reforms, Dhaka, Bangladesh.
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difficult, and there are times (such as 2003) when depressed land markets may
undermine the value of the security. As a governance problem, this falls outside the
financial sector but what is done to document the assets is of critical importance to the
financial sector.
503. With all of these uncertainties, banks have resorted to the practice of imposing a
requirement for blanket personal guarantees on loans from company directors. This is
compounded by the practice of the Credit Information Bureau (CIB) in extending the
coverage of an unsatisfactory credit record of a person to include other companies of
which the person may be a director. While some effort has been made in the CIB to
avoid this, the tendency persists to lift the corporate veil and hold one limited company
responsible for another limited company when there is a common sponsor director. This
practice is not only a clear violation of limited liability, it also may also raise the risk of
borrowing to prohibitive levels for the most prudent firms, which are the most likely to
take such risks seriously. This practice may also represent a barrier to many qualified
individuals from serving as board members. In the end, the impact is likely to
discourage enterprise development rather than regularize it. The implications for the
capital market are discussed below.
504. The courts have proven to be of little assistance in the collection of overdue
loans. While banks never want to depend on the courts to be loan collectors, the threat
of the court is very important. The trouble with the present situation is that the court is
not seen as a threat. The newly passed Money Loan Case Act features much stronger
provisions and may pose a more serious threat to defaulters if it is implemented
successfully.
505. Quality of Loan Sanctioning: While sound procedures for loan sanctioning are
generally not a matter for governance, certain dimensions relate to good governance.
The current sanctioning process suffers from interference by Directors and partisan
interests as well as outright corruption, particularly in the NCBs. This undermines the
prospects for loan recovery, partly as a result of understanding between the loan officer
and borrower and partly since loans with doubtful prospects of success are more likely to
be sanctioned. Once the practice begins, it soon becomes the norm, with bank officers
demanding compensation from everyone. This has the effect of raising the interest rate
that is paid by the borrower. The impact of this is perhaps not well understood. If the
borrower takes out a loan for one year and pays 5 per cent as a “fee” to get the loan,
then the impact on the interest rate is to increase it by a little more than five percent;
however, if the loan is to be repaid after two years then the increase in the interest rate
is reduced. From this it can be concluded that for term loans the fee will be larger and
that the borrower will always try to defer payment, since this lowers the effective interest
rate. Corruption thus encourages delay in repayment.
506. Two further points are relevant here. First, Bangladesh Bank has introduced the
Credit Information Bureau (CIB) so that a commercial bank can easily determine if a
borrower has a classified loan from another bank. This system works very well in
providing prompt and accurate information on defaulters. The most controversial part of
the CIB is the cross-referencing of family members and multiple directorships. Second,
the banks have begun to use Loan Risk Analysis to assess the loan. This is a powerful
tool if used properly to assess whether the loan is to be sanctioned or not. There is also
a need for further development of loan officer capabilities.
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507. Quality of Loan Administration: Loan administration is a critical part of loan
recovery. The issue concerns good management practices on the part of the bank.
That is, if the managers of the bank neglect loan administration there will be poor
recovery.
Loan administration requires that the loan officer be current with the
economic situation of the company that has taken the loan. In Bangladesh, 60 percent
of the portfolio is covered in just 18,000 loans, which is remarkably small in a country of
more than 130 million people. This requires not more than 2,000 loan officers out of a
total work force of almost 100,000 persons in the commercial banks. The point is that
the resources are available to manage loan administration, yet it is largely neglected.
Loan administration is much better in the private banks than in the NCBs. Neglect of
loan administration is a powerful signal of the unwillingness of the NCBs to improve their
performance.
508. Rationing and Interest Rates: The sanctioning of loans is not controlled by
interest rates, but rather by the rationing of the commercial banks. All banks face
demand for loans in excess of their resources and determine the volume of lending on
administrative criteria. The commercial banks do not react through adjustment of
interest rates. The NCBs have set their interest rates to try to recover enough interest
earnings to cover their cost of funds; however, the administrative processes of loan
application and review, side payments, and directions from outside influences determine
the amount of lending. The loan officers of NCBs can presumably do their job correctly if
there is proper leadership from senior management. One NCB is receiving such
leadership and has managed to increase its profits rapidly as a result; however, the
corporate culture of the bank cannot be changed without sustained leadership of this
kind over the course of several years. The NCB interest rates are not adjusted for the
risk that the bank faces from the borrowers, so that risky borrowers are subsidized by
sound enterprises. This is a perverse result and arises from the inability of the
management of the NCBs to establish a range of interest rates based on the risk the
bank faces with particular borrowers. This is an example of a purely technical banking
problem shaped by governance considerations.
509. The private banks set their deposit rates at levels required to attract deposits.
The flow of deposits is generally from the NCBs through the inter-bank market to the
private banks that offer a higher interest rates to attract funds. Lending rates of the
private banks are higher than for the NCBs, but due to the side payments required for
the NCBs the actual perceived interest rates are quite similar. Private banks lend to
customers that they believe will repay the loans following good practices in the selection
of borrowers. This system is far from perfect, but much improved and certainly more
profit-oriented.
510. Problems Faced by NCBs: From the preceding discussion, it is evident that the
NCBs are in serious difficulty. The four NCBs are insolvent and, as of December 2002,
required Taka 57 billion to meet the capital requirements and to cover unmet provision
requirements. The condition of these banks defies rapid solution, and many regard them
as symbols of the failure of the financial system. The NCB share of the net loans
excluding the specialized banks has declined from 67 percent in 1989 to 47 percent in
2002. It is not clear if the government will be able to privatize these four banks, how
long this might take, and how the financial sector could adopt to the changes that this
would cause. If the authorities can enforce the MOU for the next five years, the NCB
share of net loans should fall to the range 27 to 30 percent. A gradual fading of the
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NCBs and resulting reduction of influence on the economy is arguably the best that can
be hoped for.
511. While the planned World Bank project to improve the management of the four
NCBs may yield positive results, it will be a challenge to secure significant change. It
should be possible to improve the loan sanctioning process to a limited extent, but it is
most unlikely that interference in the personnel system and the loan sanctioning that
now occurs can be fully arrested. At the very least, the strong liquidity position of the
NCBs should help them to weather the next few years.
3. Legal Framework
512. Weaknesses in legal support for the banking sector are both technical and
administrative. On the technical side, training curricula have not kept up with changes in
the legal system. As a result, legal education institutions do not teach financial laws.
The vocational training of lawyers further neglects the operations of specialized courts
that deal with the financial system, such as the Money Loan Court, the Bankruptcy
Court, and the Company Court of the High Court Division, which has jurisdiction over
matters pertaining to the 1994 Companies Act.
513. On the administrative side, case management and court efficiency are both poor.
Bank transactions and products are poorly documented, creating delays due to
uncertainties. Judges are slow in executing decisions, and the shortage of judges adds
to the sizeable backlog of cases. The 90 Money Loan Courts in Bangladesh manage to
settle most small loan cases, but the lack of progress on large default cases means that
chronic defaulters on large loans are still not being held accountable for their actions.
514. The Minister of Law, Justice, and Parliamentary Affairs has highlighted the
backlog issue and introduced a new system aimed at expediting loan cases. This
system, which was to have been effective from May 1, 2003, would dispose of all cases
in three months. The Money Loan Courts would also become more specialized, dealing
only with loan-related cases, whereas in the past they had dealt with a variety of other
cases.
D. Non-bank Financial Institutions
515. Non-bank financial institutions (NBFIs) in Bangladesh are licensed under the
provisions of the Financial Institutions Act, 1993 and regulated by Bangladesh Bank.
Bangladesh Bank’s objective is to promote a diversity of financial institutions to serve
different markets and to promote competition. While the total assets are small at
present, there is considerable potential for these institutions in leasing and housing.
516. There are currently 28 such organizations. Most are involved in leasing
operations, although several concentrate on housing or make project term loans. There
is one government owned housing finance organization, not included in the 28, that falls
outside the supervisory oversight of Bangladesh Bank. A few of the NBFIs functioned
before the law was passed, but most have been established subsequently.
517. The NBFIs are allowed to take deposits or borrow funds as long as the term of
the deposit or loan exceeds one year. Bangladesh Bank is careful to distinguish
between banks and NBFIs. One of the key distinctions is the one-year minimum deposit
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requirement. NBFIs have a very limited branch network, so collecting small deposits is
difficult. The resources mobilized come from banks, insurance companies, and other
institutions. These funds are then used for long term projects, which typically involve the
purchase of equipment or housing. The regulatory regime is similar to that for banks.
Loans are reviewed and classified on the same basis. These organizations make
provisions for their non-performing assets exactly as the banks do. The regulations
prescribe the capital requirements. A risk-weighted asset base will soon be applied, as it
is in the case of banks. The overall condition of NBFIs is satisfactory. Three have a
very high level of non-performing loans, but the remainder have less than 10 percent of
their portfolios classified.
518. Governance issues with respect to NBFIs revolve around the issue of making
good loans. The record is generally satisfactory, but that said most of the NBFIs are
new. Some 13 have been licensed in the past five years. Of the three that are
experiencing serious problems, all were licensed before 1998. The supervision systems
in place should promptly detect any deterioration of an institution’s portfolio.
519. The most interesting case related to governance is the case of SABINCO. This
institution was formed in the 1980s as a joint venture between the Governments of
Bangladesh and Saudi Arabia. Over the years it was not really supervised. The
Government members of the Board appear to have paid little attention to the activities of
the organization, and no regulatory authority was legislated until the Financial Institution
Act. This institution was formed with virtually 100 percent equity. Of the outstanding
loans, 50 percent are non-performing and are unlikely ever to be recovered. Other
assets are shares whose values are below the purchase price. A substantial part of
shareholder equity has been lost. In the ensuing conflict, the Saudi Arabian owners
have devoted only a modest effort to improve the situation and the assets of the
institution have been depleted. The Board has been unable to appoint a new Managing
Director acceptable to Bangladesh Bank. SABINCO is unable to formulate a program to
resolve its financial difficulties. As a result of the 100 percent equity position, the capital
adequacy is satisfactory, yet SABINCO is clearly in bad condition and good governance
demands remedial action. Of the total classified loans of the NBFIs, almost half come
from SABINCO. This example illustrates some of the limitations of the present
supervision system.
520. The governance of the NBFIs indicates that, on the whole, the situation is quite
acceptable. Among the serious cases, one is improving but the SABINCO situation
continues unresolved.
E. Equities Market
1. Overview
521. This section provides a brief review of the capital markets, followed by an
analysis of key governance issues. The overall view of the capital markets, as reflected
in both reports and opinions, is that corporate governance is poor and that stockholders
are potentially exposed to too much abuse. The balance between the protection of
persons entering into public limited companies and the sponsors of such companies is
central. The economic and development literature asserts that the emergence of limited
liability companies is the key to the development of a competitive market economy. This
step is required to mobilize equity and to move away from reliance on bank lending.
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Two factors blur this important distinction in Bangladesh. The first relates to the
existence of the Islamic banking attempt to provide a kind of equity through the banking
system. The intent is clear that the bank and the company must share the risk; however,
this is still a small part of the financial system. The second relates to the banks’
determination to lift the corporate veil and force some owners to take personal
responsibility for the loans made to limited companies. This practice muddies the waters
between ownership and liability, and is one of the central issues in the emergence of an
equity market.
522. The capital market in Bangladesh is small, with a market capitalization of less
than 3 percent of GDP. The Dhaka Stock Exchange (DSE) was originally established in
the Pakistan era and continued after Independence, although there was very limited
activity. The Chittagong Stock Exchange (CSE) was formed much later, in 1992. The
SEC was established in 1994 to replace the Controller of Capital Issues, which was
located in the Ministry of Finance. As of June 20, 2003, the Dhaka Stock Exchange
listed 260 securities comprising 241 companies, 10 mutual funds, and 9 debentures.
The Chittagong Stock Exchange lists most of these same companies, with the two
exchanges trading the same shares. This is an unusual arrangement that can
potentially cause trouble if there are different rules and standards imposed on the two
exchanges. In addition, it discourages an exchange from trying to toughen its rules
since the company may simply allow trading on the other exchange.
523. Listings and initial public offerings (IPOs) occur at the rate of about 20 per year,
which is about a 9 percent per annum increase in number of companies. Whether this
rate is considered low relative to the growth of the economy is uncertain. There is
informed opinion that the quality of the recent IPOs is weak.216 The diligence of the SEC
in reviewing the IPOs has also been questioned.217 The general sense of the business
sector is that there is unsatisfactory growth in IPOs.
524. The stock market grew steadily in capitalization and in price, accelerating in 1996
in an explosive bubble that collapsed by the beginning of 1997. The causes of this
bubble are uncertain. One view holds that it reflected a failure of governance to arrest
the expectations of the market; however, this bubble grew on public expectations of
rising prices and it is likely that most participants were fully aware of the fact that
collapse was inevitable. While the authorities could perhaps have fed more securities
into the market and slowed down the rate of price increase, such intervention would
likely have simply extended the bubble. Since this collapse, the market has regained
some ground but is still below the index price at the beginning of the boom.
525. The Investment Corporation of Bangladesh (ICB) is another institution that has
played an important role in the past in Bangladesh. ICB has several different functions:
it manages investment accounts and provides brokerage services; it operates mutual
funds and unit trusts; it has provided bridging loans to companies that were preparing for
listing; and has generally served as a merchant bank. ICB has substantial power. It is
estimated that it controls 20 percent of shares through the mutual funds and investment
216
DSE Annual Report 2001-2002.
See Bangladesh Enterprise Institute (2003), ”A Comparative Analysis of Corporate Governance in South
Asia:Charting a Roadmap for Bangladesh” (Stage 1: Diagnostic Study of the Existing Corporate Governance
Scenario in Bangladesh), March 2003
217
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accounts that it operates. It has now formed three subsidiary companies: one to handle
brokerage and investment accounts; one to serve as a merchant bank; and one to
operate new mutual funds and unit trusts under SEC rules. The existing mutual funds
and unit trusts remain with the parent ICB. ICB funds do not now come under the SEC
rules and it has proven impossible to open up this area to determine what has taken
place over the past decade. ICB has played a powerful role in the capital market in the
past. Its role will be different under the new system if the three subsidiary companies
are really allowed to operate independently.
526. Credit rating agencies have a critical place in the emergence of a capital market.
The SEC has now approved one such company. Credit Rating Information and Services
Ltd. (CRISL) is a private company, established jointly by foreign rating firms, local
financial institutions and local individuals. Its main purpose is to provide ratings for
capital markets, using a methodology based on international principles. In addition,
training and quality monitoring has been offered from Duff and Philps Credit Rating Co.,
a large U.S. rating firm that was approved by the SEC in October 2001. A rating
organization provides objective guidance to the public and also upholds standards that
listed companies will ideally strive to reach. Failure to obtain a high rating can be
expected to provide some impetus for improvement. At the same time, companies
cannot overcome the reality of the market conditions in which they operate, so there is
only limited room for an organization of this type to have an impact in Bangladesh.
527. This significant development has been complemented by positive media attention
for favorable ratings. In November 2002, two private commercial banks, Southeast Bank
and Dhaka Bank, were both rated A- by CRISL, with their “strong fundamentals, asset
quality, profitability, growth rate, and consistent efforts to maintain capital adequacy and
required liquidity” duly praised in the press.218 Similar coverage occurred when the
Industrial Promotion and Development Company (IPDC) was rated A in April 2003 by
CRISL.219 CRISL remains the sole rating company in Bangladesh. Other credit rating
companies may follow, although the market is small. This experience underlines the
important role of the media in promoting informal, horizontal accountability in the
financial sector and other areas.
2. Governance Issues
a. Insider trading and market manipulation
528. While some would argue that insider trading and market manipulation are
criminal activities that are outside the ordinary scope of governance analysis, and
moreover that insider trading on the stock exchanges is not so great a problem in
Bangladesh as it is in some countries, it merits attention. The usual triggers for insider
trading activity include announcement of the results of the company’s performance;
mergers and acquisitions; achievement of a technological breakthrough of relevance to
the market; or award of a major contract. Apart from the first example, these triggers are
only marginally relevant in the present condition of the Bangladesh industrial sector.
529. As for announcement of company results, there is so little confidence in the
reports issued by companies that there tends to be no clear response to such
218
219
The Daily Star, November 15, 2002, “Southeast, Dhaka Bank Secure A-Rating.” Star Business Report.
The Daily Star, April 14, 2003, “IPDC Achieves Best Financial Institution Rating.” Star Business Report.
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announcements. A common practice is to announce strong, unaudited, half-yearly
results. While the actual audited results are often less satisfactory, participants in the
stock markets are well aware of this bias and are not induced to buy on the basis of the
half-year reports. In addition, it is difficult to maintain secrecy regarding important
changes in the performance of a company, so that unusual levels of trading may actually
serve to leak information into the domain of public knowledge. While there are clear
examples of insider knowledge, this is not yet a serious problem in Bangladesh. Market
manipulation is certainly possible and there is reason to believe that manipulation of this
kind occurred during the 1996-97 boom and bust. There may be examples of stocks
being ramped to induce artificial and temporary price increases. The SEC has the
capacity to identify such cases, although it may prove difficult to punish such
manipulation.
b. Boards, owners, and management
530. The classic issue in corporate governance is the difference in interests among
management, owners, and Boards of Directors. In Bangladesh this emerges in a rather
different light than in the industrialized countries. First, the ownership of most listed
companies remains in the hands of the sponsors of the companies. If not a full majority,
there is typically a large share in the hands of the founders. Typically this is a family, so
that the major shareholders are a tightly knit group under the control of the founder.
While this is changing gradually, it is a slow process. There is little difference in the
interest of the Boards comprising the major owners and the management.
In
Bangladesh there is limited professional management. Instead, the children of the
founders are returning to Bangladesh following education abroad and assuming a place
in company management. The children have generally received advanced training in
management and business and are expected to raise the level of professionalism. The
minority shareholders face the greatest problems where their interests are different from
those of the Board-management group. The actual extent of the abuses of the minority
shareholders is uncertain.
531. The most serious issues emerge from the observation that most listed companies
are members of a “group” that includes unlisted private limited companies and, in some
instances, other listed companies. The behavior of these groups leads to abuses arising
from the shifting around of funds; however, whether this actually harms the minority
shareholders is another question. Most investors in Bangladesh are in for the long term,
having decided that the investment is one that will pay off in the long term. Buying and
selling shares to exploit short-term price changes is not very common. This attitude is
one of the reasons for the relatively low level of activity in the equities markets. In
addition, many shareholders are locked in, having purchased at the high prices of 1996,
and are hoping for a revival of the market. In this sense, the minority shareholder has
put his faith in the individual who runs the company and, having made that decision, is
likely to stick with the company. Finally, returning to the point made in the introduction
about the corporate veil, discrimination among types of owners creates the real basis for
the behavior of the sponsors. The behavior of people and markets will also act to
correct differences in risks and returns and rules cannot keep this from happening. In
effect, many of the arguments regarding corporate governance in listed public
companies arise from the simple fact that these are in fact not genuinely limited
companies.
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c. Industrial groups
532. Many of the listed companies are members of groups owned by the same family.
The largest of these groups, Beximco, has eleven listed companies and many privately
held companies. Almost every listed company belongs to a group. The current tax laws
do not permit consolidation of companies into a single company for the purposes of
taxation. This implies that the group has an interest in distributing profits to minimize
their tax burden and if there are different holdings by sponsors, which of course there
are, the taking of profit may discriminate against the minority shareholders. Corporate
governance is undermined here, as there is a clear separation of interest among the
sponsor-mangers from those of other stockholders. In this case, the tax laws bring out
this difference.
d. Transparency of listed companies’ accounts
533. Observers are unanimously agreed that the standards of auditing of listed
company accounts are not satisfactory. The issues here are well understood but there is
difficulty in breaking out of the impasse that exists. There are four considerations: (i)
manger-owners want to control the presentation of the accounts; (ii) audit fees are very
low and in most cases insufficient for a proper audit; (iii) the number of experienced
auditor firms is small and improvements in the capacity of the auditor industry are very
slow; and (iv) SEC rules and tax laws apply great pressure on the listed companies to
declare dividends. All of this leads to misrepresentation of company results; hence,
there is always a suspicion that company accounts are not correct. The poor results and
the low consequent dividends are accordingly attributed to misrepresentation of the
actual situation of the company.
There could be many reasons for such
misrepresentation by the manager-owners, but the point is that such suspicions
ultimately arise from the presumed weakness of the auditing. The audit industry seems
to have divided into two groups. One group tries to meet high standards and carries out
audits largely for organizations that pay them appropriate amounts. The second group is
technically weaker and cannot compete for the most remunerative audits. Those in the
latter category work for low fees and do not maintain appropriate standards. Instead
they primarily use trainees for their work and pay them very little. Generally the quality
of the persons in the industry is declining.220 It is this split in quality and the existence of
two markets for audits that leads to the current problems. Without question, the
accounts of most listed companies are not transparent and may not accurately reflect
the outcome of company operations.
e. Implementation of SEC rules dealing with corporate governance
534. The SEC, established in 1993 with the passage of the Securities and Exchange
Commission Act, has substantial power to set new rules. The Securities and Exchange
Ordinance (SEO) of 1969 provides the basic framework for the regulation of the equities
market. Amendments to the SEO made in 1995 and 2000 confer broad powers on the
SEC to intervene in the operations of a listed company. One view holds that these
amendments provide such broad powers that the SEC can, in effect, change the
See Bangladesh Enterprise Institute [BEI] (2003), ”A Comparative Analysis of Corporate Governance in
South Asia: Charting a Roadmap for Bangladesh” (Stage 1: Diagnostic Study of the Existing Corporate
Governance Scenario in Bangladesh), March 2003.
220
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Companies Act without legislative approval insofar as listed companies are concerned.
The SEC has issued many rules that have an impact on corporate governance. These
are focused on ensuring that annual general meetings are held and properly conducted,
announced dividends are paid, and the Companies Act is followed. The SEC has
recently introduced some positive changes. These include the requirements that listed
companies must audit their annual accounts within 120 days following the end of each
year and that audit reports are submitted within an additional 14 days. Listed companies
are required to hold AGMs regularly, with delays of up to three months permitted.
Biannual reports are to be issued within one month of the end of the first month of the
fiscal year. The SEC has also been more active in cases of alleged fraud and default.
535. While considerable progress has been made in these areas, the implementation
of rules is sometimes confronted with court cases. For example, a current case (August
2003) involves failure to pay a dividend despite SEC instruction to do so, because there
is a court case demanding that the company pay a higher dividend than announced.
The difficulty with going to court is that the resolution of the case can take a very long
time. During that time the SEC is hamstrung. Little is being done to accelerate the court
cases linked to the financial sector and it is unlikely that there will be much improvement
in the near future. There are means to handle this—for example, by requiring payment
into an escrow account pending resolution of the issues. In general, the SEC faces
difficulties as a result of the inability of the courts to move promptly to resolve conflicts.
Many of the issues related to the security laws and their enforcement are new to the
justice system in Bangladesh. Until this situation is remedied, problems will persist and
the SEC will continue to face grave difficulties in regulation.
536. The basic problem in regulation of the securities industry is that there are
enormous powers granted to the SEC. The interpretation of these powers rests on the
assumption that when a company shows poor performance, it reflects an inclination on
its part to defraud the shareholders. Research has shown that SEC staff are using
company performance as a proxy for compliance.221 When reviewing financial
statements, SEC staff look specifically for negative changes in profits and revenues. The
argument holds that when bad results occur, they arise from misrepresented accounts in
the past. There are of course many reasons for poor performance and the SEC
argument is not convincing. Moreover, this approach is backward looking and does not
indicate which companies are following improper accounting practices at present.
537. Does SEC rule making discourage the use of the capital market to raise funds?
This view is frequently advanced, but at this time it is surely stretching the point to
believe that the SEC has an influence of this magnitude on the performance of the
capital market. Performance is more powerfully influenced by real factors such as high
interest rates, reduced investment in large industry, and the withdrawal of the foreign
portfolio investors.
In fact, the initial public offerings (IPOs) continue to be
oversubscribed.
While the SEC has tried to play a strong hand, the actual
implementation of critical financial matters has still not really cost the listed companies
very much. The problem with companies entering the stock market rests elsewhere.
Weak investment demand by large size companies is the most critical factor. What one
looks for are successful companies that are trying to become larger and prefer to go to
the market for the funds to avoid loan financing. The absence of such companies
221
See BEI (2003), ”A Comparative Analysis of Corporate Governance in South Asia.”
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reflects the difficulties in new projects. For example, companies in the ready-made
garment sector are generally not listed on the stock market, and most of the textile
companies are listed on the stock market but are not currently expanding capacity.
Organizations of this kind, which require substantial equity, are arguably the very types
of companies that could lead to market expansion.
f. Implementation capacity of the SEC
538. In contrast to the rule making power of the SEC, its implementation capacity is
weak. This arises from shortage of personnel, inability to retain capable professional
officers, low compensation, and inability to provide continuing training. The SEC reports
that its staff roster has been declining, making implementation of responsibilities
increasingly difficult. While the SEC is able to recruit good staff, the compensation is
very poor so that the most talented staff soon receive offers from the private sector. In
one sense, society is clearly signaling that it does not want to regulate the equity
markets since it will not commit the resources to do so. At present staffing levels, the
SEC has little chance of fulfilling its responsibilities. On the other hand, without better
compensation, it is impossible to recruit and hold the caliber of staff required. There is
no other solution. If the Government wants to have a strong SEC, it must provide
adequate compensation and recruit professional staff with the technical skills to do the
work.
Efforts to build staff with contract employment and training, while at the same
time retaining government pay scales, have not been successful. With an undermanned
SEC, the prospects of improved governance of the capital market are limited.
g. Implementation capacity of the stock exchanges
539. The two stock exchanges have some responsibilities in supervision of the capital
markets. Each is building some capabilities but there is little that can be done at the
exchanges.
The nature of the exchange management really prevents these
organizations from being strong regulators. Critical issues such as holding timely annual
general meetings and providing necessary audited accounts are ultimately driven by the
SEC.
h. Role of Investment Corporation of Bangladesh
540. The role of the Investment Corporation of Bangladesh (ICB) remains uncertain.
The extent to which the new companies that ICB has formed will act independently will
only be known over the next few years. The brokerage business will have to survive in
the competitive market without funding from ICB or indirectly from the Government or the
banking system. The merchant banking business will also have to survive in a
competitive environment. The most critical area is the operation of unit trusts and
mutual funds. There is little competition from the private sector at this time. As this is an
area in which there is little role for the Government, the early privatization of this
component is an essential indicator of the prospects for improved governance in the
mutual fund market.
i. Black money in the equity markets
541. An important area of governance is the decision of Government to allow black
money to be invested in the capital markets without inquiry into its origins as long as the
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shares are held for two years. This idea prompts considerable controversy and its
impact on good governance is complicated. The intent of the practice is to try to induce
greater supply of funds to the equity markets, so as drive up prices and create more
interest for businesses to enter this field. It is unclear how successful this move will be.
Deep distrust of the Government on issues of this kind persists, and there must be a
clear demonstration that the Government means what it says.222
j. Tax policy
542. The 2003 budget makes extensive use of tax policy to try to stimulate the capital
market. The details of this are not so important as the concept that underlies it. In
effect, the tax system is arranged so that benefits are given to those companies that pay
high dividends and hold their AGMs. Companies that do not do so will find their tax
assessments increased. In addition to this, a 15 percent tax on dividends is imposed but
dividends are tax-free income to the shareholder. Finally, the tax rates are differentiated
by sector. While the last point is a matter of policy, these tax rules are likely to
encourage manipulation of accounts. Actually, the owners of the companies concerned
would like to pay high dividends, as they own most of the company. The group structure
of most businesses may enable them to shift funds to pay high dividends from those
companies in which they hold a high share of ownership. Tax policy rules of this kind
lead to elaborate accounting maneuvers to realize tax savings.
F. Insurance Industry
543. The insurance industry remains very small in Bangladesh. It comprises a
number of companies that sell life insurance and a number that provide general
insurance. The Ministry of Commerce regulates the industry through the Controller of
Insurance. The Controller has been a part time position and has not played a very
active role in trying to supervise the activities of the insurance industry.
544. The nature of insurance requires that the companies take the funds that are
collected in premiums and invest them in low risk assets. The return from these
investments and the insurance premiums themselves provide the funds from which
payments are made. The supervision rules are of three types: (i) limits on behavior of
firms with respect to how they go about selling insurance; (ii) rules regarding the
investments that can be made; and (iii) rules with respect to payments of claims. At
present, the lack of a continuous effort to track and supervise leaves the industry in a
somewhat uncertain state. The life insurance companies are following the necessary
rules and tighter supervision is unlikely to expose any serious problems. The general
insurance companies face more serious problems. Awareness of these problems is
increasing and the Government is now reviewing the supervision procedures and is
expected to introduce some substantial revisions.
545. The performance of the insurance industry is influenced by the existence of two
important government owned insurance companies. These companies do not feel that
they have to follow the established rules since their position as state-owned enterprises
protects them from adverse consequences of their actions.
222
Specifically, there is a fear that once one has revealed to the tax authorities that one has black money,
one would remain categorized as such indefinitely, so that even if the decision is withdrawn a year or two
later, one would remain vulnerable to harassment and negotiations in the future.
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546. The diversification of financial assets and ways to manage funds are important
factors in improving the financial sector. The insurance industry is one that should
expand rapidly over the next decade in providing services that are widely demanded
within the economy. As this happens, the risks in the industry will increase unless there
is an improved level of supervision. Attempts to supervise the industry in its present
state by regular civil servants are not really viable, and the present supervisory structure
is not sufficient to deal with an expanded insurance industry. The supervision effort
should be managed by persons who are committed to this task for a long period of time
and who can expect to receive appropriate remuneration.
547. There are numerous complaints about the general insurance business from both
sides, including allegations of suspected fraud by policyholders and slow or
unsatisfactory payments by the insurance companies in settling legitimate claims. The
supervisory role of the Government includes smoothing out these disputes without taking
sides, which poses a challenge with respect to government owned insurance
companies. There is less conflict between the life insurance companies and their
clients.
G. Pension Funds
548. There are numerous pension (provident) funds in Bangladesh. Their investment
rules are limited. This is an area where there is great potential and demand but the
regulatory environment is not very satisfactory. Positive steps must be taken to create a
demand for companies to manage pension funds. While the Deposit Pension Scheme
(DPS) operated in the commercial banking system was very successful, its high fixed
interest rate of 15 percent could not be sustained in a period of lower inflation in the
1990s and the banks gradually stopped taking such deposits. The events surrounding
the DPS demonstrated that this responded to a felt need of the population, but nothing
has emerged to take its place. This is an example of a rigid regulatory environment not
being able to adapt to changing conditions. There is no clear authority responsible for
the development of pension funds.
H. Micro Credit
549. Micro credit institutions are another type of financial organization that has
prospered in Bangladesh. Small loans are made under supervision by a group to raise
the probability of repayment. Although interest rates and costs are high, these small
borrowers rarely have access to any other kind of organized credit market, so their
alternative is the informal market that charges higher interest rates.
550. The supervision of micro credit organizations is a continuing issue in
Bangladesh. Some of the larger organizations have resisted any supervision from
Bangladesh Bank and prefer self-regulation. This is a matter of concern as there is
considerable potential for abuse among the hundreds of micro credit organizations that
operate under minimal oversight or scrutiny. To the extent that these organizations have
created deposits, the issue of responsibility for the custody of the deposits arises. In
general, micro credit organizations require a more thorough scrutiny by regulatory
agencies and agents of informal, horizontal accountability.
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I. Accounting Standards and Disclosures
551. The supply of accountants in Bangladesh is relatively low, with less than a
thousand certified as of June 1999. The limited supply of qualified professionals
represents a barrier to enforcing higher accounting standards in Bangladesh. Why is the
supply of accountants so low? Several factors work against expanding the accountancy
profession. First, the process of training for qualification as a chartered accountant is
quite demanding, involving four years after graduation from university. During this
period the compensation of the student is small and the work is rigorous, both in
preparing for the examination and in carrying out the business of the company to which
the student is attached in conducting audits. As a result, the supply of qualified
chartered accountants is low. Second, the companies have not been interested in good
quality audits and see their auditors as part of their public relations activities. The price
competition in the profession and the peculiar fact that the compensation of the auditors
is a matter for discussion at annual general meetings implies that the fees are not
adequate. The low fees means that the accountancy firms can only make progress by
engaging a large number of students on low salaries to do the work. Third, the
combination of a shortage of trained auditors and low fees interact in this way to keep
people out of the industry and to reduce competition.
552. In addition, companies often see little value in obtaining a high quality audit. The
fee schedule of the Institute of Chartered Accountants of Bangladesh (ICAB)
recommends a minimum audit charge of Taka 60,000 for a company with gross sales of
up to Taka 10 million, but the actual market rates being paid for an audit by companies
of this size are between Taka 10,000 and Taka 15,000, which barely covers the costs of
conducting an audit, and provides few financial incentives to obtain formal accounting
credentials. On the other hand, the absence of legal threat against accounting
impropriety provides no incentive to meet professional standards, as opposed to client
demand. As a recent World Bank study observed, “in the whole history of Bangladesh
there has never been legal action against an auditor for professional negligence.”223
553. Apart from the low supply and quality of accountants and auditors, problems also
arise in inconsistency and weakness in the official set of standards. While the ICAB
adopted 22 out of 41 International Accounting Standards (IAS) as Bangladesh
Accounting Standards (BAS), many of these adoptions were made in the original form of
the IAS, and do not include subsequent amendments. In effect, BAS are now
substantially inconsistent with international norms. Current accounting standards in
Bangladesh do not impose full disclosure requirements, which effectively allow
companies to wield significant discretion over auditing practices. Without full disclosure,
complete assessments cannot be made of a company’s financial status and future
prospects. In addition to these loopholes in current standards, disciplinary mechanisms
for non-compliance are not in place, which further weakens controls on company
behavior and transparency.
554. The Institute of Chartered Accountants of Bangladesh (ICAB) sets standards
through its Technical and Research Committee. The law provides ICAB with a
monopoly over all auditing services, and requires ICAB members to apply BAS and
auditing standards (BSA) relating to external, general-purpose financial statements. As
noted above, the poor level of accounting standards in Bangladesh today are due to the
223
World Bank (2002), Bangladesh: Financial Accountability for Good Governance, Dhaka, Bangladesh.
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mutually reinforcing negative forces of poor quality audits produced by accountants and
low fees paid by companies. The low fee structure reduces incentives for quality audits,
and the low quality audits reduce incentives to pay highly.
555. The inadequate training provided partly accounts for the poor quality and low
supply of accountants. While a high number of students join the accounting training
institutes each year, only 30 to 35 graduate as trained accountants. This is partly due to
the use of English as the medium of instruction, whereas education in Bangladesh
generally tends to be conducted in Bangla. The two training institutes (ICAB and
ICMAB) are both currently working to improve their programs, by planning an Academic
Complex. The World Bank is working with ICAB to establish an English Learning
Center, as well as to modernize its Computer Training Center.
556. The curriculum for accounting training also needs to be updated and
restructured. ICAB training materials date back to 1982-83, and the training course is
designed only for full professional status. There is scope to introduce greater flexibility
into the training program, such as creating sub-professional programs, to produce
qualified technicians that could support full-fledged accountants in their work. This would
reduce the current high dropout rate, and raise the productivity of available accountants.
557. There is currently a lack of disciplinary mechanisms within the accounting
profession to ensure ethical practices and technical consistency among members.
While ICAB has a published Code of Ethics and an Investigation and Disciplinary
Committee responsible for investigating outside allegations, the system remains
inadequate as it depends on self-regulation and external complaints. ICMAB is in the
process of introducing a Code of Ethics. The SEC is playing a greater role in reviewing
the audited accounts and insisting that improvements be made. This regulatory
oversight is the most important step that can be taken to improve the auditing process.
Bangladesh Bank has established similar improved standards for audits of the
commercial banks. It is only the regulator that can require better quality audits.
558. The private sector will not raise its standards by itself. The only possible force for
good auditing that may come from the private sector is the entry into the equities market
of foreign investors—although this is unlikely to be an important factor in the stock
markets in the next five years. Strong domestic institutional investors are not yet in the
market and there is no sign of such investors entering the market in the immediate
future.
559. If the regulators can successfully enforce quality standards, the accounting
industry will respond with higher fees and ultimately the industry will grow larger. In the
past, neither the SEC nor Bangladesh Bank was prepared to raise auditing standards.
Without insistence on the part of regulators, audit standards will not improve. Adoption
of international standards will not be successful unless there is a determined effort by
the regulators to see that this is actually done.
J. Independent Regulators
560. There are a number of agencies, both governmental and non-governmental, that
perform a regulatory function with respect to the performance and behavior of economic
agents. Government regulators include: the Registrar of Joint Stock Companies and
Firms (RJSC), the SEC, and Bangladesh Bank. Non-governmental regulators include
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the ICAB, the Chittagong Stock Exchange, and the Dhaka Stock Exchange. The fact that
there are so many agencies involved in monitoring and enforcing the private sector
creates complications for the consistency and effectiveness of enforcement. Companies
themselves have raised the issue of regulator governance. The role and scope of
regulator actions are not well defined, which has led some regulators to act beyond their
official scope of authority. This high level of discretion has caused companies to
complain about the arbitrary nature of some rules and rulings passed by regulators, as
well as the lack of options to appeal these rulings.
a. Registrar of Joint Stock Companies and Firms (RJSC)
561. RJSC is the official depository of all statutory reports submitted by companies in
Bangladesh. While all public companies are required to submit annual financial
statements, private companies have no similar obligations. This inconsistency is
exacerbated by legal ambiguity regarding the roles and responsibilities of RJSC. While
it is only supposed to act as a report depository, its actions have gone beyond this
function to actually have an impact on the behavior of firms. For example, RJSC has
been known to impose restrictions on the acceptance of a company name for
registration, which is an arbitrary and entirely subjective criterion. The written law
requires companies to file a satisfaction of mortgage with RJSC, while the latter issues
requisite notices prior to recording the satisfaction. The law as practiced by RJSC
imposes an additional requirement of a counter-signature to be provided for mortgages,
which is outside the stipulations of the law and creates additional effort on the part of
company owners. According to the law, RJSC has no authority to either accept or reject
filings made by companies, while in reality RJSC only accepts such filings after a review
of all the records of a company. These extensions of authority by RJSC discourage
companies from filing records, and are possible only because of ambiguous wording in
the law, rather than as a result of explicit and intentional legal authorization.
562. The problems in the law are exacerbated by administrative weaknesses. Staff
members do not receive training on the role of RJSC or on company law. While about
2,500 to 3,000 companies register with RJSC each year, there are only about 50 staff
available at the registrar to process the documents submitted. Documents are
processed manually, except for a recent addition of an online search function for
company names. The administrative inefficiency is apparent in the fact that no records
are available with respect to the number of public and private companies. While the law
provides for RJSC to penalize public companies that fail to file annual reports, the
penalties are only one taka per day of default and paid only if a company voluntarily
makes a late filing at the registrar, rendering the penalty system essentially ineffective.
These inefficient registration procedures result in lengthy procedures for locating files,
which may require additional informal payments to expedite the search.
Supplementary Note on State Owned Enterprises (SOEs) and Privatization
1. State Owned Enterprises
563. It is relevant to include a closing note on state owned enterprises due to their
impact on the fiscal health of the State, the overall enterprise efficiency of the economy,
and the solvency of the banking system. It is also relevant for analyzing the balance of
roles between private and public sectors in stimulating economic growth.
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564. Most public enterprises in Bangladesh are characterized by negative net worth,
negative profit margins, and technical insolvency. The consistent overall losses of SOEs
means that they require heavy state financing each year for continued operations. This
financing comes from net long-term borrowing, state equity injections, and finance
deficits through inter-corporate arrears, arrears to the State, and changes in domestic
bank debt incurred that year. This poor financial performance reduces the
competitiveness of the industrial sector and places a significant burden on the national
commercial banks, reducing overall bank asset quality. Instead of facing financial
consequences for poor performance, the SOEs continue to receive financing from NCBs
each year regardless of performance, thereby undermining any incentive for improving
business practices. State financing further adds to public debt and budgetary pressure
and diverts public resources from investment in other potentially productive areas.
There is therefore a need to improve the performance of SOEs through realigning their
operating incentives and strengthening corporate governance.
565. The corporate governance of SOEs is extremely weak, since these organizations
do not view themselves as corporate enterprises. The first level of misalignment of
incentives lies in the nature of oversight. As SOEs report to government agencies, their
organizational behavior tends to be politically rather than commercially motivated. For
example, labor tends to be hired not on the basis of individual qualifications and
productivity, but rather on the basis of family and personal ties and regionalism.
Similarly, wages are not priced according to productivity and costs of labor, and output
prices are not based on costs of production. These pricing practices operate without the
disciplining effect of the market.
566. Within SOEs, there is no specified group of shareholders to exert control and call
for careful monitoring. In principle, SOEs are owned by the public while the Government
holds responsibility to monitor them. These government agencies themselves exercise
control, and often do not include efficiency and economic growth objectives in their
management of public enterprises. Even when commercial goals are included as
management objectives, they frequently conflict with partisan interests. This is
complicated by the fact that government agencies are not homogenous, static
organizations, but rather take the form of a shifting coalition of interest groups that are
accountable to a variety of powerful stakeholders, including labor unions. SOEs are
therefore instructed with a set of guidelines that mirror this plethora of interests, including
maintaining high employment, maintaining price stability, and creating infrastructure for
economic growth. SOE management is appointed by government authorities, often
without reference to business experience or skill. Little action is taken to check
irregularities or to monitor the state of financial management in the sector, and
individuals are not held accountable for their actions.
2. Privatization
567. The poor alignment of economic incentives suggests that the SOE sector will not
improve in performance unless measures are taken either to introduce a greater
commercial focus or to privatize these enterprises. This section discusses the approach
to privatization. It is important to note that there are several types of enterprises that
might be suitable candidates for privatization. The following sectors will be reviewed as
potential candidates: manufacturing, transport, energy, and telecommunications.
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568. In the manufacturing sector there is no reason not to privatize all SOEs. They
are uniformly disruptive of parallel private sector operations, as well as inefficient, and
there is little hope of improving their performance within the context of government
ownership. Furthermore, they are a drain on the budget and do not actually represent a
very large share of the manufacturing sector. The basic privatization problem is that
other than the land there is almost no value in these enterprises. Their net worth is
negative in most cases so no one would buy them unless the liabilities are removed.
569. The transport sector has a number of enterprises that should be privatized. Here
there is probably real value available, but there are problems. For example the
government attempted to privatize Biman but set a series of conditions that made it
impossible to find a buyer. Biman is an interesting example, as many of the problems of
the SOEs emerge in considering how it could be privatized. First, there is the excess
staff that would have to be dealt with. Second, there are some assets that are
overvalued and others that are undervalued. The accounting procedures do not
recognize the market value of the assets, whereas this is of significant interest to
prospective buyers; thus, the value of the aircraft is less than is carried on the books,
while the value of gates at Heathrow and New York, flying rights to the Middle East, and
other factors have real market value but are not perceived as such in accounting
practices.
570. The energy sector comprises a large number of enterprises, most of which are
potentially profitable, but the sector is troubled by pricing rules and by overstaffing. The
enterprises are prime candidates for privatization if the Government was prepared to
move forward in this direction.
571. Finally, in telecommunications the Government’s efforts to raise revenues causes
the retention of the Bangladesh Telephone and Telegraph Board under government
control. BTTB is about to extend its operations into the mobile phone area, thus bringing
the Government into direct competition with the private sector. In this sector, the
Government is moving away from privatization and trying to expand its role.
572. Progress in privatization is very slow. In the early 1980s Bangladesh had the
most ambitious and successful privatization program anywhere but the program lost
momentum in the mid-1980s and has never revived. For example the Privatization
Commission listed 105 enterprises for privatization, scheduled for 1994-95. During the
period 1992-96, however, only 13 SOEs were privatized. What are the problems? Why
is this effort so unsuccessful? The basic reason is that there is widespread opposition
within the civil service, as well as within the enterprises and their holding corporations.
The sources of this opposition are ideological, cultural, and personal. Among a limited
section of the elite, there is still a preference for the SOE as the right way to organize
enterprise and a belief that the large corporations and businesses should be under
government management. To defend this view, proponents point to the condition and
behavior of large business enterprises in Bangladesh. The cultural resistance arises
from distrust of the private businessperson, who is seen as inferior to civil servants and
members of civil society. Finally, everyone involved with SOEs are perceived to benefit
in one way or another. This may take the form of payments, provision of transportation,
opportunities for travel, or access to guesthouses. Moreover, surplus labor represents
another group of beneficiaries that is naturally averse to privatization. These and other
views and vested interests help to shape opposition to privatization.
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573. There are two critical substantive problems with respect to privatization that are
relevant to governance:
574. First, there is the policy environment. For example, there is considerable interest
in trying to privatize the sugar industry. The sugar sector is in very difficult shape and it
is clear that the government does not have the will or resources to improve it; however,
the economic potential depends critically on government decisions with respect to
imports, and other matters. The problem is not so much whether there is a proper trade
policy but that the Government has been unable to make up its mind in setting clear
policy. If there were a set and stable policy for sugar, then the valuations of the plants
would follow from that and the private sector would respond accordingly. With an
uncertain policy environment, no one can confidently value the plants that may be
privatized. The policy problem is clear: the more protection afforded, the higher the
value of the industry, but the higher the domestic price of sugar. The governance issue
here is the importance of making policy and sticking to it.
575. Second is the need for consistent regulations and procedures—in effect, an
operations manual for the Privatization Commission. Currently, privatization decisions
are being made on an ad hoc basis. There is no comprehensive set of steps and
procedures to link the decisions made at the political level to the actions and
responsibilities that devolve from these decisions. At the Cabinet level there are
generalized decisions to privatize, but then these must be implemented and on this there
is no agreement. The Commission has prepared such operating rules and policies and
is waiting approval. Until this can be achieved, the process of privatization will continue
to be controversial and open to challenge.
Box 2
Closure of Adamjee Jute Mills
The closure of Adamjee Jute Mills in 2002 shows that the damage that SOEs are inflicting on
the economy can be curbed with sufficient leadership and political will. Adamjee Jute Mills had
been one of the largest jute mills in the world. It supported the families of about 25,000 workers
in Narayanganj, and ran four schools in the industrial town. The mill was also one of the most
unprofitable enterprises, with continuing losses.
Closure of Adamjee was predictably a controversial issue, and a difficult one to complete
politically. The mills were a traditional center of trade unionism, and had created many trade
union leaders. The subsequent livelihood difficulties of discharged workers were another
responsibility that the Government had to discharge well. The closure of these mills was
achieved through a combination of political will, compensation packages, and donor pressure.
The need for consistent and sustained implementation in such economic restructuring plans is
also showcased in the Adamjee Jute Mills example. Alleged delays in payment of outstanding
dues of Taka 38 crore to farmers led to smaller farmers and members of the Jute Traders
Association confronting the Bangladesh Jute Mills Corporation (BJMC) in protest. The delays in
payments and consequent burden on farmers’ survival led to a threat by the association
members to launch a “fast-unto-death” program on BJMC land, and to take the case to the
courts.
The lesson from this case is that if there is will and determination then the closure of the SOE
can be achieved; however, its privatization was not accomplished. Central to the success of this
closure was a willingness to work out with the union leaders an agreement on closure. Without
the union leadership fighting the closure it could be successfully accomplished. In some way it
appears from this case that it is easier to close the SOEs than it is to privatize.
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576. Most manufacturing SOEs have considerable debts that make them technically
bankrupt. The management of these loans is an important part of the privatization
process. Most loans of this kind have to be paid off by the Government or there will be
no positive price at which the asset can be sold. These SOEs are worth very little apart
from the land. If the Government actually wants the privatization process to result in
continuing operation of the establishments, it must strike the debt from the balance
sheet, permit the businesses to sell off surplus land, and authorize the reduction of the
labor force by the private owner. The governance issue here is the ability and will of the
Government to move ahead in actually completing the transactions.
577. Privatization policies also need to take into account negative social
consequences, including increase in unemployment, especially in industrial towns
heavily reliant on the SOE for jobs. As yet, safety net policies do not exist. Without
adequate compensation packages, it is unlikely that privatization programs will be
successful, due to the significant power wielded by militant labor unions within SOEs.
Box 2 assesses the experience of the closure of the Adamjee Jute Mills.
578. Good governance in the privatization area should focus first on establishing the
operating principles of the Privatization Commission and, second, on ensuring that the
path to privatization is clearly prescribed in written rules. Among other things, the rules
should ensure that failure to act after Cabinet approval of a privatization is not
acceptable behavior. Whether privatization will work or not will depend on the quality of
these rules and procedures, but for governance the essential point is to establish clear,
transparent, and predictable rule-based procedures.
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CHAPTER X
SMALL AND MEDIUM ENTERPRISE DEVELOPMENT
A. Introduction
579. Small and medium enterprises (SMEs) are the dominant source of industrial
employment (80 percent) in Bangladesh, with about 90 percent of industrial units falling
within this category.224 Among these, more than 50 percent are small enterprises that
employ less than 20 workers.225 Given its sheer size, the small business sector is an
important source of private sector development and economic growth, particularly in the
transformation of the economy from agriculture to industry and services. In secondary
towns, cottage industries226 appear to predominate—with SMEs representing the largest
industrial units in the local economy (Figure 1).
580. While the majority of SMEs are in the service and retail sector, the sector
includes several industrial categories, including food, beverage, and tobacco (33
percent), texile and leather (20 percent), and metal products (15 percent). In recent
years, the ready-made garments (RMG) industry has grown substantially. Agroprocessing and poultry have also become important activities in SME development.227
Figure 1: Distribution of Enterprise Size, Mymensingh Town
10-100 employees,
2%
3-9 employees,
31%
1-2 employees,
67%
Microenterprise (1-2 employees), Very Small Business (3-9 employees), Small and Medium Enterprise (10100 employees)
Source: The Asia Foundation (2003).
581. This chapter considers the ways in which governmental, financial, legal, and
regulatory institutions and civil society either constrain or encourage the growth of
SMEs. Many of the governance issues affecting the SME sector are similar to broader
private sector experience of the business environment. While major changes in the
224
Based on Industrial Policy 1999, the Government of Bangladesh defines an SME as employing between
10 and 99 employees, or with an investment of up to US$6 million. The Government further defines cottage
industries as industrial units in manufacturing or servicing, generally run full-time or part-time by family
members, with total investment limited to Taka 500,000. Donor agencies apply varying definitions. For
example, DFID defines an SME as employing 5 to 400 workers, while the IFC definition uses 50 to 500
workers, with total assets between $250,000 and $10 million.
225 Najmul Hossain (1999), The Small and Medium Enterprise Sector in Bangladesh, Report commissioned
by The Asia Foundation, Dhaka, Bangladesh.
226 The Government defines cottage industries as industrial units in manufacturing or servicing, generally run
full-time or part-time by family members, with total investment limited to Taka 500,000.
227 Asian Development Bank (2001), Quarterly Economic Update, September 2001, at 10.
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SME policy environment have historically tended to result from broader economic
changes rather than specific sectoral initiatives, studies have demonstrated that weak
governance often imposes disproportionate costs on SMEs. For example, informal
payments associated with rent-seeking in Bangladesh appear to consume a higher
percentage of income for SMEs than for larger businesses228. Inefficiencies in
governance, policy, and regulation translate into higher formal and informal costs of
doing businesses. For SMEs, these costs constitute a greater proportion of total cost,
and therefore a greater burden on operations, than for either large businesses with more
monetary and informal political resources or for micro-enterprises that operate outside
the regulatory framework.
B. Key Governance Issues
1. Policy Environment
a. Fiscal policy
582. The manner in which government revenues are raised and financial resources
are allocated and expended can be an important determinant of the business
environment for SMEs. All registered firms with an annual turnover greater than Taka 1.5
million must pay the 15 percent value added tax (VAT).229 To mitigate the impact on the
earnings of small businesses, the law stipulates that enterprises with annual turnover
less than Taka 1.5 million are subject to turnover tax at the rate of 2.5 percent in lieu of
paying the VAT. This ceiling is low enough that most small enterprises earn revenues
above the limit, making them subject to the VAT rather than the turnover tax. The large
gap between VAT and turnover tax rates creates strong incentives for firms to underreport their earnings. In addition, business owners report that VAT officials frequently
seek payment of unofficial fees in addition to the VAT. Together with the tax, these
amount to a significant financial burden. Businesses therefore have much to gain from
colluding with officials to under-report their turnover, thereby avoiding VAT payments.230
583. Cottage industries are exempt from taxation regardless of annual turnover, which
has served as a benefit to the sector. At the same time, the policy may create an
incentive to remain small and to continue to engage in informal, home-based activities
rather than enter the more formal economy. NGOs are also exempt from taxation, but in
this case the distortion may come from NGOs that have succeeded to the point where
arguably they should be paying normal taxes rather than receiving a special competitive
advantage over other commercial enterprises. Combined, these attempts to mitigate the
impact of the VAT on small businesses appear to have created an inconsistent array of
incentives and disincentives that do little to promote an efficient and competitive small
business sector.
584. Other forms of taxation, such as Excise and Supplementary Duties, are applied
on items without specification of enterprise size, thereby placing a disproportionate tax
burden on smaller enterprises. Technically, SMEs are able to apply for tax holidays
228
Najmul Hossain (1999), The Small and Medium Enterprise Sector in Bangladesh, at 20.
A value-added tax is a consumption tax, which is levied at each stage of production based on the value
added to the product at that stage.
230 Asian Development Bank (2002-2003) Strategic Framework and Interventions in the Finance, Industry,
and Trade Sectors, TA No. 3698-BAN: Review of the Finance Industry and Trade Sectors & Strategy
Formulation-Final Report, at 36.
229
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based on their size categories as set out by the National Board of Revenue. In practice,
the process is long and complicated, requiring sponsoring agencies to request approval
from the National Board of Revenue. One complication for small businesses is that sole
proprietorships may not apply for the tax holiday, making most SMEs ineligible for this
benefit. As sole proprietorships, SMEs are also required to pay a wealth tax if incomes
exceed Taka 2.5 million, which does not apply to larger companies. Inadvertently, tax
policies that were designed to raise revenues from the wealthy have become a
significant burden for small business owners.
585. These fiscal policies create a business environment that favors large enterprises.
In some cases, the laws reflect the interests of large and well connected businesses, but
in many other instances, a hostile environment has been created by a patchwork of
policies and regulations that emerged over the years from a process that included
virtually no participation of the small business community. It is difficult to determine the
extent to which these impediments negatively impact the growth of SMEs, as tax
evasion is widespread in Bangladesh, but even when taxes are not collected they may
provide opportunities for officials and inspectors to collect side payments.
b. Industrial policy
586. In the fourth Five Year Plan, SMEs were singled out as a development priority,
and were allocated Taka 2.0 billion for public development, or 0.58 percent of the total
public development budget. Only 69 percent of this allocation was actually expended
during the period and the fifth Five Year Plan (1997-2002) allocated a smaller share for
development of this sector. Public development budgets are best used for investments
in long-term enabling infrastructure and would be more conducive if applied for
improvements in health, education, energy, and transport infrastructure that will
stimulate long-term growth prospects rather than on targeted policies to stimulate growth
of certain sectors.
587. Industrial policies directly targeted at SME development generally have not been
successful in Bangladesh, as in other countries. Programs that have sought to promote
SMEs in particular sectors have often failed as a result of capture by special interests.
For example, the Bangladesh Small and Cottage Industries Corporation (BSCIC) has
been running an Industrial Estate project since the 1960s, with the goals of poverty
alleviation through income generation, self-employment through small and cottage
industry activities, women entrepreneurship development, and strengthening of the rural
economy. The project is premised on the strategy of setting aside land for small
enterprises and providing each unit with electricity and other necessary infrastructure to
operate businesses. The state subsidies provide incentives to both SMEs and large
enterprises to locate in these industrial estates. The result has been an informal
secondary market and land prices beyond the purchasing power of most SMEs. As a
result, in estates such as in Sylhet wealthy individuals have set up shopping centers but
no industries and are the main investors in the estate.231
In other cases,
misappropriation of funds designated to prepare the estate for industrial purposes has
meant that there is no demand for the space. The Bhola industrial estate has become a
grazing ground, while entrepreneurs in Bhola district cite erratic power supply as a
The Bangladesh Observer, “Financial Incentives Needed to Set Up Industries in Sylhet BSCIC Estate,”
April 27 2002.
231
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deterrent to investment.232 These difficulties exemplify why economists do not
recommend policies targeting SMEs.
2. Financial Institutions233
588. Weaknesses in the banking system combined with very high rates of loan default
have resulted in banks that are highly risk-averse. In many cases this is a rational
response by the banking sector to an environment in which access to credit depends on
privileged connections and borrower responsibilities are poorly understood. These
political economy factors mean that lending is normally accompanied by terms that
include interest rates that currently range from 14 percent to 22 percent, lengthy
documentation requirements, and real estate security amounting to 200 percent of the
loan amount. These requirements add to the cost of capital and effectively restrict SME
access to credit
589. High collateral requirements are directly linked to perceived risk in the
environment. Government schemes to target money for economic growth purposes
through Nationalized Commercial Banks are marked by high default rates that have
distorted financial markets. In December 2002, the non-performing loan ratio of NCBs
was 34 percent (an improvement from 37 percent a year earlier), compared to 16.7
percent in private banks (a slight improvement from 17 percent the previous year). 234
Lenders must also hedge against the high cost of repossessing goods used to secure
loans in the event of default. Where legal proceedings commence on a defaulted
mortgage, a repossession action can take between three years and a generation to
complete.235 Cases of this kind are dealt with through the Money Loan Courts, which, as
explained in Chapter VI, are burdened by case backlog, corruption, and poorly trained
staff. To some extent, over-collateralization may be an attempt by commercial banks to
signal to borrowers that they are serious about repayment and to hedge losses
associated with repossession through the courts should the loan go bad.
590. Moreover, the current secured finance236 law comes with a variety of statutory
provisions and judicial precedents, such that security instruments and requirements
differ between mortgages, pledges, charges, and leasing or hire-purchases.
Transactions that are equivalent in value and purpose are nevertheless treated in
different manners depending on the security in question, thereby creating different legal
requirements and adding to delays. A more efficient system would classify collateral
according to value, and design security agreements based on collateral classification
rather than the form of transaction. Alternative forms of collateral such as accounts
receivable, letters of credit, and chattel paper are not practiced. The credit reporting
system, despite recent computerization, remains outdated and inconsistent. Reporting
is required for charges on company assets and floating charges, but not for pledges and
hypothecations or encumbrances against assets for sole proprietorships. Since most
The Independent Bangladesh, “Bhola BSCIC Estate’s Fate Uncertain,” February 25, 2003.
Corporate governance issues within the banking sector affecting economic growth are discussed in
Chapter IX. Readers should refer to this chapter for a more detailed analysis of governance constraints in
the financial sector.
234 Asian Development Bank (2003), Quarterly Economic Update, March 2003, at 7.
235 Patrick Meagher (1998), “Secured Finance for SMEs in Bangladesh,” JOBS Program, IRIS, University of
Maryland at College Park.
236 Secured finance refers to financial transactions requiring security (including real estate and non-real
estate security).
232
233
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SMEs are sole proprietorships, credit reporting is therefore much less stringent for the
sector. The computerized Credit Information Bureau places reporting requirements on
debts of Taka 10 lakh and higher, but this information is not freely available. The debt
information takes on average two months to become available, and even then can only
be accessed by regulated financial institutions and relevant government agencies. The
lack of transparency therefore reduces the utility of credit reporting, lowering incentives
for timely repayment behavior. Since the CIB system does not work efficiently,
companies and financial institutions have less of an incentive to both feed information
into the system, and to rely on it for credit information.
591. Collateral requirements are cited as the primary barrier to SME access to credit.
Any loan greater than Taka 100,000 requires real estate security, and/or endorsement
from an influential person.237 Even then, collateral does not offer effective protection to
lenders. Inefficiencies in the land titling system impose a high cost on loan processing,
and reduce the value that can be extracted from collateral. Part of the inefficiency stems
from incomplete land surveys that have not been updated since 1918, and from the
delays involved in the title and mortgage registration systems. The security` registration
system is paper-based and highly unreliable. Multiple deeds can exist for a single parcel
of land, and forgery and incomplete documentation are common.
592. A number of donor-funded government programs have been designed to extend
credit to the SME sector in the face of these problems. These include ADB’s SME
Development and Expansion Program (SME-DEEP), the International Finance
Corporation (IFC)’s Small Enterprise Development Fund (SEDF), and the United States
Agency for International Development (USAID)’s Job Opportunities and Business
Support (JOBS) program. While each project has made important contributions to the
sector, governance weaknesses, corruption, and bureaucratic inefficiency have affected
the ability of SMEs to enjoy the full, intended benefits of these initiatives. It should be
noted that, while the majority of private firms are considered microenterprises by
government definition, a large proportion of these enterprises are not generally eligible
for borrowing in Bangladesh’s large micro-credit market.
3. Infrastructure and Public Service Delivery
593. The poor state of basic infrastructure and public utilities provision increases costs
for SMEs both in production and in accessing markets. The most commonly cited
concern is irregular power supply, particularly in large cities, which has an impact on
manufacturers that are dependent on electricity and on retail and service providers who
require power to service customers. SME owners are likely to suffer more than large
businesses from the poor quality of energy supply, as they lack resources to make
independent provision for alternative energy supplies, such as stand-by generators.
Deregulation of the power sector has been proceeding in a gradual but steady fashion.
The 1996 Private Sector Power Generation Policy allowed for private sector
involvement, and led to the addition of Independent Power Producers (IPPs) and urban
power companies. This increased the generating capacity of the country to 4,005
Megawatts (MW). Actual availability of energy for general public consumption, however,
remains at only at 2,850 MW, below system capacity. This is discussed in further detail
in Chapter XIV.
237
Patrick Meagher (1998), Secured Finance for SMEs in Bangladesh.
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594. The poor quality of roads and rail systems are another source of high costs for
SMEs that must move their goods to market. This problem is compounded by informal
costs such as time delays from traffic congestion, and reported demands for regular payoffs to the police along highways.238 The Government is making some movement
towards improvements in transport. A Private Sector First Policy (PSFP) for transport
infrastructure development and management is under consideration by the Government,
a National Land Transport Policy239 has been drafted, and a list of projects for private
sector investment in infrastructure are included for the first time in the Annual
Development Program 2003-2004. Feeder roads are not only under-funded, but suffer
from a confusion of agency oversight. The Roads and Highways Department (RHD) and
the Local Government Engineering Department (LGED) share responsibility for
maintaining feeder roads. As a result, a large proportion of feeder roads are unpaved
and poorly maintained.240 Further reforms in opening and regulating the sector are
currently supported by ADB and other donors.
595. Difficulties in the telecommunications sector restrict SME access to customers,
suppliers, and business service providers. For fixed lines, waiting times are estimated at
4.4 years on average and connection fees at Taka 18,400.241 The sector has seen
improvements with the establishment of the Bangladesh Telecom Regulatory
Commission (BTRC) in June 2002. The establishment of the BTRC creates a
competitive regulatory environment for telecommunications, with active private sector
participation.242 Private investment in the telecommunications sector has already
contributed to a rapid increase in the teledensity (number of telephones per 100
persons) of the country, with a large proportion of the increase occurring in the cellular
mobile telephone market.243
The influx of private service providers in the
telecommunications industry is believed to have reduced fixed costs and waiting times
for business owners. For SME owners, and for smaller sole proprietorships in particular,
this may represent a significant reduction in the costs of doing business.
596. Scarcity and monopoly provision of public utilities (electricity, gas, and water)
create incentives for rent-seeking, often to obtain connections sooner. Businesses also
face alleged pressure from bill collectors to collude on utility bills, with the required
payment amount lowered in return for kickbacks to officials involved. Businesses that
refuse to pay kickbacks face increased harassment and more stringent billing.244 Table 1
shows entrepreneur and household perception ratings of corruption and service quality
in urban public utilities. Corruption ratings are high across the board, while service
quality ratings are poor in all agency categories for both households and enterprises.
Moreover, enterprise ratings of corruption tend to be higher than those of households.
238
In a nationwide survey of 1500 enterprises, sixty percent of businessmen surveyed reported paying
bribes to the police, and over one third reported paying bribes to local mastaans and political activists (36
percent and 38 percent respectively). See World Bank (2002), Bangladesh: Improving Governance for
Reducing Poverty, at 22.
239 The policy covers integrated strategic development of roads, ports, and railways, and provides guidelines
for private sector involvement in these transport modes.
240 World Bank. (2003), Rural Transport Improvement Project, World Bank, Bangladesh. For a more detailed
discussion on the state of the transport infrastructure, please refer to Chapter XIII.
241 S.M. Uddin, (2001), Current Situation of E-Commerce in Bangladesh. Presented at the Asia Pacific
Telecommunity Meeting. Unpublished.
242 Asian Development Bank (2002), Bangladesh Country Strategy and Program Update 2003-2005.
243 S.M. Uddin (2001), Current Situation of E-Commerce in Bangladesh.
244 Najmul Hossain (1999), The Small and Medium Enterprise Sector in Bangladesh, at 20.
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Table 1
Public Utility Ratings
HH
8.0
Ent
8.4
Service
Quality
Ratings
HH
Ent
2.5
1.3
Gas Company
Water Supply
5.3
7.1
3.3
Na
6.1
7.1
3.3
2.6
Telephone
5.7
7.4
3.2
2.5
Agencies
Electricity Supply
Corruption
Ratings
HH: Households’ Evaluation; Ent.: Entrepreneurs’ Evaluation
0 = Low; 10 = High
Source: The World Bank. (2002), Bangladesh: Improving Governance for Reducing Poverty.
597. Other public services are equally problematic. In rural areas, waste disposal and
sewage is the responsibility of local government, but insufficient revenues result in
services simply not being provided, with consequent health and environmental
implications that have a direct impact on SME owners. A number of donors, including
ADB, World Bank, and the Government of Germany are working to improve such
infrastructure, particularly in rural areas.
4. Regulatory Regime
598. The market liberalization reforms that took place in the 1980s greatly improved
the ease of setting up and operating SMEs. Sanctioning procedures and other
regulatory barriers were eased, while trade barriers (including import procedures) were
reduced. More importantly for SMEs, agricultural input markets were liberalized and the
government embarked on privatization schemes for many state-owned enterprises.
Nevertheless, with the exception of reduced regulatory burden for the garments industry,
the liberalization of the industrial sector has lagged behind other reforms. A “plethora of
quasi-controls” remain with regard to licenses, permits, and certifications required for
businesses to begin operations.245
599. To establish an enterprise, an entrepreneur is required to procure a trade license
from the local government body by paying statutory fees under the Companies Act 1994.
Studies indicate that each step in the licensing and registration process involves bribe
payments and time delays, representing significant transaction costs. Registration with
the Registrar General246 involves not only the greatest amount of time (2.8 weeks), but
also one of the largest bribes (190 percent of the registration fee), and is practiced by
the highest percentage of surveyed businesses (76 percent) (Table 2)247.
S. Ahmed (2002), The Politics of Reform in South Asia: Bangladesh and Pakistan,” Dhaka, World Bank,
at 31.
246 The Office of the Registrar General is responsible for the registration of companies under the Companies
Act 1994. More details on business registration under the Companies Act can be found on
http://www.vakilno1.com/saarclaw/bangladesh/companies_act.htm
247 World Bank (2002), Bangladesh: Improving Governance for Reducing Poverty, at 19.
245
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Table 2
Time and Money Required to Obtain Registration and Licenses
Time Taken to
Register the Firm
(weeks)
Bribe as
Percentage of
Registration Fee
Percentage of
Surveyed
Enterprises that
Paid Bribes
2.8
2.1
2.1
190
204
130
76
47
53
1.5
1.7
119
177
75
36
1.9
162
47
1.4
2.0
85
155
62
57
For Registration
Registrar General
Chamber of Commerce
City/Corporation/Municip
ality
Cooperative Society
Trade Association
For Licenses
City/Corporation/Municip
ality
Zila/Thana Parishad
Trade Association
Source: World Bank. (2002). Bangladesh: Improving Governance for Reducing Poverty. World Bank,
Bangladesh.
Table 3
Waiting Time, Official Unofficial Payments to Obtain Illustrative Utility
Connections, Permits, and Licenses in Mymensingh Town
Services
Telephone
connection
Electrical
connection
Construction permit
Registrar of Joint
Stock Companies
Municipality/operatin
g license
Gas connection
Total Waiting Time
Official Fees
Unofficial Payments
(days)
(Taka)
% of Mean Media % of Mean Media % of Mean Media
Firms
Firms
n
Firms
n
n
6.9% 134.6
90
6.9%
16,420 18,400 6.9% 2,833
2000
9.7%
21.3
15
8.6%
2,763
974
500
0.2%
0.4%
7.0
4.4
7
4
0.2%
0.4%
200.0
132
200
150
0.2%
0.4%
0
0
0
0
56.9%
4.2
2
56.4%
327
200
52.1%
212
25
0.8%
64.6
45
0.5%
2,300 7.8%
38,081 35,000 0.1% 20,000 20,000
Note: The “% of Firms” column refers to the share of firms reporting payments made for selected services.
The mean and median figures refer to those firms making payments.
Source: The Asia Foundation. 2003.
600. The inefficiencies of registration and other regulatory requirements may differ
between large cities such as Dhaka and Chittagong, and smaller, mid-sized towns. For
example, a 2003 survey conducted by The Asia Foundation and Data International Ltd.
in the secondary Town of Mymensingh found that businesses did not identify the
process of licensing and registration as priority problems (See Table 3). At the provincial
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level, most firms (over 90 percent) are sole proprietorships and obtain licenses from
municipal authorities rather than registering their business. In large cities, where higher
numbers of firms are required to register as opposed to taking out a license, this process
appears to be more onerous (See Table 3).
601. In the same Mymensingh survey, it was also found that bribes that are paid,
either to access services or to obtain permits, tend to have a heavier impact on revenue
for smaller enterprises than for larger ones (See Table 4).
Table 4
Annual Average Unofficial Payment
by Size Class, Mymensingh Town
Size
ME
VSB
SME
Total
% of Firms
9.6%
5.0%
0.7%
15.2%
Minimum
(Taka)
20
20
200
20
Maximum
(Taka)
10,000
14,000
20,000
20,000
Mean
(Taka)
864.
1,628
4,900
1,290
Mean as % of Sales
7.2
4.1
1.2
5.9
Note: The “% of Firms” column refers to the share of firms reporting payments. Unofficial payments refer to
one-off payments made to obtain services or permits.
ME = MIcroenterprise (1-2 employees), VSB= Very Small Business (3-9 employees), SME = Small and
Medium Enterprise (10-100 employees).
Source: The Asia Foundation. 2003.
602. A number of regulations do not distinguish between firms by size and may place
a particular burden on SMEs. For example, the Factories Act, 1965 requires all
manufacturing firms that employ more than 10 persons to register with the Office of the
Chief Inspector of Factories and Establishments, in order to facilitate oversight of factory
working and safety conditions.
These working and safety standards are not
differentiated according to firm size, and their provisions are unrealistic for small
enterprises. The Act has allegedly become a source of lengthy delays and rent seeking
by local authorities.248 Similarly, the Department of Environment (DOE) requires all
industrial firms to complete a certification process for pollution and safety standards that
does not distinguish between the different operating environments of small and large
businesses.
603. Visits by regulatory and administrative officials are supposedly aimed at
monitoring and assisting enterprises to adhere to safety, sanitary, environmental, and
tax regulations and statutes. Table 5 shows the number of visits made to enterprises in
Mymensingh Town. The perception is raised that multiple, time consuming visits may, in
many instances, be motivated by rent-seeking rather than legitimate enforcement.
Excessive monitoring and supervision causes entrepreneurs to lose time and creates
implicit pressure to pay bribes.
248
Najmul Hossain (1999), The Small and Medium Enterprise Sector in Bangladesh, at 19.
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Table 5
Number of Visits by Regulatory and Administrative
Authorities Annually, Mymensingh Town
Authorities
Municipality
Sanitary inspector
Labor inspector
Fire and building safety
Land registration office
Police
Income tax authorities
VAT authorities
Environment
% of Firms
9.3%
2.3%
3.0%
1.9%
0.5%
1.0%
23.6%
9.2%
0.5%
Min
1
1
1
1
1
1
1
1
1
Max
12
12
52
4
1
12
12
12
1
Mean
2.1
4.0
6.4
1.9
1.0
2.8
1.5
2.9
1.0
Median
1
4
4
1
1
1
1
1
1
Note: The “% of Firms” column refers to the share of firms reporting payments made for selected services,
And other values refer to those firms reporting visits.
604. It should be noted that the Factories Act, 1965 only applies to industrial units that
employ more than 10 persons, and therefore excludes most cottage industries. DOE’s
Environment Conservation Rules 1997, which establish compliance standards and fees
for all industrial units in Bangladesh, similarly exempt cottage industries (other than
certain ones that are specifically listed in its classification) from requiring a Clearance
Certificate from the DOE. These exemptions, in addition to the aforementioned
exclusion of small and cottage industries from VAT payments, act as strong incentives
for cottage industries to remain small, in order to avoid the additional licensing, taxation,
and informal payment burdens that accompany business expansion249.
5. Legal Framework and Enforcement
605. Bangladesh’s judicial system is marked by procedural inefficiencies and
perceptions of corruption that dissuade many potential litigants from turning to the courts
to resolve legal problems. Many SME owners are unable to afford the costs involved in
completing lengthy court procedures and lack the financial resources or connections
necessary to influence favorable outcomes. As a result, SMEs may seek alternative
forms of contract enforcement and dispute resolution that are more efficient than the
formal court system.
606. Commercial undertakings between SMEs rely more on personal ties and
connections as forms of guarantee than on paper contracts. Entrepreneurs are more
averse to entering into contracts with strangers; rather, they tend to seek personal
recommendations, basing their decisions on the reputation of the other party in the
community concerned. Business disputes are also more likely to be settled through
mediation by local leaders or mutual relations than through the formal legal system. This
reliance on informal ties therefore acts as an alternative form of security in the SME
business environment. Most SMEs finance their businesses using either personal funds
or through borrowing from personal relations.250
249
Asian Development Bank (2002), Strategic Framework and Interventions in the Finance, Industry, and
Trade Sectors, at 36.
250 In a survey of enterprises in Mymensingh, over 90 percent of survey respondents had obtained financing
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607. Though these existing informal practices may be sound and more effective than
formal legal recourse, the weakness of the formal system still imposes costs on SME
activities. Reliance on personal relations, local reputation, and past experience as the
main criteria for engaging in joint business activities necessarily reduces the amount of
economic activity generated. A legal framework that allowed public information,
transparent contracts, enforceable rules, and efficient dispute mechanisms should, in
principle, enable economic agents to transact at much lower costs. Given the deeply
entrenched problems of the formal system, it may be possible to realize some of these
potential economic gains through concurrent efforts to enhance informal dispute
resolution mechanisms in addition to formal justice sector reforms.
608. Similarly, law and order is a commonly cited barrier to private sector growth.
There is a perception among many SME owners that police fail to fulfill their protection,
enforcement, and investigative roles. In large cities, extortion by organized criminals, or
mastaans, is a major concern of businesspersons.251 Moreover, there is a perception
that police may play a collusive role in these activities, by either refusing to pursue
criminals or by releasing offenders in exchange for bribes.253
6. Civil Society
609. A large number of business associations exist in Bangladesh to represent private
sector interests. Those that exercise an influential role at the policy level are the
Federation of Bangladeshi Chambers of Commerce and Industry (FBCCI) and the
Bangladesh Garments Manufacturers and Exporters Association (BGMEA). These
organizations tend to be dominated by large, powerful industrialists with strong political
connections. Small business interests are unlikely to benefit from FBCCI and BGMEA
participation in economic policy decision-making unless their interests coincide with
those of large companies. Sectoral associations may be more successful in this regard
but run a high risk of seeking special treatment for their sector. Many of the national
chambers offer business development service (BDS) programs to improve the internal
governance of SMEs, largely funded by donors.
610. National associations representing small and cottage industries include the
National Association of Small and Cottage Industries of Bangladesh (NASCIB), the
Women’s Entrepreneurs Association (WEA), and the Bangladesh Agro-Processors
Association (BAPA). To date, these associations have yet to demonstrate significant
impact in terms of policy leverage and representation of constituent interests. All
national-level associations appear to have weak branches and few linkages with
constituencies outside of the largest cities. Moreover, they cannot be said to represent
national interests, even when they do advocate for small business members.
611. Outside of Dhaka, where SMEs tend to be the larger businesses in their
community, they dominate formal chambers and have privileged access to local
either from personal savings or personal borrowing. The Asia Foundation (2003) The Business Environment
and the Role of Supporting and Regulatory Institutions: An Assessment of a District Town in Bangladesh, at
25. Other studies focused at the national level report similar findings. See Patrick Meagher (1998), Secured
Finance for SMEs in Bangladesh, JOBS Program, IRIS Center, University of Maryland at College Park, at 2.
251 In a nationwide survey of 1500 enterprises, over one third reported paying bribes to local mastaans.
World Bank, (2002), Bangladesh: Improving Governance for Reducing Poverty, at 22.
253 Ibid at 7-9.
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policymakers.
Despite this leverage, the effectiveness of local chambers is
questionable. They often see themselves as representing the apex body, the FCCI, in
the town rather than vice-versa. In some instances, they exclude microentrepreneurs
from joining, thereby failing to represent the majority of the private sector in their town.
Micro and small enterprises are instead served by informal business associations called
samities. Samities are constituted on sectoral or geographic (such as a market or street)
lines and provide a number of important services. Headed by an elected executive
committee of president and treasurer, samities provide security and trash collection,
sometimes run informal credit circles, and interface with government officials including
tax collectors, police, and officials on behalf of members. A survey in Mymensingh
found that only 4.7 percent of business owners surveyed were members of the formal
chambers, while 24.4 percent were members of market samities.254 Chamber members
demonstrate low satisfaction levels with their chamber, while samity members tend be
more satisfied with the services provided by samities (See Table 7).
Table 7
Perceptions of Samity and Chamber Effectiveness (percentage)
Issues
Chamber Samity Neither
No
Don’t
Comment know
22.9
10.2
Solving local mastaan problems
Dealing with income tax and VAT
authorities
Dealing with public utility authorities
Help in resolving conflict with clients/
suppliers /others
Law and order (police protection)
1.2
27.6
38.0
0.2
6.5
51.1
19.8
22.4
0.0
10.1
46.3
20.2
23.4
0.0
21.1
47.1
19.5
12.2
0.7
12.3
47.3
19.7
19.9
Advocating pro-business policy changes
0.0
5.1
36.6
22.1
36.2
Marketing
Getting information on legal or regulatory
changes/requirements
Help in obtaining credit
0.0
3.4
53.5
20.5
22.6
0.0
9.3
36.9
21.0
32.8
0.0
1.4
56.7
19.1
22.8
Note: Percentages represent firms responding in the positive. Source: The Asia Foundation (2003).
612. If local chambers are to be effective in serving SMEs, they need to improve their
focus on serving members and develop linkages both with samities that represent
smaller firms and national apex bodies that have access to central policymaking
processes.
613. SME specific issues have received increased media attention, which is an
encouraging sign for generating greater public awareness on the needs of this sector.
The link between independent research and media reporting should be strengthened, in
order to diversify information sources and viewpoints and to improve the quality of
reporting.
254
The Asia Foundation (2003), The Business Environment and the Role of Supporting and Regulatory
Institutions: An Assessment of a District Town in Bangladesh, at 43.
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C. Issues And Opportunities for Reform
614. The main constraints to SME development, which include the legal and
regulatory framework, quality of governance, infrastructure (particularly electricity and
transport), and bottlenecks in the financial systems, are faced across the economy as
opposed to being unique to SME owners. Accordingly, the SME sector is most likely to
benefit from focused government efforts to improve the enabling environment for
business, enforce discipline in the financial sector, and reduce corruption in publicprivate interactions. Building on its support for SME development, ADB recently
completed a comprehensive study on Strategic Framework and Interventions in the
Finance, Industry, and Trade Sectors, which devotes a chapter to SME development
and export expansion.255 The combination of issues facing the SME sector—which
concern the nature of SMEs as businesses and how they grow, the legal and policy
framework in which they operate, and various risk management issues—reflect the
interplay of sectoral and core governance in the SME sector and underline the
importance of concurrent sectoral and core governance initiatives in ensuring that SMEs
achieve their full potential as engines of national economic growth. The following
governance issues are of particular importance to future sectoral interventions. Their
interrelationship is illustrated in Figure 1.
1. Policy
615. Government industrial policy towards SMEs currently focuses on direct support,
such as subsidized industrial estates, direct purchasing of cottage industry products, and
subsidized business development services and credit. These policies, while costly to the
State, have proven largely ineffective in promoting new activities. Instead, they have
tended to distort the policy environment and to create new obstacles to growth for most
existing businesses. A more sustainable approach would be to focus on removing
distortions and regulatory burden in the economy. For example, fiscal policy and tax
administration should be reviewed to remove provisions that discriminate against sole
proprietorships or create perverse incentives for firms to stay small to avoid taxation.
Tax rates should be rationalized so that incentives for collusion with tax collectors and
under-reporting are mitigated, with the tax code remaining simple to understand.
2. Financial
616. Financial sector reform efforts will have an important impact on making credit
more readily available to SMEs. In particular, measures to ensure that banks can
manage risk effectively should be supported. These include simplification of current loan
security procedures, and revision of the security registration and credit information
systems. The inefficiencies created by the problematic land titling system have resulted
in tenure insecurity that reduces the ability of firms to provide collateral. One priority
action is therefore to create a transparent, efficient land administration system that
provides secure property rights through enforceable contracts. This would improve the
incentives for business activity.
617. Strengthening loan procedures, credit information, and property rights are
economy-wide concerns. As discussed in Chapter IX, the banking system is already
255
Asian Development Bank (2002-2003), Strategic Framework and Interventions in the Finance, Industry,
and Trade Sectors. See in particular Chapter 2 (November 2002).
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troubled by poor credit discipline, overstaffing, inadequate regulation, and corruption. 256
It is therefore important that the Government act pragmatically when designing or
discussing SME access to credit. While there are encouraging signs that financial
institutions are willing to explore alternatives to collateralized loans, these will have the
most measurable impact in an environment in which SME lending is considered a
profitable, relatively low risk proposition. Measures to increase lender capacity need to
be taken with complementary measures in privatization and corporate governance
reform.
618. It appears that the majority of SMEs, with the exception of women-owned SMEs,
do not have access to Bangladesh’s pervasive micro finance market. Large-scale
providers such as Grameen Bank and BRAC target micro enterprises (often homebased self-employment) rather than more commercial enterprises. In the survey on
enterprises in Mymensingh, only 0.6% of enterprises cited NGOs as a source of
finance257. Commercial banks such as Sonali Bank have lent through cooperative
associations and village societies, but have experienced difficulties in recovering these
loans.258 International experience has demonstrated that SMEs can in fact be a very
profitable marketing segment. For example, in Indonesia the success of Bank Raykat
Indonesia has led a number of commercial banks to start competing for the SME market.
Support to micro finance institutions to move up market may be helpful in expanding
access to credit.
Figure 1
Relationship of the Various Factors
That Influence SME Growth and Performance
256
Asian Development Bank (2001) Asian Development Outlook 2001.
www.adb.org/Documents/Books/ADO/2001/BAN.asp
257 The Asia Foundation (2003) The Business Environment and the Role of Supporting and Regulatory
Institutions: An Assessment of a District Town in Bangladesh, at 25.
258 Meagher, P. (1998) Secured Finance for SMEs in Bangladesh.” JOBS Program, IRIS Center, University
of Maryland at College Park. at 20.
185
and Regulatory Reform)
Asian Development Bank: Bangladesh Country Governance Assessment
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Cost of Production
Access to Finance
SME
(Energy)
(Financial
Reform)
Sector
Access to Markets
(Transport)
3. Legal and Regulatory Framework
619. SMEs in Bangladesh are constrained by archaic legal and regulatory structures
that impose registration, monitoring, supervision, and security requirements that take
time to attend to and reduce business efficiency. Requirements that represent
appropriate government regulatory and oversight interests are poorly administered and
tend to frustrate rather than facilitate honest business practices. Other essential legal
and regulatory elements, such as security of title to land, efficient judicial procedures for
the enforcement of contractual obligations, and assurance of law and order are largely
absent. These deficiencies raise the cost of doing business and may actually bar certain
types of business that would prosper in a more conducive legal environment. The
launch of the Legal and Judicial Capacity Building Project by the World Bank and other
donor agencies259 aims to address these and other issues, but it will take some time for
reforms to begin to register in the business affairs of SMEs. In the meantime, alternative
dispute resolution mechanisms may facilitate SME business dealings, while
improvements in the commercial code and other laws affecting small business will also
contribute to a more conducive environment for SME growth.260
4. Registration and Statistical Monitoring
620. Responsibility for registering businesses is shared by a combination of national
and local agencies whose coordinating capacity is presently limited. Consequently, the
registration system fails to provide a reliable information base for monitoring enterprise
structure and performance in the context of land use and urban planning, fiscal
compliance, import-export integrity, safe working conditions, environmental compliance,
and statistical progress monitoring. For example, the annual Census of Manufacturing
Industries and other survey functions of the Bangladesh Bureau of Statistics is
inadequately funded and poorly managed.261
5. Secured Transactions Legal Framework
621. A modern secured transactions framework founded on a secured transactions
law and a computer-based national electronic registry system for moveable assets will
benefit the majority of small business owners who are more likely to pledge moveable
property than land as collateral for credit.262 As discussed in Chapters VIII and XV,
259
For a more detailed description of the project, see Chapter VI.
Asian Development Bank (2002-2003) Strategic Framework and Interventions in the Finance, Industry,
and Trade Sectors. at 41.
261 Ibid, at 41-42.
262 Ibid, at 42.
260
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ADB’s planned Good Governance TA will help to strengthen governance and corruption
prevention in secured transactions.
6. Land Administration
622. As cited in several connections above, reform of the land titling system will have
a positive impact on SME development and other sectors, reducing the volume of
lengthy litigation and one of the primary causes of social conflict in Bangladesh. For the
SME sector, clarification of property rights and security of title will provide entrepreneurs
with improved access to credit through the pledge of real property as security for
lending.263
7. Improved Law and Order
623. Improvements in the present law and order environment, in which SME owners
face pressure from criminal elements and dishonest businesspersons prosper, will help
strengthen the enabling environment for business development.264
8. Infrastructure and Public Service Delivery
624. SME development will benefit from improvements in local infrastructure and
public service delivery that are presently constrained by weak governance standards
and other factors. The previously referenced ADB study concluded that the most urgent
service sectors to be addressed are ports and power. Governance reforms and
technical upgrades are needed to improve the efficiency of Chittagong and other major
ports. The power sector also needs to be improved and developed through policy
reforms focusing on restructuring of sectoral finances, tariff rationalization, and other
issues discussed in detail in Chapter XIV. There is also a need for credit and investment
components focused on support for power generation, essential transmission, and
distribution strengthening to meet the energy needs of an increasing number of
customers and to improve supply to existing customers.265 The National Land Transport
Policy currently under consideration plans to bring several transport modes into one
integrated strategic framework for development, and to bring greater funding into those
that have traditionally been neglected. The Annual Development Program 2003-2004
has set aside projects for private bids.
9. Civil Society
625. Reforms in financial, legal, and regulatory systems and infrastructure discussed
above should be implemented with opportunities for direct participation by SME owners.
Accordingly, it is important to increase space within established channels for
entrepreneurs to voice their business concerns. This can be achieved through
broadening policy dialogue to include regional chambers and samities and increasing
the policy advocacy role and capacity of these organizations. Research in Mymensingh
shows that in mid-sized towns, medium enterprises and smaller businesses are joining
separate business associations. Relationships between the formal and smaller informal
associations are characterized by a combination of tensions and collaboration. Given the
263
Ibid, at 42.
Ibid, at 43.
265 Ibid, at 40-41.
264
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limited resource capability of small samities and the greater policy leverage of larger
chambers, effort should be directed towards supporting collaborative projects between
the two groups to ensure that the interests of smaller businesses are represented.
626. The media plays an important informal, horizontal accountability role in raising
levels of transparency and accountability in the public sector, and in highlighting the
indirect negative impact that broad, non-discriminative policies have on SMEs in terms of
regulatory and fiscal burden. Technical assistance directed at strengthening media
knowledge of SME-specific constraints to growth will significantly improve the quality of
business and economic reporting and help to make government policies more
accountable to business owners.
627. In addition, research institutions need to conduct more studies within the SME
sector in order to improve measurement indicators and sharpen policy recommendations
in this area. Independent research also helps to diversify the sources of information on
SMEs, and to reduce dependency on BSCIC-generated information. This also serves to
enhance transparency and accountability in the sector. Potential areas of research
include the ability of “graduates” of NGO micro finance programs to access formal credit,
rural versus urban barriers to credit access, and gender-specific barriers to SME
entrepreneurship.
CHAPTER XI
EDUCATION
A. Overview
628. In the three decades since Independence, Bangladesh has made significant
progress in increasing access to education and expanding the geographic coverage of
the education system. Primary education reforms have been especially effective, with
enrolment increasing from 72 percent in 1990 to 91 percent in 2000. The gender gap
has narrowed with an increase in female enrolment, including among the very poor. 266
The traditional disparity between urban and rural enrolment has also been reduced as
enrolment increases among the rural population, while the literacy rate for children over
266
The World Bank-Asian Development Bank (2003), Bangladesh Public Expenditure Review, Dhaka, at 51.
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seven has increased from 24 percent in 1991 to 50 percent in 2000. These and other
achievements are comparable to countries with higher per capita income.267
629. Despite these achievements, the full potential of education reform has not been
met. Advances in enrolment, gender parity, and literacy have yet to be matched by
improvements in education management.268 Management constraints have affected the
quality of education. Student attendance rates are low at 62 percent, while teacher
absenteeism is high at an average of 5 to 20 percent. As the economy evolves, the
standard curriculum is increasingly less relevant to the career aspirations of students or
consistent with employment opportunities. Students have little contact with teachers and
the quality of classroom instruction is low. Finally, passing and completion rates are
especially low.269
630. A recent World Bank survey reports that parents are increasingly dissatisfied with
the education system.
Sixty-five percent of households surveyed expressed
dissatisfaction with the quality of education generally, and with the standard of primary
education in particular. Parents of primary school students are sensitive to the
perceived increase in corruption in and administrative neglect on the part of the
Directorate of Primary Education. They are increasingly bound to incur expenses over
and above those born by the State.270 Respondents noted problems in the supply of
textbooks that are supposed to be provided by government, especially in the case of
poorest students. Poor families face particular difficulties in ensuring quality education
for their children and in securing their entitlement to stipends for female education. 271
However the issues are characterized, weak governance lies at the heart of most
constraints to educational development in Bangladesh.
631. Weaknesses in a system of centralized management and administration have left
the education system vulnerable to corruption and partisan interference. Corruption is
perceived to occur in personnel recruitment and management, production and supply of
textbooks, public examinations, construction and maintenance of schools, and stipends
for poor students and girls. As a result, improvements in education have not occurred
on a scale relative to the investment. In addition, education administration is subject to
centralized bureaucracy, with inadequate devolution of decision-making authority to local
representatives of central government agencies and/or local government bodies, and
few opportunities are extended for communities and families to play a role in education
policy and management at the local level.272
B. Legal and Administrative Structure and School Operations
1. Legal and Administrative Structure
632. Article 17 of the Constitution prescribes the basic obligation of the State to
provide universal education:
267
Ibid
Ibid.
269 Ibid at 52.
270 World Bank (2002), Bangladesh: Improving Governance for Reducing Poverty. at 25-26.
271 Ibid, at 27-28.
272 The World Bank (2001), Building on Success to Make a Strong Education Sector Stronger. Policy Brief
#7: Education. at 8.
268
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The State shall adopt effective measures for the purpose of(a) establishing a uniform, mass-oriented and universal system of education and
extending free and compulsory education to all children to such stage as may
be determined by law;
(b) relating education to the needs of society and producing properly trained and
motivated citizens to serve those needs;
(c) removing illiteracy within such time as may be determined by law.
633. The education system in Bangladesh consists of five years of compulsory
primary education (Classes 1-5), three years of junior secondary education (Classes 68), two years of secondary education (Classes 9-10), and two years of higher secondary
education (Classes 11-12). The post-senior secondary higher education system
comprises degree colleges, universities, and other higher-level institutions.273 There are
three educational streams: vernacular, religious (madrasah), and English-language.
a. General management structure
634. Education is administered through a series of regulatory laws passed in the years
following Independence. Original laws have been succeeded by new legislation in some
cases, while in others they have been amended by successive administrations. Primary
education is regulated by the Compulsory Primary Education Act, 1990, while secondary
education is administered in accordance with the Bengal Education Code of 1930, as
amended.
635. Primary Education: The Ministry of Primary and Mass Education (MOPME) has
overall authority for primary education. The Prime Minister presently holds the
ministerial portfolio.
The MOPME is responsible for policy formulation, while
implementation responsibility lies with the Directorate of Primary Education (DPE),
headed by a Director General. Administrative units at the Division, District, and Upazila
level are headed by Deputy Directors, District Primary Education Officers (DPEOs), and
Upazila Education Officers (UEOs), respectively. The DPE and its district and upazila
level offices are responsible for the management and supervision of primary education.
Their responsibilities include recruitment, posting, and transfer of teachers, in-service
teacher training, distribution of textbooks, and supervision of schools. At the school
level, School Management Committees perform specific functions prescribed by
government directives.274
636. Secondary and Higher Education: The Ministry of Education is responsible for
policy formulation for secondary and higher education, while Directorate of Secondary
and Higher Education (DSHE), under the Ministry of Education, is responsible for
implementing policies. The DSHE is divided into eight zones, each headed by a Deputy
Director. District offices are headed by District Education Officers (DEOs). The
Directorate operates through a base of 208 administrative and supervisory staff (of
whom 40 are based at headquarters, 40 at the Zonal level, and 128 at the district level).
While the Directorate is primarily involved in project-level planning, it is also responsible
for the payment of salary subsidy (subvention) to over 250,000 teachers and employees
273
At present there are 12 public universities, more than 50 private universities, and over 900 degree
colleges.
274 CPD (2003) Developing a Policy Agenda for Bangladesh: Civil Society’s task Force Report 2001.
University Press Limited. Dhaka, Bangladesh. April. at 88-89.
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of non-government secondary schools and higher secondary institutions. In addition, the
Directorate is responsible for enforcing academic standards in secondary and higher
education.275
637. Many observers have noted that the division of responsibility for the education
sector between two ministries poses a challenge to improvements in the governance of
the education sector. The situation gives rise to competition and, to some extent, a lack
of clarity in the division of responsibility between the two ministries. For example, the
MOE is responsible for deputizing staff to the DPE, which operates under the MOPME.
In addition, all madrasa schools and teachers, including madrasa primary education
teachers, are administratively under the MOE, although MOPME is responsible for
primary education. Although a coordination committee has been established consisting
of key officers of both ministries and chaired by the Principal Secretary, further steps are
needed to streamline the coordination of functions of the two ministries.
638. Beneath these primary administrative agencies, the following staff-level
educational organizations share responsibilities for curriculum development, production
of textbooks, examinations, and accreditation:

The National Curriculum and Text Book Board (NCTB) is responsible for curriculum
development and the publication of standard textbooks;

Six region-based Boards of Intermediate and Secondary Education (BISE) are
responsible for conducting the Senior Secondary Certificate (SSC) and Higher
Secondary Certificate (HSC) examinations and for granting recognition to nongovernment secondary schools.
639. Non-Formal Education:
The Directorate of Non-formal Education, which
operates under MOPME, was established to advance the government’s commitment as
signatory to the World Declaration on Education for All. Its management staff includes
33 officials and a supporting staff of 55 at headquarters, as well as 64 District
Coordinators, who are in turn assisted by a supporting staff of 128. ADB and other
donors have made significant investments in non-formal education in the past, and are
presently investing in collaboration with the Government. Non-formal education has
played an increasingly significant role in assisting education delivery, particularly for
disadvantaged populations in remote or economically disadvantaged areas. While
funding of the Directorate of Non-formal Education was recently transferred to the
revenue budget, the Government subsequently decided to abolish the Directorate. ADB
and other donors protested, but no definitive action has been taken by the Government
to reverse its decision. A small non-formal education cell may be established under
MOPME, but it seems unlikely that such as cell could effectively assume the
responsibilities that were formally held by the Directorate of Non-formal Education.
640. Technical Education: The Directorate of Technical Education is responsible for
planning, development, coordination, and supervision of technical and vocational
education under the Ministry of Education.
275
Ibid
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2. School Operations
a. Primary schools
641. Approximately one-half of all primary schools are operated by government,
accounting for 60 percent of total enrollment. The balance is comprised of registered,
non-government primary schools (representing approximately 25 percent of primary
schools and 24 percent of enrolment) and madrasahs (representing approximately 9
percent of schools and 5 percent of enrolment).
The Government supports
approximately 80 percent of teacher salaries and is responsible, in principle, for the
provision of free textbooks. It covers the full cost of government primary schools, and
approximately 90 percent of the base teacher salaries of registered, non-government
schools. In addition, non-government schools receive government grants for the repair
of school buildings. The Upazila Nirbahi Officer (UNO) determines which schools will
receive grants and is responsible for the disbursement of allocated funds. All primary
schools follow a national curriculum developed by the National Curriculum and Textbook
Board.
b. Secondary schools
642. Ninety-eight percent of all secondary schools are privately managed, accounting
for 94 percent of enrollment. Almost all costs of government secondary schools are
supported by the government through salary subvention payments, with student
responsible for a nominal fee. Non-government secondary schools also receive
substantial support. This includes 90 percent of basic teacher salaries, together with
rental subsidies and medical allowances. The government provides occasional grants
for the construction and maintenance of schools, teacher training activities, and female
education scholarship stipends.
c. Higher education institutions
643. Seventy-five percent of students who pass the higher secondary certificate
(HSC) examination continue on to some form of higher education. Among these, 15
percent attend universities, while the balance continue their studies at degree colleges,
most of which are privately operated. Public universities charge nominal tuitions, as they
almost entirely state funded. Private universities depend on tuition fees, with no financial
support from government.
C. ADB Experience In Education
644. Since the Second Five-Year Plan (1980-85), government policy has aimed to
widen the base of primary education, improve the quality of science education at the
secondary level, enhance the quality of vocational and technical education, and achieve
a marginal expansion of university education with an emphasis on science and
technology. In actual practice, expansion of access took precedence over quality
improvements. More recently, the goal of university primary education has been
adopted, together with the aims of improving the quality of education by reducing the
ratio of pupils to teachers, enhancing women’s participation in education, and
encouraging private sector and community participation in establishing education
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institutions. In recent years, ADB has provided sustained assistance in three sectors of
education: primary, general secondary, and non-formal.276
645. ADB project and technical assistance interventions have helped to ensure the
allocation of a consistently high share of government total expenditures to basic
education, supported programs designed to make education more accessible to the poor
and women, and developed systems to monitor the performance of schools and
teachers at the secondary level. Interventions for teacher training have also been
significant. Lessons learned from ADB’s recent Country Assistance Program Evaluation
of particular significance to governance of the education sector include the observation
that ADB investments tended focused on quantitative expansion of education rather
improving the quality of existing services, much of which is tied to governance
constraints. These include management problems resulting from over-centralization of
control, poor operations and maintenance of facilities, and insufficient training of school
principals in management and administration. ADB recognizes that these governance
issues may compromise the potential gains from rapid expansion of education
coverage.277
646. The current Secondary Education Sector Improvement Project (SESIP) takes
steps to address these and other governance constraints, while the forthcoming Second
Primary Education Development Program (Sector Loan), approved in November 2003, is
guided by the need to address governance issues as a key component of the education
agenda.278 The program includes a comprehensive and detailed reform framework for
the primary education sub-sector, linked to an institutional and organizational analysis
that focuses on streamlining and, where necessary, redefining the roles and
responsibilities of various levels and institutions in the sub-sector. Terms of reference
for staff, resource allocations, and other elements of the program are expected to be
adjusted within the sub-sector to improve system efficiency for further decentralized
planning, management, monitoring, and evaluation, as well as for improved teacher
support and professional career development. These are all necessary for the delivery
of adequate inputs at the classroom level, in order to improve the quality of primary
education in a sustainable manner. The reform framework also includes specific
governance dimensions, including an action plan for addressing corruption in primary
education and strong measures for improving financial management.
D. Key Governance Issues
1. Overview
647. Three policy reforms are generally credited with Bangladesh’s significant
advances in education: (i) sustained allocation of public resources; (ii) effective
collaboration between government and the private sector in education delivery; and (iii)
the introduction of subsidies that have helped to shape demand for education in favor of
the poor and girls. Despite significant achievements in enrolment, basic literacy, and
national coverage, citizens continue to express dissatisfaction with the education
system. Most problems have a governance dimension rooted in the quality and integrity
of management of the education system. A culture of top-heavy administrative control, a
276
Asian Development Bank (2003), Country Assistance Program Evaluation for Bangladesh, at 22-23.
Asian Development Bank (2003), Country Assistance Program Evaluation for Bangladesh, at 23-24.
278 BAN 36298-01
277
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propensity for tedious administrative procedures over practical efficiency, and the weight
of precedent appear to take precedence over responsiveness to changing needs,
conditions, and development opportunities.279 Citizens have responded to lack of quality
in education by making substantial investments in private tuition. Again, this represents
an inefficient use of private resources and contributes to inequities in access to quality
education, as poor families are unable to make the same investments in tuition,
textbooks, and other supplementary services and goods as more affluent households.280
2. Financial Management
648. The State has primary responsibility for education finance in Bangladesh, with
budget allocations drawn from a combination of revenue and development budgets.
More than 50 percent of development expenditures on education are financed through
donor assistance.281
a. Public expenditure on education
649. Total public expenditure on education as a percentage of GDP increased to a
high of 2.4 percent in 1994-95, but subsequently declined to 2.21 percent in 2001-02.
Similarly, the allocation for education as a percentage of the revenue budget has
declined from 19.5 percent in 1994-95 to 15.9 percent in 2002-03. There has been a
similar trend in the development budget, with the education share declining from 13.6
percent in 1994-95 to 12.9 percent in 2001-02. The allocation for education in the total
government budget declined from 16.4 percent in 1994-95 to 15 percent in 2001-02.282
650. The majority of government expenditure on education is earmarked for primary,
secondary, and mass education. In the last decade, there has been a significant shift in
basic education allocations from the primary to secondary level. This reflects a policy
shift to expand provision of secondary education, particularly for girls.283
651. Teacher salaries in governmental education institutions, together with grants for
salary subvention in non-government education institutions, account for the largest share
of current public expenditures on education—leaving scant resources for quality
improvements. Ninety seven percent of total revenue spending on primary education in
1998 was earmarked for teacher salaries in government primary schools and
subventions payments to teachers in non-government public schools. This left only 3.3
percent for operations and maintenance. In the case of secondary education, 79
percent of revenue expenditure covers subvention payments to teachers in non279
Japan Bank for International Cooperation (JBIC), Bangladesh Education Sector Overview: Final Report,
March 2002, at 69.
280 World Bank (2001), Building on Success to Make a Strong Education Sector Stronger, at 8.
281 Ibid at 89.
282 Ibid at 89-91.
283 World Bank-Asian Development Bank, Bangladesh Public Expenditure Review, at 53. Two programs
provide subsidies to selected schools and direct benefits to selected groups of students and their families.
Food for Education (FFE) program provides grain rations (recently monetized) to disadvantaged families if
they send their children to primary school. Female Secondary Stipends (FSS) program provides stipends
and tuition waivers to girls in non-municipal areas if they attend grades 6-10. FFE program is reasonably
well targeted to poor. FSS program is not pro-poor, but has raised secondary enrollment of girls to as high
or higher than that of boys in all but wealthiest 20 percent of population. Recent evidence suggests
effectiveness of programs significantly negated by implementation problems, particularly leakage (World
Bank, Public Expenditure Review, at 55)
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government schools. Development expenditures on education are primarily spent on
building and renovation of physical facilities.284 While revenue expenditures tend to be
set by precedent rather than sound, needs oriented planning (guided by patterns in
previous years), development expenditures register large variations in sub-sectoral
share, based on fluctuations in the resource commitment of donor and lending agencies.
b. Household expenditure
652. The household sector is the most significant source of education finance in
Bangladesh. Schools receive fees or contributions to cover costs, while households pay
for supplementary education materials and private tutorials. At the secondary level,
private expenditures exceed government spending by a substantial margin, with parents
bearing the costs of school uniforms, educational supplies, transportation, and private
tuition. For example, in 2000 household expenditure per student on secondary
education was $73, versus $27 in public expenditure (contributions were exactly equal in
the case of primary education, at $13).285 This represents an inefficient use of private
resources. In addition to benefiting students, improvements in the quality of education
should free household resources for other applications by reducing the need for private
tuition.
c. Universities
653. Having once enjoyed considerable academic prestige in South Asia, public
universities in Bangladesh are perceived to have declined due to funding shortages, as
well the effects of partisan tensions on faculties, teaching staff, and students. With the
majority of funds committed to meet teacher salaries, students have limited access to
library, laboratory, or computer facilities. Resource allocations to different departments
are based on historical precedent rather than student demand or the requirements of a
changing employment market.286
3. Resource Mobilization
654. The quality of education in Bangladesh is compromised by lack of adequate
resource allocations, falling short of the threshold per capita expenditure required to
deliver quality services. This points to the need for greater cost effectiveness in the
application of public resources. CPD’s Civil Society Task Force on Education (2001)
recommended that public expenditure on education should increase from two percent of
GDP to five percent, and that additional resources be raised through a combination of
sources, including the introduction of an education tax or an increase in tuition fees at all
public education institutions, subject to scholarship provision for poor households.287
4. Administration
a. Central administrative dominance
CPD (2003), Developing a Policy Agenda for Bangladesh: Civil Society’s task Force Report 2001.
University Press Limited. Dhaka, Bangladesh. April. at 90-91.
285 World Bank-ADB, Public Expenditure Review, at 53
286 World Bank-ADB, Public Expenditure Review, at 60-61
287 CPD (2003) Developing a Policy Agenda for Bangladesh: Civil Society’s task Force Report 2001.
University Press Limited. Dhaka, Bangladesh. April. at 100-01.
284
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655. Central government agencies exercise strong administrative control over the
education system. Senior officials are perceived to overly regulate, extending few
opportunities for mid- and local-level officials to exercise the decision-making authority
with which they are legally entrusted. For example, central government agencies tend to
recommend expenditures on physical expansion and construction work rather than
improvements in education quality, despite calls for improved quality control measures
by those at the delivery level, and by citizen beneficiaries. Educational reforms are
further constrained by lack of a clear decentralization policy. While there is growing
recognition of the need to decentralize management responsibilities, the benefits of
efforts to establish fully decentralized systems and structures will take several years to
register.
b. Limited central oversight capacity
656. Despite the tendency towards top-heavy control over education policy and
administration, central policy planning and implementing agencies are often
inadequately equipped to fulfill their oversight roles. For example, existing human
resource capacity is insufficient to meet the needs for thoughtful policy research,
thorough planning and budgeting, and monitoring and evaluation, including assessment
of school performance. Present capacity is further strained in monitoring the flow of
resources for subvention payments and other purposes.
c. Inadequate delegation of authority
657. Observers perceive a tendency on the part of central government officials to
guard their authority, with little delegation of decision-making powers to School
Management Committees or local government. In turn, local Management Committees
tend to be dominated by influential local elites, leaving limited opportunity for significant
representation by parents and community. Managerial control should ideally shift as
close as possible to the seat of education in the community, with opportunity for all
members of the community to register their needs and interests.288
d. Lack of performance standards
658. There is no strict correlation between the allocation of public resources for
education and the performance of recipient institutions. For example, qualified private
secondary institutions consistently receive funds regardless of their performance or user
satisfaction. The Government typically renews school accreditation as a matter of
course, and rarely suspends subvention payments. Similarly, there is no correlation
between teacher performance and professional compensation. Teachers draw a
meager salary regardless of their performance and whether or not they attend school.
5. Implications of Weak Governance
a. General
659. Low Quality and Internal Inefficiency: Weak governance has a negative impact
on the quality of education, which has in turn led to low attendance and completion
rates, declining relevance of the education curriculum to public interest and market
288
World Bank-ADB (2003), Bangladesh Public Expenditure Review, at 59.
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needs (particularly at the secondary level), reduction in teacher-student contact time,
and poor quality instruction. The implications are reflected in the decline of competency
scores in reading and writing, mathematics, and basic life skills289 and an increase in the
average time taken for students to complete a particular level of education relative to the
target completion period.290 As noted previously, parents and students are sensitive to
the decline the quality of education, and they now recognize and complain that many of
the problems are rooted in poor governance standards and practices. Parents draw
connections between these and other problems and corruption, negligence, and the
undue influence of wealth on access to schooling.
b. Primary Education
660. Inequities in the Benefit of Primary Education: While Bangladesh has made
commendable progress in increasing total primary school enrollment, the majority of
those who have yet to be included in the primary school system are from marginalized
communities. These include working children from extremely poor households, the
physically and mentally handicapped, urban slum dwellers, residents of remote rural
areas, and indigenous peoples. The primary education system includes no formal
mechanism for assessing learning achievement. An independent survey determined
that only 29 percent of primary students achieved certain basic competencies, with
results especially low among children from poor families.291 The implication is that even
those students who are accommodated by the education system do not receive a quality
education.
661. Minimal Opportunity for Community Participation: The nationalization of the
Bangladesh primary school system in 1973 created one of the world’s largest systems of
centralized education. Primary school management is perceived to have declined in part
because a highly centralized, administratively top-down system provides few
opportunities for community participation. Parents and communities have begun to
demand greater accountability for the academic performance of students and the
professional competence of teachers. This can be achieved, in part, through greater
decentralization of management authority, together with increased professional capacity
in education management.292 This situation ultimately points to the need for greater
resource mobilization at the local level, so that local education officials can draw on
resources to mobilize community input and citizens can play a role in determining how
resource allocations are used to improve education standards in local schools.
c. Secondary Education
662. Governance constraints that affect primary education have a similar effect on
secondary education. The structure of secondary education administration has led to
deterioration in the quality of instruction and low completion rates. The challenge lies in
making the existing combination of private ownership and substantial government
289
World Bank-ADB (2003), Bangladesh Public Expenditure Review, at 57-58
It takes an average of 8.7 years of instruction to complete each five-year school cycle. Japan Bank for
International Cooperation (JBIC), Bangladesh Education Sector Overview: Final Report, March 2002, at 7071, citing World Bank Education Sector Review.
291 1998 CAMPE survey, cited in Japan Bank for International Cooperation (2002), Bangladesh Education
Sector Overview: Final Report and in CPD (2003) Developing a Policy Agenda for Bangladesh: Civil
Society’s task Force Report 2001. University Press Limited. Dhaka, Bangladesh. April. at 91-93.
292 World Bank-Asian Development Bank (2003) Bangladesh Public Expenditure Review. at 59.
290
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financial support more effective. At present, there is minimal coordination among the
various central government units that play a role in secondary education
management.293 The units are understaffed, while incumbent staff lack the professional
skills required to manage an administrative structure that encompasses a large number
of institutions, teachers, and students. The situation is exacerbated by the previously
noted tendency of senior officials to guard their traditional decision-making authority
rather than delegate authority to a lower tier of officials who, in principle, should have a
better understanding of local needs and issues by virtue of close contact and goodwill
relations with local communities.
663. Advances in secondary education have tended to confer particular benefits on
more affluent communities. There has been a high growth of private sector secondary
schools in prosperous areas, while many poor communities are left with inadequate
facilities. Gender disparity has been reduced by the introduction of education stipends,
yet girls remain underrepresented at the secondary level. Overall performance on public
secondary examinations is low, and students find that they are not adequately prepared
to meet employment opportunities or the demands of the market. The student dropout
rate was 42.7 percent at the higher secondary level in 2001, with a 65 percent failure
rate in the SSC examination.
d. Post-secondary education
664. Governance issues, together with constraints in resource allocation, frequently
compromise the balance between autonomy and accountability in post-secondary
education, with inadequate attention to quality standards and associated enforcement
mechanisms. The Ministry of Education exercises stringent control over post-secondary
education, with financial control extending to other dimensions of central government
oversight. For example, the University Grants Commission was established for the
purpose of coordinating planning and resource allocation, promoting quality, and
safeguarding the administrative autonomy of local education authorities by serving as an
intermediary between government and universities. In practice, the Commission tends
to be subject to government control, particularly in the context of resource allocation. It
is perceived to lack the necessary professional authority to perform its functions
effectively. Similar problems extend to the National University, which is responsible for
setting curricula, approving accreditation, and conducting examinations for degree
colleges. Inadequate resource allocations from central government are among the most
serious constraints affecting the National University.294
e. Non-formal education
665. Despite substantial achievements in non-formal education, governance
constraints have prevented development efforts from achieving their full potential. While
the management capacity of the Directorate of Non-Formal Education had been
hindered by weak committee structures, high staff turnover, and highly centralized
administration, the recent decision of the Government to abolish the Directorate raises
serious concerns for the governance of this important sub-sector. While NGOs have
293
These include the Directorate of Secondary and Higher Education, five Boards of Intermediate and
Secondary Education, the national Curriculum and Textbook Board, the Directorate of Inspection and Audit,
and the Secretariat of the Ministry of Education
294 Japan Bank for International Cooperation (2002), Bangladesh Education Sector Overview: Final Report,
at 75-76
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played a leading role in the success of non-formal education initiatives, studies have
found that some implementing NGOs are constrained by weak management capacity
and lack of experience in administering education programs. For example, two-thirds of
NGOs involved in non-formal education fell short of their target performance criteria.295
E. Issues and Opportunities for Reform
1. General
666. Improving governance in the education sector has received increasing attention
in the last few years, with some important action steps taken by the Government. Within
the higher education system, efforts are underway to strengthen academic supervision,
improve publication and distribution of textbooks, train teachers, monitor performance,
decentralize management, and increase stakeholder participation. Several of these
initiatives are being supported by the ADB’s SESIP project. ADB is currently processing
a Teaching Quality Improvement in Secondary Education Project (TQI-SEP) for approval
in 2004. The project will focus on improving teaching training policy and delivery
systems in the secondary education sub-sector. In will include governance dimensions
linked to institutional and organizational development of teacher training, including
management, planning, and monitoring.
667. Additional governance reform needs in the education sector include increased
resource mobilization, decentralization of administrative authority to bring decisionmaking closer to citizens and communities, creative partnerships between government
and non-governmental actors, improved management capacity, and enhancement of
curricula and professional skills. While fine progress has been made through sectoral
governance reform initiatives, corruption, weak financial management and administrative
coordination in the education sector underline the importance of core governance
initiatives in building on sectoral governance achievements to date.
2. Education Policy-making
668. The National Education Policy 2000 was prepared and approved by the previous
Government but not endorsed by the present Government. While the policy includes
some sound reform strategies, observers have suggested that the closed-door process
that yielded the policy statement lacked transparency and adequate opportunity for
broad stakeholder input. The policy was presented and adopted in Parliament without
debate, and was not distributed as a public document, even in summary form. The
CPD Task Force report notes that policy proposals have tended to focus on
organizational issues and the duration of programs and physical expansion, with minimal
attention to the difficult issues of quality assurance and the relevance and outcome of
education reform in meeting citizen needs and the demands of the employment
market.296
The present Government established committees in 2002 to produce a
revised policy, but to date the committees have produced a few short papers but no
comprehensive policy.
Some observers have suggested that the division of
responsibility for the education sector between two ministries has contributed to delays
in the formulation of a revised policy.
295
Japan Bank for International Cooperation (2002), Bangladesh Education Sector Overview: Final Report,
at 71.
296 CPD (2003), Developing a Policy Agenda for Bangladesh, at 105.
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3. Resource Mobilization and Efficiency of Use
669. Although the Government of Bangladesh places high priority on education in
overall resource allocations, with education ranking highest in revenue and development
budget allocations, education expenditure is low by comparison to other South Asian
countries and the nations of East Asia. Government investment in education as a share
of GDP has declined in recent years. By the time teacher salaries and basic
maintenance are covered, few resources remain for quality improvements. With low
salaries and few professional development opportunities, teachers have little incentive to
improve their standards of performance. At the very least, increased resource
commitments are required to secure ongoing reforms. Some observers have suggested
that, rather than simply increasing overall budget commitments, the Government should
consider reallocating resources from unproductive sectors to the education sector. 297
Additional sources of funding should also be explored, including local government and
the private sector. Regardless of the level of investment in education, the paramount
requirement is that available resources be utilized more efficiently, with a practical focus
on increasing education quality and equitable access and meeting the needs and
interests of students and the employment market, rather than simply expanding the
existing system without due attention to quality improvements.
4. Improving Management Capacity
670. The need for improvement in the professional standards of public administration
and management is particularly felt in the education sector. Recruitment, training, and
performance-based promotion of administrators and teachers should recognize the need
for greater professionalism in education policy development and management and
classroom instruction.298
5. Decentralizing Management Functions and Decision-making Authority
671. There has been a considerable degree of administrative decentralization in
primary education, with significant decision-making authority vested at the Upazila level.
In contrast, those responsible for education at the school level, including the Head
Teacher, have little power and authority. At the secondary level, the management of
public sector schools remains highly centralized. Non-government secondary schools
are administered by individual School Management Committees (SMCs). Local power
dynamics within the SMCs leave headmasters with little authority to run their schools. 299
Accordingly, reform initiatives should aim to transform SMCs into facilitating rather than
regulatory bodies. Responsibility for primary and secondary education should vest with
local government. Education authorities should be established at local levels and be
tasked with responsibility for meeting resource needs, providing technical assistance,
and supervising academic standards.
6. Partnerships Among Stakeholders
297
Ibid at 100.
Ibid at 102.
299 For example, SMCs tend to be chaired by local Members of Parliament. In some instances, one Member
will chair more than one SMC.
298
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672. As an alternative to the present dominance of central-level public authorities,
education should ideally be administered through a partnership of stakeholders
representing families, teachers, communities, the private sector, non-governmental
organizations, and other civil society agents. The benefits of an inclusive mix of
stakeholders include greater transparency and inputs in decision-making, as well as the
potential for an expanded resource base to finance improvements in education
administration, curriculum, and teaching standards.
7. Curriculum Reform and Teaching Standards
673. At present, education curricula are set and standard textbooks designated by
central administrative authorities. Reform efforts should entrust central authorities with
the broad definition of core curricula, while leaving local officials and schools the
discretionary authority to fine-tune curricula and supplement standard materials with
other educational materials of relevance to local needs and interests.300
8. Professional Development of Teachers
674. Improvements in education curricula will only be successful if teachers receive
the training necessary to apply new learning materials to optimal advantage. Hiring
authorities must ensure that teachers meet professional standards, while administrators
must ensure that teachers have opportunities for professional development training and
be paid enough to meet the basic living needs of their families. The recruitment of
government primary and secondary teachers through competitive examinations
conducted by Directorates helps to ensure that reasonable standards are maintained. At
the secondary level, 97 percent of schools and 93 percent of teachers belong to the
private sector. While recruitment guidelines are reasonably well defined, they are
subject to variation and inconsistency as well as to stakeholder pressure that does not
ensure that the best qualified applicants are hired. Absent an enforceable quota system
for the recruitment of female teachers, women represent less than 20 percent of percent
of the total population of teachers. Moreover, only 37 percent of secondary school
teachers and 7 percent of madrasah teachers receive any formal, in-service training.301
9. Corruption Prevention
675. With examinations playing such an important role in determining the professional
future of students, it is not surprising that the examination system is subject to
manipulation and abuse. Corruption poses a major impediment to reform efforts,
affecting almost every dimension of education administration, including personnel
recruitment and management, production and supply of textbooks, public examinations,
subventions to non-governmental institutions, school construction and maintenance,
distribution of food-for-education benefits, and the allocation of stipends for poor
students. To address this issue, there is a need for stricter enforcement of standards
CPD (2003), Developing a Policy Agenda for Bangladesh: Civil Society’s task Force Report 2001.
University Press Limited. Dhaka, Bangladesh. April. at 102-03.
301 Ibid.
300
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and prohibitions on the supply side, as well as increased collaboration among parents,
teachers, and communities to restore the integrity of examinations on the demand side.
These community efforts should be complemented by steps to improve the technical and
professional competence of examination bodies, such as the Education Boards and the
National University.
10. Additional Reforms
676. In their recent Bangladesh Public Expenditure Review, the World Bank and ADB
recommended a series of policy and governance reform actions be taken to improve
public resource allocation for education. They include: 302

Broader application of area-based poverty indicators as a basis for allocating public
funds under the recently monetized Stipends for Primary Education program.

Reference to examination results and other performance criteria in directing
subvention payments to performing schools.

Institutional and management changes to help improve efficiency of service delivery,
including decentralized management of primary and secondary education to district
and thana levels, confining central government role to technical support services.

Streamline the process for procurement of public works, goods, and services

Reduce the dependence of public universities on budget allocations by tapping
resources from a student population that has demonstrated its readiness to invest in
private education.
CHAPTER XII
HEALTH
A. Overview
677. This chapter reviews governance in the health sector. The importance of health
in the context of national development efforts cannot be overstated. Investments in the
sector support labor productivity, free up resources by reducing the negative
externalities associated with poor health, and reduce growth constraining inequality. In
addition, health care provision can contribute to poverty reduction. Generally speaking,
302
The World Bank-ADB (2003), Bangladesh Public Expenditure Review, at 62-64
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the poor suffer from more health related problems than the wealthy, and because they
are more dependent on physical labor and have fewer savings to spare for health care,
the economic effects of illness are more severe for the poor. These effects are largely
preventable, as the diseases to which the poor are most vulnerable can be treated or
prevented at a low cost.303
678. Bangladesh has made significant progress in public health improvements. Infant
mortality has declined by 50 percent. Through voluntary acceptance of modern means
of contraception, the total fertility rate has also reduced by half. Life expectancy has
increased by 14 years to 61. Progress has been achieved in cholera and malaria
prevention, and polio and leprosy have almost been completely eliminated. These core
achievements compare favorably with many developing countries.
679. Progress in the health sector is largely attributable to the establishment and
maintenance of close partnerships between the Government of Bangladesh and NGOs,
particularly in the areas of family planning and immunization, and the implementation of
an affordable basic national health program.304 Improvements in health have also been
aided by effective intervention in other sectors. For example, wider availability of food,
the expansion of education, and increased access to safe water have increased demand
for improved health services.305
680. While national health policy is properly focused on the population’s most pressing
needs—primary health care in rural areas, population control, and immunization—
substantial gaps in health outcomes and policies remain. For example, Bangladesh’s
maternal mortality rate of 392 per 100,000 is among the highest in the world. 306
Likewise, there is a higher incidence of child malnutrition than in many developing
countries. The extensive presence of arsenic-contaminated groundwater threatens
provision of safe drinking water to many regions of the country.307 Though the incidence
of HIV/AIDS remains low, the threat of the disease looms large, particularly as a result of
traditional cultural bars to acknowledging the severity of the problem and low public
awareness of the threat. The country’s health sector is also challenged by low birth
weights, a slowdown in the reduction of fertility rates, and the continued prevalence of a
number of infectious diseases.
681. Similar to the declining public satisfaction with the education system reported in
Chapter XI, a 2003 World Bank survey found growing dissatisfaction with public
administration in the health sector. Discontent is fueled by the perception that corruption
in the sector has increased significantly in recent years.308 Many respondents
complained of having to make extra-official payments to gain admission to a medical
facility and to receive care once admitted.309 In a 2002 perception survey conducted by
303
ADB, Policy for the Health Sector, at 10.
The World Bank-ADB (2003), Bangladesh Public Expenditure Review, at 65.
305 The World Bank-ADB (2003), BangladeshPublic Expenditure Review, at 65.
306 Rate due to low level of clinic deliveries (95 percent of deliveries take place at home) and an insufficient
number of trained midwives. The World Bank, Public Expenditure Review, at 72.
307 The World Bank-ADB (2003), Bangladesh Public Expenditure Review, at 65.
308 In 1998, 26 percent of households rate corruption in the health sector as “low.” In the 2003 survey, that
figure shrunk to 18 percent. The percentage of household who believed corruption in the sector was “heavy”
grew from 31 percent to 45 percent over the same period. See The World Bank, Bangladesh: Improving
Governance for Reducing Poverty, at 29.
309 Thirty percent of households whose members had been treated in government hospitals indicated that
304
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Transparency International, respondent perceptions ranked the health sector as the
second most corrupt in the country, exceeded only by the police.310
682. A number of key factors underpin poor governance in Bangladesh’s health
sector.
They include inefficiencies associated with financial management and
procurement processes, an underdeveloped regulatory regime, and gaps in coverage.
In addition, corruption at all levels of public health administration threatens the provision
of health services for the population at large.
683. The donor community has registered concerns regarding the quality of
governance in the health sector. In May 2003, a large consortium of donors temporarily
suspended most support to the Health and Planning Sector Program (HPSP).311 The
decision to withhold funding was made in response to the perceived failure of the
Government to move forward on a variety of previously agreed upon governance and
policy reforms. The reforms at issue included structural changes to the Ministry of
Health and Family Welfare (MOHFW), decentralization of public health management to
local levels, augmentation of hospital autonomy, formulation of a national essential drugs
policy, and expansion of health insurance, as well as development of a regulatory
framework for private provision of health services and for Government-NGO
cooperation.312 While donors have since reinstated funding to the sector,313 the incident
reflects the tentative pace with which governance reforms in the sector proceed. The
Government—with the full support of the donor community—is now in the final stages of
development of a new plan for the sector, the Health, Nutrition, and Population Sector
Project (HNPSP).314 It must remain steadfast in its commitment to reform measures set
out in the HNPSP plan if the governance challenges facing the sector are to be
overcome.
B. Legal and Administrative Structure and Management
684. The health system in Bangladesh includes a variety of public and non-state
actors. Public health care provision is organized into four tiers: medical college
hospitals (44 country-wide); district hospitals (80); Thana health complexes (460), which
provide both inpatient and outpatient services; and union health and family welfare
centers (3,275), which mainly deliver primary services.315 Non-state provision includes
care offered by NGOs and other non-profit entities, traditional and homeopathic
they made payments to receive care. The World Bank, Bangladesh: Improving Governance for Reducing
Poverty, at 30.
310 Transparency International Bangladesh, Corruption in Bangladesh: A Household Survey, at iv.
311 The provision of essential commodities – including contraceptives, drugs, and vaccines – continued.
312 “Donors Partially Suspend Funding Due to Stalled Health Reforms,” The World Bank press release, 4
May 2003.
313 “Development Partners Support New HPSP Action Plan, Lift Suspension of Funds,” The World Bank
press release, 11 July 2003.
314 See discussion of the HNPSP, the successor program to the HPSP, below.
315 The World Bank-ADB (2003), Bangladesh Public Expenditure Review, at 66.
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providers, qualified pharmacists and unlicensed drug sellers, qualified and unqualified
modern care providers, and government doctors who practice in a private capacity.
685. The MOHFW is the apex organization for management of the public health
sector. The MOHFW includes two primary directorates—the Health Directorate and the
Family Planning Directorate—and several auxiliary directorates. The Health Directorate
provides services such as preventative and curative health care, and is funded primarily
from the revenue budget.
The Family Planning Directorate, which provides public
sector family planning services (including maternal and child health services), is
supported primarily from the development budget. The auxiliary directorates—which
include the Directorate of Drug Administration and the National Institute of Population
Research and Training—are responsible for a variety of administrative functions,
including the recruitment and training of doctors, nurses, and other health personnel, as
well as for a number of development projects, national policy implementation, and
interdepartmental and donor coordination. The two principal directorates operate with
their own vertical delivery structures, and collaboration between the two directorates is
limited. As a result, the MOHFW suffers efficiency losses from the duplication of
activities across directorates.
686. In terms of division of labor within the health sector, the Government is the
principal provider of prenatal health care and immunizations, while pharmacies and
private providers are the leading deliverers of curative care. Given the limited public
resources devoted to health (approximately $3.60 per year per household, out of an
average total expenditure of $7 per year), the private sector plays a significant role in the
provision of health services.316
The largest group of private providers comprises
qualified and unqualified drug retailers, which prescribe and sell drugs. In 1997, they
accounted for nearly fifty percent of all health services provided.317
687. NGOs also play an important role in the sector, especially in the areas of family
planning and immunization services. NGOs were instrumental in popularizing oral rehydration therapy for diarrhea and the use of contraceptives, and have also provided
services in nutrition and in tuberculosis and leprosy management. In recent years,
NGOs have begun to promote behavioral changes to reduce the spread of HIV/AIDS. In
addition, they have been engaged by the Government to provide primary and
community-based health care and nutrition services.318
688. The current structure and make-up of the health sector is in significant part the
result of implementation of the HPSP program, a donor-supported approach to health
service delivery. The HPSP was launched in 1998 and was originally scheduled to
conclude in June 2003. Following the brief suspension of donor support, HPSP was
extended for an additional period of six months. The HPSP shifted Government
planning in the sector from project to a program approach, and involved extensive policy
and structural reform. At the core of the HPSP was an Essential Services Package
(ESP), which specified five main categories of service: child health, limited curative
care, maternal and other reproductive health, family planning, and communicable
disease control and behavior change communication. The ESP was designed to
316
Households spend on average USD 7 per year for health care. The World Bank-ADB (2003),
Bangladesh Public Expenditure Review, at 66.
317 The World Bank-ADB (2003), Bangladesh Public Expenditure Review, at 66.
318 The World Bank-ADB (2003), Bangladesh Public Expenditure Review, at 66.
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constitute 60 to 70 percent of the combined health budget.319 The World Bank and other
donors that played a lead role in the HPSP envisioned a unified service that would
eliminate the need for citizens to go to different health care facilities for different
services. The unified service approach met resistance from local health officials,
particularly those of the Family Planning Directorate. The HPSP is due to be succeeded
by the HNPSP, which envisages a similar budgetary allocation to essential services.
Under the HNPSP, the Directorates of Health and Family Planning are expected to
operate as separate units at all levels. The HNPSP is expected to take account of
manpower needs that impeded implementation of the HPSP, to introduce
decentralization of authority that will entrust community clinics and hospitals with greater
autonomy in decision-making, and to establish improved coordinating mechanisms
between two directorates. The new project may also introduce a user fee to be based
on capacity and willingness to pay.320
C. ADB Experience In The Health Sector
689. ADB investments in the health sector have traditionally represented a fairly
modest component of its overall country program in Bangladesh. The signing of the
Partnership Agreement on Poverty Reduction in 2000 envisions an effective
convergence of Government and ADB strategies for health sector development. The
health-related objectives enshrined in the Partnership Agreement are expressed in
terms of improvements in social indicators, which cannot be precisely ascribed to the
provision of health care services of the kind to which ADB has traditionally contributed.
ADB financed two projects in the health sector between 1986 and 2001, with a total loan
amount of $91 million. It also provided five TA grants of nearly $2 million for a
combination of project preparation and strengthening public health agencies.321 ADB’s
ongoing, $40 million Urban Primary Health Care Project322 aims to strengthen the
capacity of local authorities in four major urban areas to assume responsibility for public
health care services in collaboration with NGOs and other private sector agents. While
early implementation of the project was slowed by bureaucratic impediments, impacts
have now begun to register in the form of: (i) sustained improvements in public health
centers, through improvements in the administrative and financial management,
planning, and evaluation capacity of city corporation health departments; and (ii)
structural reforms designed to change the role of government and alter the way in which
it relates to the private sector and NGOs through partnership agreements. The project
applies an innovative “process” approach to partnership agreements that allows lessons
learned during implementation to be taken account of as the project proceeds.323
D. Key Governance Issues
690. Many governance issues affect the health sector. For practical purposes, they
may be grouped under three categories: inefficiency in delivery, under-regulation, and
gaps in coverage. In addition, health sector governance is undermined by the
overarching problem of corruption.
319
Over 65 percent of public health spending was devoted to the ESP.
Ministry of Finance, The
Government, Bangladesh: A National Strategy for Economic Growth, Poverty Reduction and Social
Development, Annex 7 (“Strategic Issues in Health Sector Development), at 101.
320 Based on interviews with World Bank program staff.
321 Asian Development Bank (2003) Country Assistance Program Evaluation for Bangladesh, at 33.
322 Loan 1538-BAN(SF).
323 Asian Development Bank (2003) Country Assistance Program Evaluation for Bangladesh, at 33.
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1. Inefficiency in the Public Health System
a. Deficient procurement processes
691. As noted in the previous discussion of financial management systems, the health
sector suffers not only from inadequate budgeting, but also from expense under-runs.
Less than full utilization of donor funds and other budgetary outlays occurs primarily
because of procurement problems. Procurement guidelines and regulations are overly
complex, and those responsible for shepherding projects through the procurement
process often lack adequate specialty training.324
Regulatory complexities and
inconsistencies also create opportunities for corruption.
b. Pervasive corruption
692. Corruption is perceived in virtually every administrative apparatus and in many
development projects. Manipulation of procurement processes by public officials creates
rents from the construction, maintenance, equipping, and supplying of hospitals. Theft
and unauthorized use of facilities or services also impose a drain on resources.
Hospital workers solicit offline payments from patients to guarantee admittance or
treatment. Instructors in teaching hospitals often neglect their teaching and hospital
duties in order to carry out more lucrative private practice in their chambers and in
private clinics.
c. Shortages of qualified medical personnel
693. Shortages in qualified medical personnel is a nation-wide problem,325 although
the issue is particularly acute at the Thana level. Many doctors and nurses are reluctant
to take assignments in Thanas, opting instead for private practice in towns, where higher
incomes are possible and exposure to burdensome work is more limited. The human
capacity problem in the sector can be traced back to the systems in place for the training
of medical personnel. Lack of coordination among the Ministry and Directorate hospital
authorities and medical college authorities affects the quality of government health care
services. In addition, low standards in government teaching hospitals foster apathetic
attitudes among medical professionals and give rise to corrupt practices.
2. Under-regulation of the Private Sector
694. Regulation of private-for-profit health services remains limited. Under-regulation
of the private sector is a matter of serious concern, given the large number of agents
operating within the health sector.
As noted above, pharmacies and other private
retailers are the main providers of curative care. Weaknesses in the regulatory
environment (and in law enforcement) gives rise to counterfeit and inefficient drug
prescriptions and sales. Irregularities also exist within private medical colleges and
hospitals with respect to service standards, professional competences, fees, and costs.
324
The World Bank-ADB, Bangladesh Public Expenditure Review, at 68, citing analysis by Health
Economics Unit of the MOHFW.
325 There are only 18 doctors and 5 nurses for every 100,000 people in Bangladesh. CPD (2003) Developing
a Policy Agenda for Bangladesh: Civil Society’s task Force Report 2001. University Press Limited. Dhaka,
Bangladesh. April. at 111.
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695. The government is uniquely positioned to oversee regulatory development, and
such work is compatible with the view that the government should re-focus its attention
in areas in which it holds comparative advantage (see Policy Reforms below).
Moreover, though there are costs associated with changes in the regulatory system,
regulatory reforms present opportunities to substantially improve the health of the
population.
3. Financial Management
696. While budget allocations to health nearly doubled between FY1994 and FY2000
(Taka 5,040 million against Taka 9,430 million), actual expenditures declined between
FY1998 and FY2000, both in real per capita terms and as a share of GDP. At the same
time, total spending was only 84 percent of the original budget. The expenditure underrun, located mostly in the development budget, is primarily the result of less than full
utilization of donor contributions that account for more than 70 percent of all
development budget resources.326 More specifically, the spending shortfall appears to
be attributable to inadequate understanding of procurement procedures, which in turn
results from a lack of trained procurement specialists and the cumbersome nature of
procurement guidelines.327
697. The proportion of the total government budget allocation to MOHFW has been in
steady decline since the launch of the HPSP in 1998. Over the first three years of the
HPSP, the share fell 20 percent, from 6.5 percent to 5.2 percent.328 The Ministry of
Finance has suggested that this trend is not a matter of policy, and that it is willing to
allocate additional funding to MOHFW should the latter demonstrate that it can budget
and spend more funds.329
698. Public spending on health in Bangladesh does not compare favorably with other
developing countries. The National Health Accounts estimated that in 1996-97, total
health spending in Bangladesh was approximately $10.60 per capita (two thirds of which
was out-of-pocket).
By contrast, the WHO Commission on Macro Economics and
Health has found that the average spending in least-developed countries was
approximately $13 per person per year.330
699. In addition to the problem of countrywide spending, a number of sub-national
spending issues also arise. The most significant of these concerns differences in heath
expenditures on the rural and urban poor. While the rural and urban poor receive
roughly the same proportion of overall health subsidies in their respective sectors, the
very poor (the poorest 20 percent) of the urban population command a smaller share of
subsidies than their rural counterparts. This pattern reflects the fact that the urban poor
have substantially less access to government subsidies for curative care.331
326
The World Bank-ADB, (2003) Bangladesh Public Expenditure Review, at 68, citing analysis by Health
Economics Unit of the MOHFW.
327 The World Bank-ADB (2003), Public Expenditure Review, at 69, citing analysis by Health Economics Unit
of the MOHFW.
328 CPD, Health, Nutrition and Population Policy, at 9.
329 CPD, Health, Nutrition and Population Policy, at 9.
330 The Commission also suggested an optimum expenditure level of approximately USD 24 per year, of
which public sector outlays would be USD 13. CPD, Health, Nutrition, and Population Policy, at 9.
331 The World Bank- Asian Development Bank (2003) Bangladesh: Public Expenditure Review. Dhaka. at
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700. On the positive side, several spending objectives of the ESP have been
achieved, as expenditures on reproductive health and child health (45 percent and 36
percent of the total ESP, respectively) have been in line with Government policy
objectives.332 The HPSP goal of directing resources to the facilities closest to users has
also been accomplished, with 44 percent of current expenditures spent on facilities at
the Thana level and below, and 35 percent spent at the district level.333
701. Most importantly, public spending on health has had positive distributional effects
in Bangladesh.
The overall income share of the poor, a group that comprises 50
percent of the total population of the country, is approximately 26 percent,334 yet the poor
enjoy approximately 45 percent of all public health expenditures.335 In addition to the
positive distributional implications of such spending, the scheme supports poverty
alleviation, as it creates enhanced labor productivity among the poor.
4. Gaps in Coverage
a. Access to health care for the urban poor
702. The health conditions of the very poor remain bleak, particularly for those living in
urban areas, where high population density and inadequate or non-existent sanitation
and waste removal systems present ubiquitous challenges. As noted above, the urban
poor enjoy a smaller share of sector specific subsidies relative to their rural counterparts
and appear to be systematically excluded from access to government health subsidies.
The nutritional status of children in urban areas is lower than those of similar
socioeconomic status in rural areas.336 With the rapid urbanization of the country, the
challenges of health care provision to the urban poor will increase with time unless steps
are taken to address them.
b. Maternal mortality remains high
703. As noted previously, Bangladesh’s maternal mortality rate is among the highest
in the world. This is mainly due to the low level of clinic deliveries in the country (95
percent of deliveries take place at home). This situation results from the poor quality
and quantity of medical facilities, and to an insufficient number of trained midwives. 337 In
addition, evidence suggests that maternal health is the most under-resourced of all the
ESP services relative to needs.338 The situation also reflects certain cultural constraints
to health care, where male members of rural households may discourage pregnant
women from seeking care at public health facilities.
70
332
Ibid at 69.
Ibid at 70.
334 Ibid
335 Ibid
336 Bangladesh Bureau of Statistics, Child Nutrition Survey of Bangladesh 1995-96
337 The World Bank- Asian Development Bank (2003) Bangladesh: Public Expenditure Review. Dhaka. at 72
338 Ministry of Finance, The Government, National Strategy for Economics Growth, Poverty Reduction and
Social Development, at 102.
333
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c. Child malnutrition remains high
704. Child malnutrition is a serious problem in the health sector. Nearly one half of
children below the age of six are underweight or experience stunted growth and
malnutrition is an important underlying cause of death from infectious disease among
children.339 The effects of malnutrition, which include impaired learning and cognitive
development, lead to poor schooling completion and performance rates. Given the high
returns on schooling in Bangladesh, low educational attainment perpetuates poverty by
preventing the poor from increasing their earnings and income. In addition, because
malnutrition increases the risk of growth-slowing infections in a child, it often traps the
young in what the World Bank has termed “a vicious cycle of malnutrition and illness,”
which heavily taxes the health care system over time.340 The key governance challenge
to improving child nutrition involves behavioral change communication. Despite the
significant strides in communication methodologies and media that have secured
positive changes in certain parts of the health sector, the overall flow of information to
the public—particularly concerning feeding practices in the first days and months of a
child’s life—must increase beyond present scale.
d. Threat of infectious diseases (particularly HIV/AIDS)
705. Though the number of HIV infections and reported AIDS cases in Bangladesh is
still very low relative to many Asian countries, the threat of AIDS looms large. Behavior
patterns and risk factors correlative with the rapid spread of the disease are widespread,
making the country vulnerable to an HIV/AIDS epidemic. Risk factors identified by the
World Bank include: a large commercial sex industry;341 low consistent condom use;342 a
prevalence of sexually transmitted diseases among sex workers;343 high rates of needle
sharing among intravenous drug users; and limited knowledge of the disease and its
transmission among the general population. As with the problem of combating child
malnutrition, the governance issue of paramount concern is the achievement of
adequate information flows, particularly in raising awareness among the poor. To date,
Government response to this problem has been limited. Local government, in particular,
appears to have taken the fewest steps to respond to the public health risks posed by
HIV/AIDS.
E. Issues and Opportunities for Reform
1. Policy Reform
In the mid-1990’s, two-thirds of childhood deaths were attributable to malnutrition (with immediate causes
of death including pneumonia and diarrhea and other less common infectious diseases. The World Bank,
Quest for a Health Bangladesh, at 4.
340 The World Bank, Poverty in Bangladesh: Building on Progress, at 56
341 The commercial sex industry is comprised of about 36,000 sex workers. Brothel-based sex workers
average 18.8 clients per week, while hotel-based workers average 44 clients per week. The World Bank,
HIV/AIDS in South Asia: A Human and Development Challenge (2002 Update for Bangladesh). Document
available at www.worldbank.org (visited July 1, 2003).
342 The majority of brothel-based sex workers report at least some sex without condoms with their clients.
Among the clients, such as rickshaw pullers and truckers, about 83 percent have never used condoms when
buying sex. The World Bank, HIV/AIDS in South Asia: A Human and Development Challenge (2002 Update
for Bangladesh). Document available at www.worldbank.org (visited July 1, 2003).
343 Approximately 43 percent of female sex workers and 18 percent of male sex workers have syphilis. The
World Bank, HIV/AIDS in South Asia: A Human and Development Challenge (2002 Update for Bangladesh).
Document available at www.worldbank.org (visited July 1, 2003).
339
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706. As the preceding discussion reflects, Bangladesh’s public health system suffers
from inefficiencies and inadequate resources. With these constraints in mind, the ADB
and World Bank have argued that the health needs of the country’s growing population
would best be served by de-linking the Government’s finance and provider functions,
and by concentrating service provision in activities of comparative advantage (referral,
specialist, and emergency services) and public good (policy planning, regulation,
surveillance, and information).344
707. At a minimum, the Government should build on efforts within the HPSP to
decentralize administrative control of health services. The Government has committed
to a Decentralization Action Plan within the context of its HNPSP, and has plans to
finalize draft legislation for a hospital autonomy bill.
In practice, however,
decentralization is not easily accomplished. Centrally based public officials tend to be
reluctant to delegate greater authority to local public health authorities. In combating
opposition to reforms, the link between health expenditure and economic growth and
development should be emphasized wherever possible.
708. The Government should also capitalize on the proven success of collaboration
with NGOs and the private sector, outsourcing primary level service provision and
monitoring responsibilities to NGOs. At the same time, any move to outsourcing should
be matched by the introduction of companion regulations to ensure quality in health care
delivery.
2. Public Sector Inefficiencies
a. Consolidate health sector management
709. The health and family planning directorates should be unified, at both regional
and national levels, to reduce uncertainty, waste, and duplication in sector
administration. With the same goals in mind, auxiliary directorates should be evaluated
for opportunities to introduce economies of scale.
b. Strengthen procurement procedures
710. The declining trend in disbursements should be addressed through the
streamlining and simplification of procurement rules and procedures in the health sector.
Training programs for procurement officials should be implemented in order to develop
trained experts capable of dealing with these regulations. In addition, eGoverment
applications should be introduced wherever appropriate to increase transparency in
procurement processes and thereby reduce opportunities for corruption.
b. Outsource service provision
711. The Government is encouraged to undertake pilot programs to outsource support
services, such as cleaning, security, and catering in health care facilities, to private
entities. It should also begin to outsource primary level service provision and monitoring
to NGOs and private actors.
344
The World Bank-ADB, Public Expenditure Review 2003, at 65.
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d. Improve incentives for staff
712. The Government is encouraged develop a more appropriate incentive regime for
medical personnel, which will help to motivate doctors and nurses to work in local level
public practice and reduce incentives for corruption. To this end, performance-based
promotion procedures should be introduced, and recruitment rules should be developed
and codified. In addition, the Government should de-link budget transfer norms from
bed and staff numbers and instead base them on caseloads and poverty indicators.
e. Increase spending on essential services
713. Public appropriations should be re-prioritized to increase provision of essential
services to hard-to-reach populations, especially in urban areas. Behavioral change
communication on issues related to maternal mortality and child nutrition should be
brought to the fore with increased expenditure prioritization. The frequency of offline
payments and the share of private spending as a share of total health care spending
suggest that the demand for health care services is price elastic. While this would imply
that medical personnel and facilities could raise their fees, the hypothesis should be
thoroughly researched. If verified empirically, it could have significant implications for
spending prioritization, by making additional resources available for essential services.
3. Under-regulation of the Private Sector
a. Improve the legal and regulatory environment
714. A Patient’s Bill of Rights should be introduced, either as a free standing bill or as
part of the broader Citizen’s Charter called for by the Interim National Poverty Reduction
Strategy. Likewise, a code of ethics and other provisions to regulate private practice by
government doctors should be adopted.
Evaluation, monitoring, and regulation
mechanisms for private, for-profit hospitals, clinics, and medical colleges should be
improved or, where lacking, established. Finally, a regulatory framework governing
private pharmaceutical sellers and other retailers should be developed to overcome
hazardous drug sales and other private provision. New regulations should be developed
with carefully consideration given to avoid stifling innovation and presenting
opportunities for corruption.
4. Gaps in Coverage
a. Increase capacity for preventing infectious Diseases
715. From a budgetary standpoint, the Government should strengthen its own
capacity, and that of NGOs, for program planning, implementation, monitoring, and
evaluation of prevention strategies for HIV/AIDS and other infectious diseases.
Program initiatives to contend with threats posed by the disease should include:
improved behavioral change activities, particularly at the local level; additional efforts to
promote the acceptability of condom use among the general public; and efforts to reduce
discrimination against those infected by, or at risk of infection from, the disease.
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CHAPTER XIII
TRANSPORT
A. Introduction
716. Efficient, safe, and reliable transport services and infrastructure play an important
facilitating role the economic development of a nation. This relationship is especially
important in Bangladesh, where development of the transport sector will play a key role
in meeting the economic growth and poverty reduction targets set by the Interim National
Poverty Reduction Strategy (I-NPRS). The quality and efficiency of the transport
network in a nation with formidable geographic and climatic challenges affects the flow
of people and capital, as well as market size, access, and integration. At the individual
enterprise level, a sound transport infrastructure enables growth through economies of
scale that result from reduced costs of production and improved market access. At the
national level, an efficient transport system helps to raise competitiveness and to
increase export-led growth and the share of international trade.
717. Bangladesh’s transport system has grown substantially in the past two decades.
Roads and highways now connect all major business centers and the majority of thanas.
Bangladesh has one of the highest road densities in the world, providing more than half
the country with access to an all-weather, hard surface road within a five-kilometer
radius.345 Improvements in the transport infrastructure have contributed to poverty
reduction in rural areas, overall economic growth, and enhanced disaster preparedness
and management. Despite these advances, many challenges remain to be addressed,
many of which have a clear governance dimension. The size and outreach of the
transport network on which sectoral governance initiatives have tended to focus to date
are important factors that affect the overall quality of the transport infrastructure. To
meet future transport needs, the Government must be ready to assume a more active
regulatory and standard setting role in meeting citizen needs and expectations, ensuring
the optimal use of available public resources, and creating opportunities for increased
private sector involvement in the transport sector.346
B. Sector Overview
1. Introduction
718. Development of the transport infrastructure in Bangladesh, including
railway and air transport, has traditionally been administered primarily by the
public sector.
Substantial expansion of the transport infrastructure since
Independence has led to the development of nearly 223,000 kilometers of roads,
2,700 kilometers of railroads, 5,970 kilometers of perennial and seasonal
waterways, two major seaports, and seven airports. The private sector has
assumed a lead role in road348 and inland water transport services, while the
public sector continues to dominate ocean shipping, railways, and air transport.
Roads have been the fastest growing mode of transportation, with annual growth
averaging 7 percent for passengers and 9 percent for freight since the early
345
The World Bank- Asian Development Bank (2003), Bangladesh Public Expenditure Review, at 91-92.
The World Bank-Asian Development Bank (2003), Bangladesh Public Expenditure Review, at 91.
348 The only public road sector organization, Bangladesh Road Transport Corporation (BRTC) controls about
two percent of passenger operations and one percent of the freight market.
346
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1990s.349 The road network includes four broad categories: national highways,
regional highways, feeder roads, and rural roads.350 Roads now represent the
principal form of transportation in Bangladesh. Average road conditions have improved
through substantial donor investments in the expansion of the road network and
improvement of road surfaces, with the percentage of roads classified as good or fair
increasing from 73 percent in 1997 to 96 percent in 2002.351
719. The two major ports in Bangladesh are Chittagong Port and Mongla Port, which
together handle about 95 percent of total international trade. Of this, 80 percent is
handled by Chittagong Port. The Bangladesh Railway (BR) network includes broad
gauge rail lines west of the Jamuna River (together with a small meter gauge network in
the northwest) and exclusively meter gauge east of the Jamuna River. BR provides a
combination of passenger and freight services. The Jamuna Multi-Purpose Bridge
includes rail lines that directly connect the east and west of the countries, replacing the
traditional ferry links that connected rail transport in the two parts of the country.
2. Institutional Framework
720. Responsibilities for planning and developing the transport sector are divided
among several ministries and parastatal agencies. These include the Roads and Highway
Department (RHD), under the Ministry of Communications, and the Local Government
Engineering Department, under the Ministry of Local Government, Rural Development,
and Co-operatives.352 In addition, city corporations or municipalities (pourashavas) are
responsible for the construction and maintenance of paved roads that fall under their
jurisdiction. In the port and shipping sector, the Ministry of Shipping holds controlling
authority, and Chittagong Port Authority (CPA) and Mongla Port Authority (MPA)
regulate port activities in their respective districts. In addition, the Ministry also functions
as the overarching authority for parastatals and authorities that oversee the movement
of government owned ships and inland waterway steamers and trawlers and the
maintenance and setup of inland waterway transport.
3. Policy Framework
721. The Government of Bangladesh has historically focused its transport
development strategy on expanding linkages to the internal transport system and
promoting local market integration, particularly in rural areas.353 Its current
transport policy is outlined in an annex to the I-NPRS. The policy paper signals a
349
The World Bank-Asian Development Bank (2003), Bangladesh: Public Expenditure Review, at 91.
National highways connect the national capital with district headquarters, port cities, and international
highways. Regional highways connect different regions and district headquarters that are not connected by
national highways. Feeder roads are of two types: A and B. Type A feeder roads connect thana
headquarters and important growth centers to the main arterial road network, while type B feeder roads
connect growth centers with other growth centers and thana headquarters. Local roads include municipal
roads and rural roads. There are three types of rural roads: Class 1 roads that connect growth centers with
farms; Class 2 roads that connect union headquarters and local markets with villages and farms; and Class
3 roads that include roads within the village.
351 Asian Development Bank (2002), Report and Recommendation of the President to the Board of Directors
on a Proposed Loan to the People’s Republic of Bangladesh for the Road Network Improvement and
Maintenance Project, RRP: BAN 3223.
352 The World Bank-Asian Development Bank (2003), Bangladesh Public Expenditure Review, at 91-92.
353 The World Bank-Asian Development Bank (2003), Bangladesh Public Expenditure Review, at 92.
350
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“new approach” to infrastructure development based on reorienting sectoral
priorities and increasing private participation as a means of reducing
infrastructure bottlenecks. For the road sector in particular, the I-NPRS focuses
on the need to maintain and improve the existing network, and to improve the
efficiency and safety of road operations. This requires a strategic land transport
policy that creates an integrated framework for institutional cooperation, and the
development of options for financing road maintenance and operation. For rural
infrastructure in particular, policy mandates emphasize maintenance and upgrading of
the current network, decentralization of design, implementation, and monitoring functions
to local government, improved cost effectiveness, and participation by local groups.
722. For improvements in the transport infrastructure, priority is being given to reform
in the port sector to improve export competitiveness. A new National Shipping Policy
has been adopted, which lays out guidelines for private sector participation. The policy
provides shipping authorities with greater autonomy, addresses labor efficiency through
labor reform programs and job analysis, and aims to improve accountability through the
setting of performance evaluation criteria.
723. The Partnership Agreement on Poverty Reduction between the Government of
Bangladesh and the ADB identifies roads as one of the leading agents for poverty
reduction. The Partnership Agreement focuses on (i) accelerating pro-poor economic
growth through improved access to markets and inputs; (ii) improving networks,
including national, regional and feeder roads that serve poor areas; (iii) introducing more
objective and transparent approaches to resource allocation especially for road
maintenance; and (iv) opening up road sector operations for private sector involvement
and public-private sector partnership.354
724. With support from ADB, a Land Transport Policy has been under consideration
by the Government that deals with future development of the national transport system.
The new policy calls for an integrated, connected, and well managed transport system.
This new system is to be achieved through an increased role for the private sector
(including the corporatization of Bangladesh Railway and the privatization of all rail
services); improved coordination with inland river transportation; and national design and
safety standards for all types of roads. The policy further proposes various options for
financing road maintenance and operations, restructuring of the Roads and Highways
Department (RHD), and the clear separation of responsibilities between the RHD and
the Local Government Engineering Department (LGED).355 Related to the Land
Transport Policy and its policy direction, a Private Sector First Policy (PSFP) for
transport infrastructure development and management is under consideration within the
Government, which would include for the first time a list of projects for private sector
investment in the Annual Development Program 2003-2004.
725. Even after government adoption of the above policies, much depends on the
actual process of implementation of supporting action plans. The Government has
demonstrated initiative recently in implementing concrete changes in the transport sector
354
Asian Development Bank (2002) Report and Recommendation of the ADB President on Road Network
Improvement Project. Dhaka, Bangladesh.
355 News from Bangladesh (2003). “30-year Land Transport Policy Formulated.” 3/18/2003.
http://bangladesh-web.com/news/mar/18/n18032003.htm
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to address constraints that results from legal and regulatory, financial management, and
other governance issues.356
4. Recent Developments
a. Regulatory reforms to improve traffic safety
726. Road safety is a major issue in the transport sector in Bangladesh. Fatality rates
in road accidents are the highest in South Asia, with the number of people reported killed
increasing from 955 in 1983 to 3,162 in 1997. The road accident fatality rate is 30 to 40
times higher than that of developed nations that have many times more vehicles.357 This
high incidence of road fatalities, and even higher rate of accidents, result from speeding,
overloading of passengers, unsafe overtaking on high speed roads, and other reckless
driving behavior, and the unregulated movement of non-motorized vehicles on roads
shared with high-speed motorized vehicles—all of which can be addressed through
more effective enforcement of road safety standards. The RHD is responsible for the
engineering aspects of road safety, while the National Road Safety Council (NRSC)
takes the lead in national level training and awareness raising initiatives.
727. In response to the road safety problem, the NRSC issued a National Road Safety
Strategic Action Plan (2002-2004) in 2001. The Action Plan identifies problems and
strategies in nine road safety issues. These include, inter alia, (i) planning, design,
construction, and maintenance of roads; (ii) revising traffic legislation to promote road
user compliance; (iii) developing a more effective and efficient traffic police; (iv) ensuring
minimum standards for driver competence through improved driver training and testing
procedures; (v) improving the roadworthiness of vehicles; (v) introducing road safety
education and publicity programs; and (vii) improving the emergency assistance,
hospital care, and rehabilitation available for victims of road traffic accidents. The Road
Safety Cell has developed an implementation action plan, to be coordinated with the
World Bank, DFID, and ADB. An Accident Analysis and Research Centre has been
established at Bangladesh University of Engineering Technology (BUET) to play a role in
implementing the plan.358 The Strategy further provides for the inclusion of appropriate
educational material on road safety in primary and secondary school curricula, which the
Ministry of Education has approved for introduction in 2004.
b. Improved urban transport management
728. To improve urban traffic management, special training programs have been
introduced for traffic police at the Traffic Police Training School under the DUTP (Dhaka
Urban Transport Project). Efforts are also ongoing at the Dhaka Transport Coordination
Board (DTCB) to restrict use of non-motorized transport (NMT) as feeder transport and,
to this end, to identify networks of secondary roads. Five major roads in Dhaka have
already been designated rickshaw-free. Two-stroke, three-wheel auto rickshaws (baby
taxis) have been prohibited in Dhaka, replaced with clean-burning, four-stroke,
356
For a detailed tracking of changes since 2001, refer to the Center for Policy Dialogue (2003), National
Policy Review Forum 2003 on Transport and Infrastructure.
357 Center for Policy Dialogue (2003), Developing a Policy Agenda for Bangladesh: Civil Society’s Task
Force Reports 2001, Dhaka, CPD and University Press Limited, at 152-53.
358 CPD (2003) National Policy Review Forum 2003 on Transport and Infrastructure. Dhaka, Bangladesh.
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compressed natural gas (CNG)-driven models. This latter initiative has had a significant
impact in reducing air pollution in Dhaka.
c. Encouraging private sector participation
729. To assist the Government to encourage private sector participation in the
transport sector, the Government and The World Bank have jointly established an
Infrastructure Investment Facilitation Center (IIFC). Its resources include expertise in
engineering, economics, finance, competition and regulation, procurement, and
contracting. Financing and technical assistance is provided in part by DFID and CIDA.
In addition, an Infrastructure Development Company Limited (IDCL), a non-bank
financial institution, was set up as a government-owned limited company in 1997 to
promote private sector participation in investment, operation, ownership, and
maintenance of infrastructure facilities.
C. Key Governance Issues
730. The quality of governance in the transport sector has implications for other
sectors whose performance depends on reliable, efficient, and readily accessible road,
rail, inland waterway, and other modes of transport. These related sectors include
education, public health, and private sector development. Current transport sector
constraints include poor cost recovery, deteriorating quality of roads, pollution, poor road
safety, and increasing traffic congestion. These issues reflect overarching problems in
policy planning and implementation, institutional and administrative coordination and
management, financial management, and sectoral development (including opportunities
for increased private sector participation). As a result, Bangladesh’s transport network is
extensive but inefficient. One of the overarching governance issues for the road sector
is the persistent view of citizens that roads are public goods, with no concept of
assuming responsibility for road maintenance and operations through charges levied on
users. As a result, the cost of road infrastructure investment by government and
subsequent operations and maintenance is recovered indirectly through the levy of
gasoline tax and other general taxes. This has been a serious obstacle to promoting
private sector investment in the road sector because there is no mechanism for the
private sector to recover its investment where road users resist tolls.
1. Policy Framework
731. A well functioning transport system requires careful planning that takes account
of how different modes of transport can be best integrated in accordance with their
respective roles, functions, and comparative strengths, associated costs of production,
and the overarching needs of society and the economy. Successive Five-Year plans
have included a reasonable articulation of transport policy, including pricing
considerations, capacity utilization, investment priorities, urban and rural transport
system development, and efficient resource allocation, informed by the requirements of
the economy at particular points in time. The primary policy constraint lies in the inability
of the Government to articulate and implement an integrated strategy for the
development of the transport sector that takes account of the various transport modes
and their relationship to one another.359 For example, while spending on roads has been
359
CPD (2003), Developing a Policy Agenda for Bangladesh, at 141.
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increasing as a proportion of overall transport sector expenditure, this does not reflect
strategic development within an integrated framework; rather, it reflects a lack of sectoral
coordination and long-term policy planning.
732. At present, each transport mode is developed and administered by separate
agencies that effectively operate in isolation from one another. This leads to inefficient
modal linkages, especially in riverine areas and along inland waterways, where bridges,
ferries, and highways are poorly connected. In the railway sector, the poor connectivity
of different rail lines and their relative inefficiency has caused BR to lose a significant
share of lucrative freight traffic, as private contractors switch to truck transport as an
alternative to rail.360
733. Port sector reform has been slow to evolve, leaving ports burdened by
overstaffing, labor unrest, complex customs procedures, and inefficient work rules and
management practices, the costs of which are borne by traders and consumers.361
734. There is no logical prioritizing among different modes of transportation, which
would improve resource use and reduce duplication. This uneven, sector-led policy
framework is costly in the long run, and prompts greater inconvenience as the economy
continues to grow and human and capital mobility increases. Empirical studies have yet
to be undertaken to determine if the rapid growth of the roads sector is efficient and
whether it is creating an appropriate mix of transport modes.
735. Policy development has also been slow to target specific urban transport issues.
Although Bangladesh has experienced rapid urbanization in the last decade, notably in
Dhaka and Chittagong, a national urban transport policy has yet to be developed to
address the particular issues raised by urban traffic management.
2. Institutional and Administrative Management
a. General
736. Although the Land Transport Policy (LTP) sets out a comprehensive approach to
improving the transportation sector in Bangladesh, the institutions responsible for
implementing transport policies remain quite weak. They tend to operate in an
independent capacity, with little coordination in addressing issues of common interest.362
There are no formal mechanisms for coordinating dialogue between the Ministries of
Finance, Planning, Local Government and Development, Communications, and other
implementing agencies. This lack of coordination creates challenges in implementing
the LTC and other policy directives. In addition, transport policies are developed by the
various responsible agencies with little consultation between them and few opportunities
for stakeholder inputs.363
737. Coordination problems are further exacerbated by lack of clarity in the division of
roles and responsibilities between various administrative institutions. For example,
division of responsibilities for different elements of the road network should be effected
in a practical manner between RHD, LGED, city corporations, and local government. In
360
Asian Development Bank (2000) Railway Technical Assistance in Bangladesh. ADB. Dhaka,
Bangladesh.
361 The World Bank-ADB (2003), Bangladesh Public Expenditure Review, at 92.
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the case of inland waterways, river crossings along highways have been bridged in a
spontaneous and unsupervised manner, without adherence to any guidelines regarding
the height and strength of bridges. This practice results in the physical obstruction of
waterborne traffic.364
738. Future refinements of the national transport policy should ideally take these
coordination issues into account and include specific elements that focus on improved
collaborative relations between responsible agencies. While he recent reallocation of
responsibility for feeder roads between RHD and LGED introduces greater logic in the
system, it may potentially lead to an overburdening of the LGED, which is also
responsible for R1, R2, and R3 roads. This could in turn lead to further deterioration in
the quality of rural and feeder roads, unless Union Parishads increase their involvement
in rural road maintenance. Another consequence of the lack of coordination between
the several ministries involved in transport infrastructure is that projects are being
implemented according to narrow sectoral design, with little coordination or proper
guidelines for integrated development. At a roundtable meeting convened by the
Ministry of Communications in 2002, a recommendation was tabled for the
establishment of a single Ministry of Transport to improve coordination and overall
sectoral management. The I-PRSP commits the Government to create a single ministry.
c. Implications for urban and rural transport and ports
739. Urban Transport: While significant improvements have been made in air quality
and the management of certain traffic flow problems in Dhaka through the regulation of
cycle rickshaw traffic and the banning of two-stroke, three-wheel motor taxis, the city
remains highly congested, with high accident rates and poor traffic management. Heavy
congestion imposes significant costs on businesses and individuals, both in terms of
valuable time lost and in direct losses from accidents. The existing transport
infrastructure falls far below what is required to adequately support current traffic loads.
Causes of congestion include rapid urbanization, consequent increase in vehicle and
infrastructure demand, and poor traffic management schemes. In particular, the mixture
of non-motorized and motorized vehicles is a common cause of congestion. Except for
major highways, over 50 percent of traffic flow in most parts of Dhaka is made up of nonmotorized vehicles such as rickshaws. While traffic in Dhaka has increased from several
hundred to hundreds of thousands of motorized and non-motorized vehicles, the road
network has remained virtually unchanged for two decades.365 The World Bank’s Dhaka
Urban Transport Project was established to address a combination of policy issues,
infrastructure impediments, and traffic management challenges, as well as long-term
planning and institutional reform.366
740. Rural Transport: Success in creating an extensive rural road network has
enabled growth and poverty reduction by improving the ease of agriculture technology
transfer, lowering transport costs, improving labor mobility, and increasing overall
productivity. The needs of rural transport now lie less in construction than in improving
the quality and ensuring regular maintenance. The labor-intensive technology used in
362
CPD (2003), Developing a Policy Agenda for Bangladesh, at 138-39.
CPD (2003), Developing a Policy Agenda for Bangladesh, at 139.
364 Ibid
365 To mitigate traffic jams in the Dhaka Metropolitan area, a second Sitalakhya Bridge and a third Buriganga
Bridge are being planned for construction.
366 CPD (2003), Developing a Policy Agenda for Bangladesh, at 138.
363
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rural road construction has led to 80 percent of the rural road network being comprised
of narrow, poorly compacted roads.367
741. Ports: Although Bangladesh’s ports have the potential to support a robust
international trade sector, their potential is undermined by poor management and
resulting inefficiencies. With the phasing out of the Multi Fiber Agreement (MFA) at the
end of 2004, Bangladesh is likely to lose part of its current market share in textile and
garment exports—in part due to the relatively high costs of transportation in export
zones in relation to other South Asian countries. Port sector reform should accordingly
rank high on the list of policy priorities.
742. All three major ports of Bangladesh suffer from overemployment, frequent labor
strikes, and outdated management and work practices. Port users face complicated
customs procedures, and high turnaround times. At Chittagong, where 80 percent of the
foreign trade is located, turnaround time for feeder vessels is six to ten days, compared
to two days in Bangkok. The prevalence of unofficial costs have raised the expense of
moving a container in Bangladesh from the official charge of $100 per container to $600,
compared to $150 to $300 in Bombay.368
These costs affect Bangladesh’s
competitiveness.
743. Heavy siltation at Mongla Port has reduced berth use. In addition, both Mongla
and Chittagong ports are poorly connected to mainland transport arteries, which results
in additional costs, delays, and inconveniences. Studies have indicated that port
inefficiencies, if eliminated, could lead to as much as a 30 percent increase in earnings
for Bangladeshi garment exporters alone. In overall terms, port delays have been
estimated to cost the economy approximately $1.1 billion per year.369
744. The sensitive political environment in which the port sector operates adds further
challenge to reform efforts. Employment practices are entrenched and difficult to
restructure, especially given the highly unionized labor force. As a result, delays caused
by hartals are frequent, and the ports are significantly over-staffed. For example, the
Chittagong Port Authority employs 6,500 workers permanently, and an additional 6,000
day laborers of the Dock Workers Management Board. These staffing levels are
estimated to be five times the actual number required to handle current shipping
loads370.
745. Though a new National Shipping Policy has been adopted, past experience
suggests that implementation of its directives is likely to be challenging. The Ministry of
Shipping is currently assessing plans to construct a new Mooring Container Terminal.
This modern terminal is expected to double the container ship handling capacity of
Chittagong Port and improve the regional competitiveness of Bangladesh’s ports. As of
June 2003, the implementation of the Taka 737.24 crore project had been delayed,
further lengthening a project period that was to have begun in 1998-1999 and been
completed by December 2005. Delays are attributed to manipulation by vested
367
The World Bank- Asian Development Bank (2003) Bangladesh: Public Expenditure Review.
Ibid, at 92-93.
369 Ibid, at 96.
370 The World Bank (2001), Workshop on Private Investment Opportunities in Shipping Sector of
Bangladesh to Raise Investor Awareness. Speech by Frederick T. Temple, The World Bank Country
Director for Bangladesh. August 20, 2001.
368
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interests.371 A previous project to build a private port by the Stevedoring Services of
America (SSA) was initiated in 1998, in the face of strong protests by labor unions, but
never implemented. The Supreme Court declared the project illegal in May 2003.372
This episode has significantly reduced the political feasibility of private sector
involvement in the ports sector. Similarly, an increase in income tax rate on the
Chittagong Port Authority from 25 percent to 37.5 percent proposed in the national
budget FY 2003-2004 was withdrawn in response to protests from workers and
employees of the CPA.373 The slow progress in current port sector policy changes and
projects underlines the difficulty in overcoming entrenched practices and vested
interests.
3. Legal and Regulatory Structure
746. While weaknesses in the legal and regulatory administration of the transport
sector create many problems, safety implications are the most serious. The loss of life
resulting from accidents involving overloaded passenger launches in 2003 serves as a
stark reminder of need for stricter enforcement of rules and regulations intended to
ensure the safety of passengers. In the road sector, the incidence of traffic related
injuries in Bangladesh (73 per 10,000 vehicles a year) is the highest in South Asia. The
factors that contribute to high accident rate include a general lack of infrastructure for
pedestrians, the mix of motorized and non-motorized vehicles that share the road, poor
driver education, and a lack of enforcement of traffic regulations and safety standards.
Safety concerns are especially problematic in urban areas, reflecting the absence of an
effective city management framework.
747. The Bangladesh Road Transport Authority (BRTA) is responsible for enforcing
technical standards for vehicles. It also regulates the safety and environmental
standards of private vehicles through the issuance of fitness certificates. The traffic
police, governed by the national police under the Ministry of Home Affairs, are
responsible for enforcing traffic laws and managing traffic flow in the cities. The
municipal government oversees construction and maintenance of roads in urban areas,
provision and maintenance of street lighting, and maintenance of public streets374.
748. A Road Transport and Traffic Act 2001 has been prepared to replace the older
Motor Vehicles Ordinance 1983. The draft is presently being reviewed and modified by
BRTA. While vehicle safety standards have been established, they are poorly enforced.
Current law requires vehicles older than five years to be tested annually. To facilitate
effective implementation of this law, ADB supported the creation of modern vehicle
inspection centers in four divisions, with responsibility for issuing fitness and nonpollution certificates. Due to a lack of expertise within the Bangladesh Road Transport
Authority (BRTA) however, the equipment is not fully utilized. Attempts to lease the
equipment to the private sector also faced barriers resulting from poor institutional
capacity and corruption within the BRTA.
The Independent (2003). “Taka 737 Crore New Mooring Terminal Project Uncertain.” June 26, 2003.
Sustainable Development Networking Program Bangladesh. (SDNPB) National News Archive, May 20,
2003, See www.sdnbd.org/sdi/news/general-news/Previus%20news/May-2003/20.htm
373 The Independent (2003) “Enhanced Tax on CPA Withdrawn.” June 25, 2003.
374 The World Bank (2002), Bangladesh Urban Service Delivery: A Score Card, The World Bank. Dhaka,
Bangladesh.
371
372
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749. A recent World Bank survey375 found that it is common practice to pay a bribe to
a BRTA official to obtain an annual vehicle fitness certificate, particularly in Dhaka. As a
result, fitness certificates are being issued for unfit vehicles based on incomplete
checking. Respondents in the World Bank survey indicated that, in certain instances,
the bribe paid was equal to about 50 percent of the official fee. Focus group discussions
further revealed the lack of incentives for obtaining a valid certificate. The police
routinely extract payments from vehicle drivers, regardless of the validity of their
certificates. Consequently, many drivers see no the need to go through the process of
getting their vehicles inspected and certified. It is estimated that about 80 percent of the
vehicles currently in use are unfit.376
750. Recent perception surveys indicate that the police are regarded as a common
cause of traffic congestion. Rather than enforcing traffic regulations and safety
standards, the police reportedly stop vehicles to demand bribes, allow trucks to illegally
load or unload goods on main roads in return for a fee, or fail to take action when roads
are blocked by motorists who ignore basic driving rules.377 Although the size of the
Dhaka Metropolitan Police (DMP) has increased in recent years and more traffic police
are completing traffic management courses at the DMP Training Academy, the number
of traffic irregularities is increasing. Perception surveys suggest that penalties are not
imposed on traffic violators, but that bribes and illegal tolls are extracted in an ad hoc
fashion on all types of vehicles. In addition, the driver training system in Bangladesh
allows anyone to conduct training, without certification as a competent instructor.
Although driving tests are conducted, the standards required to obtain a driver’s license
are low and reports suggest that fake licenses are frequently issued.
751. These legal and regulatory issues underline the relationship between sectoral
and core governance in the context of the transport sector. Steps taken to strengthen
the role of the police and other public agencies in enforcing traffic safety and other rules
and regulations that govern the transport sector will contribute to broader core
governance reform of the justice sector.
4. Financial Management
a. General
752. Despite clear policy recognition of the importance of an efficient, functioning
transport system in facilitating economic growth and poverty reduction, resource
allocations for the development, maintenance, and regulation of the transport sector
have fallen short of policy goals. Financial allocations have implications for other
dimensions of transport sector governance, including general management, legal and
regulatory administration, promotion of private sector involvement, and other sectoral
development initiatives.
753. Between the early 1980s and the late 1990s, expenditures on transport
increased from less than 10 percent of total Annual Development Program (ADP)
expenditures to more than 20 percent.378 Approximately 44 percent of total transport
375
Ibid.
Ibid
377 See Transparency International, Corruption in South Asia.
378 The World Bank- Asian Development Bank (2003) Bangladesh: Public Expenditure Review, at 93.
376
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expenditures are allocated for major highways, while 34 percent are allocated for rural
roads. Railways and inland waterways account for a total of 12 percent of transport
expenditures.379 RHD expenditures increased at an annual rate of 12 percent from FY
1997 to FY 2000, while that of the LGED grew at 19 percent. In contrast, the port sector
has always received a minimal allocation in the ADP.
754. The 2003-2004 budget provides for a combined allocation of Taka 31.89 million
(6.13 percent of the total budget) for transport and communication sector development.
This reflects a reduction from the previous year, in which Taka 34.21 million was
allocated for the sector (7.62 percent of the total budget). The change may reflect a
leveling off of infrastructure needs, or under-prioritization of the sector. Whatever the
circumstances, the current allocation appears to be insufficient to fulfill the transport
infrastructure priorities specified in the I-NPRS. Even in earlier years, when budget
allocations for the transport sector were increasing, the majority of funds were allocated
for construction projects, while maintenance and repair needs were neglected. While
the current budget places greater emphasis on repair and maintenance of existing roads
and highways, bridges, and culverts—a departure from historic budgeting trends—
maintenance expenditures have grown at a considerably lower rate than those on road
construction and improvement (see below).
755. Allocations within the road sector budget are not even. There are three large
umbrella projects currently implemented by the RHD,380 under which approximately 800
sub-projects are operating. Annual ADP allocations for these small projects currently
represent only two to three percent of total project costs, reflecting poor project selection
and prioritization. At current funding levels, these projects—most of which involve road
improvement and rehabilitation—would require 30 to 50 years to complete.381
d. Implications for infrastructure maintenance and improvement
756. Despite improvements in the road network, the majority of roads in Bangladesh
remain narrow and poor maintained. Economic growth has outstripped infrastructure
development, and many roads are unable to support high traffic volumes.382 This leads
to traffic congestion, high transport costs, and lengthy delays. Road capacity is being
pushed to the limit by the absence of bridges at river crossings that are currently being
serviced by ferries.
757. The Planning Commission allocates funds for infrastructure construction, while
the Ministry of Finance expenditure allocates maintenance funds as part of the recurrent
expenditure. Expenditures under RHD increased at an annual rate of 12 percent from
FY 1997 to FY 2000, while RHD expenditures for maintenance increased at only 4
percent annually during the same period.383 Similarly, while LGED expenditures
increased annually at 19 percent, maintenance expenditures increased by only 7 percent
on average. Analysis conducted using a predictive model suggests that annual long
379
Ibid, at 93.
The Thana Connecting Road Project, and Phases 1 and 2 of the Construction of Public Priority Roads
and Bridges Project.
381 The World Bank- Asian Development Bank (2003), Bangladesh: Public Expenditure Review.
382 A traffic survey conducted in FY 2000 showed an average of 4,950 four-wheeled vehicles driving on each
national road in Bangladesh. See The World Bank-ADB (2003), Bangladesh Public Expenditure Review, at
95.
383 The World Bank- Asian Development Bank (2003) Bangladesh Public Expenditure Review, at 93.
380
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term spending on preventive maintenance should be about Taka 5 billion. Current
annual maintenance expenditure is approximately Taka 2.2 billion, or less than half of
what is required. The cumulative under-funding over the years has led to an additional
24 billion in backlogged maintenance projects. This situation has persisted for several
years, creating a backlog of deferred maintenance work. 384
758. Road maintenance issues are compounded by the fact that the two agencies that
coordinate development and recurrent expenditures fail to adequately coordinate, which
has led to a rapid deterioration in the quality of roads in Bangladesh. While annual
flooding is a leading cause of road degradation, flooding is a predictable issue. The
implication is that road degradation can be prevented, or at least reduced, through
greater allocation of funds to the maintenance budget.
759. In the absence of local government action, much rural road maintenance work
has been taken up by NGOs or by local initiatives. This work primarily involves
plantation of roadside trees to prevent soil erosion from destroying roads. These
activities reflect a willingness on the part of local communities to contribute in order to
ensure that roads are regularly maintained. Similarly, tolls introduced at the Jamuna
Bridge have not deterred vehicles from utilizing the bridge, affirming public willingness to
pay for road services.385 Given the lack of government funds, the new Land Transport
policy recommendation for raising taxes may prove to be a step in the right direction,
assuming that taxpayers are satisfied that their taxes are being applied to good use.
Vehicles using Ashulia Road are currently being charged Taka 20 each, and this
practice can be extended to other highways. Other initiatives should be taken into
consideration, such as the establishment of an autonomous road maintenance fund.386
5. Private Sector Participation in the Transport Sector
760. Private sector involvement in transport infrastructure can contribute to increased
competition, efficiency, and cost effectiveness in transport projects. At the same time,
constructive private sector participation is dependent on functioning regulatory
institutions and a legal framework that inspires investor confidence. Private sector
involvement is currently limited to roads, inland waterways, and shipping. Even in this
context, private contractors in the road sector face challenges to operations due to weak
governing institutions and inefficient procedures. The size of works available for private
company contracts is small—one to two kilometers for LGED, and five to tem kilometers
for RHD.387 This not only reduces the competitive abilities of the private sector, but also
adds an administrative burden to the oversight agency.
Decision-making on
procurement action is multi-layered, requiring approval by the Cabinet Committee or
even the Prime Minister, even for relatively small contracts. These bureaucratic
inefficiencies, and the small scope of available work, are likely to discourage rather than
encourage private sector activity.
384
Ibid, at 93-94.
Ibid, at 95.
386 Ibid, at 95.
387 The World Bank-Asian Development Bank (2003), Bangladesh Public Expenditure Review, at 95.
385
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D. Issues and Opportunities for Reform
1. Improved Policy Coordination
761. The relevant ministries need to initiate more coordinating discussions and
institutionalize mechanisms that will enable integrated development between different
transport modes such as bridges and inland waterways. The recent confirmation by the
Government of plans to create a Ministry of Transport needs to be supported by strong
commitment on the part of all ministries and departments involved.
2. Setting and Enforcing Legal and Regulatory Standards
762. The Government needs to prioritize its role as regulator and standard setter in
the transport sector, with a particular focus should be on the enforcement of existing
rules with respect to safety standards, traffic regulation, and driver licensing. As a
regulator, the Government should also explore ways to improve traffic flow in city centers
by designating additional areas from which non-motorized vehicles are barred, and
improving public transportation alternatives such as buses. The current ban on nonmotorized vehicles on highways must be strictly enforced to reduce accidents and
improve the efficient flow of traffic. These responsibilities fall to the Municipal Council
and the Ministry of Home Affairs, but require a firm commitment among the top ranks of
government. Recent initiatives, such as the issuance of plastic licenses to counter
widespread fraud, are a positive step.
3. Financial Management and Resource Allocation
763. The existing network of roads in Bangladesh requires regular maintenance and,
in many cases, improvement. Given the existing high road density, expenditures for
construction of new roads should be reallocated for road maintenance and improvement
projects. Continued expansion of the road network in rural areas, rather than improving
the quality and capacity of existing roads, carries a high opportunity cost.
4. Private Sector Participation
764. The lack of funds for maintenance work could be overcome by creating an
enabling environment for greater private sector involvement. While private sector
involvement in RHD and LGED projects is presently constrained by bureaucratic
impediments and requirements, there is considerable scope for increased engagement
by the private sector. This will require a review and restructuring of current guidelines
for private sector contracting in the transport sector. Reform efforts should be planned
and implemented with private sector involvement, as well as participation by various
stakeholder groups (including local road users) to ensure that road improvements are
conducted in an equitable manner that enhances public welfare.
765. Bangladesh Railway used to be one of the largest loss-making, state-owned
enterprises in the country. With continued restructuring, largely supported by ADB, the
private sector is increasingly involved in the sector, taking on leases on the commercial
functions of passenger trains. This increase in private participation has created
significant increases in revenue for BR, as well as higher quality services for the public.
Despite this progress, the connectivity and reach of rail networks in Bangladesh falls
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short of potential. Rail transport holds little appeal to potential users, since the rail
system is poorly connected to other modes of transport such as roads and ferries.
Given the current congestion problems in the urban centers, efficient mass rail service is
also needed to facilitate inter-city and intra-city passenger transit. The ongoing
reorganization of BR should be supported by development partners. ADB is preparing to
implement a project to reorganize BR. The project will introduce business units for core
and non-core BR activities, emphasizing collaborative working relations between
government and the private sector. A modern costing system is also to be implemented
to improve decision-making on the basis of sound commercial principles.
5. Improved Port Competitiveness
766. Improved port competitiveness requires enabling private sector involvement in
port management and improvements, particular labor guidelines, and enhanced
management practices by the Port Authority. Reforms to improve competitiveness in
this area are given high priority, due to the anticipated phasing out of the MFA, but are
politically difficult to implement. Private participation in this sector cannot be introduced
in the absence of associated labor reform efforts whose success will depend on strong
leadership and political will. The Ministry of Shipping and IIFC are cooperating on
increasing private participation in the sector, which appears to affirm the commitment of
the Government to improve port management and implement directives specified in the
new National Shipping Policy. Labor reform efforts should include discussion of
legitimate concerns such as severance packages, through close consultation with
unions, the Government, port authorities, and the private sector. ADB will fund a project
in 2004 to improve trade movements at Chittagong Port. This will involve improving
management practices at CPA and Customs at Chittagong Port, physical improvements
within the CPA area, and strengthening environmental management.388
388
See The World Bank-ADB (2003), Bangladesh Public Expenditure Review, at 99.
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CHAPTER XIV
ENERGY
A. Introduction
767. The energy sector in Bangladesh encompasses the production, transmission,
and distribution of electricity and gas and the refining, import, and distribution of
petroleum products, as well as the oversight of private power production and oil and gas
sector development. Geographic coverage and per capita consumption of commercial
energy are low by regional standards, with commercial energy accounting for only 35
percent of Bangladesh’s total energy consumption.389 While service is gradually
improving, and substantial improvements have been achieved in the power sector,
overall standards require significant improvement. Weak governance has contributed to
the troubled state of the energy sector, characterized by high system loss, under pricing
of electricity and gas for privileged consumers, weak financial and other regulation, and
inadequate planning, development, and sound investment to meet future consumer
demand.390 High system losses and other problems place a serious burden on the
economy. Governance reform efforts are required for the energy sector to meet growing
demand for energy and to fulfill its role in facilitating economic growth targets for poverty
reduction and for the Government to redefine its combined role and meet consumer and
other stakeholder needs as service provider and regulator.
B. Power Sector
1. Present State of the Power Sector
768. National economic growth and the performance of specific sectors of the
economy and infrastructure that depend on a reliable power delivery are constrained by
inadequate supply of electrical power. Bangladesh’s annual per capita electricity
consumption (110 kilowatt-hours (kWh) in FY2003) is the third lowest of ADB
development partners, after Cambodia and Nepal.391 At present, no more than 32
percent of the total population has access to electricity.392 Consumption of electricity
increased at an annual rate of 8.2 percent from 1994 through 2001, with industrial and
residential uses accounting for the major share of this increase.
769. The current installed generating capacity is 4,710 megawatts (MW), which
includes both public and private sector generators. As a result of load shedding and
interruptions in the supply of electrical service, industrialists and entrepreneurs have
been forced to invest in stand-by generators, increasing their production cost. The
World Bank has estimated that power shortage reduces industrial output and GDP
growth by an estimated US$ 1 billion and 0.5 percentage points, respectively, every
year.393
389
The World Bank-Asian Development Bank (2003). Bangladesh Public Expenditure Review, at 101.
Ibid.
391 ADB (2003), Report and Recommendation of the President to the Board of Directors on Proposed Loans
to the People’s Republic of Bangladesh for the Power Sector Development Program, RRP: BAN 36205,
November 2003, at 1.
392 Ibid, at 1.
393 The World Bank. Bangladesh: Review of Public Enterprise Performance and Strategy, November 2002.
Cited in BEI (2003), Reducing the Cost of Doing Business in Bangladesh, Draft Work in Progress, January
2003, at 42.
390
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770. ADB records indicate that load shedding of 5-468 MW was necessary on 210
days to date in 2003, for a total duration of 767 hours, consistent with improvements
since 2000. This improvement from earlier years reflects several developments,
including the reduction of gas supply constraints to power stations, full commissioning of
the 360 MW Haripur IPP station and the 450 MW Meghnaghat-I IPP station, the
reinforcement of the Dhaka 230 kV ring, the 100 MW expansion in Baghabari, and
completion of the Rampura 230 kV substation. Some degree of load shedding will be
necessary until new generation capacity is added to replace aging power stations, create
a reserve margin, and meet rising demand for new connections.394
771. An additional 550 MW of captive capacity is committed exclusively for the use by
various industries and commercial users. On average, only 2,900 MW of electricity is
available to meet general consumer requirements through the national grid. The
country’s existing generation plants have been unable to meet the aggregate demand for
electricity, which is now growing at an annual rate of 9 percent.395 This growth trajectory
will require a doubling of present generating capacity by 2010. Although private sector
participation has helped to increase overall capacity (based on current installed capacity,
IPP are generating 40 percent of the present national power supply), which is projected
to reach 5,500 MW by 2005, aggregate demand will remain unfulfilled—especially in
remote areas where the generation and distribution infrastructure remains inadequate.
Peak demand of 3,622 MW was met on August 17, 2003. The Power System Master
Plan (PSMP) projects a demand of 9,900 MW by 2015, while the Power Policy
Statement (2000) projects that generation capacity will need to increase by a factor of
five to 15,000 MW by 2020.396 Gas production will have to increase commensurately to
meet increased power generation capacity. Taking these various estimates into
account, Bangladesh faces a shortfall of approximately 2,500 MW of generating capacity
over the next five years. Part of this demand is likely to be met through the award of
additional power generation rights to foreign private companies.
2. Legal and Regulatory Framework
772. Under Articles 15 (provision of basic necessities) and 16 (rural development) of
the Constitution, the Government of Bangladesh is obliged to provide electricity to all
citizens. At present, no more than 32 percent of the total population has access to
electrical power. Per capita annual electricity consumption is estimated at around 110
KWh (Kilowatt hour), which is low by comparison to other less developed countries.397
773. The Government regulates and supervises the generation, transmission, and
distribution of electricity through the Power Division of the Ministry of Power, Energy,
and Mineral Resources (MPEMR). The passage of the Energy Act 2003 on March 10,
2003 will establish an Energy Regulatory Commission (ERC). The ERC will assume
principal regulatory responsibility, while the Government of Bangladesh will play the role
of policy maker. The U.S. Agency for International Development (USAID) will contribute
primary resources to support the establishment of the ERC and other elements of the
new Act, while ADB will monitor the implementation of the new law and the ERC. In the
394
ADB (2003), Report and Recommendation for the Power Sector Development Program, RRP: BAN
36205, November 2003, at 1.
395 CPD (2003), Developing a Policy Agenda for, at 170.
396 Ibid at 171.
397 CPD (2003), Developing a Policy Agenda for Bangladesh, at 173.
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meantime, MPEMR holds exclusive authority for policy formulation, key personnel
appointments, investment decisions, and overall regulation of the power sector. There
are three executing agencies in the sector:

Bangladesh Power Development Board (BPDB): BPDB, an integrated utility, is the
dominant agency in the power sector. It accounts for 60 percent of electrical
generation, 40 percent of distribution in secondary cities and towns, and a portion of
electrical supply in rural areas.398 Until 1998, BPDB was responsible for all
generation and most of the transmission in the country, as well as for distribution in
district towns, municipalities, and some rural areas. In December 2002, the final
transfer of responsibility to the Power Grid Corporation of Bangladesh (PGCB) for
transmission lines was completed.

Dhaka Electric Supply Authority (DESA): DESA is responsible for distribution and
commercial operation in Dhaka and adjoining areas, with the exception of Mirpur and
Gulshan Circle, where this function is performed by Dhaka Electric Supply Company
(DESCO). DESCO is incorporated, with sole public ownership. Until 1998, DESA
was responsible for distribution in the great Dhaka area, including the capital.

Rural Electrification Board (REB): REB performs similar integrated functions in rural
Bangladesh, through 67 cooperatives or Palli Bidyut Samity (PBSs).
774. As part of the sector reform process, new public entities such as the Power Grid
Company of Bangladesh (PGCB) and the Dhaka Electric Supply Company Ltd.
(DESCO), together with private sector independent power producers such as the Rural
Power Company Ltd. (RPC), have been constituted. Over the next few years, these
companies will own and operate a substantial portion of the assets of the power sector.
775. The West Zone Power Distribution Company (WZPDC) was established by
separating a part of BPDB’s operations in Khulna Division. Its commercial operations
will begin following the completion of rehabilitation work.399 Under ADB’s new Power
Sector Development Program, the Northwest Distribution Company will be established.
This will leave just two urban distribution zones outside Dhaka in the hands of BPDP.
776. The Government has recently taken the positive step of extending opportunities
for private sector investment in the power sector to resolve current deficits in the
generation and distribution of electricity. With the entry of Independent Power Producers
(IPPs) through a private sector power generation policy, five IPP contracts have been
signed. Implementation of four of these contracts has added at least 810 MW of
electricity, and is expected to add another 575 MW by the end of 2003.
3. Government Policy
777. In 1994 the Government adopted a policy paper on Power Sector Reforms in
Bangladesh (PSRB). The paper was informed by inputs from major development
398
Board of Investment. Bangladesh Investment Handbook (2002). Reproduced in Bangladesh Enterprise
Institute (2003) Reducing the Cost of Doing Business in Bangladesh, Draft Work in Progress, January 2003,
at 37.
399 The World Bank (2003), Bangladesh: Review of Public Enterprise Performance and Strategy,
Washington, DC, The World Bank, at 88.
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partners, including ADB, the World Bank, the United Kingdom Department for
International Development (DFID),400 the Japan Bank for International Cooperation
(JBIC), Kreditanstalt Wiederaufbau (KfW) of Germany, and the United States Agency for
International Development (USAID). The PSRB outlined the reform process through
which the Government committed to gradually remove power sector constraints through
improvements in sector and corporate governance, introduction of competition, and
public-private partnerships in energy delivery.401 In accordance with the PSRB, the
power sector has been gradually undergoing structural changes, supported by ADB and
other development partners. Donor inputs include technical assistance for planning and
institutional strengthening and capital for system expansion, consistent with the principle
of reforms-linked assistance. Positive steps to date include the restructuring of DESA
and PBDB and a series of regulatory reforms to support the new structure of the power
sector. For example:

the DESA Act was amended in 1998 to rationalize DESA’s boundary with REB. The
transfer of all areas outside metropolitan Dhaka has increased demand in seven
PSBs and reduced system loss in the areas for which REB and the PSBs assumed
responsibility.402

DESCO commenced commercial operation in September 1998, assuming
responsibility for distribution and commercial operations in the Mirpur area from
DESA. DESCO has a fully independent board and has introduced a commercially
oriented business culture. System loss was reduced from 43 percent at the start of
operations to 21 percent by November 2002. Billing, collections, and the quality of
consumer services have all improved.403

Parliament passed the Energy Regulation Commission Bill on March 10, 2003.
Consultants engaged under two ADB technical assistance projects are supporting
the proposed Energy Regulatory Commission (ERC).404
778. These and other reforms affirm that the Government is indeed taking steps to
restructure the power sector by facilitating a business environment that enhances
operating efficiencies, financial viability, consumer service, and conservation. ADB has
assisted in the implementation of the reform agenda, while USAID will assume primary
responsibility in future. The strategy includes, inter alia: 405

encouraging and facilitating private sector participation and fostering a more
transparent and competitive environment for private sector participation;

adopting a corporatized, “profit center” approach to strengthen the operations of
public sector power utilities;

establishing tariffs on the basis of commercial principles, which will facilitate cost
recovery and reasonable returns on investment;
400
Formerly ODA.
Asian Development Bank (2003), Draft Aide Memoire, Bangladesh Power Sector Development Program
(March 2003), at 1.
402 ADB (2003), Summary Table on Progress of Power Sector Reforms.
403 Ibid.
404 Ibid. See further discussion below.
405 ADB (2003), Report and Recommendations for the Power Sector Development Program.
401
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
establishing independent regulation and tariff setting, supported by statutory
provisions;

extending transparent, reasonable, direct, and qualified subsidies to targeted sectors
of the consumer market.
779. The opening of the power generation market to private investment under the
1996 Private Sector Power Generation Policy (PSPG) has had a favorable impact on the
supply of electricity. Independent Power Producers (IPPs) supply electricity at
competitive prices and have improved the reliability of the power supply. BPDB, in turn,
has a better management record with respect to its dealings with IPPs. The
Government’s early relationship with IPPs has laid a good foundation for further
assumption of or provision for regulatory responsibilities, as an important element in
defining the new role of the State in the power sector.
780. An issue of concern noted by the World Bank is that, given the increasing share
of independent providers in the power sector, government guarantees may be called
unless the financial performance and creditworthiness of the power sector improves
commensurately. A 1999 World Bank study concluded that, unless new sources of
foreign exchange earnings, such as gas exports, are tapped Bangladesh may find it
increasingly difficult to meet financial obligations accruing from power purchase
agreements with independent power providers.406 Again, the present and future role of
IPPs calls for thoughtful reflection on the part of the Government in defining regulatory
roles and responsibilities in a sector in which the State has traditionally served as
principal service provider.
781. Other recent Government initiatives include: adjustment of energy prices in
January 2002:407 preparation of electricity bills to empower the Energy Regulatory
Commission to set power tariffs; initiatives by BPDB and DESA to strengthen revenue
recovery by making the names of delinquent consumers public; and the issuance of new
guidelines for supplier credits that will limit recourse to a form of financing that is
generally regarded as inefficient.408 As noted previously, Parliament approved the
Electricity Regulatory Commission Bill in March 2003, which lays the basis for the
establishment of an independent ERC for the electricity and downstream hydrocarbons
sector. Building on their earlier contributions to the passage of the legislation to date,
ADB and USAID are assisting the Government to establish the ERC and to build
capacity to amend existing legislation, regulations, and tariffs in the power sector.
4. ADB Experience in the Power Sector
782. ADB has supported power sector development in Bangladesh for 25 years. It
has played an active role in promoting institutional reform to enhance the costeffectiveness of sector operations and to enable greater private sector participation.
This approach has led ADB to pursue a strategy of continued investment combined with
pressure to reform, both through loan covenants and extended policy dialogue. With the
406
Word Bank (1999), Foreign Direct Investments in Bangladesh: Issues of Long-Run Sustainability.
Washington, DC, cited in The World Bank-ADB (2003), Bangladesh Public Expenditure Review, at 106-07.
407 The adjustment proved insufficient given the financial requirements of the power sector.
408 The World Bank-Asian Development Bank (2003), Bangladesh Public Expenditure Review 2003, at 107.
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adoption of the Power Sector Reforms in Bangladesh (PSRB) in 1994, ADB began to
provide policy advice to the Government in implementing the PSRB, together with funds
to help achieve the least-cost expansion program. 409While resistance to institutional
governance reform efforts from certain vested interests within the Government has
resulted in delays throughout the energy sector, the reform strategy has generally been
more effective in the power sector than in the gas sector. This is believed to reflect the
fact that commercial management practices have been more readily adopted in the
power sector. 410
783. Between 1996 and 2001, ADB financed seven projects and associated technical
assistance activities in the power sector. ADB strategy has been based on a flexible,
long-term commitment to development of the power sector. The strategy takes account
of partisan tensions and other constraints, with the expectation that reforms will
gradually take hold through the course of sustained assistance.411 ADB strategy of
sustained engagement on a combination of sector issues has served to facilitate
progress toward reform goals in the power sector and, in turn, has helped to leverage
private investment on terms that have brought benefit to both local consumers and
foreign investors.
784. Prior to the launch of the West Zone Power System Development Project, ADB
concentrated its work on the greater Dhaka area, in light of its commercial and political
importance to the country. While the greater Dhaka area experienced physical and
financial improvements, other parts of the country that have attracted less assistance or
private sector capital have lagged behind in physical infrastructure development and
overall pace of reform. The ADB-funded West Zone Power System Development
Project was part of the first effort to correct this imbalance by providing assistance for
regional urban distribution in the southwestern region of Bangladesh. Current West
Zone efforts target the northwestern region.412
785. As a direct result of assistance by ADB and KfW, three new companies have
been established: PGCB, DESCO and RPC. While RPC was a new start-up generation
company, PGCB took over assets and liabilities of the existing transmission operations
of BPDB and DESCO and the Mirpur distribution operations of DESA. Although both
companies have improved their operations and have broken even on current operations,
past liabilities create an accumulated problem that to date has prevented their full
transformation into profitable companies.
786. ADB’s Rural Electrification Project was formulated to assist the Government in its
rural electrification program, which was an integral part of the country’s power
development plan and the power sector reform program. The main objective of the
project was to (i) intensify rural electrification in seven PBSs; (ii) increase the availability
of power supply to five PBSs; and (iii) introduce the basic elements of corporatization,
commercialization and private sector participation in the power sector. The project was
409
ADB (2003), Report and Recommendation on the Power Sector Development Program, at 7.
See ADB (2003), Draft Aide Memoire, Bangladesh Power Sector Development Program (March 2003);
Asian Development Bank (2001), Report and Recommendation of the President to the Board of Directors on
Proposed Loans and Technical Assistance Grant to the People’s Republic of Bangladesh for the West Zone
Power System Development Project, RRP: BAN 31296.
411 Asian Development Bank (2003), Bangladesh Country Assistance Program Review, at 27.
412 Asian Development Bank (2003), Bangladesh Power Sector Development Program Fact-Finding Mission:
March 17-27, Aide Memoire, at 1-2.
410
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successfully completed and major capacity building and governance reforms were
achieved.
787. ADB’s strategy of combining policy dialogue with continued lending (with
conditions) has helped to facilitate significant reforms in the power sector and the
achievement of measurable performance improvements.
The previously cited
assessment further concluded that a pragmatic approach to private ownership has
helped to facilitate private investment in power generation. Certain benefits also
resulted from synergy between ADB work in the power and gas sectors. For example,
expanded use of natural gas as fuel for electrical power generation has in turn
contributed to economic growth and to reducing oil imports, thereby strengthening the
balance of payments.
788. The work of ADB and other development partners in the power sector has
traditionally focused on discrete power projects based on a “policy reform linked
assistance” strategy, which required that substantial policy actions be taken as preconditions for assistance. This approach enabled the Government and the executing
agencies to gradually increase technical and managerial capacity in the power sector.
The gradual approach also facilitated a smooth transition from the pre-reform
monopolistic model to the post-reform “unbundled” model with minimal disruption in
service or resistance among public officials. ADB subsequently elected to concentrate
assistance on a limited number of select entities and areas. Building on first stage
reforms secured under this new approach, ADB will now focus on financial stabilization
of the sector entities, improved sectoral governance through enhanced regulatory
oversight, and the introduction of structured competition and discipline. The new Power
Sector Development Program (PSDP) will combine a policy loan with an investment
loan. The sub-projects to be covered by the investment loan are integral parts of the
least-cost development plan for the power sector, and are accorded high priority by the
Government. The policy loan will assist the government to restructure the finances of
DESCO and PGCB by liquidating liabilities.413 It will require the Government to liquidate
outstanding dues to the power distribution companies.
789. The objective of the PSDP is to support the Government’s efforts to reform the
power sector through financial restructuring of two major companies and to prepare for
long-term sustainability in the sector. The PSDP will assist the Government to: (i)
provide support and incentives for sector reform activities such as independent tariff
setting, competitive dispatch of generation, and functional segregation of sector
activities; (ii) promote the PGCB and DESCO as commercially viable companies,
gradually relieving the Government of financial support for the sector; and (iii) modernize
and upgrade distribution systems in the northwest.414
5. Key Governance Issues
a. Institutional and administrative constraints
790. ADB has attributed the weak performance of the power sector through the late
1980s and 1990s to five key factors, each of which has a governance dimension: (i) lack
of institutional capacity; (ii) inadequate long-term domestic capital for financing
413
414
Ibid at 1-2.
ADB (2203), Report and Recommendations on Power Sector Development Program, at 11.
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investment; (iii) limited foreign debt service capacity of the economy; (iv) poor
management systems and procedures; (v) low employee commitment; and (vi)
associated institutional weaknesses in governance, banking, law enforcement, and the
judicial process.415
791. Most of these issues can ultimately be traced to inefficiencies that result from the
traditional role of government as owner, operator, and regulator of the power sector, and
to the absence of sufficient commercial orientation in day-to-day decision making and,
more broadly, in defining the appropriate role of the State. Weak governance and poor
accountability within state-owned power enterprises have in turn created opportunities
for corruption. Corruption and performance lapses take a variety of forms. These are
perceived to include collusion between meter readers and consumers to appropriate
revenues, illegal connections, tampering with meters, use of multiple meters by single
customers to take advantage of subsidized rates under the first block of tariffs, and poor
enforcement of peak-hour tariffs.416 The most serious problems are associated with the
supply of electricity to urban areas.
792. In contrast to the problematic performance of BPDB and DESA, the power
distribution operations of the Polli Bidyut Samity operating units under the Rural
Electrification Board have been more successful. With ownership dispersed among
cooperative PBS members, boards of directors assume responsibility for policy
formulation, resulting in increased efficiency. The REB performs only supervisory and
regulatory duties in ensuring that technical standards are met and performance is
monitored. Losses incurred by any single operating unit are absorbed by that unit and
not accumulated under REB. These rural cooperatives are more efficient, and operate
with system losses of only 16 to 17 percent—considerably lower than the comparable 30
to 35 percent losses incurred by BPDB and DESA.417 For its part, DESCO has made
significant progress in reducing its system loss 40.5 percent in 1999 to 21.2 percent in
2003.418
793. The various power management agencies are burdened by many of the same
constraints that affect the public sector as a whole, as discussed in Chapter IV. From
the perspective of electricity supply, commercial and household users are especially
frustrated by the delays, extensive paperwork, and rent-seeking demands faced in
registering for new connections or maintaining existing services. This situation frustrates
the growth of new industries, particularly in the manufacturing sector.419 Consumer
surveys conducted by Transparency International Bangladesh indicate that citizens
perceive the power sector to be highly corrupt.420
794. Strains on public administration have also led to poor investment decisions in
developing the power sector. Examples include opting for coal-powered versus gas-
415
Ibid at 1.
The World Bank-ADB (2003), Bangladesh Public Expenditure Review. at 107-08.
417 CPD (2003), Developing a Policy Agenda for Bangladesh, at 172.
418 ADB (2003), Report and Recommendation on Power Sector Development Program, at 3.
419 BEI (2003) Reducing the Cost of Doing Business in Bangladesh, January 4 (Draft - Work in Progress), at
43-45.
420 Transparency International Bangladesh (2001), cited in Word Bank-ADB (2003), Bangladesh Public
Expenditure Review, at 107.
416
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powered generating plants and using supplier credits rather than concessional
lending.421
b. Financial management
795. The financial performance of the power sector has been poor, with combined
losses from BPDB and DESA approaching $100 million per year.422 Notwithstanding this
poor performance record, the Government has subsidized the power sector to the extent
of $350 million per year. Subsidies tend to benefit users of greater financial means who
are already connected to the electrical supply grid, at the expense of the poor, who are
largely deprived of electrical service. Urban residential consumers in turn benefit from
cross subsidy, at the expense of industrial and commercial users.423
796. Power shortages and interruptions in service have imposed substantial costs on
the economy. The estimated power elasticity of GDP is 0.03 to 0.05, which implies that
a power shortfall of 10 percent could reduce GDP growth by 0.3 to 0.5 percent. Power
interruptions cost about $1 billion per year and are estimated to reduce annual GDP
growth by half a percentage point. The 2000 Household Income Expenditure Survey
(HIES) indicates that approximately 31 percent of households have access to electricity
(90 percent of urban household and 19 percent of rural households), a significant
increase from 21 percent coverage in 1995-96.424 The wealthiest 20 percent of the
population is more than twice as likely to have an electricity connection than the poorest
20 percent.425
797. BPDB and DESA are estimated to incur a combined annual cash shortfall of
approximately $100 million. In the case of BPDB, the shortfall reflects a combination of
high system loss, high cost of generation in some plants, inadequate power tariffs,
subsidies on natural gas and liquid fuel, and variations in power purchase price.426 In
the case of DESA, the shortfall reflects a combination of system loss, weak governance,
and inadequate tariffs.427 As a result, they are unable to meet present market demand
or to take develop actions that will allow them to meet rising demand in future. Private
sector involvement, while improving, falls short of potential, constrained by the absence
of a fully coherent strategy and strong opposition to private investment among certain
stakeholders.428
798. While BPDB produces regular annual reports and statements of account, the
underlying financial management systems remain rudimentary and fall short of generally
accepted accounting standards. At the same time, BPDB has reduced losses and
improved its collection rates to approximately 90 percent of billing. The financial status
of rural electrification is much sounder. Compared to clients in Dhaka, rural customers
receive lower subsidies, pay their bills on time, and are less prone to pilferage. While
the rural electrical system is not without problems, customers generally enjoy more
421
The World Bank-Asian Development Bank (2003), Bangladesh Public Expenditure Review. at 105.
The World Bank (2001), Reforming the Power Sector, Policy Brief #12 (Power), at 1.
423 Ibid.
424 See footnote 395.
425 The World Bank-Asian Development Bank (2003), Bangladesh Public Expenditure Review, at 104.
426 The World Bank (2003), Bangladesh: Review of Public Enterprise Performance and Strategy, at 90.
427 Ibid at 90.
428 The World Bank-Asian Development Bank (2003), Bangladesh Public Expenditure Review, Dhaka. at
104.
422
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efficient distribution and a greater voice in the administration of the electrical supply
system.429
c. Regulatory management and oversight
799. System Loss: Inefficient generation and weak distribution capacity are
compounded by substantial system loss (consisting primarily of power pilferages and
theft) and low bill collection rate. System loss in the power sector is estimated to be as
high as 30 to 35 percent of gross generation, while only 90 percent of billings have been
collected.430 The problem is more acute in urban areas, due to illegal connections by
households and industrial users and exacerbated by outdated distribution and wiring
systems. The situation is better in the rural cooperative units under the REB, where
operation is privatized.
800. Consumer Default: Poor recovery efforts resulted in a tripling of account
receivables of BPDB between FY1996 and FY2001. The present total of Taka 37 billion
exceeds 12 months’ sales revenue. Similarly, DESA’s account receivables almost
tripled during the same period, reaching the equivalent of 16 months’ sales. DESA
accounts for approximately 50 percent of BPDB’s account receivables, with a large
share of DESA account receivables attributable to public sector consumers.431 Core
governance reforms in the judicial sector are expected to gradually strengthen the
prospect of enforcing legal sanctions and remedies against defaulting consumers. In the
meantime, sectoral governance actions to reduce system loss and consumer default will
help to lay the groundwork for broader legal reforms.
801. Inadequate Tariffs: Power tariff rates for domestic, industrial, and commercial
use have increased by four to five percent per year since the mid-1990s. The present
formula for tariff adjustments is deficient and does not fully capture the revisions needed
to achieve cost recovery. In FY2000, BPDB’s average power tariff was six percent
below the long-run marginal cost (LRMC) of power. Power supplied to agriculture was
subsidized at a level of 48 percent of LRMC and domestic power consumption at 36
percent that year. Urban households have benefited from tariffs to a greater extent than
rural counterparts.432
Recent tariff restructuring will increase the average tariff
approximately five percent.
802. Pricing and Subsidies: Adjustments in power tariffs have not kept pace with
increases in the cost of supply of electrical power. This problem is largely attributable to
the subsidies extended to particular entities and consumer groups and to weaknesses in
pricing formulas. Rates for consumers have been 50 percent less than those for
industrial and commercial customers, which has negative implications for efficiency and
equity.433
429
Ibid.
Ibid at 172. See also The World Bank-ADB (2003), Bangladesh Public Expenditure Review, at 105; and
The World Bank (2003), Bangladesh: Review of Public Enterprise Performance and Strategy, at 91.
431 The World Bank-Asian Development Bank (2003), Bangladesh Public Expenditure Review, at 105. See
also BEI (2003), Reducing the Cost of Doing Business in Bangladesh, at 44.
432 See The World Bank (2003), Bangladesh: Review of Public Enterprise Performance and Strategy, at 9394.
433 Ibid at 93-94.
430
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d. Slow expansion of infrastructural capacity
803. Bureaucratic impediments resulting from government ownership, regulation, and
operation of BPDB and DESA contribute to inefficient management, corruption, systemloss, and delays in key decision-making. These constraints in turn result in inefficient
production and poor optimization of existing capacity, exacerbating the scarcity of
electrical power.
6. Issues and Opportunities for Reform
804. Recent assessments of the energy sector by ADB, the World Bank, the Centre
for Policy Dialogue, and other organizations have identified a series of priority
governance reforms to strengthen the performance of the energy sector. These can be
categorized under institutional, regulatory, financial management, and administrative
reforms.
a. Basic institutional reform
805. CPD has identified four priority institutional reform actions that will enhance the
performance of the energy sector: (i) the need to redefine the role of government; (ii)
continued investment in institutional capacity building; (iii) establishing greater
autonomy, accountability, and transparency in the various corporate agencies tasked
with managing different elements of the power sector; and (iv) establishing an Energy
Regulatory Commission (ERC).434 A civil society task force convened by CPD proposed
that institutional functions be divided as follows: the government should retain
responsibility for policy-making; a separate independent regulatory commission should
assume responsibility for regulating sector; and operations should be left to corporate
entities, accountable to their respective boards of directors.435 Further efforts to
unbundled corporate functions should be guided by reflections on the desired future role
of the State in shaping policy, empowering an independent regulatory body to oversee
the work of various corporate entities and private sector power providers, and ensuring
that transparent mechanisms are in place for consumers and other stakeholders to
register their views and interests. In addition, the Government should ensure that the
institutional structures and mechanisms for administration of the power sector take due
account of poverty reduction goals in expanding electrical service delivery to rural areas
and ensuring a reliable supply of electrical power to private enterprises that will drive the
achievement of economic growth targets.
b. Regulatory reform
806. As noted previously, the recent passage of the Electricity Regulatory
Commission Bill lays the groundwork for establishment of an independent Energy
Regulatory Commission (ERC) for the electricity and downstream hydrocarbons sector.
Until a regulatory framework is fully established, the Government should define clear,
transparent tariff policies in lieu of the ad hoc tariff decisions that are presently taken,
with policies implemented by sector agencies. Once the policies are adopted, the tariffs
should be periodically adjusted on the basis of accepted indexes that take account of
434
CPD (2003), Developing a Policy Agenda for Bangladesh, at 191-92.
435Ibid.
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inflation, the cost of purchasing, the price of gas, and prevailing exchange rates.436
would establish a regulatory framework for private participation in the power sector and
ensure the autonomy of the regulatory agency and its authority to set tariffs. In addition,
the Government should take further steps to reduce the system loss and power
pilferage.
c. Financial management
807. Adoption of financial action plans will help to resolve the financial difficulties
faced by BPDB and DESA. The plans should ideally lay out steps to: (i) address the
high levels of accounts receivable and payable to the Government and inadequate
capitalization, guide the settlement of outstanding claims among various entities; (ii)
revise the tariff structure and fund pensions and other liabilities; and (iii) provide
adequate budgetary provisions to pay for the use of electricity by government units.437 In
addition, the financial action plans should reduce outstanding debts to the industry
standard of no more than two months arrears. The Government has already taken steps
make the identity of debtors public.
e. Administrative reform and restructuring
808. Building on reforms to date, power generation, distribution and bill collecting
entities should be further restructured through incorporation to provide them with greater
independence and autonomy, while at the same time ensuring an appropriate degree of
government regulation, oversight and quality control. Single, multifunction entities such
as BPDB or DESA cannot continue to exercise sole responsibility for vast elements of
power sector administration without risk of corruption, inefficiency, and system loss. The
Government should assume primary responsibility for establishing infrastructural
capacity throughout the country. Once a viable infrastructure is in place, newly
incorporated companies can gradually assume responsibility for power generation and
distribution.
C. Gas Sector
1. Present State of the Gas Sector
809. At present natural gas is the only significant source of commercial energy in
Bangladesh, providing approximately 70 percent of total commercial energy. Gas is
used primarily for electricity generation (50 percent), fertilizer production (25 percent),
and for other industrial, commercial and domestic purposes. Current annual natural gas
production and consumption from 12 gas fields is roughly 370 billion cubic feet (BCF).
There has been great speculation regarding the total volume of gas reserves in
Bangladesh. Estimates vary according to the survey methods applied, the technology
used to measure reserves, and the particular agency or organization responsible for the
estimate. In 2001, the Government estimated that approximately 15.12 trillion cubic feet
(TCF) of gas remained available from a 1960 estimate of 24.74 TCF in 22 fields.
Estimates have since been revised to 28.8 TCF, which is equivalent to approximately 40
years supply based on present consumption rates. With the opening of gas exploration
and production to International Oil Companies (IOCs), gas production has doubled in the
436
437
The World Bank (2001) Reforming the Power Sector. Policy Brief #12 (Power), at 10-11.
Ibid at 10-11.
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last ten years at 7.5 percent annual growth.438
810. Private sector interest and foreign direct investment in the gas sector has
increased significantly since the mid 1990s, when the government extended
opportunities to foreign companies to extract and produce gas under production sharing
contracts (PSCs). While the involvement of IOCs has contributed to improved gas
supply in recent years, 65 percent of the total energy needs of the country continue to be
met by biomass, particularly in rural areas. The situation reflects infrastructural
constraints in the supply of gas, including inadequate production and lack of an efficient
distribution system. The nation’s natural gas reserves are under exploited, while
domestic gas use is significantly under priced. This results in high opportunity cost with
respect to unutilized resources that would have supported investment within and outside
the gas sector, which in turn would have helped to meet national development financing
needs.439 While the financial structure of the gas sector is actually ahead of the power
sector, the gas companies do not have the governance attributes of a fully corporatized
entity, including independent boards of directors.
2. Legal and Regulatory Framework
811. As with the power sector, the oil and gas sector is regulated and administered by
the Government of Bangladesh.440 Article 143 of the Constitution prescribes the rights
and responsibilities of the State in managing natural resources. The Government of
Bangladesh, through the Ministry of Power, Energy and Mineral Resources (MPEMR),
manages the exploration, production, and distribution of gas and imported crude oil, and
holds exclusive authority for policy formulation, appointment and transfer of officials,
investment decisions, and regulation.441 Until recently, the Bangladesh Oil, Gas, and
Mineral Corporation (Petrobangla) was the primary institutional actor in the gas sector.
812. Petrobangla was created under the Petroleum Act, 1974 as a state corporation
for oil and gas exploration, production, and distribution. In 1977, the petroleum division
of Petrobangla was separated and brought under the newly created Bangladesh
Petroleum Corporation (BPC). BPC now acts as holding company for the oil marketing
companies operating in Bangladesh and for the country’s single oil refinery. Since 1994,
when the first round of production sharing contracts were entered with the international
oil companies (IOCs) responsible for drilling, Petrobangla has served as supervisor,
regulator, and sole purchaser of IOC outputs.
813. Petrobangla is no longer operationally active, but rather conducts its activities
through eight operating companies. While these operating companies are incorporated
as public limited companies under the Companies Act and governed by boards of
directors, Petrobangla and MPEMR have authority to override major board decisions on
matters of pricing, operating and development budgets, organizational structure and
staffing, and the award of contracts exceeding Taka100 million. The directors of the
438
The World Bank, Bangladesh: Review of Public Enterprise Performance and Strategy, at 82.
Ibid, at 81-82.
440 During the last few years there have been initiatives for privatization.
441 CPD (2003) Developing a Policy Agenda for Bangladesh: Civil Society’s task Force Report 2001.
University Press Limited. Dhaka, Bangladesh. April. at 187.
439
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operating companies are either directors of Petrobangla or government officials
appointed by MPEMR.442
814. The following corporate entities, or operating companies, under Petrobangla are
responsible for exploration for and production and marketing of gas and gas liquids:

Bangladesh Petroleum Exploration Company Limited (BAPEX):
responsible for oil and gas exploration and production.

Bangladesh Gas Fields Company Limited (BGFL) and Sylhet Gas Fields Company
Limited (SGFL): BGFL and SGFL and are responsible for the development and
production of gas;

Titas Gas Transmission and Distribution Company Limited (TGTDC), Bakhrabad
Gas System Limited (BGSL), Jalalabad Gas Transmission and Distribution System
Limited (JGTDSL), and Paschimanchal Gas Company Limited (WESGAS): TGTDC,
BGSL, JFTDSL, and WESGAS are responsible for gas distribution and marketing.

Rupantorito Prakitik Gas Company Limited (RPGCL): RPGCL is responsible for
marketing compressed natural gas (CNG) and liquefied petroleum gas (LPG).

Gas Transmission Company Limited (GTCL): GTCL was established in 1993 to
administer the gas transmission grid.
BAPEX is
3. ADB Experience in the Gas Sector
815. ADB has undertaken several projects to promote sectoral reforms, improve the
gas infrastructure in Bangladesh, and increase the supply of gas as commercial energy.
ADB gas sector projects have focused primarily on increasing the number of gas
producing wells and gas treatment facilities and expanding the gas transmission and
distribution network. The Third Natural Gas Development project financed drilling and
other specialized services for the development of new wells, gas treatment plants,
pipelines and related facilities, equipment and materials, and overseas training and
consulting services. The project also focused on a number of crucial sector reform
issues, including the establishment of an appropriate pricing policy, increased private
sector participation, improved efficiency in gas transmission and distribution companies,
and better energy conservation. The project vigorously supported reform initiatives, with
a particular focus on private sector participation and enhanced management efficiency in
production and distribution. Through additional loans and technical assistance projects
undertaken during the late 1990s, ADB has supported sectoral reforms and pipeline
expansion in rural areas. These projects help to provide gas to remotest parts of the
country with increased efficiency and reduced system loss.443
816. Compared to results in the power sector, progress toward institutional reform and
improved management in the gas sector has been considerably slower. The difference
is attributed to varying receptiveness to reform among concerned senior officials in the
executing agencies and MPEMR. For example, it is perceived that a greater number of
442
Ibid
Gas Sector Development Project. Available at http://www.adb.org/Documents/ Profiles/ PPTA/
27106013.ASP
443
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influential interest groups (including corporate ones) are affected by deficiencies in the
supply of electricity versus gas. The increasing surplus of gas since 1997 is believed to
have resulted in less pressure on authorities to adopt reforms promoted by ADB and
other development partners.444 Future sectoral governance strategies should place
increasing emphasis on the demand side of gas development, production, and supply in
assisting the Government to reflect on its role in ensuring efficient regulation and
oversight and responsiveness to stakeholder interests, expectations, and inputs. Losses
in the gas sector largely occur in the distribution phase.
4. Key Governance Issues
a. Institutional and administrative constraints
817. The multiple responsibilities of Petrobangla include resource exploration,
development, and production, contracts with foreign oil companies, sole purchase of gas
produced by foreign companies, ownership and operation of the gas distribution
network, control and operation of the national petroleum database, and advising
government on gas policy. Even if no conflicts of interest arose from these multiple
functions, Petrobangla would still not be equipped to perform them effectively. One of
key constraints is that it does not operate on a commercial basis, but rather acts like an
extension of the State.
818. While government control and regulation is important to maintain sovereign
control over the country’s natural resources, the oversight powers of Petrobangla and
MPEMR impede operational efficiency and increase production costs. As a result,
systems loss and irregularities in accounts receivable have reached unprecedented
levels.445 Lack of control mechanisms and corruption have resulted in gas theft, system
loss, and non-payment of bills. In addition, the Government entered into production
sharing contracts (PSCs) with IOCs operating under Petrobangla, whose terms provide
that the government becomes sole purchaser of IOC produced gas for 75 percent of the
international market price. The gas is then sold to consumers at a much lower price,
resulting in large deficits. While reasonable energy prices are an important factor in
national economic development, the resulting financial weakness of Petrobangla is of
equal concern.
819. The bureaucratic nature of administrative and maintenance operations result in
increased cost and delays in the provision of services to the end users. For example, an
industrial consumer that requires a gas connection for a project from TGTDCL is
required to submit two copies of the prescribed forms along with as many as 14
documents.446 Consumers have reported that additional costs are required to secure
and maintain a connection.
444
Asian Development Bank (2003) Bangladesh Country Assistance Program Review. at 28.
For example, TGTDC’s system loss and accounts receivables in 1993 reached a high of 8 percent and 6
months of billing respectively.
446 Board of Investment, Utility Services and Environmental Clearance, Prime Minister’s Office, January
2001. Cited in BEI (2003), Reducing the Cost of Doing Business in Bangladesh. January 4. (Draft - Work in
Progress). at 37.
445
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820. Inadequate distribution systems further impede the supply of gas to many
industrial areas, limiting factory production and hurting local industries. At present only
about 4 percent of households have natural gas connections.447
b. Financial management
821. Poor financial governance of the gas sector has resulted in poor financial
performance of the various public entities and inadequate consumer services. In
particular, the financial performance of Petrobangla has deteriorated in recent years. A
profit of Taka 2 billion in 1999 was followed by a loss of Taka 1 billion in 2000. 448 In the
1990s, Petrobangla averaged Taka 1.2 billion profit per year, with pre-interest return on
assets averaging four percent. This implied shortfall in returns has averaged an
equivalent of 0.25 percent of GDP per year, a disappointing performance for a state
monopoly that exploits natural resources.449 A combination of factors have affected the
performance of Petrobangla and it subsidiary entities. They include high tax burden
(with approximately 55 percent of gross revenues paid in taxes to the Government in the
form of VAT and supplementary duty), the obligation to buy natural gas from IOCs at
prices linked to international fuel oil prices; the financial burden assumed through the
development of the Barakhupuria Coal Mine, with foreign financing through a supplier’s
credit; low gas tariffs; operational inefficiencies; subsidies; and non-payment of
accounts.
822. Under the terms of production sharing contracts with IOCs, Petrobangla is bound
to buy gas at 75 percent price of international market value, which is then sold on the
domestic market at a substantial discount, resulting in large revenue deficits for
Petrobangla. The Government ultimately subsidizes this deficit. Gas subsidies,
including revenue deficits, system loss and collection shortfall amount to 40 percent of
government’s budget spending on health and 18 percent of education sector
spending.450 This subsidy benefits more of the high-income groups, as the majority of the
population (mostly rural) does not have gas service.
823. Gas tariffs have been inadequately adjusted for many years. Gas tariffs are fixed
below the financial and economic costs of supply, with only those charged to commercial
and industrial users exceeding marginal costs.451 In local currency, nominal tariff
adjustments have been offset by depreciation of the taka, which has averaged 4.4
percent annually for the last twelve years. Consequently, gas prices have not increased
in dollar terms since the early 1990s, affecting the viability of Petrobangla’s operations.
Recent tariff adjustments have helped to improve cost recovery, but have not reduced
the overall rate of gas subsidy to the power sector, fertilizer sector, and domestic
consumers. 452
824. The combined effect of under pricing of gas and dividend and direct tax payment
obligations has limited the operating margins of gas sector entities. This has in turn
affected their ability to meet debt service obligations, investment requirements, and gas
447
Ibid at 173.
The World Bank (2001), Reforming the Natural Gas Sector, Policy Brief # 12, at 6.
449 Board of Investment in BEI (2003), op cit.
450 BEI (2003) Reducing the Cost of Doing Business in Bangladesh. January 4. (Draft - Work in Progress), at
37.
451 The World Bank (2001), Reforming the Natural Gas Sector, Policy Brief # 12, at 6.
452 The World Bank, Bangladesh: Review of Public Enterprise Performance and Strategy, at 84.
448
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purchase payments, as well as to meet basic consumer demands for quality services
and standards of financial accountability commensurate with sound governance
practices. With gas supplied to the power, fertilizer, and household sectors at heavily
subsidized prices and high dividend and tax payments to the Government, Petrobangla
has limited capacity to meet investment requirements. As a result, it is dependent on
subsidized budgetary loans and equity for investment financing, with a recent record of
default on debt service liability payments to the Government.453
c. Regulatory constraints
825. The present regulatory framework does little to encourage private participation in
the gas sector. Neither Petrobangla nor its associated operating companies work on a
transparent basis. For example, financial statements such as cost of production
accounts are not made available to the general public, creating opportunities for
misappropriation of funds and assets.
826. System Loss, Accounts Receivable, and Corruption: System loss, non-collection
of bills, and corruption have placed Petrobangla is in a fragile financial state. 454 Losses
in the gas system have increased from five percent of total production in the early 1990s
to as much as 10 percent today. In FY02, the economic cost of system loss was
estimated at Taka 3.9 billion.455 Most loss occurs in the retail market, which constitutes
20 percent of total gas sales. Retail market loss is attributed primarily to non-payment of
bills by institutional and government customers and illegal connections. Lack of
coordination between the billing and accounts sections is regarded as a major cause of
the problem. Current collections average only about 80 percent of billing, and accounts
receivable is increasing by approximately US$100 million per year. The problem is
exacerbated by the payment of high taxes and compulsory dividends456 to the
Government by Petrobangla, leaving Petrobangla with little capacity to finance
investments.457
d. Inadequate investment in exploration and development
827. Beyond their immediate consequences for consumers and the financial health of
public Petrobangla and other gas sector entities, weak financial management and other
governance constraints have an impact on the development of the gas sector to meet
increasing industrial and household demands. Petrobangla lacks sufficient capital to
invest in gas exploration, research, and improved production and distribution capacity.
As a result, exploration of new sources of recoverable gas is left to the IOCs, with little
involvement and associated capacity development on the part of the Government. In
addition, the Government is not undertaking adequate pipeline development projects to
serve rural areas that continue to depend on sensitive biomass resources as the primary
source of energy. Infrastructure development activities such as gas treatment facilities
453
The World Bank, Bangladesh: Review of Public Enterprise Performance and Strategy, at 86.
System loss primarily consist of losses linked to theft, pilferage, inadequate maintenance and repair and
inadequate application of efficient commercial practices.
455 World Bank and ADB, Bangladesh Public Expenditure Review, May 2003, at 103.
456 For example, Petrobangla’s total tax contribution to the government during FY1995 was Taka 11 billion,
which increased to Taka 19 billion in FY2001.
457 CPD (2003) Developing a Policy Agenda for Bangladesh: Civil Society’s task Force Report 2001.
University Press Limited. Dhaka, Bangladesh. April. at 177.
454
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and pipeline building projects should be undertaken by the Government to ensure that
gas is available to the majority of the population.458
5. Issues and Opportunities for Reform
828. Improvements in the financial status and performance of the gas sector will
require the same combination of governance reforms necessary in the power sector.
Recent assessments by the World Bank, the Centre for Policy Dialogue, and other
organizations point to the following actions:
a. Administrative reforms
829. Bureaucratic hurdles should be reduced, while the board of directors of operating
companies should be given greater operational autonomy to reduce the decision-making
time and improve operational efficiency. At the same time, the Government should be
careful in regulating IOCs and signing new contracts.459
830. Steps should be taken to reduce corruption and system loss by incorporating the
operating companies and making their operation, bill collection, and accounts
procedures more transparent and accountable. More emphasis should be placed on
more efficient bill collection, reduction of the accounts receivable period, and preventing
illegal usage of gas. Since unauthorized connections are usually included in system
losses, improved billing and collection procedures should help to identify and address
gas loss.
831. The administrative procedures required to arrange a gas connection should be
streamlined to reduce paperwork, time requirements, and associated payments.
eGovernment applications and other mechanisms to streamline connection, bill
payment, and other administrative functions should be explored
b. Improved financial management
832. As a first step toward broader financial reforms, Petrobangla should adopt a
sound financial plan to guide minimum performance ratios. The plan should ideally
address taxation of Petrobangla, the abandonment of ventures that are not economically
viable, settlement of intercompany accounts and government arrears, and arrangements
for financial pass-through of gas purchased from IOCs.460
c. Regulatory reforms
833. Reduce Outstanding Debt: As with the power sector, steps should be taken to
reduce outstanding debt to the industry standard of no more than two months arrears.
Leading debtors should be required to settle their outstanding accounts or face
disconnection of services.
834. Pricing Gas for Domestic Consumption: Gas is currently priced in the domestic
market at prices lower than required to break even. This situation creates a large
458
Ibid. See also The World Bank-ADB (2003), Bangladesh Public Expenditure Review.
Ibid
460 The World Bank-Asian Development Bank (2003) Bangladesh Public Expenditure Review. at 108-09.
459
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revenue deficit for Petrobangla, which has to be indirectly subsidized by the
Government. Gas prices should be adjusted periodically, in accordance with a
transparent pricing formula that is linked to changes in the cost of supply, including the
purchase price from IOCs under PSCs, and distribution costs. Excess gas produced by
IOCs and bought by Petrobangla should be exported to foreign countries at international
market price. Export revenues will help reduce Petrobangla’s revenue deficit. Domestic
gas prices should in turn be kept at reasonable levels so that electricity production,
industrialization, local small industry development, and overall economic growth are not
hampered.461
835. Reduce Tax and Dividend Burden: The Government should reduce the tax and
compulsory dividend burden on Petrobangla and encourage the allocation of retained
earnings for capacity building investments. Adequate control and oversight mechanisms
will be required to ensure that retained earnings are not misused.462
d. Increased investment in development
836. The Government should invest adequate capital in developing the infrastructure
of the gas sector to increase production and distribution capacity. The Government
should assume a more active role in exploring new gas fields, rather than depending on
IOCs. In particular, the Government should take action to build gas treatment and
pipeline transport facilities to serve rural areas, especially the western zone.
461
462
Ibid
Ibid
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CHAPTER XV
STRATEGY
837. This concluding chapter provides an overview of the current governance reform
strategies of the Government of Bangladesh, local research and policy institutions, ADB,
and a sampling of development partners, reflects on lessons learned from reform efforts
to date and the challenges that lie ahead, and presents general recommendations for
future ADB governance strategy.
A. Current Strategies For Governance Reform
1. Government Of Bangladesh
838. Although the Government of Bangladesh does not have a single, overarching
strategy for governance reform, the need to address weak governance as a constraint to
poverty reduction, sustainable economic growth, and effective development
management figures prominently in recent articulations of the national development
agenda. These include post-election pledges of the present Government and the
recently adopted Interim National Poverty Reduction Strategy (I-NPRS).463
Commitments to advance priority governance reforms are also enshrined in agreements
between the Government and ADB and other development partners.
839. The Government's Memorandum for Bangladesh Development Forum 20022003464 identified several priority areas for governance reform to improve transparency
and accountability. The list was headed by the need to address the deteriorating law
and order and human rights environment, which have severe implications for the poor
and other marginalized groups whose rights and interests are especially vulnerable to
abuse. The Government established a law and order monitoring committee to monitor
the security environment and took a number of additional steps, including passage of the
Law and Order Disruption (Speedy Trials) Act 2002 to deal with crimes involving
terrorism or extortion. In addition, the Government has promised that the Office of
Ombudsman will be established shortly, and has accepted the PARC recommendation
to establish an Independent Anti Corruption Commission, which is now in a Bill before
Parliament. A Cabinet Committee headed by the Minister of Finance and a Secretaries’
Committee headed by the Cabinet Secretary have been established to review the PARC
recommendations and to make recommendations on priority actions.
Recent
announcements by the Prime Minister indicate that the Government is preparing to take
up several of the key PARC recommendations. The Government has further committed
to privatize all types of state-owned enterprises in a phased manner.465 Local
stakeholders and the donor community have welcomed this governance reform
commitment by the Government and stand ready to assist in the effort.
840. The I-NPRS draws connections between national poverty reduction efforts and
the associated governance constraints that must be addressed under various sectoral
and other components of the strategy. To meet the two primary goals of poverty
463
Government of Bangladesh (2003) A National Strategy for Economic Growth, Poverty Reduction and
Social Development. Economic Relations Division, Ministry of Finance.
464 Government of Bangladesh (2002) Memorandum for Bangladesh Development Forum 2002-2003,
Ministry of Finance, Dhaka. Cited in The World Bank-ADB (2003), Bangladesh Public Expenditure Review,
at 44-45.
465 The World Bank and Asian Development Bank (2003) Bangladesh Public Expenditure Review. at 44-45.
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reduction and accelerated social development, the I-NPRS calls for the achievement of a
series of targets by 2015, driven by the need to increase the poverty reduction rate from
1.5 percent in the 1990s to 3.3 percent between 2000 and 2015, and to achieve
sustainable GDP growth of at least seven percent per annum over the same period. An
entire section of the I-NPRS is dedicated to the governance dimension of poverty
reduction.466 Beyond this specific reference, the importance of good governance as a
crosscutting element of poverty reduction is implicit throughout the text of the I-NPRS.
841. The I-NPRS underlines the need for participatory governance to strengthen the
voice of the poor, the importance of greater transparency and accountability in reforming
and deepening political institutions for “pro-poor” governance, and the value of
independent civic monitoring of strategic outcomes and of building competitive pressure
groups for different elements of the reform agenda. The strategy paper attributes the
deterioration of law and order and the human rights environment to weak governance. 467
Specific governance objectives include:

creating a competitive environment across all segments of society, together with a
free flow of information;

establishing and enforcing clear rules and regulations for public sector
administration, supported by separation of power among the respective branches of
government and appropriate oversight arrangements;

promoting civil society voice and participation, with a particular emphasis on women,
the poor, and disadvantaged groups.468
842. The priority institutional reforms identified in the I-NPRS are consistent with
recent research on governance and with the findings of this assessment. They include
improvement in the oversight role of Parliament; greater judicial independence through
the establishment of separate Judicial Service and Judicial Pay Commissions; and
enhanced police capacity to deal with corruption, crime, and violence against women
through institutional reform and the introduction of civilian oversight mechanisms. The INPRS also calls for policies and institutional measures to broaden participatory local
governance and enhance the voice of the poor in public decision-making. The
grassroots policy consultations that informed the I-NPRS registered popular demand for
a multi-tier combination of effective local government bodies at the union, thana, and
district level, supported by adequate resource allocations and capacity building
initiatives.469 In addition, the I-NPRS calls for the framing and adoption of a Citizens’
Charter to enshrine the rights of individuals to access public services, with an initial
focus on primary health, education, and reproductive health, and for improved and more
accountable management of public resources. While there is relevant international
experience on which to draw in framing a Citizens’ Charter, little effort has been taken to
date to follow up on this element of the I-NPRS. Of particular importance, the I-NPRS
recognizes that poverty has a particularly severe impact on women and calls for the
466
Government of Bangladesh (2003) A National Strategy for Economic Growth, Poverty Reduction and
Social Development. Economic Relations Division, Ministry of Finance. at 34-36.
467 Ibid.
468 Ibid at 34.
469 Ibid at 49-50.
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advancement of women and closing of gender gaps across every dimension of the
national strategy.
843. Finally, Chapter 7 of the I-NPRS recognizes the importance of monitoring
progress in implementing the national strategy, calling for a systematic approach to
monitoring and evaluation. While all dimensions of the I-NPRS present a challenge to
the development of reliable baseline data and benchmarks that will serve as the basis
for monitoring and evaluating progress, governance reform has always been especially
difficult to assess. For this reason, it is essential that ADB and other development
partners work closely with the Government of Bangladesh to establish reliable
mechanisms to monitor the progress and impact of governance reforms and their
relationship to the broader goals of the I-NPRS. It is especially important to monitor
progress from the perspective of the millions of ordinary citizens whose quality of life is
contingent on the reduction of poverty in Bangladesh. Recent examples of rapid
participatory appraisal methodologies applied to monitor the progress of local
governance reform initiatives in Indonesia and the Philippines may provide useful
examples for the refinement of monitoring mechanisms in Bangladesh.
2. Local Research And Policy Institutions
844. Local policy research institutions have assumed increasing prominence in
facilitating dialogue and providing policy recommendations on governance reform and
other issues. Among several institutions whose work enriches dialogue on governance
reform, the Center for Policy Dialogue (CPD) and Transparency International,
Bangladesh (TIB) deserve special mention for the scope, scale, and quality of their
respective work on national policy review and associated governance issues and in
combating corruption. The emergence of CPD and other organizations that focus on
policy reflects concerns that, for many years, the Government and development partners
held an uncontested monopoly on policy planning and review, with inadequate
opportunity for local stakeholders to inform the process. CPD conducts research,
convenes stakeholder forums on select policy issues in Dhaka and in district centers
around the country, and prepares comprehensive policy briefs on a variety of issues,
with a strong focus on the governance dimension of policy reform. TIB has conducted
public perception surveys and other research on corruption and published a series of
papers on the impact of corruption on economic development and the quality of life of
citizens. It has recently begun to mobilize local corruption prevention efforts through the
formation of “Communities of Concerned Citizens” in secondary cities. As the preceding
chapters attest, this assessment report has greatly benefited from the policy briefs,
reports, and recommendations of CPD and TIB. It is hoped that the Government will
continue to take careful account of relevant governance reform recommendations tabled
by CPD, TIB, and other local institutions.
3. Asian Development Bank
845. ADB is committed to facilitate governance reform as a key element of sound
development management in its Developing Member Countries. In the last five years,
the Government of Bangladesh and ADB have focused particular attention on the impact
of weak governance on national development efforts in general, and on the achievement
of poverty reduction goals in particular. For example, they have jointly recognized that
low standards of accountability, the absence of mechanisms for broad-based
participation in development planning, lack of transparency in decision making, and
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other constraints have hindered progress in almost every sector in which ADB works. In
response, ADB has adopted a proactive approach to governance reform. Governance
initiatives have been undertaken in several sectors through loan agreements and
associated technical assistance—expressly in some instances and implicitly in others.
846. These governance reform efforts have secured promising regulatory, legal, and
institutional reforms in several sectors. In others areas, they have yielded valuable
lessons regarding the kinds of working relations with counterparts in government, the
private sector, and civil society that are most conducive to reform. Examples include the
reconstitution of regulatory bodies, corporatization, participatory tariff setting, and
rational separation of management functions in the power sector; mechanisms for broad
stakeholder participation in urban sector planning and management; and improved
regulation and supervision of the capital markets. Cooperative working relations with
counterparts in government and other sectors have established a foundation of
commitment and trust that will serve as the basis for continued sectoral governance
work and select core governance initiatives focusing on corruption and other issues that
undermine national development efforts across all sectors.
4. Donor Governance Strategies
a. Overview
847. This section reviews donor approaches to governance reform. With the
increasing attention given to governance issues by the donor community, there is a need
for good communication and coordination among donors, ensuring the optimal impact of
available resources.
This section provides a brief overview of donor coordinating
mechanisms and the challenges to effective coordination then goes on to outline the
governance strategies and programming of select donors that are active in the field of
governance.
848. Bilateral and multilateral donors have actively promoted good governance in
Bangladesh for several years. Their attention to governance issues is founded on the
widely held view that weak governance remains a key obstacle to national development
efforts, particularly with respect to poverty reduction and accelerated economic growth.
Priority areas of focus vary from one organization to the next. Some donors prefer to
fund individual projects that target specific governance issues, while others integrate
governance reform within broader development objectives. There are similar variations
in preferred mode of delivery. Some donors prefer to work directly with Government,
while others work primarily through grants or technical assistance to NGOs or other local
civil society partners.
849. The largest multilateral contributors to governance reform in Bangladesh are the
World Bank, ADB, the United Nations Development Program (UNDP), and the European
Commission (EC). Leading bilateral donors in the field of governance include the United
Kingdom Department for International Development (DFID), the U.S. Agency for
International Development (USAID), the Canadian International Development Agency
(CIDA), the Swedish International Development Agency (Sida), the Danish International
Development Agency (Danida), the Norwegian Agency for Development Cooperation
(NORAD), the Royal Netherlands Embassy, the Government of Switzerland (Swiss
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Development Corporation) and the Government of Australia (AusAID).470 As the largest
bilateral donor to Bangladesh, the Government Japan takes thoughtful account of the
governance dimension of its development work, although its direct support for specific
governance activities has been relatively modest to date. In addition to the multilateral
and bilateral donor agencies, a number of private development assistance organizations
are also active in governance reform, working independently in some instances, while in
other cases working in partnership with bilateral donors. For example, The Asia
Foundation has played an active role in governance reform for many years, supporting
the efforts of local partners in government, civil society, and the private sector.
850. Donors typically define their strategic areas of intervention through multi-annual
country strategies. A review of these strategies reveals that, in recent years, donors
have moved to reduce the number of priority sectors in which they are involved. In most
instances, this strategy reflects a desire to concentrate available resources in select
areas rather than spreading program activities too thinly across multiples areas.
Coupled with the Government’s decreased dependence on development assistance, this
strategic preference underlines the importance of effective coordination both among
donors and between donors and the Government. 471 To this end, several coordinating
bodies have been established, with the lead role played by the Local Consultative Group
(LCG) on Governance, which is coordinated by UNDP. These coordinating mechanisms
are discussed in further detail below.
851. Although there is no universal consensus among donor agencies on governance
strategy, regular consultations and exchange of information among donors have led to
general agreement on priorities for improved governance focused interventions. For
example, the LCG Subgroup on Governance tabled three thematic governance priorities
as part of its input for the 2003 Bangladesh Development Forum: (i) the development of
a comprehensive anti-corruption strategy, including the establishment of an independent
and effective anti-corruption commission; (ii) criminal justice sector reform, including
comprehensive changes to police services and separation of the judiciary from the
executive; and (iii) improved local governance through decentralization.472
b. Donor coordination
852. The principal mechanism for multilateral and bilateral donor coordination in
Bangladesh is the LCG on Governance. Membership in the LCG is comprised of
representatives from donors and the Government. In addition to a general session, the
LCG includes 22 sub-groups that focus on sectoral coordination and crosscutting issues.
These sub-groups in turn coordinate working groups on particular thematic areas. The
LCG Subgroup on Governance, like other subgroups in the LCG hierarchy, is a
permanent forum that meets on a regular basis. The Subgroup currently oversees
working groups on justice and human rights, financial management reform, elections,
local governance, and media. These working groups operate on an informal basis,
meeting every few weeks for discussion and coordination. The most recent matrix of
donor governance work compiled by UNDP as coordinator of the LCG on Governance is
470
This is not an exhaustive list of donors involved in governance reform.
Official development assistance as a share of gross national income declined from 7 percent in 1997 to
2.5 percent in 2000. See The World Bank Development Indicator database.
472 See Governance Priorities for Discussion at the BDF. May 2003. LCG Sub-Group Governance.
471
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included in Appendix II. The matrix is now somewhat dated, but will be updated in early
2004.
853. In addition to work within the LCG, donors engage the Government and one
another in the context of the annual Bangladesh Development Forum (BDF). For the
2003 BDF meeting in Dhaka, donors provided their shared views on the Interim Poverty
Reduction Strategy, including the governance dimension of the I-PRSP noted previously.
Donors also engage on bilateral and more limited multilateral bases. For example, a
‘Like-Minded Group” of donors comprising Canada, Denmark, the Netherlands, Sweden,
and Norway coordinate their work in areas of common interest, while EU member
countries have committed to preparing a joint Country Strategy when their current plans
expire in or about 2005.473
854. Despite these coordinating mechanisms, a number of obstacles to efficient donor
coordination remain.
Insufficient government participation in the LCG system,
particularly at the sub-group level, is a recurring problem. Frequent turnover among
donor representatives to the LCG consultative process has also created challenges of
continuity. While donors have yet to achieve complete agreement on the prioritization of
governance reforms, the degree of consensus is striking, given the number of
organizations and institutional perspectives represented in the donor forum.
855. In March 2003, donor members of the Subgroup on Governance reviewed the INPRS and provided inputs on the governance dimension of the Strategy for
consideration by the National Development Forum. The following strategic issues were
raised by the Sub-Group: 474

Need for greater emphasis on "political" governance as underpinning poverty
alleviation goals: The Subgroup submitted that the strategy and medium-term policy
matrix presented in the I-NPRS does not give sufficient attention to "political"
governance issues raised by the citizen respondents that participated in the
participatory assessment conducted as part of the I-NPRS planning process. Issues
raised by respondents included deteriorating law and order, corruption within the
police, and the effects of intimidation and extortion by criminal elements. Donors
have called on the Government to place greater emphasis on these issues and to
develop detailed strategies to address them.

Need for comprehensive strategies and prioritization of reforms: The Subgroup
suggested that the I-NPRS should provide more detailed and comprehensive
strategies to achieve governance reforms, and that the strategy should convey a
clearer sense of prioritization, sequencing of actions, timelines, and benchmark
indicators of progress. This need is particularly important for actions that fall under
the five broad avenues of pro-poor economic growth, human development for the
poor, women’s advancement and the closing of gender gaps, social protection
measures, and participatory governance.

Ensure a truly participatory process involving all governance stakeholders: The
Subgroup encouraged the Government to extend the consultative process that
473
DFID Bangladesh Country Assistance Plan 2003-2006 (Draft) at § 6.1.5.
Local Consultative Group, Sub-group on Governance, Input to the Interim Poverty Reduction Strategy
Paper. Source: www.worldbank.org.
474
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informed the development of the I-NPRS through the implementation and monitoring
phase, and to take steps to ensure active involvement of Parliament and civil society
organizations beyond the NGO community (including, inter alia, trade unions,
professional associations, and the media).

Measuring the impact of governance reforms: The Subgroup urged the Government
to develop a set of indicators to measure the progress of governance reform.475
856. In addition, the Subgroup submission highlighted some specific governance
issues on which further clarification of strategy would be welcome:

Greater clarity in proposed actions to ensure accountable public financial
management

Clearer articulation of the strategy to be followed for decentralization and devolution
of power to local government, including the institutional and legal frameworks for the
structure of local government bodies, their role and responsibilities, and their
relationship with other governmental and non-governmental bodies.

Need for a comprehensive sector approach to improve the law and order situation
and to minimize the effects of economic and social violence on the poor, including
the criminal justice (police) and judicial reform dimensions of the strategy.

Greater elaboration on reference to a rights-based framework for development,
including greater analysis of the human rights environment as background to the
strategy

Development of a comprehensive strategy to address the problem of corruption.

Clearer strategic basis for improvements in the corporate legal and regulatory
framework and in the interface between the public and private sectors.

Need for a clearer definition of governance in the context of the I-NPRS.

Further elaboration of the link between improved governance in the education and
health sectors and better service delivery.
c. Multilateral donors
857. The World Bank: The World Bank is committed to improve governance as a
central element of its country assistance strategy for Bangladesh.
Its country
governance strategy includes three broad elements: strengthening public sector
management, strengthening civil justice administration, and empowering communities
and vulnerable groups. The World Bank is working with a number of bilateral and
multilateral donors and NGOs in programming in each of these areas.
475
Although the point is not mentioned in the comments, donors are keenly aware of the challenge of
developing measurable indicators for governance reform, and stand ready to assist the Government in its INPRS monitoring efforts.
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858. The strengthening public sector management element of the World Bank's
governance strategy deals with financial management and civil service reforms. World
Bank activity in the field of financial management includes the production of financial
accountability and country fiduciary assessments and governance surveys and
scorecards, as well as the provision of training for Comptroller and Auditor General and
project staff. It recently launched a new program in partnership with the Government
that aims to establish greater transparency and efficiency in public procurement. In the
area of civil service reform, the World Bank is providing technical support and actively
facilitating policy dialogue.
859. World Bank support for justice sector reform aims to improve the legal and
judicial environment for economic activity and access to justice for women and the poor.
Current work focuses primarily on the World Bank's role as lead supporter of the Judicial
and Legal Capacity Building Project, as discussed in Chapter VI. There are five major
components of this project. The first targets improved court administration, reduced
delays, and improved case management, and includes the installation of a court
management information system, training for court administrators, and upgrading of
training facilities, together with other human resource support and upgrading of court
infrastructure. The second component aims to improve access to justice by raising the
level of gender sensitivity, developing alternative dispute resolution mechanisms,
strengthening small claims courts, improving access to legal aid, and promoting legal
literacy and public awareness at the local and national levels and through the Bar. The
third, fourth, and fifth components strengthen the law commission and the ministry of
law, finance analysis in preparation for future reforms, and support project
implementation. CIDA and Danida have joined the World Bank in supporting specific
components of the Judicial and Legal Capacity Building Project.
860. In the context of empowering communities and vulnerable groups, the World
Bank has undertaken a number of decentralization and local capacity building initiatives.
These include a decentralization study and pilot programs to develop replicable models
of local governance, as well as water and sanitation sector improvement projects. The
World Bank has also engaged in social inclusion work, conducting and disseminating
research on capacity building for women representatives to local government and on the
needs of tribal groups, and funding activities to reduce the number of working children.
861. UNDP:
UNDP devotes substantial share of its program resources to
strengthening governance in Bangladesh.476 Its governance strategy targets a number
of areas, including: increased political participation through development of Parliament
and other institutions and through development of electoral processes; promotion of
human rights through cooperation with civil society to support the rights of
disadvantaged people and minorities; and increased transparency and accountability,
mainly through building the capacity of internal and external watchdog organizations.
862. On a project basis, UNDP has funded activities to build capacity in the Office of
the Comptroller and Auditor General and to assist the Planning Commission in
monitoring the implementation of its human development strategy. It is presently
supporting a project in support of the Ministry of Law, Justice, and Parliamentary affairs
efforts to protect human rights. The project provides human rights focused training for
476
See Democratic Governance in Bangladesh, available at http://www.un-bd.org/undp/governance/
index.html (visited June 30, 2003).
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police officers, public prosecutors, and more than 1,000 religious leaders, as well as
information dissemination on issues ranging from legal aid to HIV/AIDS and circulation of
a Bangla translation of the Universal Declaration of Human Rights.
UNDP also
supports the institutional development of the Election Commission and a program to
strengthen the Parliament’s legislative and oversight functions through revisions of the
Rules of Procedure, reform of the Committee System, and orientation and training for
Members of Parliament and staff by an independent Institute of Parliamentary studies.
863. In September 2003, UNDP commenced a two-month human security
assessment, which built on its earlier study of human security in Bangladesh, with a
particular focus on criminal justice administration. The study is expected to inform the
development of a strategy for a major program of assistance to strengthen criminal
justice administration and human security in Bangladesh. In addition to its governance
programming, UNDP serves as point institution for the coordination of donor work in the
field of governance reform, chairing of the Local Consultative Group and maintaining a
matrix of donor assistance for governance reform and other documentation.
864. European Commission: Historically, the European Commission (EC) has been
involved in a broad range of development work in Bangladesh, including large-scale
commitments to health, population, and nutrition, education, food security and rural
development, and employment creation
Its governance activities recently included
elections programs, which featured technical assistance and elections observation, as
well as funding voter education. Under its current Country Strategy (2002-2006) the EC
has strategically narrowed the scope of its interventions to a set of core areas of focus.
In the near term, the EC will center its attention on the health and education sectors. 477
While governance is not a priority area per se, the EC plans to systematically include
components of institutional strengthening and capacity building in the design of all of its
programs in Bangladesh. Separately, it will continue to support the electoral process
with plans underway for a three-year election assistance program.
865. In terms of delivery, the EC has traditionally worked through a combination of
NGOs and direct partnerships with the Government. It also has tended to favor general
programmatic work over specific projects. Under its current strategy, the EC plans a
shift towards more direct cooperation with the Government, while retaining its emphasis
on crosscutting programs.
d. Bilateral donors478
866. Government of the United States/USAID: USAID has a long history of support
for governance reform in Bangladesh. Its general strategic framework for good
governance covers four key objectives: (i) strengthened rule of law and respect for
human rights, (ii) more genuine and competitive political processes, (iii) increased
development of a politically active civil society, and (iv) more transparent and
accountable government institution.479
In Bangladesh, USAID has translated these
objectives into a broad portfolio of activity covering local government and parliamentary
477
In May 2003, donors suspended funds earmarked for the Health and Population Sector Program (HPSP)
in response to the Government’s failure to meet certain conditions as agreed to in the HPSP.
478 This sampling of bilateral donors is by no means an exhaustive list of those that work in the field of
governance.
479 See USAID Budget Justification, FY 2001, available at http://www.usaid.gov/pubs/bj2001/prog_perf.html
(visited June 30, 2003).
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development, human rights, anti-trafficking, and protection of the rights of women and
children. At present, USAID governance assistance to Bangladesh is delivered primarily
through NGOs. USAID works closely with DFID, the World Bank, the International
Organization for Migration, and CIDA in support of good governance in the country.
Current governance projects include partnerships with Associates in Rural Development
(ARD) for a local governance project, with the Academy for Education Development
(AED) for a human rights advocacy project, and support the National Democratic
Institute and the American Center for International Labor Solidarity.
867. From 1995 through 2001, The Asia Foundation, the Bangladesh Rural
Advancement Committee (BRAC), and the USAID collaborated in implementing the
Democracy Partnership. The Democracy Partnership supported the efforts of local
NGOs to work directly with community associations and local elected bodies to improve
local governance and citizen access to justice. It was the first major donor effort to
improve governance in rural Bangladesh. Though most resources were directed to the
local level, the Democracy Partnership also supported efforts to affect national policy,
legislation, jurisprudence, and electoral process. Specific objectives included promoting
citizen advocacy, ensuring free and fair elections, improving the performance and
accountability of local elected bodies, increasing awareness of legal rights, and
promoting alternative dispute resolution through village mediation boards.
868. USAID’s Job Opportunities and Business Support Program is implemented by
the University of Maryland’s Center for Institutional Reform and the Informal Sector
(IRIS). It encompasses four integrated components: (i) shaping a policy environment
supportive of private sector growth by identifying and analyzing policy constraints and
developing local capacity to advocate the adoption and implementation of policies and
regulations that support employment generation by small and medium enterprises; (ii)
strengthening production, management and marketing capabilities of micro and small
enterprises by working closely with NGOs and Chambers of Commerce to create vertical
linkages between micro enterprises and larger businesses in the same; (iii) expanding
access to local and foreign markets; and (iv) facilitating small businesses' access to
credit. JOBS also focuses on developing the IT Policy and IT Law, developing a proper
regulatory environment to foster the growth of ICT sector, forming associations of micro
enterprises to link them to the mainstream financial institutions, and SME Training for
need-based skill development. 480
869. Government of the United Kingdom/DFID: DFID has expanded the scope of
its work in governance over the last five years. Program activities have included support
for improved budget and accounting systems, audit procedures, and training of
Government staff. For example, the Reforms in Budgeting and Expenditure Control
(RIBEC) project has supported improved public financial management through the
establishment of computerizing budget and accounting systems in the Ministry of
Finance and the establishment of Financial Management Units in seven ministries.
Among these, the Financial Management Unit in the Ministry of Health helped to satisfy
the financial management requirements of pooled funding, facilitating innovative, multidonor support for Health and Population Sector Program (HPSP).481 DFID is currently
480
Information drawn from the USAID and IRIS websites. For more detailed information see the USAID and
IRIS websites: http://www.usaid.gov/bd/enterprise_dev.html and http://www.iris.umd.edu.
481 Department for International Development (2002) Country Strategy Review 1998-2002 Bangladesh.
DFID, at 31-32.
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supporting programs to improve public financial management, public administration,
access to justice, and human rights. In addition, it hopes to support government efforts
to introduce community policing initiatives that will help to increase the accountability
and performance of police in serving citizens. DFID’s new Country Assistance Plan
adopts the core objectives of the Government’s National Poverty Reduction Strategy,
one of which is enhanced participatory governance. In the context of governance, DFID
has determined to focus on four key issues: (i) increased accountability for the delivery
of more and improved services to the poor, (ii) increased access to justice, (iii) improved
representation of women at all levels of government, and (iv) the adoption of a
comprehensive anti-corruption strategy across government.482 The strategy features a
special commitment to enhance the voice of poor women across all DFID-funded
programs.
870. Government of Canada/CIDA: The Government of Canada is presently
developing a new Country Development Programming Framework (CDPF) to cover the
period 2003 through 2008. Although the new CDPF will not be finalized until later in
2003, CIDA has released a discussion paper that sets forth objectives and an
implementation strategy for the framework. Governance figures prominently in this
document as one of three main goals (the others are social development and private
sector development). The implementation strategy associated with the governance
objective calls for capacity building in public institutions and civil society in areas ranging
from legal reform and access to justice to support for human rights education, women’s
and children’s rights, and participatory governance.
871. Under the current CDPF, published in 1999, governance initiatives have
accounted for approximately one-third of CIDA’s program budget for Bangladesh.483 To
enable Bangladesh to manage its own development process, CIDA’s strategy under this
framework has emphasized focused interventions in support of management and
organizational systems. To this end, CIDA has worked to improve public financial
management through programs to modernize the financial systems of the Bangladesh
Water Development Board and the Ministry of Water Resources; improve environmental
management with capacity building in the Department of Environment to enable it to
exercise its legislative powers, mandate, and functions, as well as through a pilot
program to design an integrated water management system; and reduce the arbitrary
exercise of judicial power through assistance to the Ministry of Law, Justice, and
Parliamentary Affairs to improve the legal drafting system, the Law Commission, and
some elements of the criminal justice system (a component of the previously described
Legal and Judicial Capacity Building project, which CIDA co-funds with the World Bank
and Danida).
872. CIDA has also provided technical assistance to the port, gas,
telecommunications and power sectors (through the World Bank-led Private Sector
Infrastructure Development Project) to encourage private sector investment in
infrastructure improvement. Other governance initiatives have included support to the
Ministry of Women and Children’s Affairs to enhance its ability to advocate for gender
equality, and to the Center for Policy Dialogue to analyze the impact of the World Trade
Organization on Bangladesh.
482
See DFID Bangladesh Country Assistance Plan 2003-2006. February. (Draft) at § 2.2.11.
See CIDA’s Country Development Programming Framework Discussion Document. Link available at
http://www.acdi-cida.gc.ca/CIDAWEB/webcountry.nsf/asia_e.html.
483
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873. Government of Denmark/Danida: The Government of Denmark is an active
supporter of governance reform and human right initiatives in Bangladesh. Its current
programs include support for the Judicial Administrative Training Institute (JATI) under
the Legal and Judicial Capacity Building Project, media (with a particular focus on media
reporting on human rights issues), women’s rights and access to justice, child protection,
rights of indigenous people, and capacity development of NGOs involved in governance
and human rights work. The Government of Denmark has also supported local election
monitoring.
Program activities include institutional and program support for
Transparency International Bangladesh; training of journalists in human rights;
preparatory assistance for the establishment of a national human rights commission (in
collaboration with UNDP); and prevention of trafficking and violence against women.
DANIDA recently established a Program Support Unit that will develop, manage, and
monitor a human rights and good governance program that is expected to program up to
US$30 million over the next five years.
874. Government of Sweden/Sida: The Government of Sweden's support for
governance reforms encompasses media development and public access to information,
human rights and democracy, parliamentary development, elections, and gender and
women's empowerment. In recent years, SIDA’s governance work has had a particular
focus on gender-based human rights programming. It has worked primarily through
NGOs, including support for the efforts of Ain O Shalish Kendra, the Bangladesh
National Women’s Lawyers Association, Steps Towards Development, and the
Association for Community Development to increase women’s participation in the
democratic process. Additional program activities have included journalism training and
local election monitoring capacity.
875. Government of Norway/NORAD: The Government of Norway's country
assistance program focuses on education, the productive sector (including small
business development and rural electrification), human rights and good governance,
access to justice, and corruption prevention. It works with a combination of local NGO
partners and the Government of Bangladesh. Governance, human rights, and access to
justice program activities include training of journalists in secondary towns and media
reporting on human rights and governance issues; women's rights and trafficking
prevention; training of women Union Parishad members; local election monitoring
capacity; community legal service delivery and alternative dispute resolution. The
Government of Norway’s current work is informed by a five-year development
cooperation agreement signed with the Government in 2003. It has a particular interest
in donor coordination in the field of governance and human rights, and will place
particular emphasis on support for select organizations, reduced in number from earlier
years, in collaboration with other donors.
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B. Reflecting on Lessons Learned
Bangladesh has experienced a combination of progress and persistent
constraints in national development and governance reform efforts
876. Bangladesh has made commendable progress in meeting a combination of
development challenges. Achievements include sound macroeconomic management,
consistent GDP growth, and relatively high public expenditure allocations for social
service delivery—with advances of particular note in primary education and health
service delivery.
Notwithstanding this progress, the extent to which potential
development achievements have been constrained by weak governance is equally
striking. While Bangladesh has a long history of formal governance institutions such as
Parliament and the judiciary, an extending record of free and fair elections that bring
over 60 million voters to the polls, and many exceptionally qualified and committed
public officials, broad-based economic growth and associated governance reforms
continue to be undermined by lack of accountability, transparency, and predictability,
and lack of opportunities for citizen participation in public decision-making. A succession
of public commission reports, domestic policy briefs, and donor assessments of public
administration, decentralization, and other elements of governance have reached
general consensus on key constraints and the actions needed to address them. Despite
consensus view on key issues and the steps to be taken to address them and the
declared commitment of successive governments to pursue a reform agenda, only
modest progress has been made in resolving corruption, restoring law and order,
safeguarding judicial independence, reducing public administrative malaise, promoting
improved inter-governmental coordination, or addressing the overarching politicization of
every dimension of life, and other challenges.
Weak governance has particularly severe implications for the poor, women, and
other marginalized groups
877. The negative consequences of weak governance affect the entire population, but
have a particularly severe impact on the poor, women, and other marginalized groups
whose vulnerability to traditional social biases and inequitable power relations place their
rights and interest at risk long before governance issues even begin to affect their quality
of life. Of particular concern, weak governance undermines efforts to wrest one-third of
the population from the grip of poverty through sustainable economic growth at the level
necessary to meet the ambitious poverty reduction goals enshrined in the I-NPRS,
empowerment of women and the poor, and extension of opportunities for ordinary
citizens to participate in public decision-making. The implication for future governance
work is that reform strategies should give careful consideration to the time required for
national-level governance reforms to secure positive changes that improve the quality of
life of disadvantaged populations. Those responsible for the design and implementation
of governance strategies must ensure that reform initiatives are actually informed by the
interests, expectations, and participation of beneficiaries at the grassroots.
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A spectrum of governance constraints have coalesced in five areas of special
concern
878. As the preceding chapters report, governance constraints take a variety of forms,
most of which have core and sectoral governance dimensions. Most observers agree
that a broad spectrum of governance constraints have, in recent years, coalesced in five
areas of particular concern, each of which have serious consequences for the poor.
They include (i) the deteriorating law and order situation and failure of the justice sector
to check crime, corruption and impunity; (ii) weak public administration; (iii) a regulatory
environment that combines overly strict regulation in some sectors and inadequate or no
regulation in others; (iv) inadequate national policy and resource commitments to local
government reform; and (v) the impact of intensifying partisan tensions on every
dimension of life in Bangladesh.

Law and Order, Corruption, and Impunity: The rising incidence of crime, violence,
intimidation, and extortion—and the struggle of law enforcement authorities to
contain it short of controversial counter-criminal initiatives—touch the lives of millions
of Bangladeshis. The deteriorating security environment has a particularly severe
impact on the poor and women. Despite the existence of sound laws and
institutional structures, the justice system has been only marginally effective in
bringing offenders to justice,484 which has in turn allowed corruption and impunity to
flourish. Perception surveys suggest that citizens have little confidence in the police
or the courts, preferring to resolve legal problems by other means. As a result, many
crimes go unreported, particularly those affecting the rights and security of women.
There are few opportunities for civilian oversight of or engagement with law
enforcement agencies, while the police in turn have minimal understanding of the
needs and expectations of the communities that they serve—although anecdotal
evidence indicates that the police are increasingly sensitive to their poor public
image. The law and order situation affects the security and livelihood of ordinary
citizens and constrains economic growth by undermining domestic and international
investor confidence.

Civil Service: As the primary agent of public administration and point of interface
between citizens and government, the Bangladesh Civil Service is perceived to
corrupt, inefficient, overly bureaucratic, and poorly responsive to citizen needs. At
the same time, recent studies have found that reform-minded senior government
officials and many officers in the middle tier of government service share many of the
same frustrations as citizens. Their performance and decision-making authority are
constrained by low salaries, inadequate professional development opportunities, the
absence of merit-based performance review and other professional incentives,
opposition for colleagues who are opposed to reform, and inadequate space in which
to pursue their reform initiatives. Poor standards of governance in particular sectors
in turn affect inter-governmental roles and responsibilities, with poor communication,
information sharing, and collaboration between various ministries and government
agencies on issues that affect multiple interests. To date, civil service reform efforts
484
Recent speed trials procedures appear to have begun to expedite the trial of murder cases and other
crimes of violence.
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have tended to begin and end with studies and recommendations, with little progress
made in implementing reforms. This may in part reflect the fact that public
administrative reform strategies to date have tended to prescribe daunting, overarching reforms in the realm of core governance rather than more modest, focused
attention on particular sectors which, if successful, may provide models for more
broad reaching public administrative reforms.

Regulatory Environment:
The regulatory environment is undermined by a
combination of governance constraints that include overly strict government controls
in some areas, inadequate regulatory provision in others, weak or inconsistent
enforcement, lack of access to information on regulatory rules and procedures, and
weak capacity among many officials tasked with the administration of regulatory
systems.

Local Governance: Local government structures have been created or dismantled
by a succession of new governments as a matter of principle rather than practical
expediency, prompting Hossain Zillur Rahman to observe that local government in
Bangladesh has been “more an area of policy experimentation that of stable
institutional development.”485 With the exception of the Union Parishad, the one
enduring seat of local government, there has been little continuity of effort on the part
of successive governments to strengthen local government as a medium for bringing
government closer to the people. As a result, ordinary citizens have little input in
public decision-making at the level of government that is closest to their day-to-day
life and experience. In addition, local government bodies are under resourced and
lack genuine independent decision-making authority. Similarly, local representatives
of central government ministries and agencies are routinely deprived of their legal
decision-making authority, preventing them from effectively serving local
beneficiaries of health, education, and other essential social services.

Partisan Tensions: With important advances in the administration and independent
oversight of elections, the electoral process has emerged as the sole effective check
on governance standards in the context of partisan politics in Bangladesh. In
contrast, there are no enforceable standards for campaign finance, little evidence of
inclination on the part of political parties to adopt sound internal governance
standards, and a continued tendency for partisan differences to be contested in the
streets rather than in Parliament. The situation undermines the lawmaking and
executive oversight role of Parliament, cripples the accountability checks required for
responsible public financial management, and exacerbates public security concerns.
While the situation affects all citizens, it has a particularly severe impact on the
quality of life of the poor, as reform efforts of any kind require time, attention, and
oversight to ensure that their benefits reach to the poor.
The fact that these five constraints lie in the sphere of core governance underlines the
limits of sectoral governance work, and the need for core governance interventions to
address overarching constraints that sectoral governance initiatives are unable to
resolve.
485
Rahman H. Z. and S. Aminul Islam eds. (2002) Local Governance and Community Capacities: Search for
New Frontiers, University Press Limited. Dhaka. at 154.
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Successful governance reforms in select areas offer a foundation on which to
build
879. While the preceding analysis paints a stark image of the overall state of
governance in Bangladesh, some striking details emerge on closer view of the
landscape. Although the overall pace and progress of reform efforts have been
disappointing, evidence suggests that modest but important reforms are taking hold in
several areas. For example, thoughtful media coverage of governance issues and the
civic education efforts of civil society organizations have enriched public dialogue on
governance standards and raised public expectations. This dialogue includes candid
discussion of corruption and impunity in language that was rarely heard a decade ago,
and expressions of dissatisfaction with the quality of education, public health care, and
the supply of energy and other basic services. In addition, civil society initiatives at the
grassroots have facilitated more effective dialogue between communities and local
government bodies. While there are relatively few examples of the poor and other
marginalized communities playing a direct role in governance, an increasing number of
interlocutor organizations are working on behalf of the poor, providing channels to
register their views an interests, particularly at the local government level. These
pockets of achievement are in some instances attributable to core and sectoral
governance initiatives helping to create space and opportunity for civil society activities,
while in other cases the determination of civil society reform efforts have created
opportunities for civil society and government to work together.
880. Some of the most encouraging progress has been made in strategically selected
areas that are some distance removed from the center of sensitive partisan controversy.
Achievements in certain areas serve as models for working partnerships government
and civil society that may be extended to address some of the more sensitive
governance issues that dominate national debate, including corruption and impunity.
For example, in the field of environment, significant policy reforms and a more liberal
definition of legal standing in public interest litigation were secured through strategies
that aimed to broker dialogue and collaborative working relations between environmental
activists and public officials. In other cases, governance reforms can be attributed to a
combination of factors that are as much fortuitous as strategically designed. They
achievements are no less significant for the fact that elements of chance contributed to
their success.
Variations in the basis of opposition to governance reform call for different
strategies and approaches
881. Whatever the circumstances in which reform efforts have gathered momentum,
important lessons can be drawn in every case. For example, while corruption, impunity,
and resistance by public officials who feel threatened by change raise formidable bars to
governance reform, many governance initiatives are impeded by more basic and benign
constraints. These include:
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
Limited institutional and human resource capacity, to which a variety of factors
contribute, including inadequate entry-level and in-service training, and recruitment
procedures that fail to take account of optimal qualifications.

Resistance to change among public officials as a matter of principle, reflecting
concerns about competition and job security and lack of knowledge and experience
to appreciate the value of institutional or procedural reforms until they take hold.

Concentration of decision-making powers among the highest ranks of public officials,
with inadequate delegation of decision-making authority to, and sense of ownership
among, mid-level officers tasked with the day-to-day management of administrative
procedures or resource allocations.

Apathy resulting from low salaries, poor training, lack of merit-based review, and
other performance disincentives.

Archaic administrative practices that leave little scope for creative solutions or
efficient problem solving.
882
While constraints of this kind create additional opportunities for corruption or
impunity to flourish, they require subtle programmatic responses that differ from the
sharp-toothed legal sanctions and other deterrent actions that are taken to combat
corruption or impunity.
Public institutions do not reform themselves
883. What factors, or combination of responses, have been most conducive to
governance reform in Bangladesh or other countries that face similar problems in similar
circumstances? First and foremost, experience attests that that public institutions, left to
their own devices, do not reform themselves. Reform initiatives are invariably driven by
a combination of internal and external forces and incentives of various kinds. These
precipitating forces may include "champions of reform" in the person of committed
officials who tactfully create the space needed to implement their vision of change within
the institutional working environment; conditionality requirements that have added a
time-bound rigor to reform efforts in some areas; events in one sector that serve as
catalysts for unanticipated spillover changes in others; or demands raised by private
sector or civil society stakeholders. The implication for future governance strategies is
that there is no single pattern of progress in governance reform. While commitment on
the part of responsible public officials from the outset inspires confidence, reforms may
ultimately be secured through bottom-up pressure applied by civil society, the private
sector, or a combination of stakeholders.
Governance reforms are advanced by appropriate incentives, public participation,
and collaborative partnerships between government and various stakeholders
884. Champions of Reform: In facing an apparent sheer wall of opposition, it is easy
to imagine that a particular institution—or the public administration as a whole—is
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braced to resist reform effort. Impressions aside, this is not the case in Bangladesh,
where many capable public officials have reform visions that have only to be freed from
the weight of bureaucratic resistance. The remarkable professional achievements of
public officials who join NGOs or commercial ventures on retirement from government
service are a testament to their capabilities and vision. Successful reform initiatives in
the public sector typically begin with a single individual or champion of reform, who is
able to methodically create the necessary space for change by nurturing those who
share his or her vision and deftly managing those who resist. This underlines the
importance of intellectual ownership and commitment on the part of government
counterparts in a reform initiative. Experience suggests that donor-funded reform
initiatives are most likely to succeed where the core plans either originate with
government counterparts, or were developed through a design process in which those
responsible for their implementation, or whose support was critical to the success of the
initiative, were extended every opportunity to contribute.
885. Incentive Structures: Similarly, reform initiatives are more likely to succeed
where those responsible for implementing them are provided with incentives that
stimulate their interest, commitment, and pride of ownership once the activity is
underway. These include specially tailored in-service training and other professional
development opportunities that meet specific needs; establishment of performancebased professional review and promotion procedures; opportunities to participate in
policy planning and public decision-making processes; a combination of autonomy and
support as needed in defined areas of responsibility; internal oversight mechanisms that
strengthen horizontal accountability; and other incentives that foster a genuine sense of
ownership in the reform process.
886. Public Participation: While the success of governance reform initiatives is clearly
dependent on the commitment and resolve of relevant public agencies and officials,
public understanding and confidence is equally important. Public support is in turn
dependent on the flow of timely and complete information and on opportunities for
citizens to register their views, interests, and expectations. Some of the most
encouraging governance reform initiatives in Bangladesh have been seeded at the local
level, through opportunities for citizens to engage with local government bodies and for
local officials to better understand and take account of constituent interests.
887. Collaborative Partnerships Between Government and Various Stakeholders:
Collaboration between government, civil society, and the private sector in governance
reform presents an optimal pairing of reform-minded public officials and stakeholders to
pursue common goals. Although there are relatively few examples of partnerships of
this kind in national-level governance initiatives in Bangladesh, there are many examples
of collaborative working relationships at the local level. These include the previously
described local governance reform initiatives and the early efforts of community legal
service organizations to strengthen the statutory “village court” role of the Union
Parishad. Recent justice sector reform experience in Indonesia includes several
interesting examples of effective working relations in which civil society organizations
have collaborated with the Supreme Court of Indonesia.486 Other Asian countries
486
Examples supported by The Asia Foundation and USAID, the Partnership for Governance Reform, and
the Government of Australia/AusAID include a diagnostic governance assessment of the Supreme Court;
developing and testing pilot models for court-administered mediation; and drafting a new Supreme Court
regulation for the administration of public interest lawsuits.
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provide examples of alternative corruption prevention and other initiatives that partner
private sector organizations and civil society groups.487 There is potential for similar
partnerships in Bangladesh, particularly in engaging the private sector, which to date has
not assumed a strong voice in governance reform.
Governance reform is a long-term process that rarely proceeds on a linear course,
has no single formula for success, and is notoriously difficulty to measure
888. Some additional lessons can be drawn from the experience of Bangladesh and
other countries that face similar governance constraints:

Governance reform is a long-term process that in some instances is better measured
in decades than in months or years. Often a sweeping political change or other
milestone event that sets of series of governance reforms in motion raises
expectations that are difficult to fulfill in the short term. Since 1991, donors and local
activists have pressed a succession of governance reform agendas in Bangladesh,
with minimal progress made on major issues such as public administrative reform.
While slow progress has raised justifiable frustration among stakeholders, in
Bangladesh and other countries there has been a tendency to set unrealistic time
lines for governance reform and to sharply criticize government partners when
targets are missed. Tensions of this kind may undermine relationships that are as
important to the long-term success of reform efforts as short-term progress. There is
a need to balance expectations with a clear appreciation of the local context and to
hold reasonable expectations for what is possible in the short term.

Governance reform rarely proceeds on a linear course. Most reform efforts have an
experimental dimension whose outcomes are impossible to fully predict. The pace of
reform will fluctuate and there is certain to be occasional backslide regressions from
which important lessons can be drawn and strategies refined.

There is no single formula for reform. While certain initiatives will succeed by design
where others fail, flexibility and fortuity are as important as careful planning.
Governance reform is difficult, and any public agency, civil society interlocutor, or
donor agency that is not prepared to invest time, energy, and patience will be
disappointed.

Unlike some development initiatives whose progress can be measured on a
quantitative basis, governance reform is notoriously difficult to measure. Where
monitoring efforts focus on high-level indicators, subtle evidence of gradual progress
is easily overlooked. There is too little empirical research conducted in the field of
governance, particularly as a prelude to large-scale reform initiatives. As a result,
projects that are conceived with the best of intentions may be designed, conducted,
and assessed without adequate baseline knowledge of the circumstances in which a
487
For example, in the Philippines the Makati Business Club, Social Weather Stations, and the Philippines
Center for Investigative Journalism have formed a coalition to combat corruption with support from The Asia
Foundation and USAID.
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particular institution works or the specific needs and expectations of those whom a
particular governance reform initiative is intended to benefit.
C. Proposed ADB Governance Strategy
1. Key Considerations
889. As noted in the Introduction, the purpose of this Country Governance
Assessment is a relatively modest one. It is intended: (i) to take account of the current
state of governance in Bangladesh in core areas such as public administration and
public financial management and in individual sectors of interest to ADB, based on
practical guidelines and key criteria set by ADB and other agencies that have conducted
similar assessments in other Asian countries and internationally;488 (ii) to reflect on the
experience of past and present governance reforms and the practical lessons that can
be drawn from them; and (iii) to provide recommendations to assist the Government of
Bangladesh, ADB, and other development partners in sharpening future governance
reform strategies and coordinating mechanisms.
Governance strategies should take account of the varying nature and context of
governance problems facing Bangladesh
890. Reform initiatives that seek to apply a single formula or blueprint are certain to be
confounded by the nuances of the Bangladesh working environment.
Factors to be
taken into account in planning and implementing governance reform strategies include:

the extent to which bureaucratic opposition reflects efforts to preserve opportunities
that flow from corruption or other power advantages versus more benign resistance;

institutional weaknesses that reflect limitations in human resource capacity and low
incentive, which are different from willful corruption or impunity;

inadequate public awareness of governance standards and consequent lack of
public demand for reform;

declining public confidence in the integrity of public institutions and officials, including
the police and the courts;

lack of opportunity for ordinary citizens to participate in public decision-making
processes.
891. They should also take account of an intensifying debate over the appropriate role
of development partners in shaping or helping to facilitate national governance reform
488
For examples of guidelines for governance assessment see the websites of ADB, World Bank, OECD,
and other agencies.
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efforts. Of particular importance, governance strategies should be guided by the need to
facilitate:

the pro-poor economic growth objectives enshrined in the I-NPRS;

improved delivery of basic education, health, and other essential services to the
poor;

greater human security (particularly with respect to the rights of women);

greater accountability and transparency in public administration;

human resource development in the public and private sector;

increased citizen voice in public decision-making; and

sustainable management of Bangladesh’s sensitive natural resource base.
Begin by reflecting on experience to date
892. For the Government of Bangladesh, local stakeholders, and ADB and other
development partners, the natural place to begin in planning future governance reform
initiatives is to reflect on experience to date. ADB has many years of experience in
facilitating governance reform through lending and technical assistance work in specific
sectors, including finance, education, public health, transport, and energy. Even before
certain sectoral development constraint were expressly characterized as governance
related, ADB was taking steps to address institutional and administrative problems that
affected the progress of its sectoral work and broader national development efforts. By
working with government partners to resolve these constraints, ADB program staff
forged relationships of trust that will serve as a foundation for future governance reform
initiatives that build on them. While the impact of implicit governance interventions
varied from project to project and from sector to sector, and new challenges emerged as
circumstances evolved, the process of learning and relationship building has proceeded
on a positive course. In addition, relationships of trust have begun to extend from
government partners to private sector and civil society partners and stakeholders and to
community partners and beneficiaries. These relationships provide an ideal platform on
which to launch new and expanded sectoral governance work.
Determine strategies on the basis of comparative strengths and capacities
893. Analysis of core governance constraints in Chapters III to VIII underlines the
problems raised by limitations in public administrative capacity and overly centralized
management structures, weak systems of accountability, policy implementation, and
intra-government collaboration in public financial management and financial sector
governance, encroachments on judicial independence, weak legal enforcement, and the
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deteriorating law and order environment. These and other core governance issues pose
formidable challenges to the Government of Bangladesh, local stakeholders, and ADB
and other development partners. While achievement of Bangladesh’s economic
development and poverty reduction goals is ultimately dependent on the resolution of
these core governance constraints across the broad spectrum of development work, it is
neither practical nor financially feasible to address every issue simultaneously. ADB and
other development partners face important strategic decisions in determining which
issues they are best positioned to address on the basis of their comparative institutional
strengths and capacities, which reforms are likely to have the greatest reach and impact
in stimulating follow-up actions and broader benefits, and how governance reform efforts
can be best coordinated among relevant government agencies, other stakeholders, and
donors once strategic decisions are taken and courses set.
894. The lines drawn in analyzing governance issues on the sector-by-sector basis
followed in the preceding chapters, or in distinguishing core and sectoral governance for
convenience of analysis, tend to be somewhat arbitrary and are certain to blur in
practice. Chapter I introduced the relationship between core and sectoral governance
issues and the mutually reinforcing relationship between sector and core governance
interventions. The consistency of common themes that emerged in analyzing key
governance constraints in the six sectors covered in Chapters IX through XIV attests that
the governance problems that affect development goals in a particular sector generally
mirror the broader core governance issues that affect many sectors. Given this
relationship, improved governance standards in a particular sector will help to advance
broader core governance reforms such as improved financial management, more
transparent recruitment, procurement, or licensing procedures, or greater independence
in the exercise of judicial decision-making authority.
895. Governance reform for improved development management should strike an
optimal balance between what is needed and what reasonably possible. This requires a
careful accounting of priority needs, windows of opportunity, management of potential
resistance from various stakeholder groups, institutional and human resource capacity,
availability of donor resources in the short and medium term, and the ability of the
Government to assume financial responsibility in the long term. Some illustrative
examples of the balances and trade-offs to be borne in mind include:

How to strike the optimal middle ground between cumbersome regulatory rules and
procedures that slow the progress of development efforts or regulatory requirements
that are streamlined to a point that the critical oversight role of Government is
compromised;

Generic professional development training that, however valuable it may be in its
own right, may leave public officials inadequately equipped to perform their duties
versus specialized training at a cost that cannot be sustained without long-term
donor support;

Investment in select pilot or proof-of-concept initiatives that have a reasonable
chance of success and replication over time versus major investment in sweeping
reforms that pose enormous management challenges and risk of subversion by
those opposed to reform.
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Acknowledge and advance the role and comparative advantages of the State
896. Of particular importance, contemporary governance reform initiatives should aim
for balance in defining the appropriate role and development needs of the State. Until
recently, many governance reviews were critical of the commitment or capacity of
Government and public officials. Some went so far at to insist that the Government
abandon its regulatory, management, or oversight roles and devolve full responsibility to
the private sector and civil society. In contrast, today the most compelling governance
reform prescriptions acknowledge the role and comparative strengths of Government
agencies and aim to enhance their capacity in regulatory and other areas in which the
State has a clear comparative advantage and an important regulatory or oversight role to
play. The capacity of government officials can be enhanced through training, technical
assistance, facilitation of collaborative working relations with various stakeholders whose
talents will complement those of government officials, and opportunities for public
institutions, the private sector, civil society, and beneficiary communities to collaborate in
achieving common goals.
2. Recommendations
897. Drawing on the assessment findings and preceding reflections on lessons
learned, it is recommended that ADB adopt a three-pronged governance strategy that
combines:

A primary focus on new and ongoing sectoral governance initiatives that address
fresh challenges by building on experience to date;

Complementary core governance initiatives in select areas, with an initial focus on
corruption prevention and gradual expansion to select areas; and

A higher profile role for the Bangladesh Resident Mission (BRM) in engaging the
Government of Bangladesh on governance reform issues, promoting greater public
dialogue on governance reform, and collaborating with donor partners.
a. Expanded focus on sectoral governance
Build on existing experience and goodwill relations
898. Sectoral governance initiatives should draw on the experience, contacts, and
goodwill that ADB has established with government counterparts. They should also aim
to develop deeper relations with the broad community of stakeholders in the various
sectors in which ADB works, including representatives of the private sector and civil
society and community beneficiaries. This is not a simple call to stay the course of work
to date, but rather one to build on past experience and relationships in addressing
sectoral governance constraints in more explicit terms that draw on ADB regional
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experience and the support of governance specialists in ADB headquarters. To date,
ADB sectoral governance work has quite naturally focused primarily on relations with
government partners, while gradually taking advantage of opportunities to engage with
other stakeholders. Future sectoral governance work should facilitate collaborative
working relationships between government counterparts and private sector and civil
society stakeholders. By facilitating stakeholder dialogue, ADB can promote greater
horizontal accountability, ensure greater transparency and predictability, promote
informed stakeholder participation in sectoral governance, raise public confidence in the
integrity of public officials and institutions, and facilitate greater understanding and
cooperation between government partners and the private sector and civil society
stakeholders with which they engage.
899. Improvements in sectoral governance standards are in turn expected to have a
positive impact on core governance reform, including greater expectations and demand
for improved governance standards. Achievements in sectoral governance reform will
establish a human resource base and yield proven models on which ADB can draw in
selecting and implementing core governance initiatives. Advances in strategically
targeted core governance work on corruption prevention or other select issues will in
turn help to advance sectoral governance reforms.
Include explicit reference to governance reform objectives in all documentation
900. The governance dimension of earlier ADB sectoral work tended, for good reason,
to be left implicit in working relations with government partners and other local
stakeholders. As the language of governance becomes increasingly familiar and widely
spoken, the governance elements of ADB sectoral work should be expressly
documented in project agreements, memoranda, and other documents. In addition,
governance-specific performance monitoring criteria and indicators should be developed
and incorporated in project documents, including agreements with the Government. To
the extent possible, governance criteria should also be incorporated in project terms of
reference and in the day-to-day professional performance objectives of those
responsible for implementing projects, government counterparts, and other stakeholders.
ADB sectoral program staff should make it a point to raise governance issues in their
regular discussions with local counterparts, and take every opportunity to facilitate
workshops and other forums for discussion of governance topics, circulate Bangla
language translations of ADB governance documents, and assume a valued resource
role in helping to build popular support for governance reform through education and
dialogue with project counterparts and beneficiaries.
The professional working
relationship between ADB project staff, government counterparts, and other
stakeholders in integrating and reflecting on the governance dimension of project goals
should continue to be one of mutual learning and exchange and reciprocal support.
Strike the optimal balance between enforcement and incentives
901. Sectoral and core governance initiatives should strike an appropriate balance
between enforcement of legal and other governance standards through the courts and
other mechanisms and incentives that will encourage and assist champions of reform
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within the Government and their supporters to redefine the culture of governance in
Bangladesh. The rationale is that investment in incentives is likely to have a greater
positive impact in the long term than concurrent investments in short-term legal
sanctions. While strict enforcement of laws and regulations is essential to combat
corruption and impunity, restore law and order, and raise public confidence in the legal
system and other institutions of governance, from a strategic perspective it is arguably
more effective to invest finite resources in incentives that will help to reduce corruption
than in legal or administrative procedures that will bring past offenders to justice.
Accordingly, it is recommended that the greater share of resources be invested in
human resource development; establishment of performance-based assessment
procedures for public officials; program activities that will promote collaboration between
public institutions and reformers in the private sector and civil society; public education;
opportunities for citizens to engage in public decision-making; and application of
eGovernment and other practical tools that will bring greater transparency and
accountability in public decision-making.
Engage a broad mix of stakeholders
902. Sectoral governance initiatives should build on the goodwill relations that ADB
has firmly established with government counterparts and the connections that ADB
sector specialists have begun to establish with stakeholders from the private sector and
civil society. Beyond the technical assistance inputs provided to stakeholders to date,
ADB is positioned to play a trusted convening role in bringing together different
stakeholders to discuss common interests and to devise strategies for collaborative
action to achieve common goals. Governance reform activities should be premised on
the value of networks of trust, respect, and cooperation among government functionaries
and in civil society, and work to foster such networks by well-oriented incentives and
open collaboration between government and academics, the business community, civil
society organizations, and citizens.
Advance the core elements of sound development management
903. Sectoral governance initiatives should also be guided by opportunities to
advance the core elements of sound development management: accountability,
transparency, predictability, and participation.

Accountability: Sectoral governance initiatives should promote a combination of
formal institutional monitoring and oversight mechanisms and informal oversight
activities by civil society, strengthening horizontal accountability.

Transparency: Sectoral governance work should support innovative efforts to ensure
that public decision-making and related procedures are transparent. In particular,
ADB should encourage eGovernment and other information technology applications
to make registration, licensing, and other administrative procedures more efficient
and open to public scrutiny.
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
Predictability: Guidelines and other information on the role and procedures of
sectoral agencies and other public institutions should be documented in writing and
made available to all stakeholders, including public officials. Similarly, administrative
and other decisions that define rights, responsibilities, and accountabilities should be
published and disseminated among all stakeholders, including public institutions.
These materials should be incorporated in the training curricula for public officials.

Participation: Sectoral governance initiatives should be guided by the objective of
enhancing participation in two contexts. First, opportunities should be extended to
citizens, communities, the private sector, and other stakeholders to inform the design
and implementation of sectoral development initiatives through consultations, focus
group discussions, and advisory inputs. Second, steps should be taken to ensure
that mid- and lower-level public officials are free to exercise the legal decisionmaking and other responsibilities with which they are legally entrusted, free from
undue pressure or interference by senior officials to whom they are accountable.
Sectoral governance dimension of ADB’s new Technical Assistance for
Supporting Good Governance Initiatives
904. Technical Assistance for Supporting Good Governance Initiatives: In late 2003
ADB will launch a new Technical Assistance Project for Supporting Good Governance
Initiatives (Good Governance TA).489 The objective of the Good Governance TA is to
support an integrated corruption prevention strategy through a combination of legal,
registry, and private institutional corruption prevention initiatives in the secured financing
sector of private credit markets (Part A).490 This work will be complemented by public
sector core governance initiatives,491 focusing on the establishment of an independent
anticorruption commission (IACC), for which an enabling Bill is before Parliament (Part
B). The TA is intended to forge collaborative linkages between private sector secured
financing institutions and public sector corruption prevention efforts.
905. The first component of Part A of the TA will provide assistance for legal reform on
(i) consensus building for a modern legal framework for secured transactions, (ii)
finalization of a new draft secured transactions law for Bangladesh, and (iii)
harmonization of a modern secured transactions regime with other laws. Based on the
foundation of a modern secured transactions law, this component will also support the
development of the overall architecture for a transparent, electronic registration system.
The second component will support institutional governance through governance
surveys of a cross-section of secured financing institutions. Part A will also support
training and study visit to a modern registry systems.
b. Select core governance initiatives
906. It is further recommended that ADB support select core governance reform
initiatives to which it is best positioned to contribute, as a complement to its work in
Asian Development Bank (2003), Technical Assistance to the People’s Republic of Bangladesh for
Supporting Good Governance Initiatives, TAR: BAN 37017 (July 2003).
490 See TAR: BAN 37017 (July 2003).
491 See TAR: BAN 37017 (July 2003).
489
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sectoral governance. With a focus on corruption prevention, the Good Governance TA
represents ADB's first core governance initiative in Bangladesh. The results of this first
initiative will inform decisions on the focus of future core governance initiatives, which
will be planned in consultation with the Government of Bangladesh and other
development partners.
Core governance dimension of ADB’s new Technical Assistance for Supporting
Good Governance Initiatives
907. The first core governance component of the Good Governance TA will contribute
to broader governance reforms through support for the establishment of an Independent
Anti Corruption Commission. This will involve: (i) consensus building on the nature,
objectives, mandate, and structure of the IACC; (ii) associated drafting of a statute,
rules, regulations, and procedures; (iii) public dissemination and consultation with
stakeholders on IACC, the law, rules, regulations, and procedures related to it and the
ensuing anticorruption strategy of the Government; and (iv) formulation of the
Government’s anticorruption strategy. The second component will support a national
committee on corruption prevention (NCCP), which will (i) examine the need for changes
to or improved enforcement of substantive laws, rules, and regulations; (ii) facilitate a
collective cross-verification by investigative and regulatory agencies that will enable
more integrated and balanced prevention of corruption by the Government; and (iii) seek
feedback from civil society and other stakeholders on the output of the proposed NCCP.
The third component will support prevention of institutional corruption in line ministries
through governance audits, which will result in indicators for implementing rules,
regulations, procedures, and mechanisms for corruption prevention in line ministries.
Access to line ministries will be obtained as needed after consultation with NCCP.
908. The combination of expanded sectoral governance work and the upcoming
corruption prevention TA is expected to establish a platform for expanded ADB
governance initiatives. Future initiatives should include close collaboration with
government counterparts (with a particular focus on professional development,
extension of decision-making authority to mid-level public officials, and other incentive
mechanisms) and facilitation of working relations between government counterparts and
civil society and private sector stakeholders, and beneficiary communities.
909. Future sectoral and core governance initiatives should continue to be guided by
comprehensive background research and stakeholder consultations that will serve as a
baseline for measuring progress against indicators to be determined in collaboration with
government counterparts and other stakeholders. In accordance with ADB practice,
future governance initiatives should be undertaken in close coordination and
collaboration with other development partners to avoid duplication of effort, ensure
maximum impact of limited resources, streamline monitoring efforts by sharing
information, and encourage the donor community to speak with one voice in calling for
policy reforms that will advance common interests. Areas of potential focus include
expanded corruption prevention initiatives that build on the initial work of several donors,
support for the development of non-court enforcement mechanisms that will complement
formal justice sector reforms, and reform of land administration. Reform of the legal and
regulatory structure for land administration poses a formidable challenge, yet there are
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few areas in which effective change could bring positive benefits across multiple sectors
and improve the quality of life of million of Bangladeshis by reducing conflict in
communities and advancing national poverty reduction goals.
c. Broader institutional engagement in governance reform
910. ADB’s Bangladesh Resident Mission (BRM) has played an active role in dialogue
between the Government of Bangladesh, the private sector, civil society, and
development partners on governance constraints to economic development and poverty
reduction, including the design and implementation of the Interim National Poverty
Reduction Strategy. The BRM also closely involved in the coordinating efforts of the
LCG Subgroup on Governance. This report recommends that the BRM build on
experience to date by assuming an even more vigorous and higher profile role in
facilitating stakeholder dialogue on governance. In particular, the BRM can draw on
ADB’s experience, contacts, and professional resources from across the Asia-Pacific
region and on its comprehensive collection of studies, policy papers, and other
documents on governance.
Establish a governance unit within ADB’s Bangladesh Resident Mission
911. While the professional staff of the BRM have been well supported by governance
specialists in ADB headquarters in Manila, an expanded sectoral and core governance
strategy will benefit from the day-to-day leadership and contacts of a resident
governance unit within the BRM. A Bangladeshi national with extensive experience and
domestic and regional contacts in the field of governance should ideally head the
proposed unit. Program staff of the unit would play a lead role in implementing ADB’s
country governance strategy, and be responsible for updating the country governance
plan on an annual basis. They would work closely with sectoral specialists, advising on
the design, implementation, and monitoring of sectoral governance activities. In
addition, unit staff would actively facilitate coordination with other donors on governance
initiatives, including work on the upcoming Good Governance TA, and convene regular
seminars and other public events that focus on governance issues. The BRM
governance unit would in turn be supported by governance specialists in ADB
headquarters, who would provide quality assurance and strategic guidance.
If a
residence governance unit is approved, initial planning procedures should include
establishing the competency profile of the unit and defining recruitment procedures.
Disseminate Bangla language translations of ADB policy papers and resource
materials
912. ADB has a superb collection of materials on various dimensions of governance.
While these materials have been well circulated among English readers in Bangladesh,
translation of select materials into Bangla will ensure that ADB experience and policy
perspectives reach a broader audience, including partners in sectoral work. Translation
and dissemination of governance materials offers a cost-effective means to raise public
awareness of governance constraints to economic growth and poverty reduction.
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Greater awareness will in turn help to raise public expectations for improved governance
standards and encourage thoughtful citizen scrutiny of and participation in public
decision-making.
Invest in empirical research on governance
913. Working in close collaboration with staff of the governance unit in ADB
headquarters, the proposed resident governance unit would coordinate the design and
commission of empirical research on governance issues of interest to ADB as a planning
tool in developing new programs or assessing the impact of ongoing activities. The
BRM should maintain close working relations with local specialists in governance,
convene meetings of governance advisory panels representing civil society and the
private sector, and engage local research institutions in commissioning studies or
inviting feedback on program plans. In this way, ADB will benefit from the knowledge
and experience of local specialists, while at the same time contributing to the further
development of local capacity in applied governance research.
Place increased emphasis on monitoring and evaluation
914. The local governance unit should develop, test, and implement monitoring and
evaluation strategies to measure the progress of governance reform initiatives in the
local context. In particular, the unit should assist government counterparts and other
local stakeholders to incorporate governance performance targets and indicators as part
of their institutional mandate, work plans, and the individual performance plans of key
personnel. Appendix I provide some illustrative baseline monitoring tools and proxy
measures which can be developed and refined in collaboration with local partners.
Enhance donor coordination
915. Members of the BRM governance unit should represent ADB in meetings of the
LCG Subgroup on Governance, in smaller sub-groups that focus on specific governance
issues, and in other donor coordinating forums, as well as attend seminars, workshops,
and other governance focused activities organized by local organizations and
development partners.
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