Performance discipline: The missing ingredient in our incentive policy

Incentives are a powerful tool in the private sector, used to stimulate and steer private investment. It comes in different forms such as cash subsidies, import protection, tax exemption, and easy loans.

However, their effectiveness often diminishes in the absence of a 'performance discipline'. It implies a structured, accountability-focused culture where efforts are regularly tracked, goal-driven, and aligned with measurable outcomes.

The interim government's economic reform task force published its report in February this year, which it recommended establishing a performance discipline. So, what is a performance discipline really? How will it work?

Why incentives fail to bring results in Bangladesh

Bangladesh provides a range of incentives to the private sector. However, unlike countries such as South Korea, Bangladesh does not impose strict performance discipline on those who receive the incentives and does not link these well to strategic goals. 

Economist Dr Syed Akhtar Mahmood, former lead private sector specialist at the World Bank Group and also a member of the task force, believes that we must focus on how the government can become more performance-oriented. 

"There is still a weak internal culture within the government when it comes to checking the actual outcomes of various events or policies it undertakes. When government projects get approved, these indicators are often missing—or even if they are included, they are rarely monitored," he said.

In the garments sector, there is currently a generalised export incentive in place. One incentive also supports the exploration of new markets, while another targets small and medium-sized factories. However, the performance requirements are limited to export volumes and do not include technological upgrades or productivity improvements. In other sectors, performance discipline is either weak or entirely absent.

How South Korea got it right

South Korea is a prime example of how a performance discipline boosts efficiency in private sector incentives.

Over the years, the South Korean government has offered a range of incentives to the private sector, such as cash subsidies, tax exemptions, preferential allocation of credit, and interest rate subsidies. These measures aimed to stimulate investment in activities that served the country's development goals, such as export generation, export diversification, technological learning and upgradation, and innovation. 

These incentives played a key role in restructuring the economy, reinforcing its export orientation, advancing technological capabilities, and improving the competitiveness of industrial enterprises.

In this East Asian country, incentives produced results because the government imposed tough performance discipline on the firms. The most important was export discipline, i.e., firms were required to export a significant part of their production. This meant that firms had to be globally competitive. 

It also meant that the firms, and through them, the government would learn about the dynamics and developments in the global marketplace and modify their policies and approaches accordingly.

Similar discipline was present in Japan and Taiwan, and later in China. Over time, with the evolution of development strategies, other performance dimensions were included, such as technological upgrading, knowledge transfer from foreign to local investors, innovation, and research and development.

On the other hand, subsidies were often ruthlessly withdrawn if firms failed to achieve the targets. South Korea identified firms which could not make the mark and forced them to go bankrupt or be merged with more successful firms. 

The automobile industry is a good example. About half a dozen car manufacturers were set up in South Korea after the government adopted a long-run programme to develop the industry in 1974, Only one purely Korean firm was able to meet the performance targets; the others were allowed to die. That firm, Hyundai (with its subsidiary Kia), is now a leading automaker in the world.

Time to reform our incentive policy

Bangladesh needs to adopt a sound incentive policy, which will be the foundation on which an effective incentive regime can be built. 

"Bangladesh's existing incentive structure and strategy are quite outdated. It requires a careful and detailed review to rationalise and modernise it," commented M Masrur Reaz, chairman and CEO of Policy Exchange.

"The business world has evolved, bringing with it new challenges, opportunities, and cost dynamics. Bangladesh's incentive policy must be updated to reflect these changing ground realities," he added.

Reaz emphasised the fair distribution of incentives. There are sectors or firms that have been receiving incentives for decades. If a firm becomes profitable over a few years, he believes there is really no need to continue providing incentives for such a long period.

At that point, a clear timeline should be set to gradually phase out those incentives. Instead, it is essential to redirect them toward new types of emerging businesses such as the digital economy, light manufacturing, healthcare, etc. 

"They need to be given opportunities to enter the global market and become export-oriented. Because the cost of doing business in Bangladesh is high. Moreover, export and import expenses are significantly greater here compared to many other Asian countries," he noted.

The government announced a new Tariff Policy in August 2023, recognising that the existing tariff structure is deficient and adversely affecting the international competitiveness of Bangladeshi firms. The effective implementation of the new Tariff Policy is a priority, but it must be recognised that tariffs or customs duties cover only part of the incentive regime. 

Thus, the government needs to enact a comprehensive investment incentive policy. Without a sound policy framework, incentives may not contribute to development objectives and instead become a tool for favouring certain businesses.

Now a key question could be: what kind of conditions would actually be effective in terms of performance? 

Masrur Reaz said, "Performance needs to be defined from multiple angles—not just from a commercial perspective. For example, one aspect could be demonstrating various forms of business or financial efficiency. Another could be sustainable employment—that is, the jobs created should be sustainable and inclusive in terms of gender and region."

"Yet another aspect could be maintaining Responsible Business Conduct (RBC) and Environmental, Social, and Governance (ESG) standards. Because globally, from buyers to investors, these factors are increasingly taken into account," he added.

According to the taskforce report, a well-designed incentive policy should clearly define the development objectives it aims to support, specifying the relevant performance indicators and the criteria for awarding incentives. 

It should ensure transparency, including regular publication of information about recipients of the incentives. Additionally, the policy must include periodic reviews to assess the effectiveness of the incentives, evaluating both their costs and their contribution to achieving the intended development goals.

Now, the question is how the business community will perceive this.

Zahedul Amin, co-founder and managing director of LightCastle Partners, has extensive experience working closely with both business owners and investors. He believes they should welcome it.

"Especially in Western economies, these business practices are already well integrated. So, if businesses want to attract foreign investment, aligning with these goals would actually work to their favor. On the other hand, investors would also feel more confident knowing that these conditions will be properly enforced. I believe both sides have good reasons to welcome this policy," he explained.

Abdullah Hil Rakib, Managing Director of TEAM Group, and former senior Vice President of BGMEA, personally appreciates the idea of establishing a performance discipline. 

"After all, incentives are meant to support economic balance and growth. Therefore, the government should treat such incentives as a form of investment and ensure that they are adding value in return for the economy," he said.

This prominent businessman also emphasised the need for a balanced allocation of incentives.

"I believe sectors that are already saturated, such as cotton, should no longer receive more incentives. Instead, the focus should shift toward areas with growth potential. For example, we're now talking about fibre diversification; products with untapped potential like these need to be brought into our export basket. We've seen a flow of over-investment in the same type of products—if we take a policy-driven approach, it will help address this imbalance," he added.

How will the performance discipline work? 

The government may identify the performance dimensions based on its development objectives and, in consultation with the private sector, set targets for each performance dimension.

Dr Mahmood believes that there is no need for a separate agency for this. Several ministries within the government can oversee it jointly.

"I think the body within the government that can support this idea is the Ministry of Finance. The Ministry of Finance can oversee the overall management of this incentive discipline or policy, as the funds come from them," Dr Mahmood mentioned.

"However, the Ministry of Commerce and the Ministry of Industries must also be part of this process," he added.

Masrur Reaz also believes that such a policy should not be imposed overnight. "That will not be effective. It must be implemented through discussions between the government and the private sector," he said.

On the other hand, businesses receiving support should commit to providing the data needed to assess performance. The government may hire third-party assessors to assess whether the firms receiving support have met the agreed performance targets.

However, over the past decades, we have seen strong ties between political parties and businessmen. If this continues in the future, businesses might be able to bypass the performance requirements. How to keep the proposed performance discipline from such political influence could become a matter of concern.

According to Dr Mahmood, we are currently at a point in time where there is room to experiment with different policies. 

"It is the key responsibility of the current interim government to lead by example. The same applies to this performance discipline," he concluded.

However, introducing drastic changes could also be counterproductive, according to Zahedul Amin. Because one of the biggest obstacles to investor confidence in this country is the lack of policy continuity. In other words, once a policy is introduced, investors are often unsure whether the next government will uphold it or reverse it.

"Therefore, instead of implementing anything overnight, I believe there should be inclusive discussions involving all relevant stakeholders to make sure it will sustain in the long run," he concluded.