Review of Equity Entrepreneurship Fund (EEF)

Final Report

Zaid Bakht

Monzur Hossain

February 28, 2013

Bangladesh Institute of Development Studies

E-17 Agargaon, Sher-e-bangla Nagar
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Table of Contents

Table of Contents ……………………………………………………………………..ii

Executive Summary…………………………………………………………………..iii
I. Background of Equity Entrepreneurship Fund ……………………………………….1
II. Mode of EEF Operation ……………………………………………………………....1
III. Scale of EEF Operation ………………………………………………………………5
IV. Past Reviews of EEF ………………………………………………………………….7
V. Objectives of the Present Study ………………………………………………………8
VI. Coverage of the Present Study and Data Source ……………………………………..9
VII. Investment Impact of EEF …………………………………………………………..12
VIII. Employment Impact of EEF ………………………………………………………...13
IX. Impact on Production ………………………………………………………………..16
X. Dividend Payment and Share Buyback ……………………………………………..19
XI. Factors Affecting Performance of EEF Supported Projects ………………………..21
Evidence on EEF Disbursement……………………………………………………..21
Faulty Project Appraisal and Working Capital Problem……………………………23
Weaknesses in Institutional Supervision……………………………………………..24
XII. Conclusions and Recommendations…………………………………………………25
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Executive Summary

1. The EEF was set up by the government to encourage investments in promising but somewhat
risky food processing and agro-based industries and ICT related industries, and thereby
contribute to employment generation and socioeconomic upliftment of the country. The
distinctive feature of the fund is that the financial support is in the form of equity and not credit.
The underlying concern is to facilitate investments by young, educated and enterprising investors
who do not have the ability of placing adequate collaterals for institutional credit to finance
investment. The fund was operated directly by Bangladesh Bank during 2001-2009 and was later
handed over to ICB with overall responsibility of policy guideline and monitoring remaining
with Bangladesh Bank.

2. The EEF can be used for setting up new units or expansion or development of existing units in
food processing and agro-based industries and ICT related industries. The applying unit must be
registered under the Company Law of 1994 as a Private Limited Company. Interested
entrepreneurs are required to submit EOI in prescribed form and if the EOI is accepted then the
applicant will have to prepare a Project Proposal (PP) and have it appraised by any commercial
bank or financial institution and then submit the PP through this lien bank/financial institution to
ICB. If the PP is finally approved, Sanction Letter for specified amount is issued in favor of the
project. The project size in the case of ICT industries has to be a minimum of Tk. 20 lac and a
maximum of Tk. 5 crore. In the case of food processing and agro-based industries the lower and
upper limits are Tk. 20 lac and Tk. 10 crore respectively. EEF contribution can be a maximum
49% of the project size.

3. After completion of own investment, the entrepreneur will have to apply to ICB through the
lien bank for the release of EEF fund. After verifying completion of entrepreneur’s part of
investment the ICB releases the first installment of the sanctioned amount through the lien bank
provided the entrepreneur has completed all necessary documentations as per the sanction letter.
Subsequent fund release is contingent upon proper utilization of the previously released fund.
Total sanctioned amount is released through 4 installments. The company will issue share in the
name of the government of Bangladesh equivalent to the equity support.
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4. The entrepreneur is required to start buying back the share issued to the government in the 4th
year after the release of first installment and complete buyback by the 8 th year. In the event of
failure to buyback, the share will be converted into debt in the name of the entrepreneur with rate
of interest determined by the government. During the use of EEF fund, the lien bank will
nominate an official to represent ICB in the board of directors of the company and participate in
board meetings and AGM.

5. The lien bank will monitor the activities of the company and will submit quarterly reports to
ICB. Dividend earned on government share will be split between ICB and lien bank in 75:25
ratio. The ICB or the lien bank will have no liability if the company incurs loss.

6. During the first 10 years of its existence the EEF received a total disbursement of Tk.925 crore
from the government. A total of 697 agro based projects and 48 ICT projects were sanctioned for
EEF funding up to the end of April 2011.The average size of the agro based project was Tk. 4.41
crore while it was Tk. 3.97 crore in the case of ICT projects. The sanctioned equity amounted to
43.6% of the project size in agro based projects as opposed to 40.9% in the case of ICT projects.

7. The trend in fund disbursement by the Ministry had close correspondence with the number of
projects sanctioned. During the political regime of 2001-06, number of projects sanctioned
increased steadily and reached the peak in 2004-05. During the Caretaker government the
number of sanctioned projects declined drastically. After the current government took over in
2009, sanctioning of projects increased rapidly and reached the all-time peak of 372 projects in
2010-11.

8. At the request of Bangladesh Bank, the Implementation Monitoring and Evaluation Division
(IMED) of the Ministry of Planning carried out in 2006 an evaluation of the projects funded
under the EEF. Following the decision of the Audit Committee of Bangladesh Bank, a further
review of the activities of EEF was carried out by a team of Bangladesh Bank officials in 2009.

9. The IMED study of 2006 surveyed 82 agro based projects and 15 ICT projects and found that
more than half of the enterprises in both sectors could not start production activities by the time
of the survey although all of them were supposed to be in production stage at least a year before
in 2005. The study identified problems relating to delayed EEF disbursement, shortage of
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working capital and weak monitoring as the main reasons behind implementation delays. The
study observed that while EEF was well targeted in providing equity support to young, educated
and new entrepreneurs particularly in the ICT sector, faulty project appraisals and
implementation snags compounded by weak monitoring led to less than satisfactory outcome.

10. In the Bangladesh Bank study of 2009, attempt to seek information through mailed
questionnaire and follow up meetings with the entrepreneurs in the Divisional Head Offices met
with limited success. The extremely high rate of non-response was an indication of weak
institutional grip on EEF supported projects that adversely affected successful implementation of
EEF. Bangladesh Bank officials made field visits to 45 randomly selected projects. In all, the
team found 15 of the 45 projects visited (33.3%) to be closed or non-existent or involved in
activities completely different from the sanctioned project. The study recommended stricter
criteria for sanctioning ICT projects, easing access of EEF supported projects to working capital
loans from commercial banks, bringing all EEF supported projects under regular and close
monitoring, and pursuing recovery of EEF resources from projects that have become non-
functional or non-existent.

11. According to the data compiled by Bangladesh Bank and ICB, a total of 278 projects
received full or partial funding from EEF up to the last day April 2012. Of these, 243 were agro
based projects and the rest 35 projects belonged to ICT sector. Our attempt to conduct a census
of all these enterprises through mailed questionnaire and follow up visits to project and site
office met with limited success. A total of 105 projects responded to our questionnaire of which
95 were agro based and 8 ICT projects. Contacts could be established with another 59 projects
who did not return the filled-in questionnaire, of which 48 were agro based and 11 ICT projects.
A total of 62 projects could not be located of which 49 were agro based and 13 ICT projects. The
remaining 52 projects were approached only through mail and no field visits were undertaken in
these cases. Thus, the response rate works out at 39% for agro based projects and 23% for ICT
projects. On the other hand, the incidence of missing project was observed to be 20% for agro
based project and 37% for ICT projects.
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12. One of the main objectives of EEF is to facilitate investment in diverse agro based and ICT
industries. The information collected on investment undertaken by the projects under EEF
suggests that this objective has been largely met. A wide range of agro based activities including
Hatchery and fish farms, Shrimp hatchery, Poultry and fish feed mill, Fruit and vegetable
processing, Potato flakes, Parent stock, Meat processing, Dairy products, Food processing,
Reptile farms, Cattle feed etc. were undertaken with EEF support. However, in the case of ICT,
the activities have been limited mainly to software development.

13. Although the EEF support is limited to a maximum of 49% of project cost, the respondents in
our survey reported that they have already undertaken investment nearly 3.5 times the EEF
amount received and nearly 3 times the sanctioned EEF amount. Considering the sanctioned
amount and investment already undertaken, the equity participation by EEF for agro based
project comes down to only 32.8%. For ICT projects this proportion is observed to be 47.6%.

14. Land development accounted for nearly 45% of total investment in the agro based projects.
Thus, EEF support seems to have been channeled mainly to activities that are more land
intensive.

15. An implicit objective of the EEF has been to promote small and medium enterprises. This
seems to have been largely met as the evidence shows that nearly 60% of the EEF supported
enterprises currently in production belong to small category having 10 to 49 workers.

16. While EEF support seems to have been targeted well with regard to employment size group,
the overall size of employment generated appears rather small indicating high cost of job
creation. In agro based projects, productive employment has been generated for only 4001
persons by 95 enterprises under study. Similarly, in ICT projects, productive employment has
been created for 60 persons by the 8 enterprises under study. The implied cost of each job
created works out at more than Taka 18 lac for agro based projects and more than Taka 22 lac for
ICT projects. Given that the average project cost was estimated at the time of sanctioning to be
Tk. 4.41 crore for agro based projects, the expected cost of job creation for agro based projects is
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estimated to be Tk. 7.7 lac. The observed cost of job creation in agro industry is nearly 2.3 times
this figure.

17. The picture with regard to production appears quite unsatisfactory. Nearly 29% of the
responding enterprises (28 in number) did not have any production last year. Seven of these 28
enterprises never undertook production although for these enterprises the EEF was sanctioned
way back in 2005-2007. Apart from these 28 enterprises without production, another 3
enterprises sanctioned in 2006 did not have any production for first 5 years and started
production only in the current year. Twenty eight of these 31 enterprises belong to agro based
category. In the case of the ICT industries, 3 out of the 8 reporting enterprises (38%) did not
have any production last year and remained closed for past 1-3 year period. Also, the enterprises
under production last year experienced delays in starting production. Nearly 58% of the agro
based projects experienced delays of 2 years or more in starting production after the receipt of
first installment of EEF support, although EEF regulations requires production to commence
within 9 months of disbursement of 1st installment.

18. The information on investment shows cumulative investment that has been undertaken in the
enterprise and can be treated as rough indicator of the book value of fixed capital (except the
adjustment for depreciation). Output as a proportion of investment has been observed to be less
than 30% in all ICT projects and in micro and small enterprises in agro based projects suggesting
low rate of return in these enterprises. This was corroborated by evidence on profit as % of
investment which was observed to be extremely low in all enterprises except large enterprises in
agro based industries.

19. The equity share provided by EEF is required to be bought back by the project in 8 years’
time. During this period, the government is supposed to receive dividend on profit earned. The
burden of loss, however, accrues to the project sponsors alone. Available data shows that up to
February 2011, the government received dividend against equity from only 3 agro based projects
and none from the ICT projects. The amount received as dividend was only Tk. 4.8 lac. This
experience has been corroborated by data from our survey. Of the 71 agro based projects that
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were under production last year, 45 enterprises or 63% of the total reported that they incurred
loss. Similarly, 4 out of the 5 ICT projects that were under production reported loss.

20. A total of 40 agro based projects received their 1st installment of EEF disbursement in 2004
or earlier and for these enterprises buying back of share was supposed to start from 2008 and full
buying back of share was to be completed by 2012. The total disbursement of EEF to these
projects up to end of April 2012 was Tk. 155.16 crore. Seventeen of these 40 enterprises have
bought back share to the tune of Tk. 53.31 crore. Thus, these enterprises for which the full
buying back of share has already fallen due, the amount of share bought back constitutes only
34.4% of the EEF disbursed. In the ICT projects this proportion has been observed to be 30.7%.

21. In the course of the field survey, information was elicited from the respondents regarding
major problems faced in implementing and running the project. Of the 103 respondents, 43
indicated one or more such problems. Delays and corruption in EEF disbursement is the most
frequently mentioned problem. This is followed by the issue of underestimation of the project
size, lack of institutional support, and working capital related problems.

22. For nearly one fifth of the 173 agro based enterprises which received EEF in more than one
installment the time gap between the first and the last installment of EEF disbursement was
between 3-6 years. In fact, for one enterprise the gap was nearly 7 years. Moreover, for nearly
39% per cent of the enterprises belonging to this group the EEF disbursement remained between
70%-80% of the sanctioned amount even after such a long delay in fund disbursement. For
another 31.7% of all enterprises the gap was between 1.5 years and 3 years.

23. The respondents complained that the lien banks usually assign junior and fresh officers to the
task of appraising project proposal, who do not have adequate knowledge of the sector and as a
result project appraisals are not properly done. This often leads to underestimation of initial
expenditure relating to physical infrastructure and eventually puts the entrepreneur in working
capital crisis. The working capital need estimated in the project appraisal is either less than what
is actually needed or sponsor’s resource for financing working capital gets squeezed due to
higher expenditure on physical infrastructure over what was indicated in the approved project.
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24. Considering the sanctioned amount and investment already undertaken, the equity
participation by EEF for agro based project was found to be only 32.8% against the envisaged
equity participation of 43.6% in the these projects. The fact that 21 of the 103 enterprises
covered in this survey started production but closed down later reinforces the concern regarding
the working capital problem faced by the EEF supported projects.

25. The other major problem that has impacted upon the performance of the EEF supported
projects is lack of proper institutional supervision. The entrepreneurs complained that the
director nominated by the government remained detached and maintained only partial contact
instead of taking active interest in the working of the project. In such lax environment, the main
tools of monitoring, namely, regular holding of board meetings and AGM attended by
government nominated director, submission of quarterly reports and follow ups on year-ending
balance sheet and profit and loss accounts etc. have been largely ineffective.

26. Follow-up supervision and monitoring constitute critical elements in any successful financing
program. In the case of equity financing, these factors assume even greater importance. The
present study like the two previous studies have found that despite being successful in attracting
significant amount of investment in the targeted agro based and ICT industries the incidence of
non-performing EEF supported projects has been much too high. Also, the cost of job creation
has been found to be much higher than what was envisaged at the time of project sanctioning.
The arrangement of the lien bank appears as the weakest link in the set up. The lien bank is
expected to play an important role in channeling well appraised Project Proposals to ICB, giving
clearance for disbursement of the first and subsequent EEF installments, nominating government
representative in the board of directors, and regularly monitoring and reporting on the activities
of the project. In reality, the performance of the lien banks has fallen much short of these
expectations. A significant number of respondents in our survey also complained of widespread
corruption involved in project sanctioning and subsequent fund disbursement. The main reason
behind this is that the lien bank has virtually no stake in the EEF supported projects. The
provision of the lien bank getting 25% share of the dividend that accrues to the government
against its equity contribution has little operational significance as the actual receipt of such
dividend income, as the past experience shows, is likely to be negligible. At the same time, the
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ICB also appears to be ill-equipped in terms of human resource and technical skills to provide
the second level of oversight and monitoring. The fact that (i) in our survey, nearly one third of
the Dhaka Office of the EEF funded projects could not be located at the address provided by
Bangladesh Bank,(ii) that, 29 of the 30 Dhaka based ICT projects did not attend the discussion
meeting at Bangladesh Bank Head Office arranged by the study team of Bangladesh Bank and
(iii) that, share buyback has remained at only one third of what has fallen due are strong enough
evidence to indicate that institutional grip on the EEF projects is too weak to ensure broad based
successful implementation of the EEF.

27. In the backdrop of above discussions, a set of recommendations, short-to-medium-to long

term in nature, have been made to make the EEF process more functional and effective. To make
the EEF disbursement more secure and effective, private venture capital firms should be allowed
to operate as EEF managers. Necessary regulatory frameworks in this regard need to be
developed so that both domestic and foreign venture capital firms can be involved in EEF
operations. Due to equity ownership, the venture capital firms will be expected to provide other
necessary services to investors, such as providing introduction to potential customers and
suppliers, helping obtain additional financing, and other strategic and operational advices. Under
the current system, EEF enterprises do not get these services as was revealed from our survey.

28. Since the current system of EEF operation is not working properly, it is suggested here that
the EEF can be operated under “refinancing scheme” mode. Under such schemes, Bangladesh
Bank will provide fund to a venture capital (VC) firm so that the firm can invest it by its own
choice following a well-designed guidelines. This mechanism might ensure active participation
of the VC in investee firms operations as well as it may secure the investments.

29. The present pool of funds available for venture capital (EEF) is very limited both in terms of
amount and number of sectors. The pool of domestic venture capital needs to be augmented by
increasing the list of sophisticated institutional investors permitted to invest in venture capital
funds. This should include banks, mutual funds and insurance companies up to prudential limits.
Later, as expertise grows and the venture capital industry matures, other institutional investors,
such as pension funds, should also be permitted. The venture capital funding is a high-risk
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investment and thus be restricted to sophisticated investors. However, investing in venture

capital funds can be a valuable return-enhancing tool for such investors while the increase in risk
at the portfolio level would be minimal. Internationally, over 50% of venture capital comes from
pension funds, banks, mutual funds, insurance funds and charitable institutions.

30. Development of a proper venture capital industry particularly in the context of Bangladesh is
important for bringing to market high quality public offerings (IPOs). In the present situation, an
individual investor becomes a venture capitalist of a sort by financing new enterprises and
undertaking unknown risk. Investors also might get enticed into public offerings of unproven and
at times dubious quality. This situation can be corrected by venture capital backed successful
enterprises accessing the capital market. This will also protect smaller investors.

31. The venture capital funds are set up for a limited life and on maturity—the returns are
distributed amongst the investors. The structure of venture capital funds should therefore protect
the interest of investors and the liquidation process should be as simple as possible. In this
context, Limited Partnership (LP), Limited Liability Partnership (LLP) and the Limited Liability
Company (LLC) are commonly used and widely accepted structures internationally. These
structures limit the liability of investors to the extent of funds committed, at the same time they
can solve liquidation problem of enterprises. For venture capital funds which deal in high risk
investments structuring flexibility is very important to meet their business strategies. In
Bangladesh, such structures like LP, LLP and LLC are not well recognized. For development of
VC industry in Bangladesh and also to facilitate and attract the foreign investment in venture
capital industry, such alternative structures need to be provided by bringing appropriate changes
in legislation.

32. Implementation of these recommendations would lead to creation of an enabling regulatory

and institutional environment to facilitate faster growth of venture capital industry in the country
in the medium-to-long term. However, some short-term measures need to be undertaken to run
the current system properly.
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33. As majority of EEF projects have failed or remained inactive, the current EEF disbursements
should be based on strict technical and financial scrutiny. Only a limited number of projects (say,
4-5 projects in a year) should be chosen for funding under the existing mechanism until the
operation handed over to private VCs under a refinancing scheme.

34. To avoid asymmetry of information in project selection, a model of “Syndication” in initial

investment proposal can be applied to ensure good investments. In addition, current system of
“control right—sending nominee to board”, share buy-back and other regulatory rules should
continue.

35. Lien bank system appears to be almost non-functional. The provision of the lien bank getting
25% share of the dividend that accrues to the government against its equity contribution appears
to insufficient to get due services from the Lien Bank. Therefore, more incentive mechanisms for
Lien banks should be developed to make the system functional.

36. The EEF enterprises should be allowed for additional financing, particularly bank financing
in the form of working capital for good rating enterprises. At all stages of financing/investments,
the equity ratio of 49:51 should be maintained, which may facilitate flow of funds. This is
important in the sense that in many cases the ratio came down to 32:68, which created problem
in equity sharing.

37. A survey of EEF enterprises should be made on a regular basis (for example, every six-
month basis) through recruiting a professional supervisory or credit (investment)-rating
agency—further investment (installments) should be contingent upon good rating/report of the
agency.
 Review of the Operations of Equity Entrepreneurship Fund (EEF)

I. Background of Equity Entrepreneurship Fund (EEF)

To encourage investments in promising but somewhat risky food processing and agro-based
industries and ICT related industries through the provision of equity support the government set
up an Equity Development Fund in 2001 and in the national budget FY01 allocated Tk. 100
crore to this fund. The responsibility of operating this fund was initially given to the Bangladesh
Bank (BB) through the directives of the Ministry of Finance. The name of the fund was changed
in 2001 to Equity Entrepreneurship Fund (EEF) and an EEF Unit was set up within Bangladesh
Bank, which conducted the activities of the fund till 2009. However, because of fundamental
differences between the nature of the fund activities and the mandated purview of Bangladesh
Bank as a central bank the government approved handing over of the operational responsibility
of the fund to the Investment Corporation of Bangladesh (ICB) as Bangladesh Bank’s sub-agent
as of June 1, 2009. The responsibility of preparing policy guidelines, overall fund management
and performance monitoring of the fund continued with the EEF Unit of Bangladesh Bank.

The distinctive feature of the fund is that the financial support is in the form of equity and not
credit. The stated criteria for approving a project includes financial and technical viability of the
investment proposal, educational qualifications of the investors, their technical know-how,
marketing skill, past records of financial transactions particularly bank transactions etc. The
underlying concern is to facilitate investments by young, educated and enterprising investors
who do not have the ability of placing adequate collaterals for institutional credit to finance
investment, and thereby contribute to employment generation and socioeconomic upliftment of
the country.

II. Mode of EEF Operation

The EEF can be used for setting up new units or expansion or development of existing units in
food processing and agro-based industries and ICT related industries. For ICT industries, the
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applicant must have a minimum of 1 years’ experience in the case of call centers and 3 years’
experience in the case of other industries. Existing units involving production of software or
hardware and call-centers under ICT industries can apply for EEF support for modernization or
technological up-gradation with a view to expanding business or entering into international
market.

The applying unit must be registered under the Company Law of 1994 as a Private Limited
Company. Non-resident Bangladeshis, freedom fighters, women, tribal entrepreneurs, projects in
monga afflicted areas and in the hill tract districts will have preferential access to the fund. Loan
defaulters as per Bangladesh Bank definition will not be eligible for EEF funding.

The ICB puts out advertisement in the newspapers inviting interested entrepreneurs to submit
Expression of Interest (EOI). The ICB website also contains information on the fund. For food
processing and agro-based industries interested entrepreneurs are required to submit EOI in
prescribed form collected from the Head Office or the website. In the case of ICT industries, the
interested entrepreneurs have to collect the form from the Head Office by paying Tk. 5000 (non-
refundable). If the EOI is accepted then the applicant will have to prepare a Project Proposal (PP)
and have it appraised by any commercial bank or financial institution and then submit the PP
through this lien bank/financial institution to ICB.

The PP passes through the following three tiers in the ICB. First, the PP is scrutinized by the
Technical and Financial Evaluation Sub-Committee. Then it is forwarded to the Project
Evaluation Committee and finally to the Sanctioning Board. If the PP is finally approved by the
Sanctioning Board, Sanction Letter for specified amount is issued in favor of the project.

Financial analysis in project evaluation uses the following criteria: IRR 15%, ROE 15% Debt
Service Coverage Ratio 1.5:1, Fixed Asset Coverage Ratio 1.5:1. In addition, there has to be
acceptable SWOT analysis results.
 3

The project size in the case of ICT industries has to be a minimum of Tk. 20 lac and a maximum
of Tk. 5 crore. In the case of food processing and agro-based industries the lower and upper
limits are Tk. 20 lac and Tk. 10 crore respectively.

Food processing and agro-based projects having bank loan are not considered for EEF support.
But this restriction is not there in the case of ICT industries. EEF contribution can be a maximum
49% of the project size where there are no bank loans. In the case of bank loans, EEF
contribution can be a maximum 49% of equity or 33.33% of project size, whichever is lower.

The sanction letter mentions the size of the project, the investment to be undertaken by the
entrepreneur and the equity support from EEF. If there are any bank loans that is also mentioned
in the sanction letter. The sanction letter sets 12 months for the food and agro-processing
industry and 6 months for the ICT industries as the time limit within which the entrepreneur has
to complete his/her part of investment.

After completion of this investment, the entrepreneur will have to apply to ICB through the lien
bank for the release of EEF fund. After verifying completion of entrepreneur’s part of investment
the ICB releases the first installment of the sanctioned amount through the lien bank provided the
entrepreneur has completed all necessary documentations as per the sanction letter. Subsequent
fund release is contingent upon proper utilization of the previously released fund. Total
sanctioned amount is released through 4 installments. If there is cost overrun the entrepreneur
will have to meet the additional expenditure. No additional fund can be sought from EEF for this
purpose.

The company will issue share in the name of the government of Bangladesh equivalent to the
equity support. ICB will retain these shares. These shares cannot be sold or transferred without
the permission of ICB. During the use of EEF fund, shares owned by the entrepreneurs also
cannot be sold or transferred without prior permission of the ICB.

In the case of food processing and agro-based industries, the entrepreneur is required to buyback
20% of the share issued to the government in the 4th year after the release of first installment.
 4

Rest of the share has to be bought back at the rate of 20% in each of 5 th, 6th, 7th and 8th year. In
the case of ICT industries, the entrepreneur is required to buyback 10% of the share in the 4th
year and 15% of the share in the 5th year. Rest of the share has to be bought back at the rate of
25% in each of 6th, 7th and 8th year.

There is also the option of buying back government share during the first three years at the face
value. But after 3rd year up to next 5 years, the buyback will have to be done at the face value or
break-up value (determined by certified chartered account’s firm), whichever is higher.

After 8 years, any government owned share that has not been bought back can be sold by ICB to
interested shareholders, other individuals or company at face value, break-up value or price
determined by ICB, whichever is higher. If ICB fails to sell these shares after 8 years, these will
be converted into debt in the name of the entrepreneurs with rate of interest determined by
Bangladesh Bank.

In the event of diversion of EEF fund to other use, business closure or if the enterprise cannot be
traced then following issuance of show cause notice, subsequent scrapping of investment
agreement and conversion of EEF equity into loan, legal proceedings will be drawn against the
entrepreneurs.

Before the release of EEF fund, the lien bank will enter into an investment agreement with the
company in prescribed format. During the use of EEF fund, the lien bank will nominate an
official to represent ICB in the board of directors of the company and participate in board
meetings and AGM. The nominated person will have no personal liability involved.

The lien bank will monitor the activities of the company and will submit quarterly reports to ICB
by the 7th day of the month following the quarter. Dividend earned on government share will be
split between ICB and lien bank in 75:25 ratio. The ICB or the lien bank will have no liability if
the company incurs loss.
 5

The EEF funded company will have to use the fund on approved heads and maintain books of
accounts for inspection by ICB or lien bank officials. The company will remain obliged to
provide all information relating to the company. The company will prepare quarterly reports in
prescribed format and submit year ending balance sheet and profit and loss accounts to ICB by
the 4th month after year completion. The company will also have to hold board meeting every
three months.

The company cannot get into any investment agreement with anyone else or sign any agreement
that contradicts the provision of the EEF circulars. The company cannot appoint management
agent or change the memorandum of articles of association, give loan to anyone, or change the
directors/shareholders without prior permission from ICB.

III. Scale of EEF Operations

Following inception in 2001, the EEF received Tk. 400 crore from the government over the five
year period 2001-2006. The original government allocation of Tk. 100 crore was released in two
installments of Tk. 50 crore in 2000-01 and 2002-03. No disbursement was made by the Ministry
in 2001-02. However, during the last two years (2004-05, 2005-06) of the regime in power,
disbursement to EEF rose to Tk. 150 crore and Tk. 100 crore respectively.

Government contribution to EEF came down to Tk. 115 crore during the Caretaker government
of 2007-09. The present government, which assumed power in 2009 disbursed Tk. 410 crore to
EEF during the first three years of its tenure with the highest disbursement of Tk. 300 crore in
2009-10. Thus, during the first 10 years of its existence the EEF received a total disbursement of
Tk.925 crore from the government.

A total of 697agro based projects and 48 ICT projects were sanctioned for EEF funding up to the
end of April 2011 (Appendix Table A1). The total size of the sanctioned projects was Tk.
3073.04 crores for agro based projects and Tk. 190.75 crores for ICT projects against which the
sanctioned EEF equity support were Tk. 1339.83 crores and Tk. 78.09 crores for agro based and
ICT enterprises respectively.
 6

Thus, agro based projects accounted for 94.5% of the total sanctioned amount. This resulted
from a higher share of agro enterprises in the total number of projects sanctioned (93.6%), higher
average size of the agro based projects, and higher percentage of equity support in these projects.
The average size of the agro based project was Tk. 4.41 crore while it was Tk. 3.97 crore in the
case of ICT projects. The sanctioned equity amounted to 43.6% of the project size in agro based
projects as opposed to 40.9% in the case of ICT projects. Accordingly, the average size of the
sanctioned amount is estimated to be Tk. 1.92 in agro based projects and Tk. 1.63 crore in ICT
projects.

As is evident from Fig 1, the trend in fund disbursement by the Ministry had close
correspondence with the number of projects sanctioned. During the political regime of 2001-06,
number of projects sanctioned increased steadily and reached the peak in 2004-05. During the
Caretaker government the number of sanctioned projects declined drastically. In fact,
consideration of fresh application for EEF support remained suspended from August 2005 and
was resumed for ICT projects in April 2008 and for agro based projects in December 2008. After
the current government took over in 2009, sanctioning of projects increased rapidly and reached
the all-time peak of 372 projects in 2010-11.

Fig 1: No. of EEF Projects Sanctioned

400
350
Number of Projects

300
250
200
150
100
50
0

Year
 7

IV. Past Reviews of EEF

At the request of Bangladesh Bank, the Implementation Monitoring and Evaluation Division
(IMED) of the Ministry of Planning carried out in 2006 an evaluation of the projects funded
under the EEF. Following the decision of the Audit Committee of Bangladesh Bank, a further
review of the activities of EEF was carried out by a team of Bangladesh Bank officials in 2009.

The IMED study of 2006 surveyed 82 agro based projects and 15 ICT projects and found that
more than half of the enterprises in both sectors could not start production activities by the time
of the survey although all of them were supposed to be in production stage at least a year before
in 2005. The study identified problems relating to delayed EEF disbursement, shortage of
working capital and weak monitoring as the main reasons behind implementation delays. The
study observed that while EEF was well targeted in providing equity support to young, educated
and new entrepreneurs particularly in the ICT sector, faulty project appraisals and
implementation snags compounded by weak monitoring led to less than satisfactory outcome.

Under the Bangladesh Bank study of 2009, structured questionnaires were mailed out to all 231
enterprises that had received EEF support till that time. Of these, 167 enterprises or 72% of the
total number of enterprises did not respond. In 13% of the cases, the questionnaire was sent back
to Bangladesh Bank as the addressee could not be found. The mailed questionnaire was followed
up by holding discussion meetings in the Divisional Head Offices of Bangladesh Bank and
invitations were sent out to all 231 EEF supported projects to attend the meeting. The Dhaka
Division meeting was held at the Bangladesh Bank Head Office. Out of the 83 agro based
projects of Dhaka Division 56 projects remained absent in the meeting. In the case of ICT
industries, 29 out of the 30 projects remained absent in the meeting. The average rate of absence
in the meeting of Dhaka division projects was 75%. Given that the operation of the EEF was
directly handled by Bangladesh Bank till June 1, 2009 the extremely high rate of non-response
was an indication of weak institutional grip on EEF supported projects that adversely affected
successful implementation of EEF.
 8

Of the 64 projects that responded to the questionnaire, 43 provided statement of accounts which
showed that 58% of them were operating at loss.

In the course of the study, Bangladesh Bank officials made field visits to 45 randomly selected
projects. Of the 32 ICT projects that had received EEF support, 30 were located in Dhaka city
and two others were located in Chittagong and Sylhet. The Bangladesh Bank team visited 6 of
the 30 Dhaka based ICT projects. Only 2 of these 6 projects were found in production while a
third was waiting for government license. The rest 3 were either non-existent or involved in
activities quite different from sanctioned project. The lone ICT project in Chittagong was found
to be non-existent. In all, the team found 15 of the 45 projects visited (33,3%) to be closed or
non-existent or involved in activities completely different from the sanctioned project.

The study observed that most of the ICT projects were located in rented accommodation that
made it easy for them to move out of the project and use the fund in other profitable ventures,
and this contributed to the high rate of non-performance in the EEF supported ICT projects.

Although the scope of such diversion of EEF resource is less in agro based projects as these are
based on owned fixed assets, the study team found that in a significant number of cases partial
withdrawal of capital were taking place through unauthorized lease or by keeping the project
partially operational.

The study recommended stricter criteria for sanctioning ICT projects, easing access of EEF
supported projects to working capital loans from commercial banks, bringing all EEF supported
projects under regular and close monitoring, and pursuing recovery of EEF resources from
projects that have become non-functional or non-existent.

V. Objectives of the Present Study

The broad objective of the present study is to carry out a review of the operations of EEF to
assess the following amongst others.
 9

 Extent to which the EEF support has reached the target sectors of agro based and ICT
industries;
 The extent to which EEF supported projects have survived and continued to exist;
 Success in launching production and continuing with production activities;
 Investment facilitated in agro based and ICT industries;
 Employment generated and the cost of job creation;
 Production performance of EEF supported projects;
 Profit/loss outcome of the projects;
 Incidence of buying back of share, and
 Factors affecting performance of EEF supported projects

VI. Coverage of the Present Study and Data Source

As mentioned earlier, the number of EEF sanctioned projects has been rising steadily in recent
years. However, since the thrust of the present study is on impact assessment we have limited our
investigation to only those enterprises which have already received some funding from the EEF.
According to the data compiled by Bangladesh Bank and ICB, a total of 278 projects received
full or partial funding from EEF up to the last day April 2012. Of these, 243 were agro based
projects and the rest 35 projects belonged to ICT sector.

The mailing addresses of all 278 enterprises were collected from Bangladesh Bank and a
structured questionnaire was mailed to the project office soliciting information on the following.

 Date production started

 Last year’s production level
 Employment last year
 Investment in land development
 Other investment
 Profit/Loss last year
 Reasons for not starting production
 Problems faced regarding EEF support
 10

Out of these, only 21 enterprises replied of which all except one were agro based projects. Two
of these 21 enterprises (both agro based) bought-back fully the share issued against EEF equity
and on that ground they declined to provide any information on the current status of the project.

Because of the poor response to mailed questionnaire, attempts were made to track down the
Head Offices of these projects in and around Dhaka city. The address list provided by
Bangladesh Bank showed that 152 agro based projects and 30 ICT projects had their Head
Offices located in Dhaka city. The fact that such a high number of projects have their Head
Offices at Dhaka suggest that a high proportion of the entrepreneurs are residents of Dhaka city
which is somewhat inconsistent with the objective of generating decentralized entrepreneurship
growth. Out of these projects with Head Office in Dhaka, 13 agro based projects and 1 ICT
project had already responded to the questionnaire through mail. Attempt to locate the remaining
168 Dhaka offices and administer the structured questionnaire resulted in the following outcome.

Table 1
Distribution of Projects with Head Office in Dhaka City
Sector Office could be located Office could not Total
Responded to the Did not respond to be located
questionnaire the questionnaire
Agro based 49 45 45 139
(35.2) (32.4) (32.4) (100)
ICT 6 11 12 29
(20.7) (37.9) (41.4) (100)
Total 55a 56a 57a 168
(32.8) (33.3) (33.9) (100)
a
20 of the 55 questionnaires were actually filled-in by visiting the project site office and 8 of the missing 57
enterprises could not be located even in the field. One of the 56 non-responses occurred even after field visit.

As can be seen from Table 1, nearly one third of the project Head Offices in Dhaka city could
not be located. While a good number of these cases may have been due to shifting out of the
rented premise, in a significant number of cases it was reported by landlords/local people that
such offices never existed at the indicated address. In a few cases the address was found to be
fictitious in the sense that no such address existed or that a mosque or some such establishments
were there at the address where no office could be set up. The proportion of missing office is
higher in the case of ICT projects. This is more alarming since in most of the ICT projects the
 11

project address and the office address are the same. Some landlords mentioned that their rented
premises were vacated by the project hurriedly and at short notice immediately after the
caretaker government (of 1/11) took over. While some of these address changes may have been
due to genuine reasons, it is suspected that a significant number of the ICT projects may have
changed address because of discontinuity of project activities. It is also evident that the data base
maintained by the Bangladesh Bank had no record of these address changes, although EEF
regulations requires the projects to immediately inform any change of address.

In the case of the projects that did not have their head office in Dhaka city, field officers were
sent out to locate these projects in the field. A total of 64 agro based projects and 2 ICT projects
were visited by the field officers (Table 2) and response to questionnaires were obtained in 60
agro based and 1 ICT project.

Table 2
Distribution of Visited Projects with Head Office outside Dhaka

Sector Office could be located Office could not Total

Responded to the Did not respond be located
questionnaire to the
questionnaire
Agro based 28 3 4 35
(80.0) (8.6) (11.4) (100)
ICT 1 0 1 2
(50.0) (0.0) (50.0) (100)
Total 29 3 5 37a
(78.4) (8.1) (13.5) (100)
Figures within parentheses show row percentage
a
In addition to these 37 enterprises, another 29 enterprises with Head Office in Dhaka were checked out in the field

Thus, a total of 105 questionnaires were received back; but as mentioned earlier in two cases the
respondent did not provide any information as they have already bought-back the share issued
against EEF equity. Of the filled-in 103 questionnaires, 95 were agro based projects while 8
belonged to the ICT sector, which roughly corresponds to the distribution of the sectors in the
total number of 278 projects that have already received EEF disbursement. The response rate
works out at about 39% (95 out of 243) for the agro based projects and 23% (8 out of 35) for the
 12

ICT projects. The incidence of missing enterprise is seen to be 20% for agro based projects and
37% for ICT projects.

VII. Investment Impact of EEF

One of the main objectives of EEF is to facilitate investment in diverse agro based and ICT
industries. The information collected on investment undertaken by the projects under EEF (Table
3) suggests that this objective has been largely met. Although the 243 agro based projects under
EEF support are dominated by 122 (50%) Hatchery and fish farms, 47 (19%) Shrimp hatchery
and 20 (8%) Poultry and fish feed mill, a wide range of other agro based activities including
Fruit and vegetable processing, Potato flakes, Parent stock, Meat processing, Dairy products,
Food processing, Reptile farms, Cattle feed etc. were undertaken with EEF support. However, in
the case of ICT, the activities have been limited mainly to software development (33 out of 35
recipients of EEF). The same picture of diverse agro based industries and concentration of ICT in
software development is seen amongst the respondents of our survey.

As the evidence on Table 3 shows, in the case of the agro based projects the enterprises received
a total of Tk. 205.54 crore disbursed from EEF during the reference period against which a total
investment of Tk. 721.55 crore were undertaken by these projects. The disbursed amount of EEF
was about 87.6% of the sanctioned amount of Tk. 234.74 crore. Thus, although the EEF support
is limited to a maximum of 49% of project cost, and in the case of the 697 agro based projects
sanctioned up to April 2011 this proportion was 43.6%, the respondents in our survey reported
that they have already undertaken investment nearly 3.5 times the EEF amount received and
nearly 3 times the sanctioned EEF amount. Considering the sanctioned amount and investment
already undertaken, the equity participation by EEF for agro based project comes down to only
32.8%. For ICT projects this proportion is observed to be 47.6%

Land development accounted for nearly 45% of total investment in the agro based projects.
However, one observes significant variations amongst different agro based activities with regard
to the share of land development in total investment. In the case of the dominant activities,
namely, Hatchery & fish farms, Shrimp hatchery and Poultry and fish feed mill, the share of land
 13

development expenditure exceeded 50% of total investment. On the other hand, activities in
which total investment is significantly higher in relation to EEF disbursed amount seem to entail
a smaller share of land development expenditure in total investment. Examples are Potato flakes
(21.06%), Salt manufacturing (15.52%), and Mixed fertilizer (14.02%). These later activities
constitute a much smaller proportion of total number of projects under EEF support. Thus, EEF
support seems to have been channeled mainly to activities that are more land intensive.

Table 3
Investment Undertaken by Activity Type
Activity No. of EEF EEF Investment Investm Land
respond Sanctioned disbursed undertaken ent/ development
ents (Crore (Crore (Crore Disburse expense as
taka) taka) taka) ment % of total
ratio investment
Hatchery & fish farm 34 56.24 47.01 144.31 3.07 69.67
Shrimp hatchery 26 50.01 41.44 150.05 3.62 77.10
Poultry & hatchery 4 7.67 6.30 25.10 3.98 54.7
Fish processing 3 9.65 9.29 44.64 4.80 20.39
Food processing 3 15.21 14.77 36.00 2.44 70.00
Poultry & fish feed 3 13.68 11.55 31.63 2.74 9.84
Fruit processing & Veg
41.92
preserve 3 22.69 20.46 2.05 35.32
Cattle feed 2 8.08 7.25 23.55 3.25 12.12
Potato flakes 1 4.00 4.00 60.36 15.09 21.06
Salt Mfg. 1 8.00 8.00 54.76 6.85 15.52
Vegetable processing 1 2.92 2.92 8.00 2.74 25.00
Dairy products 1 8.68 8.68 34.70 4.00 4.90
Orchid 1 8.31 8.10 18.44 2.28 41.48
Hatchery & feed mill 1 7.06 7.06 16.00 2.27 75.00
Mixed fertilizer 1 3.32 3.32 18.84 5.68 14.02
Cold storage 1 8.62 4.78 10.45 2.19 4.31
Meat processing 1 0.60 0.60 2.80 4.67 28.57
Sub-total (Agro based) 87 234.74 205.54 721.55 3.51 45.40
Software 7 6.24 4.86 13.11 2.70 2.90
Total 94a 240.98 210.40 734.66 3.49 44.58
a
Relevant data were not available in the case of 9 enterprises

VIII. Employment Impact of EEF

An implicit objective of the EEF has been to promote small and medium enterprises. This seems
to have been largely met as the evidence shows that nearly 60% of the EEF supported enterprises
currently in production belong to small category having 10 to 49 workers (Table 4). Also, the
 14

small enterprises accounted for 24% of the total employment. In contrast, the large enterprises
having 100 or more workers accounted for 20% of the enterprises but nearly 60% of
employment.

Table 4
Distribution of Enterprises by Employment Size
Employment size All enterprises Enterprises currently in production
No. of cases Total number of No. of cases Total number of
workers workers
Nil 8 - -
0
(7.8)
1-9 (Micro) 22 114 12 79
(21.4) (2.4) (16.0) (2.0)
10-49 (Small) 50 1085 44 948
(48.5) (22.5) (58.7) (23.3)
50-99 (Medium) 10 662 9 602
(9.7) (13.7) (12.0) (14.8)
100 or more (Large) 13 2959 10 2432
(12.6) (61.4) (13.3) (59.9)
All 103 4820 75a 4061
(100) (100) (100) (100)
a
28 enterprises were closed during the reference year

As would be expected, the dominant activities, namely, Hatchery & fish farms and Shrimp
hatchery are mostly small enterprises (Table 5). Other activities that involve mainly small
enterprises include Food processing, Vegetable processing, Orchid, Mixed fertilizer etc. Most of
the ICT enterprises also fall under the small category. In contrast, Fish processing, Salt
manufacturing, Poultry & fish feed, and Fruit processing & vegetable preservation belong mainly
to large enterprise category. As can be seen from the Table, these later activities account for a
larger proportion of the employment but smaller proportion of the number of enterprises
supported under EEF.
 15

Table 5
Distribution of Enterprises under Production by Employment Size and Activity Type
Activity Employment size Total No. of Total No. of
Micro Small Medium Large Enterprises Workers
2 11 4 17 519
Shrimp hatchery (11.8) (64.7) (23.5) (100) (12.8)
7 22 2 1 32 712
Hatchery and fish farm (21.9) (68.8) (6.3) (3.0) (100) (17.5)
1 1 184
Fish processing (100) (100) (4.5)
1 1 75
Poultry & hatchery (100) (100) (1.8)
1 2 1 4 117
Food processing (25.0) (50.0) (25.0) (100) (2.9)
1 1 650
Salt Mfg. (100) (100) (16.0)
1 1 27
Vegetable processing (100) (100) (0.7)
1 2 3 394
Poultry & fish feed (33.3) (66.7) (100) (9.7)
1 1 120
Dairy products (100) (100) (3.0)
1 1 2 157
Cattle feed (50.0) (50.0) (100) (3.9)
3 3 852
Fruit processing & Veg preserve (100) (100) (21.0)
1 1 31
Orchid (100) (100) (0.8)
1 1 90
Hatchery & feed mill (100) (100) (2.2)
1 1 33
Mixed fertilizer (100) (100) (0.8)
1 1 40
Cold storage (100) (100) (1.0)
2 3 5 60
Software (40.0) (60.0) (100) (1.5)
12 44 9 10 75 4061
All (16.0) (58.7) (12.0) (13.3) (100) (100)

While EEF support seems to have been targeted well with regard to employment size group, the
overall size of employment generated appears rather small indicating high cost of job creation. In
agro based projects, productive employment has been generated for only 4001 persons by 95
enterprises under study. As seen from Table 3, 87 of these enterprises invested 722 crore taka
with equity support of more than 206 crore taka from the EEF. Similarly, in ICT projects,
 16

productive employment has been created for 60 persons by the 8 enterprises under study 7 of
whom invested nearly 13 crore taka with equity support of nearly 5 crore taka from EEF. The
implied cost of each job created thus works out at more than Taka 18 lac for agro based projects
and more than Taka 22 lac for ICT projects.

As mentioned earlier, the average project cost was estimated at the time of sanctioning to be Tk.
4.41 crore for agro based projects. On the other hand, the average employment size for the
71agro enterprises which are currently under production has been observed to be 57. Assuming
that these enterprises have the planned level of employment, the expected cost of job creation for
agro based projects is estimated to be Tk. 7.7 lac. The observed cost of job creation in agro
industry is nearly 2.3 times this figure.

The EEF also seems to have failed to promote women entrepreneurship. In only 2 out of the 103
responding enterprises a women was named as the head of the project. However, further query
revealed that they were only nominal heads and not active entrepreneurs.

IX. Impact on Production

The picture with regard to production appears even more disquieting (Table 6). Nearly 29% of
the responding enterprises (28 in number) did not have any production last year. Seven of these
28 enterprises never undertook production although for these enterprises the EEF was sanctioned
way back in 2005-2007. Of the remaining 21 enterprises, 14 remained closed for last 2 years or
more.

Apart from these 28 enterprises without production, another 3 enterprises sanctioned in 2006 did
not have any production for first 5 years and started production only in the current year. Twenty
eight of these 31 enterprises belong to agro based category. In the case of the ICT industries, 3
out of the 8 reporting enterprises did not have any production last year and remained closed for
past 1-3 year period.
 17

Table 6
Distribution of Enterprises by Current Production Status
Year of 1st Never No production Production Production Total
Installment undertook last year year not carried out last
production completed year
Agro based project
2002 0 0 0 1 1
2003 0 2 0 1 3
2004 0 3 0 11 14
2005 1 7 0 21 29
2006 5 5 3 20 34
2007 1 1 0 5 7
2008 0 0 0 2 2
7 18 3 61 89
Sub-Total (7.9) (20.2) (3.4) (68.5) (100)
ICT Projects
2004 2 3 5
2005 0 1 1
2006 1 1 2
3 5 8
Sub-Total (37.5) (62.5) (100)
7 21 3 66 97a
Total (7.2) (21.6) (3.1) (68.1) (100)
a
Relevant information were not available for 6 responding projects

Also, the enterprises under production last year experienced delays in starting production (Table
7). Nearly 58% of the agro based projects experienced delays of 2 years or more in starting
production after the receipt of first installment of EEF support, although EEF regulations
requires production to commence within 9 months of disbursement of 1st installment.

Table 7
Time Gap between Production and EEF Disbursement (1st Installment)
Time gap Number of agro based projects No. of ICT projects
1 year or less 28 5
(42.4) (100)
2 years 19
(28.8)
More than 2 years 19
(28.8)
All 66a 5
(100) (100)
a
Relevant information was not available for 4 agro based enterprises under production
 18

Apart from the 28 enterprises with zero production last year, information on output was not
available for another 11 enterprises. Evidence on output data for the remaining 64 enterprises has
been presented in Table 8 along with information on investment and sanctioned EEF. The
following points can be noted from the evidence presented.

 The size of output is by and large positively related to employment and investment.
 The average level of output in ICT is much less than the average level of output in
comparable employment group in agro based industries. This is true also in relation to
the size of sanctioned EEF amount. While average sanctioned amount in ICT is about
28% of that in agro based industry, the average level of output in ICT is only 3% of that
in agro based industry.
 The investment data shows cumulative investment in the enterprise and can be treated as
rough indicator of the book value of fixed capital (except the adjustment for
depreciation).The implied output capital ratio appears quite unfavorable for ICT projects
and micro and small enterprises in agro based projects.

Table 8
Level of Output in Enterprises Currently under Production
Employment size No. of Average per enterprise (lac taka) Output as
cases Sanctioned EEF Investment Output % of
Investment
Agro based
Micro enterprise 9 233 787 116 14.7
Small enterprise 35 222 478 117 24.5
Medium enterprise 9 255 771 376 48.8
Large enterprise 7 686 2276 3824 168.0
Total 60 285 778 586 75.6
ICT Industries
Micro enterprise 1 47 50 14 27.9
Small enterprise 3 91 180 19 10.7
Total 4 80 147 18 12.2
 19

X. Dividend Payments and Share Buyback

As mentioned earlier, the equity share provided by EEF is required to be bought back by the
project in 8 years’ time. During this period, the government is supposed to receive dividend on
profit earned. The burden of loss, however, accrues to the project sponsors alone.

Available data from Bangladesh Bank shows that up to February 2011, the government received
dividend against equity from only 3 agro based projects and none from the ICT projects. The
amount received as dividend was only Tk. 4.8 lac.

This experience has been corroborated by data from our survey. Of the 71 agro based projects
that were under production last year, 45 enterprises or 63% of the total reported that they
incurred loss. Similarly, 4 out of the 5 ICT projects that were under production reported loss.
Also, one of the two enterprises that had fully bought back the share and did not fill up the
questionnaire reported that their firm was closed down due to persistent loss.

The evidence on profit earned as a proportion of investment undertaken and value of output also
gives a similar poor picture (Table 9). The average size of profit per enterprise and profit as a
proportion of investment is seen to rise steadily with the employment size of the enterprise.
However, except the large agro based industries all other size groups including the lone micro
enterprise in the ICT sector reporting profit is seen to entail very low rate of return.

Table 9
Profit as a Proportion of Investment and Output
Employment size No. of cases Average profit per Profit as % of Profit as % of
enterprise (Lac investment output
taka)
Agro based
Micro enterprise 2 12.5 0.87 4.76
Small enterprise 12 7.92 1.60 7.26
Medium enterprise 5 49.18 5.19 12.96
Large enterprise 5 360.53 15.71 7.40
Total Agro 24 90.36 8.67 7.13
ICT Micro 1.0 1.0 2.02 7.25
All 25 86.78 8.66 7.16
 20

According to Bangladesh Bank data, 17 agro based projects fully bought back the EEF share by
the end of May 2012 while another 12 agro based projects partially bought back the share during
the same period. The total bought-back share (Tk. 74.87 crore) amounted to about 73.7% of the
EEF disbursed (Tk. 101.58 crore) to these 29 agro based projects.

However, if one looks at the year of EEF disbursement, one notices that a total of 40 agro based
projects received their 1st installment of EEF disbursement in 2004 or earlier and for these
enterprises buying back of share was supposed to start from 2008 and full buying back of share
was to be completed by 2012 (Table 10). The total disbursement of EEF to these projects up to
end of April 2012 was Tk. 155.16 crore. Of the 29 agro based projects that have bought back the
share fully or partially, 17 received their 1st installment of EEF in 2004 or earlier and these
enterprises have bought back share to the tune of Tk. 53.31 crore. Thus, these enterprises for
which the full buying back of share has already fallen due, the amount of share bought back
constitutes only 34.4% of the EEF disbursed. Data from the field survey showed that one more
agro based enterprise belonging to this group had recently bought back the share fully the
amount being Tk. 2.85 crore. If this is included in the calculation the total buy-back amounts to
36.2% of the due buy-back.

Table 10
Extent of Share Buyback
Sector No. of cases EEF disbursed Share buyback Buyback as % of
(Crore taka) (Crore taka) EEF disbursed
All enterprises with share buy-back
Agro based 29 101.58 74.87 73.7
ICT 8 15.21 10.87 71.5
Enterprises receiving 1st Installment of EEF in 2004 or earlier
Agro based 40 155.16 53.31 34.4
ICT 19 35.35 10.87 30.7

In the case of ICT, Bangladesh Bank data shows that 3 projects fully bought back the EEF share
by the end of May 2012 while another 5 projects partially bought back the share during the same
period. The total bought-back share (Tk. 10.87 crore) amounted to about 71.5% of the EEF
disbursed (Tk. 15.21 crore) to these 8 ICT projects.
 21

All the 8 ICT projects that have bought-back share received their 1st installment of EEF
disbursement in 2004 or earlier. However, there are 11 other ICT projects which also received
their 1st installment of EEF disbursement in 2004 or earlier, but these projects did not buy-back
any share although full buy-back became due for them. Considering all 19 ICT projects for
which the full buying back of share has fallen due, the amount of share bought back is seen to
constitute only 30.7% of the EEF disbursed.

XI. Factors Affecting Performance of EEF Supported Projects

In the course of the field survey, information was elicited from the respondents regarding major
problems faced in implementing and running the project. Of the 103 respondents, 43 indicated
one or more such problems (Table 11). As is evident from the Table, delays and corruption in
EEF disbursement is the most frequently mentioned problem. This is followed by the issue of
underestimation of the project size, lack of institutional support, and working capital related
problems.

Table 11
Problems Faced by Entrepreneurs in Project Implementation
Problem No. of responses % of all responses
Delay and corruption in EEF disbursement 25 35.8
Underestimation of project size 11 15.7
Lack of institutional support 8 11.4
Working capital problems 7 10.0
Marketing difficulties 7 10.0
High input price 4 5.7
Problems with utility connection 4 5.7
Natural calamity 4 5.7
All 70 100

Evidence on EEF Disbursement

Bangladesh Bank data on EEF disbursement shows that 9 agro based enterprises received the full
sanctioned EEF in one disbursement between 2002 and 2003 which was the system prior to
2004. Interestingly, 7 out of these 9 enterprises have fully bought back the share while one
enterprise has partially bought back the share. The remaining enterprise, which received Tk. 60
 22

lac as EEF equity has not bought back any share and has been found to be closed during our
survey.

Bangladesh Bank data also shows that another 15 agro based enterprises received their first
installment of EEF disbursement, amounting to approximately 40% of the sanctioned EEF, but
received no further disbursement. Thirteen of these 15 enterprises received their 1st installment of
EEF disbursement between 2004 and 2006 while the rest two received the 1st installment during
2009-10. One of these 15 enterprises has fully bought back the share while the others have not
bought back any share during this period. Four of these 15 enterprises responded to our
questionnaire of which one was found to be closed while the other 3 were operating at loss.

The situation with regard to the time gap between the first and the last installment of EEF
disbursement for another 173 agro based enterprises is shown in Table 12. There appears to be
quite a bit of truth in the allegation regarding delay in EEF disbursement. As is evident from the
Table, for nearly one fifth of the enterprises the time gap between the first and the last
installment of EEF disbursement was between 3-6 years. In fact, for one enterprise the gap was
nearly 7 years. Moreover, for nearly 39% per cent of the enterprises belonging to this group the
EEF disbursement remained between 70%-80% of the sanctioned amount even after such a long
delay in fund disbursement. For another 31.7% of all enterprises the gap was between 1.5 years
and 3 years.

Table 12
Time Gap between First and Last Installment of EEF Disbursement
No. of % No. of firms Disbursement as % of sanctioned
enterprises Distribution with 100% EEF for remaining enterprises
Time gap disbursement
Up to 6 months 23 13.3 15 81.8
6 to 12 months 26 15.0 15 84.2
12 to 18 months 33 19.1 19 81.4
18 to 24 months 21 12.1 17 67.2
24 to 30 months 13 7.5 9 80.1
30 to 36 months 21 12.1 7 78.6
36 to 42 months 13 7.5 9 77.4
42 to 48 months 6 3.5 6 -
48 to 54 months 6 3.5 4 87.6
54 to 60 months 5 2.9 1 87.2
More than 60 months 6 3.5 2 69.9
All 173 100 104 -
 23

Faulty Project Appraisal and Working Capital Problem

According to the EEF regulations, the applicant is required to prepare a Project Proposal (PP)
and have it appraised by any commercial bank or financial institution and then submit the PP
through this lien bank/financial institution to ICB after the EOI has been accepted. The
respondents complained that the lien banks usually assign junior and fresh officers to this task,
who do not have adequate knowledge of the sector and as a result project appraisals are not
properly done. This often leads to underestimation of initial expenditure relating to physical
infrastructure and eventually puts the entrepreneur in working capital crisis. The working capital
need estimated in the project appraisal is either less than what is actually needed or sponsor’s
resource for financing working capital gets squeezed due to higher expenditure on physical
infrastructure over what was indicated in the approved project.

The entrepreneurs also mentioned of difficulties in getting working capital loan from other
commercial banks as they have already received financing from EEF. Current EEF rule allows
projects to receive such loans on the basis of no objection certificate from ICB. For this, the full
amount of the EEF support has to be fully utilized by the sponsor and ICB scrutinizes the merit
of the case and actual working capital need of the project against its cash flow situation. The no
objection certificate is issued under the condition that none of the assets of the project are used as
collateral against the working capital loan sought.

The evidence generated in our survey lends support to this concern relating to underestimation of
project size and subsequent working capital problem. As shown in Table 3, the respondents in
our survey reported that they have already undertaken investment nearly 3.5 times the EEF
amount received and nearly 3 times the sanctioned EEF amount. Considering the sanctioned
amount and investment already undertaken, the equity participation by EEF for agro based
project was found to be only 32.8% against the envisaged equity participation of 43.6% in these
projects. The fact that 21 of the 103 enterprises covered in this survey started production but
closed down later reinforces the concern regarding the working capital problem faced by the EEF
supported projects.
 24

Weaknesses in Institutional Supervision

The other major problem that has impacted upon the performance of the EEF supported projects
is lack of proper institutional supervision. The entrepreneurs complained that although the
government has more than 40% ownership, it hardly puts in any effort towards smooth
functioning of the project. The director nominated by the government remains detached and
maintains only partial contact instead of taking active interest in the working of the project. In
such lax environment, holding of Board Meeting and AGM and attendance in these meeting by
nominated director does not take place as per requirement of the EEF. There are also lapses with
regard to the submission of the quarterly report by the sponsor and the lien bank. Thus, none of
the main tools of monitoring, namely, regular board meetings and AGM attended by government
nominated director, quarterly reports and follow ups on year-ending balance sheet and profit and
loss accounts submitted by the company seems to have been effective.

The lien bank nominates the official who represents ICB in the board of directors of the
company. But lien bank has virtually no stake in the project. The provision of the lien bank
getting 25% share of the dividend that accrues to the government against its equity contribution
has little operational significance as the actual receipt of such dividend income has been
negligible.

Our study findings have put up evidence that corroborates the earlier Bangladesh Bank study
finding of weak institutional grip on the EEF supported projects. Like Bangladesh Bank study,
we also experienced a high rate of non-response from the EEF-supported projects despite the fact
that the projects were approached with forwarding letters from both Bangladesh Bank and ICB
requesting them to cooperate with relevant information. As per agreement with ICB they are
required to provide such information.

Like Bangladesh Bank study, we also observed a high rate of non-existent and closed enterprises.
EEF regulations stipulate that in the event of diversion of EEF fund to other use, business closure
or if the enterprise cannot be traced then following issuance of show cause notice, subsequent
scrapping of investment agreement and conversion of EEF equity into loan, legal proceedings
 25

will be drawn against the entrepreneurs. Because of lax supervision and monitoring arrangement,
not much seems to have been done in this regard despite the fact that Bangladesh Bank study
unearthed a significant number of cases of non-existence, business closure and diversion of EEF
fund.

According to EEF regulations, buying back of share has to start from the 4th year after the
disbursement of 1st installment of EEF. The evidence presented shows widespread default in this
respect. Once again, persistence of such a situation illustrates the weak institutional supervision
of the EEF supported projects.

XII. Conclusions and Recommendations

This study makes an in-depth review and analysis of EEF disbursements procedures and current
status of EEF projects. Both positive and negative aspects of EEF have come out from our
survey analysis.

The following three situations of EEF enterprises have emerged in the study findings:

1. About 25% of all approved EEF projects appear to be missing. In terms of ratio, about
20% of agro-based and 37% of ICT projects are missing. These projects could not be
located through physical survey as well as mail survey.
2. About 24% of EEF enterprises did not respond or refused to respond, indicating that
these are troubled enterprises.
3. The rest 51% of EEF projects are functioning with different conditions, most of which
are losing concerns. Some of the firms started their operation after quite a few years of
receiving EEF support.

The above situations of EEF enterprises are totally disappointing, warranting a thorough review
of the whole process as the processes are supposed to entail problems. This gloomy outcome
definitely undermines the spirit of EEF facilities that were designed to help young entrepreneurs
 26

develop their own business in some non-traditional sectors with huge potentials to grow as an
exporting industry. While the situation of the first group points to adverse selection, the second
group was perhaps attributed to moral hazard problem. Adverse selection arises due to faulty
project appraisal, which in part points to lack of capacity of EEF operating agencies and their
alleged involvement in corruption. Moral hazard problem arises due to lack of monitoring of
investment activities. The third group, already in operation, claims that they have been facing
financing constraints particularly working capital as well as technical support.

Although there have been some mechanisms in place to mitigate information asymmetry and
moral hazard problem in EEF process, such as nominating an agent in the board of investee
firms, project appraisal by a Lien bank, a technical committee to appraise investment proposals,
these do not seem to have worked properly as a substantial proportion of EEF firms is missing or
not working.

One problem we see in the operation of EEF disbursements is that until 2009 Bangladesh bank
itself were involved and afterwards another government agency, ICB has been involved in EEF
operation. These two organizations, however, lack appropriate technical and monitoring
capacities to handle with venture capital operations. There is no other alternative way to improve
EEF disbursements to quality enterprises unless an efficient operation management of EEF could
be spelled out.

International practice is that the active involvement of venture capitalists in the operation of their
investee firms may help mitigate the moral hazard problem. Other suggested solutions
engineered by the venture capitalist industry to overcome problems relating to asymmetry of
information include the use of “preferred stock”, “control rights”, which may include
representation in the board of investee firms, and “syndication”. Syndicating first round
investments may lead to better decisions about whether to invest.

In Bangladesh, although some of the above practices are in-built in EEF operations, these are not
properly followed due to limitations of the operating agency. In this context, it seems that
without creating monopoly of EEF operations to only one agency, some efforts or legal steps
 27

could be taken to allow and develop venture capitalist industry. Likewise Bangladesh Bank’s
current refinancing schemes, refinancing facilities could be extended to venture capital firms so
that they could handle the EEF disbursements by their own assessments and risks.

In the backdrop of above discussions, a set of recommendations, short-to-medium-to long term

in nature, are made below to make the EEF process more functional and effective.

A. Change in Operations Management (Medium-to-Long term measures)

1. To make the EEF disbursement more secure and effective, private venture capital firms
should be allowed to operate as EEF managers. Necessary regulatory frameworks in this
regard need to be developed so that both domestic and foreign venture capital firms can
be involved in EEF operations. Due to equity ownership, the venture capital firms will be
expected to provide other necessary services to investors, such as providing introduction
to potential customers and suppliers, helping obtain additional financing, and other
strategic and operational advices. Under the current system, EEF enterprises do not get
these services as was revealed from our survey.
2. Since the current system of EEF operation is not working properly, it is suggested here
that the EEF can be operated under “refinancing scheme” mode. Under such schemes,
Bangladesh Bank will provide fund to a venture capital (VC) firm so that the firm can
invest it by its own choice following a well-designed guidelines. This mechanism might
ensure active participation of the VC in investee firms operations as well as it may secure
the investments.
3. The present pool of funds available for venture capital (EEF) is very limited both in terms
of amount and number of sectors. The pool of domestic venture capital needs to be
augmented by increasing the list of sophisticated institutional investors permitted to
invest in venture capital funds. This should include banks, mutual funds and insurance
companies up to prudential limits. Later, as expertise grows and the venture capital
industry matures, other institutional investors, such as pension funds, should also be
permitted. The venture capital funding is a high-risk investment and thus be restricted to
sophisticated investors. However, investing in venture capital funds can be a valuable
 28

return-enhancing tool for such investors while the increase in risk at the portfolio level
would be minimal. Internationally, over 50% of venture capital comes from pension
funds, banks, mutual funds, insurance funds and charitable institutions.
4. Development of a proper venture capital industry particularly in the context of
Bangladesh is important for bringing to market high quality public offerings (IPOs). In
the present situation, an individual investor becomes a venture capitalist of a sort by
financing new enterprises and undertaking unknown risk. Investors also might get enticed
into public offerings of unproven and at times dubious quality. This situation can be
corrected by venture capital backed successful enterprises accessing the capital market.
This will also protect smaller investors.
5. The venture capital funds are set up for a limited life and on maturity—the returns are
distributed amongst the investors. The structure of venture capital funds should therefore
protect the interest of investors and the liquidation process should be as simple as
possible. In this context, Limited Partnership (LP), Limited Liability Partnership (LLP)
and the Limited Liability Company (LLC) are commonly used and widely accepted
structures internationally. These structures limit the liability of investors to the extent of
funds committed, at the same time they can solve liquidation problem of enterprises. For
venture capital funds which deal in high risk investments structuring flexibility is very
important to meet their business strategies. In Bangladesh, such structures like LP, LLP
and LLC are not well recognized. For development of VC industry in Bangladesh and
also to facilitate and attract the foreign investment in venture capital industry, such
alternative structures need to be provided by bringing appropriate changes in legislation.

Implementation of these recommendations would lead to creation of an enabling regulatory and

institutional environment to facilitate faster growth of venture capital industry in the country in
the medium-to-long term. However, some short-term measures need to be undertaken to run the
current system properly.
 29

B. Recommendations for improving the existing system (Short-term nature)

1. As majority of EEF projects have failed or remained inactive, the current EEF
disbursements should be based on strict technical and financial scrutiny. Only a
limited number of projects (say, 4-5 projects in a year) should be chosen for funding
under the existing mechanism until the operation handed over to private VCs under a
refinancing scheme.
2. To avoid asymmetry of information in project selection, a model of “Syndication” in
initial investment proposal can be applied to ensure good investments. In addition,
current system of “control right—sending nominee to board”, share buy-back and
other regulatory rules should continue.
3. Lien bank system appears to be almost non-functional. The provision of the lien bank
getting 25% share of the dividend that accrues to the government against its equity
contribution appears to insufficient to get due services from the Lien Bank. Therefore,
more incentive mechanisms for Lien banks should be developed to make the system
functional.
4. The EEF enterprises should be allowed for additional financing, particularly bank
financing in the form of working capital for good rating enterprises. At all stages of
financing/investments, the equity ratio of 49:51 should be maintained, which may
facilitate flow of funds. This is important in the sense that in many cases the ratio
came down to 32:68, which created problem in equity sharing.
5. A survey of EEF enterprises should be made on a regular basis (for example, every
six-month basis) through recruiting a professional supervisory or credit (investment)-
rating agency—further investment (installments) should be contingent upon good
rating/report of the agency.

Getting it right is what this report is concerned about. The endeavor has been made in this study
to spell out some recommendations that will facilitate, through an enabling regulatory, legal, tax
and institutional environment, the creation of a pool of risk capital to finance start-up enterprises
with the underlying objective of helping the country to achieve rapid economic growth.
 30

Appendix Table 1
Year wise Description of EEF Operations
(Crore Taka)
Year Fund No. of Projects Total Project Cost Sanctioned EEF EEF Disbursed
Released Sanctioned Amount
by the Agro ICT Agro ICT Agro ICT Agro ICT
Ministry
2000-
01 50 0 0
2011-
02 0 2 0 22.25 5.2 5.2
2002-
03 50 8 2 158.79 27.79 56.22 10.16 31.72 9.39
2003-
04 50 65 18 693.67 75.88 236.05 33.89 45.49 6.82
2004-
05 150 116 13 522.75 39.63 227.7 14.36 127.63 19.93
2005-
06 100 22 0 93.62 40.86 101.86 4.78
2006-
07 25 2 0 6.11 1.41 2.04 70.99 2.48
2007-
08 90 1 0 2.56 0.85 51.62 0.65
2008-
09 110 0 0 39.38 0.7
2009-
10 300 110 14 386.83 41.75 189.55 18.98 17.88 0.11
2010-
11 0 371 1 1186.46 4.29 581.36 0.7 44.40 2.45
Total 925 697 48 3073.04 190.75 1339.83 78.09 536.17 47.31