RMG sector in post-MFA period: Policies for strengthening competitiveness-III

The Centre for Policy Dialogue (CPD) in association with the SouthAsia Enterprise Development Facility (SEDF) has recently completed a study titled “Bangladesh Apparel Sector in Post MFA Period: A Benchmarking Study on Ongoing Restructuring Process”. The Daily Star is publishing the recommendations of the study in three parts. The third and final part of the study highlighting policies for strengthening infrastructural, legal and export market base of the RMG sector is being published today.
Policies for Strengthening Infrastructural, Legal and Export Market Base of the RMG Sector
* Support for relocation: The concentration of RMG industry in the cities of Dhaka and Chittagong is already revealing a number of disadvantages from the perspective of the need for future expansion of the enterprises and consolidation of the industry. In view of increasing demand in the area of compliance assurance many of these enterprises are looking for opportunities to shift to alternative locations, away from residential and commercial areas in Dhaka and Chittagong. The government of Bangladesh has recently announced establishment of a number of garment villages in Adamjee, Munshiganj and other places to facilitate this process. Creation of a 'Fund for Relocation of Factories' to provide concessional loan to the enterprises is the most important initiative that need to be taken. In this context development partners along with international financing agencies and business support organisations should come forward to stimulate the process. Establishment of new RMG units within the limits of the major cities should also be restricted to the extent possible.
* Support for improvement of existing laws and regulations: About one third of sample entrepreneurs are of the opinion that laws and regulations guiding the operation of RMG industry should be improved. Bangladesh required more flexible working hours, with provisions for work during the night shift, recruitment of young workers as apprentices etc. Others mentioned about enforcement of more strict laws for improvement of worker's health and safety standards in the workplace, change in the building codes for improving working conditions, and for ensuring compliance with factory laws etc. The issues and concerns as regards various acts of the new Labour Law such as working hours, punishment for failing to provide maternity leave, retirement benefit of workers, timely payment of fired workers etc. need to be reviewed. Thus government may consider setting up a committee to review different new labour laws and also review other rules and regulations relevant to the garment and textile sector with a view to changing these to suit the emerging demands of the industry.
* Need to focus on stock market for required capital: The trend of upscaling visible in recent years could in future demand that the RMG industry has access to larger amount of capital for the sort of restructuring taking place at present. The survey found that most of the locally-owned enterprises are private limited companies which are in most cases are operated by board of directors, constituted by family members. In this context, policy support for creating a conducive and enabling environment for the RMG sector to raise funds from the capital market should be given due consideration. Along with this, the RMG enterprises, particularly the large scale ones, should improve their state of corporate governance including standards of auditing, reporting, accounting, management etc. So that they are adequately prepared to offload shares and raise capital in the country's stock market.
* Support for reduced lead time: Lead-time is another crucial factor that puts Bangladesh at a disadvantageous position when compared to China or India. With the change in the consumer market in recent years, retailers tend to spend more time on research on fashion and design, and they are putting more responsibilities on manufacturers under 'lean retailing' arrangement. Strengthening both backward and forward linkage has become crucial, in this context. Ready access to raw materials and inputs and higher capacity at enterprise level to carry out order-specification related functions are proving to be important. Bonded ware-house facilities for relatively longer period for items for which inputs are not available locally deserves careful consideration in this context (e.g. man-made synthetic grey fabrics). A consensus-based policy needs to be developed on an urgent basis in this respect. Recent initiative to extend the period of bonded warehouse facility is a welcome move.
* Overhaul port management: Sample entrepreneurs have pointed out a number of bottlenecks and weaknesses in the management and operation of the Chittagong port, such as bribe-taking by port officials, unnecessary delay caused by port officials in handling export and import consignments, container jam in the port, and loading and unloading, lack of vessels, and damage of imported and exported goods at the time of unloading or loading etc. In this backdrop, Caretaker Government's recent initiatives to address management, operation and labour relations issues are expected to contribute to improving efficiency of Chittagong port. To speed up handling activities, government could allow loading of containers at factory premise instead of loading goods at the port premise. Further expansion of port facilities will be required in the future in order to handle large volume of imported and exported items.
* Need to develop backward linkage textile sector: In view of the pressure on lead time, a competitive textile sector would play a critically important role. In national budget 2008, large allocation was made for the development of textile industries, with a view to promote integration with RMG sector- about Tk 8.48 crore has been allocated for 3 different projects. However, appropriate utilisation of these funds should be ensured. Moreover, access to suitable land and capital needs to be facilitated to establish textile units. Foreign investment particularly for manufacturing woven textile needs to be encouraged. In addition, the proposed “Technology Up-gradation Fund” could also provide support for modernisation and technology acquisition initiatives in the textile and RMG enterprises, as is evidenced by the Indian experience.
* Ensuring uninterrupted electricity supply for RMG units: The study revealed that shortage of electricity was 15% higher compared to that of 2004, testifying to an increasingly aggravating situation. Problem of electricity outage was more acute for small and medium size enterprises (69 hours and 72 hours respectively) as these enterprises could not bridge the gap between demand and supply from their limited captive power generation facility. Besides, the study indicated a negative correlation between lost hours due to outage of electricity and enterprise's earning of profit (-0.20). In view of rapid expansion and upgradation taking place in the export-oriented RMG sector, use of machineries has increased substantially in recent years. Government has taken some measures to address the electricity supply problem. Some of the small scale power generation plants getting approval in recent times may not start operation in due time because of lack of supply of gas in the plant. Government may consider exemption of VAT on electricity bill for operating garment factories. Government may provide subsidy especially to small and medium firms to set up small scale captive power plants. Power generation ought to be given highest priority.
* Vigorously pursue various market access initiatives: The analysis carried out in the study bears testimony to falling profit margins and increasing competition. Implementation of the Hong Kong Ministerial decision of the WTO in a manner that would include (most of) apparels items was thus critical to Bangladesh's RMG industry's competitiveness in the global market. Bangladesh should also lobby for the passing of the TRADE Act by the US Senate. In view of this, with respect to the issue of market access Bangladesh should focus on several areas: (a) try to ensure that the 97 per cent list for the US market is designed in such a manner that it includes at least some items of apparels; (b) negotiate RoO in EU and USA that enables very high GSP utilisation rate (the Canadian GSP, 25% domestic value addition requirement for all LDC exports, should serve as the reference point); (c) enhance and strengthen backward and forward linkage capacities in the RMG sector to raise compliance with RoO and (d) vigorously pursue all market access negotiations in WTO, with EC, USA and in the context of RTAs such as SAFTA and BIMSTEC. In this context it is important to note here that duty free market access for apparels in India (8.0 million pieces per year) under the SAFTA, on a limited scale, is going to be operationalised soon. Bangladesh's strategy should be gradual expansion of this tariff rate quota with the objective of taking RMG items out of India's negative list. Bangladesh should also carefully study the recently proposed NAMA draft of the WTO and ensure that items of Bangladesh's interest that enjoy preferential treatment are included in the lists of annexes of NAMA draft and those that do not enjoy such treatment are excluded from the lists.
(Concluded)
Authors are respectively research director, executive director and research fellow at the Centre for Policy Dialogue (CPD).