transformation challenges and opportunities for bangladesh garments industry
TRANSCRIPT
Transformation Challenges and Opportunities for BangladeshGarments Industry
Bangladesh Development Conference 2015at Harvard University, South Asia Institute
Financing the Transformation of BangladeshGarments IndustrySESSION 6
June 6, 2015
Anis A. KhanManaging Director & CEOMutual Trust Bank Limited
Dhaka, Bangladesh
Presented by
SWIFT Member and User Group of
BangladeshChairperson
2014 – Present
Primary Dealers Bangladesh
LimitedChairman
2014 – Present
Association of Bankers,
BangladeshVice Chairman2014-present
Metropolitan Chamber of Commerce & Industry, Dhaka
Vice President2013-present
The road to US $50b industry
is exciting and challenging if
an enabling environment is
created
Financing the Transformation of Bangladesh Garments Industry
IntroductionThe phenomenal growth, over the last few decades, has
inspired the Bangladesh Readymade Garments (RMG) industry to set its export target at USD 50 billion by the end
of the year 2021.
In the backdrop of pronounced skepticism of some quarters, the wise thing would be to eliminate the existing
roadblocks, and thereby facilitate the smoothening process towards attaining the target.
To achieve a target of this magnitude in only seven years, will require a steady growth of around 11% in export income every year.
Bangladesh exported readymade garments worth US $24.5b during the last financial year. A growth of 11% in one year means an average of US $3.75b year on year growth.
2014 2015 2016 2017 2018 2019 2020 2021
24.5b 27.2b 30.2b 33.5b 37.2b41.3b45.8b50.9b
"We consider Bangladesh free from major macroeconomic imbalance despite several fiscal constraints, a low income economy
and heavy development needs."Standard and Poor (S&P)
FINANCING STRATEGY
What is urgentvs.
What is important
A two-stage strategy is proposed to finance the RMG sector of the country
Identify
Remove bottlenecks in our path to reform the RMG
industry
Stage 1 Strategy
A domestically led targeted financing initiative, aided by development partners, aimed at fostering sustainable growth in the RMG sector
Stage 2 Strategy
FINANCING STRATEGY
Urgent NeedsConsolidate the industry
towards self-sufficiency by 2018, so we can take over the
reform work from Alliance and Accord, and keep the
momentum going.
Protect the naturally developed capabilities.
Stage 1 Strategy
Long-term NeedsDiversify and expand to secure a strong footprint in the global market
Promote capabilities to thrive amidst global competition
Stage 2 Strategy
Continued
Strategy:
Expand &
Diversify
Strategy:
Consolidate
Strength
Thrive in Global MarketBy 2025
We are Here2015
Important
Urgent
Attain Self-sufficiencyBy 2018
In the medium term, Bangladesh looks to be the sourcing country of choice
Mckinsey & Company
Financing the Transformation of Bangladesh Garments Industry
Stage
1Invest in Realizing Short Term
Strategy
Financing the Transformation of Bangladesh Garments Industry
in investment is what the RMG industry needs over five years, to make long-
term improvements needed to effectively support its
reform process and achieve self-sustainability
US $Stage1.Invest in achievingShort Term Goals >1b
www.actiongrouprmg.com - Jul 22, 2013
Financing the Transformation of Bangladesh Garments Industry
3 YEAR ACTION-PLAN• State support for factory relocations
• Allow concessional interest rates the during the reform period
• Make local capital market more efficient• Remove obstacles from FC borrowing• Policy amendments to support reform
• Ensure Cotton Price Stability
Meeting Urgent Needs
Soft Loan by JICA
The aim of the fund from Japan International Cooperation Agency (JICA) is to provide financial support to the RMG enterprises for conducting safety assessment of their buildings under the supervision of JICA experts businessnews-bd.com – March 21, 2014
BDT1B VF-IFC to InvestVF teamed up with IFC to provide US
$10 million for financing fire and building safety improvements in the RMG sector. Three RMG units got US $1.3m in fist round of disbursements www.vfc.com
US$10M
RMG remediation finance guidelines developed by AccordAccord has developed a new remediation financing guidance for its members and the local manufacturers, outlining key steps for both sides to make sure remediation is financially feasible.www.thefinancialexpress-bd.com - Mar 9, 2015
Credit Facility by Alliance
The retailers’ platform aims to create a credit facility of US $20-35m, via five local banks, to extend low-cost loans to factories they source from, especially the small and medium enterprises for remediation works.www.dhakatribune.com - Mar 11, 2015
US$35M
Remediation Financing: Developments
Financing the Transformation of Bangladesh Garments Industry
Support RMG Village ProjectBGMEA and Orient International Holding Company are jointly spearheading the initiative to setup garments village at Munshigonj.The US $1Bn project is set to accommodate apparel manufacturing units that comply with global factory laws and standards.
This project is set to be completed by the end of the fiscal year 2018.
The infrastructure development will require US $2.3bn.
1
RMG Sector 10-Point Plan | ACTion Group RMG
Hurdles
RMG Clustering Initiative (Continued)
Proposed Measures
http://businessoutlookbd.com – June 3, 2014
• Response from the small factories is not yet satisfactory mainly due to lack of funding, though they are on the top priority regarding allocation of plots in the garment village.
• Many of the entrepreneurs expressed their frustration over high prices of the land, which they have to pay off from their export proceeds.
• Since green buildings save expenses in the long run, the relocated factories should also have the option of being “green”.
• The government should seriously consider a number of ‘state aid’ measures as a kind of economic aid package.
• Invest in providing workers with preferential treatments in the likes of privileges given to EPZ workers.
3Related infrastructure and utilities
should be funded on a priority basis by the Government, under the Infrastructure Development
Project (coming up later).2
Part of the relocation cost could be initially funded by the Government under special arrangements as loans to the enterprises, at concessional rate, and adjusted gradually from the export proceeds. The rest can be paid off using the funds brought in by Alliance-Accord projects.
1GoB should Involve Alliance-
Accord in project assessment and viability study as well as
involve them in the development process.
Proposed Relocation Financing Roadmap
Continued
Everyone has the right to life, the right to work, to free choice of
employment, to just and favorable conditions of work.”
Universal Declaration on Human Rights
Financing the Transformation of Bangladesh Garments Industry
Concessional Interest Rates during ReformsFunds from local banks will also be required for the reform. The interest rate should be concessional under a special discount facility of Bangladesh Bank. The money allocated in the budget may partly be used to finance the discount operation.
The project should be brought under a ‘Refinance Scheme’ framework, aided by IFC/GIZ, or any other similar organization. . Banks/Fis are to extend the fund to their clients at Bank rate +5% interest.
2
Financing the Transformation of Bangladesh Garments Industry
Remove Financing Difficulties in the
Domestic Market and Tapping
International Capital Markets
3
Inefficient Domestic Financial Market
• The spread in the overall Bangladesh banking system is at around 5%, which is certainly high.
• The recent decline in deposit rates have not been fully passed on to the borrowers in terms of lower lending rates, allowing banks to pass on their inherent inefficiencies to the depositors and borrowers.
• Foreign commercial banks are taking advantage of this situation by charging even higher spread and making greater profits in the domestic market.
www.thefinancialexpress-bd.com - Feb 1, 2015
Although it is true that government is safeguarding RMG sector from this high spread through waivers/discounted
loans, These inefficiencies lurking in the dark will eventually catch up and hamper its progress.
Financing the Transformation of Bangladesh Garments Industry
We should open up more to FC BorrowingBangladesh cannot allow itself to remain disconnected from the international capital market.
It has been found that recent modest liberalization of private sector foreign currency-denominated borrowing has contributed to lowering of domestic interest rate structures, which bodes well for the country’s economy.
4
Exchange rate fluctuations
Borrowing from off-shore banking units
Companies, which are not export-oriented, do not earn in foreign currency. Unfavorable exchange rate fluctuations may lead to losses in local currency, when servicing their FC denominated loans.
Companies borrowing from off-shore banking units of local banks are at risk of facing significant losses, as banks sometimes cannot continue FX financing and switch to higher cost local financing.
Difficulties: External Borrowing
Lengthy procedure of loan approvalThe loan application and approval process takes considerable time, particularly in state-owned banks, which acts as hindrance for some companies which require financing urgently.
An Analysis of Private Commercial Borrowing from Foreign Sources in Bangladesh – Bangladesh Bank
Financing the Transformation of Bangladesh Garments Industry
Policy Amendments to Support Industry
Reform
5
US Tariff Reform
Bangladesh pays 15.6% duty on RMG exports to the US market, which is almost twice that paid by Vietnam, and roughly five times that by China and India.
Reducing this rate, or diverting some of the excess tariff raised to support a major fund to finance improvements in the RMG industry, as proposed by the Bangladesh Bank’s chief economist, will benefit all stakeholders.
Buyers, factory owners, consumers, and most of all, workers will gain from supporting such tariff reforms.
Policy Amendments: USA
A better solution | The Bangladesh Chronicle - May 1, 2014
Financing the Transformation of Bangladesh Garments Industry
Protect against Cotton Price SwingsWith an aim to protect RMG sector from frequent swings in global cotton prices and availability, GoB should make an intervention in the market to ensure fixed price for cotton. This could be achieved by: • Creating buffer stocks for cotton• setting a fixed price for cotton
imports• Allowing importers in modern
financial instruments, e.g.: hedging mechanism
6
"Bangladesh shows us that even in circumstances that seem the most
hopeless there are ways forward if the right strategies are applied, and if the
right combination of investments is made" Jeffrey Sachs, Earth Institute, Columbia University
Financing the Transformation of Bangladesh Garments Industry
Stage
2Invest in Realizing Long Term
Strategy
Financing the Transformation of Bangladesh Garments Industry
in investment is what the RMG industry needs, over
ten years, to make the long-term improvements needed
to effectively build on its large export base and sustain future growth
Stage2.Invest in AchievingLong Term Goals
US $
1b
NY Firm to Invest
Tau Investment Management, a New York-based investment firm is planning to invest a significant portion of its US $1.0 billion global fund in the Bangladesh RMG sector.www.dhakatribune.com - May 6, 2014
us$200M IDA-WB to InvestThe World Bank is set to extend long-
term low-cost loans to private sector firms, including those from garments, footwear and light engineering sectors, in a bid to brighten the country's stagnant investment scenario.www.thedailystar.net - May 28, 2015
US$300M
Development Financing:Recent Initiatives
Financing the Transformation of Bangladesh Garments Industry
Government Initiativesthe degree of facilities being extended by the government
are simply outstanding and probably not to be found anywhere in the close vicinity. These include:
• Tax holiday for five years• Exceptionally low-cost power• Cash Incentives on RMG exports
• Waiver on some service charges and collections• RMG clustering through Garments Village
• BB, BGMEA give RMG workers soft housing Loans
businessoutlookbd.com, www.thefinancialexpress-bd.com, http://www.unb.com.bd/
Financing the Transformation of Bangladesh Garments Industry
10 YEAR ACTION-PLAN• Invest in Backward Linkage Financing Project• Targeted investment initiatives towards SME
growth and stronger financial integration• Find avenues for venture capital investments• Review and update policy for FDI in RMG sector• Product/Market/Geographical Diversifications
Fulfilling Long-term Goals
Financing the Transformation of Bangladesh Garments Industry
The Government of Bangladesh (GoB) can invest in debt financing through private sector financial intermediaries
for eligible, government-endorsed RMG backward linkage development projects, to be undertaken by the private
sector.
Invest in RMG Infrastructure &Backward Linkage Financing Project
1
Financing the Transformation of Bangladesh Garments Industry
For this purpose, GoB can request development partners like the IFC to fund a RMG Sector Transformation Fund, at
concessional interest rates, that can be accessed by the BGMEA and BKMEA members.
This could follow the same structure as the Investment Promotion and Financing Facility (IPFF) Project, administered
by Bangladesh Bank for lending in the Energy sector.
Invest in RMG Infrastructure &Backward Linkage Financing Project
GoB & Development
Partners
Bangladesh Bank Project
WingParticipating
FIs
Private Investors
PPP Backward Linkage Projects
Facility Loans
Facility + FI Loans
Project + FI Loans + Investor Equity
Facility Loans
Project Promoter
Equity
Fund Flow ExampleThe project will provide loans to PFI upon request from Private
Investors through Bangladesh Bank
Development Partners
Participating FIs Offshore
UnitPrivate
Investors
PPP Backward Linkage Projects
Facility Loans Facility + FI Loans
Project + FI Loans + Investor Equity
Project Promoter
Equity
Alternate Fund Flow ExampleThe project will provide loans to directly to PFI offshore units upon
request from Private Investors , bypassing Bangladesh Bank
Financing the Transformation of Bangladesh Garments Industry
The Governor of Bangladesh Bank is very keen that commercial banks spearhead the drive to utilize the IPFF
for the RMG Sector.
The Government is in talks regarding setting up US$ sovereign fund for the country’s growth. Part of the fund
can be used for developing RMG backward linkages.
Reallocate IPFF Funds for Investment in the RMG
Sector
Alternatively,
Financing the Transformation of Bangladesh Garments Industry
A Renewed Focus on SMEDevelopment of SMEs is envisaged as a key element in the RMG sector development strategy. To achieve and sustain a US $ 50b RMG industry, development of the SME sector is important.
2
“In my experience, poor people are the world's greatest entrepreneurs. Every day,
they must innovate in order to survive. They remain poor because they do not have the opportunities to turn their creativity into
sustainable income.”Nobel Laureate Dr. Muhammad Yunus
Collateral Based Lending
One of the main factors that have hampered flow of institutional finance into small and medium enterprises is banks' pre-occupation with collateral based lending.
Financing Difficulties SME Owners Face
Fiscal Policy Fiscal policy in Bangladesh is not particularly tailored to providing support to SMEs, and, in many cases, it discriminates against them. The system of tax holiday is not available to sole proprietorships and partnerships, which is the major form of SMEs in Bangladesh.
Non-pecuniary Problems
These include long waiting periods for getting initial finance from banks, due to tedious paperwork and inexperience in preparing financial statements, high interest rate, etc.
High Interest Rate
A number of studies have revealed that small and medium entrepreneurs pay high interest rates on loans compared to the large entrepreneurs.
SolutionExport credit guarantee scheme can be used as a substitute for collateral
Strategy for Development of SME in Bangladesh - Bangladesh Institute of Development Studies
Database for Targeted Credit
One aspect of strengthening targeted financing of SMEs in which little progress has been made is the creation of a database, which will help assess the relative growth potential of such enterprises, based on utilization of credit disbursed.
Other Measures
Worker Welfare Fund
The buyers can contribute a certain percentage of FOB, as part of CSR, and, at the same time, the suppliers may match the amount to set up a trust/provident/pension fund for ensuring a better future for the workers. This will also help reduce high turnover of workers in this sector.
Tailor-made SME Loan Products
The financial institutions will be required to develop loan products that relate better to specific types of credit needed by the SMEs.Financing plan should include provision of subsidized credit to clusters, as well as disadvantaged groups with close monitoring.
Inclusion in RMG Village
SME-RMG factories should receive highest priorities when it comes to plot allocation in the ongoing RMG relocation project in Munshigonj. Preferential treatment can be given in the form of low-cost loans.
Strategy for Development of SME in Bangladesh - Bangladesh Institute of Development Studies
Financing the Transformation of Bangladesh Garments Industry
Venture capital financing for SMEsVenture capital financing with associated business support services can play a vital role in meeting the needs of SMEs in Bangladesh.
The sources of financing are mostly from friends and family members , which have limited impact.
On the other hand, the venture capitalist will be committed to financing emerging and potential SMEs, at different stages ,including their continued expansion and growth.
3
Lack of Security
New businesses generally do not have property, equipment or collateral to secure the investment.
Difficulties Venture Capitalists Face
Communication Gap
Lastly, there is still an existing communication gap between Venture Capitalists and entrepreneurs, which needs to be effectively bridged.
Structural Deficiency
The structure of the financial system and quality of auditors are potential problems.
Absence of Regulations
There is currently no regulation that secures the investment of Venture Capital firms. We have been told that the BSEC is currently drafting the rules.
SolutionCommercial banks can set up ‘Venture Capital Wing’ to attract entrepreneurs and connect them with Venture Capitalists.
lightcastlebd.com - May 30, 2014
Financing the Transformation of Bangladesh Garments Industry
Upscale to the Premium Market
Our export of RMG products to the developed countries mostly comprise low-end items and export of high value items is very limited.
Export of mid-value items like, suits, blazers, ties, synthetic and polyester dresses is also not very encouraging, which suggests that the export market needs to be diversified for its greater prosperity.
4
Financing the Transformation of Bangladesh Garments Industry
Invest in developing Competitive
Advantage in the Premium/Specialize
d SegmentEntry of foreign investors entry in new areas of
production, and export of high-end RMG products, is likely to benefit both the investors and
Bangladesh, which is yet to make any mark in this particular area of the global market.
Financing the Transformation of Bangladesh Garments Industry
To What Extent Should we allow
FDI in RMG Sector?
Pressing Issue
There is no denying the areas that the local apparel sector leaders have identified, have high business potential. By setting up state-of-the-art fabric manufacturing units here, foreign investors can
help the local manufacturers avoid import related hassles.
FDI should only be allowed in niche sectors, producing specialized items and high-value products, that can transfer
knowledge and technology to our local industry.
The Government should develop a policy framework in this regard to safeguard the local entrepreneurs.
Bangladesh is one of the hottest emerging market having the
potential of attracting increased foreign investment.
Investor Chronicle, a UK based research organization
Financing the Transformation of Bangladesh Garments Industry
Invest in Market DiversificationsBangladesh is starting to diversify its export destinations in order to reduce its dependency on US & EU. The duty-free and preferential market access offered by countries like India, China, Korea and Malaysia have helped with the process.
GoB is giving cash incentive for exporting of RMG products to all countries except EU, USA and Canada, with an aim to encourage exporters to explore new markets. GoB should also think of enhancing diplomatic cooperation with those countries for this purpose.
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7 Strategy for Export Diversification, Policy Research Institute of Bangladesh
The Next Eleven (N-11) are eleven countries among which Bangladesh has a
high potential of becoming one of the world's largest economies along with BRICS.
Goldman Sachs research report
Financing the Transformation of Bangladesh Garments Industry
We Need Initiatives From All Fronts
Governments Financial
Institutions
Buyers
Development
Partners
Financing the Transformation of Bangladesh Garments Industry
ConclusionWe cannot afford to let the success of our RMG
industry, which we have built brick by brick with our commitment and years of hard work, fade away.
We firmly believe that with the support of allStakeholders - leaders, governments, buyers,
development partners and the financial institutions, we will be able to rise above all the challenges and
ensure a safer and sustainable RMG industry in Bangladesh.
Thank you