Home ARTICLES Garment factory remediation requires $929m: Study

Garment factory remediation requires $929m: Study

About $929 million has been estimated to be needed for fixing the identified flaws in the country’s readymade garment (RMG) factories assessed by the three initiatives, according to a report released Monday. Fire, electrical and structural integrity in some 3,778 garment factories has been assessed by Accord, Alliance and National Initiative.   “The last two years have seen remediation activities begun in earnest, reducing the remaining remediation costs to around $635 million with $262 million in structural, $ 201 million in electrical and $171 million in fire related issues,” the report said. Over the last two years, it was estimated that remediation activities worth some $ 294 million have been carried out in Bangladesh’s RMG sector through actions of the Accord, the Alliance and individual factory owners. The study also included a review of Bangladesh’s banking sector and the credit facilities recently developed by international organisations such as IFC, JICA, AFD and USAID, which have made available some $ 187 million specifically for RMG remediation. It also revealed that the total remaining financing gap for factory remediation is around $448 million. The report titled “Remediation financing in Bangladesh’s Ready Made Garment Sector: An Overview” was jointly commissioned by International Finance Corporation (IFC) and International Labour Organization (ILO) to assess the cost of safety remediation for structural, electrical, and fire safety work in RMG factories, as well as the ability of factories to finance these works. The report was launched Monday in a city hotel. Bernardo Contri of Emerging Markets Consulting for IFC presented the findings while Wendy Jo Werner country manager of IFC Bangladesh, Bhutan and Nepal and Gagan Rajbhandari, deputy director of ILO Bangladesh, among others were present. According to the study, the cost of remediation if the factory does not need extensive structural retrofitting work can range from $20,000 to $900,000. The total remediation cost for 80 per cent of factories ranges between $ 100,000 and $250,000. It is estimated that 75 per cent of factories in Bangladesh will not need large structural retrofitting work, and therefore will fall within this range. Some 1,641 garment factories, assessed by the Accord, are estimated to require $403 million and its remaining work would need $232 million, the report revealed. The Alliance-inspected 662 units would require $163 million while $113 million would be needed to complete the remaining work. On the other hand, some 1,475 garment factories under the national initiative would need $363 million and $290 million for the remaining remedial works, it showed. The report also revealed that Accord and Alliance factories are generally larger with European Union and North American brands and buyers while the units under National Initiative tend to be smaller in size and export mostly smaller international brands  exhibiting comparatively less concern for safety and labour law compliance. Remediation efforts are highly dependent on international buyers’ pressure and the strength of relationship between factories and buyers while factory size is an important consideration for local lending banks in approving factory loan applications, it identified. The study, however, identified high interest rates  ranging from 9.0 to 18 per cent, lack of financial literacy including presentation of audited balance sheets, profit and loss statements and cash flow projections to banks and prospective investors as major obstacles to factories in the RMG sector to obtaining remediation financing. “Cost per factory can be all but prohibitive and entrepreneurs can be unwilling to spend large amounts of capital on investments that will not increase their productivity, efficiency or product quality. Further challenges are in the capacity of multiple sector stakeholders as well as in the lack of quality product certification mechanisms for safety equipment,” it said. Large-sized factories, having longer term purchase orders from brands and buyers, thus stronger cash flow statements, are the bank’s primary target for lending money while banks consider medium-sized factories having average business relation with their brands and buyers risky to qualify for loans though at higher interest rate and greater collateral. The small 884 factories having weaker relationships with their buyers are likely to have a harder time in remediation and thus may not be able to have enough resources to invest and are unlikely to receive business support from buyers, it said. Banks also may not view them as worthwhile investment, it said. Speakers said small units failed to submit required documents and guarantees for getting loan while they are not clients of the selected four banks that are providing fund. Faruque Hassan, senior vice president of Bangladesh Garment Manufacturers and Exporters Association (BGMEA), said all the factories have to do the remediation work. “Few factories are doing well as they have no financial problems. But unfortunately the small and medium ones needing funds are not getting the financial support from the $187 million fund due to complexity over documentations”, he noted. During the last three years, only one factory got loan from JICA’s fund due to complexity in documentation and stiff conditions, he noted. Speakers stressed easing of loan process, lowering of interest rate and ensuring government guarantee for small units in getting loan. Responding to a query, Roger Hubert of H&M said orders are coming to Bangladesh after shifting from China as it has huge capacity and workforce. “The investment to be made in remediation will help encourage more buyers to come with the message that their business is safe here,” he noted recommending government guaranteed fund for the smaller units.   Ms Wendy Werner said, “It’s imperative for the RMG sector in Bangladesh to realise the significance of remediation finance and respective factories ought to look at expenditure for safety as an investment. Once compliance levels are respected, buyers will have more confidence, leading to overall industry expansion.” Mr Rajabhandari said, “Efforts are needed to ensure that financing is available and accessible for all RMG businesses; however, those which are already able to self-finance this work or access loans should do so without delay.”