What options are available for the safety measure financing of RMGs

More than 80 percent of the export income of Bangladesh comes from the RMG sector. Bangladesh Bank stated in the Quarterly Review on RMG: the RMG sector covers 82.11 percent of our total export earnings and 85.60 percent of industry product exports in July-September of FY'21 after the withdrawal of nation-wide lockdown due to covid-19 pandemic. 

Despite the admirable success of Bangladesh RMG, numerous domestic factors pose some daunting challenges to Bangladesh's RMG sector.  Since the infamous Rana Plaza and Tazreen Fashion incidents, most international buyers feel insecure about the infrastructure and safety Standards in Bangladeshi RMGs. 

After these incidents, Accord's and Alliance's followed by Remediation Coordination Cell (RCC) have been working on Fire, Building Safety, and workers' safety. In the aftermath of these incidents, 3,780 export-oriented RMG factories were inspected for electrical, fire, and structural safety by two European (Accord's) and American (Alliance) buyer platforms along with the Bangladesh government's National Initiative supported by ILO.

Remediating all the issues of electrical safety, energy, water, solid waste management, chemical management, fire exit management, infrastructural development, etc. are too expensive and need external financing. While no specifically designed financing products have been identified, a variety of standard financing products are available such as trade financing and back to back LCs which could help manage working capital financing. But structural development or other remediation demands project financing within the long term spectrum and lower cost to borrow for RMG factories.

To determine whether a borrower qualifies for the loan at the correct pricing, Bank follows Risk-based pricing methodology based on seven analytical dimensions: cost of funds, expected loss, cost of allocated capital, the term cost of liquidity, and cost of liquid asset buffer, loan administration cost, and competitive margin which makes the loan disbursement process length and most of the time expensive for the RMG sector.

Until recently, there have been no available financial products on the market that are specifically designed to focus on RMG factories in their need to carry out the fire, structural, and electrical remediation work. RMG factories paid for the cost of remediation activities through their resources, through standard term loans from banks, or support from international buyers. 
Today there are a couple of RMG-specific products available from Bangladesh Bank, local banks, and therefore, the international community. The following section would give an overview of the recent financing of RMG safety measures.

Green Re-Financing Mechanism through Bangladesh Bank: 

Bangladesh Bank set up a revolving green re-financing scheme of BDT 2 billion as a financing option for green products (solar energy, bio-gas, effluent treatment system, etc.). After two major adjustments, in 2015 the facilities expanded to 47 products including products specifically designed for the RMG sector. But as far as safety remediation is concerned, the facility is currently only targeting issues related to fire safety.

SREUP:

The AFD along with other developing partners EU, KFW, GIZ, and BB has currently launched a new credit facility in November 2020,  with 50 million euro credit and 14.29 million euro grant facilities under the project title "Program to Support Safety Retrofits and Environmental Upgrades (SREUP)" in Bangladeshi Ready-Made Garment (RMG) Sector. The purpose of this project is to make the RMG industry safer (safety for fire, electricity, and building structure), greener (environment-effluent treatment plant, better management of solid waste, reduction of water and power consumption, etc.), and a decent place to work (social: better aeration, installation of air-conditioning, improvement of bathrooms, construction of canteen, childcare facilities, etc.) through providing them financial and technical support.

Target areas of the project are safety retrofit for fire protection, electrical safety systems, and building strength and safety; environmental up-gradation for pollution control, energy efficiency, and resource efficiency; social up-gradation for better work conditions, crèche for working mothers and medical facilities.

The expected benefits from this project would be achieving adherence to national regulation, achieving compliance with international standards, lowering the cost of operations, and providing workers safer and better conditions of work.

However, the expected financial benefits would be an attractive interest rate of 7 percent per annum for the loan's tenure of 3 to 5 years and can be extended to 7 years in some cases.  The incentive grant is received on the total loan amount and is received when the project is completed. 

Many of the bigger RMGs had already completed investments in safety areas but some of the smaller RMGs, especially in the category of SMEs have not yet done so.  The remaining safety areas for RMG SMEs financing facilities by SREUP fund include Structural Remediation (can go up to BDT 8.5 crores), Fire Remediation (can go up to BDT 1.5 crores), and Electrical Remediation (investments are typically smaller – a few lacs).  Structural Remediation will cover As-built drawing, Detailed Engineering Assessment; Repairs to crack, damp, damaged portions; and Strengthening of structural members. 

Under Fire Remediation, the coverage will include Fire detection, separation, and protection drawing; Active fire-fighting systems; Passive fire-fighting systems.  Electrical Remediation will cover Single line drawing/electrical line drawing; Retrofit of electrical distribution systems; Installation of the lightning protection system

Buyers with Accord have signed a binding agreement to support their suppliers in case the suppliers are not able to independently sustain remediation expenses. Under article 22 of the Accord: "to induce Tier 1 and Tier 2 factories to comply with upgrade and remediation requirements of the program, brands and retailers will negotiate commercial terms with their suppliers which ensure that it is financially feasible for the factories to maintain safe workplaces and comply with upgrade and remediation requirements instituted by the Safety Inspector." 

This approach has been confirmed by brands and suppliers, who have acknowledged the arrangements in support of suppliers implementing remediation work.  These arrangements include: Improving supplier payment times - a buyer might reduce the payment time for specific orders from a maximum of 60 days to a lower minimum of 21 days, to help the suppliers better manage cash flow; Longer commitments - if a buyer considers a specific supplier to be strategic, it will consider committing to purchase orders from that supplier with one or two years in advance, which improves its financial standing and therefore its access to loan products, and finally, Modifications to FOB Prices of inputs and outputs.

Mohammed Sohail Mustafa CFA is an Associate Professor and Director (Training) at the Bangladesh Institute of Bank Management (BIBM). E-mail: [email protected]  

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.