Report No. 31394-BD Bangladesh Growth and Export Competitiveness May 4, 2005 Poverty Reduction and Economic Management Sector Unit South Asia Region Document of the World Bank TABLE OF CONTENTS EXECUTIVE SUMMARY ................................................................................................................... i Attachment ......................................................................................................................................... xlll ... PART I................................................................................................................................................... 1 Chapter 1: Growth and Export Competitiveness .............................................................................. 3 Introduction..................................................................................................................... 3 Chapter 2: Sources of EconomicGrowth. Productivity. and Export Competitiveness .................7 A. Long-termGrowthandProductivityTrends............................................................. 7 B. Sources of GrowthinBangladesh............................................................................. 8 Chapter 3: ImprovingInvestmentClimate for Stronger Productivity Growth and Export Competitiveness .............................................................................................. 14 A. Trade Openness andExportCompetitiveness......................................................... 14 B InvestmentEnvironment: Structural Impedimentsto Growthand . Productivity............................................................................................................. 21 C AssessingFuture GrowthPotential......................................................................... . 28 PART I1 ............................................................................................................................................... 31 Chapter 4: IntegratedValue Chain Analysis of Strategic Exportable ProductsinBangladesh 33 . A An IntegratedValue Chain Analysisofthe KnitwearSub-sector-T-shirts.........38 B An IVCA ofFarmingandProcessingExportOrientedFreshVegetables .. (FrenchGreenBeans) ............................................................................................. 53 D. IntegratedValue ChainAnalysis for CeramicsProduction.................................... C. IVCA for LeatherFootwear inBangladesh............................................................ 68 79 E. IntegratedValue ChainAnalysis for FarmingandProcessing Shrimp for Export................................................................................................................ 88 PART I11 ........................................................................................................................................... 101 Chapter 5: Transaction Costs. Logisticsand StandardsKey Competitiveness Ingredients .................................................................................................................. 103 A. Import-ExportTransaction Costs.......................................................................... 103 B Logistics.Trade FacilitationandCompetitiveness ............................................... . 109 C. QualityandFood Safety Standards....................................................................... 124 ANNEXES ......................................................................................................................................... 139 REFERENCES ................................................................................................................................. 147 STATISTICALAPPENDIX ............................................................................................................ 149 TABLES Table 2.1: Cross-Country Per-Capita Growth Comparisons ............................................................ 7 Table 3.1: Bangladesh-Average Protection Rate (MFNRates. including concessional rates) ......................................................................................................... 16 Table 3.2: Rankings o f Average Tariffs in South Asia inRelationto Average Tariffs inOther Developing Countries...................................................................................... 17 Table 3.3: Estimates o f Anti-Export Bias Based o f EffectiveExchange Rates for Imports and Exports....................................................................................................... 19 Table 3.4: Country Rankings on A.T. Kearney/Foreign Policy Globalization Index Measures ........................................................................................................................ 22 Table 3.5: Cost o f Doing Business: Bangladeshvs. Comparators .................................................. 23 Table 3.6: Infrastructure Indicators: Cross-Country Comparisons................................................. 24 Table 3.7: Human Development Indicators: Cross-country Comparisons .................................... 26 Table 3.8: 26 Financial Sector Indicators: Cross Country Comparisons (2002) ................................. Innovation Potential and InformationTechnology Infrastructure ................................. Table 3.9: Table 4.1: Bangladesh Ready Made Garment Sector Profile (all prices inU S Dollars) ................27 39 Table 4.2: Exports o f Garments from Bangladesh- 1993-2003 (inUS$millions) ....................... 40 Table 4.3: FOB Price Comparison.................................................................................................. 41 Table 4.4: Working Hours and Wages inthe Garment Industryin Selected Asian Countries........................................................................................................................ 43 Table 4.5: InflationRates o f Selected Countries ............................................................................ 43 Table 4.6: Comparison o f Textile and Garment Industriesin South Asia ...................................... 44 Table 4.7: Yam ProductionValue Chain for Bangladesh, per kilogram........................................ Labor and Productivity Comparisons ............................................................................ 45 Table 4.8: 46 Table 4.9: Historical Cotton Prices $/1001b.................................................................................... 48 Table 4.10 Duty and Other Charges on the Spare Parts for Knitwear Sector .................................. 48 Table 4.11: Spinning Cost Comparisons -U S Dollars per kg.......................................................... 49 Table 4.12: Summary of Constraints Facedby the Knitwear Garment Sector ................................. 52 Table 4.13: Top 10 Import-Export Countries o fFresh Vegetables, 2002 ........................................ 53 Table 4.14: HORTEXProject FreshVegetable Exportsto Ethnic and Mainstream Supermarketsby Crop and by Year........................................................................................................... 54 Table 4.15: New Markets Developedby HORTEX for FreshVegetable Exports ........................... 55 Table 4.16: Average Fertilizer Application ...................................................................................... 58 Table 4.17: Fertilizer Cost Comparison............................................................................................ 59 Table 4.18: Cost Per Hectare o f French Green Beans - Bangladesh vs.Kenya............................... 59 Table 4.19: Summary o f Constraints Facedby the FrenchBean Farming Sector............................ 60 Table 4.20: Export Market Profile.................................................................................................... 62 Table 4.21: IndicativeAir Freight Rates to Europe.......................................................................... Table 4.22: Summary o f Constraints Facedby the Horticulture Sector inBangladesh ...................63 67 Table 4.23: Bangladeshi Shoe Manufacturers Perceived Strengths and Weaknesses ...................... 70 Table 4.24: Value Chain for Leather Footwear inBangladesh......................................................... 72 Table 4.25: Leather Footwear Value Chain for Indonesia................................................................ 72 Table 4.26: Value Chain for Leather Tanning.................................................................................. 73 Table 4.27: EnvironmentalHazards Associated with the Leather Sector......................................... Table 4.28: Present and Future Success Factors According to Bangladeshi Producers ...................74 77 Table 4.29: Policy and Market Based Constraints inLeather Footwear Sector ............................... 78 Table 4.30: Number o fCeramics Plants Currently Operations inBangladesh................................. 79 Table 4.3 1: Product and Market Profile for Bangladesh's Ceramics Sector .................................... 80 Table 4.32: Average Price Paid for Imported Material (2003) ......................................................... 81 Table 4.33: Distribution o f Administrative Overhead Costs ............................................................ 83 Table 4.34: Distributiono f Administrative Overhead Costs DuringPacking .................................. 84 Table 4.35: Summary o f ConstraintsFacedby the Ceramics Sector inBangladesh........................ 87 Table 4.36: EstimatedRaw Material Cost for Productionof Black Tiger Shrimp. Bangladeshvs. Indonesia.............................................................................................. 93 Table 4.37: EstimatedAdmin & Export Cost for Productiono f Black Tiger Shrimp, Bangladeshvs.Indonesia................................................................................. 94 Table 4.38: ComparativePicture of Costs of Cultivation of Shrimps: Traditional Technologyvs ATDP Technology................................................................................ 96 Table 4.39: Summary o f ConstraintsFaceby the Shrimp Sector inBangladesh............................. 99 Table 5.1: EstimatedAverage Import Cost of 40' Container from ChittagongPort to Dhaka Factory ......................................................................................................... 105 Table 5.2: Comparisono f Export Port Charges of Several SE Asian Countries.......................... 106 Table 5.3: Costs for Knitwear Exports ......................................................................................... 110 Table 5.4: 115 CPA Port Performance- Container Statistics............................................................. Shipping Ratesand Times ........................................................................................... Table 5.5: 116 Table 5.6: Air Freight Rates ($/kg)............................................................................................... 117 Table 5.7: RecommendedAction for Improving BangladeshLogistics....................................... 121 Table 5.8: BangladeshiExports o f FreshProduceby MarketinTonnes (2001-2)....................... 125 Table 5.9: PossibleImpactof ImprovedQuality Systems on Export Volunes inTonnes............127 Table 5.10: Strengthsand Weaknesses o fHygiene and Other Food Safety Controls in the BangladeshShrimp Industry.................................................................................. 136 Table 5.11: ManagementCapacity ConstraintsRelatingto Hygieneand Other Safety Controls inthe BangladeshShrimp Factory................................................................ 137 FIGURES Figure2.1: Trends inGDP Per-CapitaLevel and Growth................................................................. 7 Figure2.2: Poverty Trends inBangladesh: Growth Has Beenthe Key Driver ................................ 8 Figure 2.3: Factor and TFP Growth Rates......................................................................................... 9 Figure2.4: Bangladesh. Rice (paddy) Production. 1971-01.......................................................... 10 Figure2.5: Non-Rice TFP Growth................................................................................................... 10 Figure2.6: Determinants of Growth: Cross Country Comparisons................................................ 12 Figure2.7: EnterpriseConstraints: Rural, Urban Small vs. LargeFormal Firms........................... 13 Figure3.1: Procedures Involved with Startinga New Business inBangladesh.............................. 23 Figure3.2: FutureGrowth Dividends from Key Areas ................................................................... 29 Figure3.3: Growth That Can Be...................................................................................................... Figure4.1: Bangladesh:Top Constraintsto Business OperationandGrowth as Viewedby Firms ..............29 34 BOXES Box 4.1: IVCA ComparisonbetweenKenya and Bangladesh..................................................... 46 Box 4.2: China's Strategy ............................................................................................................ 85 Box 4.3: BangladeshiBlack Tiger (Penaeus monodon)headless shrimp, 16/20......................... 89 Box 4.4: Comparisonof the Indonesiaand BangladeshiValue Chains for Shrimp..................... 95 DIAGRAMS Diagram 4.1: Integrated Value Chain o f Men's T-shirt for Bangladesh .......................................... 41 Diagram 4.2: Productivity and InvestmentMeasures Bangladesh and China.................................. 45 Diagram 4.3: Integrated Value Chain for Yarn Production.............................................................. 47 Diagram 4.4: Spinning Cost Graphic Comparisons . U S Dollars per Kilogram ............................. 49 Diagram 4.5: Bangladesh: All FreshVegetable Exports (1999-2002) ............................................. 53 Diagram 4.6: Integrated Value Chain Analysis for French GreenBean Production in Bangladesh ................................................................................................................. 57 Diagram 4.7: Integrated Value Chain for French Bean Processing inBangladesh.......................... 65 Diagram 4.8: Market Transaction Flow Chart o f Leather Footwear Production ............................. 69 Diagram 4.9: IntegratedValue Chain for Leather Footwear inBangladesh .................................... 71 Diagram 4.9a: Value Chain for the Production o f Leather Footwear inIndonesia............................ 71 Diagram 4.10: Value Chain for Ceramics Production Based on a Standard 52 Piece Set (TWkg) ........................................................................................................................ ..........82 89 Diagram 4.12: Value Chain for Shrimp Production inBangladesh ................................................... Diagram 4.11: Basic Raw Material Flow and Names o f the Various Stages o f Development 91 Diagram4.13: Distribution Chain o f Shrimp to the Processors......................................................... 96 Diagram 5.1: Export Processing Procedure from Bangladesh....................................................... 108 Diagram 5.2: Inboundand Outbound Supply Chains for Ready Made Knitwear.......................... 110 Diagram 5.3: Supply Chains for Shrimp Exports........................................................................... 113 Diagram 5.4: Container Traffic Chittagong-Dhaka Corridor......................................................... 114 Diagram 5.5: Flow Chart for Temporary Imports .......................................................................... 119 Diagram 5.6: Import Clearance Time-Chittagong.......................................................................... 120 ACKNOWLEDGMENTS This reportwas preparedby a teamledby TercanBaysanandZaidi Sattar (Co-TaskLeaders; SASPR). Other members of the core teamincluded: SandeepMahajan(SASPR), MarkDutz (SASFP), Deepak Adhikary (IFC/SEDF);MontieMlachila(IMF); a team of Bangladeshiprofessionals (fromthe BangladeshForeignTrade Institute,DhakaChamber of CommerceandIndustries,Jahangirnagar University,BangladeshInstituteof Development Studies, andDhakaUniversity),comprising Abdul Bayes(TeamLeader),NazneenAhmad, FerdausAra Begum, andMasudaYasmin; Kent Ford, Yasuo Konishi,BrianBarnett of GlobalDevelopment Solutions,LLC (ConsultingFirm); JohnArnold, GrahameDixieof Accord Associates LLP, James Cat0 ofUniversityof Florida, S. Subasingeof INFOFISH,F.M.ZiaulAhsan (Consultants). The teamis grateful to the following World Bank andIFC stafffor their contributions andcomments: Ani1Sinha, StevenJaffee, Jean-FrancoisArvis, Zeynep Ersel, Anthony Bottrill, PaulDorosh, John Sinclair, andKapilKapoor. The report was preparedunder the generalguidance of SadiqAhmed, Sector Director,IjazNabi, Sector Manager, andChristine Wallich, Country Director,andit benefitedfrom comments ofthe peerreviewers BernardHoekman,MagdiAmin, andM.A. Taslim. Aneeka RahmanandNermeenShams Roufpreparedthe StatisticalAppendix and Annexes, andprovidedinvaluable assistanceinhandlingall logisticalarrangementsfor the missionand field work of GDS andBangladeshTeams. The study also reliedon secretarial support at various stages from OxanaBricha,Mehar Akhter Khan, andJoyceMormitaDas. OxanaBrichaandArlene Reyes processedthe report at itsvarious stages. The report was supportedby funds madeavailable by IFC/SEDFandUK'sDepartmentfor InternationalDevelopment(DFID). BANGLADESH GROWTHAND EXPORTCOMPETITIVENESS EXECUTIVESUMMARY INTRODUCTION 1. By developing-country standards, Bangladesh's growth for the past two decades and more has been notable. The average annual real increase in GDP o f about 5 percent inthe 1990s and drop o f almost 10 percent inthe poverty rate - are both very respectable. The past decade's boom in exports - with earnings in2003104 (of $7.6 billion) about three times the level o f 1991/92 -- - and the successin halving the 1980's average rate of population increase have helped raise the country's per-capita growth ranking to twice the global median for 1991-2000. By that measure, over the past 30 years, it has overtaken Pakistan and Nepal and narrowed the gap significantly between its standing and that o f India and Sri Lanka. 2. This record o fprogress is one guide to Bangladesh's potential to grow and to score well inworld markets. Competition among apparel exporters, however, has intensifieddramatically from January 2005, and the country's past impressive achievements inthat field do not by themselves guarantee continuing success. With an eye to the looming global competition and drawing on an exceptionally detailed analysis o f the factors that help and hinder export performance, this report gauges Bangladesh's competitive strengths and weaknesses. The bottom line: to make the most o f its export opportunities on a changing international playing field, Bangladesh needsto follow a strategic game plan, invest in infrastructure, technology and skills, streamline policies, and improve quality and safety standards. 3. Bangladesh has earned a place for itself inthe world's apparel trade. Winning inthe global trade arena has already spurred economic growth at home. Further stronger gains flowing from increases inthe productivity o f its people and natural resources are essential for continued development and sustained poverty reduction. This report describes actions that can untie the hands o f the country's exporters and put solidprogress within their grasp. The concrete recommendations made inthe report for improving export competitiveness could serve as a critical basis for making the needed revisions in the two pivotal trade policy instruments o f the Government --Import Policy Order 2003-06 and Export Policy Order 2003-06 -- inlight of the post-MFA global trading environment. SOURCES OF COMPETITIVE DISADVANTAGE 4. Macroeconomic stability is and must remain the strategicfoundation for all of Bangladesh's competitiveprospects. In developing countries from Chile to China, the highest growth returns have been linked to success inattracting and keeping foreign investment. Such capital, however, shuns countries where erratic fiscal and monetary policies yield uncertainty instead o f a reliable setting for long-term commitments. Thanks to significant reforms during the 1990s, Bangladesh achieved a growth rate far superior to that o f most low-income countries and positioned itself to offer the macroeconomic stability that should have drawn FDI insignificant volume. But too little outside capital came. Bangladesh's gross FDIinflows as a share of GDP during the 1990s placed it 137`hout o f 141 countries. Since macroeconomic conditions were improving, something else was wrong. 5. Economic governance. Infact, the shortcomings were and are multiple. They include deep- seated problems o f economic governance. Corruption, not all o f it petty, imposes a heavy tax on all kinds of business operations; customs clearance bribes can hit twice at manufacturers who import material which they later export as processed goods. Another excessive charge comes from the costs involved in i starting a business or enforcing a contract. Eventhough procedures are fewer and registration time shorter, it costs roughly twice as much to get a venture underway inBangladesh as inChina, Sri Lanka, Thailand, and Vietnam. Enforcing a contract inBangladeshi s three times as costly as inChina and requires half again as many days on average. 6. Suchproblems are hardly unique to Bangladesh. Wherever redtape puts businessmen at the mercy o f bureaucrats, corruption flourishes. Where the rule o f law gets lip service but public servants lack the skill and backing to make rules stick, delay frustrates enterprise. According to Transparency International, corruption inBangladesh is pervasive. Although that judgment is subjective, it tallies with first-hand experiences. About 60 percent o f 1,001 firms questioned inDhaka and Chittagong viewed corruption as a major constraint on their operations, an obstacle cited second only to an infrastructure failure: the lack of stable and adequate supplies o f electricity.' 7. Corruption. The Bangladeshi entrepreneurs are right. The results o f this study's breakthrough use o f a powerful analytical tool --integrated value-chain analyses (IVCA) -- to pinpoint the price exacted by obstacles to export growth found, for example, that: 0 Bribespaid at the point o f import can raise the cost o f equipment that knitwear manufacturers bring into the country by 6-10 percent. 0 Inthe case ofneedles, importers who make ready-madegarments (RMG) for export are given a substantial (3 percent instead o f 38.13 percent) duty exemption, but- ironic as it may seem - they mustpay bribes to get the advantage. 0 Footwear makers' costs rise because o f the bribes they have to pay both to clear imported materials and to export finishedproducts. Bribes typically amount to 2-5 percent of import value, and sometimes as much as 10percent, according to producersiexporters. 8. Giventhat RMGactivities provide direct employment for two million Bangladeshis - 90 percent o f them women - and account for 9.5 percent of the country's GDP as well as three-fourths o f its export earnings in 2003/2004, anything that reduces the industry's competitive ability imposes a tax on the entire society. Corruption i sjust such a tax. Its effect is to make Bangladeshi products less price-competitive in export markets than they could be. The value-chain analysis inthis study has revealed that all export and potential export products without exception suffered from the disadvantage implicit inthe cost-raising effect o f corruption at various stages along the value chain. 9. Infrastructure. To improve the climate for both domestic and foreign investors, policymakers must first acknowledge the damage that flawed governance -corruption, burdensomeregulation, and breakdowns in law and order -- i s doing to the country's growth ingeneral and its export performance in particular. Beyond recognizingthose obstacles and taking purposeful action to reduce them, the authorities need to understand the price the country i s paying for severe infrastructure bottlenecks inthe delivery o fpower, gas, and telecommunications to all enterprises and - especially for exporters -- inthe malfunctioning o f the country's land and sea ports. 10. These elements of the business climate, too, are considerations that foreign investors take into account. Again, the study's I V C A findings quantify the harmdone to the performance and growth prospects o f different export sectors. Specifically, 0 The supply o f electricity is so erratic that it forces many firms to rely on power from captive generators at 2.5 times the cost per kilowatt hour o f current from the grid. 0 Port congestion results in the second highest o f all the costs t-shirtmakers incur for materials. ' A surveyundertakenfor the study Imarovina the Investment Climate in Bangladesh, World Bank andBangladeshEnterprise Institute,2003. 11 0 Limited and unpredictable air cargo service blocks the expansion o f exports o f fresh French green beans and other produce to Europe's supermarket chains. The problem lies notjust inthe cost - 86.4 percent o f the deliveredprice -- o f shipping the beans to such distant markets, but in the factors that drive the cost up. One is thepractice ofBangladeshBimanAirlines which monopolizes air-cargo facilities, o f rejecting agreed-upon consignments an estimated five percent o f the time, thus forcing exporters either to sell their goods domestically at a loss or pay the higher rates that international carriers charge. 0 Bangladesh's exports o f shrimp supply 4-5 percent o f the world market and represent the second largest export-earning industry inthe country. The most serious obstacle to further growth is quality control, but inthe short term, highmortality rates among day-old shrimp (fry) trucked from hatcheries in Cox's Bazaar to farm ponds inKhulna can be traced inpart to the poor conditions o f the roads and lack o f alternative transport options. 11. High cost offinance. Along with weak governance and infrastructure inadequacies, finance - the cost of borrowing - represents a third, significant obstacle to stronger export performance across the board inBangladesh. The average real lendingrate i s higher than the real rate o f GDP growth and substantially more than the real lendingrates o f such neighbors and competitors as India, Sri Lanka, Malaysia, Thailand, and Vietnam2. The cause o fthese highcosts can be found inlong-standing structural and other problems o f the NationalizedCommercialBanks and t.heirresultant highvolume o f non- performing loans. Fortunately, the government is taking steps to reform these institutions and strengthen supervisory and regulatory authority over them. 12. Both the pace and scope o f banking reform needto be increased. Inthe meantime, I V C A findings show that Financingcosts alone constitute 13.5 percent of the f.0.b.price o f an exported set of ceramic tableware, and interest payments make up as much as 2.5 percent o f the f.0.b. price o f a Bangladesh-made man's t-shirt. 0 Indirectly, bank financing rates limit the growth o fproduce exports. The charges remain too high to allow a typical fresh-vegetable exporter to borrow money to buy land to help aggregate production and maintain it at a high, export-level quality. 0 Bangladeshi shoe manufacturers, operating in a capital-intensive industry, contrast their 7-12- percent interest charges with the rates o f around 5 percent at which their main competitors in Indonesia, for example, can borrow. 13. The three cross-cutting hindrances (corruption, poor infrastructure, highcost o f finance) to export competitiveness described above are not the only problems Bangladeshi exporters face in common. Labor quality and, therefore, the productivity o f labor lag behind the country's Asian neighbors and trade rivals, Further, although Bangladesh has lately been attracting substantial foreign investment in the telecommunications sector, untilrecently3,the ban on FDIin its most promising industry, garments, was at odds with its relatively liberal FDIregime and deterred the kindso f large outside investments that have expanded capital stock and eased technology transfer inother countries. Realinterest rates have beenon the decline.Reforms inthe financial sector during 2002-04 have been instrumentalindriving down lending rates inBangladesh.Bank lending rates to industry were 12-13.5 percent in late 2004 inprivate banks and 10-12.5 percent inNCBs, comparedto an average of 16-17percent in2003 and earlier. Dueto floods inAugust 2004 and POL price adjustments inresponse to higher intemational oil prices, inflation rate has been creepingup to nearly 7 percent by late 2004. Real lending rates were therefore down from their highs of over 10percent in2003 to 5-7 percent by late 2004 - still high by regional standards. However, it is not certain that the inflation creep is permanent or the result of atemporary shock. Inthe latter case, with sound monetary management inplace, it is likely to decline in 2005 leading to higher real interestrates. A revisedIndustrial Policy that was approved by the Cabinet inDecember 2004 did away with the FDIrestriction inthe domestic garment sector. ... 111 14. Ineach of the five export areas examined for this study, moreover, industry-specific barriers to competitive success loom large. For instance, 0 A ban aimed at overland imports o f Indianyarn means that yam for knitwear can only come by sea. Such protectionfor domestic textile manufacturers raises exporters' costs and the time to deliver. e Similarly, shippingcartons cannot be imported, forcing vegetable producers either to pay higher costs for Bangladesh-madepackaging or reuse old cartons and risk rejectionby European and supermarket buyers. The same import ban raises packaging costs and hurtsfootwear and other exporters as well. 0 Shoemakers and ceramics manufacturers alike -because they sell their products at home as well as abroad - are denied the bonded facilities that RMG firms use for duty-free imports. The compensating duty-drawback mechanismthat the govemment provides is, moreover, so inefficient that refunds may come only after a six-monthwait and, even then, not in full. 0 Shrimp growers and their employees are both hurtby weak enforcement o f the labor and environmental standards that such exports must meet ininternational markets. 0 The "open sky policy" for air cargo needs to be made effective inorder to attract international air cargo carriers to land inDhaka inorder to lift fresh vegetable cargo for European markets which are now being suppliedinlimitedamounts, partly due to a lack o f air cargo space. 15. Finally, although Bangladesh has done well with bonded-warehouse and export-processing-zone schemes to insulate its RMG enterprises from the high(21-27 percent) anti-export bias o f its trade policies, too many incentives still favor import substitution. The escalatingtariff structure, for example, sets lower duties on imports o fraw materials and intermediaries and higher ones on processed products, favoring domestic producers without spurringthem, through competition, to higher levels o f efficiency. 16. Export concentration inreadymade garments makes the economy, jobs and income, extremely vulnerable to external shocks arising from changes in global demand for RMG. Export diversification, therefore, i s a highpriority. Butthe import regime for other exports i s cumbersome and the duty drawback system dysfunctional, thus literally stopping any prospect o f export diversification dead on its tracks. It must be noted that streamlining the import regime for exports ina highly protected economy such as Bangladesh isjust as important for ensuring export competitiveness as reducing anti-export bias o f the tariff and QRregime. 17. Many o f the findings above have been spelled out inprevious World Bank ~tudies.~The harm done by corruption, port congestion and finance-sector weakness i s not news to Bangladesh's policymakers. Because the I V C A technique reinforces those conclusions with highly detailed examinations o f export activities, this study is able to make specific recommendations for corrective actions with even greater assurance than its predecessors. The chief recommendations follow. STRATEGYFORSUSTAINEDEXPORTGROWTH 18. The broad aim of policy measures to improve Bangladesh's competitive performance i s to expand exports and to strengthengrowth prospects by raising factor productivity and encouraging private investment. Total factor productivity (TFP), Le., the efficiency with which resources are usedin production, has been crucial at the margin to the country's overall economic growth for nearly three decades. Clearly, it is important to improve human capital and to mobilize more investment from foreign and domestic sources. What is also critical for export-accelerated growth, however, i s the efficiency with which labor and capital resources do their work. Inefficiencies o f various kinds and degrees o f severity See for instance the following 2004 World Bank publications: Bangladesh Investment Climate Assessment; Doing Business in South Asia 2005; TradePolicies in South Asia: On Overview. iv now hamper all sorts o f enterprises. Concentrating on those that significantly harm exports, the study offers a strategy (see Table 2 below and the full policy matrix inthe attachment that follows the Executive Summary) for strengthening Bangladesh in intemational competitionand equippingit for stronger, long- term economic progress. It urges: A sustained effort to improve governance, reducing the opportunities for and incidence o f bribery in ordinary business dealings. Such a fundamental course correction will require a clear long-term vision and the pragmatic energy to exploit every reasonable approach to strengthening the overall framework o f public accountability. Progress is very much dependent on strong political commitment and home-grown strategies tailored to the circumstances o f Bangladesh. A broad consultative process to formulate a comprehensive anti-corruption strategy, with a special focus on exports, and to stimulate participationin its implementation and monitoring would lendlegitimacy to the effort and increase the likelihood o f its success. Specificallv to bringhighpayoffs in export competitiveness, reform should be a priority in Customs as well as the Duty Exemption and Drawback Office (DEDO). Practices inboth these services are characterized by inefficiency and rent-seeking that penalize firms capable, in a freer regulatory environment, o f expanding Bangladesh's share o f world trade. A thorough-going program to matchinfrastructure services to the needs o f a growing, outward- looking economy. The basic goal should be to redefine the role o f the public sector from service provision to regulation while encouraging private-sector participationby establishing rules o f competition, strengthening the regulatory environment, and addressing the problem o fpoorly performing state-owned enterprises (SOEs). To complement reforms undertaken since 2000 to address the key policy, institutional, and structural constraints inpower and telecommunications, it i s recommended that the Govemment strengthenthe Power Cell in the Power Division o f the Ministryo fEnergy andMineral Resources, with professional staffwho are paidmarket-based salaries. The same approach is neededto augment professional strength o f the HydrocarbonUnit in the Mineral Resources Division. Other reforminitiativesinthe sector needto be sustained inorder to accelerate financial restructuring and unbundlingo fthe power sector; develop a plan for private participationto improve efficiency, coverage, and financial performance in urban distribution; and give new energy regulators strong enforcement powers and adequate financial and human resources. All public procurements inthe power and gas sectors should move speedily and transparently. Finally, to address the problem o fpower shortages, augmenting generation capacity i s an urgent necessity. Specifically to remedy the transportation infrastructure failures that exporters see as heavy burdens on their competitive performance, Table 1presents five central initiatives listed in order of priority and selected after discussions with manufacturers, third-party logistics providers, and Government agencies involved in trade and logistics, as the likeliest candidates for successful implementation. While there is no doubt that additional investment is requiredinall modes o ftransport, this report concludes that the changes that are required most immediately are modijkations ofpolicies, processes, and management rather than capital investment. Even inthat area, policymakersneed to look systematically at the problem o f delivery o f transport services along the major corridors and to plan investments so as to improve overall performance, notjust the performance o f a specific mode on a specific link o fthe network. V 0 The most important initiative is the reform of ChittagongPort container terminaloperations to take advantage o f the recently procured modern container handling equipment (ship-to-shore gantries (SSGs) and rubber-tire-gantries (RTGs)). Current average berththroughput o f 5.6 boxes per vessel hour and 22 days average dwell time for containers place Chittagong at or near the bottom for comparable sized ports inthe region. This performance could change with the introductiono f the new equipment but will requirecomputerization, restructuring o f the workforce, and close interaction with the shippinglines. Such modernizationwill not be possible with the current public-sector management andpoliticized labor force, but without such transformation, the large capital investment will provide very little improvement in efficiency. More importantly, it will not create the conditions for quick, predictable, vessel turnaround time and day-of-the-week feeder services. With these improvements inplace there i s a potential savings o f 10-14 days in order-cycle time including both inbound and outbound supply chains. 0 The secondmost important set o fmeasures centers on increasing customs bondedfacilities including road-based and inland container depots (ICDs) in the Dhaka region. The former will reduce the time spent inport, the informal payments to port workers, the cost for road haulage (by reducing empty backhauls) and, in all likelihood, the clearance time. It will also reduce the losses of cargo in transit and due to multiple handlings. The savings in order-cycle time should be on the order o f five days, includingthree days for temporary imports and two for exports. 0 The thirdinitiative will continue the reforms incustoms clearance procedures. The greatest success has been inthe clearance o f exports and temporary imports at the ports, airports, and Dhaka Customs facilities. Computerization and introduction o f risk management will create additional opportunities for further reductions in clearance times and informal payments, but these gains will be less dramatic than the gains over the past five years. The areas where improvement has lagged are the clearance of imports, especially goods entering Bangladesh across land borders, where the use o f computers remains limitedand supervision i s lax. These activities involve cumbersome procedures, lengthyprocessing times, and excessive informal payments. The introduction o f additionalASYCUDA models to address selectivity and risk management -- plus better use o f the Pre-Shipment-Inspection (PSI) system -- should provide significant improvements for imports. At the landborders, all the procedures must be re- engineered from a land port to a cross-docking facility with the eventual goal o f door-to-door movement o f goods crossing the border(s) under bond. Thefourth fresh policy start is to put railway container services on a commercial footing and introduce corridor planning to improve the utilization of available, multi-modal capacity. These steps would ensure that investments ininfrastructure offer the greatest benefitrelative to expenditure. Bangladesh should emulate India's efforts in separating container-unit train services vi from other less profitable and less time-sensitive services and place the former under commercial management. Decisions on capital investmentin the road and rail sector should recognize the two as part o f the same corridor and within that corridor, choose the service that offers the greatest improvement in service relative to cost. Decision-makers should also consider inland- water transport (IWT) where there i s latent demand or potential demand as traffic volume increases. 0 Onthefifth issue, a number o f options are available to minimize the additionalcost and time associated with trucking both Indian and Bangladeshi goods through the Benapole border crossing. The most efficient regime would permit sealed containers or vans to move with Indian exports from the border to Dhaka or with Bangladesh exports from the border to Kolkatta where the cargo would be cleared, usingeither a trailer exchange or a cross-docking operation. Eventually door-to-door movements by Indian and Bangladeshi trucks should be permittedunder a bilateral arrangement that incorporates a regional licensing scheme and payment o f a transit fee. Since these improvements are unlikely to materialize inthe short term, procedures needto be simplifiedon both sides o fthe border, where restrictions on truck movements and lack o fcustoms officers and checkpoints can delay trucks by a week. 0 A particular transport-systemissue-the unreliability o f air-freight service -- affects the ability o f produce growers to make the kindo f long-term arrangements with foreign buyers that enable both parties to insure highquality and safe production. Biman, the national airline, should improve its performance inproviding forward-contract air cargo space, and the government should permit other carriers to compete against it. That is, open sky policy for regular air cargo movement needs to be put inplace. To correct the severe banking sector weaknesses, it i s imperative to resolve the longstanding governance and other structural problems o f the NationalizedCommercial Banks (NCBs) while stemming their financial hemorrhaging. Fortunately, the Government's reform strategy for the sector covers these two track^.^ Although the Bangladesh Bank's supervisory and regulatory authority has been recently strengthened, we believe that further steps are needed to strengthen creditor rights and contract enforcement to improve the efficiency and coverage o f the banking sector. Reduce the remaining significant anti-export bias. Although Bangladesh has managed to insulate the RMG sector throughthe bonded-warehouse and EPZ schemes from the effects o fprotectionist policies, further trade reforms are needed to provide comparable stimulus to other industries with the potentialo f diversifying the country's exports. Inaddition to dealing with the flaws in governance, transport, and finance, trade-related policy changes need to further simplify the import tax regime and reduce the dispersion and average level o fnominal (and thus effective) protection, preferably through a pre-announced medium- and long-term schedule o f tariff reductions (as done recently by India), and the elimination o f any remaining protective quantitative restrictions. At the same time, Bangladesh should avoid usingdirect export subsidies because o fthe strong likelihood of their abuse and limitedimpact. Policy reform should focus instead on addressing the costly bottlenecks that damage not only performance but also the investment climate. 0 The Government's recent decision, announced with the FY05 Budget, to reduce the maximum customs duty rate from 30 to 25 percent, moving to a three, non-zero, tariff slab system, abolishing the Regulatoy Duty, and significantly scaling down and rationalizing the Supplementary Duty was a welcome and important step toward overcoming the existing anti- export bias. Key elements of a program to further advance the reform o f trade policy and to strengthenand diversify Bangladesh's export base would include: The two IDA projects addressing these issues are: Central Bank StrengtheningProject and Enterprise Growth and Bank Modernization Project. vii Removing non-tariff barriers to imports and reducing tariffs. These fundamental steps constitute by far the single most important pro-export reform because they help increase the relative attractiveness for businessesto invest and produce for export rather than planjust for the domestic market. Moreover, import duty neutralization schemes -- such as duty-drawback -- become easier to manage and involve lower transaction costs ifthe tariff structure is simpler and tariffs are low. Lower inputtariffs, additionally, will reduce pressure for tariff exemptions and - by also facilitating a more efficient duty-rebate system -- will help move the net incentives for different exported products towards a more neutral range. Finally, lower input tariffs and therefore lower drawback and other rebates reduce the incentives for negotiation between exporters or their agents and Customs officials and, therefore, also reduce the incentives for corrupt practices such as over-invoiced or misclassified export shipments; e unifiing allpara-tariffs and mergingthem with the customs duty so as to have one tariff rate for each tariff line; e maintaining the `tops-down ' tariffreduction approach in effect over the last decade so as to gradually drop the maximum tariff rate (after the mergingo f all para-tariffs with customs duties) to 20 percent over the next two-three years as a medium-termobjective. Lookingbeyond 2006107, inthe subsequent 2-3 year period, a new maximum tariff rate o f 15 percent could be set as an objective, say, for 2008. This reduction would, o f course, also require parallel progress in expanding the base o f VAT and direct taxes, while the tax administration is further strengthened; e reducing the number of non-zero customs duty/tariffslabs to two rates over the next two- three years, thus simplifying the tariff structure even further and moving it toward a long-term target o f a low, uniform tariff rate; e avoiding any re-introduction of offsetting para-tariffs; e discontinuing theprotective use of VATby ensuringthat it is leviedboth on domestic production and imports o f the same products; e eliminating all quantitative restrictiodbans that arefor protective purposes, such as those imposed on imports o f textile products, poultry, cartons, and salt. Replacing them with appropriate tariffs would be the right step; and e removing the ban on imports o f yarnitextiles over land routes. >Bangladesh needs to make significant changes to its quality-assurance and safety standards, concerns o f special and growing importance for horticultural producers and shrimp growers. Although quality issues connected to food safety, pesticide and heavy-metal levels are becoming more important internationally, inthe medium-term they mightnot have a huge impact on Bangladesh's export volumes. As yet, in fact, the Bangladesh horticultural export sector has hardly felt the effects o fraised international standards for quality. It is, however, only a matter o f time before the UK and European food legislation starts tq bite. The emergent European Food Agency mightinsist that the Bangladeshi authorities present aplan on how they will control food quality standards inthe country's exports to the EU. It i s also highly likely that individual markets inthe Middle East will step up their own standards for produce imports. Efforts to upgrade quality and safety will have to address two interrelated issues -- traceability of products and control over growers. Traceability i s now an increasingly important area o f competition and a crucial demand trend across the food industrywhere margins are very thin. Companies spend billions o f dollars on supply-related activities, including the movement, storage, and control o f products, and traceability systems help firms isolate the source and extent of safety or quality-control problems that can result inproducing and distributingunsanitary or inferior products at a highpotential cost inbad publicity, liability, and recalls. The better and more precise the tracing system, the faster a producer can identify and resolve food safety or quality problems. It i s only a question o f time before it will not be enough, from a competitive V l l l ... standpoint, for a bag o f fresh vegetables to carry a label such as "produced and packaged in Bangladesh." The demand for traceability will instead require more information as to the exact location inBangladesh where the produce originated. 0 The pursuit o f quality assurancerequires, moreover, that exporters have close contact and control over their growers. Since any breakdown inthe commitment to maintaininghighquality and safe produce exports by one exporter could harm the whole industry, a systemo f sanctions needs to be considered for those that damage Bangladesh's reputation. Such tough measures will require a strategic accord, a private sector/public sector partnership, to set the sanctions and insure their enforcement. Only then will exporters be able confidently to contract productionby specialist export growers. 0 The Government will needto take the lead role inintroducing improved practices, butthe success o f any program will depend on the commitment o fthe trading community. A key element in gaining buy-infrom exporters i s through their involvement in designingthe program incorporating three key elements: controls over pesticide use; improved food- safety standards; and reduced contamination by heavy metals such as arsenic. 0 Two existingprojects offer an opportunity for action. The FAO's Technical Cooperation program has initiated a process aiming to strengthenfood quality control inBangladesh, promoting the establishment o f a food-control council inBangladesh. Additionally, the EUis planning a project to improve food quality, with the horticultural sector as one area to be involved. 19. As a subset o fproduct-safety and quality concerns and as a field where productivity gains are much needed, Bangladesh's shrimp industry, currently producing about 4-5 percent o f the world's farmed shrimp, meritsspecial attention. For shrimp exports to expand, shrimp farmers and processors need to act on two fronts: 0 First,they will have to adhere to self-imposed standards and the recognition and acceptance o f the third-party certificationprocess by importers and regulatory agencies in importing countries. The industryand the Government are embarking on a programto institute a Shrimp Seal of Quality Program (SSOQ). While safety and quality assurance concerns do not impose the most severe limits on the growth of volume and value o f shrimp exports from Bangladesh, they will require an above-average level o f attention, training and investment by both industryand the Government to maintain a quality product and reputation. 0 Second, inthe medium-term, farmers needto adopt semi-intensive and intensive methods o f shrimp farming inplace ofthe prevalent extensive practice. To achieve substantialproductivity gains will require not only major productivity increases inexisting ponds, but investment innew ponds and newer technology methods o f production as well. The capital costs and technology required for semi-intensive and intensivemethods, however, are currently beyond the capabilities o f most shrimp farmers inBangladesh. The greatest short-term opportunity for increasing production at the farm level i s to train the farmers and Government support personnel and technicians to improve their farm management-related skills, to cause them to adopt standards and reduce disease, improve productivity and eliminate contamination o f raw materials. Other changes that will be necessary to increase farm output will be increasedhatchery production o f post-larvae and a move away from the current heavy dependence on natural fry. Also, the heavy dependence (90-95 percent) on casual labor inthe processing sector equates to poorly trained staff. ix CONCLUSION 20. As skillsrise andspread, as corruptionand excessiveregulationshrink, as infrastructure improves, as trade restrictionsease anddomestic finance flows more freely, Bangladeshiswill steadily improvetheir positionas competitors inworldmarkets. Forthe economy to realize its full export potential, it will haveto draw increasedsupport from foreigninvestors.That outcome is possible. All the measuresdiscussedinthis reportpointtoward improvingthe investmentclimate andoverall competitiveness o f export activity. Adoptingthemwill signal outsiders that Bangladeshis a global contender, a tradingforce to be reckonedwith andevenemulated. X Table 2: Summaryof RecommendedActions for StrengtheningBang desh's ExportCompetitivenessand for SustainedExport id OverallGrowth InterventionArea I.EconomicGovernance: Improvingthe quality of civil invest more in improvingthe competence andresponsiveness of the continuous service; civil service; give adequate compensationto civil servants; institute merit-basedpromotion fighting corruption formulate ananti-corruption strategy through a consultative process, start withinsix months, and and start implementing the finalizedanti-corruption programs ustainit as a continuous Iffort; encourage civil society andthe mediato play a major role infostering 1continuous change inthe institutions of economic governanceand demanding transparency Improvingregulatory Take measures to removebarriersto entry and exit, and cut the cost of 1start immediately environment starting and closing businessby reducing the length of time and financial cost of openingiclosing abusiness, andmonitor implementation; minimize the number of visits by tax inspectorsand regulators 11.Infrastructure: Power strengthen the Power Cell inthe Power Divisionof the Ministry of 1 ongoing,two years Energy and Mineral Resources,with professional staff who are paid market-based salaries; inthe same way, augment professional strength of the Hydrocarbon Unit inthe Mineral Resources Division; accelerate financial restructuring andunbundlingof the power sector; and give new energy regulators strong enforcement powers and adequate financial and humanresources encourage private investmentin generationand distribution; plan to continuous,longer-term augment generationcapacity to runaheadof demand growth 111.Finance-Cost of Borrowing: Reducingcost of financing resolvethe long-standinggovernance andother structural problems of e ongoing, two years the NationalizedCommercial Banks, while stemming their financial haemorrhaging;further augment the Bangladesh Bank's authority to supervise andregulatethe bankingsector disinvest NCBs longer-term strengthen creditor rights and contract enforcement within one year IV. Labor Quality and Productivity: enhancingquality and complement increased social spendingwith significant improvements continuous productivity of labor inthe institutionalframework for service delivery ineducation and health decentralizepublic spending on health and educationwith adequate longer-term steps to ensure effective delivery to reachthe poor V. Transportand Trade Logistics/Facilitation: Reforming containerterminal Concession or operating leasing start within6 months operations inChittagong Port Taking steps to reduce vessel liberalizeprocedures for establishingbondedwarehouses within one year turnaroundtime Establishingbonded implementation of ASYCUDA ff, full EDI, channelling and other risk ongoing,three years warehousesandICDdDry ports management Continuing Customs reforms with greater emphasison imports roadwidening; improving rail operations; selected double tracking continuous Increasingcapacity in Dhaka- Chittagong Corridor simplify procedures; increasecross-docking one year Improving Benapole-Dhaka Corridor performance xi !VI. Trade Policy: Furtherreducinganti-export unify all para-tariffsandmergethemwiththe customsduty *one year ** bias ofthe trade regimeby reducing reducethe maximumtariff to 20 percent two years tariffs andremovingnon-tariff reducemaximumtariff to 15 percent three years barriers; (this wouldrequireparallel eliminateall quantitativeimportrestrictionsibans,andreplacethem *one year ** progress inexpandingthe domestic with appropriatetariffs tax baseand administration) Improving`duty drawback implement fully an effective andspeedy `duty drawback system' immediately system' VII. ProductSafety and Quality Standards: Improvingfood qualityand the Govemmentandthe privatesectorjointly needto work to safety (in horticultureandshrimp strengthenBangladesh's food quality assurance and safety standardsby sectors) o increasinglaboratorycapabilities three-fouryears o improvingGovemment andindustrycapabilitiesinmosthygiene andother food safety controls,includingthroughnew hires andtraining three-fouryears o implementingthe "Shrimp Seal of Quality'program one-twoyears o taking steps to developa systemto allow `traceability ofproducts' three-fiveyears in I /a: High impactshort andmedium-termmeasuresare inbold; /**: `Strokeofthe pen' actions with highpay off. xii B U E 8 s8 m Ys C Y L 0 I 0 Y ?? Y .e .-mC B 3E 1E Y 8 Y 93 C I ge 3 .e L 2 c 0 0 c.) 3Z .->x .- C 0 Y f C -0 .-c c Y m L 0 4 .-E .C c D cF 5 E -.-z .C c .C c c e ct4 1 cc tw cE c L. 0 9 c 0 4 G x E 0 rd 8 U 5E U 5 a 0 E .C Y a, YC .I c0 m d 1E U Y 3 C X X 2 a 5E .*XX -G 8 .3 X x L 0 PART I Chapter 1 GROWTHAND EXPORTCOMPETITIVENESS INTRODUCTION Backgroundand Context 1. Halving by 2015 the proportion o f the population living below the poverty line in 2000 i s the Government's overarching goal inBangladesh. To attain this poverty reductiontarget, the acceleration of pro-poor growth is identified as one o f the key thrusts o f Bangladesh's poverty reduction strategy, as articulated in the InterimPoverty Reduction Strategy Paper (I-PRSP). The latter also emphasizes: improvements ingovernance; investment in human development; women's advancement; and social protection. 2. The Government's I-PRSP estimates that it would be necessary to raise the economy's annual growth rate from about 5 percent achieved inthe1990s to around 7 percent inorder to achieve the poverty reduction objective. The Government recognizes that the challenge i s enormous. Aside from maintaining a sound macroeconomic framework, the other key elements o f Government's growth strategy include: 0 promotingprivate sector-led growth and, to this end: creating an investment-jiriendly environment by reducingthe state's role in commercial activities; strengthening governance, including economic governance pertainingto the interaction o f the state with the private sector; improving law and order; addressing the critically constraining infrastructure bottlenecks (inpower, overland and port transport, and communications); establishing a sound and well finctioning financial sector; and addressing other barriers to productivity growth and international competitiveness; 0 supporting the development o frural areas where most o f the poor live and where there i s still scope for productivity gains, both inagriculture and in the non-farm sector, through improvements inthe policy environment and critical rural infrastructure services; 0 emphasizing globally competitive industrialization based on the country's dynamic comparative advantage, such that industrialization is employment-intensive and paves the way for greater export diversiJication and competitiveness; to this end, 0 moving forward with the remaining trade policy reform agenda, buildingon the past record of trade reforms which had helped in reducing the substantial anti-export bias. 3. Tradeintegration, growth andpoverty reduction are related in Bangladesh. Helped by prudent macroeconomic management, partial deregulation o f the investment regime, sporadic improvements on trade liberalizationand shift toward export-oriented growth, and risingremittances, Bangladesh realized a fairly respectable economic growth rate o f around 5 percent per annum in the 1990s and reduced the poverty incidence by almost 10 percentage points to below 50 percent o f the population. Contributing to this outcome was also Bangladesh's export boomfor mucho fthe 1990s, thanks to the rapidexpansion of the readymade garment (RMG) exports under the umbrella o f the Multi-Fibre Arrangement (MFA) and more recently under the WTO Agreement on Textiles and Clothing (ATC). By end-2002, the RMG sector was directly employing as many as 1.8 million workers (another million or so through backward and forward linkage activities), most o f whom were women coming from poor, rural, backgrounds. 4. Satisfactory but belowpotential economicperformance in the 1990s. There is a broad consensus also that Bangladesh's economic performance has remainedbelow potential. This is not 3 surprisinggiven the substantial deficiencies ofBangladesh's business environment. Many ofthese so- called behind-the-border constraints to private activity - the remaining policy distortions, institutional/administrativehurdles, and severe infrastructure bottlenecks-have been widely assessed,' and the shared view is that Bangladesh could have achieved even higher economic growth and better poverty outcomes had the Government pushed for broader and deeper reforms to improve Bangladesh's investmentclimate, together with improvements inpublic expenditure management, reform o fthe SOE sector, and stronger efforts to expand the capacity/quality o fphysical infrastructure and social services. As such, the I-PRSP's emphasis on continued reform ofthe investment environment and ofthe trade policy regime i s consistent with these observations, and it i s a reflection o f the positive impacts o f earlier trade and domestic liberalizationefforts and o f outward-orientation. 5. The key challenge is to increase `productivity' of the local industries/sectors. Aside from strengtheningand sustaining sound macroeconomic management, to raise the economy's growth rate, a key development challenge facing Bangladesh is to increase `productivity' o f local firms and industries and, thereby, o f the whole economy. A conducive business environment--withwell-functioning factor markets, efficiently runinfrastructure services, easy market entry/exit, an enabling regulatory environment and bureaucracy, access to information, and strong competitive pressures--would allow firms to become more productive, competitive, dynamic, and innovative. This is when it also becomes easier to improve export performance, as the basisfor competing inforeign markets. I t extends beyond comparative advantage (based on cheap labor and /or natural resources) and shifts to competing on the basis of competitive advantages. And this is what Bangladesh needs to strivefor in promoting export diversiJication and competitiveness. Given the small size of its domestic economy, Bangladesh needs to expand its exports of goods and services in order to move to a higher growth path and grow out of poverty. 6. The need to become more competitiveand diversified. There is indeed an urgency to act fast in addressing the priority policy and institutionalconstraints to improving Bangladesh's competitiveness. First,global integration will continue with intensifyingcompetitive pressures. Countries will have to become increasingly more competitive to diversify their export base and strengthen their performance in the current export products and enjoy faster growth. Second, with the phase out o fthe remaining quotas under the W T O Agreement on Textiles and Clothing (ATC) at end-December 2004 and the absence o f reserved market access, Bangladesh's RMG exports will face stiffer competition inthe USA and EU markets. As much as 76 percent o f Bangladesh's total exports are concentrated inRMG. Given Bangladesh's large export volume, the sector is vulnerable to the abolishment o f the T&C export quotas. Low wages notwithstanding, due to low productivity, perception o f low product quality, and long lead times (see Parts I1and I11for further details), Bangladesh's RMGfirms needto strengthentheir competitiveness vis-A-vis countries like China, India, Vietnam and others. This is not an insurmountable task, Bangladesh has made inroads into the global RMG market and gained significant experience in production and marketing areas and also benefited from learning-by-doing. Furthermore, future potential intrade growth and diversificationis enormous globally. Efforts made towards enhancing international competitiveness will pay off. It is therefore critical that concerted effort i s made to improve Bangladesh's competitiveness by addressing both behind-the-border constraints as well as the remaining significant external trade agenda. Focusand Objectives of the Study 7. The unifying theme and objective of the study. As articulated above, the basic unifyingtheme o f this study is the critical importance o fhigher factor productivity and enhanced international competitiveness for stronger export performance and economic growth. And the principal objective is to ` ~~ Some o f the studies include: The World Bank, Bangladesh: Achievements and Challenges-Development Policv Review, December, 2003; The World Bank and Bangladesh Enterprise Institute, Improving Investment Climate in Banpladesh, June, 2003; The Asian Development Bank, Various Economic and Sectoral Reports. 4 examine macro and particularly microeconomic factors that are critical in affectingproductivity and international competitiveness inBangladesh. This investigation will help identify the specific areas where policy/institutional actions may have the greatest positive impact on the productivity o f local firmshndustriesand on Bangladesh's export competitiveness and diversification and, thereby, on economic growth. Specific recommendations on priority policy and institutional actions will be made to help the Government in the implementation o f its broad-based, export-led, accelerated growth strategy, which is one o f the key thrusts o f Bangladesh's Poverty Reduction Strategy. 8. Scope and approach. To this end, Chapter 2 in Part Ifocuses on Bangladesh's economic growth and poverty reductionperformance inrecent times and examines the relative importance o f factor accumulation (capital and labor) and o f factor productivity inexplaining Bangladesh's growth performance. In Chapter 3, the discussion moves to the microeconomic dimensions o f the investment environment that affect o fproductivity, competitiveness, and growth. Accordingly, this chapter presents a more detailed examination o fthe structural areas-both behind-the-border as well as the trade policy agenda--identified as critical inthe aggregate-level growth analysis as well as by the recently completed InvestmentClimate Assessment (ICA). 9. To bringmore depth and concreteness to the productivity and export competitiveness assessments and policy analysis, in Chapter 4 (Part 11) ualue-chain analyses are carriedout for five, strategically identified export products. The latter include: ready-made garments (specifically, T-shirts), shrimp, footwear, ceramics (tableware), and vegetables (French beans).* Because avalue chain (VC) analysis follows the product flow o f the selected commodities from the initial point o f production to the final consumption/market destination, it enables tracking o fthe specific cost components and allows benchmarking against the key competitorsicomparators. 10. As the import protectionlevels continue to come down around the world, it is recognizedthat transport costs and trade logistics as goods go through customs are becoming increasingly more important factors affecting cost competitiveness in foreign trade. To complement the value-chain analysis and cover a very important cross-cutting area, inChapter 5 (Part 111) key issueshottlenecks faced in Bangladesh's transport and trade logistics are assessed, together with cross-country comparisons and benchmarking (Chapter 5). Specific recommendations are made to address the most serious, priority issues/constraints. Inview o f their increasing importance inaffecting export competitiveness and performance, particularly for shrimp and horticulture exports, the issues offood safety and product quality standards are also covered in Chapter 5. While shrimp i s already an important export item, stronger and sustained safety and quality standards and an effective domestic institutional basis for implementingthem will be in the interest o f stronger export prospects inBangladesh. Horticulture i s a potential export area with growth prospects. However, it i s also a sector where food safety and quality standards need to meet the increasingly more stringent standards demanded inthe major import markets such as EUand USA. The specific rationale for product selection is explained inChapter 4. 5 6 Chapter 2 SOURCES OF ECONOMIC GROWTH, PRODUCTIVITY,AND EXPORT COMPETITIVENESS A. LONG-TERMGROWTHAND PRODUCTIVITYTRENDS 11. Economic growth in Bangladesh has been on a rising trend since independence. Per-capita growth increased from an annual averageof-0.7 percent duringthe 1970sto 1.1percent duringthe 198Os, and further to 3.0percentduringthe 1990sand 3.3 percent during2001-03. As seen inFigure2.1, there appears to be a sharp structuralbreak in the growthprocess in 1990. Annual per-capitagrowth averaged 1.5 percentduring 1973-89anddoubledto 3 percent during 1990-2001. Figure2.1: Trends in GDP Per-Capita Leveland Growth 1 ~ 1 8 0- U 170 4 c9 160 ? B 2 150 8 L ia o 140 2U+ -2 130 120 g 2- -4 110 -6 100 1975 1980 1985 1990 1995 2000 -5g 0 10Per-capitaGDP(rightaxis) -Per-capita growth (left axis) Source: WorldBank staff calculations 12. Bangladeshhas consistentlyimprovedits growthperformancerelativeto the rest of the world. Accordingto the WB's World DevelopmentIndicators(WDI) database, its annual per-capitagrowth averaged 1.8 percent between 1973-00,which is better than the performanceofthe mediancountry inthe world and significantly higher than the medianlow-incomecountry (LIC). Bangladeshhas outperformed the mediancountryinthe world by a considerable marginsince the early 1980s(Table2.1). Amongthe countriesfor which comparabledata are available,45 percent(59 out 130) of all countries grew at a pace faster than Bangladeshover this period. This percentagedrops to 32 percent if one looks at the 1981- 2000 periodand further to 21percent ifthe 1991-2000periodis ~onsidered.~Among the group ofLICs, Bangladeshhas consistentlyperformedinthe 80thpercentile. Within the South Asiaregionthough Bangladeshwas outperformedby all other countriesduringthe 1973-90period. PakistanandNepal laggedBangladeshduringthe 1990swhile India and Sri Lanka did better. Bangladesh Median Median India Nepal Pakistan Sri Lanka Bangladesh's Bangladesh's Country Low-Income Rank Rank in World Country (LIC) in World Among LlCs 1973-2000 1.8 1.7 0.2 3.0 1.9 2.5 3.5 60/130 7/39 1981-2000 2.1 1.o 0.2 3.6 2.5 2.5 3.5 541168 14/58 1991-2000 3.0 1.5 -0.1 3.6 2.6 1.4 3.9 39/182 11/62 Only those countries are considered inthis comparison for which more than 20, 10, and 5 annual observations onper-capita growth are available for the 1972-2000, 1981-2000, and 1991-2000 periods. 7 13, Looking at the data on per-capita income, which are expressed inconstant 1996 US$ and adjusted for international purchasing power difference^,^ Bangladesh ranks 91 among 102 countries in 1972, improving to 78 in 2000. Within the region, over this period India improved its rank from 87 to 71, Pakistan from 89 to 74, Sri Lanka from 74 to 67, and Nepal from 94 to 82. China, Thailand and Korea saw the most impressive improvements intheir ranks over the period: China improved from 93 to 60, Thailand from 71to 41, and Korea from 54 to 26. It is worth noting that China and Nepal are the only non Sub-Saharan countries that ranked lower than Bangladesh in 1972. Also, all countries that were overtaken inranking by Bangladesh are Sub-Saharan countries. 14. Growth has been the key driver of incomepoverty reduction. An acceleration ingrowth o f GDP per capita in the 1990s led to relatively good progress inreducing income poverty, following virtual stagnation inthe mid-1980s (Figure 2.2). I t i s not a mere coincidence that significant liberalizationo f trade and phenomenal expansion o f exports also occurred duringthis decade. The poverty rate declined from 59 percent in 1991-92 to about 50 percent in 2000, while the percentage o f population living in hard-core poverty declined from 43 percent to 34 per~ent.~ Relatively broad-based growth inrural areas duringthe 1990s resulted ina greater decline inthe depth and severity o fpoverty inthese areasrelative to urban areas. Figure 2.2: Poverty Trends inBangladesh:Growth Has Been the Key Driver i 50 - 4 1 45 - Per-capitaGDPgrowth 5 3 pmoung arerage 35 - 30 - National 45 National 25 40 20 35 Urban lo 1983-84 1991-92 2000 1983-84 1991-92 199960 UpperPoFertj Line Lower Poverty Line Source Bangladesh Bureau of Statistics and World Bank B. SOURCES OF GROWTH INBANGLADESH 15. The Government's poverty reductionstrategy envisages growth acceleration to be primarily private-sector led and underpinned by a conducive investment climate supported by: continued macroeconomic stability; implementation o f long overdue structural reforms inthe banking and energy sectors, along with restructuring o f SOEs; and increased and more effective investment inhuman development. While the Government's overall development strategy appears broadly consistent with achievement o f improved growth performance, it does not derive from a systematic understanding o f the determinants o f growth in Bangladesh. Recent analytical work at the Bank has sought to narrow this gap.6 The remaining part o f this chapter summarizes its main messages. 16. Accounting for GDPgrowth: primacy of factor productivity overfactor accumulation. I s it factor accumulation or technology growth and more efficient resource allocation that fundamentally explains growth inBangladesh? The answer to this has important implications for policy formulation - should the focus o fthe policymakersbe on accumulation o f capital (saving and investment) or on technology infusionvia R&D, FDI, and a higher quality labor force? * The Summers-Hestoncross-countrydata. The World Bank andthe Asian DevelopmentBank, Poverw in Bangladesh: Building on Propress, (2002); andAhmed and Sattar (2003), "Trade Liberalization, Growth and Poverty Reduction: The Case ofBangladesh ", World Bank, SouthAsia Region. "Sources oj.Growth and Productivity: The Case ofBangladesh." World Bankmimeo, 2004. 8 Figure 2.3: Factor and TFP Growth Rates FL 0.0 -2.0 -4.0 ~ GDPgrowth -a- Cap StockGrowth Humn CapitalGrowth i c T F P g r o w t h1 1 Source: WorldBank staff calculations 17. Figure 2.3 presents estimates o f the contributionof capital, effective labor, and total factor productivity (TFP) to GDP growth in Bangladesh.' TFP growth has been fluctuating around a mean about 0.5 percent since the beginning o f the 1980s. Capital stock growth has beenrobust and on an increasing trend. Effective labor, which reflects a combination of the labor force and human capital, has been growing steadily since the mid-l970s, although its growth rate dropped a bit duringthe 1980s due to a slowdown in human capital growth.' 18. The TFP analysis illustrated inFigure 2.3 strongly suggests the primacy o f TFP (technology growth and efficiency o f resource allocation) over factor accumulation inexplaining GDP growth in Bangladesh. Specifically, an assessment o f the impact of TFP on GDP growth--in a way that incorporates the fact that physical and human capital respondto technological progress--shows that TFP growth explains about 80 percent o f GDP growth above its long-tenn average between 1975-2000.9 This i s consistent with similar calculations for other countries and with cross-country studies that show that most o f the cross country differences inGDP growth can be explained by differences inTFP growth. 19. TFPtrends: rice and non-rice components. As seen inFigure 2.4, total production ofrice (about 70 percent o f the agriculture sector's value added) has been on a risingtrend since the mid-1970s, mostly due to improved productivity (rice output per hectare land area used for rice cultivation). Rice production in 2001 was 150 percent higher than in 1976, while the area under rice cultivation increased by only 5 percent over the period. Productivity gains have come from expanded cultivation o fwinter seasonrice (boro rice), involving widespread use of high-yieldingvarieties o f seeds, irrigation (mainly shallow tubewells), and fertilizer. lo 20. Next, a measure of TFP growth inthe non-rice sector i s derived." A three-year moving average of this i s shown in Figure 2.5. This can be expected to have been dominated by productivity patterns of the non-farm sector and, accordingly, shaped by broad shifts inthe business environment. The rising trend inthe early 1980s reflects early industrialderegulation andprivatization measures. The declining '*The accounting framework usedinderiving these estimatesi s explained inAnnex to Chapter 2. The measureused for this - (covariancebetweenTFP growth and GDP growth)/ (variance of GDP growth) Human capital here is relatedto the education level of the average worker. - answersthe question: ifGDP growth is above its long-termmean, then how muchof the additional growth is attributable to TFP growth? loThe dominant role of rice inthe nationaleconomy is visible inthe high correlationbetweenrice productivity growth andTFP growthtrends since 1980. The simple R2betweenthe two series is almost 50 percent (Figure 2.5), andregression of TFP growth on riceproductivity growth yields an R2of 0.19, i.e., about one-fifth of the TFP growth since 1980may be attributed to changes inrice productivity. " ThisistheresidualintheregressionofTFPgrowthonriceproductivitygrowth. 9 trend inthe latter halfo fthe 1980sis consistent with concomitant deterioration inthe overall macro environment, political turmoil, and lack o f microeconomic reforms. The sharp increase inthe trend Figure2.4: Bangladesh-Rice (paddy)Production, 1971-01 I25,0001 V I & I , , , , , , , 1 1 , , 1 1 1 9 41 EO 8 2 E4 E 6 E 8 90 92 9 6 9 8 00 - T F P g r o w t h (left axis) -cRiceproductivity growth (rightaxis) Source: World Bank staff calculations growth inthe first half o f the 1990s corresponds to impressive progress on key structural reforms: notably, macro stabilization and trade liberalization. The growth inthe trend falters toward the end o f the decade, but remains positive, as trade liberalization stalled, and macro and financial sector vulnerabilities built up. Figure2.5: Non-RiceTFP Growth (3-yr movingaverage) -1.2 80 82 84 86 88 90 92 94 96 98 00 Source: World Bank staff calculations 21. AssessingBangladesh's Growth Performance in a Cross-country Framework. Analytical work`2 assessing Bangladesh's growth performance ina cross-country framework shows that GDP growth has beenmuch higher in Bangladesh than would be suggested by its rate o f (physical and human) capital accumulation relative to other countries. Factors impacting the efficiency o f capital utilization play a major role inexplaining GDP growth inBangladesh. The main structural areas identified inthis regard are: 0 The level o f global integration and the capacity to benefit from it. For the latter, the skill level o f the labor force and the level o f physical infrastructure development matter. 0 The quality o f economic govemance. This refers to the efficiency o f the public-private sector interaction, as shaped by the nature and implementation o f the regulatory environment, tax systemand its administration, customs, and the delivery and quality o fpublic services. As such, the quality of economic govemance and its impacts are reflectedinvarious o faspects of l2 "Sources of Growth and Productivity: The Case of Bangladesh",World Bankmimeo (2004). 10 economic activities, including the cost o f doing business (such as, the cost o f starting and closing a business and enforcingbusiness contracts), the scope o f corruption, and the extent to which the rule o f law i s abided by. 0 The efficiency with which the financial sector allocates capital. 0 The level o fmacroeconomic stability. 22. Figure2.6 below benchmarks Bangladesh's performance against a group o f comparator countries inthe structural areasthat the analytical work identifies. By choice, the comparator group comprises better performing countries than Bangladesh, except for Niger which is includedto understandhow Bangladeshwas able to avoid the fate o f most o f Sub-Saharan Africa. These comparisons show that: 0 Bangladesh had the lowest initial real per-capita GDP among the group which, ceteris paribus, should have resultedinhigher growth. Clearly, given that Bangladesh's growth performances relative to rest o f the group has been relatively slow, other factors outweighed any advantage givento it by havinga lower initial income level. 0 A partial explanation is providedby the rate of capital accumulation inBangladeshwhich is slower vis-a-vis the better performers and faster than inNiger. 0 A relative inability to attract FDIand to benefit from its spillover effects has been a major area o f deficiency for Bangladesh. EvenNiger outperforms Bangladesh on this measure. 0 The cost o f starting a business in Bangladesh i s quite high--exceeded by only Niger--and consistent with its relative ranking in the group. 0 The quality o f economic governance--reflected mainly by the rule o f law and abstracting from the direct cost o f starting a business--has been quite weak inBangladesh and appears to be an important cause o f its relatively weak position within the group. 0 Bangladesh appears to have beena mediocre performer inthe banking sector, although analysis suggests that the growth impact o fbanking sector weaknesses may have been more adverse for Bangladesh due to its low development level. 0 Populationgrowth rates across the group provide a (small) part o f the puzzle. Populationgrowth inBangladeshwas higher than inall comparators except Malaysia andNiger. 0 Bangladesh has done well inachieving macro stability which appears to be a major reason why its growth rate has been far superior to that o fmost low income countries (LICs). 23. Investment climate andfirm-level performance in Bangladesh. Firm-level analyses for Bangladesh produce similar results: that the investment climate i s highly correlated with productivity. For example, drawing on standardized firm-level surveys o f common sectors inBangladesh, China, Ethiopia, and Pakistan, a recent researchat the BankI3finds that across firms improvement in the investment climate-represented by infrastructure, bureaucratic hurdles, financial sector performance, and distance from markets--leads to higher TFP growth. The authors find also that factor returns (wages and profit) tend to increase with better investment climate, which inturn reinforces factor accumulation growth and output growth at the firm level. Application of their results shows that ifthe investment climate in Bangladesh were to match China's, then, on average, wages in Bangladesh would be 20 percent higher, return to capital 80percent higher, TFP IlOpercent higher, and output growth and employment growth 3.7 and 4.6percentagepoints higher. l3 "Investment Climate and Firm Performance in Developing Economies." World Bank mimeo, 2003. 11 Figure 2.6: Determinantsof Growth: Cross Country Comparisons I Average GDP per capita Growth Real PPP GDP Per Capita in 1980 I (1981-2000) 1 600000 - 1 5000 00 ~ 7 0 0 , I 400000 - 100 E 200000 -1 00 300 J Average Annual PopulationGrowth Gross Domestic Investment Rate (Average 1981-00) (1981-2000) ( O hGDP) 4 00 14000 - 3 00 p 2 0 0 ~8100 0 00 ~ ~ Standard Deviation of Inflation, 1981-2000 Volatilityof Terms of Trade Growth, 1981-2000 (NaturalLog of) 1 3 0 0 I ~ 200 I I 100 0 00 m m ~ FDI Spillover Variable Quality of Economic Governance 12 00 8 00 4 00 0 00 id jwasured 8s Ln(li(FWGD?)'(av yrs Of school~nQ))'Ln(phones (per 1 0001 Cost of Starting a Business (%, GNI) Concentration Ratio in BankingSector I 100, 0 80 060 - Fi 040 1 *:*: *: 020. I nnn *:*: 24. The 1999 World Bank report, "Bangladesh: TradeLiberalization- Its Pace and Impacts ",also analyzes firm-level surveys and concludes that trade liberalization duringthe 1990s along with concomitant improvements in some aspects o f the domestic investment climate--market-oriented reforms and macroeconomic stabilization inparticular--had a beneficial impact on productivity growth across the surveyed firms. Most o f the import-competing firms that did lose out did so on account o ftheir own inability to improve efficiency and competitiveness despite earlier prolongedperiods o f trade protection than as a result o f trade reforms per se. The surveyed firms also cited other domestic investment climate related constraints--lack o f access to credit, infrastructure, corruption, theft and toll collection, shortage o f skilled labor--as beingresponsible for deterioration intheir performance. 25. More recent firm level surveys for thejoint World BanWBangladeshEnterprise Institute (BEI) Investment ClimateAs~essment'~ and by the National Private Sector Enterprise Survey of Bangladesh (NPSEB), highlight a wide range o f investment climate factors that constrain enterprise growth inrural and urban areas (Figure2.7). Lack o f access to electricity and finance and law and order problems are the major impediments shared by rural and urban firms, large and small. Economic governance related factors such as corruption, custom and trade regulations, and tax administration seem to affect mostly the larger urban enterprises--not surprisingly,since smaller enterprises tend to be outside the formal sector and do not have the frequency o f dealings with public institutions as do the larger firms. On the flip side, natural disasters and poor road conditions adversely impact small enterprises, particularly the rural ones, far more visibly than the larger ones. Figure 2.7: EnterpriseConstrains: Rural, Urban Small vs. Large Formal Firms 80 1 60 1` 40 20 0 2 I 4 r - Source: ICA 2003 and NPSEB 26. Insum, this chapter, drawing onthe recentlycompleted aggregate as well as firm-level productivity analyses, identifies some o f the key cross-cutting policy and institutional constraints that are seemingly the most bindingfor faster GDP growth, and hence for more rapid poverty reduction, in Bangladesh. Specifically, the areas o f relative weakness inBangladesh are: policies and institutions to enhance and benefit from global integration; quality o f and access to infrastructure; quality o fhuman capital; quality o f and access to financial intermediaries; quality o f economic governance; and regulatory and administrative burdens that directly impact cost o f business. It i s these same factors that also impinge on Bangladesh's export competitiveness. The next chapter takes a closer look at these areas and brings out the more structural, micro level, issues. l4The WorldBank andBangladeshEnterpriseInstitute,Improving the Investment Climate in Bangladesh, (June2003). Chapter 3 IMPROVINGINVESTMENT CLIMATE FOR STRONGER PRODUCTIVITYGROWTHAND EXPORT COMPETITIVENESS A. TRADE OPENNESSAND EXPORTCOMPETITIVENESS 27, As highlighted in theprevious chapters and suggested by the significant amount of cross-country empirical evidence, trade integration has been goodfor economic growth.I5 Trade liberalization, accompanied by complementary policies and institutional reforms, increases trade openness, which in turn enhances competition andfacilitates technological upgrading. Competition and technological improvementsfoster productivity growth and eflciency in resource use and allocation, thus boosting economic growth. Inthis section, Bangladesh's experience with trade liberalizationand trade openness since the early 1990s is reviewedbriefly with a view to highlightingthe remaining border barriers to export competitiveness and growth, and making recommendations for future actions to reduce Bangladesh's remaining anti-export bias. 28. One o f the principal indicators o f global economic integration i s `trade openness', which i s generally measuredby the ratio o f total trade (exports +imports) GDP. This ratio to (for merchandise trade) has increased considerably inBangladesh inrecent years: from 17.6percent in 1990 to around 29.4 percent in 2002.16 To a large measure, this reflects impacts o f significant reductions in import tariffs and inquantitative restrictions on imports, as well as considerable progress on exchange liberalization. In addition, inthe 1990s Bangladesh also achieved a phenomenal expansion inRMG exports under enclave arrangements that facilitated dutyhax free access to imported inputs. The latter arrangements, while concurrently expanding imported inputs--fabrics, yarn, and the accessories--enabled Bangladesh to benefit from the hitherto `reserved' import markets under the MultiFiber Arrangement (MFA) and more recently under the Agreement on Textiles and Clothing (ATC). It is worth noting also that Bangladesh's import penetration did not rise as fast as her export share in GDP, thanks to the sound macroeconomic managementpursued. However, trade liberalization efforts were a common phenomenon across the globe during the 1990s. As a result, despite the large increase in trade openness, Bangladesh's rank inthe world improved only marginally over the 1990s." 29. Bangladesh could have achieved greater trade openness and realized even higher productivity gains and economic growth inthe 1990s, had Bangladesh: (i) continued with the trade policy reforms rather than stalling them as done inthe mid-1990s and avoided even some back-tracking (see the discussions below); and (ii) more effectively dealt with the major weaknesses o f the investment environment and constraints to private activity, including those cited in Chapter 2. Notwithstanding tariff rationalization o f the last decade, today Bangladesh's trade policy provides the highest protectionlevel in South Asia and one o f the highest in the world, still creating a significant anti-export bias and barrier to Bangladesh's export competitiveness. It i s important to stress that tariffs and other protective instruments function as `taxes' on export activity by raising costs o f imported inputs and by shiftingincentives in favor of import substituting production, as the profitability o f production for domestic markets rises with protection. On the other hand, exporters have no choice but compete at international prices, regardless l5Dollar, D.and Kraay, Aart, "Trade, Growth, and Poverty", Economic Journal (2004); Dollar, D.andKraay, A. "Growth is Good for the Poor", Journal ofEconomic Growth (2002); Rodriguez, Franciscoand Rodrik, Dani, ``Trade Policy and Economic Growth: A Sceptic's Guide to the Cross-NationalEvidence", NBER MacroeconomicsAnnual 2000 (Cambridge, MA; MIT Press); and Winters, L.Alan, McCulloch, Neil, and McKay, Andrew, "Trade Liberalization and Poverty: The Evidence So Far", Journal of Economic Literature, Vol, XLII (March 2004). l6The trade-to-GDP ratioswere 20 and 33.3 percent for the respectiveyears, when non-factor services are included. " Bythe `tradeopenness'measurecitedabove,among 160countriesfor whichcomparableWDIdataareavailablefor 2002, Bangladeshranks 151. 14 of how much theirproJit margins are squeezed. We now turn to these important trade policy and domestic (behind-the-border) factors that affect productivity growth and export competitiveness. Trade PolicySince the Early 1990sand Its Anti-Export Bias 30. The tradepolicy reforms initiated in the early 1990ssignaled a signiJicant departurefrom the highly protectionist, inward-oriented import-substitution policies of thepast. The intendedobjectives were to foster trade integration, enhance domestic competition, and bringdomestic relative prices more into alignment with international prices. These developments would promote efficiency inresource use, lead to productivity growth, spur activities with comparative advantage, encourage technological progress and diffusion and thus generate dynamic gains. The reforms, which started in 1991, includedtariff cuts and rationalization, elimination o f quantitative restrictions, adoption o f a unified exchange rate system, switching from a fixed to a more flexible exchange rate regime, and current account convertibility. There were also some accompanying measures to liberalize the domestic economy and improve market orientation through deregulation, elimination o fmost administered prices, and the liberalizationo f the investment regime.'' 31, Duringthe first halfo fthe 1990s, import tariffs were cut significantly inBangladeshthrough a 'tops down' approach o f gradually reducing the maximum customs duty rate while also bringingdown the number o ftariff slabs. As a result, the (unweighted)average protectionrate (i.e., customs duty plus other protective levies or para-tariffs, such as the License Fee, and the extra protectionprovided by the Supplementary Duty and VAT)fell from 73.6 percent in 1991/92 to 32 percent in 1995/96." However, this liberalizationdrive slowed down significantly after 1995/96. As the domestic industries were exposed to foreign competition with the reductions in customs duties from prohibitively highlevels, the reactions from the protectionist lobbies, the reliance on customs revenues, and the concerns about the slow progress made domestically inaddressing the key structural weaknesses and constraints faced in carrying out business activities appear to have playeda key role in this outcome. Although, customs duties declined by nearly 35 percent, average nominalprotectionfell only modestly over the next eight years (Table 3.1). Cuts in customs duties were offset by the use o f other protectivetaxes2' The Infrastructure Development Surcharge, an across-the-board import tax, was introduced in 1997/98, and it has gradually been increasedfrom 2.5 percent to its current level o f 4 percent (of the 'assessable value' o f imports).2' A Regulatory Duty was introduced in2000/01, and in2003104 it was levied on 334 tariff lines that includedmarine products, transport equipment, electrical and non-electrical machinery--at rates ranging from 5 percent to 30 percent, with over 70 percent o f the applied rates beingat 30 percent. l 8This section draws from: The World Bank, Bangladesh: TradeLiberalization-Its Pace andImpacts,Report No. 19591-BD (November, 1999); The World Bank, TradePolicies in South Asia: An Overview, ReportNo. 29949 (SeptemberI,2004). These two studies providea detailedreview of the evolutionof Bangladeshtrade policiesduringthe last decade, with assessments, analysis,andpolicy recommendations. l9 Inprinciple, the SupplementaryDuty (SD) andVAT are supposedto beprotection-neutraltaxes. However,inBangladeshin implementation, the SD is mostly leviedon only importedproducts (e.g., importsof textiles), andwhen appliedon domestically producedsubstitutes,the rates are generally lower. Furthermore,becausethe SD is appliedon the landedvalue plus customs duty, it has a cascadingeffect, with protectionrates rising furtherwith higher customs duty rates. In2003104, 691 tariff lines were subjectto the SD at nine differentrates rangingfrom 15 percentto 75 percent; about 35 percent of SDs were on textiles, but others were leviedon adiverseset of products coveredby 41 differentHS chapters, with the SD rateon importsaveraging30 percent. Similarly, VAT has beenusedto provideextraprotectionto certainimport competingindustries(e.g., importsoftextiles are subjectto the general VAT rate of 15percent,but domesticallyproducedtextiles are subject to a special lowerVAT rate of 2.5 percent). 2o For a detaileddiscussiononthe protectiveapplicationof the SD andVAT as well as on the 'other' protectiveimporttaxes, see: TradePolicies in South Asia: An Overview, op. cit., Chapter 3. 21 'Assessable value' equalsthe c.i.f. value plus a 1percent landingfee. 15 32. Duringan eight-year periodsince 199.51'96,the overall protection rate fell only by 3 percentage points, from 32 percent to 29 percent.22And by 2003/04, these otherprotective levies on imports accountedfor 35 percent of total nominalprotection provided by the statutory import duties, as opposed to I Opercent in 1995196. It should also be noted that since 1995196 while average industrial tariffs fell by 5 percentagepoints, the average overall protection rate on agricultural products increasedby 7.4 percentage points. Table 3.1: Bangladesh- Average ProtectionRate (excluding duty-free export-related importsj i l : The averages reported here are based on 8-digit 6877 tariff lines and the Most FavoredNation (MFN)tariffs. They do not reflecppreferential' tariffs. /a: Harmonized System (HS) Chapters 25-97; /b: HS Chapters 01-24. ic: `Total protection' incorporates, in addition to customs duty, protectionprovided by the Infrastructure Development Surcharge (IDSH), License Fee (LF), Regulatory Duty (RD), as well as protectionresulting from asymmetric implementation o f the Supplementary Duty (SD) and VAT. Asymmetric implementation results when the so-called protection-neutral taxes are levied on only imports but not on domestic protection and/or when higher rates are applied on imports than on domestically produced substitutes. id: The collection rates include VAT but not the advance income tax (AIT) on imports. Source: The WorldBank, TradePolicies in SouthAsia: An Overview, Chapter 3. 33. There is also a significant tariffescalation inBangladesh's import duty structure, with the customs duty rates risingaccording to the stages o fprocessing. This means that the effective rates o f protection(ERP) for import substitutesare significantly higher than the nominal tariff protection on the product. Moreover, this escalation i s magnifiedby the imposition o f some o f the para-tariffs, such as the SD, whose duty-base includes landed costs plus customs duty. And in FY2003/04, of the 691 targs lines that were subject to SD when imported, only 5.5percent were also subject to SD when domestically produced. Thus, with the imposition of the SD, which varied inthe 15-75 percent range untilthe end- June 2004, the nominal protectionrates were raised drastically for some products whose domestic productionwere not subject to the SD (see footnote 19).23For example, given the maximum tariff rate o f 22This was despite the elimination of the License Fee in2002/03, which was another across-the-boardimport tax levied at 2.5 pycent of the assessable value. For further details on the application of para-tariffs and their incidence on imports, see: Trade Policies in South Asia: An Overview, Chapter 3. 16 30 percent inFY04, with a SD rate o f 40 percent, total nominal protection for textile products reached 85.5 percent.24Also, because o f a plethora o f end-user specific customs duty concessions, tariffpolicies have discriminated against the domestic production o f certain products that were not favored, such as intermediate material and components. Inaddition to import levies, Bangladesh has retained a number o f quantitative restrictions (QRs)on imports, some for protective purposes, particularly to protect the local textile industry. 34. I n early 2004, Bangladesh had the mostprotected economy in South Asia (Table 3.2).25 And globally, Bangladesh was also one of the topprotectionist countries, ranking 5thamong 134 developing countries when allproducts are considered26(also see Table AIII.l in Annex to Chapter 3). It needs to be noted also that these protective measures indicate `available' protection provided by the statutory import taxes. Inpractice, o f course, these protection levels may not reflectthe actual differences between domestic and international prices due to informal trade which limitsthe ability o f local firms to raise domestic prices to the extent that import tariffs would allow. Specifically, large volumes o f illegal imports from India--induced to a large extent by Bangladesh's highprotectionlevels--as well as smuggling through official channels (Le., Customs) by way o funder-invoicing and other mis-declarations reduce the scope for price increases. Table 3.2: Rankings of Average Tariffs in SouthAsia in Relation to Source: The World Bank, TradePolicies in SouthAsia: An Overview, Chapter 3. 35. Enhancing Bangladesh's export competitiveness depends on reducing the existing anti-export bias of the trade regime. Notwithstanding the Government's commendable efforts o f the last decade to liberalize trade policies, today Bangladesh has the highest protectionlevel in South Asia and one o fthe highest inthe developing world as described above. High targs and other protective instruments that protect domestic industries create strong disincentives to exports and export activities through several channels, thus causing significant anti-export bias: 0 Duties levied on imports o f final goods raise their domestic relativeprices, thereby increasing the profitability o f import substitutes relative to exports, which have to be exported at world prices. This divertsresources towards inefficient production for the domestic market, away from the production o f exports. For example, the very highprotection (nearly 100percent) afforded to the ceramics industry--which is, to some degree, reflected inmuch higher domestic prices o f ceramics products compared to their export price^,^' e.g., tableware--appears to be discouraging production for exports). 0 With import demand being curtailedunder highprotection, import-related(ex ante) demand for foreign exchange i s being curtailed, thus perhaps enabling the country to maintain a lower 24 In a move to further reduce Bangladesh's high protection rates and rationalize its complex system of import levies, the Govemment reduced the maximum customs duty from 30 to 25 percent, cut the number o f non-zero tariff slabs from four to three, abolished the Regulatory Duty, and rationalizedthe 9-slab SD structure with the FY05 Budget. 25 On the basis o f its unweightedaverage ofprotective import taxes. 26 Bangladeshalso ranked the lothtop protectionist country for agricultural products among 134 developing countries. 27 Of course, even inthe absence o f protection, domestic prices that are higher than export prices for the same product could be observed when firms can (and want to) practice price discrimination on the basis o f different demand elasticities faced inseparate markets. 17 exchange rate (Le., a lower domestic currency price for foreign currency) than otherwise. This would mean that export proceeds, expressed indomestic currency, would be lower than what the exporter would receive had the protection levels providedby import duties and other instruments been lower. 0 An escalating tariff structure, with lower tariffs on imports o fraw materials and intermediatesand higher tariffs on more processed products, raises the effective protection for an import substitute above the nominal protectionthat the same import substitute receives from import duties and other protection. This means that the value-added (processing margins) involved inproduction for the domestic market will exceed the value-added that would have existed inthe absence o f any protection, by proportionately more than the nominal protectiono f the final product. This further increases the anti-export bias. 0 Exporters sell in competitive world markets and cannot pass on increases in their costs o f production to their buyers. Thus, import duties paid on imported inputs increase their production costs and reduce their profit margins. Similarly, ifthey buy their inputs from local producers who are competing with lower-pricedimports, again there may be cost raising effects due to protection/localtaxes and/or lack o f local competition. o Even ifthere i s a dutyhax rebate system, these are generally very inefficient and slow, and even the delayed collection o f rebates may require some bribes. o Enclave arrangements, such as the bonded-warehouse scheme used by the RMG sector and export processing zones (EPZ), serve only specific activities and they tend to limit the extent o f positive externalities. 36. InBangladesh, exporters who do noticannot access the duty-free bondedwarehouse systemor EPZ (because they are not 100percent exporters) or that the specific inputsare acquired paying import duties or domestic taxes, can benefit from the existing duty drawback system managedby the Duty Exemption and Drawback Office (DEDO). However, despite various attempts to improve DEDO's governance and efficiency through staff training, new technical staff, and strengthened reimbursement procedures, this office still remains weak in governance and inefficient in disbursingrebates, as reflected insignificant delays inpayments of tariffltax rebates.28This ispartly due to the complexity o fthe existing import duty regime and a very lengthy duty drawback process involving the determination o f input-output coefficients and the submission of 18 documents by direct exporters (even more documents inthe case of indirect exporters). Currently, it takes a minimum of six monthsfor drawbacks to bepaid; 50percent of applications are not disposed of in twoyears; 75percent of the stafs time is spent on the RMG sector (though the latter sector benefits from the bonded warehouse system), because RMGfirms are applying for rebates of VATpaid on utility bills and on services of ChF agents. 37. To shed some light on a perception that one occasionally encounters inBangladesh, which i s the claim that there is no anti-export bias, it i s important to stress that neither the duty drawback system, which is highly inefficient, nor the enclave arrangements can offset all the anti-export bias created by highprotectionlevels. The bonded-warehouse systemand/or EPZs address mainlythe issue o fhow to provide exporters dutyitax free access to inputs (and for 100percent exporters), but they do not offset the other disincentives caused by highprotection listed above. 38. Falling but still high anti-export bias. Bangladesh's trade liberalization efforts since the early 1990shave produced only a partial success in reducing the anti-export bias o f the trade regime, as shown inTable 3.3 below. The ratio of (average) effective exchange rate for imports (EERm) to that of exports 28Reportedly,exportersthemselves are also causingdelays inthe reimbursement of tariffitax rebatesby not submittingall the requireddocuments ina timely manner. 18 (EERx) is used as an indicator o f the trade regime's anti export bias29--thehigherthe ratio above 1.OO, the higherthe bias against export activitie~.~' Fiscal Imports Average total Average total Nominal EERda EERml" EERx Anti-ExportBias Year (in protectionrate protect. rate Exchange billion (%) 'a (%)" rate ib: Average (unweighted)total protectionbasedon MFNratesadjustedfor end-user concessions andexemptions-the correspondingEERmis given in column5 under EERml. The latteralso reflectsduty-freeaccess to importedinputs providedto exporters of RMG. 39. As figures in columns 7 and 8 o f Table 3.3 indicate, inthe first half o f the 1990s, the anti-export bias o f the trade regime declined significantly with the reductiono f average protection levels. This i s observed both with the average import effective exchange rate based on the MFNrates only (column 4) as well as with the import EERs that also reflect end-user tariff concessionsiexemptions (column 5). Both series indicate a leveling off since the second half o f the 1990s, verifying that while customs duties (CD) have been brought down through reductions inthe maximum CD rate, increases inthe rates o f some para- tariffs and the introduction o f new ones have maintained considerable anti-export bias untilpresent. With the extent of average bias remaining in the 21-27 percentage point range. the structure of incentives created by the trade policv stillfavors the production of import substitutes and constitutes a significant barrier to the emergence of new areas of exports and to the expansion of exports that are not benefiting from enclave arrangements cited above. These calculations are based on the protection levels made 'available' by import duties. As noted earlier, statutory tariffs may not reflect the actual price differences between domestic and international prices due to illegal border trade and smugglingthrough official channels. However, it i s important to stress that such informal trade i s inducedby highprotection rates, and it is the structure o f protection shaped and made available by the statutory duties that i s going to affect medium- and longer-term production decisions. 40. Other indicators of anti-export bias inBangladesh are consistent with the results reported here. In particular, estimates o f anti-export bias measured interms o f the ratio o f effective protection resulting 29 Inthe current context, EERs for importsrefer to nominalexchange rates adjustedfor (protective)import leviesandany scarcity premiumthat exchange controls may generate. As such, the EERmindicates the domestic currency cost of one unit of foreigncurrency (US$l, inthis case) worth of imports. For exports, EERxrepresentsthe exchange rate after adjustmentfor the existingexport promotionschemes, suchdirect export cash subsidies, subsidizedexport credits etc. Thus, EERxrepresents domestic currency equivalentofproceeds from exportsworth one unit of foreigncurrency. 30 Ifthe ratioequalsunity, this would imply that trade policy is neutraltowards exportingandimport substitutingproduction. 19 from tariffs for the domestic market and that for manufactured exports indicate an even larger anti-export bias, The latter (Maxwell Stamp, 2002)3' results are based on firm-level data for the period 1999-2002. 41. Reducing the remaining signifcant anti-export bias. Bangladeshhas managed to insulate certain activities from this anti-export bias, most notably and perhaps the only noteworthy activity being the RMGsector, through the bonded-warehouse and EPZ schemes. Undoubtedly, this has demonstrated that Bangladeshi producersiexporters will respond to incentives and opportunities and can compete globally when they do not face disincentives inthe domestic market. However, Bangladesh i s yet to replicate the success o f RMG sector in other industries. This will require sustained efforts to reduce the existing anti-export bias through further trade reforms (elaborated next) and, o f course, by tackling behind-the-border investment environment bottlenecks that are discussed in the next section. 42. Recommendations: 0 The key objectives o f future trade reform needs to be: further simplification o fthe import tax regime; reduction in the dispersion and average level o f nominal (and thus effective) protection, preferably through a pre-announced medium- and long-term schedule o f tariff reductions (as done recently by India), and the elimination o f any remaining protective quantitative restrictions. Key elements of such a programwould include: o The unification o f all para-tariffs and merging o f these with the customs duty, with the result o f having one tariffrate for each tariff line; o following the practice of the last decade, a `tops down' tariff reduction approach could be maintained by gradually reducing the maximumtariff rate (after the mergingo f all para-tariffs with customs duties)to 20 percent over the next two- three years as a medium-term objective. Lookingbeyond 2006/07, in the subsequent 2-3 year period, a new maximum tariff rate o f 15 percent could be set as an objective, say, for 2008. This would, o f course, also require parallel progress in expanding the base o f VAT and direct taxes, while the tax administration i s further strengthened; o reducingthe number o fnon-zero customs dutyitariff slabs to two rates over the next two-three years, which would simplify the tariff structure even further and move it towards a long-term target o f a low, uniform tariff rate; o avoiding any re-introductiono f offsettingpara-tariffs; o discontinuingprotective use o fVAT by ensuring that it is leviedboth on domestic production and imports o f the same products; and o eliminating all quantitative restrictionshans that are for protectivepurposes, such as those applying on imports o f textile products, poultry, cartons, and salt. Replacing them with appropriate tariffs would be the right step. 0 Since many export items do not benefit from the duty-free access to imported inputsthrough the bondedwarehouse and EPZ schemes, it is critical to have a well functioning duty drawback systemsuch that rebates are paid quickly. To this end, the full implementation o f the new duty drawback and bonded warehouse scheme is needed. 43. Latestpositive developments. Inthis regard, the Government's recent decision, announced with the FY05 Budget, to reduce the maximumcustoms duty rate from 30 to 25 percent, movingto a three non-zero tariff slab system, abolishing the Regulatory Duty, and significantly scaling down and 31Maxwell Stamp (2002), Review ofRelative Protection ,preparedfor Bangladesh Tariff Commission. 20 rationalizing the Supplementary Duty was a welcome and important step in further reducing the existing anti-export bias. ExchangeRate Regimeand Export Competitiveness 44. Aside from the domestic structural factors and trade policy, changes in the exchange rate also affect export competitiveness o f a country. Inthis regard, developments inthe real effective exchange rate (REER) are important. This i s because REERreflects the overall exchange rate competitiveness by taking into account the movements inthe nominal exchange rates and inflation inrelation to the country's major trading partners. Bangladesh's long-term strategy has beento maintain a stable REER. Since the late 198Os, the REERwas maintained within a relatively narrow band, mainly through periodic mini devaluations untilthe taka was floated in May 2003 (Chart AIII.1 in Annex to Chapter 3). 45. A more complete and interestingpicture emerges when Bangladesh's exchange rate performance i s compared to that o f its key Asian competitors. Duringmost o f the eighties, virtually all o f Bangladesh's key competitors, notably China and India, massively depreciated inboth nominal and real terms (Chart AIII.2 in Annex to Chapter 3). The trend slowed down somewhat duringthe 1990s. Nevertheless, by end-2003, Bangladesh's bilateral RERwas more appreciated than those o f India, Pakistan and Thailand, and only slightly more depreciated than that o f China. Inshort, although Bangladesh avoided an appreciation o f its REER, the relative rigidity o f its exchange rate policy compared to its competitors (Chart AIII.3) entailed an effective loss o f competitiveness. Bangladeshwas able to withstand this adverse development mainly through the rapid growth o f RMGexports, which benefitedfrom generous ATC quotas, low labor costs, and reduction o f anti-export bias. Going forward, the floating o f the taka in 2003--which depoliticized exchange rate movements that had inpart hampered a more aggressive exchange rate policy during the past two decades--should help keep export prices competitive and facilitate adjustment to the potential shock following the removal o f the ATC quotas. B. INVESTMENT ENVIRONMENT: STRUCTURALIMPEDIMENTS TO GROWTHAND PRODUCTIVITY 46. As assessedby the previous chapter, GDP growth has beenimpressive since the early 199Os, and could have been even higher but for policy and institutionalweaknesses inimportant investment climate areas that the chapter identified. Relative weaknesses inthese areas offset to some extent the advantages offered by lower initial income and impressiveperformance on macroeconomic stability. The latter, in fact, has been the cornerstone o f economic performance inBangladesh. CPI inflation has not touched the 2-digit mark since the mid-l980s, and has beenmore stable than in any other low-income (or even lower- middle-income) country.32Exposure to external shocks has also been limited, though mainly due to a low trade base.33 Partly due to the low exposure to domestic macro and external shocks, GDP growth has beenremarkablystable: over the previous two decades, the volatility o f GDP growth inBangladesh has been among the lowest inthe This section discusses ingreater detail the most bindingpolicy and institutionalconstraints associated with insuficient global integration, followed by economic governance, physical infrastructure, human capital and innovation,finance, and specific agricultural and rural issues. 47. Global irztegratiorz. Bangladesh's economic integrationwith the global economy i s still fairly low, by most measures. The 2004 Globalization Index prepared by the consulting firm A.T. Kearney and the ForeignPolicy magazine ranks Bangladeshat 56 out o f 62 countries (Table 3.4). Bangladeshranks 32 As measured by its standard deviation over the 1980s and 1990s. 33 Weak fiscal performance inthe form o f extremely low revenue mobilization(one o f the lowest inthe world) and inefficiencies inpublic expenditure allocation remains an important area of macroeconomic weakness inBangladesh. 34 To be sure, the economy remains vulnerable to weather related shocks (floods and cyclones inparticular) that affect Bangladeshdue to its unique topography. However, the capacity to both manage and cope with natural calamities has improved tremendously, though there remains significant scope for further improvements in this area. 21 last in the area o f economic integration, and within that category, last on investment income, second to last on FDI, third to last on portfolio flows, and fifth from last on trade openness. Table mntrv Rankin s on A.T. Kearne /Forei n Polic ( obalization idex Measures I ?Economic lntegratio? I IIPersfnal ContaYcct Technology Political Engagement P E 2 5 ; 2 ,5 Es 0 0 Bangladesh 62 62 59 Chile 27 26 32 30 37 46 9 33 China 49 56 55 49 46 51 55 54 35 44 58 India 55 58 61 30 55 57 53 28 58 53 51 Indonesia 51 57 57 53 51 49 51 37 59 30 40 Malaysia 26 46 42 28 7 12 20 36 35 32 43 30 45 Sri Lanka 56 60 22 54 43 53 49 52 7 58 50 47 51 55 44 49 Thailand 58 44 53 37 53 42 32 37 41 42 45 45 53 52 Source: ForeignPolicy,The2004 A.T.KearnedF0rei.m Policv Globalization Index, (MarchiApril2004). 48. Interms o f openness to FDI, Bangladeshranks 137 among the 141countries for which there are comparable data inthe WDI database on gross FDIinflows to GDP ratio duringthe 1990s. Only Nepal, Iran, Republic o f Congo and Samoa rank lower. This is despite the fact that Bangladesh has a relatively liberal FDIregime. Clearly, foreign investors are deterred by the licensingrequirements for private activity inthe energy and the telecom sectors, as well as other investment climate problems identified in the recentInvestment ClimateAssessment (ICA) for Bangladesh (see Chapter 2). The perceptiono f widespread corruption i s also likely to have dampened FDIinflows, as has been shown for other countries. 49. The way forward. Significantly higher FDI inflows would be neededto support a higher growth environment in Bangladesh to compensate for domestic resource constraints and to enable Bangladeshto benefit from associated knowledge and technological spillover effects. The current ban on FDIinflows into the RMG sector also needs to be removedin order to bolster Bangladesh's prospect for the post-ATC quota era, International experience suggeststhat attracting FDIwill require tackling the domestic investment climate constraints. InBangladesh's case, this impliesaddressinginparticular the problems o f corruption, law and order, and infrastructure-along with increased export-orientation, Another major challenge i s to address the issue o f trade union rights in export processing zones (EPZs), reflectingthe concerns o f Bangladesh's largest export markets (US and EU), while retaining the attractiveness o f the EPZs as FDIdestinations. 50. Economic Go~ernance.~~ quality o f economic governance i s quite weak inBangladesh and The i s a major part o f why it underperfomed relative to its true p ~ t e n t i a l . ~ ~ 5 1. Theuroblem of endemic corruption. Bangladesh has received a lot o f negative attention lately due to perceptions o f widespread corruption inpublic-private dealings. Most prominently, Transparency International, the Berlinbased private rating agency, has placedBangladesh last on its cross-country corruption ratings. While such a blanket indictment o f Bangladesh could be viewed as unjustified since it reflects subjective perceptions that may not be meaningful in a cross-country setup, the problem o f endemic corruptionin Bangladesh i s undeniable. In a recent survey, about 60 percent o f the 1,001 firms 35 Factormarketconditions,albeit extremelyimportant,are not discussedheremainlybecauseof lackingbackgroundanalyses. Ingeneral, labormarketconditions are perceivedto be fairly relaxedandnon-bindinginBangladeshrelativeto most comparator countries. 36 Economic governancehererefers to qualityofthose aspects ofpublic service delivery andpublic-privatedealingsthat directly affect the efficiency of the privatebusinesssector. 22 surveyed in Dhaka and Chittagong areas viewed corruption as a major constraint to businessoperation and growth (as was shown inFigure 2.7); lack o f access to electricity was the only other constraint which was viewed as a major constraint by a higher number o f the surveyedfirms. 52. Poor law and order situation. Extortions and other criminal activities, feeding on an environment of widespread corruption inpolice and lower courts, are a major governance problem. This has seriously hurt public confidence in enforcement o f the rule o f law and impartial protectiono f property rights, vitiating the business environment and harming long-run growth. Figure3.1: ProceduresInvolvedwith Startinga New Businessin Bangladesh E a n g l a d e i h 1. Buy Non-Judicialstamps I 2. Verify the companyname 35 1 3. A lawver verifiesthe MemorandumandArticles of Association 4. Pay the registration fee 5. File documents with the Registrar of Joint Stock Companies 6. Make a company seal 7. Registerwith the tax authority i / Source: WorldBank's Doing Business Database 53. Renulatow environment and the cost of doing business. According to the World Bank's Doing Business 2003 database, on average, 7 procedures are involved in starting a business in Bangladesh (Figure 3.1). This compares favorably relative to other benchmark countries. On average, it takes about 30 days to clear these procedures inBangladesh, which again is relatively good--only Niger and Chile among the comparator countries have a shorter duration. However, the cost o f eventhese relatively few procedures i s extremely highin Bangladesh. Despite having fewer procedures, the cost o f starting a business (inUS dollars) is higher inBangladesh than inChina, India, Indonesia, Sri Lanka, Thailand, and Vietnam. The same cost, expressed as a share o fper-capita GNI, i s higher inBangladesh than inany other country except Niger inthe comparator group. A complementary measure based on surveys o f executives corroborates that starting a business i s more onerous inBangladesh; o f all comparator countries in Asia, Bangladesh ranks lowest on a question rating the difficulty o f starting a formal business interms of administrative burden, ranking 77thout o fthe 102 surveyedc~untries.~'As seeninFigure3.1, the most costlyprocedures, interms ofboth time and money spent, are filing documents with the registrar of Joint Stock Companies and registering the company with the tax authorities. Number of Duration Cost cost("0 of Number of Duration cost cost ("0 Procedures (days) (US$) GNI per capita Procedures (days) (US$) GNI per capita Bangladesh 15 270 973 270.3 Chile 10 28 494 11.6 21 200 626 14.7 China 11 46 134 14.3 20 180 301 32 India 10 88 239 49.8 11 365 456 95 Indonesia 11 168 103 14.5 0 225 1910 269 Malaysia 8 31 959 27.1 22 270 687 19.4 Niger 11 27 759 446.6 29 365 97 57.1 Sri Lanka 8 58 154 18.3 17 440 64 7.6 Thailand 9 42 144 7.3 19 210 586 29.6 Vietnam 11 63 129 29.9 28 120 37 8.5 Median Country i 10 I 45 I 541 24.3 21 225 352 12 Source: Doing Bu, 37 WorldEconomic Forum, 2003-04, Table 8.05. 23 54. Similarly, while the number o f procedures involved in gettinga business contract enforced i s relatively low inBangladesh, the cost o f clearing these is quite high--the average cost o f enforcing a contract in Bangladesh is almost three times its per-capita GNI, the highest such ratio among the comparator group (Table 3.5). Complementary survey results obtainedby the World Economic Forum paint a similar picture. O f all comparator countries in the WEF survey, Bangladesh ranks one o f the lowest on a question on the effectiveness o f bankruptcy law, 96`ho f 102 countries3*(See Table AIII.2 in Annex to Chapter 3 for Bangladesh's relative standing among 80 to 102 countries in"business competitiveness" and "growth competitiveness"). 55. Theway forward: Improving governance requires a clear long-term vision as well as pragmatism inexploiting opportunities to strengthen the overall framework ofpublic accountability. Progress is very much dependent on strong political commitment and home-grown strategies tailored to the circumstances o fBangladesh. A broad consultative process to formulate a comprehensive anticorruption strategy and participation inits implementation and monitoring would lendlegitimacy to the process, increasing the likelihood o f its success. The success and sustainability o f a strategy for better governance i s also predicated upon improving the competence and responsiveness o f the civil service, the quality o f which has been declining since independence. Civil society, including the media, will have to play a major role inforcing a change inthe institutions o fpolitical governance. 39 56. Infrastructure Development. Infrastructure bottlenecks relatedto power, ports, gas, and telecommunications are severe. These significantly increase the cost of production, impede productivity growth and, thus, hamper export competitiveness o f Bangladeshi firms. Product specific examples o f how infrastructure deficiencies affect production costs and export competitiveness are presented in Part 11, where value-chain analysis is carried out on T-shirts (RMG), tableware (ceramics), shrimp, Frenchbeans (vegetables), and footwear. 57. Only 31percent o fthe population--80 percent inthe urban areas and 19percent inrural--has access to power. Inadequate access to electricity was the most frequent complaint among firms surveyed for the Bangladesh ICA. Lack o f access to power is significantly more constraining for rural enterprises. A recent survey found only 32 percent o frural firms with access to electricity comparedto 60 percent in urban areas.40 For those fortunate enough to have a utility connection, reliability i s a major issue--power outages and surges are all too frequent--since only 1.8 percent o fthe roughly 3 million rural enterprises own a generat~r.~~ Electricity Generating Telephone Total Road Roads, Capacity (Kw per Mainlines (per Network (per paved (Yo 01 capita) 1,000 people) sq. km area) total roads) Bangladesh 0.03 8.3 1.6 9.53 Chile 0.63 574.8 0.1 18.9 China 0.25 247.7 0.1 22.4 India 0.11 43.8 1.1 45.7 Indonesia 0.10 65.7 0.2 46.3 Malaysia 0.58 509.9 0.2 75.8 Niger 2.1 0.0 7.9 Sri Lanka 0.09 79.9 1.5 95.0 Thailand 0.34 221.9 0.1 97.5 Vietnam 0.06 53.0 0.3 25.1 38 WorldEconomic Forum, Table 2.13. 39The World Bank,Bangladesh: Develoument Policv Review, (2003) contains specific recommendationsto address the governanceproblems. 40The World Bank,Promoting the Rural Non-Farm Sector in Bangladesh, (2004). 4' Ibid. 24 58. Poor port conditions extract a hefty price interms o f lost economic potential. The Chittagong port, which handles nearly 85 percent o f the country's trade merchandise, i s plagued by labor problems, poor management, and lack o f equipment--a situation that i s fairly symptomatic o f the rest o f the sector's problems as well. Its container terminal handles only 100-105 lifts per bertha day, well below the UNCTAD productivity standard o f 230 lifts a day. Ship turnaround time i s 5-9 days, significantly above the 1 day standard o fmore efficientports. Inaddition, handling charges for a 20-foot container havebeen estimated at $640 (of which $250 is for unofficial tolls) compared to $220 in Colombo and $360 in Bangkok.42 Infrastructure relatedproblems at the ports are exacerbated by time consuming and cumbersome customs procedures that provide constant opportunities for bureaucratic discretion. Customs procedures at ports require more documents and take longer than at other regionalports. Results o f the ICA surveys exemplify this: for instance, Bangladeshi firms reported an average 11.7 days to get their last shipment o f goods through customs, compared with Malaysia (3.4 days), China and India (both 7.5 days), and Philippines (10.2 days), and only inPakistan it took longer (17.9 days). Similarly, customs procedures at airports also are fraught with multiple requirementsfor documents and approvals. 59. Despite a relatively highdensityo f its road network, poor road conditions and lack o f transportation seriously impair private activity, particularly on account of: poor construction o f roads and bridges; lack o f maintenance o froads and waterways; and a lack o f integrationo f differentmodes o f transportation (which makes long-haul transport very difficult). Poor road conditions and lack o f transportation are especially constraining for enterprises in far-flung rural areas, where, ina recent survey, 36 and 18 percent o f firms, respectively, reported them as severe problems.43 Public spending on road maintenance falls well short o f what is needed. For example, expenditure by LGED on rural road maintenance was about Tk 1.7 billion inFYOO as opposed to an assessedrequirement o f Tk 2.4 billion44. 60. Another significant source o f the weak investment climate inBangladesh-especially so inrural areas--is the lack o f access to communications services. Teledensity (fixed line and cellular) in Bangladesh i s far lower than in comparator countries (Table 3.6). The vast majority o frural enterprises do not have access to fixed line phone service--only 1.5 percent o frural firms reported access to phone in the recent NPSEB survey. Bangladeshhas one public call office (PCO) per 32,000 population(India has one per l,OOO), and as a result only 31 percent o f the rural population has access to a fixed line (compared with 70 percent inIndia). Eveninregions that are within reach o f the telephone network, access is made difficult by the extremely highcost involved (interms o f $/taka and time) ingetting the initial connection. The average cost o f a fixed line is $171 inBangladesh (compared to India's $18 or Nepal's $28), while firms report an average waiting period o f 130 days in Bangladesh (versus 42 inPakistan and 16 in China). 61, Theway forward: The central policy challenge with respect to infrastructure development i s to redefinethe role o f the public sector from service provision to regulation and to encourage private sector participation at the same time. A great deal o f preparatory work i s neededhowever to establish an environment that is conducive to private investment. Inparticular, authorities would need to define the rules of competition, strengthenthe regulatory environment, and tackle the problem o fpoorly performing state-owned enterprises (SOES).~~ The failures o fthe infrastructure and financial (see below) sectors reflect the performance o f SOEs that has gone from bad to worse. The Government has recently begunto address this issue seriously.46Inpower, additional important actions that remain to be undertaken include: (i) implementingthe new pricing framework; (ii)establishing a professionally staffed reform directorate inthe MinistryofEnergy and Mineral Resources; (ii) accelerating financial restructuring and unbundling o f the power sector; (iii) developing a plan for private participation to improve efficiency, coverage, and financial performance inurban distribution; (iv) updating the strategy for expanding and financing 42 Bangladesh EnterpriseInstitute,Reducina the Cost of Doina Business in Bangladesh, (20041, pp 99-105. " TheWorldBank,PromotinptheRuralNon-FarmSectorinBanaladesh,opcit. 44 The World Bank,Bangladesh Public ExpenditureReview, 2003. 45 More specific infrastructure-relatedrecommendationsare coveredinthe Bangladesh: Development Policy Review, (2003). 46 The World Bank, Bangladesh: Review ofpublic Enterarise Performance and Stratepv ,(2002). 25 generation; and (v) establishing a new energy regulatory agency with strong enforcement powers and adequate financial and humanresources. Chapter 5 inPart I11contains a detailed review and assessment o f transport and trade facilitation issues and challenges together with specific recommendations. 62. Labor Quality, Innovation System, and IT Infrastructure. As seen inTable 3.7, despite significant improvements since independence, Bangladesh still lags comparator countries on most human development indicator^.^' This significantly dampens labor productivity and, consequently, growth and wage levels. Bangladesh also lags comparator countries in terms o f innovationpotential and information technology (IT) infrastructure. The cross-country comparisons inTable 3.8 on four telling measures o f a country's innovation system and two indicators o f informationinfrastructure exemplify this. Maternal Mortality Prevalence of Child Rate (per 100,000 Malnutrition (Oh of children Average Yrs of Edu (2000) Life Expectancy Fertility Rate live births) under 5), Weight for Age 1975 2000 1975 2000 1975 2000 1990.1998 1993-2001 Bangladesh 1.3 2.6 46.0 61.2 6.6 3.1 440 48 Chile 5.6 7.6 65.7 75.6 3.2 2.2 20 1 China 4.4 6.4 64.7 70.3 3.4 1.9 55 10 lndia 2.7 5.1 51.8 62.8 5.4 3.1 410 53 lndonesia 3.0 5.0 51.3 66.0 5.0 2.5 450 25 Malaysia 4.4 6.8 64.4 72.5 4.6 3.0 39 20 Niger 0.5 1 .o 39.9 45.7 8.0 7.2 590 40 Sri Lanka 4.8 6.9 66.2 73.0 3.9 2.1 60 33 Thailand 4.0 6.5 60.6 68.8 4.6 1.8 44 18 Vietnam 55.9 69.1 5.7 2.2 160 34 RBD Number of Patents Granted by the Scientific 8 Technical Personal Computer Number of Expenditure Researchers US Patent 8 Trademark Office Journal Articles Penetration internet Users (Ohof GDP) (per million pop.) (per million pop.) (per million pop.) (per 100 pop.) (per 10,000 pop.) Bangladesh 0.03 51 0.00 1.2 0.3 15 China 0.7 551 0.21 9.3 2.8 460 lndia 0.7 158 0.17 9.2 0.7 159 Malaysia 0.2 154 2.35 18.3 14.7 3197 Pakistan 78 0.01 2.1 0.4 103 Philippines 0.2 156 0.19 2.2 2.8 440 63. The way forward: With good foundations already built, Bangladesh should now move swiftly with the second generation reforms needed to further improve human development. The I-PRSP's targets for human development provide a good referencepoint to anchor core reforms. These entail complementing increased social spending with significant improvements inthe institutional framework for service delivery. As recommended inthe latest World Development Report, the emphasis should always be on placing the poor at the center of service provision: by enabling them to monitor and discipline service providers; by amplifying their voice in policymaking; and by strengtheningthe incentives for providers to serve the poor. Special attention i s needed on quality improvements inhealth and education, especially by strengthening partnerships between public and private sectors--including NGOs and community-based organizations (CBOs). Efforts also need to be stepped up to promote decentralization, which i s key to improving the quality o f and the poor's access to public service delivery. 64. Financial Sector Performance. Bangladesh has a relatively shallow financial sector. In2002, bank credit to private sector was just 29 percent o f GDP and broad money was 37 percent o f GDP. Not only that, deep-rooted institutionalweaknesses drastically restrict the efficacy o f the banking sector. Due to weak management, constant political interference, and problems o f corruption and directed lending, the four Nationalized Commercial Banks (NCBs), holding almost half o f the industry's net assets, are 47The BangladeshDevelopment PolicyReview (2003) contains an in-depthassessmentof humandevelopmentissues. 26 technically insolvent, with the ratio of their non-performing loans to total loans estimated at 34 percent. The court systemcannot be relied upon to protect creditor rights which further vitiates lender incentives and contributes to misallocation o f credit. 65. It is hardly surprising thenthat instead o f contributing to economic growth the banking sector is dragginggrowth down and poses serious systemic risks to financial stability. Recognizingthis, a 1998 World Bank report4*commented that "The three institutional pillars o fbanking--a strong regulatory system, well-managed banks, and an effective court system--have crumbledto such a point that banking institutions cannot be relied on to ensure the safety o f deposits and efficiently allocate credit, their two most important functions. Ina more difficult economic environment, the banking system could become Bangladesh's Achilles heel." That broad assessment remains true, although some positive developments have been seen since. Inparticular, the condition o f private banks has improved markedly inresponse to improvedbanking supervision and governance. Performance o f the NCBs continues to worsen however. Bank Stock market Lending rate Real Private Concentration capitalization minus deposit interest I MllGDP CreditlGDP Ratio to GDP rate (%) Bangladesh 37.02 29.07 0.43 0.02 7.34 12.95 Chile 44.73 66.41 0.23 0.75 5.70 5.03 China 167.58 139.67 0.52 0.50 3.60 6.55 India 57.99 31.74 0.48 0.21 7.61 indonesia 53.68 22.28 0.53 0.08 3.07 10.99 Malaysia 100.27 145.23 0.30 1.32 3.29 2.59 Niger 9.02 5.01 1.oo Sri Lanka 36.76 28.25 0.52 0.05 8.38 5.51 Thailand 98.54 102.92 0.31 0.26 4.71 6.09 Vietnam 49.90 43.10 0.71 4.12 5.56 66. Banking sector inefficiencies along with administered interest rates on some government saving instruments such as National Saving Certificates and postal saving schemes have kept the real lending rates quite high, leadingto (more or less ad hoc) rationing o f credit to private businesses and hurtingthe efficiency o fprivate investment. In2003, the average lendingrate was 16 which implies that the average real lending rate was over 10 percent (CPI inflation in2003 was about 5 per~ent)~'.Also, reflecting the lack o f adequate competition inthe banking sector and inefficienciesinbank operations, the spread betweenbank lending and borrowing rates i s quite high--the average spread was about 8 percentage points in 2003 and remained over 8 percent inthe first two quarters o f 2004 according to IFS data. 67. Other elements o fthe financial sector are fairly underdeveloped as well. Microfinance institutions serve about 13 million households and have played an important role inpoverty alleviation. However, their total asset base i s still quite small (about 1.4 percent o f GDP) and many o f the NGOs involved in microfinance are multipurposeorganizations that needto depend on grants and soft loans for existence. There i s no regulatory and supervisory framework for microfinance, except for the Grameen Bank which is covered by a special ordinance issued in 1983. In addition, the microfinance institutions, despite their impressive coverage, are able to cater only to the poorest segments o f the population (for 48 Strategyfor Establishing a Sound and Competitive Banking Sector (1998), Volume I, World Bank. The 49 As per the IMF's International Financial Statistics (IFS) data. 50 Real interest rates have been on the decline. Reforms inthe financial sector during 2002-04 have been instrumental in driving down lending rates inBangladesh. Bank lending rates to industry were 12-13.5 percent in late 2004 inprivate banks and 10-12.5 percent inNCBs, compared to an average o f 16-17 percent in2003 and earlier. Due to floods inAugust and POL price adjustments inresponseto higher intemational oil prices, inflation rate has been creeping up to nearly 6.5 percent by late 2004. Real lending rates were therefore down from their highs of over 10 percent in 2003 to 5.5-7 percent by late 2004 - still high by regional standards. However, it is not certain that the inflation creep is permanent or the result o f a temporary shock. Inthe latter case, with sound monetary management inplace, it is likely to decline inthe next few months leading to higher real interest rates. 27 small and very short-term loans) and are not accessible to micro and small enterprises. The latter group o f enterprises typically also find themselves outside o f the formal banking sector net. The size o f the capital market i s also very small--market capitalization equals only about 2.4 percent o f GDP. There are no derivative or over-the-counter markets inBangladesh. Insurance company assets equal only about 1.3 percent o f GDP and those o f finance companies another 0.7 percent o f GDP. 68. Theway forward. Giventhe severity o fthe banking sector problems, it i s imperative that the longstanding governance and other structural problems o f the NCBs be resolved while stemmingtheir financial hemorrhaging. Fortunately, the authorities' reform strategy for the sector covers these two tracks. 51 The Bangladesh Bank's authority to supervise and regulate the banking sector has been recently strengthened, which needs to be augmented further. Strengthening o f creditor rights and contract enforcement are also needed to improve the efficiency and coverage o f the banking sector. Micro-credit institutions have an extremely important role to play, but the regulatory framework for these institutions remains an issue the resolution o f which needs to be expedited. Finally, perhaps not as urgently as the banking sector though, authorities needto develop a long-term debt market and deepen and strengthen equity markets--particularly by strengthening the capacity and authority o f the SEC. 69. Agriculture and rural sector issues. The I-PRSP has rightly identifiedrural development as a priority for rapid poverty reduction. This can be achieved through accelerated agricultural and non-farm- sector growth. The major source o fproductivity growth inrice has beenlargely exhausted and further breakthroughs are far more challenging. Agricultural diversification and rural non-farm (RNF) activities constitute the more promising sources o f rural growth and employment in Bangladesh. Strengthening o f agriculture sector performance requires further input and output market deregulation; public investment in and bettermanagement o f irrigation and flood control; intensificationo f agriculturalresearch and extension; improvements in the functioning o f the land market, including legal reforms to facilitate land transactions; and agricultural credit delivery inpartnership with NGOs and community-based organizations. 70. To unleash the growth potential o f the RNF sector authorities will needto strengthenthe rural investment climate.52 The priority reform areas here are: (i) rationalizing the tariff structure, and particularly reducing tariff dispersions that hurt small entrepreneurs, and revising special incentive schemes that bypass small and rural entrepreneurs; (ii) ensuringaccess to basic physical infrastructure, by investinginrural electrification, removing regulatory obstacles to expansion o ftelecommunications coverage inrural areas, and ensuring adequate fundingfor maintenance o f rural road infrastructure; (iii) reformingthe rural financial system, to mobilize rural savings and to improve delivery o f credit particularly to small and medium sized firms; (iv) providing a regulatory framework to facilitate development o f agro-food supply chains and refocusing agriculturalresearchand extension services to non-cereal crops; and (v) sustaining progress innatural disaster management. C. ASSESSINGFUTURE GROWTHPOTENTIAL 71. Growth potential based on currentpolicy performance. Figure 3.2 below shows growth potential inBangladesh based on the most recent performance measurements inkey structural areas that are identified inthe cross-country growth analysis summarized in Chapter 2. Overall, current policy and institutionalperformance inBangladesh appears to be consistent with annual per-capita growth o f 3.7 percent--about the same as the actual growth performance over the last few years. It appears therefore that the current policy stance should be able to sustain GDP growth inthe 5.0-5.5 percent range. "InanunderstandingreachedwiththeBankandtheIMF,authoritiesareintheprocessofstrengtheningmanagementofeachof the NCB anddeveloping bank-by-bankstrategiesfor long-termresolution. At the same time, the BangladeshBankhas signed MOUs with the four NCBs that capNCB lendingat reasonablelevels, prohibit largeunsyndicatedloans, andoblige the banksto expediteloanrecoveries. 52Promotina the Rural Non-Farm Sector in Bangladesh (2004), op cit. 28 Figure3.2: Future Growth Dividends from Key Areas ` in 4 00, 1 ,E 1 3 50 0 FDISpillovers 300 + 250 0 Increase in $ 200 Dom3StlC Investrent Rate 150 100 0 50 0 Average 0 00 Growth (1981- 00) Note: Each colored box bar shows incrementally the amount of additional growth that can be obtained due to improved performance in 2002 (or latest data) vis-a-vis the 1981-2000average. Source: World Bank staff calculations 72. Growth that can be ....and reform areas that hold mostpromisefor growth. Figure 3.3 below shows the growth dividends ifgrowth-oriented policies and institutions (identifiedin the cross-country analysis in Chapter 2) in Bangladesh were to equal those o f the comparator countries. For instance, if Bangladesh's investment climate performance across the five structural areas had equaled that o f Chile, its future per-capita growth would rise from 3 to 11 percent, or if it had equaled that o f China, it would rise to 8 percent. The highest pay-off areas in terms o f improving growth appear to be: attracting more FDIand increasingthe economy's capacity to benefit from its spillovers; by improving the quality o fand access to physical infrastructure and education; financial sector reforms; improving economic governance--especially by strengtheningthe rule o f law; and streamlining the regulatory and administrative environment in order to reduce the cost o f starting (and doing) business inBangladesh. Figure 3.3: Growth That Can Be a 00 6 00 ~ Governance ~ 4 00 [ 2 00 0 Cast of starting Eusiness 0 0 0 0 FDISpillovers 1~ -2 00 -4 00 -6 00 0 FinancialSector Note: Each colored box bar shows incrementally the change in future per-capita growth ifBangladesh's performance in 2000 equaledthat o f a benchmark country Source: WorldBank staff calculations 73. Implications in terms of needed rates of saving, investment, and TFPgrowth. A growth target O f 7 percent-needed to achieve the I-PRSP's poverty objectives-appears extremely difficult interms o f its requirements on investmentand productivity growth and the amount o f additional savings.53 For example, if investment were to grow at 9 percent per annum (it grew at an average rate o f 8.5 percent duringthe 1990s), a growth path o f 7 percent would imply a four-fold increase inthe rate o fTFP growth relative to its average duringthe 1990s. Alternatively, an annual investment growth o f 12percent would 53 Bangladesh Development Forum Economic Update (2004), World Bank, Washington, D.C. 29 result inthe investment rate reaching 32 percent by 2010 and 4 1percent by 2015, with the implications o f additional annual financing requirements equaling 6 percent o f GDP by 2010 and 15 percent by 2015. Eveninthis highinvestmentgrowth scenario, attaining 7 percent growthwould be possible only with a three-fold increase in the average annual TFP growth over the next 10years. 74. A growth scenario close to 6 percent appears more feasible, albeit still ambitious. Eventhis will place substantial demands on growth in investment and its efficiency: performances on both fronts would needto be far superior than seen so far. This will also require minimizing the adverse impact o fthe expected phase-out of the A T C quotas, by shiftingrelatively efficiently and costlessly capital and labor from the garment sector to other equally or more productive sectors. A large net write-off o f capital stock and loss o f employment due to this transition would pushgrowth to a lower path. 75. Over the longer term, for productivity gains o f the magnitude needed for acceleration ingrowth, structural measures are necessary inthe areas identified above: improving financial intermediation; attracting more FDI; accelerating human capital and infrastructure development; increasingprivate participation (private investmenthas been far more productive inBangladesh than public sector investment); and improving economic governance, and reducing regulatory and administrative burdens that increase cost o f business. At the same time, continued macroeconomic stability, lower barriers to entry for new firms, and improved access to finance are critical in stimulating investment growth. Even then, financing o fhigher investment levels will remain a challenge and will require fiscal prudence (cutting budget deficits, lowering SOE losses etc.) and substantial donor support. 76. There i s little doubt that the higher growth momentum o fthe 1990s was at least partly drivenby the phenomenal growth o f exports, particularly o freadymade garments. To sustain this growth and build on it, it is a national imperative to keep the export sector competitive and free from institutional and policy constraints. Inthe next chapter, we investigate the micro aspects o f competitiveness through the lens o f Integrated Value Chain Analyses (IVCA). 30 PARTI1 Chapter 4 INTEGRATED VALUE CHAINANALYSIS OF STRATEGIC EXPORTABLE PRODUCTSINBANGLADESH Assessing Export CompetitivenessthroughValue Chain Analysis 77. The phase out of the ATC export quotas and the challenge o funbridledglobal competition inhitherto restricted markets have raised the issue o f competitiveness and export diversification to the top o f the policy agenda. The examination o f Bangladesh's export competitiveness i s important for at least two reasons: firstly, to identify key impediments in the value-chain that constrain the private sector's ability to maximize its export potential, and, secondly, to identify cross-cutting policy, logistics and institutionalconstraints that impede potential export diversification. The expansion o f Bangladesh's exports rests upon the competitiveness o f its private sector firms, how efficiently and fairly the market operates, and whether or not the private sector can maximize productivity throughout the entire chain o fvalue- added activity -- from raw material inputs to the sale o f finishedgoods. 78. To this end, this report employs an Integrated Value Chain Analysis (IVCA) approach across five selected commodities to provide a better understanding o f the characteristics and inefficiencies o f specific valueisupply `chains. Together with the rest o f the components o f this study, this IVCA will helpthe Government and businesses identifythe measures needed to minimize impediments; improve the environment for domestic business, export transactions and private investment; and help prioritize reform activities to improve the competitiveness o f the private sector. By acting upon this knowledge, the Bangladesh Government can re-orient policies, remove burdensome regulations and control mechanisms, thereby strengtheningthe competitiveness and growth potentialo f the private sector so that it plays its role in accelerating export-led growth inBangladesh. 79. Going Beyond Investment Climate Assessment.Emerging from this analysis i s the prospect o f close public-private sector partnership for building a strong, diversified and competitive export sector. An Investment Climate Assessment (ICA) was recently completed for Bangladesh. The study identified infrastructure (power, ports, telecommunications), corruption, burdensome regulation, and poor access to finance, as major constraints to investment, disproportionately affecting small and medium enterprises-- the largest segment o fbusiness enterprises in Bangladesh; (see tabledcharts inAnnex 3 on Bangladesh's global competitiveness ranking-which, among other factors, take investment climate into account--and for her relative standing with respect to some indicators o f investment climate vis-a-vis some comparators). While these constraints discourage private investment, they also make domestic production less competitive inrelation to many o f Bangladesh's competitors. The ICA, however, does not look at how these various physical and policy constraints actually raise costs at various stages o f fabrication o f a product. Put another way, the I C A does not attempt to link the observed high costs of effecting certain business transactions to the specific causes, be it poorly formulated policies or intrusive regulations/procedures or structural deficiencies. Therefore, it becomes difficult to move from observed issues to specific policy recommendations. 80. This couldbe overcome by breaking down the production flow o f a target commodity or product into a number o f strategic value chain segments, from raw material input to the productiono f the finished product, and then on to the consumer at the end o f a retail chain. At each segment o f this process, either policy distortions and/or institutional deficienciesharriers 33 could affect costs. A value chain (VC) analysis helps to identify cost impacts o f these constraints/deficiencies on individual commodities and facilitates cross-country comparisons. Figure4.1: Bangladesh:Top Constraintsto BusinessOperation and Growthas Viewed by Firms 81. Integrated Value chain analysis and cross-country benchmarking.Thus, to complement the I C A results as well as the findings o f the other components o f the investigation, this study has undertaken an IntegratedValue Chain Analysis (IVCA) o fa number of strategic export products and some potential exports. The I V C A focuses on five specific key products/sectors: 1. Readymade Garments - knitted t-shirts; 2. Fresh Vegetables - French green beans; 3, Footwear - leather shoes; 4. Ceramics - tableware; and 5. Shrimp -black tiger, 16-20. 82. Application o f this technique makes it possible to breakdown all the costs involved inthe whole value-chain process of a specific product. These costs are then benchmarked against costs incurred in the value chains of a number o f similar export products o f comparator countries. The findings provide indication as to the current relative cost competitiveness o f Bangladesh's exports, while identifying cost raising constraints and policy distortions along the entire value chain. The results also allow mapping of the relevant policies/constraints to costs. Such information is highly useful for policy analysis and to inform the Government's planned policy reforms and measures to address structuraliinstitutional impediments. 83. Rationalefor product selection. Inline with Bangladesh's comparative advantage, the products identified above involve relatively labor-intensive productionprocesses. (a) Readymade garments, which emerged and then thrived under the MFA quotas, are an obvious choice. With nearly $5 billion of exports (Table 2, Statistical Appendix), direct and indirect employment creation o f several million, the garment industry i s the sector that drives growth and employment. Knitwear and knitted garment exports, at $1.7 billion in 2003, i s a growing component o f RMG exports. The phase out o f the ATC quotas at end-December 2004 has raised considerable speculation over the competitiveness o f Bangladesh's RMG exports under a fiercely competitive external environment. Hence, the I V C A makes a close scrutiny o f those factors that enhances or undermines competitiveness o f RMGexports (knitwear inparticular; Table 3, Statistical Appendix). (b) Vegetables, a product of the rural economy, has experienced risingdemand from the Bangladeshi diaspora inthe Middle East and UK (Table 4, Statistical Appendix). But growth 34 and expansion to supermarkets o f developed countries are constrained by inability o f suppliers to meet sanitary and phytosanitary (SPS) requirements, lack o f cargo space on domestic airlines, poor quality o f packaging, and sundry problems. (c) Leather has been inthe export basket for decades, but leather footwear has shown signs o f growth only inthe 1990s (Table 5, Statistical Appendix). Adverse environmental impacts o f production is making countries like South Korea consider re-location o f some o f their factories in countries like Bangladesh. It i s worth identifying logistic and policy constraints that underminecompetitiveness o f this sector. (d) Compared to the 1990s, annual exports o f ceramic products doubled to nearly $20 million, mostly reaching European markets (Table 6, Statistical Appendix). Quality improvements have been recognized by leading international suppliers o f brand name house wares. Yet export competitiveness i s underminedby several structural factors and the anti-export bias resulting from highdomestic protection. (e) Shrimps, the second largest export category and labor- intensive inproduction, is potentially the next garment sector o fBangladesh, having tripled in export value over the past decade to about $350 million. Located inthe coastal regions, the sector provides employment to nearly one million rural people with substantialpoverty reduction impact. Among other things, competitiveness o f this sector i s subject to stringent SPS standards inEUandNorthAmerica, the major export destinations (Table 7, Statistical Appendix). Although the coverage o f products in this study is limited, our understanding i s that I V C A o f these five products would throw enough light on policy, institutional, and market based constraints to become the basis for suggestinga broadbased package o fpolicy and institutional changes to enhance competitiveness o f exports ingeneral. 84. Details o f the Integrated Value Chain Analysis (IVCA) o f key export products listed above are described in sections A through E below. At the end o f each section, a summary o f policy based and market based constraints i s presented. These constraints were identifiedthrough the IVCA exercise and field level interviews o frepresentative firms. Policy basedconstraints may arise from badly formulated public policies that create distortions or disincentives. Alternatively, there are market failures that call for public interventions that are poorly delivered and i s subsumedunder weak governance. Eithero f these constraints could be cost-raising for the firm. Finally, there are market dynamics, such as external competitive trends, consumer taste changes, technological development, and policy reforms by trading partners. Any combination o f these market developments could undermine competitiveness if firms are not properly equipped to respondto such changes fast. These are described as market based constraints. 85. To complement the value-chain analysis and cover a very important cross-cutting structural cost component, Chapter 5 o f this report includes an import-export transaction cost audit, which examines existingbottlenecks and processeshequirements for international transactions, most notably inthe customs area. This i s followed by a discussion o f the current logistics for Bangladesh's principal exports. The final section highlightsthe importance o f meetingquality and safety standards for agricultural exports (shrimp and vegetables) inmajor markets. Summary of Findings of the Value Chain Analysis 86. The Investment ClimateAssessment (ICA) for Bangladesh identified infrastructure (power, ports, telecommunications), corruption, burdensome regulation, and poor access to finance, as major constraints to investment, disproportionately affecting small and medium enterprises. The I V C A serves as a complement to the I C A in identifyingthe policy, infrastructure and institutionalconstraints that enterprises face duringthe productionprocess over different segmentso fthe value and supply chain. The focus o fthe present exercise has been on export production. The commonality o f the mainpolicy constraints betweenthe two assessments 35 i s striking. Not surprisingly, those constraints that inhibit the investment climate are also the ones that raise the cost o f doing business and undermine competitiveness at the firm level. 87. The I V C A finds the following constraints as common to all products investigated: Physical Constraints:. Infrastructure -- ports, electricity, telecommunications, road transport (rural). Almost all enterprises surveyed complained about the harm caused by erratic electric supply which leads some to go for captive generators thus raising costs (e.g. power costs lOc/kwhr from captive generation compared to 4c/kwhr from the grid). Port congestion and corruptionalongside cause delays with extra costs. Poor telecommunications and bad road infrastructure hit agro-based exporters harder than others. Institutional constraints: Customs -unnecessary hassles and extra payment incustoms add to the bottom line o f all exporters. Duty Drawback systemworks inefficiently, delaying refund o f duties paid on raw materials and intermediates. Minimumtime taken for refunds i s six months or more and actual refunds received are well below 100% o f actual payments. Policy constraints: Poor Governance and slippage inlaw and order create uncertainty and raise costs. Past mismanagement inthe financial sector has resulted inhigh borrowing costs with interest rates being the highestin South Asia. Highprotectionto import substitutingactivities has created anti-export bias. Packaging costs have been found to be relatively highfor Bangladeshi firms because o f the import ban on cartons. Weak enforcement o f environment and labor regulations create negative externalities for firms. 88. Apart from the common complaints that plague all businesses, some policy and institutionalconstraints are specific to the products studied in the report. Placed below i s a summary o f thoseproduct-spec@ constraints that undermine export competitiveness: Knitwear exports 0 Ban on import o fyam via land ports. This requires yam imports from India to be shipped to Chittagong port (with all its inefficiencies), often via Singapore. This measure i s taken to protect the primary textile sector from competition o f cheap Indian yam, but raises production costs o f knitwear firms all the same. 0 FDIinthe sector has beenrestrainedby the requirement that any FDIinRMGhave to be associated with investments in a backward linkage facility. The consequence is very limitedFDIinthe sector, and a barrier to transfer o ftechnology, modern management techniques, and greater employment. Net result - low productivity and lack o f competitiveness. 0 Although capital machinery imports are zero-rated, imports o f spares are subject to high import duty. Until FY04, total tariff incidence on machine parts and needles ranged from 30.6% to 50.8%. This had given rise to corruption as the incentive was highto understate values by colluding with customs personnel. This problem was redressed by eliminating tariff on theses spares in FY05. 36 There i s a labor regulation that prohibits female workers to work beyond 8 PM. This rule needs to be relaxed' to allow women to work beyond 8 p.m.Ifthat were to happen, some would work overtime, while others could work the late shift, and the factory could run multiple shifts paying overtime only when they have to. This i s what happens inChina and, more recently in India. Because o fthe heavy import dependence o f this sector on imports (yarn and cotton used inyarn production) port and other transport logistics remainproblematic and cumbersome, causing hassles, delays and cost-increases. Cash export subsidy (being phased out by 2005) has not benefitedknitwear but protected domestic spinning/weaving industry. Vegetable Exports Meeting required standards inthe importing markets is a major challenge. HACCP and EUREPGAP standards have to be met to supply to European super markets. Otherwise, exports will be limitedto small ethnic markets --not exactly a significant export destination. Air freight-availability, more than cost -remains a major stumblingblock, and the problem is accentuated by Biman's monopoly control o f air cargo facilities. Insufficient air cargo capacity inBIMANleads to: a) quota systemwith small average quota sizes; this constrains large-scale exporters o f horticultureproducts; b) highrate o f rejection which forces exporters sell their extra produce indomestic markets at dirt cheap prices. Dhaka airport has cold storage facilities operated by BADC but these are not ingood working condition and hardly used. Frequent fight delays thus lead to highrejection rates since the fresh vegetables have to be left in an un-refrigerated air freight container on the tarmac. Low labor productivity and lack o f skills that are needed for producing and processing export quality vegetables. Highcost o fcartons is the consequence o fan import banwhich results inhighcost domestic cartons beingproduced. Vegetable exporters end up using only usedcartons to cut costs; not the kind o f packaging that will sell inEuropean or other supermarkets. Poor rural infrastructure - road transport, inparticular - impede fast and safe movement of agro-based products. Leather Footwear Exports A major policy constraint comes from the absence o fthe same facilities that are accorded to for example the RMGindustry- Le. bonded facilities for duty-free imports, since the duty drawback instrument does not function efficiently to neutralize import taxes. Some industry specific requirements that are lacking include: (a) absence o f chemical lab for testingpresence o f azo dyes; (b) insufficient supply of finishedleathedhides; (b) absence o f component manufacturers, such as, shoe lasts and soles. Relatively highcost o f master cartons and packing boxes. Again, this could be related to the import policy banningimport o f cartons. 'The rule has beenexperimentallyrelaxedby the Government until end-March2005 andit is likely to be extendedfor some time longer. 37 Ceramic Exports 0 Since this industrydoes not get the bonded facility for duty-free imports, reliance on duty drawback system involves time, hassles and costs, seldom resultingin full refundo f duties paid. 0 Indo-Bangladesh trade relations have not helpedin opening up the vast Indian market for internationally acclaimed Bangladeshi ceramic products. 0 Dueto mismanagement at the government runGlass and Ceramics Institute, it fails to produce the right types o f technical skills required for the ceramics industry. 0 Fixed monthly payment for gas supply is cost-raising. Meteredgas i s a demand o f the industryfor monitoring costs. Shrimp exports 0 Weak enforcement o f environment and labor standards i s not helping the shrimp industry or the environment, least of all the workforce engaged inthe sector. 0 There used to be a highlevel o fmortality (60-70 percent) of shrimp fries as they were moved by land transportation from hatcheries in Cox's Bazaar to farms inJessore.. Inthe past 3-4 years, this problem has been addressedby introduction o f domestic air cargo flights between Cox's Bazaar and Jessore thus bringingmortality rates down to negligible levels. 0 Too many non value-adding middlemenalong the value chain. Forcedbroker system extracts a highprice from hatcheries and producers. Hatcheries, for example, spend20- 30% for multiplebrokerage transactions to get de-headed shrimp. Also, collusion between suppliers throughout the value chain keeps prices on a number o f key inputs artificially high. 0 Scarcity o f suitable land i s a major problem for expansion o f the sector resulting in ecological damage. 0 There are specific problems relating to various stages o f production and processing: (a) inhatcheries --handling andtransportation; (b) inprocessing --over capacity, weak forward linkages; (c) absence o f proper testing equipment, inan industrywhere highfood quality and safety standard have to be met; and (d) lack o f proper training facilities for workers and producers. A. AN INTEGRATED VALUE CHAINANALYSIS OF THE KNITWEAR SUB-SECTOR-T-SHIRTS 89. The knitwear sub-sector i s part o f the broader readymade garment (RMG) industry. Before moving on to analyze the findings o f an I V C A on knitwear, a brief overview of the RMG sector i s in order. Background 90. The Bangladeshreadymade garment (RMG) industryemerged out o f the Multi-Fiber Arrangements (MFA) o f 1974. The MFA subjected garment exporting countries to quantitative restrictions in the form o f quotas for their exports to major importing markets, primarily to the European Union and the United States. Yet, for Bangladesh, the quotas acted as a guarantee for certain quantities o f export sales, helping to establish market presence, and acted as a kindo f 38 shield from major regional competitors such as India and China. These quotas were removed at end-December 2004, thus opening the stage for intense competition for global market share. 91, The year 2005 will be one o f significance inthe global textile and garment (T&G) industries. For the first time since the introductionofthe multi-fibrearrangements (MFA) inthe early 1970s, the two major importingmarkets (the European Union and the United States) are no longer protectedby the quantitative restrictions that hadbeenplaced on the exporting countries untiltheir elimination at the endo f2004. Thismeans the Bangladeshi RMGmanufacturers will be able to sell as much o ftheir product as they possibly can inany market around the world. O f course, this is contingent on improving their productivity and cost competitiveness vis-a-vis Indian, Chinese, Vietnamese and other major competitors around the world. 92. Although some countries will gain from the lifting o f quantitative restrictions on the movement o f textiles and garments, a number o f countries may lose as a result of this change. Many developing countries have benefitedfrom the textile& clothing export quotas, particularly the less-developed countries, includingBangladesh (Table 4.l), a number o f these countries are the ones that will probably lose the most from this change. Table 4.1: BangladeshReady Made Garment Sector Profile Japan $108 million HongKong $90 million India $84 million Sources: Global Development Solutions, LLC; Export PromotionBureauandBangladeshGarmentManufacturers and ExportersAssociation 39 93. The garment industry in Bangladesh, like in so many other garment-producing countries, has experienced unprecedented growth over the last decade and half (see Table 4.2), with exports accounting for approximately 76 per cent o f total Bangladeshexport earnings in 2000/200 1. Today, the industry accounts for 9.5 per cent o f Bangladesh's GDP and 29.7 per cent o f the manufacturing GDP. 94. The Bangladeshi garment sector, which has been enjoying preferential treatment because o f the Table 4.2: Exportsof Garmentsfrom country's special status as a least developed country, will be exposed to increasingly intense global competition beginningin 2005. Although the industrywill still enjoy preferential market access to the EU, Canada, Australia, Norway`andJapan, these will not be enough to shield it from the competitive landscape. The industryand government have had plentyo ftime to prepare inorder to compete inthis new era, yet the risksto the industryremainhigh. In the event o f a major disruptiono f the RMG industry, at least 10%o f the population would be directly effected with many more being indirectly effected. The consequences of such would be socially and economically harsh. Knitwear sub-sector 1,269 I 3,082 I 4,351 1 1,496 3,3 63 4,859 95. It is important for the IVCA to focus on specific production activities in order to reveal the 1,459 3,124 4,583 cost competitiveness o f each segment o f the value 1,653 3,258 4,911 chain. The knitwear sub-sector, within the Source: Bangladesh Export Promotion Bureau readymade garment (RMG) industryhas been identifiedas the most promising interms o fhistorical growth, giventhe phenomenalrate of expansion of knitwear exports duringthe 1990s (33% annually) well ahead of the woven garment sub-sector, which i s the major component o f the RMG industry.O f the $5 billion o f exports in 2003, $1.7 billion - roughly a third- was knitwear. However, of the RMG exports o f $2.4 billion to EU, nearly 50 percent was knitweadknitted garments. The share o f knitwear exports to EUhas been risingrapidly since these Bangladeshi exports enjoy the benefits o f GSP, satisfyingEU's Ruleso f Origin (ROO) requirements o f "manufacture from yam".. Bangladesh's knitwear sub- sector is now able to source over 75 percent o f its yam and fabrics locally, with a large measure o f vertical integration (using circular knittingmachines) o f the production process -yarn to fabric to garments --,and so will benefit from the zero tariff facilities under EU's EBA (Everything but Arms) facility evenbeyond2005. This is not quite so for the woven garment sub-sector whose reliance on imported fabrics i s about 85 percent. Thus, althoughnot subject to quotas inEU, removal o f quota restriction on its competitors (India, Pakistan and China) i s likely to be a setback for woven garment exports to EU, as they must compete on an equal footing without the advantage o f preferential tariff concessions.. Knitweadknittedgarments Value ChainAnalyses 96. For this IntegratedValue Chain Analysis (IVCA) a large, fully integrated manufacturing concern was analyzed. The company has over 60,000 spindles in its spinning operation and 40 produces nearly one million pieces o f clothing a month. The company that was analyzed buys lintcotton from a number o fcountries including the United States andKazakhstan, andspins the cotton into various types ofyarn. It makes this yarn and produces some o f its own fabric, blending inother types o f natural and man-made fibers. It then uses this fabric, inaddition to imported specialty fabrics, to produce its own garments. This IVCA will look primarily at the knitwear garment production line of business (instead o f the woven line) by providing an analysis o fready made garments (RMG), inthis case a standard 180 gram men's white t-shirt. 97. The FOB price of the T-shirt analyzed for this report i s $1.2S2. At this price point, Bangladesh i s quite competitive with other regional producers, but not with China. For instance, Nepal, which i s a low-wage, but highcost producer o f garments, produces a similar t-shirtfor almost $2.00 FOB. Indian factories can deliver a similar product for anywhere from $1.15 to $1.45 FOB, while the range ofprices in Bangladesh among producers i s as low as $1.16 going up to $1.41. Although a I V C A has not been done for Chinese t-shirts and therefore exact prices have not been obtained, the range o fFOB prices for similar t-shirts starts at 85 cents per piece and can range upward to prices similar to those seen inBangladesh and India. See Table 4.3 for the detailed comparison. Bangladesh Kenya* India** Nepal** China** FOB of 180 $1.28 $1.85 $1.15- $2.00 $0.85+ gramt-shirt $1.45 ** - - Based on secondary research and not on an actual IVCA-being completed inthese countries. Source: Global Development Solutions, L L C Diagram4.1: IntegratedValue Chain of Men's T-shirtfor Bangladesh Trucking 36 73% Customs 2.70% Liffng/Loading 6.60% THC I O 79% I I Docs 23 69% BnbcsiUnofficial 10 49% 9.00% \ Source: Global Development Solutions, LL Since quotas are being phased out at the end of 2004, this analysis did not include the cost o f quota. 41 Material 98. Ofthe $1.28 that it costs to produce this t-shirtinBangladesh, the highest cost itemis material, which includes cotton material, port-related charges and accessories, and constitutes 77.96% o f the value chain. The second highest cost area is administration which constitutes about 11.99% of the FOB cost o f the product followed by sewing and assembly which accounts for 4.7% o f the entire value chain. 99. The IVCA reveals that the cotton fabric constitutes 93% o f the entire cost o fthe Materials section o f the value chain. One o f the main reasons for this i s that Bangladesh imports almost o f the cotton that goes into the garments it produces. Since Bangladesh produces a sizable amount o f its own yam, a more detailed discussion o f the cotton yarn and materials process takes place later in this report inthe Yam IntegratedValue Chain Analysis. 100. Port charges are the second highest cost itemo f the materials category. Although not excessive inpercentage terms, particularly given the large absolute amount that cotton materials constitute, these charges are still quite highrelative to those charges paid by importers in other countries. Detailed information is presented later inthis report in the direct costs o f importing and exporting, including port charges. 101. Accessories, which are the other cost itemo f materials, are an insignificant factor inthe overall value chain for t-shirts, simplybecause there are few accessories required int-shirts. Although Bangladesh has a shallow supply chain in a number o f areas, the country does produce most o f the common accessories that go into its garments. Insome ways this i s a success story because most o f these accessory manufacturers have only begunproducing i s such large quantities within the last decade. Prior to that almost everythingwas imported. Administration 102. The second most costly component o f the value chain i s that related to administration charges. The highest o f these i s profit at 41%, followed by tran~portlport~charges which constitute 27% and finally interest which i s 21% o f the Administration category. 103. Profit, which i s the highestadministration cost item, represents a 5% profit margin on this product. Although most producers interviewedfor this report set a target profit margin o f 15%, with the increasingly competitiveglobal market, combinedwith historically highcotton costs, the margins have beensqueezed to a point well below this target level. 104. Untilrecently the garment andtextile industries hadbeenreceivinga 25% export subsidy for usingdomestic yadfabrics. The subsidy i s beingphased out in2005 because o f the many instances o f abuse. This means that the industrywill needto find new economies in order to use local fabricslyam. Transport and port issues are addressed separately in another section of this report. 42 Table 4.4: Working Hours and Wages in the Garment Industry in SelectedAsian Countries Average salary I Country Year hours per Working per month week (Bangladesh= 100) Bangladesh 2000 48 100 China 2001 40 378 Philippines 2002 48 328 Thailand 1999 48 265 Sri Lanka 1998 48 183 Neoal 2000 48 160 Cambodia 2000 48 150 Viet Nam 2000 48 150 India 2000 48 140 Pakistan 2000 48 135 Indonesia I 1999 I 40 95 105. A contribL ingfactor inthe highcost o fAdministration and related Export charges is 1 highcost o ftransportation, which includes the costs associated with poor roadsas well as the charges paid by drivers to the traffic police. More details on these costs can be found inthe section on import-export transaction costs o f Chapter 5. 106. Interest charges are also a significant cost factor, accounting for 21% o f the Administration charges and over 3% o f the total cost o f the t-shirt. The Bangladesh RMG industrygenerally does not have major trouble accessing investment and working capitalthrough the bankingsystem. What is a problem, however, is the highrates charged for loans. Evenwith one o f the lowest inflation rates in south Asia, Bangladeshi businesses face some o f the highest Table 4.5: Inflation and Interest interest rates in all o f the region, reaching levels o f 14% Rates of Selected Countries for working capital and 11%-12% for capital equipment. [Table 4.51. Although government policy has recently helped lower interest rates to their current levels (11.1% nominal, 5.6% real in2004), they are still too highwhen compared to others inthe region. For instance, India and China, two of the country's largest competitors inthe RMG industry,have interest rates that are 1/3 to 1/2 o fthose charged to the businesses inBangladesh. This puts additional pricepressure on producers in Bangladesh, further increasing an untenably uncompetitiveposition in some product areas. Source: World DevelopmentIndicators2004 43 Sewing and Assembly 107. The final value added category o fmuch significance in the production o fthe t-shirt is sewing and assembly. Although this area requiressubstantial amounts o f investment incapital equipment, activities associated with this part o f the value chain continue to be labor intensive. The labor intensive nature o f this stage o fproduction i s reflected inthe breakdown o f the sewing and assembly activity, where labor inputconstitutes 67% o f the cost of the activity. In the overall scope o f the industry,however, absolute labor costs inBangladesh are low compared to other countries inAsia. In fact, according to Table 4.6, Bangladeshhas one o f the lowest labor rates o f all major textile producing countries inAsia. * Various sources indicatedIndia's average leadtime as low as 35 days andas muchas 90 days. Source: GlobalDevelopment Solutions, LLC andthe GarmentAssociationofNepal, 2001 108. However, when measuring the value added and capital investment per worker, the picture i s quite different. Table 4.7 shows that other than Sri Lanka, Bangladeshhas the lowest productivity, usingbutton down shirts as a comparison, o f any south Asian country. Although similar statistics for China were not available as stated inthe table, a recent World Bank study reported that the annual value addition per worker in a Bangladesh garment factory i s US$2,500, while it is nearly US$7,000 for a similar Chinese factory. Inregard to annual average capital intensity, Bangladeshi factories spend less than US$1,500 per worker, while their Chinese counterparts spend over US$4,0004. According to Diagram 4.2, even though Bangladeshi factories spendUS$700 as average annual wages, the Chinese companies spendaround US$18OO5. The study also notedthat even after paying the higher wages and greater amounts o f capital spending, a typical Chinese factory i s still muchmore profitable than the comparable factory inBangladesh. "Improving the Investment Climate in Bangladesh", publishedby The World Bank andThe BangladeshEnterprise Institute,June 2003 Ibid. 44 Table 4.7: Labor and Productivity Comparisons Country Unit labor 1Wages Productivity ~ costs I $/shirt I $/year I Shirtsiworkeriyear 1 Bangladesh 1I 0.1 1 I290 I2536 1I India 0.26 668 2592 Pakistan 0.43 1343 3100 Sri Lanka 0.79 570 719* Source:LaborManagementin DevelopmentJournal, 2001, Vol. 2, Number I,p.5. (*) Productivity measuredby shirtsiworkercouldbe misleadingfor Sri Lankasince Sri Lankanshirts are inthe high-endof the market andhigh- value product.Interms of quality, Sri Lanka is ratednumber 2 after Hong Kong. 109. Another factor constraining the future competitiveness o f the industryi s the labor policy which does not allow women to work past 8:OO pm. Since the garment and textile industryin Bangladesh i s 90 percent women, no factory can work more than 1 !4 shifts. This forces factories to pay overtime to their workers to meet production runs required o f the market. This not only limitsthe amount that can be produced in a day, but also increases the final cost o f the product. One way out of this problem i s to relax this rule to allow women to work beyond 8 p.m. Ifthat were to happen, some would work overtime, while others could work the late shift, and the factory could runmultiple shifts paying overtime only when they have to. This i s what happens inChina and, more recently, inIndia. I Diagram 4.2: Productivityand Investment Measures Bangladesh and China l 7000 - I 1000 i I Annual value added per Capital per worker Annual wages I worker I Source: "Improving the InvestmentClimateinBangladesh", publishedbyThe World Bankand The BangladeshEnterpriseInstitute, June 2003 45 Box 4.1: IVCA ComparisonbetweenKenya and Bangladesh Below are the primary Value Chains for t-shirt production inKenya and Bangladesh. Although the final FOB prices for each i s different for various reasons, some of which have been discussed inthis report, the most striking point of departure is inthe percentage ofthe final inputs that consists ofmaterial goods. InBangladesh, 78% o f the total cost o f inputs i s material, consisting mostly o f cotton material inthis case. IntegratedValue ChainAnalysis for Yarn Table 4.8: Yarn ProductionValue Chain for Bangladesh,per kilogram Value ChainCost Analysis (US$/unit) Lint Cleaning/ Cotton Blowing Spinning Packing Total UnitValue 2.14 0.28 0.40 0.07 $2.89 % of TOTAL 74.4% 9.6% 13.8% 2.3% 100% Source: Based on interviews conducted by Global Development Solutions, LLC 110. Many o f the large garment producers now have spinning(for yarn production) and weaving (for fabric production) operations o f varying capacities. Most o f the large production concerns interviewedfor this report either produce more than 50% o f the yarn for their own needs or are gearingup to reach that level at some point inthe near future. The knitwear sub-sector i s now 75-80% self-sufficient inits requirement of yarn and fabrics. However, to maintain that level o f self-sufficiency, substantial investments are needed by the industryto maintain and improve its competitive position. 111. It is interesting to note that this verticalization has occurred against a backdrop inwhich yarn coming from India is around 15% expensive on the Bangladeshi market than that produced inthe factories o f Bangladesh, which has an ex-factory price o f US$2.87 per kilogram. This premium inthe price o fBangladeshi yarn is attributable to the fact that Indianspinners mostly use cotton o f Indian origin versus the Bangladeshi spinners who use 100% imported cotton. 46 112. Diagram 4.3 gives the value chain breakdown for producing cotton yarn inBangladesh.6 113. Lintcotton isthe largest cost itemofthe value chain, accountingfor 74.4% o fthe total cost o f production. The cotton comes from a number o f countries, with the United States (the largest supplier); Kazakhstan; Uzbekistanand countries inWest Af?ica supplyingthose producers interviewed for this report. As noted earlier, Bangladesh imports almost its entire supply o f export quality cotton and for this analysis, only imported cotton was priced and considered. The high cost o f the cotton input has been exacerbated recently by the historically highprice levels o f cotton on the world market. Although these prices have recently declined somewhat, they remain high, creatinga difficult market situation for countries like Bangladesh that produceno cotton and are reliant on others for key components inthe process. For instance, the spinning mill interviewed for this report saw its cost o f raw materials (cotton) increase from 67% as a cost o f sales in summer 2003 to as highas 78.4% inearly 2004. 6 Since the yam and fabric for this analysis are, for the most part, used inthe factories where they are produced, this report only considers internal production and use o f the products. Therefore, import and transport charges are not includedinthe analysis. But it i s worth noting that there exists a ban on imports o fyarn from India over landroutes, ostensibly to prevent smuggling, but inreality it turns out to be a protective measure pushedby the indigenous primary textile industry. 47 114. Table 4.9 shows the global market price o f cotton since Table 4.9 - Historical 1992. With the cost o f cotton reaching over 80 cents per lb Cotton Prices $/1001b earlier this year, the cost pressures on the Bangladeshtextile Price industry,which has no indigenous cotton available for purchase, $69.05 have been enormous. To maintain profitability (or limit losses), $55.71 the company interviewed for this report buys cotton on a regular $41.81 basis, thereby usingcost averaging to keep the overall price as $57.20 low as possible. 2000 $52.84 115. The spinningprocess, which can involve some or all o f 1999 $52.84 the following process - carding, drawing, combing, roving, plying, winding and creeling -is the second most costly 1997 $72.21 component in the making o f yam, accounting for 13.8% o f the 1996 $78.59 cost. Inthis process, depreciation is the costliest itemat 29.1%, $85.61 followed by overhead at 26.6% and electricity which accounts for $91.77 20.2%. A major piece of the depreciation cost is that o f the $70.59 equipment, much o fwhich was bought new from Europe, the US 1992 $57.69 or Japan. The RMG industrygets duty exemption on imports o f capital machinery and concessional rate (7.5%) on spares. www.Cotlook.com However, there are the `requisite' bribes expected of various officials involved inthe importation process, which can be as "low" 6% o f the cost o f the machinery to as much as 10% o f the cost, These costs are captured inthe depreciation category. 116. Another significant cost item, this one inthe overhead category, i s maintenance, which i s primarily a result of the highcost o f spare parts, all o f which has to be imported. Although import taxes on machinery and spare parts have beenreduced for the RMG sector as a whole, complexities inthe tariff schedule allow customs personnel to exercise discretionary powers and extract bribes, thus increasing the actual burdeno f tax . Table 4.10 illustrates this point using a sampling o f spare parts and the various taxes applicable at time o f import. For the first two items, general importers are entitledto a total levy o f 10.5%. RMG importers get duty exemption but have to pay all the other levies ending with a total tax o f 22.5%. Clearly, they would not go for this special rate. Inthe case o fneedles, RMGimporters have a substantial advantage (3% vs 38.13%), but must pay bribes to get the advantage. Given that Bangladesh imports most spare parts from the UnitedStates, Europe or Japan, producers already pay disproportionately more for spare parts than many others due to hightransportation costs. These additionaltaxes only add to the industry's burden and undermine competitiveness. *AIT-Advanced Income Tax; IDSC-Infrastructure Development Surcharge Source: NBR 117. The third most costly component o f the spinningprocess is electricity, about which there are a number o f problems with its generation and transmission. Interviewees reported power, which i s delivered by the Bangladesh Power Development Board (BPDB), i s unreliable. It i s for 48 these reasons that in Bangladesh almost all mediumand large factories generate their own power. Although this tends to be an expensive option it i s nonetheless the only one that most have because many o fthe operations inRMGproductionrequire constant power. Any interruptions can cause an entire runto be discarded. Spinning Cost Comparison - The cases of Kenya, Kyrgyzstan and Bangladesh 118. Table 4.11 and Diagram 4.4 show a comparison o f costs to produce one kilogram o f yarn from lint cotton in Bangladesh, Kenya and Kyrgyzstan. Other than the highcost o f lint cotton, it is evident that Bangladeshi producers o f yarn can be competitive in this market. Inboth o f thes,e cases - Kenya and Kyrgyzstan-the lint cotton primarily comes from local sources, whereas in Bangladesh, it is almost entirely imported. The additional factor i s that the quality of the cotton inKenya and Kyrgyzstan is generally ofpoor quality which further aggravates an already low level o fproductivity in those countries. InBangladesh, however, the imported lint cotton i s o f much better quality thereby enhancing the capacity of local producers to be competitive inother areas on the Spinning process. Since Bangladesh i s a price taker inthe global market for cotton, the only way to reduce costs i s by lowering costs at port and other logistics. * Includespacking, overheadandtransportcharges. Source: GlobalDevelopment Solutions, LLC Diagram 4.4: Spinning Cost Graphic Comparisons-US Dollars per Kilogram 1 - 50% 41% i 0 Bangladesh 40% ~ K e n y a ~~ 31% Kyrgyzstan 0% Lint Cotton 1 Cleaning/ Blowing SpinninglAdmin ,1 1I Bangladesh 1 14% 10% 16% IIKenya 35% 47% I8% 0 Kyrgyzstan 55% 14% 31% Source: GlobalDevelopment Solutions, LLC 49 Backward Linkages 119. There are currently three types o f garment manufacturers inBangladesh. The first are the integrated factories that spin some o f their own yarn, produce some o f their own fabrics and sew their own garments. The second type imports the yam that they use, while usingit to make some o ftheir own fabric that i s used inthe garments that they sew. The third type o f producer, known as "cut, make and trim" (CMT), imports the fabric that i s used to sew their own garments. Inall cases, most o f the accessories are purchased locally. 120. There is currently a debate among the industryas to which "model" is best for Bangladesh. Most knitwear industries fall inthe first or second categories. Clearly, inthe first model the most value-added takes place inside Bangladesh. However this may not be the most cost-effective means by which Bangladesh can become most competitive. According to interviews conducted for this report, for instance, it actually costs more money to use the yam produced inBangladesh than it does to import from India and China. This i s even the case when an integrated factory produces its own yam. The biggestadvantage to producing the yam in country is that lead time to obtain yarn drops to practically zero days (from the 22 days it takes to get yam from India). This is a crucial savings o ftime and money inan increasingly competitive global market. According to some intemational buyers interviewed for this report, low and decreasing lead times are becoming one o f the most important aspects for sourcing decisions. Table 4.6 (p. 10) shows that Bangladesh not only relies on its garment and textile business more than any other country in South Asia, but that the average lead time to market i s higher than all countries except for land-locked Nepal. A rational approach would be to weigh the costs o f establishing and producing yam and fabrics locally against the benefits o f reducing lead time. However, such strategic decisions are best left to the businessmenthemselves, without policy intervention in the form o f protectionor government support. Only a competitive primary textile sector could be a cost-effective way to reduce lead times. 121. Perhaps the one argument which will take precedence over all o f them will be that o f lead time -how long does it take to get a product from conception (or order) to arrival inthe customers warehouseishop? Considering the discussion earlier about leadtimes, ifBangladesh garment makers were to increase the use o f locally produced yam and fabric, the lead time could be cut significantly. For instance, according to interviews o f industryprofessionals, ifthe country could produce 50% o f its yam and 50% o f its fabric, it would lower lead times by anywhere from 22 to 30 days - as much as 30% less than what the current average lead time i s for the industry. However, ifthe capital costs o f investing incapital-intensive spinningand weaving industries i s high, intermediate inputs produced will not be internationally competitive; and RMGproducts will lose competitiveness, lower lead times notwithstanding. 122. The RMG industrywill undoubtedly face unprecedentedpressures once the quota system ends, however it i s still not quite certain to what extent the impact will be on the industryand economy. Bangladesh i s one o fthe clearest examples o f a country that has developed a garment industryas a direct result o fthe MFA and other trade agreements. Both intemal institutional arrangements (e.g. EPZ and bonded warehouse schemes) and preferentialmarket access helped. Bangladeshhas had free access to European markets (subject to ROO), and the UnitedStates also gave the country sizable quotas so that it became a major supplier to both o f these major markets. Once quotas are removed at the end o f 2004, Bangladesh faces an uphilltask o f improving its competitiveness vis-a-vis strong competitors like India and China. 123. Nevertheless, the knitwear sub-sector i s in a somewhat better position inview o fthe fact that it currently sources nearly 75% o f its inputs locally, consequently lead times are under 60 50 days, and as such it satisfies ROO requirementsto obtainduty-freeaccess inthe EUandother counties (e.g.Canada,Australia, Norway). 124. Yet, the lack of FDIinthe sector is a problemwhichmighthavelonglastingresults, viz., low productivity,poorer skills, limitedmarket access. Except for EPZ,FDIinRMGis excluded under the 1999 IndustrialPolicy.FDIinEPZhas also beenrestrictedby the requirement that FDI in a garment enterprise has to be accompaniedby suchinvestment ina backwardlinkageindustry (e.g. spinningor weaving). This provisionhas kept out manypotentialforeigninvestors inthe EPZs. Consequently, BangladeshRMG sector has beendeprivedofthe benefits of skill and technology spilloversfromFDI. 125. This section is concludedwith a summary of the policyandmarketbasedconstraintsthat the KnitwearRMGindustryfaces, andwhich needthe immediateattention ofpolicymakers. 51 Table 4.12: Summaryof Constraints Faced1 the Knitwear Garment Sector Policy BasedConstraints Market BasedBtructuralConstraints The Bangladesh garment industry flourished under the The future o f Bangladesh's garment industry MFA guidelines, and evolved into a leadingglobal supplier i s principally dependent on successfully of garments by receiving increased quota allocations from navigating a new and intensely competitive the US, GSP preferences in EU and quota restrictions on global business climate making the entire competing suppliers in Europe, thus creating a transition industry vulnerable if the country finds itself problem that the industryneeds to reposition itself in order unprepared. to be competitive inthe post-MFA world. The major beneficiaries o f the 25% export subsidy was the Since all o f the cotton is imported, the primary textile sector which supplied yam at higher than garment and textile industry needs to finda world prices. It has not benefited the knitwear sector; its way to improve its cost competitivenessby phasing out in 2005 removes a major irritant for the sector. improving inventory management, and lowering logistics costs. Ban on imports of yam over land routes raises costs and Highcost of cotton material, importedor adds unnecessary lead time pressures for the knitwear domestically produced, make export oriented sector manufacturers vulnerable to competition. BPDB supplied electricity, though relatively cheap, i s Market principles, economic efficiency and unreliable forcing most medium and large companies to cost competitiveness should guide private generate their own power. sector investment inbackward linkage activities, not government subsidies or patronage. The government is not as well prepared for the post-MFA Given the intensely competitive nature o f the era as are other countries such as China, India and global garment and textile business, the Pakistan. industry needs to do all it can to wring out every cent o f excess cost to keep it viable in the years to come. Poorly developed infrastructure, particularly from port to Inthe post-MFA market environment, factory, will limit the ability o f the industry to compete Bangladesh knitwear exports to EUwill face effectively. stiff competition from China, India, Pakistan, though she will continue to have zero-tariff advantage under EU's EBA as it meets their ROOrequirement for knitted garments. ~~Heavy corruption at the ports increases the cost o f doing Highcost o f cotton material, importedor business substantially, thereby decreasing the country's domestically produced, make export oriented competitiveness. For instance, imported machinery costs manufacturersvulnerable to competition. as much as 10% more due to bribes that need to be paid at the point o f import. Duties and taxes on spare parts need to be rationalized to Market principles, economic efficiency and prevent customs personnel from extracting bribes as they cost competitiveness should guide private do now. This will reduce cost o f imported spares which sector investment inbackward linkage tend to be very high. activities, not government subsidies or patronage. The labor policy which states women cannot work beyond Given the intensely competitive nature o f the 8pm prevents factories from runningmore than 1 % shifts global garment and textile business, the and causes a dramatic increase in the total cost and content industry needs to do all it can to wring out o f labor. every cent o f excess cost to keep it viable in the years to come. Interest rates are still high compared to other Asian countries which are the main competitors to Bangladesh in the global garment and textile industry. 52 B. AN IVCA OF FARMINGAND PROCESSINGEXPORT ORIENTED FRESHVEGETABLES (FRENCH GREENBEANS) Background 126. This section o f the report examines the export value chain o f Frenchgreen beans as a means to identify challenges farmers and exporters face in exporting fresh vegetables in general. Consequently, this production section describes both the market for fresh vegetables and French greenbeans, while focusing on the value chain specifically for French green beans. 127. Table 4.13 below shows the top exporters and importers o f fresh Table 4.13: Top 10 Import-ExportCountries vegetables inthe world, a global of FreshVegetables, 2002 I US$ 1 I I market that hit US$21.3 Billion' in Top Ten TopTen US$ 1 billion billion 1 1 2002. Two interestingpoints come Netherlands out o f the data. The first i s that six o f the top nine importers represent Mexico United 2.3 European Union countries (implications o f where to focus fresh b i r d States ii9: I Janan I 1.7 I vegetable sales efforts, given air China 1France I 1.5 I transport links and costs'); while the France Netherlands 1I1.28 second is that even though the Bel ium Canada 1.27 Netherlands leads the world in fresh Canada 1.1 Italy .86 vegetable exports, it ranks 28'h in the , Italy 0.85 Belgium .85 world in agricultural production Thailand 0.34 India 0.64 (demonstrating that the competitive Source: GlobalTrade Atlas position o f the Dutch fresh vegetable producers i s highly superior). Diagram4.5: Bangladesh:All FreshVegetable Diagram 4.5 shows that total export Exports (1999-2002) volumes for all Fresh Vegetables out of Bangladesh are miniscule compared to the global market, yet clearly, as shown in this report, the potential for the industry to grow i s significant. 3""" rnn. Source: HORTEXFoundation 'Freshvegetablesunder the HS HarmonizedSystemof trade data#07 includes fresh driedandfresh frozen vegetables. * As this reportwill point out, air transport isjust about the only way to deliver fresh vegetablesto market, particularly to far offmarkets, due to the perishablenature ofthe product. 53 128. Bangladeshiproducers candeliver a wide range of quality andpricingto a givenmarket. Table 4.14 shows the fresh vegetable exports to ethnic andmainstreamsupermarketsfrom Bangladeshunderthe 1999-2002 HORTEXproject, focusing onthe major lineof goods exported. Table 4.14: HORTEX Project Fresh Vegetable Exports * Over correspondingperiod of precedingyear Source: HORTEXFoundation, Project Completion Report, March 2003 129. Giventhe clear potentialthis holds, the HORTEXprojecthasbeentrying to introduce Bangladeshi-producedmainlinesupermarketqualityvegetables intovarious markets aroundthe globe. The numberof new major marketsopenedover the past few years indicatesthat there is amplereasonand opportunityfor Bangladeshiproducersto aimfor these well-developed markets, particularlyinEuropeandthe MiddleEast. 54 Maldives (N.S. Soman) Total 11 10 130. To examine the competitive constraints faced by Bangladeshi farmers and exporters for exporting a larger share to these regional and global markets, this I V C A first examines vegetable production, usingFrench green beans as a representative export crop. Since Bangladeshi producers needto earn higher margins by selling other fresh vegetables to mainstream supermarkets in foreign countries, the French green bean value chain serves as a good proxy for what can and needs to take place inorder to consummate such sales. The I V C A also highlights the problems and challenges that Bangladeshi vegetable producers must presently face and solve. FrenchGreenBean Productionin Bangladesh 131. Bangladeshi Frenchgreen bean production areas are located inthe Shipu and Chandina areas, close to the packing houses, facilities and technical assistance offered by BRAC, a non- profit, development organization that exports fresh vegetables. BRAC contracts more than 1000 contract farmers and provides them with extensive technical assistance to produce and deliver export quality vegetables, includingpotatoes, to its packing houses. O f these 1000 growers, approximately 10 - 15% farm 1- 2 hectares o f land, 50 60% farm 0.4 - - 1.O hectares o f land, and the remainder serve as tenant farmers. BRAC provides training, finance, seeds, fertilizer, centrally controlled pesticides o f their farmers with buy-back guarantee to their produce. 132. While BRAC exports approximately 98% o f all Bangladeshi fresh vegetable exports sold to mainstream supermarkets, Frenchgreen beans typically represent 20 35% o f those exports, - depending upon French green bean growing conditions relative to other export crops. In 1999 - 2000 Bangladeshi Frenchgreen bean exports totaled approximately 66 MT; in 2000-01,200 MT; and in2001-02, over 500 MT. Other international competitors (e.g., Kenya) also shipped French green beans into the same markets, Le., European cities.' principally to the EUmarket where the average net profit rangedfrom 4% - 6% for fine beans and 10% - 12%for In2002, Kenya exported over 19,055 metric tons of French greenbeansand4,328 metrictons ofrunner beans, runner beans. 55 Implicationsof FrenchGreenBeanProductionValue Chain 133, The I V C A for French greenbean farming indicates that Bangladeshi farmers are producing beans at a cost of 69,955 takalha. With an average yield rate o f 8,750 kg/ha, this translates to a production cost o f 7.99 takaikg ($0,14/kg)". 134. The French green beanproductionvalue chain that appears on the next page illustrates the steps inwhichthe farmer adds value to the soil and seed: landpreparation, planting, fertilizing, spraying, weeding, harvesting, transporting (to packing house). To increase the competitiveness of French greenbean production, farmers must focus attention on the top 2 - 3 leading cost factors identified inthe IVCA. While working on lowering the costs o f other steps may contribute to improving competitiveness, improvements inthe three critical areas identified by the IVCA would have the largest singleimpact on the delivered price o f the good. Inthis context, the I V C A has identified a number o fpriority areas where targeted support, technical assistance and policy reforms are required to help maintain and grow Bangladesh's position inthe international highvalue horticulturemarket. 135. The IVCA revealed that the top three costs include: Harvesting(27.8%), Planting (23.9%) and Fertilizing (17.0%). Harvesting 136. Harvestingrepresents approximately 27.8% o f all Frenchgreen bean production costs. O f all harvesting costs, labor represents 96.5% o f harvesting costs or 17,502 takdha. Workers up to this point inthe value chain are generally paid a wage equal to 60 takdday. But as with most farming operations around the world, wages paid to farm workers duringharvest i s a hnctiono f the volume o fharvest that an individualworker bringsin. Specifically, inthe case ofFrench green bean farming inBangladesh, workers are paid 2 taka/kg o f harvest. 137. Generally, farms employ 10- 15 workers per hectare duringharvest season. Assuming that a farmer can achieve an average yield rate of 8,750 kg/ha, where 15 workers are harvesting each hectare, each worker has the potential o f earning as much as 1,167 takaiha. 138. The IVCA indicates that there is a labor productivity issue which needs to be explored in greater detail, specifically, the on-farm technical skill o fhiredlabor, bothwage and seasonal labor. By all accounts, the cost o f labor input i s high. Planting 139. The IVCA revealed that the total cost o fplantingwhen labor and all other inputs are accounted for, was approximately 15,5 86 taka/ha. While examining planting, one notes that seeds (63.4%) and labor (29.5%) represent the two highest cost components inthe IVCA. To make planting costs, and therefore overall production costs, lower and more competitive, first and foremost, the farmer must address costs associated with seeds and labor. loUnless otherwise noted, the exchange usedthroughout this report is 57 taka = $1.00. 56 I 140. Seeds: Inthe case o f French green beans, yields improved dramatically as a result o fusinga better variety o f locally grown seeds. Specifically, introducing the Amy variety o f French green bean seed improved some farmer yields by as much as 50% from 8 MTiha to 1lMT/ha. 141. However, the cost o fthese seeds represents 63.4% of the Bangladeshi French green bean farmer Planting costs. This compels a serious farmer to fully investigate and experiment with a number o f seed varieties to identify for his farm, which one or two seeds represent the optimal varieties. 142. Currently, BRAC contracts local seed growers to produce the Amy variety seed, which it later sells to its French green bean contract producer farmers. Providing the same seed to all producer farmers helps ensure end-product quality and consistency. At a cost o f 200 taka/kg for this variety, at current yield rates, farmers require45 - 50 kgo f seeds per hectare.' While the selection o fproper seed variety is ' paramount to meeting the needs o f buyers in Europe, further work is required to explore how and whether the cost o f seeds can be contained and whether altemative varieties can be introduced at a lower cost, while meeting the quality requirements o f buyers in Europe. 143. Labor: At a wage rate o f 60 takaiday, the IVCA revealed that per hectare labor inputfor planting was approximately 4,594 taka/ha. This translates to nearly 77 worker-days o f labor input for the preparation o f land. Such a cost may not seem unusual, giventhat a combination o f people, animals, and/or machines must plow, till, and otherwise prepare the soil. However, this "high" percentage cost indicates a deeper concem and potentially greater problem with regards to on-farm labor productivity, especially when evaluated alongside another step in French greenbean production. This discussion will continue in a later section. Fertilizing 144. The third highest cost to Bangladeshi Frenchgreenbean producers - fertilizers -represents approximately 17.0% o f total production cost. According to the IVCA, farmers apply about 8000kg/ha and as much as 11,000 kgiha of fertilizer (most o f which i s farmyard manure), costing up to 12,641 takaiha (Table 4.16). Source: Global Development Solutions, LLC " Inthepast, seedswereimportedfrom RoyalSluisintheNetherlands, butnowseedsareprocuredlocally. 58 145. Table 4.17 raises a number o f critical questions: 0 A r e farmers applying too much fertilizer? 0 Have agricultural colleges, extension agents and farmers fully researched the optimal costhenefit use and m i x o f fertilizers - or have they merely accepted the recommendations o f those selling fertilizers (who benefit from greater fertilizer sales)? 0 Since B R A C i s the principal exporter and does not lack technical knowhow o n the subject, is their extension work faulty? 0 A r e farmers paying too much for fertilizer? 0 H o w is government ownership in some fertilizer manufacturing plants affecting fertilizer prices and/or supply -positively or negatively? 146. T o examine fertilizer costs further, Table 4.17 benchmarks the cost o f DAP (the most expensive) and urea in Bangladesh with the cost o f those fertilizers in other Asian countries plus Kenya (the leader o f green bean exports to the EU from a developing country). I Table 4.17: FertilizerCost Comparison Country IUrea ($/ton) Price I IDAP ($/ton) Price 1 I Index Index India Kenya $328.77 I 313% 1 $438.26 178% 147. The price o f DAP paid by Bangladeshi farmers fares well when compared with other countries in the region, as well as Kenya. However, Bangladeshi farmers pay 23% more for DAP when compared to their counterparts inIndia where fertilizer i s heavily subsidized. Taking into account that DAP represents almost 5% o f the total farming cost for French green beans (approximately 35% o f total fertilizer expenditure by Bangladeshi farmers), further investigation i s required to identify possible impediments that can help to contain or lower the cost o f DAP usage. 148. A s for urea, prices paid by Bangladeshi farmers fared relatively well, with the exception that Sri Lankan farmers have access to urea at prices 30% below those in Bangladesh. doing relatively well with regards to the price paid for fertilizer. However, Table 4.18, Cost per Cost Item Bangladesh Kenya Hectare of French Green Beans - Bangladesh vs. Seeds $173.33 $160.22 Kenya, shows the Bangladeshi farmers are Pesticides $109.64 $157.78 spending nearly three times as much o n fertilizer as are farmers in Kenya. This suggests, that Fertilizer $158.17 $65.85 Total Labor $592.16 $939.49 59 150. Addingfurther to the cross-country comparisons, Table 4.18, compares the Bangladeshi cost per hectare o f other key Frenchgreen bean inputs o f seeds, pesticides, fertilizer and labor with those o f Kenya. In addition to fertilizer, the highcost o f seeds stand out as areas for improvement for Bangladesh, at least inthis scenario. Labor, on the other hand, i s clearly a competitive advantage for Bangladesh, demonstrating that ifother costs could be narrowed, the country could compete at the top o f the European market. Although Bangladesh appears competitive in cost per hectare, it i s the air cargo space and associated costs that puts it way behind Kenya. Farmer Profitability 151. Agricultural research and extension work by BRAC and the Horticultural Export Development Foundation (HORTEX) has resultedin significant increases in French green bean profitability, especially inthe concentrated area o f Chandina, Comilla. One example is the introduction of anew variety of French green bean that increased yields by as much as 50%. While the average gross yield for French green beans inthat area i s approx. 8,750 MT/ha, with an average estimatednet profit o f taka 60,00O/ha per harvest; anecdotal evidence suggests that some farm yields for beans have reachedas highas 15,000 MT/ha. This greater yield, along with other contributing factors, such as improvedpost-harvest packaging and handling, raises potential farm profitability to as much as 140,000 takdha per French green beanharvest during 2002-2003 season. Table 4.19: Summary of Constraints raced by the FrenchBeanFarmingSector PolicyConstraints Market Constraints Fertilizer: DAP is not produced inBangladesh. Seed: It appears that while BRACcontracts local seed There are projects under consideration inthe state farmers to produce the Amy variety o f seed that it later sector. Import is duty-free. So there is little or no sells to its contract farmers, the cost o f seed represents trade policy distortion. Highrelative cost o f fertilizer 63% o f the Planting costs, and 15% o f the total might be the result o f over usage. Extension work is production costs. Perhaps BRAC overpays its seed desirable to educate farmers on the right application farmers, overcharges contract producer farmers for the o f fertilizer. seeds, or both. To make Bangladeshi French green bean farmers more competitive, an independent organization Standards:Vegetable exports are subject to food may consider researchingthe optimal seed variety (both safety and quality standards inmajor markets (e.g. for market acceptance as well as production) and EU, and increasingly inthe Middle East andEast determine what is the best way to lower seed cost to Asia). As yet, there is absence o f Government farmers. regulation to ensure that production, processing and storage, adhere to these standards. BRAC has now Labor: While one expects Bangladeshi labor costs to received EUREPGAP certificate from the compete effectively against those o f other countries, labor Netherlands that opens the way to rapid expansion o f costs still represent 29.5% o f all Planting costs and 96.5% vegetables exports to European markets. o f all Harvest costs. Since materials and other non- fertilizer inputsseem competitively priced inBangladesh, such labor costs indicate low labor productivity. Increasing productivity may mean giving farmers and their laborers more one-on-one or small group training directed toward improving their farming techniques a(1and prep, planting, seeding, cultivating, weeding, harvesting) and post-harvest handling skills. Post-HarvestHandling and Processing: Exporting Vegetables from Bangladesh Background 152. The post-harvest handling and exporting IVCA starts at the delivery o fFrench green beans to the packing house, and finishes with the loading o f air freight containers at the Dhaka airport. Bangladeshi 60 firms exported approximately 12,761 MT o f fresh vegetables in 2001 - 2002, principally to the Middle East, the European Union (EU), Singapore and Malaysia. The industry experts expect that Bangladesh will grow its fresh vegetable exports at about 25 - 30% per year over the next 5 years. 153. There exist two levels o f quality for Bangladeshi exported fresh vegetables defined by their end destination: ethnic stores and mainstream supermarkets. The ethnic store refers to those overseas buyers whose customers generally represent the ethnic group for whom the vegetables were imported. These retail customers tend to prioritize the type o f vegetable and its origin over the quality, accepting certain variations in vegetable color, texture, blemishes, and freshness. that other "mainline supermarket" retail shoppers might reject. 154. Supermarket quality refers to those fresh vegetables typically found inmainstream supermarkets inforeign countries where retail customers insist on consistently highquality (e.g., Grade A) produce and often have clearly stated guidelinesfor product quality and handlingprocedures. Such vegetables seldom have any noticeable blemishes, discoloration, changes intexture, etc., and are noticeably fresh in smell, firmness, and crispness. Produce managers in these mainstream supermarkets often inspect their stock o f fresh vegetables several times a day, culling outithrowing away those vegetables that no longer appear fresh or whose quality has deteriorated. 155. Of the five major exporters o fBangladeshi fresh produce, BRAC exports about 97% o f the total, while the remaining four private exporters account for approximately 3% o fthe total. Those private firms include Crown Fruits & Vegetables, APBL, AP and Badhon Enterprise. 156. Inthe five year period 199311994through 1998/1999, HORTEXreported that the volume of Bangladesh fresh vegetable exports grew at an average annual rate o f 17%, reaching 13,200 MT However, 2002 fresh vegetable exports totaled approximately 12,800 MT. Such a decline raises concerns about lower competitiveness o f Bangladeshi fresh vegetable exports, and compels research into the constraints faced by exporters. For that reason, this I V C A explores those constraints. Market Background 157. Firmshave exported fresh vegetables from Bangladesh for many years. However, only since the mid-1990's have some Bangladeshi exporters attempted to sell fresh vegetables to mainstream supermarkets in foreign countries. Consequently, the ethnic store and mainstream supermarket exporters operate "side-by-side", while the mainstream supermarket exporter offers much more technical assistance to vegetable producers to achieve the higher level o f quality needed to attract and keep foreign buyers. 158. Ethnic and mainstream fresh vegetable exports leave Dhaka each week on flights operated by BIMAN, BritishAir and GulfAir. Occasionally consignments will leave Dhaka onEmirates Air and Lufthansa, yet because o fhigh freight charges claimed by vegetable exporters, these airlines represent shippers o f "last resort". 159. Ingeneral, 70% of all Bangladeshi fresh vegetable exports travel to the MiddleEast (UAE, Saudi Arabia, Kuwait), 25% to Europe (England, Germany, France, Italy, Belgium, The Netherlands) and 5% to Asia (Singapore and Malaysia). Occasionally, smaller amounts will fly to other destinations, such as USA and Canada. Of all Bangladeshi fresh vegetable shipments, mainstream supermarket sales (to Europe and Canada) represent only about 1%. 61 ProcessingExport Quality FreshVegetables 160. While inBangladesh, BRAC "makes it look easy" to export freshvegetables, the process requires significant financial, managerial and technical resources. BRAC succeeded in exporting fresh vegetables by applying its 20 plus years o frelationships inthe rural community, experience indevelopment and expertise in agriculture to assist Bangladeshi farmers. BRAC expended substantial effort and resources to help raise the productiono fmany Bangladeshi farmers to an export quality level. This investmentand focus included researchingmarkets and crops, negotiating and securing foreign sales, contracting and training farmers, training inand monitoring o fpost-harvest handling, coordinating harvests and deliveries to its packing houses, scheduling air freight, documenting purchase and export transactions, etc. 161. Inaddition, BRAC reliedupon its large financialresources to finance the shipment and sale o f produce, some o f which foreign buyers rejected (approximately 3% o ftotal shipments) for quality reasons and some o f which unscrupulous foreign buyers simply did not pay. BRAC also needed its substantial financial resources to underwriteall the aforementioned technical and managerial effort before, during and after production and sales contracts. 162. Evenwith all o f BRAC's financial, managerial and technical resources, it still relied heavily upon the post harvest handling, grading, packaging and marketingtechnical assistance providedbythe HORTEX Foundation. IntegratedValue Chain Analysis for FrenchBean Processing Quality Category Dimension (diameter -mm) Price paid by processors (takaikg) Ave % o f harvest Very fine 5 - 6 20 45% Fine export quality 6 - 7 15 35% Local quality >I 3 20% 62 164. The importanceof analyzing a vegetable exported to mainstream supermarkets i s that vegetable producers and exporters to mainstream supermarkets typically earn greater margins. The proven ability and success o f Bangladesh French greenbean exports serves as a motivating example to the same and other Bangladesh farmers and exporters - o the benefits f o f strivingto meet higher level quality standards demanded by mainstreamsupermarkets. 165. The IVCA for Frenchgreen beanprocessing inBangladeshconsists of seven value adding activities: sorting/cleaning, grading, cooling, packing, transport to airport, inspections and air freight. Air Freightrepresents the highest cost factor inthis value chain, accounting for 86.4% o f total value, while Packing accounts for 7.8% and Transport to Airport i s 2.7%. All other costs total only 3.2% o f the total value o f the processing costs. Based on these value adding activities, the analysis revealed that on average, the cost of processing a kilogram o f French green beans equals approximately 98.87 taka ($1.73/kg). Air Freight 166. As with all export oriented horticulturalproducts, the cost of air freight clearly determines the competitiveness o f a product. This i s no exception for exported Bangladeshi French green beans. Inthis particular value chain, air freight comprises 86% o f all costs relatedto the packing house and its exporting activities. This confirms what private companies described duringinterviews. The availability and cost o f air cargo space represented their number one constraint to increasing exports. Based on interviews, the cost o f air freight i s estimated to be approximately 84 taka/kg ($1.47/kg). While the cost o f air freight remains the single dominate cost associated with delivering a product to market, benchmarkingthe air freight costs with other countries insideand outside the region suggests that air freight rates charged to Bangladeshi processors is relatively competitive (see Table 4.2 1). Table 4.21: Indicative Air Freight Rates to Europe Country of Origin Rate ($/kg) Kenva II Price Index $1.60 - $1.65 I 103% I Israel I $0.60 - $0.90 1 56% I Bangladesh $1.47- $1.60 I 100% India 11$1.30 - $1.71) I -..-. .. 106% ..-. I Sri Lanka $1.50 - $1.70 106% Thailand 1I$2.00 - $2.40 150% 1Ecuador $2.40 - $2.90 181% Guatamala II $1.60-$1.65 IIII103% Source: Global Devleopment Solutions,LLCTM 167. Taking into account that the cost of air freight constitutes approximately 86.4% o f the delivered price o f French greenbeans to a market inEurope, maintaining the competitiveness and expanding Bangladesh's market share of the horticultural sector relies heavily upon cost and consistent access to freight services. Specifically, interviews with processors suggest that there i s a highdegree of unpredictability in the availability of air cargo space. That i s to say, even ifFrench green bean exporters have "booked" air cargo space for a specific flight with BIMAN airlines, the airline at its discretion, mightinformthe exporter at the last minutethat is does not have space available or it may not allow an exporter to ship on that particular flight, offering a myriad o f reasons and excuses. 168. The air freight cost and availability problem cannot be overstated. Each fresh vegetable exporter faces this problem. Moreover, each said that they could at least double their weekly fresh vegetable 63 exports ifthey could be assured that airfreight space would be available on a regular basis. Solving this problem would clearly bring employment benefits to the rural economy and solidify and improve Bangladesh's global market share o f horticultural products. Packing 169. Proper packagingrepresents a critical element o f successfully selling horticulturalproducts in a mainstream supermarket. I t serves to maintainproduce quality, protect the produce duringtransit, ensure proper shelf life, and attractively present the produce to consumers. Inthis context, packing represented the second largest component o fFrench greenbeanexports. The IVCA for French green beanprocessing suggests that total packaging costs are approximately 7.68 takdkg ($0.13/kg). O f all the packing costs, the shippingcarton represented78.1%, and wrapping material 13.0%. This impliesthat packing houses use labor efficiently, but that they must search for less expensive, yet equally an effective combination (for international transport) o f shippingcartons and wrapping materials. Such highpacking and wrapping material costs also explains why so many ethnic market vegetable exporters use "second-hand" shipping cartons, rather than use new ones. One reason for the highcost o f carton i s the present ban on the import of cartons to protect the emerging domestic packaging industry. This policy i s counter-productive and needs to be discontinued for the benefit o f export industries. 64 .- M E V a L v3 0 Y eo d L TransportCosts to Airport 170. The third highest component o f export costs equaled transport costs to the airport. This involves the loading o f the truck at the packinghouse, followed by the unloadingo fthe truck at the airport, and then the loading o f the air freight container. This labor represents approximately 62% o fthe total transport cost for a consignment to the airport, with the remaining 38% equaling the use o f a refrigerated truck. 171. The "Transport to Airport" cost problemis exacerbatedby the fact that even though BIMANAir charges the exporter approximately 1.20 taka/kg as a `loading' fee, the exporter i s required to hire and pay people to do the actual loading themselves. This, in effect, quadruples the cost to actually load goods onto containers and vessels (the cost to hire a crew is 0.40 takaikg, while BIMANcharges 1.20 takdkg as a load fee, for which there is no actual loading done). Key Challengesand Opportunities for Improvingthe Competitivenessof FrenchGreenBean Exportsfrom Bangladesh ExporterProfitability 172. For all fresh vegetables, exporter profitability varies by product, market destination and market prices. InMarch 2004, taka 13l.lO/kg represented a typical market price that a Bangladeshi exporter could earn for French green beans delivered to the London airport. All direct costs (including air freight) incurred by exporters selling French greenbeans averaged approximately 98.87 taka/kg, plus the average amount exporters paid farmers for their French greenbeans delivered to the packing house, Tk 14.85/kg. Consequently, exporters incur total costs o f approximately Tk 113.72/kg. For French green beans sold to the London market for Tk13 l.lO/kg, then, exporters could expect to earn approximately Tk 17.38/kg. 173. As Frenchgreenbeanproducers and exporters continue to upgrade the quality o ftheir product and increase their production, it appears they have growing demand to fulfill. Air freight cost and availability represent their biggest constraints. 174. Ifthe government, non-profitsandthe privatesector could solve the air freight cost and cargo space availability problem, Bangladeshproducers and exporters could explore and initiate sales o f other fruits and vegetables in foreign markets. From interviewswith Bangladeshi exporters, European and MiddleEasternmarkets would gladly buy more quality Bangladeshi vegetables ifthey couldbe shipped reliably. Such increased fresh vegetable volume and diversification would help stabilize and grow rural incomes. Opportunitiesfor Growth 175. Inadditionto mainstream supermarket fruits and vegetables, exporters report a large, growing demand for organic, eco-friendly produce, processed food, and frozen food. These other export opportunities can take advantage o f many o f the same skills and processes required and developed to export supermarket quality Frenchgreen beans. While the market size for such opportunities appear almost overwhelming, organizations such as BRAC and HORTEX have built the foundation with step- by-steptechnical assistance for production, post-harvest handling, shippingand marketing. They can transfer their combined knowledge and success in French green bean (and other fresh vegetable) exports to other producers and exporters as donors renew their respective funding commitments. 66 Table 4.22: Summary of Constraints Fa d by the Horticulture Sector inBangladesh Policy Constraints Market Constraints Unpredictablecargo space on BIMAN flights: Fresh TraDDed in the ethnic market: Due to lack o furouer - - vegetable exporters estimate that about 5% o f the time, standardization (food safety and quality), vegetable are BIMANrejects their shipments due to insufficient air mostly limited to the ethnic market which has little scope for cargo capacity. A s a consequence, these exporters must becoming a major player. Only Brac has moved to sell rejected consignments in the local Dhaka market for supermarkets by exporting green beans, though quantum i s much less. Bangladeshi fresh vegetable exporters lost limitedby availability o f cargo space. approximately 4,865,000 taka ($85,351) injust one year for exports o f about $15 million. Although "OpenSky Lack of cold storage facilitiesat airport: Numerous flight Policy"for air cargo exists, airlines are not offering cargo delays due to scheduling and plane repairsimaintenance space because o f one way freight (to Europe). cause fresh vegetables delivered to the airport to stay in an Consequently, BIMANremains the only major handler o f un-refrigerated air freight container on the tarmac, often for freight. hours. With no cold storage facilities, the quality o f such fresh vegetables deteriorates rapidly. Insome cases, foreign BIMAN monopoly on all air cargo handling: Although buyers reject up to 30% o f a Bangladeshi fresh vegetable Biman freight charges are reasonable, exporters claim that shipment. they end up paying for services not-performed, thus actually being over-charged, which lowers the A privately-runcold storage facility at the Dhakaairport profitability o f fresh vegetable exporters by the amount o f could help exporters salvage more o f their delayed over-charge. . shipments, as well as keep their fresh vegetables that were rejected due to the lack o f cargo-space (approximately 5% o f Unpredictable electricalpower outages: their annual shipments). There i s not sufficient volume o f Unpredictability o f power supply causes higher electrical activity for a private entrepreneur to invest in a cold storage. costs (through less efficient power generators) and can Again, unless bulk o f exports are destined to supermarkets, lead to food spoilage inboth packing houses and frozen volumes would remain limited. food manufacturing plants. Better organizationof smallholder farmers to help Needfor better communicationsystems: Onnumerous improvethe process of aggregatingharvestto meet large occasions, Bangladeshiprocessors expressed the need for volume export demand: Bank financing rates remain too better and reliable communication system betweenthem highfor a typical fresh vegetable exporter to borrow money and their customers. It i s difficult to increase exports to buy land to help aggregate production and maintain it at a when foreign buyer's phone calls often cannot connect high, export-level quality. Inthis indirect way, highinterest with phones inBangladesh after 2 - 8 attempts. Improved rates can be seen as limiting fresh vegetable exports. phone connections between Dhaka and Bangladesh agricultural production areas would help the export process as well. Needfor better road development: Improvements, particularly in rural areas, are needed to increase access and lower produce damage. Expense of export quality shipping cartons: Ethnic market exporters believe that to maintainreasonable profit margins, they must buy used cartons that cost less than half the price o f new ones. While this saves money, i t costs them inthe amount o f produce rejected by the foreign buyer due to poor packaging. Such packaging i s unacceptable in mainstream supermarkets. The import policy ban on cartons ought to be removed. I Source: Global De\ opment Solutions, LLC 67 C. IVCA for Leather Footwear in Bangladesh Background - Evolution of Bangladesh's Footwear Sector13 176. The number o fproductionunitsinthe Bangladeshifootwear industrynow exceeds 2,000. Most unitsare, however, small and medium insize and only 23 are relativelylarge and have mechanized and semi-mechanized production technology. The annual production capacity o f the industry (domestic and export production) is about 32 million pairs o f leather and non-leather footwear. Of this 25.17 million is produced by mechanized and semi-mechanizedunits. Production capacity o f individual manufacturing concerns varies from 750 to 3,000 pairs a day. A large majority o f shoes produced inthe country find their way mainly to the local market, with only a few firms produce shoes for export. The industry provides direct employment to about 25,000 people in total. Nearly 50% o f them are engaged in mechanized and semi-mechanized unitsand are classified, on the basis o f employees, as large, medium and small. 177. Marketing o f footwear manufacturing units in Bangladeshi s done through a network o f wholesale and retail shops which employ an estimated 50,000 persons. Marketing o f imported footwear i s done through importersilocalagents. Local manufacturers use a network o f wholesalers to sell to retailers and finally to consumers. Exports are organized through sales to foreign and regional wholesalers and through them, to foreign retail traders and consumers. 178. Exports o f leather footwear grew by 527% between 1990 and 1998, but plateaued at $35-40 million since then (Table 5, Statistical Annex). The list o f export markets o f footwear from Bangladesh includes Japan, the volume leader with a market share o f 34%, followed by UK (11%), Spain (9%), Germany (8%), Russia (7%), Italy (5%), and USA (2%). Presently, 16 export-oriented shoe factories exist inBangladesh, employing approximate 10,000 people. Their collective annual shoe production numbersan estimated 3 million pairs.I4 Market Transaction for Leather Shoes in Bangladesh 179. While each country has import criteria and specific distribution channels, the flow o f market transactions remains remarkably similar. The following market transaction flow chart describes the process by which Bangladesh shoe manufacturers export (Diagram 4.8). l3 The following section is adapted from materialprepared by banglaoedia.search.com.bd June 5, 2004 l4 Source: Bangladeshi Leather Footwear Association 68 Diagram 4.8: Market Transaction Flow Chart of Leather Footwear Production Finishing Inspection Source: Global Development Solutions, LLCTM 180. Inthe midstofthe intense global competition to export footwear, each sector (e.g., government, industry,labor) ineach country either actively or passively encourages or weakens its ownmanufacturers, and their employees. The following strengths and weaknesses represent the collective thoughts and comments from leaders o f selected Bangladeshi leather footwear manufacturers. 69 Table 4.23: BangladeshiSh Manufacturers Perceived Strengths and Weaknesses Strengthens Weaknesses L o w labor costs for a labor intensive Highinterest rates andbank service charges, which increase industry material, equipment, buildingand land costs Strong domestic supply, sourcing most Only six domestic tanneries have ability to produce finished o f the leather hides domestically leather, which limits domestic supply and price competition Have relatively low tariff for Tannery environmental pollution has turned away some European electricity buyers o f leather footwear, who fear badpublicity intheir home markets for buying leather products from firms polluting the environment Highquality shoe components and accessories not available locally and must be imported Shoe manufacturers mustpay import duties and taxes on capital equipment spare parts, at a rate higher than garment and textile producers, increasing their costs. No production facility exists for producing lasts (shoe molds), which must be outsourced to other countries Electricity supply is unsteady forcing manufacturersto operate factory generators (A typical 500 KVA Diesel generator cost Tk 2,900,000 to install, Tk 1,200,000 per year to operate and Tk 300,000 every three years to overhaul) High container handling costs and many inefficientport/customs processes, all o f which create a fertile environment inwhich many people seek or demand bribes Manufacturers must pay bribes both to clear imported materials and to export finished products, increasing costs. Bribes typically amount to 2 - 5% o f import value, and sometimes as much as 1O%, according to producersiexporters. Lack o f a leather footwear-oriented training institute which trains people inpractical craftsmanship, supervisoryimanagementskills, machine operating & repairing skills, chemical analysis, testing and application o f technology. Poor image o f Bangladeshi products abroad (need help in building interest among foreign buyers to visit and buy from the country). Insufficient number o f shoe manufacturers inBangladesh (like RMGmanufacturers) to give foreign buyers more reason to visit the country (Le., more selection and more supply). Constraints on existing shoe manufacturers discourage some other investors from locating their shoe factories inBangladesh. Source: Based on i rviews by Global Development Solutions, LLCTM 70 IntegratedValue ChainAnalysis 181. The IntegratedValue Chain Analysis (IVCA) for leather footwear indicates that the average Bangladeshi shoe manufacturer exports a pair o f men's shoes for approximately Tk 657.55 per pair, FOB Chittagong. The I V C A also describes the cost per pair for each process (inTaka). 182. To maximize the effort invested inmaking the Bangladesh leather footwear industrymore competitive, this I V C A focuses on the top three cost factors and how they mightbe reduced. Diagram4.9: IntegratedValue Chainfor Leather FootwearinBangladesh InputMaterial Quarter: 46.9% V q : 20.4% Lining: 14.3% Heal L m g 21% Bmdmg 97% Heal Counter 21% Insole 45% Cutting sub M I Y 60 2% 0 2% InputMaterial CementmgFilling 27 0% Outde unit 713% AttachMid-soleto ShoeLastlng 17% Source: GlobalDevelopinentSolutions, L E M Cutting Diagram 4.9 (a): Value Chain for the Projectionof Leather footwear in Indonesia 183. The cutting process begins with selecting a finished leather hide. One group o f workers cuts the leather hide according to the pattern for a particular shoe, while others organize these pieces for later subassembly and stitching. Cutting involves carehl detail, as n the cutter seeks to avoid the defects inthe leather (e.g., scratches, pin-holes, discoloration) that will face outward on the shoe, while at the Source: Basedoninteniws conductedby Global DevelopmentSolutions, LLC inJuly, 2003 same time maximizing the use o f the hide. Cutters also cut the liningleather that will become the inner lining for the shoe. 71 184. While the cutting process impliesa heavy labor component, labor comprises only 1%o f the cutting costs, The remaining 99% o f the cutting costs reflect the cost o f the process' raw material: finished leather hides. It is interesting to note in Diagram 4.9a, which represents the I V C A which was recently concluded on Indonesian leather footwear, a major competing country, that Cutting i s also the highestcost category o f leather footwear inIndonesia and Material represents the largest component o f cutting at 98.9%. This i s not at all unlikeBangladesh and for many o fthe same reasons. Evenmore interestingis the fact that a number o f other cost categories are very similar, includingImport and Export. Eventhough some o fthe other categories reflect substantially different percentages, many o fthe subcategories are similar. For instance, when comparing Finishingin Indonesiawith BottomWork in Bangladesh, the major category is again material. Tables 4.24 and 4.25 below compare the two value chains, with the addition o f a per unit cost component. The comparison reveals that Bangladesh (at $11.44) i s cost competitive with Indonesia (at $20.57), the no. 3 exporter to USA, and no. 10 globally. But is it competitive inquality. Table 4.24: Value Chainfor LeatherFootwear in Bangladesh Taka per pair Bottom Sub- Work & In-factory Import Cutting assembly Stitching Lasting Finishing Inspection Packing Export TOTAL Unit Cost 7.00 395.67 1.43 43.17 112.05 25.48 0.45 61.52 10.78 657.55 Yo of Total 1.1% 60.2% 0.2% 6.6% 17.0% 3.9% 0.1% 9.4% 1.6% 100.0% Source: Global Development Solutions, LLCTM Table 4.25: LeatherFootwear Value Chainfor Indonesia USD per pair Stitching Bottom & Sub- Work& Inspection Import Cutting assembly Lasting Finishing & Packing Export TOTAL Unit Cost 0.13 13.82 2.09 1.18 2.70 0.40 0.27 20.57 Yo of Total 0.6% 67.2% 10.2% 5.7% 13.1% 1.9% 1.3% 100.0% Source: GlobalDevelopment Solutions, LLCTM 185. Finishedleather hides represent such a highpercentage o f cutting costs that they compel the shoe manufacturer to seek ways in which to lower this cost. Infact, most shoe manufacturers earnestly look for dependable, reasonably priced finished leather hides. Part o f the problem lies with the success o f Bangladeshi tanneries. Demand for Bangladesh hides i s so great that Bangladeshi tanneries can readily export crusted hides without "finishing" them. Unfortunately for Bangladeshi shoe manufacturers, only six tanneries in Bangladesh produce finishedleather hides, limiting the potential for sourcing more locally. Tanningand FinishedHides 186. While it would seem preferable to eam the extra value by finishingthe hides, many tanneries have chosen not to do so. A major reason for not wanting to expand their tannery operations to include finishing is that leather finishingrequires significant additional investmentinequipment, facilities and staff(marketing, R&D, sales and production). Many crusted hide tanneries earn a steady and immediate return on their previous tannery investment(s)rather than investingin the management, staff, equipment and technology requiredto develop finishingcapabilities and they choose to operate at that level rather than invest in additional capacity. Also, with this new and larger investment, a crusted tannery operation 72 would have to wait a longer period to earn a payback on its investment. Table 4.26 shows the value chain for leather tanning in Bangladesh. Table 4.26: Value Chain for Leather Tanning TanningBquareFeet (Tk) Tk. 64.88 Raw Hide Wet Blue Crusting Finishing Total Unit Cost 36.56 7.70 11.67 8.95 64.88 Yoof Total 56.4% 11.9% 18.0% 13.8% 100.0Yo TanningBquareFeet Raw Hide Wet Blue Crusting Finishing Total Unit Cost $0.64 $ 0.14 $0.20 $0.16 $1.14 Yoof Total 53.9% 8.6% 15.8% 11.7% 100.0% Source: Global Development Solutions, LLCTM 187. The export o fwet blue and crusted hides has beenbannedfor years together, presumably to gain the benefits o f added employment and income from adding more value to leather hides. With only six finishing tanneries, Bangladeshi shoe manufacturersbelieve that there exists anotable limited supply of finished leather and an insufficient competitionfor its price. Moreover, these same shoe manufacturers must strongly compete against foreign buyers ofBangladeshi leather hides to get their neededraw material. Bangladeshi tanneries admit that Bangladeshi shoe manufacturers comprise only about 10% o f their annual sales. From the general tannery perspective, then, there exists no compelling reason to serve the domestic shoe manufacturers other than to sell their hidesto them at the best (re: highest) price. 188. The tragic irony from the Bangladeshi shoe manufacturer perspective is that China, the country importing the most leather from Bangladesh, manufactures and exports the greatest number o f shoes in the world, and represents Bangladesh's number one competitor for shoe exports. Leather Processingand the Environment 189. To make the leather supply matter worse, some Bangladeshi shoe manufacturers fear that they may lose [or not gain] customers from the EuropeanUnion because o f environmental practices o f certain Bangladeshi tanneries. A few E.U. shoe buyers are beginning to choose shoe suppliers based upon their environmental and/or labor policies. While shoe factory managers may operate their plant "environmentally-friendly", one Bangladeshi shoe manufacturer lost a potential multi-millionEuro purchase order because o f the highlevel o f effluent pollution from one o f his local tannery suppliers. A summary o f environmental concerns appears in the following table. 73 Tal e 4.27: Environmental Hazards Associated with the Leather Sector Waste Source Major Impacts Liquid Organic and inorganic solids, Occupationalhealthproblems, corrosion of the Hydrogen sulphide, ammonia, water-carryingsystem, contaminationof coastal volatile organic compound, area, reductioninnatural fertility for the soil, electrolytes harmto soil structure,threatto aquatic life, low crop yield, contaminationof food, reduce genetic biodiversity Solid waste Organic material, meat remains, Contaminationo f soil andundergroundwater, the tannedskinremains, contaminationof food, occupational, health chromium remainsduring hazard suchas perforation andbronchiogenic trimming carcinoma, contaminationofpoultry feed, reduce genetic biodiversity Air emissions Hydrogen sulphide and sulphur- Air pollution containing compound, ammonia andnitrogen containing compounds, organic solvents 190. Increasingly, certain foreign buyers are beginningto avoid manufacturers with poor labor and/or environmental policies or suppliers - they do not want to face bad publicity intheir key markets and lose sales as a result. Interestingly, however, all countries tanning hides and manufacturingshoes face the same environmental challenges. What appears as a competitive disadvantage (polluting tanneries and their negative consequences upon shoe and other leather exports), tanneries and shoe manufacturers could turnto an advantage. The first country/countries to develop environmentally friendly [or the most environmentally friendly] tanning and manufacturing facilities, may become the suppliers o f choice for certain, environmentally sensitive foreign buyers. Environmentally friendly processes can, in fact, become a competitive advantage in an increasingly competitive shoe and leather product global market. Two critical questions that arise are: 0 How quickly could Bangladesh and its tanneries change their facilities and environmental policies to become leaders inthese trends; and 0 How badly does Bangladesh want to keeplgrow its leather export markets? 191. The Government has for several years hadplans to relocate the Bangladeshi leather tanning industryto an "industrial park" area with its own specialized water treatment and affluent plants. The alternative is for individual firms to acquire I S 0 14000 certification. The European Union and World Health Organization are pressingthe Government to complete this project, or, inthe case o f the E.U., face leather import restrictions. However, Bangladeshi tanneries, while familiar with E.U.restrictions on disallowed chemicals for leather tanning, claim not to have received clear E.U.guidelines on the overall environmental restrictions. Unfortunately, with changing Government officials, programs and priorities, the leather tanning industryhas no industrialpark into which it can move. Furthermore, with the given land and space restrictions where tanneries currently exist, Bangladeshi lawmakers have been reluctant to codify specific environmental laws or regulations, since the tanning industry could not fulfill them unless they are relocated. Yet as noted inprevious global market charts, E.U. countries represent4 o fthe top 6 importers o f footwear in the world, purchasing approximately US$14 billion worth o f footwear products in2002. 74 Leather Supply 192. Inthis context o funcertain supply o ffinishedleather, the direct impact o fsupply uponhide prices and the pending changes in the tanning industry (e.g., environmental restrictions, tannery relocation), some shoe manufacturers increasingly experiment with forward contracting with selected local tanneries. This represents the foremost attempt o f some leather footwear manufacturers to help stabilize their price and supply of finishedleather hides, the highest cost iteminthe leather footwear value chain. Inaddition, these leather footwear manufacturers do not want to see the best or many o f the limitedsupply o f finishedleather hides "sold out from under them" to foreign buyers or other shoe manufacturers. Consequently, these fonvard-contracting shoe manufacturers seek to negotiate price and quantity orders in advance for what they expect they will need to operate their shoe manufacturing factories. Similarly, tanneries are beginningto consider the same type o f forward contracting with their suppliers (e.g., slaughter houses, hide brokers), as hides represent their highest cost inputas well. 193. Some tanneries occasionally import unfinishedleather because a particular importedhide has certain characteristics, usually a specific hide thickness, that their customer wants and such characteristics are typically not found in Bangladeshi hides. Yet, many shoe manufacturers believethat imported finished leather hides would help bringthe price competitionnecessary to lower domestic finished hide prices. This, in turn, would make Bangladeshi leather shoe prices more competitive on the global market. Leather hide impact on profitability and corporate strategy 194. The challenges o f global supply and demand for both leather (raw, crusted, wet blue and finished) and leather footwear, lead shoe manufacturers to a critical "margin squeeze". On the cost side, both tanneries and shoe manufacturers work hard to minimize their highest cost: hides. On the revenue side, shoe exporters around the world face increasing sales price competition from each other and especially from China. This downward pricepressure seriously limits any opportunities to expand margins by increasing the sales price. 195. Such a critical "margin squeeze" has led a few Bangladeshi shoe manufacturers to look for new ways to expand their margins One has added significantly more production capacity to increase his shoe manufacturing capacityholume, thus lowering his average cost per shoe. Another Bangladeshi shoe factory has distinguisheditself by responding to potential buyerswith quick turnarounds inboth quotes and small production runs. Yet another has positioned himself in makingjust one part o fthe shoe, uppers,and focusing the remainder ofhis footwear productionassets on sandal manufacturing. Bottom Work and Lasting 196. Bottomwork and lasting represents the second largest cost inthe I V C A for shoe manufacturing. Intuitively, this is not surprising. The last performs the function ofmolding and holds the shoewhile workers affix the mid-sole and outsole to the upper part o f the shoe. Bottom-work represents the focus o f the workers' efforts while cementing filler material and attaching the mid- and out-soles. Surprisingly, for all the effort seemingly expended in this process, labor costs amount to just 6% o f the total bottom work and lastingcosts. 197. As with the cutting process, materials comprise the highest cost inthe bottomwork and lasting process: 94% inthis case. With bottom work and lasting, however, there may exist more opportunities to lower costs. Outsole units, whose primary material i s leather (although sometimes manufacturers use rubber), represent 71% o ftotal material costs, while cementing filler accounts for 27%, with the remaining2% of material costs beingthose materials used to attach the mid-sole to the shoe. For the two Bangladeshi shoe manufacturers that make their own soles, the outsole cost remains high, since those 75 made o f leather must be made of hide, and those constructed with rubber, are comprised o f imported materials, which includes shipping, handling and related costs. 198. Since no domestic manufactures o f shoe soles exist inBangladesh, the remaining Bangladeshi shoe manufacturers import their soles. This adds to the costs o f the soles, since most Bangladeshi shoe manufacturers must pay for the packing and transportation o f the soles, as well as the manufacturing cost and profit made by the foreign sole manufacturers. 199. The reason for this sole-import phenomenon is that inaddition to the cost o f sole-making equipment, a mold for a particular shoe design costs approximately US$20,000. Making a mold profitable requires a minimumproductionrun o f approximately 30,000 pairs. Consequently, to justify the cost o f making one's own soles, shoe manufacturers must consistently sell shoes in sufficient volumes to justify the cost o fsole-making equipment and sole molds. With this inmind,most Bangladeshi shoe manufacturers have made the business decision to import their soles. Packing 200. Packingrepresents the process after workers inspect the shoes and before the shoes leave the factory. First, a packer places a pair o f shoes inan "inner" box, which represents the shoe box inwhich the eventual shoe retailer will merchandise the shoes. Another packer then places the inner box in a "master" carton, which typically holds 10 - 12 inner boxes. A worker then loads the master cartons onto a truck bound for the port. 201. Inpacking, material costs far outweigh labor costs. Typically labor costs equal 0.2 - 0.5% o fall packinghouse costs, while material costs represent the remaining99.5 99.8%." - Shoe manufacturers source all o f their master cartons locally as an import ban exists on cartons. Some o f the inner boxes are sourced locally as well. Other times, foreign buyers will request and/or ship to the shoe manufacturer, a particular type o f inner box inwhich they want the shoes packed. These imported boxes cost the shoe manufacturer about 2.5 times the cost o f a locally manufactured inner box. Yet, even with both the inner box and master carton manufactured locally, material costs equal 99.5% o f total packing costs. This i s in comparison to the structure o f the I V C A o f Indonesian footwear, inwhich packing and inspection was not even 2% o f the value added cost. The biggest different was that the quality of packagingusedin Indonesiawas significantly less than that used by Bangladeshi producers, whereas the labor content was about the same. Also, all packaging used inIndonesiawas sourced locally which i s not the case in Bangladesh. Clearly, one key policy distortion that needs to be addressed inBangladesh i s the removal o f the banon imports ofcartons -which is a keymaterialfor packaging. This will help enhance domestic competition, allow exporters to source their packaging inputs externally as well, thus creating downward pressure on domestic carton prices. 202. Such a highcomparative material cost leads to suggestions which clearly the industry already pursues, namely, to find lower cost inner boxes and master cartons. Looking deeper into this highcost item, the shoe manufacturer must investigate: 0 How can shoe manufacturers ship more shoes in fewer numbers o f cartons per consignment? and 0 Can the manufacturers make larger, stronger cartons and/or inserts to place inside larger cartons to give them the additional strength to carry more inner boxes? The analysis assumes that shoes are placed in local master box and a foreign inner box, where the cost o f the master box carrying 10pairs o f shoe cost approximately Tk 5.7/pair, and an imported innerbox costing Tk 55.7. 76 203. With packing costs representing9.4% o f all leather footwear costs, it behoovesthe shoe industry to explore ways in which to lower these costs, while concurrently examining the same for bottom work/lasting and cutting. Inthis context, the import ban on cartons does not help. Sector Profitability 204. Despite intense price competition, highmaterial costs, highinterest costs and frustrating disruptions o fpower supply, Bangladeshi shoe manufacturers continue to grow into the global market, expecting a record number o f exports in 2003-2004. Individual firmprofitability directly relates to their ability to secure consistent sales orders, operating their factory at close to capacity, lowering or keeping material costs stable and reasonable, and managing their businesswell. Also, servinga particular market niche in the leather footwear market may help to ameliorate the fierce price competition, define one's image and secure profit margins (e.g., Italy's shoe industrystrategy). Mediumto large-sized shoe manufacturers that achieve this can earn a gross profit margin [as a percentage o f sales price] o f up to an estimated 25%. 205. Critical to the future success o f the Bangladeshi shoe industrywill be the sustained supply o f finished leather hides, shippingcartons and other material inputs at reasonable prices, and a dependable source o f electrical power (Table 4.28). Present Future 1. Quick response to buyer inquiries 1. Creatively lower and/or control material costs, especially 2. Offer consistently: leather 2.1 L o w costs 2. Quicker turnaround between order and delivery dates, 2.2 Very good - excellent quality where buyers are beginning to expect a delivery time 2.3 On-time delivery closer to 45 days after placing an order, rather than the 3. Creatively lower andor control material traditional 90 day turnaround costs, especially leather. 3. Quickly produce small orders 4. Develop sound labor and environmental policies and choosevendors who do the same 5. Acquire improved technology o f finishing and tanning leather. Source: Basedon interviewsby Global Development Solutions, LLCTM 206. As the Government o fBangladesh seeks to increase the competitiveness o f its shoe industry, certain decisions are within its control. These are summarized inthe table below (Table 4.29). 77 Table4.29: PolicyandMarket Based `onstraintsin Leather Footwear Sector PolicyBasedConstraints Market BasedConstraints High interest rates. These create highinterest costs for The needfor stable, reasonably-pricedfinished a very capital intensive shoe industry land, building, leather hides. Currently, finished leather hides account equipment. Bangladeshi shoe manufacturers claim that for 60% o f the total leather shoe manufacturing costs. their competitor inother countries can borrow capital at Highinterest rates make it even more difficult to operate 1.5% - 4.5%, compared to 7 - 12% in Bangladesh. The their business since they reduce operating margins shoe industry not only must finance building,land and further. equipment, but also substantial working capital to pay for material inputs, most notably finished leather hides The needfor lower-pricedinner boxes and master and shipping boxes and cartons. On top o f that there are cartons,or alternatively constructedboxesand bribes to pay. Such interest cost disparities and bribes cartons to lower overall packingcosts. disadvantage Bangladeshi shoe manufacturers, burdeningthem with greater costs than their Lackof lastingmanufacturer(s)inBangladesh. While competitors. a few domestic firms make simple, low-use wooden lasts, Bangladeshshoe manufacturers must import Enforcementof Environmentaland Labor durable, long production-run composite lasts. To obtain regulations. One Bangladeshi shoe manufacturer lost a the higher quality lasts, Bangladeshi shoe manufacturers significant sale to a major Europeanretailer because the send samples andor pattems to last manufacturers in retailer did not want to be associated with the other countries (mostly India), to have the lasts made for Bangladeshi tanning industry's lack o f environmental them. This delays the Bangladeshi shoe manufacturers in controls. As more foreign buyers become sensitized to meeting orders for samples as well as for production their customer concems about and negative television runs. It also adds costs to the process, since Bangladeshi coverage regarding their vendors' treatment o f laborers shoe manufacturers must pay for the transportation and and the environment, these issues become more importing o f the lasts. important buying criteria. Progressive environmental and labor policies can also become a competitive Lackof a sole manufacturer(s) in Bangladesh. advantage, ifthe relevant Government agencies make Several shoe manufacturers complained about this positive decisions in these areas quickly and implement problem adding to their costs and management attention, them soon. since they had to manufacture their own or import them. Presently, the average cost o f an outsole, the highest The Government offersimporttax concessions to material input cost inbottom and lasting work, equals certain thrust sectors like garments for import o f US$ 1.25 per pair. machineries andparts. These same concessions are needed for the footwear industry in order for them to be Lackof component manufacturer(s) inBangladesh. competitive. Inthe absence o fbonded warehouses, the The need to import components increases the costs for duty drawback system has to be really efficient. local shoe manufacturers. Lack of a chemicallab able to test for azo dyes. The Industryrepresentatives describedthe needto improve European Union prohibits azo dyes, yet Bangladeshi the Bangladeshmanufactureproductsimageabroad, shoe manufacturers must send leather samples to India Le., promoting the fact that there exist quality to test whether they contain azo dyes or not. One o f the Bangladeshi producers manufacturing quality products, reasons that foreign buyers use an azo lab outside o f inwhich foreignbuyers may place their confidence. Bangladesh is that they do not feel a Bangladeshi lab would give them an unbiased evaluation. Govt is steppinginto set up such a lab soon. 78 D. INTEGRATED VALUE CHAINANALYSIS FOR CERAMICS PRODUCTION Background 207. The ceramics industryinBangladeshbegan in 1958 with the establishment o f Tajma Ceramic Industries Ltd. in Bogra. Itis the oldest modern ceramic manufacturing plant inBangladesh and is also the only ceramic factory located inNorth Bengal. Itsproduction was very small and the quality o f the product poor. The Pakistan Ceramic IndustriesLtd. was established next in early 1960s to service the domestic market, and has since been renamed Peoples Ceramic IndustriesLtdafter the independence o f Bangladesh. 208. As ofDecember, 2003, there were 27 registeredceramics plants, o fwhich only 15 ceramics white ware companies are in operation employing between 10,000 19,000 people (Table 4.30).16 - Sub-sector Numberof Plants Plants in Operation Ceramic Tableware 9 8 Bone china 2 2 Porcelain 5 4 Stoneware 2 2 Sanitaryware 3 2 Ceramic tiles 15 5 Sub-sectorTotal 21 15 209. Ofthe 15 enterprises inoperation there are five major ceramics companies operating in Bangladesh, namely Monno Ceramics, Peoples Ceramics, Bengal Fine Ceramics, Standard Ceramics and Shinepukur Ceramics. These companies produce highquality ceramic and porcelain wares. Peoples Ceramics, for example, has a production capacity o f about 28,000 pieces o f assorted tableware per day. The company however, has had little success inthe export markets, but only recently, the company has developed a new brand o f 'Super China', which i s drawing the attention o f foreign buyers. 210. Similarly, Bengal Fine Ceramics Ltd. i s the first firm in the country to make soft porcelain, which the company calls 'stoneware'. This i s an off-white product manufactured by usinglocal Mymensingh clay. The factory went into productionin 1986. It produces about 24,000 pieces (6 tons) o f stoneware per day. And Standard Ceramic Industries Ltd. was only recently established near Gazipur, about 30 km north of Dhaka as a sister organization by Bengal Fine Ceramics with special focus on export markets. 211, The largest and most successful ceramic company inBangladesh is the Monno Ceramic IndustriesLtd, which started production in 1985, and manufactures very highquality porcelaintableware. This company has done well inthe export market with its sales office inLondon and a permanent stall in the FrankfurtHouse-waresshow. And Shinepukur Ceramics Ltdwas incorporated in 1997 with the aim of establishing a world class bone china and porcelain tableware industry. 212. About 95% of raw materials for making quality and exportable ceramic products in Bangladesh are imported from abr~ad.'~The materials are imported mainly from Japan, Germany, New Zealand, South Korea and India. The primary raw materials for ceramic products are white clay and sand. l6Interviewswith manufacturers suggested that there is no reliable data on the number employed inthe ceramics sector. 79 213. The largest deposit of white clay in Bangladesh was first discovered in 1957 at Bijoypur o f Mymensigh. The total reserve o f white clay from this region i s estimated to be 2.57 million tons. Clay was also found injaflong o f Sylhet. Butthere is no clay or sand treatment plant at these places. 214. In2001 annual productionwas about 15,000 tons o fceramic items, ofwhich a large majority o f products sold are ceramic tableware. Product Ceramic producers typically sell tableware in sets per customer specifications e.g. a 52- piece dinner set, consisting o f a certain body (clayistone mix) decorated and/or painted with defined artwork and materials, weighing 20 kgpackagedwith certainprotective materials for export Price Tableware sets sold on price per set, with an agreement on the contents o f each set and the specifications o f each piece in the set. Place Most production sold as ongoing orders to replace regularly purchased product. Manufacturers sell other ceramic products designed for particular seasons, religious holidays, promotional events, etc. Promotion Ceramic producers promote their products primarily through sales visits and trade shows. New contracts typically won based on a combination o f cost, quality and delivery date. Renewal contracts typically won based on previous ability to deliver competitively priced product at the agreed upon quality level and delivery date. 215. Annually, about 5,000 tons are exported to 45 countries including the USA, Italy, Spain, France, New Zealand, the Netherlands, Australia and Sweden, with growing exports to the Middle East. The remaining amount i s purchased locally. Initially, all ceramic industries catered to the domestic market only. 216. According to interviewswith ceramic manufacturers, Bangladesh export sales are expected to exceed US$155 million (67 million pieces), while the domestic sales are expected to reach approximately US$ 90 million (28 million pieces).'* Most Bangladeshi ceramic exporters view their future positively, believing that they can increase their present market share inthe multi-billion dollar market. IntegratedValue Chain Analysis for Ceramics Tableware 217. A standard 52 piece ceramics dinnerware set made from a stoneiclay mixture with decorative or painted artwork weighingan average of 20 kg was selected for this Integrated Value Chain Analysis (IVCA) . The tableware i s made up largely of imported material. The 52 piece tableware i s the most popular product sold by the factory selected for this analysis.'' Inthis context rather than developing an I V C A around a particular piece o ftableware, the analysis used taka per kilogram as a unit o f measurement for the analysis.20 Key competitors like China andcountries in Eastem Europetend to source most of the key ingredientsthrough local sources. This immediately creates a cost disadvantage over the long runfor Bangladeshimanufacturers. According to data providedby one of the leading ceramics exporter inBangladesh, the averagepriceof locally sold tableware per piece is $3.21, while export oriented tableware per piece is approximately $2.31, indicating a 39% difference betweenthe two. This suggests an anti-export bias of domestic policy which needs to be addressed. I 9The factory employs nearly 730 workers. It is estimatedthat eachworker producesapproximately 12.22kgldayof finished tableware. 2o On average, each piece weighs approximately 0.36 kg. 80 218, The value chain o f ceramic dinnerware can be categorized into six distinct activities: 0 Ingredient collection; 0 Ingredient inspection; 0 M o l d formation; 0 Ceramics production; 0 Packing; and 0 Transporting. 219. The I V C A suggests that per kg cost ofproducing a standard 52 piece dinnerware is approximately Tk 72.83 ($1.28/kg), with over 91% o f the value being added duringthe ceramics production stage. In addition to production, packing and ingredient inspection accounted for 4.3% and 1.9% o f total value added respectively. 220. Taking into account that ceramics production is the single most dominant value adding activity association with the productiono f dinnerware, much o f the focus with respect to cost reduction and improved price competitiveness will have to come from this area. Ceramics Production 221, The I V C A estimated that the total value added o f ceramics production was approximately Tk 66.38/kg. The key value adding activities include: 0 Labor; 0 Inputmaterial; 0 Decorations; 0 Gas; 0 Electricity; and 0 Administrative costs. 222. Inputmaterial accounted for 37.1% o fthe value added at this stage o fthe production, followed by administrative costs (34.5%) and decorations (10.7%). The I V C A revealed that 50.3% o f inputmaterial was imported. Importedmaterials include stone, clay, feldspar, silica quartz, limestone, dolomite, and clay. In addition, other auxiliary materials such as plaster o f Paris, fire clay, and saggers were brought in through Chittagong Port. Table 4.32 provides estimates o f prices paid for selected imported input material.*' Table 4.32: Average Price Paidfor Material Price (TWMT) Feldspar 7,000 Quartz 5,500 China Clay 10,000 - 12,000 Plasterof Paris 60,000 Ball Clay 45,000 Global Development Solutions, LLCTM Over 40% of the total importedinput material is derived from China Clay, which is the second most expensivematerial used for the production of ceramic dinnerware. More troubling is the fact that Bangladesh producesover 42.5 milliontons of China Clay. 81 223. Ofthese imported inputmaterialChina Clay (40%), Feldspar (30%) and Quartz (30%) constitute the largest share o f inputmaterial required for the productiono f ceramics tableware. Diagram4.10: Value Chainfor CeramicsProductionBasedon a Standard 52 Piece Set (TWkg) h Depreciation: Tk 2.80(12.2%) Localmaterial: Tk 3.78 (15.4%) Incidentals: Tk 1.68 (7.4%) Imporirdmrricrial: Tk 11.38 (S0.3%) Financing: Th 9.83 142.9%) Glaze: Tk 2.65 (10.8%) Admin OH: Tk 4.56 (19.9%) Other inputs: Tk2.97(12. 1%) Selling/Distribution: Tk 2.5 1 (11.O%) Auxiliary: Tk2.83(11.5%) Def. Rev. Write-off: Tk 1.52 (6.6%) \laterial 8 7% 2 3% 34.5% I High Cwt (if Packingllatriial (TWkp) Labor Tk 0 19 (6 4%) I h u tmaterial Tk 0 14 (4 5%) Gas: Tkw Diagram 5.2: Inbound and Outbound Supply Chains for Ready Made Knitwear Cotton Fiber US, China, . A-GGGih W Africa, C. Asia -1 112.2 112 months- , ~Spinning Mill 1 Approvals Chittagong I Ocean 25-35 days 294. Once produced the goods are shipped directly to the buyer generally on FOB terms. The manufacturers hold only enough inventory to consolidate a shipment. The time for the shipment o f garments from the factory to the buyer's warehouse depends on three sequential movements: 0 a domestic land movement from the factory to the port, either directly as loose cargo in a truck or as a multimodal movement o f loose cargo in a truck and a container on rail, 0 an ocean movement on a feeder vessel up to Singapore or Colombo and then on a mainline vessel to the destination port, and 0 a foreign land movement from the port o f destination to the buyer's warehouse. The domestic movement is arranged by the manufacturer Table 5.3: Costs for Knitwear Exports $ITEU or his forwarder, whereas the ocean and foreign movements are usually arranged by the foreign buyer acting through his forwarder. Spinning, 295. The manufacturers can reduce the time for &ittini.CMT 10,000 movement betweenthe factory and Chittagong by using Transport 150 150 a direct truck movement and can anticipate the time Clearance, 450 450 required for clearing cargo and stuffingthe container but beyondthat there is the uncertainty o fthe turnaround Ocean Shipping I 2500 2500 110 time of the feeder vessel in Chittagongandthe time at the transshipmentportwaiting for the mainline vessel. Although the buyer assumes the risksassociatedwith delaysfromthe time the container is loaded on the feeder vessel, the total transit time affects the manufacturers ability to compete for future orders. The timing andcost for the complete order cycle is showninDiagram5.2 andTable 5.3, respectively. 296. While over 90% ofthe garment exports are shippedby sea, a substantial and increasingshare are shippedby airfreight. Relativelylittle of this is done at the request of the buyer. Rather, the manufacturer,who is late indeliveringthe garmentsto the port,chooses to use airfreightrather thanmiss the agreeddeliverydate. Sincethe door-to-doorcosts usingairfreight are about 5 times greaterthan for ocean freight, the impactonprofitabilityi s considerable. Thisproblem is further exacerbatedduringthe peak season when there is insuflcient airfreight capacity andair freightersmustbe charteredinto meet demand. 297. The competitivechallenges facing the garment industryover the next five years will remainprice, quality, standardsofmanufacturingandorder cycle time. The industryhasbeensuccessfulinaddressing the first three and cancontinue doing so assumingpoliticalstability and improvinglaborrelations. The fourth challenge is likely to bethe greatest. The order cycle for knitwear up to the time of shipment is 154-2monthsassumingrelativelylittle upfront design andthis is competitive with China andVietnam. However, for woven goods, it is one monthlonger becauseo fthe needto importfabric, whichplacesit as disadvantagerelativeto Chinawhichhas its own fabric andVietnam which has a shorter supply chain. If Bangladeshis to continue producinglarge amountsof low-valuewoven garments, it will haveto significantly improvethe performance of its inboundandoutboundsupply chains -one optionthat has beentabled by the RMG industryis the settingo fcentralbondedwarehousesto stock up gray clothfor offtake inresponseto export orders. Ifthe knitwearindustryis to continue its rapidgrowthit will haveto improveits outbound supply chain. The difficulty with improvingthese supply chains is that the garment industryhas limitedcontrolover the servicesandnone over the associatedinfrastructure. Muchofthis improvementwill haveto come fromGovernment. Leather and Tableware (ceramic) 298. Other export industrieshave similar problems with the efficiencyoftheir inboundandoutbound supply chains but are less demandingintheir logisticsrequirements. Leather and leatherproductsare similarto garments except that most o fthe leather is producedlocallywhile the accessories are imported. Bangladeshhasbeenable to export blueand crust leather but has haddifficulty in exportingshoes and handbags. The logisticsare less demandingthan for garments becausethe styles change slowly andthe buyer is able to holdsome stock. The logisticsfor tableware andother ceramic exports are evenless demanding. While the inputs includingclay and chemicals are imported, these are generic inputs. Therefore, the manufacturerscan maintainseveralmonthsinventoryin order to ensure continuousfiring intheir kilns. The foreignbuyers are generally willing to holdinventorysince designs changerelatively slowly andmost sales are filled fromwarehouse inventoryrather thanfrom retailer's shelves. Nevertheless,as the bigbox retailers suchas IKEA enter the market, the order cycles will decrease and product inventories will bereduced. FreshVegetables 299. The other major exports, vegetables and shrimp have elaborate logisticsbecausethe products are perishablesandproductioninvolvessmall-scale rural production. Only one company, BRAC, (BangladeshRuralAdvancement Committee) is responsiblefor most ofthe freshvegetable exports. It purchasesthe vegetables directly from contract farmers, supplies seeds and other agriculturalinputsto ensure the quality of the product, andoperates two smallprocessing facilities near the farms to select, gradetest andpackagethe vegetables. The vegetables are trucked'fromthese facilities directto the 111 airport or, in some cases, to its larger processing facility in Tongi where additional tests are conducted as requiredby the EU. BRAC provides its own refrigerated trucks and cool storage. 300. The major exports include Frenchbeans, bitter root, longbeans, chilis and some traditional vegetables. These are sold to wholesalers and buyers for ethnic groceries and supermarkets inEurope, the Middle East and, to lesser extent, Southeast Asia. The total amount shipped in2003 was about 800 tons of vegetables and 1000 tons o f potato. The trade is new and growing. 301. The company ships against year-round contracts that include standing orders for certain types and amounts o f vegetables. These are shippedby air on a daily or weekly basis. In order to be competitive in the Middle East, BRAC uses Biman Airlines, which offers a rate o f only $0.70 per kg., significantly less than its competitors. However, there i s insufficient low cost airfreight capacity to meet the demand inthe Middle East. Biman does not provide a similar service for Europe and BRAC uses other commercial carriers with rates o f about $1.3 per kg.. Because the maximum permissible shippingtime for leafy vegetables, which make up a majority o f the exports, is only 10-12 days, it i s not possible to use ocean freight. The exception is potatoes, which inany case are shippedto Singapore and Malaysia. Potatoes could also be shipped to Europe in marine containers but there i s insufficient demand so far. 302. Because fresh vegetables cannot be shippedby sea to Europe and because the highcost for airfreight reduces profitability, BRAC is now considering producing frozen vegetables for the European markets. This would increase the value per kilogram thereby offsettingthe highcosts for airfreight. More importantly, it would create the opportunity to use refrigerated marine containers, which would enhance both the available shippingcapacity and the profitability o f this export. Shrimps and Prawns 303. The other perishable export is Tiger Prawns (Penaeus monodon) for the United States and freshwater prawns (macrobrachium) for North Europe. The existingproductionarrangements involve complex supply chains. Most o fthe hatcheries (43 out o f 48 in2000) are located in Cox's Bazaar or Teknaf in the southeast part o f the country where there i s the right combination o f fresh and salt water and a natural supply o f shrimp fry to replenish the brood stock. The farms where the shrimp are grown are primarily inthe rural areas around Khulna in Western Bangladesh. This i s the center to the traditional shrimp farming industrysince there are the appropriate environmental conditions including an adequate supply o fboth fresh and salt water. 304. The shrimp fry are fed artemia, which are imported in containers from the UnitedStates through Chittagong and trucked down to Cox's Bazaar. The fry are transported from Cox's Bazaar to the farms around Kuhlna inpolyurethane bags containing a saline mix. This cargo i s transported by truck to the airport in Cox's Bazaar, then by small plane to Jessore and from there by truck to the farms around Khulna. The yield from the fry has been relatively low due to a mortality rate o f 60%-70%. The high level o f mortality is attributed to problems with the quality o f the broodstock, the farming techniques and the stress associated with multimodal transport. Recent efforts to test the fry prior to shipment and more careful planning o f the shipment have reduced mortality to about 30%. 112 305. The growingseasonis 120days andthere are Diagram 5.3: Supply Chains for Shrimp Exports two seasonsper year, after whichthe monsoonrains are usedto clean the ponds. Oncethe shrimp reach Imported Food maturity,they are packedinbarrelswith ice and Hatchery transportedby truck to the processingplantsaround Broodstock Q Khulnafor grading, cleaning, removingheads, I I freezing andpackagingas well as testing. Becauseof pastproblemswith quality,the major factories now Broker conformto HAACPrequirements.* The processed shrimp are loadedinto refrigeratedcontainers and shippedby inlandwater to the PortofMonglafor b loadingonto feeder vessels. Recently some processing Agent plantshavenow beenestablished inChittagongto take Ld advantageo fthe better shipping services at Chittagong port. Fromthese ports, the shrimp are shippedvia A 1-2 days Singaporeto NorthernEuropeandEast Coast ofthe Agent UnitedStates. Typicalshipping times are 30 days to Europeand40 days to the East Coastof the US. 306. The logisticschainfor bothTiger prawnand - 1 Wholesaler fresh water prawnhave a fragmented supply chain with middlemanparticipatingat boththe originand destinationof each internalmove. As a result, the farmers lack directcontract with either the source of supply or the marketsinto which they sell. The principalchallengesfor the shrimp export industryare Shrimp 120 days to improvethe quality of fry, the efficiency ofthe Farm ~ ~ Q shrimp farms andquality controlo fthe exports. n Improvements inlogisticsincludingcareful controlof the environment inwhichthe shrimp are transported Broker cancontribute to this first by reducingmortalitydue to stress duringtransport from the hatcheries to the I-2bays farms. Efficiencyinfarmingcanbe improvedby simplifyingthe supply chains so that there is more direct interactionbetweenthe shrimp farmers andboth the hatcheriesandthe processingplants. This will also c7 F s9 l increaseprofitabilityas itwill reducethe numberof Processing 3-5 days intermediatetransactionsandmiddlemenassociated Plant ~ ~ with the transfer from one activityto another. r h o r 307. So far, the limitationsonBangladesh'sexports z i 25-3jdays havebeena result ofdifficulties in insuringthe quality e m f l D of the product andthe efficiencyof its shrimp farming / - - - - industryand internallogistics. The relativelycostly ii 1 Importer I and slow external logisticshavenotbeena major concern. As the industryreorganizes andimprovesits The physical, chemical and biological tests done by exporters as per HAACAP include tests for salmonella, vibrio cholera, E coli, antibiotics, standard plate count, and others includingheavy metal as per buyers requirements. 113 processes, increasing attention will be given to its outbound logistics. While the handling o f refrigerated containers has been relatively robust and the shippinglines have beenable to adjust their schedules to meet the needs for shippingduringpeak season, these accommodations are not efficient. Vietnam, which i s one o f the largest exporters of farmed shrimp has had similar problems with its outboundlogistics because o f the location o f the farms away from the major ports. However, it i s the process o f improving their cold chain and use o fbarges for the movement from the farming areas to the mainport that both reduces costs and provides more frequent sailings. A similar process could be introducedinBangladesh to move the reefer containers from the factory to the port facilities at Chittagong. that serve international trade, e.g., the connections 200 cg to Assam, Meghalaya, Tripura, Bhutan and Nepal 8 150 . handle much smaller volumes. * / 0 100 - Chittagong-DhakaCorridor 50! + 0 0 0 , I , 311. The road connecting Dhaka and Chittagong is a combination of two lane and dividedfour-lane segmentsbut it is beinggradually upgradedto 4 lane throughout. The road can accommodate tractor- trailers with fully-loaded 40' containers but most o f the freight traffic i s 4 and 6 wheel fixed axle trucks. Congestion is growing especially around Narayanganj and Dhaka with transit times o f 6-7 hours implying an average travel speed o f 35-40 kph. Despitethe congestion and because the railroad capacity i s limited, the roadhandles about 83% o fthe containerized cargo moving between Dhaka and Chittagongalthough much o f this is moved as loose cargo. 312. This corridor also has an air route with frequent daily flights between Dhaka and Chittagong and an inland water route from Narayanganj down the Meghna and across the bay to Chittagong. West Bengal-Dhaka Corridor 313. The West Bengal corridor includes a road route via Petrapole/Benapole and rail routes via Darsana, Rohanpur, Benapole, and, to a lesser extent, Biral. This had been a major route for importing 114 Indian fabric and yarn for the Bangladesh garment industry; but, currently, there i s an import ban on yams via these routese3 314. Indian wagons are able to cross over but not the locomotives and the rakes must be reconfigured because o f shorter train lengths on the Bangladeshsystem. The potential for growth inrail traffic, both bulk and container, is considerable but requiresa lifting ofrestrictions on cross-border and internal movement^.^ 315. The truck border crossing at Petrapole/Benapole is a major source o f delay for goods moving between West Bengal and Bangladesh. On the Indian side, there has beenlittle development o f infrastructure resulting in long queues for crossing the border. This has been partially offset by the attempt to simplify customs procedures for exports, which represent a majority o f the traffic. Onthe Bangladesh side, there has been extensive development o f infrastructure, but the clearance procedures for Indian imports have become more time consuming: turnaround time for Indian trucks is 3-4 days, most of which i s spent waiting for customs officials; the time that cargo remains in the landport depends on the importer and type o f cargo, but with the exception o fperishables the periodis not less than 4 days. . 316. The landport provides a solutionfor the lack o f infrastructure at the border crossingbut creates a problem in terms o f trade facilitation. Rather than encouraging the movement o f cargoes under seal to a location close to their final destination where the customs formalities can be completed, the customs are creating delays at the border. The land port institutionalizes these border delays. Furthermore, it creates an environment in which logistics service and customs can profit from delay. B3. TransportModes Ports and Shipping 317. The major bottleneckfor Bangladesh's export logistics is theports and shipping sector. Because o f the relatively small volume o f cargo handled and the distance between Chittagong and the major shippingroutes, Bangladesh imports and exports are transported on feeder vessels. Nevertheless, the volume is sufficient tojustify shuttle operations betweenChittagong andboth Singapore/Tanjung Pelapas and Colombo with several calls per week and strong competition. The transshipment at these ports adds to the time and cost for the port-to-port container shipments. The rates and times for shipments to Europe and the U.S. East Coast, as shown in Table 5.4, are comparable to those for Vietnam and China (despite their greater distance) for cargo transshipped at Singapore. For transshipment via Colombo, Bangladeshhas a competitive advantage, but the large buyers o f Bangladesh's exports prefer the shipping lines that call at Singapore since Colombo offers less frequent service. For shipments to East Asia and the Pacific, Bangladesh would be at a competitive disadvantage relative to China and often relative to Source: Various ShippingLines Vietnam. This was introducedas a Non-tariffbarrierto trade dueto pressurefrom domestic textileproducerswho felt threatenedfrom smuggledyam. This amountsto backslidingintrade policy.It is not inthe best interestof Bangladesh's vitally important readymadegarment industry(Le.knitwear) and it limitscompetitioninthe domestic market. A HighPointRendalReportrecentlyconfirmedthat the bridgecansupport wagons canyingloadedcontainers. 115 318. Chittagong is unusual inthat it handles about 400 thousand container per year, but has only recently procured fixed container handling equipment. Under normal circumstances, a container port will acquire a mobile container crane once volumes exceed 25 thousand containers or a Ship-to-Shore gantry crane (SSG) once the volume reaches 50-75 thousand boxes. A second SSG would be acquired before volume reaches 100 thousand containers. CPA is now procuring four SSGs even though the current volume wouldjustify 5-6 such cranes. These cranes provide significant increases inberthproductivity 319. The feeder vessels calling at Chittagong range in size from 500 to Table 5.5: CPA Port Performance-ContainerStatistics 1000TEU (twenty-foot equivalent unit), There are about two vessel calls per day with a typical vessel transferring 600 containers (875 TEU). The container ships are the more costly self-sustaining vessels because the port lacks Ship-to-Shore Gantry cranes. The on-board container-handling equipment ranges from primitive to reasonably modern depending on the age o f the vessel, but overall the average vessel productivity is low, about 5.6 boxes per vessel hour (Table 5.5). The average time a vessel spends at berthis 110hours.5 Inaddition, Source:Tera Intl. there are delays waiting for tide and an available berth. These delays are reported as being less than one day, but with a berth occupancy at 93% there may be hiddendelays as vessels adjust their sailing speed to arrive intime for a free berth. 320. A typical voyage includes five days transit time in each direction, one-day turnaround inthe transshipment port and five days turnaround time in Chittagong for a total voyage time of 16 days. This may be extended duringpeak periods to allow for stopping at Mongla for shrimp and other containerized exports. The new SSGs should have a significant impact on vessel turnaround. Assuming two cranes per vessel, the average time at berthshould be reduced from 110 hours to 16 hours (including time for berthing,unberthing,removingand replacing the hatches, etc). Allowing for tide, the turnaround time in port would average less than 24 hours.6 This would save 4 days per voyage and allow for fixed day o f the week sailing. The latter is importantbecause it would allow exporters to choose in advance a feeder vessel that would arrive close to the time the designated mother ship arrives thus minimizing the time in the transshipment port. Overall this should provide an average savings in shipping time o f about 6-8 days for outbound cargo and 3-4 days for inbound cargo. However, this may be difficult to achieve under the current management. Therefore, the current plan i s not only to equip the existingterminal but also to construct a new terminal, at New Moorings, for operation by private concession. Both are expected to requireat least two years to implementsuccessfully. 'While this representsa 60% improvementover 1999, it still places Chittagongamongthe leastproductivecontainer ports inthe worldandat the bottomfor portshandlingsimilar volumes o f container. Time at berthincludes removingandreplacingthe hatchcovers, waitingfor the tide andberthingandunberthing. Turnaround time inportincludesthe time waiting to berth. 116 321, Inorder to achieve faster ship turnaround, it will also be necessary to eliminate the congestion in the container yard since this slows the movement between the vessel and theyard. This appears to have two causes. The first is a large amount o f import boxes staying a long time inport. The second is the highproportion o fboxes that are unstuffedinthe port eventhough they are FCLs (FullContainer Loads) and should be delivereddirect to their destination or to a customs facility near that destination. At present about 60% o f the inboundboxes have cargo destined for Dhaka. There are three reasons that this cargo i s unstuffed inthe port and transported as loose cargo. First, the movement o f containers by rail i s slow and requires a double handling while road transport i s cheaper for loose cargo than for containers. 'Second, importers must provide a bank guarantee to remove the container from the port unless shipped to the Dhaka Rail I C D (although the larger freight forwarders can make do with a company guarantee). Third, there are no customs facilities for clearing cargo near where most o f the production i s located. Airfreight and Airports 322. The airfreight businessinBangladesh is quite competitive with a number o f carriers providing freighter services and all o f the passenger services carryingbelly cargo. Shipments are arranged through air cargo agents rather than airlines and there are a large number o f agents providing a competitive service. Biman has the exclusive franchise for cargo handling operations at the airport, but its charges are reasonable even if its equipment i s limited.8 323. Airfreight charges are highcompared to ocean freight rates butnot significantly higherthan for surrounding countries (Table 5.6). Biman Airlines offers low freight rates relative to its competitors and is able to attract marginal traffic. However, most exporters are willing to pay a premium for the integrated logistics service providedby the larger intemationalcarriers. As a result, these airlines have more demand than capacity. 324. The demand for airfreight does not originate from foreign buyers wanting faster delivery times for their goods. Rather, it comes from the exporters who have been delayed in shippingtheir goods and must resort to airfreight inorder to meet contracted delivery dates. These situations occur because of delays inreceivingraw materials and problems with making outbound connections, among others. If these are addressed through improvements incustoms procedures and port performance, then the problem of shortage in airfreight capacity could be eliminated. As long as Bangladesh exports low value goods with relatively long shelf lives, the importers are unlikely to require air shipments. Only ifthere was a dramatic increase in exports o fperishables or fashion garments would there be regular shortage in airfreight capacity. Roadsand Trucking 325. As mentioned above, the majority o f general cargo imports and exports are transported between Dhaka and Chittagong as loose cargo. The trucks are mostly vans carrying the equivalent o f one TEU (up to 15 tons assuming a 10 tons axle load). The vehicle fleet i s relatively old and composed primarily o f two axle trucks. Exporters often use Source : Thai Airways International June 2003, various their own trucks to deliver cargo from factories in airlines, consultants estimates 'Container haulage is more expensive because o f the limitednumber o f tractor trailers and because o f the greater likelihoodfor empty backhaul. Ironically, most of the loose cargo is carried invans that are fixed axle trucks with a container welded to the chassis. * Some of the airlines have brought in their own scanners to improve security 117 Dhaka to the rail ICD or from factories in Chittagong to the port but otherwise use thirdparty providers. These are primarily independenttruckers or relatively small trucking companies. 326. The travel time between Dhakaand Chittagong is expected to increase from the current 6-8 hours as congestion inthe corridor increases. This congestion is beingaddressedthrough donor-funded improvements, but the planning appears to be incremental rather than systematic, addressing deficiencies incertain linkswithout an overallplan for the corridor. Furthermore, there have beenno recenttraffic counts and information i s not available on current levels o f congestion on different sections o f the route. Railand ICDs 327. Bangladesh Railways operates a twice daily scheduled unit train service in each direction between the port o f Chittagong and the Dhaka Rail ICD inK a m l a p ~ r .The transit time for the 298 km ~ trip is about 8 hours. The rakes have a capacity of 76-80 TEU and carry about 116 o f the containers loaded and offloaded inthe port o f Chittagong. 328. Despite the highlevel of demand and potential for growth, Bangladesh Railways has not increased the frequency o f its profitableunit train operation. The reasons for this include: 0 Lack o f freight capacity on the route due to Government policy that favors passenger services over freight services 0 A lack o f commercial incentives with the management currently being satisfied to charge a premium(both formal and informal) for this service by rationing capacity. 0 Congestion on specific sections that also serve traffic from the northeast, e.g. between Tongi and Bhairab Bazaar and between Laksam and Chakisasma, 0 The ICD does not have the capacity to handle three trains a day in each direction. 329. While there are occasions when three trains are operated ineach direction, this only occurs when the delay for containers waiting inthe port exceeds acceptable limitsas it is accomplishedbycanceling a passenger train movement. InlandWater Transport 330. Inland water transport (IWT) has long been considered an appropriate mode o f transport for containers that would avoid the congestion and delays o f the land routes connecting Dhaka and Chittagong." The travel time across the bay and up to Narayanganj is estimated to be about 16 hours which would make it considerably faster than the current rail service for inbound containers but slower than road transport especially when the door to door movement i s considered. Ifa service i s established, its market share o f inbound containers will depend on level o f congestion and other delays for road transport, pricing policy, and delays occurring inrail transport; but i s expected to be smaller than for the other modes. It is likely to have a greater share o f the outboundmovement o f empties but even for this cargo it would face stiff competition given the low backhaul rates offered by the other modes and the faster transit times. The Dhaka Inland Container Depot (ICD) was established in 1987 under the joint ownership of the Bangladesh Railway and the Chittagong Port Authority. Container handling operations are under the control ofthe ChittagongPort Authority. Since August 1991dedicated container block trains have operatedbetween Dhaka and Chittagong. The Dhaka ICD has a storage capacity for only 1,000 TEU at any one time. loSuchaservicewasto be includedas a core component of SSA's proposedcontainer terminal operation at Patengabutthis , concession was cancelled following a rather acrimonious political maneuvering by local political interests 118 . Customs 33 1, Imports and exports are cleared at the borders, the international ports and airports, the Export Processing Zones inChittagong and Dhakaand the Dhaka ICD. The Clearing Agents (CA) are licensed individuals and very few freight forwarders offer cargo clearance services. Instead, importers and exporters select a CA based on demonstrated ability to expedite cargo movements at a reasonable price. 332. The customs services have undergone significant reforms inrecent years. These include: 0 Introduction o f a Simplified Administrative Document following the UNkey layout; 0 Expandeduse o fASYCUDA++* 9 0 Mandatory Pre-shipment Inspection for a wide range Diagram 5.5 :Flow Chart for Temporary Imports o f non-Government imports; 1 CA submits shipping documents 0 Use o f a simplified tariff CA Arranges for CPA to Make Shipment based on the Harmonized Available for Customs Inspection ~ Code (8 digit); and Compare Ship Manifest with Shipping 0 Redand yellow (but not Customs Examined Decides Whether of green) channels in 1 Not to Inspect Cargo I Chittagong, Dhaka ICD and I Benapole. Logdement Generated and Entered in , Register e + Cargo Inspection as Required ~ 333. Also, the procedure for I 1 clearing temporary imports o f fiber Folder with Documents Prepared and I Given to Data Entry Clerks and fabric and exports o f fabric and I I CA Takes Assessment Notice to garments was greatly simplified in Customs Bank the period 1999-2002. The number Data Input and Bill of Entry Generated o f steps for the former was reduced Customs Bank Office Generates by */3,while for the latter decreased Release Form by % (Figure 4). Also the number o f signatures declined to about 8 + Folder with Bill of Entry to Principal Appriaser from over 40. The result has been that clearance times have dropped from more than one week to one Customs Appraiser Reviews Data and Prepares Assessment day for exports and to 1-2 days for imports o f raw materials for the .) I production o f exports. Principal Appraiser Reviews and Prepares Assessment Notice I 334. The effectiveness o fthese .) Office reforms is the more impressive Folder Sent to Customs Agent at the when compared with the lack o f Jetty change in the port which has yet to I CA Pays Port Charges computerize its cargo handling activities. Furthermore, the Source : Tera Intl estimated amount paid in speed money to the dockworkers is about twice the informal payments to customs for an export container. 335. Despite these improvements, the documentation that must be provided to customs i s lengthy and mustbe submitted inhard copy. This should be reduced as the Direct Trader Input(DTI) data entry 119 system operated by the Customs Agents is fully implemented. At present it is only usedfor exports and temporary imports but will be expanded to imports. B4. Recommendations 339. Bangladesh has successfully developed a world-class garment export industryas well as smaller but successful export activities infootwear, ceramics, vegetables and shrimps. This successhas been achieved through concerted efforts to adapt existing infrastructure, services and procedures to the demands for efficient and reliable supply of inputs to production and delivery o f products to the world market. The demand for further reductions in cost and time o f supply chains and for additional flexibility and reliability in delivery o f goods to the market continues inBangladesh as it does in competing nations. The difficulty i s that the returns to these adaptations are diminishing and a transformation of the logistics systems is required. 340. While there is no doubt that additional investmentis requiredin all modes o f transport, this report has determined that the changes that are required most immediately are modijkations ofpolicies, processes and management rather than capital investment. Even inthe area of capital investment, there i s a need to look systematically at the problem o f delivery o f transport services with the major corridors and to plan investments so as to improve overall performance, not just the performance o f a specific mode on a specific link o f the network. 341. A list o fpriority initiatives to improve logistics services for bothimporters and exporters was developed based on discussions with manufacturers, thirdparty logistics providers, and Government agencies involved intrade and logistics. Fromthis list a subset was selected based on the likelihood for " Formerlytheyinspectedallshipmentsbutonly10%ofthepackagesineachshipment 120 successful implementation in the next few years and the expected short-term benefits. These five initiatives listed (Table 5.7) in order o f priority are: Action Time Frame 1. Reform containerterminal Concessionor OperatingLease Startwithin 6 operations inChittagongPort months 2. Establish bondedwarehouses Liberalize procedures for establishing Within One year and ICDdDry Ports, bondedwarehouses 3. Continue Customs reforms with Implementationof Asycuda ++, full Ongoing, 3 years greater emphasis on imports EDI, channellingand other risk management 4. Increasecapacity inthe Dhaka- Roadwidening, Improve Rail Continuous 5. Improve Benapole-Dhaka 1 Simplify procedures, Increasecross- One year Corridor performance I docking ~ Port Reform 342. The conversion of Chittagong Port from a general cargo port that handles containers inefficiently to a modern container terminal requires a change in management style and labor practices as well as the introduction o f substantial IT and commercial incentives. These change cannot be achieved by simply modifying an organogram, re-engineering an organization or providing training inequipment operations and computer systems. Such modificationswould be appropriate for an operation involving a smaller volume o f containers with a straddle carrier or reach-stacker operation and a few years to make the transition. However, this is not the situation. The CPA i s handling 600 thousand TEU, which i s likelyto increase to 750 thousand over the next few years. It has procured some extremely sophisticated equipment and will be obtaining the supporting computer systems. All this i s to be operational within a year. Most troubling, it is proposed to institute these changes without changing the style o f management or the relationship with labor. However, this type o f operation requiretechnically sophisticated, commercially oriented managers. It also requires equipment operators working to well developed operational plans not casual labor responding to the incentives o f speed money. Without a change in both management and labor there is likely to be little improvement in performance. 343. Berthhandlingrates may increase to 15-20 boxes per crane hour initially but the problem ofyard congestion will quickly reduce this to 10 boxes per crane hour. The yard congestion will continue with additional delays inreceiving outbound boxes and delivering inboundboxes both to customs for inspection and to road chasses for removal from the terminal. As a result the dwell time for export boxes will be about 5 days whereas for import boxes, the dwell time inport is unlikely to change. Inthis situation, the feeder services will be able to reduce their voyage time by 1-2 days, but the uncertainty o f the time in Chittagong will remain and day o f the week schedules will not be possible. 344. The need for a fundamental change inmanagement structure has already beenrecognized with the proposed change to aprivate concession for theNew Moorings Container Terminal which includes the right ofthe concessionaire to recruit a skilledlabor force. However, it will take at least two years to introduce this system. Because the next two years are expected to be critical to Bangladesh's export sector and since the CPA has already investeda significant amount in SSGs, RTGs and supporting equipment, it is strongly recommendedto introduce private management through a management contract with an experienced terminal operator. Since a multi-year management contract by itself would not provide a sufficient incentive to invest inthe systems and training necessary for efficient terminal operation, it is recommended that this agreement allow for conversion o f this contract to a concession at a 121 later time.12 As part o f this arrangement, it would be necessary to modify the arrangement with the dockworkers to reduce gang size and replace casual labor with trained equipment operators. Bonded Storage 345. Bangladesh has been successful in developing a number o f EPZs and inproviding bonded warehouse status to factories producing for export. It now needs to develop supplemental bonded facilities that will further reduce the cost and time for delivery o f imported inputs used inthe production of exports. These facilities would include: Off-Dock Container Yardsfor Inbound Containers- While there is a provision inthe regulations to allow the Off-dock yards to handle inbound containers, Customs has so far not granted any permits to do so. This needs to be addressed as quickly as possible inorder to reduce yard congestion. A Rail ICD near Tongi The existing Dhaka rail ICD inKamalupur operates more efficiently - than the container yard inChittagong Port but it would be more effective if located near the importers' factories with good road access for trucks. Road ICDs to the Southeast and Northwest of Dhaka - A road ICD would allow for containers to travel inbond from Chittagong to Dhaka, to be cleared by Dhaka customs officials and to move directly to the importers' warehouse or factory. Itwould also allow for storage o f the empty containers, which could thenbe stuffedwith export cargo or returned as empties to Chittagong. The results would be a dramatic increase inport-to-door movement o f containers thereby reducingdelays, cargo damage, and empty backhauls. A common-user customs bonded warehouse - there is no facility for traders to store raw materials for export production. Relatively few o f these companies are willing to take the risk and bear the cost o f maintaining a large inventory o f fabric to reduce their order cycle time for future orders. Traders and suppliers couldperform this service but only ifthey were able to avoid paying duty and other taxes on these inputs and not have to seek a refundfrom the dysfunctional duty drawback system. A customs bondedwarehouse would allow the traders to sell to the factories under a temporary import arrangement and reduce the order cycle time for woven garments by one month. 346. The benefits from the introduction o f additional customs bonded warehouses will be to reduce the time for inboundand outbound logistics for the garment industrywith savings inorder cycle times o f2-4 weeks. This will also create an additional incentive for assembly and other export oriented production to expand production CustomsClearance Procedures 347. Reforms in Bangladesh customs has been gradual, at best. Yet, over the past decade or so, changes, albeit slow, have been institutedinprocesses, customs procedures, and inautomation o f import and export clearance. However, a large agenda for customs modernization remains unmet still with the result that clearance delays remain on the highside (Chart on median delays, Annex). 348. The time and informal payments for imports have also declined as a result o f the introduction o f a Pre-Shipment Inspection system (PSI) However, customs continues to inspect 10% o f the imports even l2 Sucha strategywhile not beingas effective as a concessioncan be usedwhere Governmentis not yet preparedto allow private sector managementof public infrastructure as was the case inJordan's recentdecisionto allow privateoperationofthe containerterminalin the Port of Aqaba following a sustainedperiodof severe congestionand shippingline surcharges. 122 though they have a CFR .I3 Informal payments to Customs are set according to the value o fthe cargo and are collected through the implicit threat o f inspection and their discretionary power to identify discrepancies both of which are to the cost and time for clearing cargo. At the same time, Customs officials themselves are under pressure to meet monthly revenue targets prescribedby the NBR, without consideration o fhow these targets are met. While Customs has beenable to reduce the clearance time for imports with proper documents to an average o f 2-3 days, the performance remains uncertain and the level o f corruption unacceptable. 349. The government has quite wisely focused its reform efforts on exports with a view towards improving the competitiveness of the export industries. Efforts to reforms the procedures for imports were delayed as they represented a substantial threat to the income o f many o f the customs officials. Now, with the demonstrated effectiveness, i s the appropriate time to extend the reform to the procedures for clearing import cargo. ASYCUDA based systems for channel selectivity and/or risk management can be introduced to reduce inspections and Direct Trader Inputsystems can be used to reduce the number o f signatures required. 350. The benefits of these reforms will be a reduction in delivery times for imports but more importantly greater reliability o f delivery times and a reduction inthe amount o f and opportunity for informal payments. Railways Container Service 35 1, The container unit train operation between Chittagong and Dhaka has the potential to provide an important benefit to both importers and exporters inthe Dhaka area. While there are some operational problems with the yard layout and operation in Chittagong and Kamalupur and with the availability o f rolling stock, these are much less important than the failure to provide sufficient train frequency or to operate in a commercial manner. The two trains per day operating in each direction are nearly fully utilizedbut Bangladesh Railways i s reluctant to add additional service as this would require eliminating some passenger services or tighteningoperations on some o f the more congested links. Eventhough these passenger services are loss-making, they have a strong political constituency and there is a general Government policy to favor passenger transport over freight transport. 352. Underlying the reluctance to introduce additional services is a management style that derives from beinga public monopoly. There i s no incentive to expand service since by limiting train frequency BRcan charge a hightariff without changing current operatingpractices. Although BRis supposed to operate inthe public interest, there has beenno attempt to determine the benefits from reducingroad traffic by increasing the freight rail services. Nor has any thought been given to the effect o f adjusting prices to encourage the use o f freight services. As experience inIndia clearly demonstrates, efficient rail transport o f containers requires commercial management, ifnot by the private sector then by a corporatized body operating along commercial lines.l4 Benapole Land Port 353. A numbero f options are available to minimize the additionalcost and time associated with the border crossing for both Indian and Bangladesh exports on truck. The best would be to permit sealed containers or vans to move with Indian exports from the border to Dhaka or with Bangladesh exports from the border to Kolkatta where the cargo would be cleared. It could be done usinga trailer exchange This i s despite the documented accuracy of the CFRs issued by the PSI system. l4There are examples of public railroads successfully operating highvolume container train services, e.g. South Korea's Pusan- Seoul service, but these are generally correlated with strong Govemment policies promoting this service. 123 or a cross-docking operation. These movements can be time-bound to preventtampering and, if necessary be movement would be time bound. Eventually door-to-door movements by Indian and Bangladeshi trucks should be permittedunder a bilateral arrangement that incorporates a regional licensing scheme and payment o f a transit fee. 354. Since these improvements are unlikelyto materialize inthe short term, efforts should be made to simplifyprocedures on both sides ofthe border. Queuing delays due to restrictions on truck movements and lack o f customs officers and checkpoints add one week to the time for trucks to complete the border crossing. C. QUALITY AND FOOD SAFETY STANDARDS Introduction 355. Of the five export products for which IVCA has beencarried out and reported inthe preceding section, two are edible items: vegetables (horticulture) and shrimp. While cost competitiveness is vital for these exports to grow and expand market share, Bangladeshi exporters must also meet the growing challenge o f stricter health and food safety standards demanded inmajor markets abroad as well as quality assurance inthe productionprocesses. Coping with these requirements entails costs; but compliance i s unavoidable for sustaining future growth o f these exports. 356. A briefreference here to the WTO disciplines on the subject is inorder. First,there are no WTO standards nor does it require membersto impose product standards. Instead, WTO rules inthis area aim at ensuring that technical regulations, voluntary standards, and testing and certification o fproducts do not constitute barriers to trade. Two WTO agreements deal with product standards: Agreement on Technical Barriers to Trade (TBT), and the Agreement on Sanitary and Phytosanitary Standards (SPS). The TBT Agreement, involving mainly industrial products, addresses "product characteristics or the related processes and productionmethods" reflected intechnical regulations and requires that these regulations conform to basic principles o f transparency and non-discrimination. The WTO SPS agreement tries to minimize the negative effect on trade from the adoption and enforcement o f SPS measures. 357. Bethat as it may, exports o fBangladeshi shrimps and vegetables to the EUmarket inparticular are subject to regulatory requirements that are deemedto be WTO compliant under TBT and SPS agreements. It is becoming increasingly likely that exports will be subject to similar standards inthe Middle Eastern, North American and East Asian markets as exporters try to reach larger numberso f consumers in supermarkets in these regions. Inthe following sections, industrycharacteristics and the progress inmeeting these standards is described in some detail. The first section addresses issues relating to the horticulture industry while the second describes the challenges faced by the shrimp exporters, C1. BangladeshHorticulture Export Industry Industry Overview 358. The Bangladeshi horticulture industryannually exports around 17,000 l5tonnes o fproduce, mainly by air. This volume o f exports will inject around $2.5 million into the farming economy per year, with another approximately $2.5 million o f value added inthe marketing chain. This represents less than 1%o fnationalvegetable production. According to national statistics the volumes exported over the last decade have fluctuated annually from 9,000 tonnes up to 32,000 tonnes. Sales are said to have depended l5By comparisonKenyaexportsabout45,000 tonnesofvegetablesannuallyby air, India27,000 tonnes,Thailand23,000, South Africa 18,000, Senegal 9,000, Zimbabwe andZambia 8,000, Ghana7,000, Uganda3,000, Ethiopia3,000 andGambia 1,000. 124 on air space availability and the strength o f the Middle East markets, which intum are a reflection o f the numberso fexpatriate workers. Exports to Europe havebeensteadily expanding, while sales to the Middle East peaked inthe late 1990s. 359. Currently around three quarters o f exports are made to the Middle East markets (Saudi Arabia, Kuwait and the UnitedArab Emirates) with Europe (mostly UK) accounting for 20% o f exports and the remaining 5% being sold to the South East Asian markets (Table 5.8). The majority o f the trade comprises a range o f Asian vegetables and particularly summer vegetables, e.g., snake gourd, bitter gourd, and yard long beans. The product i s mainly sold to Bangladeshexpatriate communities in the Middle East and the UK. Table 5.8: BangladeshiExports of FreshProduceby Market in Tonnes (20( 1-2) I Fresh Produceexports Share (percentage) Europe 3,082 20.5 UK 2,782 18.5 Other (mainly Italy) 300 2 Middle East 11,128 75 Saudi Arabia 6,837 46 Kuwait 1,947 13 UAE 1,208 8 Others 1,136 7.5 S E Asia 679 4.5 Singapore 156 1 Malaysia 0 0 HongKong 473 3 Bangkok 50 0.5 NAmerica 0 0 TOTALS 14.889 100 Source: Accord Associates, through personal co6unication with major airlines 360. Industry structure and operation. Productionis almost exclusively in the hands o f small scale outgrowers among the 300 members o f the Bangladesh Fruit, Vegetables & Allied Products Exporters Association. Product is typically sourced either via aggregators, working inthe rural areas, or from wholesale markets. Produce i s graded in rudimentarypackhouses and mostly packed into bamboo baskets or second-hand cardboard containers. The cool storage facilities at Zia airport operatedby Bangladeshi Agricultural Development Corporation (BADC) are inappropriate and hardly ever used. Cargo facilities are basic. 361. Trappedin the expatriate e t h i c market. A large proportion o f Bangladesh's horticultural export industry survives by being a low cost supplier o f Asian vegetables to their own expatriate populations. The export sector is largely dependent on subsidies and below market price air freight rates. The industryis in danger o fbeingtrapped as a low price, low margin industry,without the ability and expertise to raise its standardsI6. This focus of supplying small scale expatriate Bangladeshi importers offers little scope for growth. l6 The UKAsian vegetable markets have significantly lower compliance requirements than supermarkets or wholesale markets dealing European vegetables. Phyto-sanitary certificates are not mandated. Although M E tolerances for pesticides are legally mandatedthere is minimal enforcement. The UK Asian produce market has limited SPS restrictions, compared with very high for supermarkets and medium for wholesale markets for European vegetables. 125 Quality, Safety & Phytosanitary Regulations 362. Export markets and their regulations. O f the 15,000 tonnes o f produce that Bangladesh exports to extra-regional markets, a maximum o f approximately 500 tonnes will have found its way on to the shelves o f Britishand European supermarkets". Only 3% o f Bangladeshi's horticultural exports are entering market channels, where EUREPGAP standards need to be achieved. Inthese markets, in addition to Phytosanitary certificates and adherence to MRLs, the supply chain will needto have HACCP applied. Food Safety procedures will have to be inplace to preventproduct contamination. Product will need to be traceable from the point of sale back to the point of production (Le. the individual grower or group o f growers). Samples o fproduct will needto be regularly tested for contamination and microbial content. Farmers will have to apply good agricultural practices. Supermarkets may also demand that social welfare measures, packing specifications and product conformity are achieved. . 363. About 1,500'* tonnes o f Bangladeshi produce is finding its way to the markets o f South East Asia, mainly to Hong Kong. These markets are increasingly quality conscious, especially the supermarkets and food service sectors with their cold chains. Markets like Singapore do have MRLs, imports are being scrutinized for residues, and consumers are interested in organic and GM-free produce. 364. Food safety: A concern that will increase. The importance o f food safety issues in Bangladesh's horticultural export markets i s increasing. The important questions are the time scale before any new legislation starts to bite, the likely level o f enforcement and where limitedfunds can be most cost effectively applied. 365. Inthe UnitedKingdom,inthe first instance the focus o fthe enforcement agencies has beenon Pesticide MRLs and microbiological standards inthe major products and the dominant multiple retail chains. The supermarket sector, and therefore its importers, i s refusingto accept produce unless it i s EUREPGAP compliant, and in the case o f processed food products, has passed EFSIS-FABBL (British Farm Standard) standards. 366. Within the EUFood Safety standards are beingratchetedup. A EuropeanFood Safety Authority (EFSA) has been established. The new `Regulation on Official Feed and Food Controls' will aim to impose even lower pesticide residue levels and insist that `third' countries that are assessedas having `weak control abilities on food standards', such as Bangladesh, present their own national export control system plan. The Export Sector's Existing Quality Assurance Systems: Laggards and Progressives 367. A traditional small scale exporter first awaits confirmation of cargo space allocated by the Exporters Association. Produce is then purchased at the Dhaka wholesale market, particularly from traders who cater for export buyers. Grading and packing takes place with the workers squatting on a groundsheet on the floor. Damaged and diseased product i s rejected. Bamboo baskets and second- hand cardboard cartons are used as packaging. Produce i s kept at ambient temperatures inthe shade. The packed product i s then transported that eveningto Zia airport, where it i s weighed on arrival and packed either onto pallets or into containers. Occasionally, the exporter may have to hold the produce untilthe next available flight at the cold storage adjacent to the airport operated by BADC. 368. Some o f the more progressive export companies are introducing more sophisticated supply chain management systems. BRAC, for instance, has developed contract productionwith a network of '' " BecauseoffailuretoreachEUREPGAPstandards,thistradehasalmostentirelybeendiscontinuedin2004. About 500 tonnes by air and a further 1,000 by sea freight. 126 outgrowers, who are supported by extension staff. Product is purchased on the farm and transported in refrigerated vehicles to the company's post harvest facility. Investments o f $1million have beenmade in cold storage and a packhouse near the airport, including a highcare facility. International consultancy support has been provided to set up the protocols for the operation o f the post-harvest facility and to help the company achieve EUREPGAP standards. I t i s expected that the exporter will achieve EUREPGAP soon. The aim of BRAC i s to be able to providepre-packed and high care products to the European supermarket sector. This will involve a very significant leap inprocesses and procedures over what is currently found in the country. Recommendations 369. Thepotentialfor increasing Bangladesh 's exports. Although internationally quality issues revolving around food safety, pesticide and heavy metal levels are becoming more important, inthe medium term they will not have a huge impact on Bangladesh's export volumes. The table below (Table 5.9) attempts to quantify what might be the impact on Bangladesh's horticultural trade if active steps were taken to improve quality and food safety issues. What these changes mightbe are discussed inmore detail in the following sections o f this report. 370. Essentially, the projections suggest that without changes to the quality systems within Bangladesh there may be a small decline in sales. The introductiono f improved quality systems inBangladesh might lead to a 40% increase in sales equivalent to an additional $2-$3 million o f FOB income. Table 5.9: PossibleImpact of Improved Quality Systems on Ex->ortVolumes in Tonnes Current + 5 years + 5 yearswith Comments without quality quality improvements improvements Europeanethnic 2,500 2,000 2,000 Decline intraditional Europeansupermarket 500 1 100I 1,500 Expansioninethnic vegetable sales Europeanvalue added 0 1 1,500 l l 111Expansioninsemi- preparedvegetables to restaurants & for ready 371. Ultimately, however, interms o f volume and particularly in terms o f market opportunity for Bangladesh'ssmall scale growers, it is the potential export markets inthe surrounding Indian statesthat offer the strongest opportunity. Here Bangladesh has some climatic advantages and a tradition o f high quality vegetable production. The markets are not restricted in terms o f quality. The issues here are market access and improved market linkages. 372. Changes need to be made to the Quality Assurance systems in Bangladesh. As yet the Bangladesh horticultural export sector has hardly felt the effects o f raised international standards for 127 quality. It is, however, only a matter o ftime beforethe UKandEuropeanfood legislationbecome serious hurdles to cross. There is a likelihoodthat eventhe ethnic food market segmentswithin Europe will be subjectedto moreregulatoryoversight inthe future, inparallelwith the muchmorestringent standardsbeingappliedby governmentsandretailers alike inthe mainstreammarket. It is also highly likely that individualmarketsinthe MiddleEastwill step uptheir own standards for produce imports. 373. Real Change will require commitment by exporters. Experienceelsewherehas shownthat the introductionof improvedpractices will only take place ifimportersperceivethat it will benefittheir business. Generally this is dependentonthe demandsoftheir buyers. The naturalfocus of any such initiativewouldhave to bethe BangladeshiFruit,Vegetables andAllied ProductsExportersAssociation. This is likely to bethe forum where the industrycanbeeducatedand exporter commitmentgained. Within Bangladeshthere will be a cadreof the moreprofessionalfood export companies that recognize that their businesseswill be affectedby the constantlifting o f foodhygiene standardsinthe UK,Europe, and, inthe not too distant future, the MiddleEast. The Governmentwill needto take a leadershiprole, but the success of any programmewill dependon the commitment o fthe trade. A key element in gaining buy-in from exporters is through their involvement in designing theprogramme. Such a programme will have three key elements, controls over pesticide use, improved Food Safety standards and reduced contamination by heavy metals such as arsenic. 374. Sucha programme couldbebuilt into two existingprojects. The FAO,undertheir Technical Cooperationprogramme, have initiateda processaimingto strengthen food quality controlinBangladesh andare arguing for the establishmentof a food controlcouncil inBangladesh. Additionally,the EUis planninga projectto improve foodquality, o fwhich one componentwill bethe horticulturalsector. 375. Pesticide controls needed. Ensuringthe safe use of pesticideswill haveto be initiatedby winningthe commitment of exporters. The programmeis likely to involve: 0 identificationof insecticides,fungicides andherbicides that haveEUdeterminedMRL's for the relevantcrops 0 drawing up specifications for the correct usageof eachproduct interms of applicationrates, applicationmethodologyand safe intervalsbetweenapplicationandharvest to ensurethat MRL's are not exceeded 0 developingcrop protocolsfor major export crops, specifyingwhichproductcanbeusedfor the likelypestsanddiseases 0 drawingup sensiblebest fieldpractices for controllingexport growers' use of pesticides 0 trainingof exporters, field staff, contractors andaggregatorsinthe governance o fpesticideusage, recordkeepinganddisseminationo f information This programmecan only work ifcrops are grownspecificallyfor exporting. 376. Food safety. Key issues inliftingthe standards o f FoodSafety will beto preventproducebeing contaminatedwith all extraneousmatter includingchemicals, metals, glass, microbes, dust, soil andall manner of human,animalor avianfaecal matter. The programmeis likely to involve: 0 the trainingof exporters inthe principlesof HACCP and ofFoodHygiene 0 providingtechnical assistanceto export companiesindividuallyto carry out a HACCPanalysis o f their whole supply chain, from the farm to the port 0 develop withthemprocesses,proceduresand systems whichminimizethe chances of dangerous contamination 128 377. Arsenic. The third main issue is the needto avoid arsenic problems. With the increased transparency o f information the option o f "keeping quiet" and hoping the world does not recognize that Bangladesh has an issue with contaminated ground water is simply not practical. The industryneeds to anticipate such problems and set inplace processes and procedures to reassure the world that Bangladesh has recognized the potential problem and has a strategy for dealing with it. This i s likely to involve: 0 Using accurate mapping of arsenic contaminated areas to defineprecisely what areas are completely free o f arsenic contaminated groundwater and therefore suitable for sourcing export produce 0 To obtain clear commitment from all exporters that produce will only be sourced from arsenic- free areas 0 To set inplace a systemwhereby exports are periodically tested independently for the levels o f arsenic that they contain, in order to reassure international markets 378. As the EUis currently considering how sensible legislationcan be brought into provide standards o f acceptable arsenic levels Bangladeshshould try to involve itself at an early stage with the development o f this legislation. This will serve two purposes: 0 Firstly, Bangladesh should be able to try and influence the legislationso that the standards are sensible 0 And, secondly, to be able to respondimmediately andput inplace systems to ensure compliance. Conclusions 379. Control over export quality requires exporters to have close contact and control over their growers. This will require them to make long term plans, which are only going to be achieved if exporters can forward contract air cargo space. This in turn can only occur ifBiman change their system o f selling cargo space''. Only then will exporters be able to confidently contract production by specialist export growers. 380. Ithas been argued that any breakdowninthe commitment to maintaining highquality and safe produce exports by one exporter will harm the whole industry. A system o f sanctions needs to be considered for those that damage Bangladesh's reputation. 381. To achieve these steps will require a strategy that is agreed by a private sectoripublic sector partnership. C2. BangladeshShrimpExportIndustry ProductionCharacteristics 382. The Bangladesh shrimp industrydesires to achieve a greater share o f the world shrimp market. The industry has grown over the last two decades, but has suffered from a number o f safety, hygiene, production, environmental and social problems. 383. Production o f shrimp by coastal aquaculture accounted for about 30% o f annual shrimp productiono f 200,000 MT, while the relative shares o f marine capture and fresh water capture were 23% ~ l9 The transport logisticsissues and suggestedsolutions which are critical for exportingvegetables,are discussedinPart I1 within the contextof IVCA for FrenchbeansandagaininSectionB below which highlightsconstraints relatedto transport and trade logistics. 129 and 47% respectively. The productiono f shrimp by culture i s a 100% export-oriented activity, with about 9,O0O2O farms taking part. While shrimp from fresh water i s destinedprimarily for the domestic market, a part o f the marine capture is also processed in the shrimp processing units operating in the southern regions o fthe country*'. 384. Most o f the shrimp farms in Bangladesh are o fthe type that are controlledby several people and carried out with hired labor, and majority o f them are "extensive22." In 1995, the 9,000 shrimp farms in Bangladeshrepresented about 18% o f the world's shrimp farms, but they produced only 4% o f global production. Consequently, productivity in the industry is very low. The average size o f a farm in Bangladesh i s 14.5 hectares in comparison to 75.0 hectares inIndonesia and 112.5 hectares inVietnam. In Thailand and China, where shrimp is cultivated through intensiveand semi-intensivemethods, the average farm sizes are 4.5 and 2.2 hectares, re~pectively~~. Market Destinations 385. Shrimp produced by aquaculture is for the export market. A part o f the marine capture i s also processed for exports. Shrimp from fresh water capture is predominately destined for the domestic market24.The principal export markets are the United States (US), the EuropeanUnion (EU) and Japan. Since 1994, the export markets have ranged as follows (US-30-55%; EU-18-65%; Japan-5-21%). 1997-98 was an anomaly year due to the ban by the EUon shrimp imports from Bangladesh. That year, a much larger portion went to the US market. However, the US share has declined in 2001-02 and 2002-03 and the EUshare has substantially increased. The peak year invalue for Bangladesh exports was 1999- 2000 at US$322.4 million. 386. Shrimp i s one o f the major export products o f Bangladesh, averaging more than 6% o f total exports inthe 1990s. The importance o f shrimp exports i s highlightedby the fact that shrimp exports constitute more than 70% o f the exports o fprimary products from Bangladesh. The share in2000 was higher than the combined share ofBangladesh's exports ofrawjute andjute goods (5.8% o ftotal exports) and shrimp exports accounted for about one-fourth o f the non-ready made garments exports from Bangladesh". Products Processed 387. From 1994 to 2000, the Bangladesh shrimp industryexported almost solely frozen shrimps and prawns. Diversification began in2001, when canned, fresh or chilled, peeled frozen, and whole, not cooked, frozen product beganbeingexported. With a low percentage o f the world market, a lower-valued product, and a negative reputation inquality, Bangladesh inthe past has been a price-taker, rather than a 2o Estimates o f the actual number of farms vary widely. A 2003 report suggests that there are approximately 37,397 farms cultivating tiger shrimp with an average farm size o f 4.5 hectares (Enamul Haque, Sanitary andphyto-sanitary barriers to trade and its impact on environment: The case of shrimpfarming in Bangladesh, paper presentedat TKN policy workshop, Dhaka, April 2003). This same report indicates that another 105,000 farms produce sweet water shrimp, with these farms averaging .28 hectares, and mostly operated by poor and marginal farmers. 2' Battacharya, Rahman and Khatun 1999. A case study on Bangladesh s shrimpfarming industry. Dhaka, Bangladesh: Center for Policy Dialogue. 22 Extensive methods are usually 20 hectares or more (the average is 14.5 inBangladesh) and pumps are used to maintain water levels and manage salinity and oxygen levels. Yield depends on the natural productivity o f the water which i s maintained by inorganic fertilizer. 23 Battacharya, Rahman and Khatun 1999. 24 Battacharya, Rahman and Khatun 1999. 25 Mustafizur Rahman, 2002. Market access implications of SPS and TBT: Bangladesh Perspective. Jaipur, India: CUTS Centre for International Trade, Economics and Environment. 130 price-setter. Furthermore, Bangladesh had a reputation for producing seafood that sometimes did not meet minimuminternational standards as specified by the Codex Alimentarius Commission. 388. Bangladesh shrimp processors and exporters need to become more diversified interms o f both products and markets. A large number o f export processors are now producing increasing amounts o f value-added products such as individually quick frozen, peeledand deveined, and butterfly cut shrimp, as well as cooked products. In2001 these value-added exports made up almost 25 percent o fthe total exports o f 32,500 metric tons, valued at US$363 million. In2003, these value-added exports accounted for nearly 35% o f a total o f US$261 million. Technical assistance from FA0 and INFOFISH continues to play a role inindustrydevelopment by transferring simple, low-cost technologies for adding value and by matchingbuyers and sellers to facilitate market diversification. Industryand the Government also continue to upgrade the export sector as a whole. 389. Improvements are making a difference because the unit price o f exports has risen steadily over recent years, incontrast to the sharp decline in 1997, due to the EUban. In2000, some exporters recorded an average unit price o f more than US$15 per kilogram, a price comparable to that received by major exporters from the region. Duringthis period, the average volume o f exports also increased from about 24,000 metric tons in 1990-92 to about 30,200 metric tons in 1999-2001. Improvements in food safety have thus set the stage for Bangladesh to become more competitive inthe global market for seafood. However, even in 2002, Bangladesh shrimp exports experienced some safety problems, and more testing laboratories were established. Expansion and Assistance 390. By the end o fthe 1970s,the Bangladesh seafood processing industryhad expandedrapidly. But sanitary facilities, technology adaptation, and adequate training did not keep pace. Shrimp exports suffered in the late 1970s, and the U.S. Food and DrugAdministration placed seafood imports from Bangladeshunder automatic detention. This was only the beginning o f the export market problems arising from substandard product safety and quality that Bangladesh's shrimp industryfaced over the next two decades. 391, Recognizing both the potential for Bangladesh's exports and the problems with safety and quality of the product, the FA0 helped Bangladesh develop product standards, regulations, and fish inspection schemes inthe early 1980s. In 1983, the Bangladesh Government created a Fishand FishProduct Ordinance (Inspection and Quality Control) and in 1985 upgraded the inspection laboratory and its personnel. The World Bank extended credit to the Bangladesh shrimp culture industryamounting to SDR2620.6 million in 1985. FA0 initiated a 1996project to assist inthe preparation o f a fish safety and quality control program for the shrimp and fish plants inBangladesh, based on the HazardAnalysis Critical Control Point (HACCP) approach. The program provided training inHAACP procedures to both the public and privatesectors. It also informedthe Government about new requirementso f major importing countries. The EUBan 392. On July 30, 1997, the EUbanned imports o f fishery products from Bangladesh as a result o f EU inspections o f Bangladesh seafood processing plants. Inspections found serious deficiencies in the infrastructure and hygiene in processing establishments and insufficient guarantees o f quality controlby Bangladeshi Government inspectors. The ban was estimated to cost the Bangladesh shrimp-processing 26Special Drawing Right (SDR), an intemational reserve asset createdby the International Monetary Fund in 1969. 131 sector nearly US$15 million in lost revenuesfromAugust to December 1997. The impact on boththe industryandthe economy of Bangladeshwas substantial. 393. The only way Bangladesh can improve its export position in the shrimp market is to improve the safety and quality of its exports. Safety improvements over the last two decades, with a major effort inthe late 1990s, havebeenmadeby the industry andGovernment, andby bilateralandmultilateralagencies providingtechnical assistance. While the short-termloss inforeigncurrency fromthe EUbanwas high for a developingcountry, the bandidincreasethe commitmentby industryandGovernmentto raise product quality to meet internationalstandards. Bothexporters andGovernmentmademajor investments inplantinfrastructureandpersonneltraininginorder to achieve internationaltechnical andsanitary standards. This includednew employeesandemployeetraining, sanitationaudits, plantrepair and modification,new equipment,new laboratories, and other costs. Investingin Safety 394. Someupgrades were inprogress at the time o fthe EUban.By 1997, the Bangladeshshrimp processingindustryhadinvestedUS$17.6 million inplantupgrades,the Governmenthadinvested US$382,000 inlaboratoryandpersonnelupgrades, andoutside partnershadinvestedUS$72,000 in Bangladeshtrainingprograms.Unfortunately,these improvementswere not inplace early enoughto preventthe ban. 395. Subsequentinspections by the EUdeterminedthat some plantimprovementsdidmeetEU standards. Subject to certainprovisions, the EUbanwas liftedfor six approvedestablishments for products preparedandprocessedafter December 31, 1997. By July 1998, a total of 11plantshadbeen approvedfor export to the EU. Collectiveeffortsby the industry,the BangladeshDepartmentof Fisheries, andthe BangladeshFrozenFoodExportersAssociation havecontinuedto strengthen the export-processingsector. By 2002, out of 65 plantslicensedfor export by the Government, 48 plantshad EU approval. UnitedStates Detentions and Rejections 396. At the time of the EUban, Bangladeshshrimp were also beingcloselyexaminedby the US. During1997, a total of 143 shipmentso f frozen shrimp from Bangladeshinto the U S were automatically detainedwithout examination.Eighty-sevenpercento fthe shipmentswere detainedbetween September andDecember,whenmost Bangladeshshrimp are imported. The reasonfor the 143 detentionswere as follows: filthy, Salmonella (53); soaked, wet, filthy, Salmonella (28); Salmonella, decomposed(21); Salmonella (14); filthy, unsanitarymanufacturing,processing or packing(3); soaked, wet, filthy (1); filthy, label not bearingnutritioninformation(1); soaked, wet (1). Automatic detentiondidnot meanthat the projectwas rejected. Itmeantthat each shipment was inspectedandthen allowedinto the USifthe productwas safe andmetminimumsafety standards2'. Terrorism Impacts 397. New emphasis on food security issues as perpetuatedby internationalconcerns for terrorismhas initiatedadditionalregulations intendedto better identify the product source and condition.International seafoodcommerceis entering a decade o f additionalconcerns for food safety that couldbecomeknown as HACCP+. Changesin the US exemplifythis situation.This changemayparticularlyaffect Bangladesh shrimp imports intothe US. *'Cat0 and Lima dos Santos 2000. 132 398. Through September, 2004, the USFDA will be implementingnew proposed regulations: (1) registration o f all food facilities; (2) prior notifications for imports; (3) additional product detention authority; (4) more processor records accessibility); (5) declared country-of-origin labeling for all foods (USFDA 2004b). These proposed regulations foster more scrutiny and control for product origin and food safety. The Bangladesh industry mustbe prepared for compliance. 399. By December 12,2003, all Bangladesh shrimp processingfacilities exportingto the US hadto be registered with the USFDA. This means that the owners, operators or agent incharge o f the facilities that manufacture, process, pack or hold shrimp destined for consumption in the US must submit a registration to USFDA, including the name and address o f each facility at which, and the trade names under which, the registrants conduct business,and the categories offood the facilities handle. Eachfacility willbe assigned a unique registration number that will be usedto identify the firm's products. Farms are excluded from this requirement,which indicates the essential role o f the processors/exporters in Bangladesh. IfBangladesh processors choose to conduct value-added productionthey must be mindful that this regulation also exempts foreign facilities that export foods that will undergo further processing or packaging by another foreign facility before it is exported to the US. 400. By September 30,2004, all food suppliers will berequiredto provide informationto retailers indicating the country of origin o f the covered commodity. Implementation o f this rule interms o fpublic information will rest with the retail sector, excluding food service establishments. The information providedby the suppliers must be maintained in such a manner that it i s a verifiable recordkeeping audit trail. There are specific provisions regarding the needfor such labeling ifthe food will be an ingredient in a further processed food or processed in another locale than that o f the initial supplier. Likewise, this regulation emphasizes use o f distinct labeling for `farm-raised or wild' fishery products. Bangladesh shrimp could be subject to distinctionas farm-raised or wild relative to the original source mindfulthat the current processors handle both sources. Certification and Quality Seal of Approval 401. As established markets become more dependenton aquaculture production which is expanding in more distant and remote regions, reliance on existingregulatory programs to assure product quality and safety is being questioned. Original plans for more scrutiny through HACCP plans and identity o f competent authorities in the respective producer nations are helpful, but they still require trust in recorded performance and the ability o f the regulatory programs in nations often compromised by limitedbudgets. 402. Private interests are responding with `certification' programs that will train and employ expertise to audit operations from the shrimp farm through processing to provide evidence for appropriate performance and food safety. The audits could also include laboratory verifications through site and product sampling and analysis. Most o f these evolving programs are motivated by genuine concern for the industry,but they must depend onprofit to attract expertise and maintainthe services. Their source o f funds will be based on fees-for-services providedby the different farms and processors. 403. One specific NGO for farm-raised shrimp is being developed and is involved with the Bangladesh shrimp industry.The Aquaculture Certification Council2*(ACC) grew out o fthe successful efforts o fthe Global Aquaculture Alliance to address protection of mangroves and other environmental concerns associated with shrimp farming. Their plans are to address food safety and quality based on audits and potential sampling during farm and processing activities. Although these efforts are admirable inintent, their value will rest with regulatory recognitionby both the exportingand importingcountries. *'The Aquaculture Certification Council is located in St. Louis, Missouri. httu://www,aquaculturecertification.org/ 133 404. Bangladesh has initiated a Seal o f Quality Programwith the assistance o f the Agro-based Industry and Technology Development Project, which is managed by the Louis Berger Group inconjunction with Cargill, Land 0' Lakes29and USAID3'.The focus o f the Shrimp Seal o f Quality (SSOQ) i s an industry- led set o f standards. The project is working inthe field with various industryplayers to educate them about these standards and concerns. Project participants estimate that a credible seal o f quality program would create a 10%price differential (currently US$25-30 million as well as an anticipated US$l50 million for an expected increase inyield3'. The Seal o f Quality program i s designedto conform to codes of practice established inthe UNFood and AgricultureOrganization and the Global Aquaculture Alliance. These separate codes for producing and processing shrimp address food safety and quality assurance that meets US and EUfood safety and hygiene standards, traceability, environmental sustainability, labor practices and social responsibility. The Seal o f Quality Programhas endorsed the ACC program. The SSOQ Certification Standards are now in the final review stage Legislation and Food Safety Control 405. InBangladesh, the infrastructurethat deals with sanitary, hygieneand standard relatedissues (including environmental issues) is extremely weak. This weakness entails both the absence o f adequate human resources as well as the technical capacity to address the growing demands o f an increasingly stringent global demand in the areas of standardization. The basic legislation inBangladesh for the purpose o f food safety i s the Pure Food Ordinance 1959 and the Pure Food Rules. The Pure Food Ordinance of 1959 was subsequently revised as Food Safety Ordinance 1994 and was adoptedby the Parliament. The related activities are controlledat three levels: (1) Department o f Public Health and Extension (DPHE) under the Ministryo f Health; (2) City Corporations under the Ministryo f Local Government and Rural Development; (3) Bangladesh Standard Testing Institutions (BSTI) under the Ministryof Ind~stries~~. 406. The DPHE with its sanitary inspectors, medicalofficers and health inspectors are entrusted with (1) implementation o f the food related regulations and prevention o f adulteration; (2) dissemination o f safety messages and (3) inspection and compliance. The BSTI sets safety standards and monitors compliance o f food industries and food related establishments at both wholesale and retail levels. The BSTI also serves as the Codex contact in Bangladesh and executes the mandatory Certification Scheme as per the Codex guideline under the overall supervision o f the Ministryo f Industries.Quality control and the inspectionof food grains and foodstuff, both domestically produced and importedfrom abroad, are carried out by the Directorate o f Inspection, Development and Technical Services33. 407. Bangladesh has made institutional structure and infrastructure changes over the last few years, but major weaknesses still exist. The problems faced in ensuringcompliance with sanitary and phytosanitary measures (SPS) and technical barriers to trade (TBT) regulations can be listed inthree areas: (1) the infrastructure is still inadequate and there are only a few laboratories for testing the quality o ffood and performing chemical and biological tests to ensure compliance with the strict SPS quality control 29 Land 0' Lakes International Development i s has offices in Shoreview, Minnesota and Washington, DC. http://www.idd,landolakes.com/ Cargill Technical Services are located inMinneapolis, Minnesota http:l/www.cargill.cord 30The Louis Berger Group is the prime contractor for the USAID project. http://www.louisberger.com/ 3' The primary stakeholders inthe project are the Bangladesh Department o f Fisheries, Shrimp Farmers Associations, Shrimp Hatchery Association of Bangladesh, Bangladesh Frozen Food Exporters Association, Global Aquaculture Alliance, Aquaculture Certification Council, European Union, The World Wildlife Fund and the Danish Ministry o f Foreign Affairs. The benefit estimates are from an email correspondence between Mirvat Sewaden (World Bank) and Tara Keamey (Louis Berger Group), May 15,2004. 32 Rahman 2002. 33 Zbid. 134 requirements; (2) human resources are inadequate based on the lack o f trained manpower, both at the scientific and field level and thus the capacity to design required control points and enforce regulations i s weak; (3) the level of investment in health and hygiene research and development undermines Bangladesh's capacity to deal with the complex and highly technical issues required for both compliance assurance and formulation o f appropriate rules and regulation^^^. Strengths and Weaknesses of Food Safety and HygieneControls 408. Strengths and weaknesses o f hygiene and other food safety controls for the Bangladesh shrimp industryfor both the Government and private sector demonstrate the case for substantialneeds and improvement (Tables 5.10 and 5.11). While both the Government and some processors have achieved approval to export to the EU, and continue to export to the US and Japan, there i s still substantial room for improvement and inmany areas, severe inadequacies exist, in relationto worldwide norms. What i s lacking are the adequate financial resources for capacity buildingand training. This may improve for the industrysector ifthey can become more diversified, produce more value-addedproducts andremove the real and perceivedworld-wide reputation for producingproducts with safety and quality problems. The Government sector will have more difficulty without benefiting from major external aid from Governments and NGOs. 34Ibid. 135 Table 5.10: StrengthsandWeaknesses of Hygieneand Other Food Safety Controlsin he Bangladesh Shrimp 11 ustry. Element of capacity Governmentsector Commer 11Sector Farms Processors Internal surveillance Some have knowledge Capability low; must Some capabilities in but capacity limited depend on Government some plants, others and processors inadequate Export controls and Needs knownbut Total dependence on Have some knowledge certification capacity limited Government and but need to increase processors knowledge in some plants Responsiveness to new Needs known but Total dependence on Some willingness to emerging issues capacity limited Government and adapt; e.g., achieve EU processors; approval and SSOQ unwillingness to adopt Risk analysis Limited capability but Total dependence on HACCP implemented HACCP implemented Government and processors; unwillingness to adopt Analysis and diagnosis Lab capacity severely Total dependence on Have some knowledge limited Government and but need to increase processors; knowledge in some unwillingness to adopt plants standards Controls on inputs Capacity severely Total dependence on Have some knowledge limited Government and butneedto increase processors knowledge in some plants Pest and disease control Capacity severely Total dependence on Have some knowledge limited Government and butneed to increase processors; knowledge insome unwillingness to adopt plants standards Hygienic practices in Severely limited; need Total dependence on Have some knowledge production, processing technical training Government and butneed to increase and distribution processors; knowledge in some unwillingness to adopt plants standards Monitoring Severely limited; need Total dependence on Have some knowledge technical training Government and but needto increase processors knowledge insome plants Identification and Currently inadequate Total dependence on Have some knowledge traceability Government and butneedto increase processors knowledge insome plants 136 Table 5.11: Management Capacity Constraints Relatingto Hygiene and Other Safety Controls in the BangladeshShrimp Industry. Element of capacity I Governmentsector 1 Commercial sector 1 Farms Processors Administrative Some in placebut Inadequate Some have adequate procedures Governmentregardedas procedures inefficient Legislation Exists, revised 1994, Probablyhavelittle Probableknowledge o f possibly adequate knowledgeof legislation legislation Enforcement and control Inadequatenumberof Less accessible to Some have knowledge 1 inspectors, needtraining - I authorities and not I andprocesses,but I and retraining enough inspectors lacking industry-wide Physical structure Inadequate Inadequate Inadequateindustry- wide Humancapital Inadequateinnumber Coulduse some training Needtraining and andneedtraining and retraining retraining Capacity-building and Willingness to upgrade Inadequate Some willingness to upgrading and invest but upgradeto achieve inadequate capacity and minimum standards hnding to do so Communication Three agencies involved Probablelack of Highlevel of so communicationwill understandingof the communicationwith cause some problems issues GovernmentandNGOs bv some Conclusionsand Recommendations 409. Safety and quality o f exported shrimp has beena problem for Bangladesh. Outright bans have been implemented, but the industryand Government have responded and exports continue to be sold in the three key markets o f the UnitedStates, Japan and the EuropeanUnion (after corrective action was taken). In fact, the value o f exports to the European Union in2002-03 was at the highest level inthe last ten years, which represents a significant recovery from the 1998 ban on Bangladesh imports into the European Union. The total volume o f shrimp exported has increasedby 4.6% when comparing the three year averages from 1994-97 to 2001-03. The total value o f shrimp exports has also not increased dramatically over the last ten years; with the 2001-03 average only 6% greater than 1994-97. 410. The Industryand the Government are embarking on a program to institute a Shrimp Seal o f Quality Program (SSOQ) which can be viewed as a self-imposed "certification" program similar to those beingadoptedby Government, industry,and non-Governmental partnerships for other commodities and processes world-wide. The key to success i s adherence to the self-imposed standards and the recognition and acceptance o f the third-party certificationprocess by importers and regulatory agencies in importing countries. While the nature and characteristics o f the Bangladesh shrimp industrywill continue to create safety and quality assurance concerns, it appears that shrimp safety and quality i s not the most limiting factor inincreasing the volume and value o f shrimp exports from Bangladesh. However, safety and quality will require an "above-average" level o f attention, training and investment by both industry and the Government to maintain a quality product and reputation. 411. The Bangladesh shrimp industrycurrently produces about 4-5% o f the world's farmed shrimp. Most shrimp farming in the country is by extensive methods. To achieve substantial productivity increases in existing ponds will require not only major productivity increases in existing ponds, but investment innew ponds and newer technology methods o f production. The capital costs and technology requiredfor semi-intensiveand intensive methods are currently beyond the capabilities o fmost shrimp 137 farmers inBangladesh. The greatest short-term opportunity for increasing production at the farm level i s to train the farmers and Government support personnel and technicians to improve their farm management related skills, to cause them to adopt standards and reduce disease, improve productivity and eliminate contamination o f raw materials. 412. Other changes that will be necessary to increase farm output will be increased hatchery productiono f post larvae and a move away from the current heavy dependence on natural fry. There i s also a heavy dependence (90-95%) on casual labor in the processing sector which equates to poorly trained staff. 413. Insummary, the prioritiesforfuture action are as follows: 1-2 vears Continue trend toward producingvalue-added products. Continue product and market diversification and market promotion. Institute training programs at all levels designed to improve staff and labor skills which will ultimately increase current per unit output o f shrimp farms. This includes reducing industry dependence on casual labor. Implement the Shrimp Seal o f Quality program. Conduct a realistic study o f current shrimp processing capability and determine how many plants are neededto support current and projected production levels. Avoid aid and financing programs that create additional capacity without obvious concomitant production increases. Introductionand investment in improved sustainable post larvae production systems. Increase Government or donor aid in infrastructure development (harborilanding facilities, ice/water supplies, etc.). 3-5 years Increase laboratory capabilities. Refurbish and upgrade existing plants or buildnew plants ifjustified based on careful assessment suggested above. Improve Government and industry capabilities inmost hygiene and other food safety controls, including new hires and training. Move to semi-intensive and intensive methods o f production and grow out systems ifnew shrimp farms are developed in order to increased the per hectare volume o fproduction. Continue Government or donor aid in infrastructure development. Expand Government and industry trade promotion activities through missions abroad, trade fair participationand dedicated trade offices. 414. At the current levels of production, moving completelyto the highestvalue-added products might increase total value o f exports by 30% at most, or about US$80million, based on the 2000-02 average value. Price increases from a world market recovery would o f course cause the marginal increase due to value-added to be greater. A more realistic estimate i s that value-added products might contribute a 10-15% increase inthe value o f exports over 3-5 years. 415. Finally, to achieve the 330% increase in farmed shrimp productionprojected by VISION 2008 i s highlyunlikely.Major improvements infarmed shrimp technology and practices are necessary to achieve even a realistic increase by the end of five years. Removingthe raw farmed shrimp supply constraint i s the key and highestpriority to utilizing the existing processing capacity and achievingdesired growth in the shrimp market sector. A 15-20% annual increase is more realistic and would achieve a five-year target of 90-100,000 mt o f exports valued at US$500-600 million. 138 ANNEXES ANNEX TO CHAPTER 2 GROWTHACCOUNTINGTO IDENTIFY SOURCESOFECONOMIC GROWTH Here we develop a growth accounting framework to estimate the contributions o f capital (physical and human), labor, and total factor productivity (TFP) toward determining long-term growth. Let us assume that the standard neoclassical constant-returns-to-scale Cobb-Douglas production function describes overall production inBangladesh; i.e., 1. Y, =A,KyE t('-' A i s the Solow residual and represents total factor productivity (TFP). Y symbolizes real GDP, K stands for physical capital stock, E for effective labor, a! i s the share o f capital stock in output under perfect competition, and t i s the number o f years since the initial period 0. E equals L*H, where L i s the total labor force and H, a measure o f human capital based on education stocks and returns on education, adjusts for the quality o f the labor force.' Following Ghosh and Kraay (2000), we define H = eo.'S, where 5' i s the average years o f schooling per worker, and 0.1 is the returns to education that i s consistent with estimates for Bangladesh and with estimates found in the literature for other countries (e.g., Klenow and Rodriguez-Clare (1997)). By using the exponential form for calculating human capital, we assume that human capital grows faster at higher levels o f education: a fact confirmed by studies inthe field. The initial stock of capital in 1960 i s derived using the capital-output ratio from Nehru and Dhareshwar (1994). The data are then extended through 2000 using the perpetual inventory method. 2. Kt= (1 - geometric depreciationrate) K,, + Gross Capital Formation (t - 1 Data on gross capital formation are from the WB's SlMA database. The data on S, the average years o f school attainment by population aged 15 years or more, are from the updated Barro-Lee (2000) database on education attainment. The frequency o f the Barro-Lee database i s every 5 years and their numbers for 2000 are projections. W e fill in the five year periods using the assumption o f a constant geometric growth rate within that period. From (l), the growthrate of A (TFP) may thenbewritten as 3. g(TFP) =g(y) -a*g(K) - (1-al)g(E), where g(X) indicates the annual growth rate o f variable X. We set the annual depreciation rate at 4 percent, assume that a! equals 0.4, which i s derived by time series estimation o f the production function in Equation 1 (World Bank, 2004) and i s consistent with similar estimates for other countries. The derived annual TFP growth rates are shown inFigure 2.4 inChapter 2. 'Previousdetailedstudies (e.g. Young (1994)) have shown education to be by far the most important element in accountingfor differences in labor quality. A more accurate proxy for human capital would also include human capital development due to learning-by-doing, but lack ofdata precludesthis here. 141 ANNEX TO CHAPTER 3 Chart MI11. Bangladesh:NominalandRealEffetiveExchange Rates, 1980-2003 150.00 130.00 110.00 90.00 c,i - 70.00 50.00 Chart AIII.2. Real Effetive ExchangeRatesfor Bangladeshand Its Competitors, 1980-2003 310.00 'Bangladesh 290.00 - Cambodia ChinapR 270.00 - - -India PakIStan 250.00 SnLank 230.00 Thailand 210.00 i l 190.00 130.00 - 11000 90.00 N - 70.00 , 142 ChartAIII.3. Bangladesh:BilateralReal ExchangeRateswith Competitors, 1980-2003 160.0 140.0 120.0 -5100.0 800 E 60.0 143 ANNEX TO CHAPTER3 Table AIII.l Average MFNtariffs in South Asia comparedwith averagetariffs in some other large and medium size developingcountries ___ All products(134 countries) Agriculture (134 countries) Average Average tariff Rank Data year tariff Rank Data year (YO) (YO) Morocco 33.4 1 2002 Morocco 53.6 1 2002 Tunisia 30.2 3 2002 Turkey 51.6 2 2001 Bangladesh 26.5 5 2004-05 Tunisia 44.7 4 2002 Iran 23.9 7 2002 Korea 43.5 5 2002 Nigeria 23.4 8 2002 India 40.1 7 2004-05 India 22.2 10 2004-05 Iran 35.7 9 2002 Pakistan 18.8 15 2002-03 Bangladesh 33.1 I O 2004-05 Egypt 18.4 20 2002 Sri Lanka 28.1 12 2003-04 Nepal 18.0 22 2003-04 Mexico 25.7 14 2002 Mexico 16.2 30 2002 Nigeria 23.0 25 2002 Vietnam 15.0 32 2001 Pakistan 22.6 26 2002-03 Ghana 14.7 34 2000 Ghana 20.2 37 2000 Thailand 14.7 35 2002 Vietnam 19.7 40 2001 Sri Lanka 13.4 42 2003-04 Nepal 1Y.6 42 2003-04 Turkey 12.6 47 2001 Egypt 18.2 46 2002 Korea 12.6 48 2002 China 17.9 50 2002 Brazil 12.3 51 2002 Thailand 16.2 56 2002 China 12.3 52 2002 Colombia 15.9 59 2003 Argentina 11.8 62 2001 Median 15.1 Colombia 11.7 63 2003 Argentina 12.3 85 2001 Median 11.2 Brazil 11.7 90 2002 Malaysia 8.8 86 2002 Philippines 10.5 101 2003 Indonesia 7.2 99 2002 South Africa 10.2 104 2001 Chile 7.0 101 2002 Indonesia 8.4 115 2002 SouthAfrica 6.4 106 2001 Chile 7.0 119 2002 Philippines 5.1 120 2003 Iran 3.1 128 2000 Malaysia 3.0 129 2002 I Mean 11.7 I Mean 16.7 I Notes: The average tariffs andrankings for "all products"are for 139 developing countriesfrom data providedby FrancisNg, DECRG, World Bank. The averages for the South Asian countries are as indicatedin Table 3.1:the averagesfor the other countriesare for 2002, from a file kindly providedby FrancisNg. The averagesandrankings for "Agriculture" includefisheries and livestockand are for the years indicatedinthe Table. The datais from afile providedby FrancisNgwhich providesaverage agriculturaltariffs for 106 developingcountriesin 1998, 1999 or 2000 (most in 2000). The averages giveninthis file for the five South Asian countrieswas replacedby the later estimates shown in this Table, andfor 9 other countries by averages for 2002 also showninthis Table. Inadditionaverage agriculturaltariffs for Nigeria(not includedinthe original data set) in2002 were added, giving atotal data set of 106developingcountries. 144 Countries Growth Macroeconomic Public Institutions Technology Competitiveness Environment Index Index Index Panel B: Business Con: Countries Business Quality of National Company Operations Competitiveness Index Business Environment and Strategy Ranking I I 2003 2002 2001 2003 2002 2001 2003 2002 2001 Bangladesh 91 74 73 91 74 73 91 76 72 India 37 37 36 36 37 34 40 40 43 Pakistan 75 7n 81 Sri Lanka 57 47 58 Malaysia 26 26 37 Thailand 31 35 38 China 46 38 43 44 38 46 42 38 39 Philippines 65 61 53 74 67 54 48 49 45 is done for 80 countries in 2002 and 2001. In2003, the survey was extended to include 101 countries. Pakistan was included in 2003. Source: Global CompetitivenessReport 2003-2004, World Economic Forum website: ~t?.vw.tvorlclecononzicforiii~i or,q 145 146 REFERENCES Ahmed, Sadiq and Z. Sattar (2003). "TradeLiberalization. Growth andPoverty Reduction: The Case ofBangladesh ",World Bank, South Asia Region. Asian Development Bank, Various Economic and SectoralReports. Bangladesh Enterprise Institute (2004). Reducing the Cost of Doina Business in Bangladesh. Banglapedia: National Encyclopedia of Bangladesh.banglapedia.search.com.bd. Barro, Robert and Jong-Wha Lee (2000). InternationalData on Education Attainment: Updates and Implementation. Bhattacharya, Rahman and Khatun (1999).A CaseStudy on Bangladesh's Shrimp Farming Industw. Dhaka, Bangladesh: Center for Policy Dialogue. Cargill Technical Services. httd/www.carrrill.comi. Cato, James C. and S. Subasinge (2003). "Food Safety and Food Trade: Case Study - The Shrimp Export Industry in Bangladesh" in 2020 Vision for Food. Awiculture and the Environment. Intemational Food Policy Research Institute (IFPRI). Focus 10, Brief 17 (September). Cotton Outlook. www.Cotlook.com. Dollar, D.and A. Kraay (2002). "Growth i s Good for the Poor", Journal of Economic Growth. Dollar, D.and A. Kraay (2004). "Trade, Growth, and Poverty", Economic Journal. ForeignPolicy. The2004 A.T KearnqdForeinn Policy GlobalizationIndex. (MarcWApril2004). Government of Bangladesh (2003). National Stratem for Accelerated Povertv Reduction. InterimPovertyReductionStrategyPaper(March). Global Development Solution, LLCTM. Various reports. Haque, Enamul. "Sanitary and Phyto-sanitary Barriers to Tradeand its Impact on Environment: The Caseof Shrimp Farming in Bangladesh". Paper presented at TKN policy workshop, Dhaka, April 2003. HORTEX Foundation (2003). Project Completion Report, (2003). Land 0' Lakes IntemationalDevelopment. http://www.idd.landolakes.com/. Maxwell Stamp (2002). Review of Relative Protection, prepared for Bangladesh Tariff Commission. National Private Sector Enterprise Survey of Bangladesh (NPSEB). 147 Rahman, Mustafizur (2002). Market access implications of SPSand TBT: Bangladesh Persuective. Jaipur, India: CUTS Centre for International Trade, Economics and Environment. Rodriguez, Francisco and Dani Rodrik (2000). "Trade Policy and Economic Growth: A Skeptic's Guide to the Cross-National Evidence". NBER Macroeconomics Annual 2000. MIT Press, Cambridge, MA. The Aquaculture Certification Council. httu://www.aquaculturecertification.org/. The Louis Berger Group. http://m.louisberger.com/. The World Bank (2004). WorldDevelopmentIndicators. The World Bank and BangladeshEnterprise Institute (June 2003). ImprovingInvestment Climate in Bangladesh. The World Bank and the Asian Development Bank (2002). Poverty in Bangladesh: Building on Progress. Winters, L. Alan, Neil McCulloch, and Andrew McKay (2004). "Trade Liberalization and Poverty: The Evidence So Far", Journal of Economic Literature, Vol. XLII (March). World Economic Forum. Global CompetitivenessReport 2003-2004. The World Bank (1998). Strategv for Establishing a Sound and Competitive Banking Sector, Volume I. The World Bank (1999). Bangladesh: Trade Liberalization-Its Pace and Impacts, Report No. 19591-BD. ________----------- (2002). Bangladesh: Review of Public EnterprisePerformance and Stratem. ____________------- Bangladesh: Develoument Policy Review. (2003). ____________------- Bangladesh: Public Expenditure Review. (2003). ------------------- (2003). DoingBusiness Database. _______________----"Investment Climateand Firm Performance in DevelopingEconomies.'' (2003). _______-__--------- (2004). Bangladesh Development Forum Economic Update. _____________------Promoting theRural Non-Farm Sector in Bangladesh. (2004). ------------------- (2004). "Sources of Growth and Productivitv: The Case of Bangladesh." _______________----TradePolicies in South Asia: An Overview. Report No. 29949. (2004). 148 STATISTICAL APPENDIX Section A I Table 1: Bangladesh Macroeconomic Indicators - -- - -- -- -- -- Description Lve 1980s --FY92 FY93 1y97 FY98 -FY99 'yo0 ;yo2 Y03(R) Growth Rates (Yo) GDP Growth 3.7 5.0 4.6 4.1 4.9 4.6 5.4 5.2 4.9 5.9 5.3 4.4 5.3 GDP Growth Per Capita 1.2 3.0 2.6 2.2 3.1 2.8 3.6 3.5 3.6 4.9 3.7 2.9 4.0 Per Capita GDP Atlas Method (US$ 226.6 298.0 297.8 298.1 313.3 332.8 347.9 350.7 354.1 167.3 571.1 172.0 389.0 Saving& Investment(YOof GDP) Gross Domestic Saving 11.6 13.9 12.3 13.1 13.1 14.7 15.9 17.4 17.7 17.9 18.0 18.2 18.2 GrossNationalSaving . 17.0 19.3 18.0 18.8 19.1 20.0 21.6 21.8 22.3 23.1 22.4 23.4 23.7 Private Investment 11.3 10.3 11.5 11.8 12.4 13.6 13.7 15.3 15.5 15.6 15.8 16.8 16.5 Public Investment 5.5 7.0 6.5 6.6 6.7 6.4 7.0 6.4 6.7 7.4 7.2 6.4 6.7 Central Govt. Budget (YOof GDP) Total Revenue 8.8 8.3 9.1 9.3 9.3 9.0 9.2 9.3 9.0 8.5 9.0 10.2 10.4 Total Expenditure 17.2 12.7 13.3 13.8 14.6 13.4 13.5 13.3 13.8 14.7 14.1 14.9 14.6 Overall BudgetBalance 8.3 4.5 4.4 4.5 5.2 4.5 4.3 4.1 4.8 6.2 5.O 4.7 4.2 Balanceof Payments(YOof GDP) Exports 4.3 6.4 7.4 1.5 9.2 9.5 10.5 11.7 11.6 12.2 13.8 12.5 11.8 Imports 12.4 -11.3 -12.7 -12.4 -15.4 -17.1 -16.9 -17.1 -17.5 -17.8 -19.9 -16.3 -15.9 Services & Income(net) -0.4 -0.1 0.0 0.0 -0.3 -0.1 0.1 0.2 0.1 -0.1 -0.5 -1.7 -1.9 Current Transfers 4.1 4.6 4.5 4.7 4.8 4.5 5.1 4.6 4.9 5.7 4.9 6.0 6.4 Current Account Balance (includingtransfers) -3.9 -0.4 -0.8 -0.3 -1.8 -3.2 -1.3 -0.6 -0.9 0.0 -1.7 0.5 0.4 External Indicators ExternalDebt (US$b.) 7.9 13.3 13.6 15.4 16.8 15.2 15.0 14.0 14.8 16.2 15.1 17.3 17.0 Ext. Debt as % of GDP 34.2 39.5 39.6 43.8 44.6 37.3 34.7 31.6 32.7 34.0 30.8 34.4 32.8 BB GrossReserves (US$b.) (end of period) 0.5 1.6 2.1 2.8 3.1 2.0 1.7 1.8 1.5 1.6 1.3 1.6 2.1 BBGrossReserves(inmonths of imports) 0.7 5.5 6.3 1.9 6.3 3.5 2.9 2.8 2.3 2.3 1.7 1.8 2.6 Extemal Debt Service Ratio (% of Export Earning) 7.8 15.8 13.6 12.9 11.5 10.7 9.6 7.9 8.4 8.0 6.4 6.1 6.5 ExchangeRate Nominal Period Average (TWUS$) 26.8 38.2 39.1 40.0 40.2 40.8 42.7 45.5 48.1 50.3 54.0 57.4 57.9 Nominal End of Period (TWUS$) 34.9 39.0 39.8 40.3 40.1 41.8 43.7 46.3 48.5 51.0 57.0 57.9 58.46* Real Effective (1990=100) 107.0 95.4 91.5 92.3 90.9 93.4 93.5 101.9 104.4 102.6 101.2 Rate of Inflation (YO)(yearon year) 10.8 4.6 2.7 3.3 8.8 6.8 2.5 7.0 8.9 3.9 1.6 2.4 5.2 Total Public Debt (YOof GDP) N A NA 45.2 50.9 51.9 45.7 43.8 41.5 43.8 46.9 45.2 51.6 50.9 MemorandumItems GDP at Current. Prices (Taka bill.) 619.8 1,I95.4 1,253.; ,354.1 ,525. L,663.: ,807.1 !,001. 2,197.( !,370. 2,535.: 2,732. 3,004.5 GDP at Current. Prices Atlas Methoc (US$ bill) 22.5 33.8 34.4 35.1 37.6 40.6 43.2 44.4 45.4 47.7 48.9 49.5 Population (mill.) 98.7 113.0 114.9 116.9 118.8 120.8 122.6 124.': 126.3 128.1 129.9 131.C 133.4 Population growth Rate 2.5 ------------ 1.4 1.7 1.7 1.6 1.7 1.5 1.5 1.4 1.4 1.4 1.3 1.3 Source: Various publications of the Wroli ilk,ADP IdBang1 :sh Bureau o fStat ICs. As of June 16,2003 Note: The Atlas Method was not used for calculating average per capita GDP & GDP at current market prices in the 1980s 151 I 1989-90 1995-96 1996-97 BSIC Number As %o ftotal As % o f total As %of total Code establishments Number establishments "Iber establishments 3243 Leather Products except Footwear 278 96 145 42 612 3223 Knitwear 387 ___ 41 3 20 3231 Ready made Garments 445 39 93 4 --- 3519 Drugs and Pharmaceutical Products 4 1 15 5 ___ 3612 Ceramic Products 11 52 50 74 __- 3251 Leather Footwear 846 89 512 83 767 nia 3114 Procurement of fish and sea food (shrimp) 7 6 133 64 --- 3113 Fruits and vegetables 22 52 22 73 --- 3222 Made-up textile goods except apparel (Home textiles) 2,152 97 3,147 98 2,370 i Table 2: Number of E tablishments in Selected Medium and Large-Scale In ustries I 1 9-90 1995-96 l ! 7-98 19' -2000 Number i s % of total As % o f total As % o f total rtablishments "Iber ;tablishment: establishment Number i s % of total Number :stablishments 3243 Leather Productsexcept Footwear 12 198 58 204 188 3223 Knitwear ___ ___4 1,225 97 1,064 600 3231 Ready made Garments 703 61 2,168 96 2,353 2,636 351 Drugsand Pharmaceutical Products 296 99 278 95 267 308 3612 Ceramic Products 10 48 18 26 20 20 3251 Leather Footwear 105 11 108 17 109 nia 46 nla 3114 Procurement of fish and sea food 111 94 76 36 67 79 (shrimp) 20 48 8 27 10 12 76 3 74 2 50 50 Source: Bangladesh Bureau o f Statistics Note: Large scale establishment = establishments with morethan 49 workers Medium scale establishment = establishments which have more than 9 and less than 50 workers 152 Source: Monthly Statistical Bulletin,Bangladesh Bureau of Statistics Table 4: Quantum Index of Selected Medium and Large-Scale Industries (1988-89=100) RMG:Woven Garments Leather Footwear Fish and Seafood(shrimp) Ceramic Weight 9.13 1.60 1.81 0.55 ---------Growth Index Growth (YO) Index Growth(%) Index (YO) Index Growth (Yo) FY99 710.61 11.10 192.88 56.60 129.08 6.46 69.46 -9.01 FYOO 766.32 7.84 186.71 -3.20 185.18 43.46 67.35 -3.04 FYOl 811.67 5.92 216.67 16.05 192.97 4.21 76.20 13.14 FY02 768.71 -5.29 229.47 5.91 201.28 4.31 92.41 21.27 FY03 816.96 6.28 236.14 2.91 166.73 -17.17 103.24 11.72 153 Section C Table 1: BangladeshBalance of Payments (U! A FY97 FY98 FYOO FYOl FY02 FY03 FY04 (PI Trade Balance -2,113 -1,669 -1,934 -1,865 -2,011 -1,768 -2,169 -2,486 Exports f.0.b. (including EPZ)' 4,334 5,103 5,283 5,701 6,419 5,929 6,492 7,384 Imports c i f . (including EPZ)' -6,447 -6,772 -7,217 -7.566 -8,430 -7,697 -8,661 -9,870 Service(net) -552 -570 -603 -645 -914 -499 -722 -950 Receipt 657 707 707 849 759 865 832 850 payments' -1,209 -1,277 -1,310 -1,494 -1,673 -1,364 -1,554 -1,800 Income (net) -107 -100 -135 -221 -264 -319 -199 -230 Receipt 89 91 91 97 97 50 60 70 Payments -196 -191 -226 -318 -361 -369 -259 -300 Current Transfers 1,907 1,876 2,195 2,394 2,171 2,826 3,415 3,910 official4 137 126 220 165 72 69 57 85 Private 1,770 1,750 1,975 2,229 2,099 2,757 3,358 3,825 O f which, Workers' Remittances 1,475 1,525 1,706 1,949 1,882 2,501 3,062 3,500 Current Account Balance -865 -463 -417 -337 -1,018 240 326 244 Capital Account 598 445 387 561 432 410 392 405 Capital Transfers' 598 445 387 561 432 410 392 405 Financial Account -110 237 -395 -185 249 71 223 92 Direct Investment 16 249 198 194 174 65 48 65 Portfolio Investment -132 3 -6 0 0 -6 2 3 Other Investment 6 -15 -587 -379 374 12 471 24 MLT loans6 734 706 821 806 790 733 902 950 M L T amortization payments -316 -308 -341 -396 -416 -421 -431 -485 Other long term loans (net) 57 -47 -41 127 -13 -42 -20 -25 Other short term loans (net) -58 168 -78 56 86 20 226 72 Other assets -69 -41 -58 -55 -68 -52 -81 -90 Trade credit (net) -365 -522 -829 -641 -260 -253 -494 -450 Commercial bank (net) 23 29 -61 -276 -44 27 71 52 Assets -28 -19 -31 -161 147 -90 Liabilities 51 48 -30 -115 -33 117 Errorsand Omissions 180 -88 267 125 -47 -356 -130 -340 OVERALLBALANCE -197 131 -218 164 -384 365 811 401 Reserve Assets 197 -131 218 -164 384 -365 -811 -401 Bangladesh Bank 197 -131 218 -164 384 -365 -811 -401 Assets 325 -14 205 -79 302 -276 -871 -380 Liabilities -1 28 -117 13 -85 82 -89 60 -21 enairs 01 :ommod s. Excli 3 local si Jdes freight and insurance charges 31 Includes freight and insurance charges. 41 Excludes JDR grants 5/ Includes JDR grants 6/ Excludes suppliers' credit Source :IMF 154 I Table 2: BangladeshExports of Over $10 Million, FY96-FY03 I I I FY96 N 9 7 N 9 8 FY99 I I F Y O O I I F Y O lI I N O 2 I FY03 -rimary -.aw 'InMillion US%) A. Commodities 416 526 502 422 469 485 390 463 1 Jute 91 116 108 12 72 67 61 82 2 'ea 33 38 47 39 18 22 17 15 2a Tea inbulk 33 38 46 37 17 3 rozen Food 314 321 294 274 344 363 276 322 3a Shrimps 271 279 260 242 322 350 252 297 3b Fish 43 42 33 32 21 13 24 25 4 .gricultural Products 22 29 39 22 18 18 23 25 4a Vegetables 15 2s 32 18 14 13 15 13 -Mher 5 Primary Commodities 10 15 5 4 4 14 13 17 -lanufactured B. Commodities 3,407 3,892 4,659 4,891 5,283 5,983 5,596 6,086 1 ute Goods 329 318 281 304 266 230 244 257 2 ,eather 212 195 190 168 195 254 207 191 3 ,eatherGoods/a 29 27 48 51 52 37 45 38 3a Footwear 22 23 43 47 48 34 41 35 4 laptha,Furnace Oil & Bitumen 11 16 11 5 11 10 10 31 5 kady Made Garments 1,949 2,238 2,843 2,985 3,083 3,364 3,125 3,258 6 hitwear 598 163 940 1,035 1,270 1,496 1,459 1,654 7 :hemica1Products 98 108 74 79 94 97 67 101 7a ChemicalFertilizer 95 104 59 59 60 68 48 79 7b PVC Bags 0.04 ... 4 11 25 18 10 10 8 hgineeringProducts 15 16 20 11 8 3 1 13 9 lpecialised Textile & Household Linen 41 52 58 16 96 117 126 128 10 Mher ManufacturedCommodities 124 149 193 115 209 314 312 414 1Oa Ceramic Products 11 14 11 10 9 19 18 19 1Ob Cotton Fabrics 6 8 26 26 34 122 48 22 1oc Jamdani Saree 0.17 0.06 20 4 0.02 0.04 ... 0.03 1Od Tents 14 14 21 26 39 58 43 47 10e Camera Parts 2 7 11 9 10 13 12 17 10f GolfShaft 21 10 14 ... 10 9 12 10 1og Bicycle ... ... ... ... 10 12 31 52 -rOTAL -10h OtherS 69 95 90 100 95 141 148 247 EXPORTS 3,882 4,418 5,161 5,313 5,752 6,467 5,986 6,548 left out of e table. /a: Figuresneed to be checked for consistency. Source: ExportPromotion Bureau 155 Table 3: Bangladesh Export of RMGKnitwear by Destination FYOO N O 1 FY02 - US$ m % of Growth Yo of Growth % of Growth % of Growth total (%) US$ m total (%.) US$ m total US$ m - total (%) USA 263.17 25.42 14.50 321.64 25.32 22.22 373.06 24.93 15.98 364.18 24.96 -2.38 EU 716.56 69.20 8.52 884.99 69.68 23.50 1,049.28 70.12 18.56 1,019.66 69.88 -2.82 Canada 33.05 3.19 18.25 35.93 2.83 8.69 35.31 2.36 -1.70 35.65 2.44 0.96 Japan 3.23 0.31 10.76 3.44 0.27 6.53 4.93 0.33 43.21 3.91 0.27 -20.70 Hong Kong 1.05 0.10 70.34 0.73 0.06 -30.16 2.36 0.16 220.98 3.16 0.22 33.91 UAE 0.78 0.08 6.57 1.05 0.08 35.17 1.52 0.10 44.63 1.94 0.13 27.12 Mexico 0.53 0.05 43.28 0.68 0.05 28.14 2.20 0.15 221.96 1.53 0.10 -30.51 Australia 0.73 0.07 4.62 0.46 0.04 -36.14 0.66 0.04 42.55 1.31 0.09 98.79 Saudi Arabia 0.74 0.07 81.02 0.28 0.02 -62.37 0.55 0.04 97.14 0.63 0.04 13.95 Russia 0.13 0.01 -78.50 0.01 0.00 -93.02 0.86 0.06 9,400.0 0.59 0.04 -30.76 Singapore 0.15 0.01 -82.32 0.70 0.05 378.08 1.34 0.09 92.55 0.56 0.04 -58.71 Others 15.30 1.48 1.65 20.20 1.59 32.03 24.29 1.62 20.27 26.14 1.79 7.60 Total 1,035.42 10.12 1,270.12 22.67 1,496.36 17.81 1,459.24 -2.48 As % oftotal exports 19.49 22.08 23.14 24.38 Table 4: Ba gladeshExport of V cetables by Destination FY99 FYOO N O 1 FY02 US$ %of Growth -- -- -- US$ % of Growth US$ Yo of Growth US$ % of Growth m total (%) -- -- - m total (%) m total m total (%.) UK 6.04 34.17 -31.96 3.66 26.12 -39.46 3.23 25.24 -11.73 3.73 24.38 15.64 Saudi Arabia 3.14 17.76 -55.59 2.73 19.48 -13.09 2.43 19.03 -10.81 3.21 20.93 3 1.73 UAE 1.38 7.79 -64.73 1.79 12.75 29.54 2.07 16.15 15.69 2.71 17.67 3 1.04 Kuwait 1.86 10.52 -44.49 1.75 12.48 -6.02 1.86 14.54 6.35 1.64 10.72 -11.67 Qatar 0.97 5.49 -65.02 1.40 10.01 44.43 0.79 6.20 -43.40 1.04 6.77 30.64 Oman 0.38 2.14 -6 1.03 0.5 1 3.63 34.39 0.73 5.72 43.90 0.92 6.03 26.40 Bahrain 2.72 15.36 -25.96 1.12 7.99 -58.82 0.60 4.71 -46.15 0.83 5.43 38.21 Singapore 0.06 0.36 173.91 0.17 1.20 166.67 0.24 1.86 41.67 0.24 1.59 2.10 Germany 0.30 1.69 -57.67 0.12 0.85 -60.07 0.05 0.41 -56.30 0.23 1.52 346.15 USA 0.10 0.55 11.49 0.33 2.35 239.18 0.03 0.23 -91.19 0.04 0.29 5 1.72 Others 0.74 4.19 -28.71 0.44 3.14 -40.54 0.76 5.92 72.05 0.72 4.68 -5.42 Total 17.68 -45.55 14.00 -20.80 12.79 - -- -8.67 15.31 19.75 As % of total 0.24 0.20 0.26 exports 156 7Table F 5: BangladeshExport of Leather Footwear by Destination 4 FY99 woo FYOl FY02 US$ Yo of Growth % of Growth % of Growth % of Growth m Total ("w US$m Total (%IUS$m Total (%) US$m Total (%I EU 34.43 73.96 34.48 34.61 71.72 0.53 21.57 64.14 -37.68 19.96 48.35 -7.45 Japan 10.71 23.01 9.32 9.91 20.54 -7.47 10.88 32.36 9.76 16.95 41.05 55.79 USA 0.27 0.58 -40.18 0.71 1.48 163.47 0.02 0.04 -97.90 2.28 5.52 15,093.33 Taiwan 0.05 0.10 -74.32 0.16 0.34 244.68 0.11 0.32 -32.72 0.33 0.79 198.17 Saudi Arabia 0.18 0.38 -36.36 0.13 0.26 -28.57 0.20 0.60 62.40 0.28 0.69 39.90 HongKong --- --- _-- 0.50 1.03 --- 0.05 0.16 -89.16 0.21 0.51 287.04 Canada 0.03 0.07 -8.57 0.07 0.14 1 15.63 --- --- _ _ _ 0.14 0.33 --- UAE 0.09 0.18 -70.45 0.18 0.38 112.79 0.14 0.43 -21.31 0.15 0.36 2.08 Local Sale --_ --- --- 0.57 1.18 --- 0.004 0.01 -99.30 0.62 1.49 15,3 25.OO Others 0.80 1.72 -41.69 1.41 2.93 76.62 0.65 1.93 -54.14 0.38 0.93 -41.05 Total 46.55 22.45 48.26 3.66 33.63 -30.31 41.29 22.79 As % of Total Exports 0.88 0.84 0.52 0.69 Table 6: Bai ladesh Export of Ceramic Tableware by Destination FYOO US$m % of Growth % of Growth "$ Growth total (%) total m % oftotal1 %) US$m total EU 6.31 62.93 2.92 6.06 64.08 -3.93 14.53 76.16 139.76 13.18 USA 2.08 20.79 -37.75 2.57 27.12 23.08 2.88 15.07 12.12 2.43 Canada 0.12 . 1.18 -28.05 0.13 1.41 12.71 0.31 1.65 136.09 0.56 Australia 0.67 6.71 38.76 0.34 3.62 -49.18 0.80 4.19 133.63 0.48 -39.42 1 Japan 0.04 0.35 52.17 0.01 0.08 -77.14 0.04 0.19 362.50 0.13 0.75 254.05 New Zealand 0.36 3.56 136.42 0.17 1.80 -52.38 0.18 0.92 2.94 0.10 0.58 -42.29 UAE 0.03 0.28 -66.27 0.14 1.48 400.00 0.05 0.24 -67.14 0.07 0.39 50.00 Saudi Arabia -_- -_- --- --- _-- --- 0.02 0.09 _-- 0.56 3.20 3,149.12 Chile 0.05 0.49 -40.24 0.04 0.47 -10.20 0.04 0.23 0.00 0.04 0.24 -4.55 Others 0.37 3.71 24.00 ___ --- --- 0.24 1.26 --- 0.45 2.57 87.50 Total 10.03 -7.66 9.46 -5.66 19.08 101.73 17.50 -8.30 As % oftotal exports 0.16 0.30 0.29 157 Table 7: BangladeshExport of Shrimpby Destination FY99 FYOO FYOl N O 2 US$ m % of Growt % of Growth % of Growth total h("76) US$m total (%) 'T';'~ % US$ m % of total (%) USA 95.27 39.33 -33.15 125.94 39.06 32.19 119.07 34.04 -5.45 97.41 38.63 -18.19 EU 89.28 36.86 85.38 128.31 39.80 43.73 185.03 52.90 44.20 132.46 52.53 -28.41 Japan 32.16 13.27 -12.00 36.24 11.24 12.71 28.01 8.01 410.54 11.43 4.53 -93.82 Thailand 11.95 4.94 44.49 22.30 6.92 86.53 9.77 2.79 -56.18 7.27 2.88 -25.65 Russia 0.09 0.04 -87.57 0.17 0.05 81.52 -__ _-- _-- 1.07 0.43 _-_ Canada 2.72 1.12 -55.50 2.86 0.89 5.19 4.24 1.21 48.29 0.68 0.27 -83.86 China 3.05 1.26 71.19 4.52 1.40 48.07 1.08 0.31 -76.12 0.56 0.22 -48.24 Malaysia 0.28 0.11 -93.62 0.15 0.05 -44.73 _ _ _ --_ -_- 0.16 0.06 -_- Indonesia 0.11 0.04 -82.70 0.39 0.12 266.67 -__ -_- _-_ 0.12 0.05 -__ Saudi --- -__ _ _ _ --- Arabia 0.03 0.01 0.06 0.02 132.00 0.11 0.05 93.10 Others 5.40 2.23 513.86 1.53 0.48 -79.08 2.49 0.71 62.06 0.91 0.04 -63.48 Total 242.23 -6.98 322.43 33.11 349.75 8.47 252.18 0.36 -27.90 AS% of total 4.56 5.61 5.41 4.21 exports Table 8: BangladeshExport of RMGWoven GarmentsbyDestination FY99 - FYOO NO1 FY02 US$ m % of Growth % of Growth % of Growth %of Growth total (%IUS$m total (%I US$ m total (%IUS$m total (%) USA 1,476.98 49.48 2.36 1.673.90 54.30 13.33 1,825.37 54.26 9.05 1,591.88 50.95 -12.79 EU 1,390.40 46.58 9.04 1,288.60 41.80 -7.32 1,404.60 41.75 9.00 1,391.77 44.54 -0.91 Canada 61.46 2.06 -8.04 63.76 2.07 3.74 71.07 2.11 11.46 62.26 1.99 -12.40 Japan 4.19 0.14 -71.06 6.38 0.21 52.17 7.54 0.22 18.26 13.03 0.42 72.79 Hong Kong 4.87 0.16 93.45 3.71 0.12 -23.97 5.24 0.16 41.30 6.29 0.20 20.08 Mexico 3.21 0.11 45.62 2.44 0.08 -24.00 4.85 0.14 99.10 4.85 0.16 -0.10 Korea 3.40 0.11 119.03 3.82 0.12 12.40 2.25 0.07 -41.06 2.30 0.07 2.22 UAE 1.63 0.05 40.05 0.58 0.02 -64.39 2.90 0.09 401.21 2.22 0.07 -23.57 Russia 0.50 0.02 -74.14 0.44 0.01 -11.92 1.28 0.04 193.12 1.98 0.06 54.77 Australia 0.88 0.03 -11.09 2.28 0.07 158.73 2.08 0.06 -8.72 1.83 0.06 -12.00 Singapore 4.02 0.13 5.29 2.16 0.07 -46.32 1.69 0.05 -21.78 1.74 0.06 3.32 Others 33.28 1.11 11.33 34.56 1.12 3.86 35.34 1.05 2.25 44.42 1.42 25.69 Total 2,984.81 4.98 3,082.62 3.28 3,364.20 9.13 3.124.56 -7.12 ASYo of total 56.18 53.59 52.02 52.20 exports 158 Table 9: BangladeshExport of Leather by Destination -FY99 - - FYOl FY02 US$ % of Growth Growth US$ % of Growth US$ %of Growth m -total (%) (%) m - total (%.) m total (%) Hong Kong 54.85 32.60 -18.05 68.18 34.96 24.29 68.49 26.97 0.46 71.OO 34.25 3.67 Italy 38.37 22.81 0.51 46.82 24.00 22.02 76.33 30.06 63.02 44.93 21.67 -41.14 Japan 12.46 7.41 -1.81 -3.78 19.74 7.77 64.64 16.92 8.16 -14.27 Spain 10.42 6.19 -0.04 9.58 -7.99 13.65 5.38 42.45 12.39 5.98 -9.24 Korea 2.27 1.35 -0.04 9.37 4.81 312.86 14.85 5.85 58.44 11.38 5.49 -23.36 I Taiwan 9.89 5.88 21.74 9.41 4.82 -4.92 10.55 4.16 12.18 11.22 5.41 6.36 Vietnam 4.79 2.85 30.47 5.48 2.81 14.28 8.80 3.47 60.80 8.24 3.98 -6.37 China 1.04 0.62 29.46 3.39 1.74 227.19 6.38 2.51 87.89 6.45 3.11 1.21 Brazil 4.36 2.59 -33.13 1.46 0.75 -66.58 6.88 2.71 372.60 2.92 1.41 -57.59 Mexico 1.63 0.97 -5 1.22 2.60 1.33 59.30 1.98 0.78 -23.82 2.71 1.31 36.71 UK 4.48 2.66 18.26 3.47 1.78 -22.58 2.11 0.83 -39.16 2.51 1.21 18.90 Others 23.68 14.07 -29.33 23.30 11.94 -1.61 24.17 9.52 3.72 16.65 8.03 -3 1.09 Total 168.25 - -11.57 195.05 15.93 253.93 - - 30.19 207.33 -18.35 AS% o f total 3.17 3.39 3.93 3.36 exports Table 10: BangladeshExport of Home Textiles by Destination FY99 FYOO FYOl FY02 US$ % of Growth US$ % of Growth US$ % of Growth US$ % of Growth m Total ("/.I m Total m Total m Total ("/I E U 13.48 51.61 52.87 22.44 48.87 66.47 45.75 66.77 103.86 50.66 67.03 10.72 USA 9.10 34.82 -23.15 18.72 40.77 105.84 17.09 24.94 -8.74 15.95 21.10 -6.68 Canada 0.24 0.92 -32.77 0.26 0.57 8.75 1.49 2.17 470.50 3.91 5.17 162.26 Malaysia 0.62 2.37 1,622.22 0.06 0.14 -90.00 0.80 1.16 1,183.87 0.91 1.21 14.45 UAE 0.68 2.59 -33.98 0.36 0.78 -47.34 0.3 1 0.45 -14.33 0.89 1.18 193.11 Poland --- _-- --- _ _ _ _ _ _ -_- 0.34 0.49 --- 0.65 0.86 94.05 Hongkong 1.19 4.56 !3,740.06 2.54 5.54 113.34 0.84 1.22 -67.16 0.44 0.59 -46.95 Switzerland 0.01 0.02 -73.68 0.07 0.15 1,300.00 0.38 0.55 438.57 0.22 0.29 -41.38 Australia 0.02 0.07 100.00 0.01 0.02 -44.44 0.09 0.13 790.00 0.17 0.22 91.01 Local Sale 0.01 0.02 -93.98 __- ___ --- 0.07 0.10 --_ 1.08 1.43 1,494.12 Others 0.79 3.03 -44.88 1.46 3.17 83.94 1.39 2.03 -4.60 0.69 0.92 -49.93 Total 26.13 10.59 45.92 75.78 68.52 49.21 75.58 10.29 As % of Total 0.49 0.80 1.06 1.26 Exports 159