51648 SEPTEMBER 2009 ABOUT THE AUTHORS MUHAMMAD TAIF UL ISLAM dsas Energy-Efficient Technologies Are Saving a Vital Industry in Bangladesh is an analyst with IFC South Asia Advisory Services based in Dhaka. Earlier, he was with The Bangladesh foundry industry is a crucial element of the country's Bangladeshi private and light engineering sector, but it suffers from reliance on outdated development sectors. technologies, inefficient production processes, and an inability to RAJEEV GOPAL is an operations officer at IFC. diversify products. This SmartLesson describes the challenges and Earlier, he was with the DCM lessons learned from IFC's efforts to revitalize the industry in the Financial Services Limited, Investment Information & Bogra region by introducing new technologies. Credit Rating Agency, and A.F. Ferguson & Co. metric tons of cast iron pipes, well heads, MUSTAHID HOSSAIN engine parts, pump components, etc., per Metal Casting including pipes, is an analyst with IFC South Asia Advisory Services based pumps, components, etc. annum2. Thirty of these foundries are in the in Dhaka. Earlier, he was with north of Bangladesh at Bogra, the only the General Electric Company, foundry cluster in the country. (The foundry Merrill Lynch Investment industry supply chain is shown in Figure 1.) Bank, and Dell Computers. Foundry (Melting/Casting) As indicated in Figure 2, the local foundry SPECIAL THANKS TO Afifa Raihana industry suffers heavily from low productivity Mrinal Kanti Sircar use and high product rejection, in comparison Olga V. Puntus with regional counterparts. Our study Shazia Amina Ahmed indicated that the main culprit is the furnace, Sheikh Mohammed Hasan Coke/Fuel Pig Iron Ship Scrap Local Scrap Iqbal (Imported) (Imported) which is the most important part of a foundry and is used for melting raw material. A Figure 1: Simplified Supply Chain for Foundry furnace is expected to operate for 20 to 30 Business in Bangladesh years; however, the furnace technology used in the Bogra foundry was around 100 years old3. Melting pig iron and scrap metal using Background such older furnaces resulted in inappropriate coke combustion, lower melting rates, higher IFC Advisory Services in the South Asia pollution, and overall higher production costs. Enterprise Development Facility (SEDF) started working with the foundry1 industry in IFC Advisory Services' Approach Bangladesh in 2003 as part of its broader efforts to support the light engineering sector. SEDF's objective was to improve the local That sector includes machine shops, re-rolling foundry industry's competitiveness by mills, and foundries where the shops and mills depend on the Figure 2: Industry Benchmarks4 foundries for their input and raw material. The sector plays a critical Foundry benchmarks Bangladesh India China role in supplying local industries Productivity utilization 40% 90% 95% with machinery, parts, and repair services. Production rejection 20% 5% 2% Fuel efficiency 60% 87% 95% There are roughly 200 commercial Coal-iron ratio 1:8 1:15 1:18 foundries in Bangladesh producing an estimated 245,000 1 A foundry is a factory that produces metal castings from either 2 Statistics from Bangladesh Foundry Owners Association, 2008. ferrous or nonferrous alloys. 3 Internal IFC study. IFC SMARTLESSONS -- SEPTEMBER 2009 1 improving energy efficiency. SEDF's activity was classified as market demand and business potential, one of the local non-investment-linked value chain work. service providers decided to become an entrepreneur himself. He built his own shop that hosts one DBC and plans to go in production in a few months. "We survived because of the introduction of this new technology. SEDF handed it to us. We feel less vulnerable these days," said Abdul Malek, vice president of FOAB, on June 24, 2009 during an in-person interview. SEDF draws the following lessons from Bogra's intervention in the foundry industry: Lessons Learned 1) IFC ensures a meeting but not client buy-in. While the final results of our intervention were impressive, it took SEDF more than two years (2003­05) to earn FOAB's buy-in. Communication and commitment were issues, and Traditional Cupola Furnace Divided Blast Cupola Furnace continuous and effective dialogue had to take place with FOAB and its key members before agreement could be reached. We leveraged the expertise of the Energy and Resources Institute (TERI) of India as technology provider and IFC's globally acknowledged business reputation did little implementation partner. SEDF and TERI jointly identified to get buy-in from small and medium enterprises (SMEs). two local potential service providers to introduce new The local foundry industry has found dealing with donors furnace technologies in Bogra. SEDF also partnered with to be a sore point, as unfulfilled promises made by other the Foundry Owners Association of Bogra (FOAB) to find donors in the past fostered resentment. On top of that, our two foundries that would be interested in hosting a divided initial interventions, such as standard training (i.e., blast cupola (DBC) furnace as a pilot, out of offered options. introducing best practices) were sporadic, did not necessarily Compared to the older technologies, DBC greatly reduces provide an appropriate solution to industry issues, and thus energy consumption, including temperature and air loses. failed to generate industry interest. Clients perceived SEDF's training follow-up activity merely as data collection events Installation of each DBC furnace costs $115,000, while and developed a strong resistance against mutual building an old-style furnace costs around $30,000. FOAB cooperation. The local SME mind-set is such that they paid about 87 percent of the project's cost in cash, and SEDF believe that revealing their real situation or even their financed the remaining 13 percent. strengths can put them at a disadvantage. Sometimes they provided us with inconsistent market information, According to pilot study findings, one of the pilot foundries, intentionally or unintentionally. This skewed the program in producing 1,600 tons of cast iron, saved more than design drastically in the first phase. $76,000 in overhead and raw material costs from February to April 2009. The other foundry generated almost similar Understanding industry sensitivity and offering tailor-made results. If the trend continues, the first foundry will be able solutions finally helped to get the association's buy-in. to save around $300,000 per year (Figure 3) and reach the Because foundry SMEs lack liquidity, they tend to go for projected break-even point in just six months. quick returns if they make any investment. We further learned that interventions with a business angle were more likely to appeal to these SMEs than any environmental Figure 3: Private Sector Savings Observed in One Foundry due to compliance issues. Thus we offered a variety of solutions DBC Implementation and taught cost-benefit analysis to FOAB so that its Savings Savings in 3 Projected Total savings members are able to pick up a solution they can stick to. element months ($) savings in next in 1 year ($) Foreseeing tangible savings this time, FOAB became 9 months ($) interested in going ahead with the DBC furnace, which Fuel (coke) 75,007 225,021 300,028 promised less pollution and lower production costs. In addition, the DBC is designed to handle poor quality, low- Utility 687 2,149 2,836 priced fuel, a key criterion for Bangladesh, where fuel prices Total 75,694 227,170 302,864 are of greater concern than any environmental issues. 2) In hiring a project manager, pay attention to his or Using DBC, Milton Metal Works, one of our clients and a her personal skills, in addition to academic credentials. leading manufacturer in Bogra, not only enhanced product quality and reduced product rejection but became the first Bogra, like all of Bangladesh, has a strong, deep-rooted oral Bangladesh foundry to start exporting to India. Seeing the tradition-based culture, where the local industry luminary wants to know someone first and establish trust before 4 China International Foundry Bulletin, 2008. 2 IFC SMARTLESSONS -- SEPTEMBER 2009 making a deal. Once trust has been established, We learned that local SMEs require more hand- it is believed, doing business becomes easier. holding and long-term assistance to be sus- Otherwise, the local community is unlikely to tainable, because assistance in disseminating get involved with an outsider. knowledge is crucial for market expansion, given the technical nature of the intervention Initially, SEDF hired a non-Bangladeshi and industry's lack of expertise to transform consultant, but he did not have much success, information into knowledge. because he put a premium on getting things done instead of getting to know the key industry players personally. Such "lack of "We have done the hard bit of putting something warmth" led the industry to develop a on the ground in Bogra.... Now is the time to skepticism regarding SEDF. cash in on the hard work put in the last two years.... SEDF (is) to move forward from here so We blindly believed what the consultant the next steps are relatively "soft" work like produced, when we should have been dissemination workshops at Bogra/Dhaka/other engaging with clients in the field. We started foundry clusters, and activities like capacity going to the field regularly to establish a building/training of other local service providers relationship with the clients and verify the like fabricators/consultants."--Prosanto Pal, deliverables ourselves. To further deal with senior fellow, Energy Environment Technology these issues, SEDF hired a dedicated Division, The Energy and Resources Institute Bangladeshi task manager, who spoke the (TERI), e-mail correspondence, July 30, 2009. industry language and constantly engaged with FOAB and its key member SMEs When IFC cannot monitor its clients and docu- 3) In business, seeing is believing. ment their initial success, it is difficult to show post-completion results. Theoretically, SEDF's Energy efficiency and clean technology are Phase Two is ongoing; yet we are still uncer- new concepts in Bangladesh. Awareness tain when there will be a sign-off on all IFC raising, best-practice demonstration, and project approvals. The delays we encountered knowledge dissemination have limited or no at the outset taught us that a three- to five- familiarity among the key local foundry year-long, unchanged project strategy might industry players. Therefore, it was both risky be a better way to achieve private-sector sav- and expensive to identify the right project to ings, job growth, and potential linkages to showcase to FOAB. Calculating the cost-benefit energy-efficiency financing. ratio, IFC decided to showcase what had been achieved elsewhere in the region. Conclusion FOAB representatives agreed to visit the Rajkot Bangladesh is an SME-based economy where and Ahmedabad foundry clusters in Gujarat, large investments in environmental compliance India, to see existing industries that were doing are beyond the means of most entrepreneurs, well. In addition, FOAB members spoke to the but at the same time they need to reduce Rajkot Engineering association and the local inefficiencies. They still struggle to manage industry luminary about environmental issues, their day-to-day transactions, where it is a energy efficiency, and cost savings. The "seeing challenge to adapt even the most available is believing" concept worked and helped us to information on the Web to their business. Due persuade two local service providers to receive to the down-to-earth profile of the foundry DISCLAIMER training in DBC technology and its sector, donor-funded sophisticated operations IFC SmartLessons is an awards implementation and commissioning aspects. are less interested in working with them in a program to share lessons learned in development-oriented advisory Upon returning to Bangladesh, they systematic fashion. Sporadic training and services and investment implemented DBC technology in two foundries workshops usually do not excite these operations. The findings, in Bogra. businesses. In this situation, a small initiative interpretations, and conclusions that generates significant savings surely expressed in this paper are those 4) Delays at the beginning can produce encourages other SMEs to follow. That's where of the author(s) and do not necessarily reflect the views of IFC headaches at the end. SEDF has set the milestone. SEDF also needs to or its partner organizations, the leverage IFC experiences in other regions or in Executive Directors of The World Being a facility, SEDF had a five-year life cycle sectors with local customs to help this economy Bank or the governments they (2002­08). There was internal pressure to grow. That's how the IFC "additionality" can represent. IFC does not assume any responsibility for the complete all contractual work before December transform barren industries into luxuriant completeness or accuracy of the 31, 2008. Unfortunately, commissioning SMEs. information contained in this (commercial testing) of the first DBC furnace in document. Please see the terms Bogra did not materialize until the last week and conditions at www.ifc.org/ of December 2008, around the same time that smartlessons or contact the program at smartlessons@ifc.org. SEDF was pulling out of the market. IFC SMARTLESSONS -- SEPTEMBER 2009 3