Revamping jute industry
Saturday, 1 September 2007
Kamran T. Rahman
Lest we forget, the jute industry was the life blood of our economy for several decades and continues to be one of the mainstays of our rural economy even today. About 15 million farmers are involved in growing this cash crop and several million more of our population, perhaps an equal number, are involved with its processing, transportation, conversion, etc. Be that as it may, the industry has gone off track due to undue interference and discriminatory policies made by the policy- makers from time to time and also for reasons beyond the control of the industrial operators. In order to understand the current state of affairs in the industry, one must look into the background of the jute industry and the events that took place over the last several decades.
While this part of the country was considered to be a hinterland in the 1940s where we produced only raw jute, all processing of the fibre was done in the jute mills in present India.
The then Government of Pakistan realised that it would be better to add value to the fibre and export jute goods to earn foreign exchange for the nation instead of exporting only the fibre. As such, the Government began to promote setting up of jute mills as far back as in 1951 in this part of the country.
At a time when Pakistan was going through a period of rapid industrialisation, the Govt. of India decided to devalue her currency. The economists of that period realised that if Pakistani Rupee was also devalued at the same rate as that of India, the rapid industrialisation process that the country was experiencing would be retarded.
Therefore, the Govt. came up, as early as in 1959, with a unique method of compensating the industry for overvaluation of Pakistani Rupee in the form of bonus vouchers, a scheme carefully crafted where the consumers paid for the overvaluation of the currency and there was no burden on the national exchequer.
By the end of 1960s and early 1970s, about 30 million people were already involved directly or indirectly in the sector. By 1972-73 the industry was already producing about four hundred and fifty thousand metric tons of jute goods earning approximately US$ 195 million.
In the year 1971-72, the Govt. of Bangladesh adopted a policy of nationalisation and as such, under a Presidential Order, nationalised all major industries including the viable, vibrant and financially healthy jute industry without taking into consideration, whether the mills were owned by Bangladeshi nationals or otherwise.
After a period of about I I years of operation under the Bangladesh Jute Mills Corporation (BJMC), incurring huge losses and crippling the industry, the Government of Bangladesh adopted a policy of privatisation wherein little over one third of the loss making jute industry, which was originally owned predominantly by Bangladeshi nationals, were de-nationalised or privatised in the year 1982-83.
While doing so, unfortunately, the Government forced the present owners to shoulder the entire liability that they had created during the nationalised period. Let me reiterate that when the mills were nationalised in 1972 we had handed over a viable, vibrant and a financial healthy jute industry to the Government. In spite of all difficulties and against all odds, the original owners came forward and took over the mills in the hope of reviving the sector.
In 1982-83 the industry produced about five hundred and forty thousand metric tons of Hessian, Sacking, CBC, Carpet and Yarn and earned about US$ 300.00 million. Although the industry was divided between public sector and private sector, the norms of credit to the industry were directed by Bangladesh Bank to the commercial banks and any other facilities that were given to the industry were also given in a fair and equitable manner, irrespective of whether the mills were run in the public sector or the private sector.
The cost of the huge debt burden that the private sector jute industry had to shoulder resulted in continued losses for the industry. As a result a number of studies were undertaken and finally the World Bank came forward with a $250 million Jute Sector Adjustment Credit (JSAC) to support the Jute Sector Reform Programme (JSRP) in 1992-93. The objective of the programme was to transform the existing loss making jute industry into a viable industry run predominantly in the private sector. In order to achieve this goal the World Bank and the Government of Bangladesh decided to address 1) capacity rationalisation, ii) un-sustainability of past debts, iii) interim loss finance and iv) privatisation.
Under the project, the Govt. was obliged to:
I . Close nine Public sector mills
1. Downsize two large Public sector mills
3. Write off one third of all past bank loans as on June 30, 1992.
4. Have in place an interim financing mechanism since the Govt. and the World Bank realised that the industry would continue to incur certain amount of losses during the currency of the project.
5. Privatise 18 Public sector mills
The Jute Sector Reform Programme of US$ 250 million was the single largest World Bank-assisted project in Bangladesh at that time. The Govt. of Bangladesh was able to draw only the first tranche of US$ 50 million. The government was unable to draw the balance US$ 200 million because it did not fulfil its obligations in the project. While the project may have failed for several factors, we feel very strongly about the unfair treatment, we in the private sector received, from the World Bank Project in the form of interim loss financing. When the project was being designed, the World Bank economist informed us that there would be a predetermined loss based on the average losses of the best five private and best five public mills. He further said that the public mills will get 100% of this predetermined loss as interim loss finance but the private sector will get two third of this predetermined loss since they are considered to be more efficient. The World Bank calculated this average loss figure to be 24% of sales based on the figures of 1991-92 without taking into consideration depreciation, gratuity etc.
The private sector complained to the Inspection Panel of the World Bank that they have been materially and adversely affected by this project and as such it needs to be looked into urgently. The Inspection Panel took up the matter seriously and visited the World Bank, the Government of Bangladesh, BJMC and Bangladesh Jute Mills Association (BJMA) and confirmed that there were design flaws in the programme and the private sector mills were materially and adversely affected. As such, the Inspection Panel advised the World Bank that the credit should not be extended until and unless the project is revisited and the flaws in the programme are removed.
It appears to be fashionable to go World Bank bashing for everything that goes wrong in our country where the World Bank is involved. It is perhaps high time to take a hard look at the JSRP and the role that our policy makers took in coming up with a programme full of flaws which eventually created distortions in our raw jute market, our labour market, our financial market as well as the international jute goods market.
In 1997 an inter-ministerial committee was formed under the Ministry of Jute to recommend a 'Revised Jute Sector Reform Programme'. Unfortunately, the recommendation that was made in 1997 only reached the Economic Relations Division (ERD) and the World Bank in the middle of June 2006 after a period of about nine years. I urge upon our people to ask who were the policy makers who decided to sit on it for nine long years and for what purpose or for whose benefit. We hope the Government and the World Bank would seriously revisit the project, rectify the design flaws and develop a new project in a fair manner. We feel, given the right support and creation of a level playing field between public & private sector, the industry can be revived to its full potential.
After the interim loss financing period for the public sector i.e., BJMC, was over, they were suddenly in tremendous liquidity crisis. Under the circumstances, the Govt. had arranged for BJMC to obtain loans amounting to more than Tk 25 billion (2,500 crores) under different heads, in addition to any subsidy that was provided for export of jute goods, to keep them afloat. When the Govt. knows that these loans are never going to be repaid, for all practical purposes these are grants. Because of these "loans", the BJMC is causing distortions in the raw jute market, the financial market, the labour market, as well as the international jute goods market.
We would like to see that every single jute mill in the country, irrespective of ownership, should be in operation. However, we do not think that the public sector mills can continue to operate without large amounts of funds being made available to the BJMC directly by the Government year after year. We therefore, feel that the Govt. should address the problems of conventional jute industry and take the following steps as the way forward to revive the industry.
The way forward:
The Government of Bangladesh owes the private sector jute mills an amount of Tk. 531.9 million (53.19 crores) under the heads of JSRP/JSAC and subsidy against the export of jute yam. The Government of Bangladesh should immediately release these funds to the private sector jute mills which they owe against specific MOF circulars.
Subsidy against export of jute goods are yet to be paid to the private sector jute industry for part of FY 2005-2006, the whole of FY 2006-2007 and the current FY 2007-2008. The Government should immediately release these funds to enable the private sector jute industry to function properly. Henceforth, the Government of Bangladesh should ensure that export subsidy is credited to the accounts of the exporting mills automatically with the presentation of the Proceeds Realisation Certificates.
The Government of Bangladesh should urge the World Bank to urgently revisit the JSRP, remove the flaws and develop a fresh programme in a fair manner and create a level playing field between the public and the private sector jute industry.
Increase export subsidy from 7.5% to 15% for Hessian, Sacking, CBC and Yarn and 20% for diversified or value-added jute products as per recommendation of the Advisory Committee of the Ministry of Textiles & Jute.
Allow duty free and VAT free import of spare parts of jute mill machinery by the jute mills.
The Govt. should immediately make it mandatory to pack food grains, sugar, fertiliser, and cement in jute bags.
This will not only create a supportive and protected internal market for environment friendly and natural jute bags which are 100% indigenous products of Bangladesh, employing millions of people, but also save the nation millions of dollars used in importing polypropylene compounds to manufacture p.p. bags.
The Govt. should also consider total privatisation, public-private partnership and leasing of the public sector mills to continue production in the public mills in a sustainable manner.
Due to the energy crisis prevailing in the country a number of jute mills have installed gas-powered generators.
The price at which the mills have to pay for the gas that they consume is substantially higher than the price for gas paid for by the Power Development Board (PDB).
We urge upon the Govt. to reduce the price of gas for captive power generation to the same level as paid for by the PDB. We also urge upon the Govt. to make gas available to the jute mills which are not connected as yet but are willing to install captive gas-powered generators.
The above is a brief or a background of the conventional jute industry in Bangladesh along with 'the way forward'. It was not intention of this writer to paint a sorry picture.
Facts are only being provided here for a dispassionate consideration of the situation facing the industry.
The total quantity of Hessian, Sacking and CBC produced in 1972-1973 was little over 450,000 M.Tons which grew to about 563,000 M.Tons in 1982-83. Due to shear neglect and an uneven playing field created by the Govt. and the World Bank project (JSRP), the production of conventional jute products, namely, Hessian, Sacking and CBC dwindled to about 242,000 M.Tons in the year 2005-06.
However, there is a brighter side of the industry, which is only spinning jute yarns.
This sub-sector of the jute industry, fortunately, does not have any public sector involvement or debt overhang or any artificial distortions and as such has emerged to be a promising operation.
The production of jute yarns in the jute spinning sector has increased from around 27,000 M.Tons in 1982-83 to around 300,000 M.Tons in 2005-2006.
Bangladesh has a population of about one hundred and forty million people out of which about thirty million people are directly or indirectly involved with the jute sector.
The greatest challenge for Bangladesh today is not only to sustain the level of employment that we have generated so far but also to create employment for the millions who are joining the labour market everyday. It is, therefore, imperative that we address the problems of the jute industry in a fair manner and create a level playing field in a supportive environment.
The writer is the Chairman of Bangladesh Jute Mills Association
Lest we forget, the jute industry was the life blood of our economy for several decades and continues to be one of the mainstays of our rural economy even today. About 15 million farmers are involved in growing this cash crop and several million more of our population, perhaps an equal number, are involved with its processing, transportation, conversion, etc. Be that as it may, the industry has gone off track due to undue interference and discriminatory policies made by the policy- makers from time to time and also for reasons beyond the control of the industrial operators. In order to understand the current state of affairs in the industry, one must look into the background of the jute industry and the events that took place over the last several decades.
While this part of the country was considered to be a hinterland in the 1940s where we produced only raw jute, all processing of the fibre was done in the jute mills in present India.
The then Government of Pakistan realised that it would be better to add value to the fibre and export jute goods to earn foreign exchange for the nation instead of exporting only the fibre. As such, the Government began to promote setting up of jute mills as far back as in 1951 in this part of the country.
At a time when Pakistan was going through a period of rapid industrialisation, the Govt. of India decided to devalue her currency. The economists of that period realised that if Pakistani Rupee was also devalued at the same rate as that of India, the rapid industrialisation process that the country was experiencing would be retarded.
Therefore, the Govt. came up, as early as in 1959, with a unique method of compensating the industry for overvaluation of Pakistani Rupee in the form of bonus vouchers, a scheme carefully crafted where the consumers paid for the overvaluation of the currency and there was no burden on the national exchequer.
By the end of 1960s and early 1970s, about 30 million people were already involved directly or indirectly in the sector. By 1972-73 the industry was already producing about four hundred and fifty thousand metric tons of jute goods earning approximately US$ 195 million.
In the year 1971-72, the Govt. of Bangladesh adopted a policy of nationalisation and as such, under a Presidential Order, nationalised all major industries including the viable, vibrant and financially healthy jute industry without taking into consideration, whether the mills were owned by Bangladeshi nationals or otherwise.
After a period of about I I years of operation under the Bangladesh Jute Mills Corporation (BJMC), incurring huge losses and crippling the industry, the Government of Bangladesh adopted a policy of privatisation wherein little over one third of the loss making jute industry, which was originally owned predominantly by Bangladeshi nationals, were de-nationalised or privatised in the year 1982-83.
While doing so, unfortunately, the Government forced the present owners to shoulder the entire liability that they had created during the nationalised period. Let me reiterate that when the mills were nationalised in 1972 we had handed over a viable, vibrant and a financial healthy jute industry to the Government. In spite of all difficulties and against all odds, the original owners came forward and took over the mills in the hope of reviving the sector.
In 1982-83 the industry produced about five hundred and forty thousand metric tons of Hessian, Sacking, CBC, Carpet and Yarn and earned about US$ 300.00 million. Although the industry was divided between public sector and private sector, the norms of credit to the industry were directed by Bangladesh Bank to the commercial banks and any other facilities that were given to the industry were also given in a fair and equitable manner, irrespective of whether the mills were run in the public sector or the private sector.
The cost of the huge debt burden that the private sector jute industry had to shoulder resulted in continued losses for the industry. As a result a number of studies were undertaken and finally the World Bank came forward with a $250 million Jute Sector Adjustment Credit (JSAC) to support the Jute Sector Reform Programme (JSRP) in 1992-93. The objective of the programme was to transform the existing loss making jute industry into a viable industry run predominantly in the private sector. In order to achieve this goal the World Bank and the Government of Bangladesh decided to address 1) capacity rationalisation, ii) un-sustainability of past debts, iii) interim loss finance and iv) privatisation.
Under the project, the Govt. was obliged to:
I . Close nine Public sector mills
1. Downsize two large Public sector mills
3. Write off one third of all past bank loans as on June 30, 1992.
4. Have in place an interim financing mechanism since the Govt. and the World Bank realised that the industry would continue to incur certain amount of losses during the currency of the project.
5. Privatise 18 Public sector mills
The Jute Sector Reform Programme of US$ 250 million was the single largest World Bank-assisted project in Bangladesh at that time. The Govt. of Bangladesh was able to draw only the first tranche of US$ 50 million. The government was unable to draw the balance US$ 200 million because it did not fulfil its obligations in the project. While the project may have failed for several factors, we feel very strongly about the unfair treatment, we in the private sector received, from the World Bank Project in the form of interim loss financing. When the project was being designed, the World Bank economist informed us that there would be a predetermined loss based on the average losses of the best five private and best five public mills. He further said that the public mills will get 100% of this predetermined loss as interim loss finance but the private sector will get two third of this predetermined loss since they are considered to be more efficient. The World Bank calculated this average loss figure to be 24% of sales based on the figures of 1991-92 without taking into consideration depreciation, gratuity etc.
The private sector complained to the Inspection Panel of the World Bank that they have been materially and adversely affected by this project and as such it needs to be looked into urgently. The Inspection Panel took up the matter seriously and visited the World Bank, the Government of Bangladesh, BJMC and Bangladesh Jute Mills Association (BJMA) and confirmed that there were design flaws in the programme and the private sector mills were materially and adversely affected. As such, the Inspection Panel advised the World Bank that the credit should not be extended until and unless the project is revisited and the flaws in the programme are removed.
It appears to be fashionable to go World Bank bashing for everything that goes wrong in our country where the World Bank is involved. It is perhaps high time to take a hard look at the JSRP and the role that our policy makers took in coming up with a programme full of flaws which eventually created distortions in our raw jute market, our labour market, our financial market as well as the international jute goods market.
In 1997 an inter-ministerial committee was formed under the Ministry of Jute to recommend a 'Revised Jute Sector Reform Programme'. Unfortunately, the recommendation that was made in 1997 only reached the Economic Relations Division (ERD) and the World Bank in the middle of June 2006 after a period of about nine years. I urge upon our people to ask who were the policy makers who decided to sit on it for nine long years and for what purpose or for whose benefit. We hope the Government and the World Bank would seriously revisit the project, rectify the design flaws and develop a new project in a fair manner. We feel, given the right support and creation of a level playing field between public & private sector, the industry can be revived to its full potential.
After the interim loss financing period for the public sector i.e., BJMC, was over, they were suddenly in tremendous liquidity crisis. Under the circumstances, the Govt. had arranged for BJMC to obtain loans amounting to more than Tk 25 billion (2,500 crores) under different heads, in addition to any subsidy that was provided for export of jute goods, to keep them afloat. When the Govt. knows that these loans are never going to be repaid, for all practical purposes these are grants. Because of these "loans", the BJMC is causing distortions in the raw jute market, the financial market, the labour market, as well as the international jute goods market.
We would like to see that every single jute mill in the country, irrespective of ownership, should be in operation. However, we do not think that the public sector mills can continue to operate without large amounts of funds being made available to the BJMC directly by the Government year after year. We therefore, feel that the Govt. should address the problems of conventional jute industry and take the following steps as the way forward to revive the industry.
The way forward:
The Government of Bangladesh owes the private sector jute mills an amount of Tk. 531.9 million (53.19 crores) under the heads of JSRP/JSAC and subsidy against the export of jute yam. The Government of Bangladesh should immediately release these funds to the private sector jute mills which they owe against specific MOF circulars.
Subsidy against export of jute goods are yet to be paid to the private sector jute industry for part of FY 2005-2006, the whole of FY 2006-2007 and the current FY 2007-2008. The Government should immediately release these funds to enable the private sector jute industry to function properly. Henceforth, the Government of Bangladesh should ensure that export subsidy is credited to the accounts of the exporting mills automatically with the presentation of the Proceeds Realisation Certificates.
The Government of Bangladesh should urge the World Bank to urgently revisit the JSRP, remove the flaws and develop a fresh programme in a fair manner and create a level playing field between the public and the private sector jute industry.
Increase export subsidy from 7.5% to 15% for Hessian, Sacking, CBC and Yarn and 20% for diversified or value-added jute products as per recommendation of the Advisory Committee of the Ministry of Textiles & Jute.
Allow duty free and VAT free import of spare parts of jute mill machinery by the jute mills.
The Govt. should immediately make it mandatory to pack food grains, sugar, fertiliser, and cement in jute bags.
This will not only create a supportive and protected internal market for environment friendly and natural jute bags which are 100% indigenous products of Bangladesh, employing millions of people, but also save the nation millions of dollars used in importing polypropylene compounds to manufacture p.p. bags.
The Govt. should also consider total privatisation, public-private partnership and leasing of the public sector mills to continue production in the public mills in a sustainable manner.
Due to the energy crisis prevailing in the country a number of jute mills have installed gas-powered generators.
The price at which the mills have to pay for the gas that they consume is substantially higher than the price for gas paid for by the Power Development Board (PDB).
We urge upon the Govt. to reduce the price of gas for captive power generation to the same level as paid for by the PDB. We also urge upon the Govt. to make gas available to the jute mills which are not connected as yet but are willing to install captive gas-powered generators.
The above is a brief or a background of the conventional jute industry in Bangladesh along with 'the way forward'. It was not intention of this writer to paint a sorry picture.
Facts are only being provided here for a dispassionate consideration of the situation facing the industry.
The total quantity of Hessian, Sacking and CBC produced in 1972-1973 was little over 450,000 M.Tons which grew to about 563,000 M.Tons in 1982-83. Due to shear neglect and an uneven playing field created by the Govt. and the World Bank project (JSRP), the production of conventional jute products, namely, Hessian, Sacking and CBC dwindled to about 242,000 M.Tons in the year 2005-06.
However, there is a brighter side of the industry, which is only spinning jute yarns.
This sub-sector of the jute industry, fortunately, does not have any public sector involvement or debt overhang or any artificial distortions and as such has emerged to be a promising operation.
The production of jute yarns in the jute spinning sector has increased from around 27,000 M.Tons in 1982-83 to around 300,000 M.Tons in 2005-2006.
Bangladesh has a population of about one hundred and forty million people out of which about thirty million people are directly or indirectly involved with the jute sector.
The greatest challenge for Bangladesh today is not only to sustain the level of employment that we have generated so far but also to create employment for the millions who are joining the labour market everyday. It is, therefore, imperative that we address the problems of the jute industry in a fair manner and create a level playing field in a supportive environment.
The writer is the Chairman of Bangladesh Jute Mills Association