Golden past, golden future
We can and must revive the jute industry, argues Kamran T. Rahman
Lest we forget, the jute industry was the lifeblood 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 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, 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. After partition, the government of Pakistan realised that it would be better to add value to the fibre and export jute goods to earn foreign exchange instead of exporting only the fibre. As such, the government began to promote setting up of jute mills in this part of the country as far back as 1951.
At a time when Pakistan was going through a period of rapid industrialisation, the government of India decided to devalue her currency. The economists of that period realised that if the 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 government came up, as early as in 1959, with a unique method of compensating the industry for over-valuation of the Pakistani rupee in the form of bonus vouchers, a carefully crafted scheme where the consumers paid for the over-valuation of the currency, and there was no burden on the national exchequer.
By the end of the 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 $195 million.
In the year 1972, the government of Bangladesh adopted a policy of nationalisation and, under a presidential order, nationalised all major industries, including the viable, vibrant, and financially healthy jute industry, without considering whether the mills were owned by Bangladeshi nationals or otherwise.
After about eleven years of operation of the mills under BJMC, incurring huge losses and crippling the industry, the government of Bangladesh adopted a policy of privatisation wherein a little over one-third of the loss making mills, which were 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 was created during the nationalised period. Let me reiterate that when the mills were nationalised in 1972, we had handed over a viable, vibrant, and 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, carpets and yarn, and earned about $300 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 Program (JSRP) in 1992-93.
The objective of the program was to transform the existing loss making jute industry into a viable industry run predominantly by the private sector. In order to achieve this goal the World Bank and the government of Bangladesh decided to address capacity rationalisation, un-sustainability of past debts, interim loss finance, and privatisation.
Under the project the government was obliged to:
*Close nine public sector mills.
*Downsize two large public sector mills.
*Write off one-third of all past bank loans as of June 30, 1992.
*Have in place an interim financing mechanism since the government and the World Bank realised that the industry would continue to incur certain amount of losses during the currency of the project.
*Privatise eighteen public sector mills
The Jute Sector Reform Program of $250 million was the single largest World Bank assisted project in Bangladesh at that time. The government of Bangladesh was able to draw only the first tranche of $50 million, but was unable to draw the balance $200 million because it did not fulfill its obligations in the project.
While the project may have failed for several reasons, 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 would get 100% of this predetermined loss as interim loss finance, but the private sector would get two-thirds of this predetermined loss since they were 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.
When the credit agreement was finally signed in Washington we were astonished to find that the private sector would get two-thirds of this predetermined amount but the public sector would get 100% of their book losses. As a result, the private sector mills received 16% of their sales value as interim loss finance and the public sector mills got a minimum of 31% and up to a maximum of 67%.
In addition to the difference in the percentage of interim loss finance, the project also stipulated that the private sector would get interim loss finance for a period of 18 months while the public sector would get it for a period of 36 months. Consequently, a very uneven playing field was created in the jute sector through this World Bank assisted project.
The private sector complained to the Inspection Panel of the World Bank that they had been materially and adversely affected by this project and, as such, it needed 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 program 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 was revisited and the flaws in the program were removed.
It appears to be fashionable to go World Bank bashing for everything, where the World Bank is involved, that goes wrong in our country. It is perhaps high time to take a hard look at the JSRP and the role that our policymakers played in coming up with a program full of flaws, which eventually created distortions in our raw jute market, our labour market, our financial market, as well as in 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 Program." Unfortunately, the recommendation that was made in 1997 only reached the ERD and the World Bank in the middle of June 2006.
I urge our people to ask who were the policymakers 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 review the project, rectify the design flaws, and develop a new project in a fair manner. We feel that, given the right support and creation of a level playing field for the public and 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 government had arranged for BJMC to obtain loans amounting to more than Tk 2,500 crore under different heads, in addition to any subsidy that was provided for export of jute goods, to keep them afloat. When the government 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, is 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 government 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 53.19 crore under the heads of JSRP/JSAC, and subsidy against the export of jute yarn. The government should immediately release these funds to the private sector jute mills, which it owes against specific MOF circulars.
*Subsidy against export of jute goods is 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 should ensure that export subsidy is credited to the accounts of the exporting mills automatically with the presentation of the proceeds realisation of certificates.
*The government should urge the World Bank to urgently review the JSRP, remove the flaws, and develop a fresh program in a fair manner.
*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 government should immediately make it mandatory to pack food grain, 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, but also save the nation millions of dollars used in importing polypropylene compounds to manufacture bags.
*The government 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 which the mills have to pay for the gas they consume is substantially higher than the price paid by the Power Development Board. We urge the govt. to reduce the price of gas for captive power generation to the same level as paid by the PDB. We also urge the government 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. While it was not my intention to paint a sorry picture I am constrained to provide you only with the facts.
The total quantity of hessian, sacking, and CBC produced in 1972-1973 was a little over 450,000 metric tons, which grew to about 563,000 metric tons in 1982-83. Due to sheer neglect and an uneven playing field created by the government and the World Bank project (JSRP), the production of hessian, sacking, and CBC had dwindled to about 242,000 metric tons in the year 2005-06.
However, there is a brighter side of the industry, which is spinning jute yarn. This sub-sector of the jute industry, fortunately, does not have any public sector involvement or debt overhang, or any artificial distortions, and has emerged to be a promising operation. The production of jute yarn in the jute-spinning sector increased from around 27,000 metric tons in 1982-83 to around 300,000 metric tons in 2005-2006.
Bangladesh has a population of about one hundred and forty million, 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 every day. 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.
Kamran T. Rahman is the Chairman of Bangladesh Jute Mills Association.
Photos: Amirul Rajiv