Inside
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Living Wage is Not Just Wages MIR MAHFUZ UR RAHMAN explores the option of spreading ownership among the masses as a way of integrating the concerns of the garment industry into wider society.
Every day, when the millions of employees of the several thousand garments factories, hundreds of thousands workers of the several hundred knitwear factories or the several thousands of workers of the few hundred spinning mills head off to work, they are busy thinking of the several daily chores and expenses as is expected of any earning professional in any other company in Bangladesh. We all seek earnings for housing, food, education, utilities and some savings for a rainy day. Others more fortunate can begin to think of some savings to take care of parents, sharing in some creature comforts and finally, some helping hand to the less fortunate. Instead of limiting the discussion between workers and owners only in the arena of wage, which itself shall continue to be the main means of transferring of benefits, diverse ownership of equity units by the urban poor may be an additional alternative. This has been carried out successfully in India, where equity ownership by urban lower middle class, and even the poor, have made them a stakeholder in the future of the nation. Similarly, we need to think of innovative methods of channelling benefits to the workers, which breaks their leanings to the leaders of the splinter and fringe groups bent on extracting benefits through threats and violence. We should not be surprised if workers give a hearing to such destructive leaders as long as they are made to feel that only their immediate benefits are taken care of by the companies that they work for. Wage negotiations become the sole preserve for gaining compensation and the fear of the law remains the sole deterrent to vio- lent negotiations. If the latter were to be diluted or sidelined, then taking up the law into one's hand is not a far-fetched idea. Spreading ownership among the masses is one of the main ancillary benefits of a stock market in a capitalist society. Converting the mass savings into investible and tradable units of ownership among a large and diverse group provides both parties with returns. Owners of capital can embark on growth and expansion with flexible returns to be paid as long as the earnings cash flow remains with an approximate band of projections. However, the key point is the creation of a local stakeholder group who are willing to fund the company with increased investments and earn a portion of the company's long-term earnings. The Bangladesh capital market has surprisingly very little exposure to the huge investments in the textile sector. As ownership is entirely concentrated in the hands of the sponsors, there is a general lack of sympathy of the general public regarding the genuine plight of the owners. And as the workers are simply benefiting from immediate wages, and completely left out of any long-term appreciation in value of the companies, there is little long-term interest in the company. The means of interactions between the company with the middle class and the worker community is severely limited. Of course, this is not a panacea to the crisis, but surely is a symptom of concentrated capital and creation of distinct and uneven stakeholders with little overlapping interests. Also, there is no set game plan to increase the listing of textile companies with the stock exchanges. In fact, it should entirely be at the prerogative of the owners of the company. As the major risk takers, they should be in control of any such ownership dilution decision. However, the steps, whenever taken, will be very welcome. The BD RMG Industry Currently, about 3.5 million Bangladeshis work in the garment industry, which accounts for 80 percent of the country's exports. International companies like Wal-Mart, JC Penney, H&M, Zara, Tesco, Carrefour, Gap, Metro, Marks & Spencer, Kohl's, Levi Strauss and Tommy Hilfiger all import in bulk from Bangladesh. The total export from the sector has doubled from $6.4 billion in FY05 to $12.5 billion in FY10.1 Several times in the past, especially during the end of the quotas, the end of the MFA and during the partial floating of the taka, the entire industry was written off by global experts. However, the industry has continued to grow amid tremendous odds. Make no mistake, the continued growth of the garments industry in Bangladesh is nothing short of a miracle. The challenges facing the Bangladesh garment industry entrepreneurs are formidable. The international buyers are primarily interested in price, lead-time and quality. The manufacturers complain of still being squeezed by a slump in world market prices because of the existing fragile recovery from the global economic crisis. They also point to higher production costs due to energy crisis and poor infrastructure. One industry leader observed that the wage increase would be especially hard on smaller factories. There is truth in all of these.2 However, the long-term growth of the industry becomes speculative when discussions of the wage rate comes full centre. The wage rate in Bangladesh is the lowest in the world. As is known, the Wage Board nearly doubled minimum wage on July 29, 2010. The minimum wage at the entry level will be raised to Tk 3,000 a month from Tk 1,662.50. The new pay structure, proposed to be effective from November 1, maintains the existing seven grades with the highest pay fixed at Tk 9,300 per month.3 Note that the extent of the average real wage increase exceeds the 19.8 percent growth in real GDP per capita since the last wage adjustment in 2006.4 Thus, the proposed increase puts the average garment worker ahead of the typical Bangladeshi in terms of income growth. However, surprisingly, there is no denying that a fairly widespread undercurrent of discontent, whether justified or not, does exist amongst the workers. There is still no respite from the sudden spurts of violence and a stand-offish approach of the rest of the workers to the destruction of the industrial assets. And, there is little sympathy from the general population, while abhorring the violence to private property, for the plight of the owners.
More interestingly, even this list is not representative by any means of the leaders in the industry. Only five companies make up 80 percent of the sector. Kudos to the owners of these companies who have shown the long-term vision and acceptance of public equity shareholding of their valuable and profitable concerns, and there must surely be others who can seek financing from the public market. Issues re-listing of Successful Textile Companies The issue of mass shareholding of textile companies is a matter of demand for investment funds in a free economy. It would also be unfair to ask the government to provide incentives for such matters, as the national exchequer is increasingly looking for ways to increase the tax / GDP ratio. However, it should be mentioned that the National Board of Revenue has allowed a tax rebate of 10 percent to telecom companies which list up to 10 percent of their capital in the exchange. As companies in the textile sector are considered mainly as provider a of employment and a source of foreign currency, rather than a direct source of taxation for corporate income tax, further tax incentives may not be appropriate. However, as most tax deduction being done currently is carried out "at source," i.e. deducted before funds even reach the company, in the form of Advance Income Tax (AIT), which is usually a final settlement of income tax obligations, and with most products in backward linkage industries considered to be "deemed exports," there is hardly any major incentive to remain privately held given the fund availability, pricing advantages and cash flow flexibility of a listed entity.
It is expected that the listing of textile companies with the stock exchange shall increase with time. As there is increasing scale requirements, which increases the requirement of the total investment, and as wages continue to rise, which increases working capital requirements, companies shall increasingly seek investment from the public markets. This is the case for spinning and denim mills, which are considered more capital-intensive than garments factories. But, surprisingly, out of the 400 or so spinning mills, less than a dozen are listed. At the same time, there are increasing composite mills in the knitwear sector which require higher value added machinery and linkage investments in dyeing, finishing and printing, which may seek such public investments. The benefits of such publicly listed investments would be largely positive for the economy, the stock exchanges and the industry itself. Bringing the issue back home to the wage increase debate, the increased ownership of textile industries by the general public, and increasingly by the workers themselves, would make the latter bigger stakeholders in the industry than just a means to cover that month's household expense bill. This would not be the first sector to allow for mass ownership of its shares. This has been effectively carried out by banking, non-banking, insurance and several public utilities. Yes, these industries are white collar and the issues are vastly different. However, as the equity culture deepens in Bangladesh, and as more stocks reduce their denominations to Tk 10 rather than Tk 100, and allows for smaller market lots, investments in equity shall not remain the prerogative of the urban well to do. Second, it would allow the industries to manage global downturns better. A recent analysis of the current wage increase expense items calculates that, given the 3.5 million workers in the industry, the increase in average nominal wage from Tk 2,409 per month to Tk 4,290 per month would lead to a maximum increase in the annual wage bill of the industry by about Tk 79 billion (equivalent to about $1.1 billion). This maximum possible increase constitutes 9.2 percent of the total FY10 garment exports. As the total value of garments export increases, the estimate is that it is unlikely to be more than 8 to 10 percent of the value of exports.5 Even for the larger business groups, who are in better position to manage their cash flows due to advantages of scale and backward and forward integration, it is surely a material cost. Finally, as shown by the history of our regional stock markets, a profitable and growing company, which wants to keep the forward-looking legacy of its founders intact incorporation of quality management, increase the scale and cheaper access to capital, allows the next generation of owners to manage the business more easily. There is no better legacy for the founders of the industrial concerns than their business continuing profitably when they have long passed from the scene. There is no easier route to achieving this than by incorporating wider public ownership through the capital markets. Finally, and most importantly, it would create an ownership culture among the better off millions of people in the sector. Again, emphasising that it is not a simple solution to the wider issues of the textile sector, it remains till date a successful path of integration of these concerns into wider society in our regional countries. References Mir Mahfuz ur Rahman is a corporate advisor for capital markets.
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Textile Sector in the BD Capital Market