Garment factory owners in Bangladesh on Tuesday stopped to ask the all-important question once again: Where will they get the several-hundred million dollars needed to fix their factories?
This story first appeared in the October 15, 2014 issue of WWD. Subscribe Today.
In the wake of an announcement on Tuesday by the Accord on Fire and Building Safety in Bangladesh, which completed its inspections of more than 1,106 factories in September, more than 80,000 safety issues have been identified among manufacturers in Dhaka. This has prompted factory owners to consider the costs of improvements once again, and their ability to finance them.
“We are looking at 2 to 3 million taka [$25,800 to $38,700 at current exchange] per factory for a medium size factory and 6 to 7 million taka [$77,470 to $90,380] for a larger factory,” Shahidullah Azim, vice president of the Bangladesh Garment Manufacturers and Exporters Association, or BGMEA, told WWD. “But we only need loans, not donations.”
The Accord, which is a consortium of more than 180 brands and retailers —mostly European — came together to ensure worker safety in Bangladesh after the collapse of Rana Plaza, an eight-story building in Savar where 1,133 workers died in April 2013.
Mozemmel Huq, owner and managing director of Liberty Knitwear Ltd., one of the first factories to be shut down after inspections began in May 2013, is irate as he talks about remediation issues.
“I don’t know where the money is supposed to come from to make all this work,” he said. “This is a poor country. I was forced to close down the factory because they said it was structurally unsafe, when there was nothing wrong with the structure. I face a huge liability and it is now 17 months later.”
His factory, from which Tesco and other brands sourced for years, was found to be unstable, four days after the Accord team started its inspection process for structural, fire and electrical safety. Huq did not accept the fact that his factory was structurally unsound and has been demanding a reevaluation.
About 2,000 of the almost 3,500 garment factories in Bangladesh have been inspected by different teams, refining and agreeing upon parameters for safety for the building structure and fire and electrical safety.
On Tuesday, the Accord noted that more than 400 Corrective Action Plans had been finalized by the factories and company signatories out of the 1,106 inspections done, and that 17 factories were found to be below the acceptable level of safety. “We have found safety hazards in all factories, which was to be expected,” said Brad Loewen, the Accord’s chief safety inspector. “The safety findings have ranged from minor to significant. The Accord team is now working intensively with factory owners, brands and labor colleagues to ensure the safety findings are corrected.”
BGMEA members and local think tanks have been weighing the options to ensure funding so that these corrections can be implemented. This could include loans from bigger garment manufacturers to smaller ones within Bangladesh and borrowing from global brands. The normal route of bank loans appears restrictive in Bangladesh, where the rate of interest — between 14 to 18 percent — is burdensome.
There has been other international help.
The Alliance for Bangladesh Worker Safety, a consortium of more than 26 brands and retailers — mostly American — completed the inspection of 587 factories in July and has been since working on the issue of funds for fixing the problems. Alliance members have made individual commitments of up to $100 million in low-cost loans or preferred payment terms for their suppliers.
The brands that have put forward these terms include Wal-Mart Stores Inc., Gap Inc., VF Corp. and Li & Fung. Each of the four companies is implementing this program slightly differently. VF, for example, has already given loans to four suppliers via the International Finance Corp., or IFC. Gap is doing special payment terms; Wal-Mart is doing both, and Li &Fung is doing loans backed by the company itself.
“We have a team of people on the ground next week in Dhaka to work through the details of the additional supplier finance options we will make available to eligible factories,” said Ian Spaulding, senior adviser to the Alliance.
He said that over the next few months, the Alliance was trying to finalize a few more options, including corporate guaranteed loans via the IFC, and buying down interest payments from market rates to 8 or 9 percent so that factories able to secure local financing are able to access lower interest rates for remediation.
“We are also trying to get product manufacturers of fire doors or sprinklers to offer payment terms to factories buying their products. Factories would be able to pay off the fire equipment manufacturers over 24 or 36 months,” Spaulding said, adding that an additional offer would be to help find low-cost loans via a supplier finance fund that is partially underwritten by financial institutions, local banks and the Alliance. “Assuming a 10 percent default rate and offering a $2 million first-loss provision via the Alliance, we believe we can create a fund of $20 million in low-cost loans for remediation,” he said.
Other global players have been talking about money to fund the necessary repairs as well.
“The question remains: How much money is needed for remediation and who will pay? For the industry to answer that question, to start, we would need a more formal, fuller mapping of the industry. BRAC University is looking for funds to support that project, but this is only a first step in the process,” said Scott MacMillan, communications and outreach for BRAC USA. He said that BRAC University, especially its Center for Entrepreneurial Development, was in a good position to act as a third-party neutral convener.
There is also some ready money available, such as 1 billion taka, or $12.9 million, from Japan International Cooperation Agency, or JICA.
“The 1,700 factories that do not come under the Accord or Alliance brands have fewer options in terms of funding,” said Srinivas Reddy, country director of the International Labour Organization. “These need a separate outlook as well.” Looking out for these factories, JICA has created a pilot project in which the process of applications started in December 2013.
“An initial assessment of the buildings was done based on the Bangladesh National Building Code, followed by a detailed assessment and a cost estimate. We have 300 applications so far and two buildings have gone through a detailed assessment and cost estimate and money will be disbursed for these two enterprises in November or December,” a JICA representative said. He said that the money would be disbursed through the Bangladesh bank at interest rates that would be between 5 and 10 percent, much lower than the normal lending rate.
As compliance issues have been the focus over the last year, the results of the last quarter reflect the cautious approach on the part of global brands, as well as local manufacturers. Apparel exports did grow in the last quarter, though, rising 0.5 percent from July to September. This was despite a slightly worse performance in September when there was a decline of 2.1 percent in apparel exports.
In the third quarter, knitwear had stronger growth than woven garments, with knitwear making $3.27 billion (a 3.5 percent increase over the previous year) and wovens at $2.96 billion (a decline of 2.7 percent).
However, the $22 billion garment industry is expected to continue to grow over the next year.
Manufacturers noted that Bangladesh remains the second-largest exporter of apparel in the world, and said that since they have weathered the worst, and are on a path to improving factories and worker safety, they were ready to handle the short-term pain for a longer-term gain.
“We are in the process of change,” said Azim of the BGMEA. “Once we find a way to finance and fix the factories, there will be no looking back.”