Ensuring transparency and accountability by Zillul Hye Razi
The launch of a pilot phase for a four-year project in April this year to map the readymade garment (RMG) factories in Bangladesh ushered in a new chapter of accountability and transparency in the country’s apparel export business. The Centre for Entrepreneurship Development (CED) of BRAC University will implement this Digital RMG Factory Mapping in Bangladesh (DRFM-B) project with the C&A Foundation as the lead donor and the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) as its strategic partner. The initial preparations for the pilot phase started in 2015 with a prototype map similar to that of Google for the two RMG clusters-at Mirpur and Kaliakoir.
The DFRM-B is envisaged to cover various pieces of factory information like factory name/address/GPS location, operational status of factories (active/inactive/shut down etc.), registration status (member of BGMEA/BKMEA/EPB), type of production, factory building structure, number of workers, zones/countries where products are exported, major buyers/brands working with a particular factory and other relevant information.
RMG Sector: Opaque or transparent? The RMG export with its very important contribution to the national economy for decades is receiving the government’s patronage for its sustainability and growth. It is also the biggest provider of employment in the formal industrial sector enabling a large number of women’s economic empowerment in the society. Nevertheless, there is some confusion and the scenario is unclear about the structure, performance and accountability relating to overall activities in this sector.
The standard data on the annual foreign exchange earned from the sector doesn’t count the payment for raw materials required to make the RMG products and its eventual export. If we take into account the final retention of foreign exchange earned within the country through the RMG export (knitted items will have better share), the remittance earned annually by our expatriate workers may come very close to that figure.
The RMG sector enjoys a preferential corporate tax structure and occasional fiscal incentives and a provision of 20 per cent wastage is allowed for input of raw materials during the production process. These can be considered as a substantial support received from the government, even if that is viewed as much less than its competitors enjoying in the neighbouring countries.
Amidst news of RMG factories closing down, there is confusion about the total number of functional ones or the RMG factories that are active exporters. It is also not clear how many of the 4,363 members of BGMEA and 2030 members of BKMEA are active exporters. Similar issues can be raised about the 4,772 (as of 2016) factories named on the website of the Department of Inspection for Factories and Establishment (DIFE).
The media, at times, reported the misuse or abuse of the bonded warehouse facility provided for basic inputs and for the accessories imported without any duty. This aberration of the duty-free import facility is, however, not limited to the RMG inputs only. One newspaper report mentioned the annual loss of government revenue to be worth Taka 580 billion (fifty eight thousand crore) due to the abuse of the facility meant for 100 per cent export-oriented industries.
Media has also reported, quoting the National Board of Revenue (NBR) sources, that there are 479 RMG factories under Dhaka Bond Commissionerate, which have bond licences without having factories. There are 6,197 export-oriented factories (as per 2015 data) having bonded warehouse licences, of which 3,909 are active importers and exporters. Of these, 80 per cent are from the RMG sector. Notwithstanding the abuse of duty-free import of raw materials, there are allegations in the press about imports beyond the actual requirement by some of the factory owners.
Utilisation declaration: Tighter control required: The BGMEA and the BKMEA issue (it was done by a separate unit of Customs several years ago) Utilisation Declaration (UD) certificates on behalf of the NBR to its members to facilitate import of duty-free raw materials for export under the bond facility. Over the years, this system helped the exporters a lot to avoid hassle and the delay related to the use of the bond facility. However, the government in the recent time faced an uncomfortable situation where the UD service left with the exporters’ associations showed a gap in governance of the system.
Reluctant to take back the system despite reports of missing revenue through inappropriate certifications, the NBR has taken a move to introduce electronic utilisation declaration (e-UD) and electronic export (e-export) through integration with the system of the RMG associations to prevent fabrication of UD certificates and misuse of duty-free import facility.
It is not clear if that system is in full operation now. Under this system, the server of BGMEA and BKMEA would be integrated with the ASYCUDA World Service of the NBR. This system will eliminate the necessity of putting the hard copy of UD to the Customs and ensure transparency and accountability as well as prevent misuse of the bond facility.
Earlier in 2015, the NBR and the Bangladesh Bank (BB) introduced electronic Letters of Credit (e-LC) to prevent duty evasion through use of fake LCs. Under this system, banks upload the LCs on the BB’s foreign exchange transaction monitoring dashboard, which is linked with the NBR system.
ELVIS, SIGL and the monitoring of RMG export from Bangladesh: During the Multi-Fibre Arrangement (MFA) era that ended in 1995 and until the expiry of the Agreement on Textile and Clothing (ATC) in 2005, Bangladesh had been subject to electronic transmission of data for its RMG exports to the USA and the EU. For the USA, it was for keeping a close watch on the utilisation of the quota allocated for respective apparel categories under a system known as ELVIS.
Bangladesh’s export of RMG to the EU had an unlimited access without any duty, provided the products adhered to the rules of origin (RoO) for GSP (generalised system of preference). But the EU, in the wake of ‘third country’ exports of RMG using falsified documents imposed a ‘double checking system’ to prevent violation of the RoO. It was for T-shirts (cat. 4), trousers (cat. 6) and for cotton shirts (cat. 8) where a separate export licence had to be issued by the Export Promotion Bureau ( EPB) with every consignment destined for the EU. This was done under an Integrated System for Managing Export and Import Licences, commonly known by its French acronym SIGL.
Export licences provided to the EPB were printed in Germany and each one had unique numbers as well as contained all the features of a currency note. Both ELVIS and SIGL systems of electronic data transmission succeeded in preventing fraudulent activities related to RMG exports to the USA and the EU.
The EPB has continued the system of data transmission to the EU using its own software, even though the ‘double checking system’ through SIGL is no more applied to Bangladesh. The EPB now has a system for tracking GSP certificates by all the stakeholders related to the RMG exports to the EU. But the submission of GSP Form A with supporting documents to the EPB is still paper-based.
Better economic governance is the key: The future of Bangladesh textile and clothing (T&C) sector will depend on better economic management and the DRFM-B could very well be a step forward in that direction. Transparency in sourcing or value-chain even by top global clothing brands is much less than expected as indicated in a recent survey. Bangladesh, however, cannot ignore the economic benefits likely to accrue from a better governed export sector.
To benefit from the EU GSP, the RMG exporters (as well as other exporters) instead of EPB will issue GSP certificates from January 1, 2020, unless the EU changes its regulation by then. The exporters will be registered by Bangladesh and EU authorities under a system known as REX. Add to this scenario, we need to remember that if Bangladesh graduates from the least developed country (LDC) status, RMG will miss the relaxed rules of origin and woven items must be made from locally-produced fabrics to get duty-free access.
To sustain the phenomenal success in RMG export, Bangladesh’s T&C sector must walk with two legs and avoid a raw material supply constraint for the RMG sector, which is overwhelmingly dependent on natural fibre. If the DRFM-B or similar initiative does not take into account the current production and export activities of the factories, mapping will remain a ‘half-way house’ as far as accountability and transparency of the RMG sector are concerned.
There should be inter-links between all the information databases to ensure traceability in the sector. A transparent and accountable RMG sector would only help make sure the growth of Bangladesh’s Primary Textile Sector (PTS) is not impeded by unfair practices.
Zillul Hye Razi is a former Trade Adviser, EU Delegation to Bangladesh.
