Govt decides two-fold hike in RMG’s wastage rate

The commerce ministry is going to increase the maximum wastage rate in producing apparel products from raw materials from 16% to 28%, which will allow readymade garment exporters to import more yarn and fabrics duty free than the present level for the same amount of export.

As per the decision, from now the maximum wastage rates will be 25% for basic readymade garment items, 28% for specialised items and 3% for sweaters and socks.

A circular will be issued this week to this effect, ministry officials told The Business Standard.

Woven fabric exporters labelled the decision as "better than nothing", but knitwear exporters have rejected it as they think the wastage rate should be at least 35%.

According to stakeholders, if the production wastage rate of an export-oriented apparel manufacturer – who enjoys duty-free facility for raw material imports – is less than the prescribed rate, they sell the excess raw materials in the open market. This eventually damages the business of local companies that produce raw material.

On the other hand, if the actual wastage rate is higher than the rate set by the government, the authorities impose duty, supplementary duty and VAT on the extra wastages.

In January this year, the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) and the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) sent a proposal to the commerce ministry to increase the maximum wastage rate to 40%.

Later, the Export Promotion Bureau sent a letter to 20 companies, asking them to find out the actual wastage rate. Only two companies responded to the bureau's inquiry, saying their wastage rate was more than 40%.

After that, the commerce ministry formed a committee to verify the actual wastage rates in garment factories. After inspecting six factories – each producing basic knitwear, specialised items, and sweaters and socks, the committee recommended setting the maximum wastage rate by averaging the amount of wastage of similar factories.

They proposed 25% wastage rate for basic knitwear including T-shirts, polo shirts, trousers, shorts, skirts, pajamas; 28% for specialised items like rompers, tank tops, dresses, gowns, hoodies, and lingerie items; and 3% for items like jumpers, pullovers, cardigans, vests, and socks.

A member of the committee formed by the commerce ministry told The Business Standard, "We have found differences in the wastage rate depending on the types of machines used by the factories. Therefore, we have recommended that the ministry determine wastage rates based on the average wastage."

The ministry decided to fix the rates after a meeting with representatives of the BKMEA, the BGMEA and the BTMA on 22 August. The BKMEA, however, strongly objected to this decision.

According to RMG exporters, Bangladesh basically used to produce tubular-shaped basic T-shirts in the 1090s and the wastage rate was 16% at the time, but, in the current era of fashion, production types and qualities are completely different.

Various types of yarns and fabrics are used to make knitwear products of different designs and qualities where the wastage rate is 20-40% and the rate is even more in some cases, they added.

In this age of state-of-the-art machinery, the wastage rate should be at least 35%, they observed.

Mohammad Hatem, first vice-president of the BKMEA, told TBS, "The actual wastage in factories is much higher than the prescribed rate. If the wastage rate was set at 35%, we would accept the decision."

"Despite our strong objections, the commerce ministry has decided to issue the notification unilaterally. This rate will not solve our problems. So, we will reject the notification of the ministry," he added.

Mahmud Hasan Khan Babu, former vice-president of BGMEA and managing director of Rising Group, thinks the wastage rate fixed by the commerce ministry is "better than nothing".

"In some cases, the wastage rate is more than 40%. Our demand was to keep it at 30%-35%. Yet the decision that has been made is better than nothing," he said.

Abdul Hai Sarkar, chairman of Purbani Group and former president of the BTMA, said the rate of wastage also depends on the types of cotton used to produce yarn.

He said, "The wastage rate should be set in such a way that exporters are not harmed. It should also be made sure the bond facilities are not misused."

Besides an increase in the wastage rate ceiling, the BKMEA also demanded that the increased rate be given retrospective effect. However, the commerce ministry has rejected this demand.

"Our proposal was to give it (the increased wastage rate) effect on a date from the time the exporters have an audit pending. It can be two years for some factories or 8-10 years for some others," Mohammad Hatem said.

"It takes several years for the customs to audit products in a factory after they are exported. Therefore, we want the new wastage rate to take effect from the time the last export audit was completed," he added.

Dr Khondaker Golam Moazzem, research director at the Centre for Policy Dialogue (CPD), however, disagreed with the commerce ministry's decision to increase the wastage rate.

"Currently, the global practice is to try to bring the wastage rate down to zero. In this situation, it is not logical to increase it. The commerce ministry should look for ways to reduce the existing 16% wastage rate."

"The information on the high wastage rate is questionable as well. The ministry should conduct a research on the overall wastage condition in the factories to find out the actual situation," he added.

 Wastage for inefficiency?

How does a private sector business like the RMG sustain huge wastage in the production stage, which keeps growing?

In 1998, the RMG industry calculated 16% wastage in various stages of production – cotton to yarn to fabric to finished products for shipment. The industry now demands that the rate be 40%, meaning their wastage has increased by 150% over the past two decades.

The jump came as a surprise for officials and analysts, who do not see a point in the sharp rise in wastage at a time when technologies have improved and the fashion industry is moving towards zero-waste.

Research by Laila Hossain and Mohidus Samad Khan of Bangladesh University of Engineering and Technology last year assumed 9.5% wastage in two stages – cotton to yarn and yarn two fabric.

An earlier study by a researcher of Pakistan's Mehran University of Engineering and Technology said the spinning industry's usual yield is 84%.

A senior commerce ministry official engaged in the discussion over wastage rate revision with apparel associations, said the use of technology in the RMG industry had increased a lot in the last 22 years and this should have reduced wastage.

Industrial economist Dr Khondaker Golam Moazzem said at a time when the RMG industry is flourishing with the use of modern technologies and by improving quality of products, there is little scope that wastage will go up. Particularly, such increases are not practical when the world is moving to reduce wastage to zero.

"The commerce ministry, instead of agreeing to the industry's demand to revise the wastage rate upward, should rather call for lowering the existing rate of 16%," he said.

The ministry should investigate the factors cited by the industry that contribute to the higher wastage and come up with concrete guidelines to help industries reduce wastage using the central bank's technology upgradation fund, said Dr Golam Moazzem of the CPD.

Apparel industry owners have their points, too.

They told the government negotiators that fashion changes and types of fabric and cotton mattered for wastages ranging from 20% to 40%, even more.

In the past they used to make seamless T-shirts, which needed stitches only in sleeves. But, now they need to sew both sides, and thus fabric is required to be cut and stitched from both sides, causing more wastage, they explained.

Knitwear industrialist Mohammd Hatem also agreed that marking and cutting account for 15-20% wastage in knit units.

"Our workers are not skilled enough in these two areas. If they are trained and upskilled, wastage can be reduced," he said.

Use of yarn made of better quality cotton, like that from the USA and Australia, reduces wastage, Hatem said, stressing maximum use of technology to enhance overall efficiency.   

Abdullah Hil Rakib, a director of the BGMEA, said, "There is no standard rate for wastage, but we are lagging behind our major competitors who are well ahead of us in technology."

Some leading factories in the country, however, are improving their efficiency, but that cannot be generalised for the whole industry's position, he said, claiming that the industry's wastage is close to 40% that eats into the profit margin.