Garment industries plead for help
By Cassian M. Fernando
A prominent banker recently stated in an article that small and medium sector industrialists need special legislation for them to exist. We cannot agree more. Although there are nearly 20,000 small and medium scale industrial undertakings in the country successive governments have done very little to alleviate their pressing problems.

The small and medium scale apparel manufacturers are appealing to the government to provide relief measures to overcome the present crisis. The writer has suggested that financial assistance should be in the form of a loan to be converted into a grant on improved performance. (Library photo).

If anything was done it was under Philip Gunawardane. As minister of industries he gave all assistance to the Industrial Development Board to function as the catalyst as well as facilitator for the development of small and medium scale industries. Although trade chambers especially the federation of chambers drew the attention of the governments to promulgate a state policy towards small and medium scale industries, such suggestions and appeals have fallen on deaf ears.

The situation became worse with the free trade economy. It was cheaper and more profitable for businessmen to import rather than produce. A large number of small-scale industries were compelled to close down. The manufacturing sector received a deathblow due to the open economy policies since 1977.

However, the small and medium sectors in the apparel industry managed to survive due to its competitive nature. During the initial stages of the apparel industry 65 percent of exports were accounted for by the small and medium sectors. Even with the opening of the Free Trade Zone at Katunayake the small and medium sectors survived. Garment factories in the FTZ were allocated a definite quantum of quotas and they were entitled only to the annual growth in relation to the specific quotas that were allocated to them.

They had no access to the free quota pool nor to the bulk of the country's quota.
Garment manufacturers elsewhere in the country also had relatively small quota allocations as their own. But they did not bother as they had access to the various pool quota schemes announced from time to time. The small and medium sectors grew in this manner. Whenever they had extra orders they could go to the Textile Ministry and obtain the required quotas.

200 factories
Then came late R. Premadasa's ambitious 200 garments factories programme. The prime minister had the vision of taking industries to the rural sector and believed that he could bring about a radical change in the economic well being of the innocent peasants in the vast rural areas. No doubt the idea was noble, but created a serious setback to the small and medium scale apparel exporters who were already in business. A majority of the small-scale manufacturers had invested everything they had in the industry and they had no opportunity of going in to the 200-garments factories programme. The restrictions placed on quotas to the factories in the FTZ were removed. Three such factories got as much as 100,000 dozen each in the hottest category at that time. By these allocations made to the new factories under this programme and the common pool became thin. The existing manufacturers who had very little as their own performance quota were left high and dry as the quotas in the free pool were inadequate. That was the beginning of the serious problems that had to be encountered by the small factories.

The bomb attacks on the World Trade Centre in the US and the recession experienced there and the European Union worsened the situation. The apparel industry in Sri Lanka has never faced a crisis as it is facing today. The C.M.P. prices have dropped by a minimum of 30 percent. This is a problem faced by all manufacturers whether they are large or small. The declining prices have come at a time when the other local costs have shown a sharp increase. Within a space of 24 months electricity costs have increased by more than 50 percent.

With other increases in fuel, telephone and water rates, not only the costs to the factories have increased, but also that of local raw materials. Manufacturers have to pay higher prices for poly bags, cartons, thread and other packing materials. With an acute shortage of skilled labour, labour costs too have risen. A factory cannot find good sewing operators even at Rs. 3,750 per month which is 25 percent more than the approved wages.

To keep the workers coming to work additional attendance incentives have to be paid. Even with such additional payments, you will be lucky to find a factory operating above 70 percent efficiency due to lack of operators.

In this manner the factories are losing heavily each month. The situation has been so from around October last year and the indications are that the downward trend will continue at least till July. October last year to July this year is a long time for the factories to get into serious liquidity difficulties from which only a handful of factories will be able to bounce back.

It is therefore time that the government came to the rescue of the apparel industry. The garment industry is the flagstaff industry of Sri Lanka. In terms of foreign exchange it earns over 50 percent. In terms of employment it is the sector that provides the largest percentage of employment to women. Direct and indirect employment exceed 500,000. There is also employment generation to supporting industries like thread, carton and poly bag manufacture. A large number of clearing agencies depend to a large extent on the garment industry. If the industry is sick or facing difficulties it is the duty of the government to come to its rescue.

Others helped
Governments at various times have shown their eagerness to help other industries facing difficulties. When DC mill owners in the coconut industry want to modernise their factories, monies are doled out from the cess. Some 75 percent of such advances are outright grants and the mill owners have to pay only 25 percent.

When the occupancy rate is below 25 percent hotel owners are paid advances to cover their losses. Even now the government doles out monies for the expansion of the hotel industry, making it possible for them to face an encouraging future with the peace process.

When green leaf tea prices fall below the floor prices, monies are paid to tea small holders to save them from bankruptcy. Even when tea prices fell below the floor prices, there was a time when monies were paid from the tea cess. All the above are not loans but outright grants.

When textile manufacturers faced the prospect of closure due to the free trade policy, the government doled out nearly one billion rupees to pay off bank loans. The Treasury and the previous government virtually agreed to write off such monies advanced, but implementation of this decision was delayed due to a large manufacturer claiming a huge sum he had advanced to his own company. There is every prospect that this government may consider writing off the huge sums advanced.

In the circumstances why cannot the government announce relief measures towards rescuing the apparel sector?

The fact that the apparel industry is facing a crisis is real and not a myth. The prime minister in his policy statement in parliament stated that near 50 percent of the garment factories may have to be closed down. Even in his May day address he expressed the same view.

According to the latest Central Bank figures, although there is an overall increase in total export earnings for the first quarter, income from garment exports has declined. The decline is 23.3 percent. This was a combined effect of a 12.9 percent drop in value and 11.9 percent drop in unit prices - mainly due to lower demand from the US.

Why not us?

The sector most affected by the present crisis is the small and medium sector. Out of a total of 856 exporters, 454 factories come within the small and medium sector. In addition there are over 100 units who are not exporters, but sub-contractors. This sector too is very badly affected. Most of them are either temporarily closed down or work only for a few months during the year depending on the orders.

Realising that a crisis of this nature would arise the SME sector lobbied heavily with the Treasury, the Ministry and BOI authorities. Initially there was no prospect of any support from the authorities.

However, the situation changed with the understanding of the seriousness of the problem by such authorities like Dr. P.B. Jayasundara, then Secretary to the Treasury, the Central Bank, and also then Chairman, Textile Board, Tilan Wijesinghe. As TQB chairman, Wijesinghe asked the four associations to submit their proposals.

The four associations submitted very different proposals. Having studied these proposals, Wijesinghe submitted his own proposals incorporating most of the recommendations of the associations. The associations were requested to study this paper and submit their comments.

At this juncture the four associations arrived at certain decisions and a joint memorandum signed by the chairman of the four associations was submitted to Wijesinghe.

Wijesinghe having received a unanimous endorsement of the associations to most of his proposals submitted a board paper to the president and also the minister. The board paper recommended among other things the establishment of a restructuring fund. Although the four associations had different views on the increase in cess levied from garment exporters, Wijesinghe recommended the increase of cess from Rs. 1 to Rs. 3 per piece. These monies were to be ploughed back to the industry.

These recommendations were included in the budget proposals of 1999. When it was known that the cess was to be increased to three rupees, the large manufacturers objected. The minister was prevented from giving teeth to the budget proposals. Due to the adverse trade conditions prevailing, even the deduction of the cess of one rupee was also suspended. Some of the big manufacturers took the position that they should not pay for the benefit of the "lesser mortals". What the small manufacturers are asking is not unreasonable or unattainable. If the government could give assistance to other sectors in the industry, similar assistance should be given to the apparel industry as well.

To survive in a competitive market in the quota free era, a large number of small manufacturers have to upgrade their factories, facilities granted to workers and infrastructure. They also have to upgrade at least 25 percent of the machinery in keeping with the technological advances. They need assistance in marketing. A minimum of six buyer-seller meetings should be arranged in this sector each year for the next two years.

All these need funds and the small manufacturers have offered all their assets to obtain bank facilities. They have nothing more to offer. As pointed out by the Secretary to the Ministry Ranjit Fernando, the survival of the small and medium sector was largely due to the accommodating lending policies of the Bank of Ceylon and the People's Bank. If not for the patronage of these state banks the small industries would not have survived this long.

They are ever grateful to these state banks for their patronage and understanding and very often, granting credit facilities without gilt-edged securities demanded by other commercial banks. If these two state banks are to be privatised - god save the small industrialists of Sri Lanka.

Bail out package
The small sector doesn't expect the government to bail out all the 454 small factories. That is unrealistic and such assistance will require a large reservoir of funds. If the government could come forward and assist at least 100 to 150 factories, at 50 factories per year, these small factories will succeed in upgrading their factories to the standards demanded by the buyers. Then the government would have achieved a lot. Selecting the factories may be on the strength of the number of years in exports, number of employees and the export turnover. The factories to be eligible to receive such assistance should be those employing a minimum of 50 and having not more than 150. Each factory may be offered assistance not exceeding 8 to 10 million rupees. Such assistance should be in the form of an outright grant or a loan to be converted into a grant on increased performance.

The existence of the small and medium sector in a non-quota era is very important from the point of view of the country. Competitiveness will be the key factor in keeping buyers attracted to the country.

In economics it is well known that there are advantages in small-scale industries for very often the owner, the members of the family and close relations are on the production floor.

This cuts back enormous costs a large manufacturer has to fork out for heavily paid senior and middle level management. The factory and administration overheads are much lower than that of large manufacturers.

Small manufacturers can undertake small orders without losing, whereas it would be a loss for a large manufacturer to undertake such small quantities, per style/order.

Even with very tight delivery schedules, the small manufacturer could cope because the quantities involved are manageable. It is realising these advantages of small scale entrepreneurs that India has earmarked the apparel industry as an industry for the small and medium sector and reserved the textile manufacturer to the giants.
It is also well known that the CMP prices have come down drastically during the last few months.

And very often buyers have preferred to place these orders in countries such as Bangladesh, Vietnam, Madagascar, Kenya and Botswana. Some large Sri Lankan manufacturers have even shifted their factories to these countries. When buyers were asked why they are moving away from Sri Lanka, they maintain that the Standard Minute Valuation in those countries is below 0.05 US cents, whereas it is as high as 0.08 to 0.15 US cents in Sri Lanka. It is here that the small manufacturers can come to the scene. The Standard Minute Valuation in most of the small factories is as low as 0.03 cents per minute. The buyers are prepared to go up to even 0.05 cents.

Struggling for survival
Thus you will see that the small manufacturer has the comparative advantage of offering competitive prices. They are not lacking in quality, delivery and good relations with the buyers. They only lack the very rigid compliance requirements dictated by buyers. It is mostly to overcome such difficulties that they need financial support from the government. If the small sector is developed as in India we can bring back to Sri Lanka the orders that the buyers are at present placing with new countries. The government should make use of this opportunity to the maximum. One hundred percent of the small and medium scale manufacturers are Sri Lankans.

Whether there are quotas or not these companies will stay in Sri Lanka unlike the multinationals who would run away from Sri Lanka when quotas are withdrawn and when they find cheaper markets outside Sri Lanka. Ultimately the apparel industry will be in the hands of indigenous exporters - the way it started some decades back. But the question that one must ask is how many of them will survive to see that day?

The prime minister and the relevant minister are doing the correct thing by lobbing the US government to give Sri Lanka the same duty concessions that it has offered to some other countries. Withdrawal of these duties will make Sri Lanka very competitive.

The small and medium sectors hope the prime minister will also give serious thought to keeping this sector alive without allowing 50 percent of the factories to close down.

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