Leather & Footwear Sector Export Roadmap of Bangladesh

Leather & Footwear

The history of the Leather & Footwear and tannery industry in Bangladesh started when R.P Saha set up first tannery in Narayanganj back in 1940. It was later shifted to Hazaribagh area of Dhaka, which turned into a location that now accommodates a large number of tannery units of the whole country.

Leather & Footwear Sector Export

The leather sector1 has been identified as one of the potential sectors for export diversification. The leather sector is a significant contributor to the economy of Bangladesh, both in terms of its domestic share and exports. It contributes about 2%2 to industrial production and 0.6% to the country’s GDP. The sector is the second largest export industry in the country, employing about 558,0003 people directly through employment in leather and leather goods production, and 300,000 people indirectly who worked in allied areas in FY 2015-16.4 It was the second largest export-earning sector in 2017-18 after RMG. Understanding its potential, the Government of Bangladesh announced leather, leather goods, and leather footwear as the “Product of the Year” in January 2017 and a target of export of USD 5 billion by 2021 was forecasted.

In order to continue this momentum for the leather sector, the export roadmap outlines the strategy for enhancing leather sector exports, which should contribute to the roadmap’s vision of:
• Ranking Bangladesh amongst the top 10 leather export countries in world by 2025; and
• Achieving of the leather export target set by MoC of 5 billion USD by 2021.

Endowed with 1.3-1.8% of the total cattle population of the world coupled with the century old practice of using leather products, Bangladesh has share of only 0.5% of world leather trade. With a total ruminant population of 55 million in 2017-18, an abundant and competitive labor force, 6200 factories (tanneries, leather goods and footwear), and government support including tax holidays, duty free imports of raw materials and machinery for export-oriented leather market and export incentives, Bangladesh can enhance its capacity and capability to increase exports of leather and leather product manifold. However, the recent trend of export growth indicates that the target of 5bn USD by 2021 will be very difficult. Bangladesh needs planned and coordinated intervention from the government which includes enhancing capacity of the private sector manufacturers, transforming production and export of tannery raw materials to high end and compliant leather, attracting massive domestic investment, aggressive marketing in the global leather market, establishing effective linkage with the major brands and retailers and attracting Foreign Direct Investment (FDI) and Joint Venture (JV) from top actors of the leather goods and footwear market.

Export projections during the roadmap period:

The export roadmap has been prepared for a period till the year 2025, with 2015-16 as the base year. Two growth scenarios have been considered for the roadmap. The export targets for Scenario I are based on organic growth and historical trends, while the projections for Scenario II have been arrived at based on Government of Bangladesh’s export targets. Following are the projections:

If we consider growth and trend of export, it is found that the sector is far behind the target of 5bn USD set for 2021. Hence, even for achieving target for scenario I, it is high time for immediate intervention.
For both the scenarios, input requirements in terms of leather (both domestic and imported), investment, labor, land, and power have been analyzed and presented. Input requirements across both the scenarios are commensurate with the level of production required under each scenario.

Based on these projections and inputs requirements, an ambitious vision for the leather sector in Bangladesh has been developed.

Vision of export roadmap of the leather sector:

Mission:

To create an enabling situation for Bangladesh leather industry to remain competitive and compliant in the current global market, it need to ensure a series of strategic interventions. By attracting domestic and foreign direct investment in the form of joint ventures and technical collaboration, linkages and collaboration with major global value chain actors should be established. Through increasing productivity, maximize value addition to local raw material resources with upgraded technical expertise in an environmentally sustainable and export compliant manner. To strengthen Bangladesh Standards and Testing Institute (BSTI), Bangladesh Accreditation Board (BAB) and other private sector certification agencies to meet compliance standards of international brands and retailers and to help generate more, better, and decent jobs for men and women. To ensure equal (if not added) privilege and incentives like RMG sector for catalyzing rapid growth so that sector competitiveness increases at the onset of LDC graduation.

Challenges:

To achieve the envisioned target/goal, identification of challenges is imperative. The road to target would face multidimensional categories of challenges which needs planned, pragmatic and proactive interventions. The whole export sector faces challenges of inadequate communication infrastructures, complex tax and customs procedures, cumbersome and lengthy banking transaction, bottleneck in transportation, slow handling of products at the port and unusually high lead time, high cost of doing business, unpredictability of tax regime and bottlenecks in handling Foreign Direct Investments (FDI) and Joint Ventures (JV). The leather sector is invariably encountering a similar situation as the other exporting sectors. Moreover, like other sectors, it would face added challenge after graduation from Least Developed Country (LDC) status to developing country status which will bar the country from the privilege of Duty Free Quota Free (DFQF) access to existing export market. Apart from these challenges in general, the leather sector has specific challenges as well that need interventions and pragmatic long term remedial measures.

The leather sector faces specific challenges as follows:


Poor compliance: For the leather sector in general, one of the major factors is that global buyers across the board demand that the product being exported is compliant to international environmental, social and labor standards. So, compliances of products of leather sector is the key to further growth of export in the world market. In recent years, tannery export has shown decline due to environmental issues related to Hazaribagh. It is heartening to note that the factories have already been shifted to Savar. Immediate steps to complete Savar Tannery Estate and to operationalize the CETP are important for the growth of exporting leather and leather products.

Compliance of procurement of raw hides, particularly during Eid ul AdhaDuring Eid ul Adha: 40-50% of raw hides and skins are collected from cities and beyond cities. It is difficult to maintain and preserve raw hide in the rural areas and intermediary groups hinder rational price taking, leading to a chaotic situation in the whole supply chain. During Eid, a large number of animals are slaughtered by unskilled and semiskilled butchers across the country resulting in considerable damage to hides and skins. Current infrastructure for slaughtering animals is poorly maintained, leading to unhygienic and unscientific handling of skins, resulting in reduced value of leather.
Bangladesh to be amongst top 10 exporting countries in the world for leather, leather goods, and footwear by 2025 through integration and enhancement of capacities and investments in state-of-the-art technology, skilled human resources, and safe environmental management practices.

Inadequate capacity of CETP:
The CETP at Savar is not fully functioning. Moreover, most of the tanneries do not comply with environmental regulations, occupational safety, and health related standards, thus reducing the acceptance of leather and leather goods in international markets. Furthermore, incomplete supporting infrastructure at Tannery Estate Dhaka (TED) have contributed towards poor traceability of leather, reducing the country’s image and acceptability of leather goods from Bangladesh using local leather. Chemical usage in tanneries is substantially higher than international standards; limits to traces of chemicals in finished leather have become quite exacting with the REACH standards of the EU.

Lack of quality and process upgradation:
Leather product is pre-dominantly a fashion item worldwide. So, quality and design are burning factors that need careful observance of required compliance standard, innovation of attractive fashion and design which is compatible to latest trends and requirements. Development of skills and know-how and technical labor will be critical for the sectors further growth. Technical assistance for process and productivity improvements is imperative here. Currently, most tanners lack access to technology and know-how to transition from making crust to finished leather which is a driving factor for productivity.
A constant issue faced by the leather sector is a severe dearth of skilled workers ranging from semiskilled and skilled workforce, designers, technical workers, supervisory and managerial personnel, including quality management and quality control management.
Problem in bridging the gap between industry and academia is an important intervention required which will have an impact on programme design, setting of curriculums, absorption of graduates by the industry, and quality of academic research that will ultimately enhance productivity.
The Government of Bangladesh has taken the economy from factor driven growth to productivity and innovation driven growth. Budget provisions are kept for this purpose. Therefore, quality and process up gradation for better productivity should be aligned with the government’s budget.

No common facility centers for producing finished leather
Huge investments in machinery and equipment are required for tanneries to move up the product value chain – from making crust leather to finished leather. Many small and medium tanneries do not find this financially viable, as their operating capacity is much smaller than the design capacity of new machinery. So, SMEs need to have access to a common facility center.
No policy for encouraging value addition
Only a small volume of crust leather is converted to finished leather by Bangladeshi tanners. Most of the raw hides and skins processed in the country is exported as a crust leather without any value addition within the country. Encouraging tanners to move up the product value chain will result in significant economic gain for the sector and country. It may be noted that the finished leather fetches about 60% higher price than crust leather.

Limited capacity of the Savar tannery estate
For meeting the export targets envisaged in the roadmap, tanning capacity at Savar has to be increased manifold. New tannery estate should be established in other areas like Chittagong, Rajshahi for rapid growth of the sector.
Lack of backward linkages
Establishment of supply chain aids the growth of the sector. The Bangladesh leather sector faces major constrains with respect to linkages in the value chain. Tanneries require machinery, chemicals and tools as inputs. Most of the tannery machineries, chemical and tools are imported from the outside. Backward linkage for all these items are unable to cater to the needs of the industries.

Slow growth of foreign and domestic investments
For exponential growth of export, it is important to attract both domestic and foreign direct investment in the leather sector. For a major overhaul in the leather sector, added investment from both domestic and foreign sources is a key factor. FDI and JVs are still not as per expectations of the policy makers. Flow of FDI, and engagement with retailers and brand are important challenges even today. For growth of export, massive drive for collaboration with the brands and retailers is important. Terms of FDI should be made liberal and attractive for investment and relocation.


Limited market access
Market access of Bangladesh is minimal with only 0.5% of global market share. Image building by maintaining high standards of compliance, traceability and branding is still a challenge.


Absence of equal privileges and incentives like RMG sectors
Over the years, RMG sector enjoyed encouraging policy support and financial incentives for its steady and speedy growth. It has been nurtured by government incentives for the last three decades. In many cases, other sector like leather does not enjoy equal policy support and required export incentives.
Absence of enabling situation for SMEs
A large number of small and micro enterprises are engaged in production of leather product and footwear. They need improvement of quality, designs, product range, productivity, and overall production.

Graduation from LDC to Developing Country
Bangladesh will likely to be recommended for graduation at the following triennial review in 2021. Following the review, Bangladesh would officially graduate from the LDC status in 2024. Bangladesh, as a Least Developed Country (LDC)7, qualifies for Generalized System of Preferences (GSP) benefits under which developed countries provide preferential treatment to exports from Bangladesh in the form of reduced or zero rates of customs duties for most of the product categories (HS 01-97 except HS 93). Under this, Bangladesh can avail zero import duties in 38 countries, including 28 countries in the EU and 10 others. With the graduation and withdrawal of duty free quota free access. Bangladesh will face serious challenges which can be encountered through strategic long-term action plan.

Steps suggested


The roadmap identifies challenges and suggests remedial measures for improving the situation. Following steps have been suggested:

Meeting compliance standards
• Ensuring compliances: Improving compliance by tanneries and leather goods and footwear sectors is being considered as one of the critical growth drivers for the leather sector in the coming years. Compliance also ensures that the sector can grow their business without affecting the environment. Some of the compliance-related interventions recommended for the sector are:
>>In consultation with the associations develop a national social, environmental, chemical safety, occupational, and health compliance guideline and certification scheme. This should be formulated with international compliance standards and requirements as benchmarks. >>Existing factories should be fully compliant to requirements of all the compliance parameters. All the new factories should undergo strict compliance scrutiny.

>>Establish a sustainability and compliance cell for each subsector under the supervision of an active business association. This cell will oversee and ensure that the sector meets social compliance standards in terms of work place safety and adhere to national and international labor laws.

>>Establish a sustainability compliance cell in the Export Promotion Bureau (EPB) under the guidance of MoC for the leather sector.

>>Support the leather sector with financial assistance in engaging compliance experts to assist them in meeting international compliance standards. A comprehensive scheme for assistance should be formulated by the MoC.

>>Technically assist the leather sector and its subsectors like tanneries to obtain the LWG certification for traceability.

>>Build capacity and financially support the sector until such time that they can fully comply with all the necessary international standards.

>>Apart from these compliance certifications and standards, physical infrastructure at TED Savar, the major estate for tanneries, must also be fully developed. Here, ensuring the proper operations and maintenance of the Central Effluent Treatment Plant (CETP) with all the tanneries following a well-understood, comprehensive discharge guideline with all the acceptable parameters of compliance will play a crucial role in ensuring the sustainability of the tanneries, and the leather sector at large.

>>Strengthen downstream value chain through focussed investment promotion activities to encourage entrepreneurs to invest in value addition of by-products of tanneries. It will help solid waste management properly. This could further generate employment opportunity in the downstream businesses.

Quality and productivity in the production process
• Bridging the gap between industry and academia: To bridge the gap between industry and academia in terms of technical know-how, regular interaction and collaborative learning is needed. Industry and academia needs to meet at regular intervals to discuss specific areas of collaboration. Action has to be taken on a wide front to modernize the leather sector as well as its technical competence by induction of superior technical expertise.

• Training of trainers: Training of trainers programmes are needed to upgrade the skills of the workforce. Local training institutions and universities may go for twinning8 with international academic institutions and research grants for applied research on leather should be offered liberally.

Development of SMEs
For leather sector, Small and Medium Enterprises (SMEs) can play a driving role for speedy growth and to meet domestic demand and export targets. Currently, there are around 160 firms either directly exporting or have exposure to the export market. SMEs (around 2500 factories) can be connected with the exporters through sub-contracting and other means. But SMEs face multifarious challenges. The small footwear and leather product making units are spread out in various clusters all over the country are yet to be recognized as a formal manufacturing segment. It is high time that the government came up with some facilitating measures to help them grow up to their potential and contribute to the economy in a desired manner.

• Development of SMEs: There are a large number of small and micro enterprises that work either directly for the domestic market, or as sub-contractors for large firms, especially during peak season. There is considerable scope to improve the quality, designs, product range, productivity, and overall production of such clusters. When one or two such clusters absorb modern production practices and technology, it spreads fast amongst other clusters. A study needs to be conducted to understand artisanal clustering and ways in which it can be implemented for the leather goods and footwear sector in Bangladesh.

Improving quality of raw hides/ skins
From rearing to slaughtering, procuring to tanning, a strong monitoring system should be developed for improving quality of raw hides and skins. In addition, engaging international experts, for quality and process upgradation, for assisting tanneries to move from crust to finished leather is important. A scheme to subsidize the cost of engaging experts by tanneries will be necessary. This subsidy can be provided on a cost sharing basis and contingent to meeting defined milestones in moving from producing crust to finished leather.


Establishing common facility center
Technical assistance for process and productivity improvements is also important, along with Common Facility Center (CFC) for producing finished leather. A CFC for processing crust into finished leather needs to be set up and used on a sharing basis by tanneries. In many developing countries, such CFCs have been set up during the early phase of development of the leather sector. In addition to reducing financial burden for individual tanneries, the CFC will also reduce on the job cost of training their workers on the new processes and machinery.


Research and development of new leathers
At present, Bangladesh produces only a limited range of leather types. As bulk of the production is crust leather, not much research and innovation happen in developing new types of leather. In addition, the know-how to upgrade low-grade leather, which accounts for at least 20% of any lot of raw hides and skins, is found to be lacking among tanners. So, technical assistance for research and development of new leathers and process and productivity improvement are necessary.

Diversifying into new markets and new products
In terms of product diversification, espadrilles are an innovative product that is currently gaining traction around the world. The new markets that the sub sector can target is given below:

• Sports footwear – USA, UK, France, Germany, Belgium, Netherlands, and Austria.
• Footwear, outer soles of rubber/plastic uppers of leather coverage ankle nesoi – Italy, France, UK, Belgium, Netherlands and Canada.
• Of footwear, outer soles of rubber/plastics uppers of leather, nesoi – USA, Germany, Japan, Italy, France, Belgium, Netherlands, and UK.

Based on an analysis of historical export-import patterns, some of the new products that Bangladesh could cater to in existing markets are trunks and suitcases. Some of the new markets that the subsector could potentially enter include the following:
• Handbags – USA, France, Italy, UK, Korea, Japan, Germany, and China.
• Gloves and mittens – USA, Germany, Japan, France, Italy, UK, Spain, and Sweden.
• Belts and bandoliers – USA, Germany, Japan, France, Italy, UK, and Korea.
• Other articles of leather – USA, Italy, Poland, Czech Republic, Germany, and France.

Applying direct marketing
Given the need to engage with large brands and wholesalers, measures may be taken towards improving market access through participation in international fairs and trade delegations to present Bangladesh as a sourcing destination for leather. The direct marketing content will highlight the improving level of environmental, social, and safety compliance standards required by international markets and the sector’s inherent strengths.


Strengthening current policy support

The Government of Bangladesh’s development programme aims to use trade policy as an instrument for generating export expansion and diversification. The trade policy has helped the country’s performance in exports market. Overall exports increased by three times in the last 10 years, from less than 12 billion USD in 2006 to over 38 billion USD in 20169. Specific policy interventions and trade incentives provided for footwear have also assisted in the sector’s development, with the product sector achieving more than three times the value of exports in just six years, from 250 million USD in 2010 to 900 million USD in 2016. Policy support in the form of financial incentives followed by stringent enforcement of regulations is required.


Improving bonded warehouse facilities and duty drawback process
The bonded warehouse regime in Bangladesh permits licensed manufacturers to import inputs required for export-oriented manufacturing at a duty-free rate. A study by The World Bank, suggests some key measures were to improve the bonded warehouse regime by establishing an automated bonded warehouse management system. Instead of a transaction-based control mechanism, a risk-based control mechanism may be adopted. The export roadmap also recommends the adoption of these reform measures to improve the effectiveness of bonded warehouses as a financial incentive to leather exporters.

Attracting foreign and domestic investments
Formation of a high-level committee consisting of a senior officer of MoC, a senior representative of Bangladesh Investment Development Authority (BIDA), and two or three leading industry representatives with the following mandate is suggested:
• Reach out to existing FDI/ JV companies to promote Bangladesh as investment destination.
• Visit target countries (China, Vietnam, etc.) on investment road shows for attracting FDI.
• Organise investment seminars and local road shows to meet prospective local investors to encourage diversification of the leather sector.
It may be added here that some large tanners from abroad who are keen to relocate to Bangladesh may want to have their own premises where they would establish their tanneries rather than being a part of an Industrial Estate. The government’s policy in this regard must be quite lucid and welcoming.


Giving special attention to the tanning sector
In achieving the targets envisaged, the role of the tanning sector will be crucial. Action has to be taken on a wide front to modernize the tanning sector as well as to strengthen its competence by induction of superior technical expertise. Institutional capability in training workforce also needs considerable strengthening. If immediate action is initiated on all fronts suggested, it is reasonable to expect that the tanning sector will consolidate and expand to meet the emerging challenges successfully.

Strengthening BIDA’s role
If the interactions between potential investors, especially FDIs/JVs and various government agencies can be reduced considerably, and they are required to deal with only a single agency, BIDA, for all their requirements, the that would be a major step forward towards attracting such investments.


Making policy and infrastructure information available to investors
It may be a good idea to publicize land banks available in the country with location, area available, agency responsible and major features of such land, along with their price, to enable potential investors to make appropriate decisions before they prepare their project reports.


Taxes and policy unpredictability
There is a high level of policy unpredictability in terms of taxation, imposition of duty and VAT, formulation and implementation of rules and regulations for businesses. This unpredictability serves as a strong deterrent to innovation and investments in the country in general, and in the leather goods and footwear subsector in particular. To create a stable business environment, policies, rules, and regulations should be fixed for a period of four to five years. A customs window may be installed for rapid processing of sample shipments for the leather and footwear industries and for facilitating exports.

Ensuring smooth implementation of the Export Policy
The latest Export Policy 2015-18 aims at improving the overall exports from Bangladesh. The latest government policy considered footwear and leather products amongst the highest priority sectors for the country. Key highlights of policy support to the sector are:
• Domestic market sales of up to 20% is allowed to export-oriented businesses located outside of Export Processing Zones (EPZs), i.e. Leather industries exporting at least 80% of their manufactured products will be treated as 100% export-oriented industries – for the purpose of claiming incentives.
• Export subsidies are granted on select products; these range between 5% and 15%. The cash incentive against the export of leather products and footwear has been enhanced from 12.50% to 15% effective from FY16. Cash incentive of 5% for export of crust leather from tanneries relocated to Savar.
• Duty free import of all type of raw materials and machineries for export-oriented industries.
• Concessional duty on import of specified machinery for the leather sector.
• Support in the form of tax holidays, duty free imports of raw materials, machinery for export-oriented leather market, and bonded warehousing along with other policy supports.
• 90% loans against letters of credit and funds for export promotion.
• Export credit guarantee scheme.
Given the fact that the cash incentives and other policies are for a short duration, it is difficult for the investors to take investment decisions. It will therefore be appropriate if policy measures, such as cash incentives and trade policy, are applicable for at least five years, if not for a greater duration, to enable the potential investors to take informed decisions.

Attracting Foreign Direct Investment10(FDI)
FDI is the key for export growth as the investors are closely connected with global markets, brands and retailers. Normally investors source from a suitable location which already has a global market share. In case of Bangladesh, DFQF facility is an added advantage for the investors. Bangladesh still has 6 years time for continuing DFQF privileges.
FDI inflows into Bangladesh have been on the rise. In 2016, FDI inflows into Bangladesh increased by 4.38%, and these are expected to increase further by 5% in 2017.11 According to the seventh five-year plan, FDI in Bangladesh is expected to increase to 9.6 bn USD by FY 2020.12 BIDA should play an aggressive and proactive role to ensure inflow of FDI.
However, of the 2 bn USD FDI inflow (net) in 2015-16, 16.35 mn USD FDI inflow (net) was into the leather and leather goods sector. This is a little less than 1% of the total inflows into the sector.13 FDI inflow into the leather and leather goods sector has steadily increased over time, with the highest being in 2013-14, but has declined since then.
In addition to tracking the FDI inflow over time, it is found that Netherlands, China, and Hong Kong together constitute more than 75% of the total FDI inflows into Bangladesh’s leather and leather goods sector. However, when compared to the top six countries that have been investing in the country as a whole – USA, UK, South Korea, Singapore, Malaysia, Hong Kong, and Norway – these countries, except Hong Kong, are not major investors in the leather and leather goods sector.


Collaboration with brands and retailers
In the global export market, brands and retailers are driving factors for expansion of export growth for any country. RMG sector in Bangladesh made significant growth through involving brands and retailers. Leather sector can take similar approaches and business initiatives for growth in the sector. Private manufactures and exporters along with the policy support from the government may attract the brands and retailers to source and relocate their purchase order.


FDI inflow into Export Processing Zones (EPZ)
With a view to increase FDI inflows into the country, the Government of Bangladesh set up Bangladesh Export Processing Zones Authority (BEPZA).14 A new horizon opens with a plan of expanding industrial growth through establishment of Bangladesh Economic Zone Authority (BEZA). A bundle of attractive offers has been made to attract investment in the BEZA. The government has already made commitment to allow two specific zones for leather sector.

Automation and sensitization of relevant agencies and departments and established of one-stop services
Agencies and departments like BIDA, BEZA, NBR, RJSC, EPB and CCIE should have one-stop service and service delivery should be fully automated and time bound.

Specific challenges in the leather and non-leather subsectors:

Challenges in the leather and non-leather goods and footwear subsector are manifold and needs added interventions. Compliance in these subsectors have added requirements. Due to lack of compliance with international environmental, social, and safety standards in the factories and manufacturing premises, some of the large international buying houses often refrain from purchasing from Bangladesh. Testing and quality control is a vital issue here. Inadequate testing, certifying and quality control practices and lack of international testing and certification are major challenges for Bangladesh adding to the lead-time and risk of rejection. These subsectors also face limited access to finance for technology upgradation and expansion of units, causing serious constrains for SMEs. Effective human capital is an issue wherein lack of skilled and semi-skilled workforce puts the subsectors at further risk of declining productivity. There is a dearth of professionals skilled in product design; most of the current designers in the country are expats, resulting in lower value addition within Bangladesh. Managerial skills and capabilities are also limited within the country, with a heavy dependence on expats. Even though, women’s participation in the labor force is higher in more organized manufacturing set-ups, which they perceive to be safer in comparison to smaller units, these subsectors face low female labor force participation. Availability of necessary technology and software for product design are minimally available, as there are no local vendors generating new products. In addition, there has been minimal IT penetration in all parts of the production process, resulting in manual processing and delays. Dependency on imports for components that manufacturers depend on, e.g. moulds, accessories, and components result in high lead-time.

Export Projections During the Roadmap Period:

The export roadmap has been prepared for a period till the year 2025, with 2015-16 as the base year. The projection is based till the year 2025, the year Bangladesh supposed to begin its status as a developing country after graduating from Least Developed Country (LDC). The year 2025 has been projected as the timeline for becoming one of the top ten exporter of leather and leather goods. The projected achievement is significant for Bangladesh to become a major actor in the world trade of leather product. The very year Bangladesh will face the initial trade shock from the withdrawal of DFQF (Duty Free Quota Free) access to a new competitive world market. Two growth scenarios have been considered for the roadmap. The export targets for Scenario I are based on organic growth and historical trends, while the projections for Scenario II have been arrived at based on Government of Bangladesh’s export targets. Following are the projections:

If we consider growth and trend of export, it is found that the sector is far behind the target of 5bn USD set for 2021. Hence, even for achieving target for scenario I, it is high time for immediate intervention.
For both the scenarios, input requirements in terms of leather (both domestic and imported), investment, labor, land, and power have been analyzed and presented. Input requirements

Scenario I is based on organic growth of the sector, considering the current level of export of various product groups of the leather sector and the potential for augmenting exports of the sector to current and new markets, assuming reasonable efforts in export roadmap implementation. Scenario II considers an accelerated growth for the sector, which would require adequate policy support and incentives, extensive efforts in attracting domestic and foreign investments, as well as enhancements in environmental, social, and quality standards.

Scenario I is a projection of export of leather and leather goods sector for Bangladesh, extrapolating recent trends over the years 2012-16. Export of leather has seen a decline of 10 % during the period. However, this decline is attributable to the shifting of tanneries from Hazaribagh. Considering the additional capacity being created and technology upgradation, it is assumed the growth of leather exports from Bangladesh either directly or as value added leather goods. For Scenario I and Scenario II, 20 % of the total volume of the leather sector exports is expected to be from the export of finished leather. This assumption is based on the proportion of finished leather exports in total volume of leather sector exports of comparable countries.
Under Scenario I, the value of footwear exports from Bangladesh is assumed to grow at 25 % per annum for the period 2017-2021 and grow at 20 % per annum for the period 2021-2025. This assumption is based on the current rate of growth of the footwear sector in Bangladesh, which stands at 22 % during the period from 2012-16. A higher growth rate is assumed in the initial period justified by the investments in the sector and the presence of global buying houses that will improve compliance and market access. Also, in line with global market demand, there will be a higher share of exports of sports footwear from Bangladesh, which would increase from the current 20 % to 30 % by 2021 and to 40 % by 2025.
With respect to leather goods, gloves, handbags, and belts are the three prominent products considered. The total export of leather goods is assumed to grow at 25 % per annum for the period from 2017-2021 and the growth rate is expected to increase to 30 % for the period from 2021-2025. A lower growth is assumed in the initial period of the roadmap, as Bangladesh needs to invest in improving the market presence for leather goods in the global market space. Further, exports of handbags are expected to increase their share in overall exports of leather goods from the current 38 % to 45 % by 2021.
Scenario II reflects government targets, which are more ambitious. To achieve the exponential growth rate, the Compounded Annual Growth Rate (CAGR) for these products must increase to 45 % for leather footwear, 80 % for leather products like trunks and suitcase, 60 % for articles of apparel and clothing of leather, and 40 % for other articles of leather. 16 The target fixed in scenario II is not impossible to achieve. It is projected considering growth of the world leather export market the success story of Vietnam and steady economic and industrial growth of Bangladesh increasing number of middle class around an expansion of market. Considering the volume of the world trade market, the projected share is not that significant. With all it strength and opportunity, the target is practical and feasible.
To reach the targets set out in this roadmap, Bangladesh needs to address some critical challenges. Some of these challenges of the leather export sector are similar to other relevant export sectors and there are some specific challenges as well. Both will require long-term, mid-term and short-term interventions.
It may be noted that for achieving target envisaged in both the scenarios, massive domestic investment by the able entrepreneurs successful in RMG and other sectors and FDI flow are necessary. In the case of RMG, the brands and retailers played the vital role for its exponential growth. Massive relocation of supply orders, congenial policy support and incentives and export friendly tax facilities had been the key to success. Moreover, the leather sector may pursue similar strategy and approach for achieving the goal.

Steps Suggested

The roadmap identifies challenges and suggests remedial majors for rapid growth of export of leather sector. Following steps have been suggested and elaborate action plan of roadmap has been given in the action plan chapter.

Compliance

• Ensuring compliances: Improving compliance by tanneries (first finished product at the initial stage) as one of the critical growth drivers for the leather sector in the coming years. Improving social, environmental, safety, health, and chemical compliance by tanners will make leather and leather product from Bangladesh globally acceptable. Profitability for this sector is likely to increase with compliance, as order sizes increases, and buyers see the value in purchasing compliant-leather from Bangladesh. Compliance also ensures that the tanneries and leather factories can grow their business without affecting the environment. Some of the compliance-related interventions recommended for the sector are:

  • In consultation with the association, develop a national social, environmental, chemical safety, occupational, and health compliance guideline and certification scheme. This should be aligned with international compliance standards.
  • Establish a sustainability and compliance cell under the ambit of an active association. This cell will oversee and ensure that tanneries meet social compliance standards in terms of work place safety and adhere to national and international labor laws. A compliance and monitoring cell at the EPB may also be established under the guidance of MoC.
  • Leather sector will require financial support in engaging compliance experts to assist them in complying with international compliance standards and policy support and financial incentive will be required.
  • Technical assistance to tanneries to obtain the Leather Works Group (LWG) certification for traceability, which is an internationally accepted and recognised certification for leather and leather-related products and aligned with internationally accepted environmental protocols and priorities. This requires tanneries to be able to trace the source of leather to slaughterhouses and adopt good and safe environmental practices in use of chemicals and discharge of effluents.
  • Around 40% of raw, hides and skins are collected during Eid-ul-Adha. Extensive awareness programs should be formulated to help people to collect hides and skins in a proper hygienic way during Eid.
  • Capacity building and financial support will also need to be provided to the leather sector until such time that they can fully comply with all the necessary international standard.
  • Apart from these compliance certifications and standards, physical infrastructure at Tannery Estate Dhaka (TED) Savar, must also be fully developed. Here, ensuring the proper operations and maintenance of the Central Effluent Treatment Plant (CETP) with all the tanneries following a well-understood, comprehensive discharge guideline with all the acceptable parameters of compliance will play a crucial role in ensuring the sustainability of the tanneries, and even the leather sector at large.
  • Strengthening downstream value chain through focussed investment promotion activities to encourage entrepreneurs to invest in value addition of by-products of tanneries. This could lessen use of tannery waste for other purposes detrimental to health. Solid waste disposal management should be strictly monitored and the guideline to assist emerging environmental friendly by product factories be assisted. This could further generate employment opportunity in the downstream business.  

Quality and productivity in the production process
• Development of skills and know-how: To bridge the gap between industry and academia in terms of technical know-how, there needs to be regular interaction and collaborative learning. The facilities at ILET and COEL (among others) could be upgraded to be aligned with industry needs. It may benefit from a twinning partner, especially an international institute of repute in the leather sector. Vocational training needs to be provided to tannery workers. While the Center of Excellence for Leather Skill Bangladesh Limited (COEL) provides this training, the training capacity has to be augmented to meet the skilling requirements of the sector.
• Bridging the gap between industry and academia: To begin with, industry-academia meets can be organised at regular intervals to discuss specific areas of collaboration such as relevance of curriculum, design of innovative short-term refresher/ immersion programs and training workshops, industry internships, academic research funded by industry, etc.
• Training of trainers programme to skill the workforce: A short-term training programmes, taking into account the immediate industry needs. These training programmes, which provide a recognition of the participants’ efforts to skill themselves, can also provide certifications to the participants.
• Twinning18 with international academic institutions: For sufficiently long term, not less than 3 years, to begin with. The scope of collaboration between the institutions will include exchange of curriculum and curriculum design, exchange of faculty, student exchange, faculty training workshops, exposure visits, collaborative research, and in the end, affiliations offering certificate programmes through partner institutes.
• Research grants for applied research on leather: While fundamental research is a long-term venture and is best left to government/university/industry to fund, finding solutions to practical problems of science or engineering faced by the industry is essential for the sector’s progress.

Productive use of Hazaribagh tannery area
Over the years, Hazaribagh has been developed as the center of tannery production with its linkage, factories and workforce. The abandoned factory area can be transformed into modern green factories and thus helping the owners utilize locational advantages of the area grown over the period.


Equal policy support and similar incentive privilege
For diversification of export, it is important to make scope for at least equal policy support and export incentives given to the RMG sector. Initially, it may need extra and added policy support and incentives for exponential growth in the leather export.

Development of SMEs
For leather sector, small and medium enterprises can play a driving role for speedy growth of leather sector to meet domestic demand and export target. The small footwear and leather product making units spread out in various clusters all over the country are yet to be recognized a formal manufacturing segment. It is high time that the government comes up with some facilitating measures to help them grow up in a cluster to their potential and contribute to the economy in a desired manner. Congenial policy, financial help and required training should help SME to grow rapidly and mainstreaming it with the big factories.
• Development of SMEs: There are a large number of small and micro enterprises that work either directly for domestic market, or as sub-contractors for large firms, especially during peak season. There is considerable scope to improve the quality, designs, product range, productivity, and overall production of such clusters. When one or two such clusters absorb modern production practices and technology, it spreads fast amongst other clusters. A study needs to be conducted to understand artisanal clustering and ways in which it can be implemented for the leather goods and footwear sector in Bangladesh.

  • Motivating big retailers to source their products from artisan cluster
  •  Conduct a study to understand artisanal clustering and ways in which it can be implemented for the leather goods and footwear sector in Bangladesh.

Technical assistance for process and productivity improvements and Research and development of new leathers
The capacity of tanners needs to be developed in the following areas:
• Assortment of each lot of leather at wet blue/ crust stage to decide the type of finishing that will maximise value yield from the stock.
• Use of advanced technology to improve the quality of low-grade leather.
The next section of the roadmap discusses the development of a CFC, which will also be responsible for capacity development of tanners.

Establishing slaughtering houses
• The Government of Bangladesh, through the concerned department, may facilitate establishment of small and medium sized slaughterhouses in major urban centers preferably on a PPP model.
• As far as the slaughter of animals during Eid is concerned, it appears that the only way to improve the current situation would be to train as many local butchers as feasible in major urban centers before the Ramadan period and provide them with a certificate.

Research and development of new leathers
At present, Bangladesh produces only a limited range of leather types. As bulk of the production is crust leather, not much research and innovation happen in developing new types of leather. In addition, the know-how to upgrade low-grade leather, which accounts for at least 20% of any lot of raw hides and skins, is found to be lacking among tanners. Improving low-grade leather using methods such as roller coating, printing, etc., is an art in itself.
Some of the recommendations that are specifically applicable to the footwear subsector only are:
• Diversifying into new markets and new products: In terms of product diversification, espadrilles are an innovative product that is currently gaining traction around the world. The new markets that the sub sector can target is given below:

  • Sports footwear – USA, UK, France, Germany, Belgium, Netherlands, and Austria.
  • Footwear, outer soles of rubber/plastic uppers of leather coverage ankle nesoi – Italy, France, UK, Belgium, Netherlands and Canada.
  • Of footwear, outer soles of rubber/plastics uppers of leather, nesoi – USA, Germany, Japan, Italy, France, Belgium, Netherlands, and UK.

Some of the recommendations that are specifically applicable to leather goods subsector only are:
• Diversifying into new markets and new products: Based on an analysis of historical export-import patterns, some of the new products that Bangladesh could cater to in existing markets are trunks and suitcases. Some of the new markets that the subsector could potentially enter include the following:

  • Handbags – USA, France, Italy, UK, Korea, Japan, Germany, and China.
  • Gloves and mittens – USA, Germany, Japan, France, Italy, UK, Spain, and Sweden.
  • Belts and bandoliers – USA, Germany, Japan, France, Italy, UK, and Korea.
  • Other articles of leather – USA, Italy, Poland, Czech Republic, Germany, and France.

Policy for encouraging value addition
However, this move to make finished leather will require tanners to invest in new technology and improve their skill levels. Policy support in the form of financial incentives followed by stringent enforcement of regulations is required. In this regard, the export roadmap recommends the following measures:
It is important to developing a scheme to subsidize the cost of engaging experts by tanneries. This subsidy can be provided on a cost sharing basis and contingent to meeting defined milestones in moving from producing crust to finished leather.

Improving bonded warehouse facilities and duty drawback process
The bonded warehouse regime in Bangladesh permits licensed manufacturers to import inputs required for export-oriented manufacturing duty free. Many of the large exporting firms in the leather sector use bonded warehouse facilities. However, SME exporters mostly depend on duty drawback, as the licensing process is cumbersome, paper intensive, and time consuming.
In a detailed study conducted by the World Bank19 suggested,
• To establish an automated bonded warehouse management system.
• Instead of a transaction-based control mechanism, a risk-based control mechanism may be adopted.

Attracting foreign and domestic investments
The following initiatives are recommended:
• Prospective domestic investors must also be made aware of the great potential in the sector and be motivated to enter this sector. Able entrepreneurs of RMG and other sectors may be sensitized and approached formally.
• The advantages of investing in this sector in Bangladesh have to be specially brought out in attractive pamphlets, presentations, and videos.
• The comparative and competitive advantages of the leather sector in Bangladesh vis-à-vis competing exporters such as Vietnam, Indonesia, and China need to be analysed and exposed to investors through BIDA, MoC, MOFA, EPB, BPC.
• Formation of a high-level empowered committee consisting of a senior officer of MOC, another senior representative of Bangladesh Investment Development Authority (BIDA), and two or three leading industry representatives with the mandate like reach out to existing FDI/ JV companies to promote Bangladesh as investment destination and visit target countries and organise investment seminars and local roadshows to meet prospective local investors to encourage diversification of the leather sector.
It may be added here that some large tanners from abroad keen to relocate to Bangladesh may want to have their own premises where they would establish their tanneries rather than being a part of an Industrial Estate. The Government of Bangladesh policy in this regard must be quite lucid and welcoming in this regard. While allowing such tanneries to be established in appropriate locations, care must be taken to ensure that such tanneries comply with all environmental and labor standards that are globally accepted.
Given the need to engage with large brands and wholesalers steps towards improving market access like participation in international fairs and trade delegations to present Bangladesh as a sourcing destination for leather is needed. Improving level of compliance with environmental, social, and safety standards required by international markets. Preparing direct marketing content highlighting the sector’s strengths.
In achieving the targets envisaged, the role of the tanning sector will be crucial. Action has to be taken on a wide front to modernize the tanning sector as well as strengthening its technical competence by induction of superior technical expertise. Institutional capability in training workforce also needs considerable strengthening. If immediate action is initiated on all fronts suggested, it is reasonable to expect that the leather sector will consolidate and expand to meet the emerging challenges successfully.

Policy support
The Government of Bangladesh has taken a policy position that supports export-led manufacturing growth for Bangladesh.
Through bonded warehouses and duty drawbacks, exporters are exempt from import duties on all inputs required for export-oriented manufacturing. However, there is scope for further liberalization of trade policy, especially in new and emerging sectors such as the leather sector, on par with ready-made garments sector. In addition, industrial policy has been largely liberalized. BIDA was created to provide a one-stop solution to all investors. However, its role can be strengthened further to attract more investment into this sector.
• Trade policy related measures include

  • Commercial trade of inputs related to leather sector can be encouraged and supported to improve import lead times and to reduce cost of imported inputs.
  • Encourage input manufacturers to set up manufacturing facility in Bangladesh and avail duty exemptions and concessions as deemed exporters, thereby reducing the overall cost of inputs.
  • GoB’s plan to set up a Trading Economic Zone to permit duty free bulk procurement and distribution of imported inputs is a step in the right direction and will reduce cost and lead time of imported inputs.

Strengthening of BIDA’s role
If the interactions between potential investors, especially FDIs/JVs and various government agencies can be reduced considerably, and they are required to deal with only a single agency, BIDA, for all their requirements, it would be a major step forward towards attracting such investments.


Making policy and infrastructure information available to investors
It may be a good idea to publicize land banks available in the country with location, area available, agency responsible and major features of such land, along with their price, to enable potential investors to make appropriate decisions before they prepare their project reports.


Taxes and policy unpredictability
There is a high level of regulatory unpredictability in terms of formulation and implementation of rules and regulations for businesses. This unpredictability serves as a strong deterrent to innovation and investments in the country in general, and in the leather goods and footwear subsector. To create a stable business environment, policies, rules, and regulations should be fixed for a period of four to five years. A customs window for rapid processing of sample shipments for the leather and footwear industries may be established to expedite the process.

Foreign Direct Investment20(FDI)
FDI is the key for export growth as the foreign investor are closely connected with the global market and brand and retailers and global market share. They have exiting access to market. So FDI can play major role in helping expansion of export growth at a rapid pace.
FDI inflows into Bangladesh have been on the rise. According to the seventh five-year plan, FDI in Bangladesh is expected to increase to 9.6 bn USD by FY 2020. Of the 2 bn USD FDI inflow (net) in 2015-16, 16.35 mn USD FDI inflow (net) was into the leather and leather goods sector. This is a little less than 1% of the total inflows into the sector.21 FDI inflow into the leather and leather goods sector has steadily increased over time, with the highest being in 2013-14, but has declined since then.
Bangladesh pursues highly liberal FDI policies. For FDI, there are no limits on foreign equity participation, i.e. the Government of Bangladesh allows 100% foreign equity. Full repatriation of capital invested from foreign sources is allowed. Similarly, profits and dividend accruing to foreign investment may be transferred in full. If foreign investors reinvest their repatriable dividends and or retained earnings, those will be treated as a new investment.
The general impression was that despite difficulties, FDI-based businesses were continuing to operate from Bangladesh because they found it profitable to manufacture and/or procure from here. However, with a more congenial, proactive, business-friendly environment, specifically addressing some of the key issues raised, FDI could lead to an immediate and substantial increase in exports from Bangladesh.

Export Processing Zones/ BEZA
With a view to increase FDI inflows into the country, the Government of Bangladesh set up Bangladesh Export Processing Zones Authority (BEPZA) initially. It worked with limitations. A new horizon opens with the plan of expanding industrial growth through establishment of Bangladesh Economic Zone. A bundle of attractive packages has been offered to attract investment in the BEZA. Government has already made commitment to allow two of the zones for leather sectors.
A product-wise break up of investment shows that of the 461 industries in the EPZs, only 33 units are in the leather and footwear sector, with a total investment of 242.92 mn USD, and employing 35,245 personnel.

Financing for new machinery and equipment
A liberal and business friendly bank interest structure is imperative for growth of leather sector. Policy support like tax holiday and low interest rate along with government assistance for a tenure of the stipulated time suggested in the roadmap is important.

Encouraging leather garments
Encourage manufacturers for production of leather garments and products for upholstery.

Some Immediate Actions

  1. Optimizing the Savar Tannery Estate – The CETP of Savar TED should be fully operation with all required parameters. BSCIC can shortlist internationally reputed CETP operators with proven track record in the leather industry and set up a selection body comprising of tanners, qualified environmental experts, globally recognized certification bodies and the government to finalize one operator. They must be given a clear time bound mandate to diagnose faults of existing CETP, if any, recommend the solutions and monitor and supervise the remediation. It can be handed over through a management contract on PPP basis to a globally proven CETP operator. The process should be completed in next 9-month time.
  2. Establish one-stop service – One-stop service under the framework of the enacted law should be fully operational within 6-month time. Delivery of service and clearance procedure should be simplified and specifically time bound. BEZA should also establish a one-stop service to facilitate FDI and JV and simplify all the procedures to attract FDI and JV. It should be competed in 6 months time.
  3. Ensure compliance and certification – BSTI should develop its capacity and capability of certification for all the parameters of leather sector. The approval procedure for the Certification should be time bound. BAB should facilitate private certification agencies to grow and assist them to get authorities for certifications.
  4. Equalize the customs and tax formalities for all export sectors – The following changes should be implemented within the next 6 months:
    a. Examination of import materials used in export-oriented leather factories should be similar with RMG.
    b. Renewal of general bond should be made for every 3 years like RMG
    c. Issuing utilization permission (UP) for raw materials/packing uses by bonder should be given to LFMEAB
    d. Ascertaining co-efficient for its member factories should be permanently made the responsibility of LFMEAB
    e. Cash incentive for repatriation of export earnings from third party/country should be similar with the RMG sector.
    f. Import availability of raw materials should be made case to case basis (by back to back L/C)
    g. Cut off time for shipment of export goods (hand over goods to carrier) should be 24 hours before departure of vessel.
    h. Waiver should be given to services including expenditure on workers welfare and entertainment, laboratory test fees, IT enabled services and rent a car facility.
  5. Introduce a Temporary Tax moratorium (TTM) – Commission a study by qualified experts to identify HS codes for the top 50 raw materials/components needed to be imported for production of footwear and leather goods for export. If this TTM is made available for an initial period of 10 years, companies who are not direct manufacturers would import duty free the essential raw materials and accessories such as outsoles, PU and PVC materials, product finishing chemicals, laces and metal hardware and hold in stock, duty free, in Bangladesh. Exporters would purchase from this stock as per their requirements, through payment vide local LC which can easily be reconciled with their final export of finished goods. This will make readily available to local exporters, especially new and emerging ones, a wide array of required inputs that they can use to convert to export orders for finished products. As a result, export lead times for exporters can be reduced by 30-60 days.
  6. Establish a bonded warehouse system – A bonded warehouse should be established that can cater to the need of small exporters and manufacturers, in consultation with business associations within 6-months.
  7. Facilitate domestic investment in leather sector – For exponential growth, massive and aggressive investment by the able entrepreneurs is essential. The Ministry of Commerce and the Ministry of Industry should take immediate steps to encourage domestic entrepreneurs to invest in the leather sector. Bank interest rates, repayment schedule, tax holiday, cash incentive for export, etc. should be given priorities to draw a large number of exporters to diversify their concentration from RMG sector. Buying house for leather sector should be encouraged with all rational facilities.
  8. Automation of service delivery – Automation and specific timeline for service delivery should be completed in 6 months time in all the agencies and departments like National Board of Revenue and all its subordinate offices for customs, taxation and VAT, all the port authorities (sea, air, land), BIDA, BEZA, EPB, CCIE, RJSC and other relevant agencies and departments.

Courtesy: This article is a review of originally published by The Ministry of Bangladesh and International Fiance Corporation.

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