Document of

The World Bank~~ -4

FOR OFFICIAL USE ONLY i

Report No. 356$-BD

BANGLADESH

STAFF APPRAISAL REPORT

TEXTILE INDUSTRY REHABILITATION PROJECT

January 14, 1982

Industrial Development and Finance DivisionSouth Asia Projects

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

The Bangladesh Taka (Tk) is fixed in relation to a basket of refer-ence currencies, with the Pound Sterling serving as intervention currency.On August 24, 1981, the exchange rate was set at Tk 37.0545 buying and Tk'37.1545 selling per Pound Sterling. Depending on exchange rate movementsbetween Sterling and the US Dollar, the Taka/Dollar cross rate is subject tochange. For the past seven months, this rate has fluctuated at levels slightlybetween Tk 19.0 and Tk 19.51US$. Throughout this report the rates shown belowhave been used:

US$ = Tk 19.0

Tk 1 = US$0.0526

Tk 1 million = US$52,632

LIST OF TERMS, ACRONYMS AND ABBREVIATIONS

ADB - Asian Development Bank

BBS - Bangladesh Bureau of StatisticsBHR - Balancing, Modernization and ReplacementBSB - Bangladesh Shilpa Bank

BSRS - Bangladesh Shilpa Rin SangsthaBTMC - Bangladesh Textile Mills CorporationBHB - Bangladesh Handloom BoardDRC - Domestic Resource Cost

ECNEC - Executive Committee, National Economic CouncilFY - Fiscal Year

GDP - Gross Domestic ProductGOB - Government of BangladeshGNP - Gross National ProductGVA - Gross Value AddedIDA - International Development AssociationIEC - Import Entitlement CertificatesMOT - Ministry of TextilesMmf - M4anmade FibresSCI - Small and Cottage IndustrySFYP - Second Five Year Plan (FY81-FY85)UNIDO - United Nations Industrial Development OrganizationUNDP - United Nations Development ProgramWES - Wage Earners Scheme

FISCAL YEAR (FY)

GOB July 1 - June 30BTMC July 1 - June 30

FOR OFFICIAL USE ONLYBANGLADE SH

TEXTILE INDUSTRY REHABILITATION PROJECT

STAFF APPRAISAL REPORT

Table of Contents

Page No.

INTRODUCTION .................................................... i-ii

I. THE INDUSTRIAL SECTOR ................................. 1Structure of the Sector ............................... 1Production and Capacity Utilization ............... .... 2Investment ...................................... 3GOB's Industrial Strategy ....................... . 4

II. THE TEXTILE SECTOR ......... 5Bacground. . 5Structure of the Industry . . 6The Market and Marketing ........................ 8Development Strategy... .... 11Issues and Problems of the Industry 16Sectoral Planning .. .. ......... .... .. . 19

III. THE BANGLADESH TEXTILE MILLS CORPORATION (BTMC) 20Background .20Autonomy .20Organization and Management .21Production Performance .21Financial Performance and Prospects .24Personnel Administration .27Manpower and Succession Planning .30Marketing .30Management Information and Control .31

IV. THE PROJECT ........................................... 32Origin and Evolution .................................. 32Objectives ............................................ 33Scope .............................................. 33Coordination ......................................... 34Health Safety and Environmental Aspects . .............. 34

Following preparatory missions in July 1980 and December 1980, the projectwas appraised in March 1981 by a mission consisting of Messrs. D. Groves (MissionLeader), S. Thomas, K. S. Dorairaj (Consultant) and Ms. S. Kandel. A postappraisal mission consisting of Messrs. Groves and Thomas and Ms. Kandel visitedBangladesh in August 1981 to review GOB-s policy proposals and implementationtimetables.

This document has a restricted distribution and may be used by recipients only in the performance oftheir official, duties. Its contents may not otherwise be disclosed without World Bank authorization.

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Table of Contents (Continued) Page No.

V. PROJECT IMPLEMENTATION ..... .. ................. ... ..... 35Management ............................................ 35Procurement ........................................... 36Implementation Schedule ........................... .... 36Technical Assistance .............................. .... 38Monitoring ............................................ 39

VI. PROJECT COST AND FINANCING ..... ....................... 39Project Costs ......................................... 39Financing Plan ........................................ 40Financing Arrangements . . .................... . 41Disburseme-.t ...................................... .... 41

VII. FINANCIAL AND ECONOMIC ANALYSES ....................... 42Financial Analysis ................................. ... 42Economic Analysis .................................. ... 47Summary of Risks and Benefits ..... .................... 48

VIII. SUMMARY OF AGREEMENTS ................................. 49

LIST OF ANNEXES

ANNEX 2.1 Organization Structure - Ministry of Textiles2.2 Tax Structure on Textiles FY77-FY812.3 Status of Import Program Credit Action Programs

3.1 BTMC Operational Units FY76-FY813.2 Organisation Structure, BTMC as of March 31, 19813.3 Organisation Structure, BTMC Mill3.4 Operational Data FY76-FY813.5 Summarised Income Statements FY76-FY803.6 Summarised Balance Sheets FY76-FY803.7 Cost Structure Yarn and Cloth - FY76-FY803.8 Mill Profit and Loss Balances FY76-FY813.9 Financial Projections FY81-FY853.10 Employment Levels

4.1 Phase 1 Mills for Rehabilitation

6.1 Summary of Project Costs, by Category and Currency6.2 Phasing of Project Costs6.3 Disbursement Schedule

7.1 Assumptions for Financial Projections7.2 Financial Projections - with Project7.3 Financial Projections - without Project7.4 Financial Projections - Incremental7.5 Comparative Cost Structure - Phase 1 Mills7.6 Incremental Financial and Economic Benefits7.7 Comparative Financial Indicators - Mill by Mill with Project

8.1 Selected Documents, Reports and Data Available: Project File

Map 1 Mill Locations

INTRODUCTTON

(i, The Government of Bangladesh (GOB) has requested Bank Group financ-ing to assist the Bangladesh Textile Mills Corporation (BTMC) 1/, a publicsector corporation, implement its urgently-needed rehabilitation program.This involves the balancing, modernizing and replacement of equipment in 50of the 60 operational mills administered by BTMC. Total financing require-ment is about US$175.0 million of which US$145.0 million would be in foreignexchange. The program has been split into three phases, with Phase I (theProject) covering 15 mills. Rehabilitation of these mills is expected to becompleted by the end of FY84. Phases II and III would be dependent uponsatisfactory progress in implementing the Phase I rehabilitation and in theresolution of a number of policy issues affecting the performance of thesector.

(ii) The Project would consist also of a technical assistance componentto strengthen the management system of BTMC and the mills. This assistancewould build on the action program requirements under implementation underthe Imports Program Credits to Bangladesh.

(iii) BTMC will implement the Project through a project implementationcell staffed with experienced textile technologists and engineers. The cellwill be supported by technical assistance from a ten-member"productivity"team established by UNIDO/UNDP under IDA's Fifth Imports Program Credit. Theproject is expected to cost about US$43.9 million of which US$25.4 millionwould be in foreign exchange. It will be financed by working capital/equityinfusions from GOB, internal generation of funds by the mills and the balanceby the proposed credit of US$30.O million.

(iv) The Project is expected to improve considerably the operationaland financial performance of the mills. On completion, operational spindleswould be increased by about 52,000, operational looms by about 800, spinningefficiencies would improve from 2.22 oz. per spindle shift to 3.42 oz. perspindle shift and yarn production would increase by about 20.0 million lbs.or by 34% per annum. The aggregate incremental financial and economic ratesof return are projected at 15.7% and 27.5% respectively. The technical risksof the project are minor because of the standard plant design and technologyin operation. Given free market prices, the commercial risks of the projectshould also be minor as the incremental output of yarn and cloth wouldsatisfy only a part of the projected per capita consumption requirements forthe next five years.

(v) IDA's involvement in the Bangladesh textile sector started in 1973through the First Imports Program Credit, which provided funds for essentialraw materials and spare parts. This involvement has continued under the ninesubsequent Imports Program Credits with about US$235 million allocated to theindustry. IDA's detailed involvement with the industry started with a study

1/ Hereafter reference to BTMC relates to the aggregated operations of theindividual public sector mills.

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of the jute and cotton textile industries in March 1975. The findings of thisstudy provided the basis for an action program under the Fifth Imports ProgramCredit to address operational and mamagement weaknesses in BTMC. Under sub-sequent credits, the action progriams were expanded to address (i) appropriatedevelopment strategies and policites Eor the industry; (ii) specific institu-tional and sectoral weaknesses; and i(iii) needed improvements in capacityutlization. Overall,progress on implementing the action program requirementsis satisfactory. Long-term financinig for the private sector (mainly special-ized textile mills) has been prov:Lded through credits to the Bangladesh ShilpaBank (BSB) and credit facilities made available to the handloom sector throughthree credits for small-scale industry.

I THE INDUSTRIAL SECTOR 1/

Structure of the Sector 2/

1.01 Although accounting for only 8% of GDP in FY81, the industrial

sector is an important element in tne Bangladesh economy, It produces basicconsumer goods, supplies agriculture wi th key inputs, produces a substantialpart of the country's exports and is a major employer. The sector contributesabout 60% of export earnings and employs about five million people. Large andmedium scale units account for about 70% of the sector s contribution to GDP,about 50% of the total value added and employ about 350,000 people. Thebalance of GDP contribution manufacturing value added and employment is generat-ed by small-scale and cottage industries, The performance of the sector thushas a critical bearing on resource mobilization and the sector is potentiallyan important area of rapid economic growth.

1.02 As a result of nationalization of many of the country's industriesfollowing independence, most of the large and medium-scale enterprises are inthe public sector which now consists of approximately 300 units organized underthe administrative control of seven corporations (jute, textiles, chemicals,steel and engineering, food, cement and forestry). 3/ The public sector nowaccounts for about 85% of the capital assets of the sector, 65% of the valueadded in industry, 85% of manufactured exports, and 25% of the industrial labourforce. Although the listing of industrial activities open to private invest-ment has been expanded, the public sector corporations continue to dominatebasic industries. To date, denationalization/divestment of industries in thepublic sector has been on a minor scale.

1.03 The public industrial sector includes the country's largest export-oriented industry (jute) and import substitution industries (textiles, chemicals,pulp and paper). The jute manufacturing and cotton textile industries consti-tute close to half of the industrial capacity in Bangladesh and have essentiallinks to the agricultural, rural, and cottage industry sectors of the economyIn FY80, the jute industry contributed about 30% of the value added in theorganized manufacturing sector and abour 50% of total exports, and employed200,000 workers. The cotton textile industry, the second largest industryin Bangladesh, accounts for about 15% of value added in the manufacturingsector, employs 71,000 workers, and produces about 70% of the country'stotal yarn requirements.

1/ For an extensive analysis of the problems facing the industrial sectorand the policies necessary to effect improvements see Report No.2191-BDdated December 8, 1978 "Bangladesh: Issues and Prospects for IndustrialDevelopment".

2/ Excludes mining, construction and public utilities.

3/ Sector Corporations administer GOB's shareholdings in enterprises inthe various subsectors, but do not have the legal/accounting status ofregistered holding corporations. Their major role is to ensure uniformapplication of GOB policies.

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Production and Capacity Utilization

1.04 From FY75 onwards, the performance of the industrial sector has beenmixed. In the private sector, output of medium and large scale manufacturingunits has grown by 8.0% per annum in real terms and this growth has been sup-ported by a similar growth in small scale industrial output. This growthin private sector manufacturing can be attributed to several factors. Firstlythe liberalization of foreign exchange allocations has ensured the availabilityof imported raw material inputs. Secondly as the premia on imported goodshave declined the relative profitability of manufacturing vis-a-vis tradinghas improved. In the public industrial sector recent performance has beenvariable as reflected in Table 1.1 below. Aggregate output growth sinceFY75 has been about 3.5% annually but, because of import policy restrictions(particularly relating to petroleum), fell in FY80 to about 1.0%. The per-formance of large/medium scale enterprises was somewhat better. Since FY75,output increased at an annual average rate of 7.5%. However, in FY79 andFY80, due to a surging petroleum and food import bill, the growth of theseunits decline to 3.5% in FY79 and 0.2% in FY80, largely as a result of constantoutputs in subsectors such as textiles. The lack of raw materials, spareparts and other intermediate goods also affected production and the growth ofthe sector.

Table 1-1: PRODUCTION INDEX(FY70 = 100)

FY75 FY76 FY77 FY78 FY79 FY80

Textiles 94.0 89.1 83.1 93.4 98.5 95.5Pulp and Paper 76.6 52.6 59.8 79.1 83.8 89.3Chemicals 81.7 208.6 217.4 173.4 217.5 246.2Steel 83.5 77.3 95.3 120.5 146.7 133.6Cement 239.0 296.2 580.5 642.4 599.9 630.5

General Index 86.0 93.9 99.7 106.5 108.3 108.8(Weighted on value added)

1.05 Despite improvement in production, many enterprises suffer from lowcapacity utilization. While average utilization was about 65% in FY80, itwas particularly low in chemicals (50%), engineering (50%), and steel (50%).Common factors influencing utilization include irregular and insufficientsupplies of raw materials; equipment breakdown and poor maintenance; frequentpower failures and inadequate working capital due to delayed subsidy infusions.The mixed performance of the sector is also the result of a number of Govern-ment policy and institutional weaknesses, including labour policies inducingover-employment and low labour productivity due to inappropriate incentivesystems. These policy weaknesses are compounded by the weaknesses in theadministrative structures of the sector corporations, including overcentrali-zation of authority. Thus, low capacity utilization is only a symptom ofmany serious problems affecting production efficiency. Under the Fourth tothe Eighth Imports Program Credits, specific action programs were developedwith GOB to help rectify these problems, particularly in the jute, textile,and pulp and paper industries. AE; a result, improvements in the productionefficiency of the jute industry halve aided its conversion into a profitable

industry. For the textile industry the foundations have been laid for thenext steps toward bringing the industry as a whole to profitable operation.

Investment

1.06 Before independence, industry was predominantly private sector, butcontrolled by Government using a framework of controls, licensing and governmentallocation of resources. With independence, the structure of industry changeddramatically, 85% of the country's capital assets were nationalized andprivate investors were restricted by limits on allowable investment and areasof operation. Since FY75, however, GOB has progressively relaxed its controlsover industrial investment, with the encouragement of private investment inthe industrial sector. Limits on the size of private sector projects havebeen lifted, although projects above Tk 100 million (US$5.26 million) must beapproved by the Executive Committee of the National Economic Council (ECNEC).GOB now permits private sector investment in 50 sectors, including textile(paragraph 2.23) and sugar, previously reserved to the public sector. Encour-aged by these actions, private investment has grown rapidly over the past fiveyears, rising in current prices, from a very low base of Tk 198.0 million(US$10.4 million) in FY76 to Tk 1.2 billion (US$63.2 million) in FY80. GOB'sSecond Five Year Plan (SFYP) for FY81-FY85 projects that private investmentwill grow at about 25.0% per annum during the plan period. The Governmentenvisage also that the pattern of private sector investment will change toone of considerable and growing diversification--in contrast to past andpresent concentration in food, paper products, and transportation. Table 1.2below shows the anticipated distribution of investment during the plan period.The projection of an investment level of Tk 43.8 billion (US$2.3 billion) isclearly an ambitious target but it may be attainable if resources are avail-able, and specifically in the case of the private sector if elements of majordistortion in GOB's industrial policy framework are removed (paragraph 1.12).

Table 1.2: SFYP ALLOCATIONS FOR INDUSTRY(Tk billion at FY80 prices)

FY81-85Sector/Scale Allocation %

Public Sector, total 32.7 74.7Large- and medium-scale 32.0 73.1of which: ongoing projects (11.6) (26.5)

BMR projects (4.3) (9.8)New projects (16.1) (36.8)

Small- and cottage industries 0.7 1.6

Private Sector, total 11.1 25.3Large- and medium-scale 6.1 13.9Small- and cottage industries 5.0 11.4

TOTAL 43.8 100.0

Source: SFYP.

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GOB's Industrial Strategy

1.07 From 1973 until 1975 GOB's industrial objectives and strategy were

biased toward the use of the public sector as the vehicle for achieving indus-trial development. In 1975 this emphasis was changed when GOB announced itspolicy of encouraging private invesltment. Since then, output has recovered

and a transition to a greater involvement of private enterprise in industrialdevelopment has taken place (paragraph 1.06).

1.08 While GOB's policy changes have contributed towards the developmentof a comprehensive industrial strategy, little progress has been achieved inrationalizing public industrial investment as an aid to improving efficiencyand capacity utilization. Since FY76, 65% of public industrial investmenthas been concentrated in five large import-substitution projects. Some ofthese investments, particularly those in the engineering sector, were poorlyconceived and have resulted in an enormous waste of investible resources.The concentration of investment has also meant that many long-needed invest-ments for rehabilitation 1/ of existing plants have been unduly postponed.However, some progress has been made over the past two years in redressingthis imbalance, with major BMR programs being implemented in the jute andfertilizer sectors and programs proposed for the cotton textile and pulpand paper sectors.

1.09 Since 1978, GOB and IDA have sought to draw together into a compre-hensive industrial strategy, the policy developments and objectives that havebeen identified under the various lending and technical assistance programsfor the sector. A first step in this exercise was the focusing on the needfor a comprehensive export development program (EDP), including removal ofsupply constraints for non-traditional exports, increasing effectiveness ofexport incentives, and improvemenit of data collection and analysis necessaryto monitor export performance. Progress on these actions are satisfactoryand the EDP incorporated into the SFYP. Under the EDP GOB is counting uponthe private sector to play a critical role in the development of manufacturedgoods exports. Public sector exports of manufactured goods are only expectedto rise from Tk 7.1 billion in FY80 to Tk 7.9 billion in FY85, a real increaseof only 2.2% per annum, and these will continue to be overwhelmingly dominatedby jute goods. Private sector manufactured exports, in contrast, are targetedto increase from Tk 2.7 billion to l'k 5.9 billion over the next five years andover 85% of this increase is anticipated to emerge in three sectors: cottontextiles (including ready made garments), fisheries products, and leather.

1.10 GOB's principal objectives for development during FY81-FY85 are to:(i) expand domestic production of essential "basic needs" and mass consumption

commodities; (ii) provide for the domestic manufacture of inputs necessaryto achieve major Plan targets in other sectors, including self-sufficiencyin foodgrains and the spread of rural electricfication; (iii) maximize theuse of local raw materials and naturals resources; (iv) create more employ-ment and promote balanced regional development through the promotion of small-scale, labor-intensive industries (e.g. handlooms etc.); and (v) improve the

1/ Rehabilitation includes balancing, modernizing and replacement of equip-ment.

balance of payments by accelerating the growth of export-oriented and import-substituting industries. The industrial sector is not expected to be a majorcontributor to achieving these objectives. Rather, industrial growth isexpected to be derived from the linkages between industry and other majorsectors of the economy. Thus, the industrial investment program, particularlywith respect to the public sector, is oriented predominatly towards import-substitution investments for the domestic market.

1.11 In the SYFP, GOB envisages a substantial improvement in capitaloutput/ratios. However, if these improvements are to be achieved, there is aneed to increase the capacity utilization of existing facilities. In sectors,such as the textile sector, where capital stock has been allowed to deteriorate,rehabilitation programs offer possibilities of high incremental returns forrelatively low levels of capital expenditures. Against this background, GOBhas allocated 9.8% (US$226.3 million) of SFYP expenditure for rehabilitationprograms. The priority accorded to rehabilitation programs and to expandingthe supply of "basic needs" and some mass consumption items (such as cloth) isappropriate in view of both the country's needs and comparative advantages.

1.12 Although the SFYP recognizes the importance of private investment,insufficient attention has been paid so far to the provision of a conducivepolicy environment for a more vigorous growth of private investment in theefficient industrial sectors. As is the case in many developing countrieswhich have practiced inward looking policies for an extended period of time,the present trade and industrial policy framework demonstrates major distor-tionary effects on the allocation of scarce resources within the industrialsector. In view of this, and in collaboration with IDA, GOB has identifiedthe need for corrective actions in the area of trade and industrial policiesincluding export policies, tariffs, fiscal and other incentives as well asindustrial sectoral planning and investment promotion. Since October 1980,IDA and GOB have been involved in shaping a reform program which wouldeventually be expected to lead to major corrective actions across a broadfront of trade and industrial policies. In the medium term, these actionsshould facilitate the external adjustments required to bring about a moreoptimistic balance of payments outlook.

II. THE TEXTILE SECTOR

Background

2.01 The textile industry is one of Bangladesh's oldest and most import-tant industrial subsectors. It employs about 1.0 million people, accounts forabout 30% of manufacturing value added and meets about 85% of the country'stotal demand for cloth.

2.02 Past growth of the industry has been mixed. At the partition ofIndia in 1947, the installed capacity in Bangladesh consisted of about 110,000spindles, 2,700 automatic looms and about 100,000 handlooms. From 1947 until1972, using readily available and relatively cheap raw cotton from West

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Pakistan 1/, the industry experienced a steady growth rate. By late 1971,supported by technical expertise from West Pakistan, installed capacity hadgrown to about 858,000 spindles, 7,400 automatic looms and 300,000 handlooms,producing a steady flow of finished products for the large West Pakistanmarket. In 1972, immediately prior to the creation of Bangladesh, the growthof the industry halted, as West Pakistan investors stopped investment and inmany cases actually disinvested by rnnning down inventories, reducing main-tenance and transferring surplus funds. Supplies of raw materials dried upand non-Bengali management and technicians returned to West Pakistan. Withouttechnical supervision and ongoing maintenance, existing facilities started todeteriorate.

2.03 Since 1972 the adjusted growth rate in the number of spindles hasbeen about 41% and automatic looms about 9% (Table 2.1). The market has neverpresented a constraint to the expansion of the industry as domestic demand,despite a low annual per capita income, is substantial. Inadequate foreignexchange for raw materials and spare parts, low production efficiency andinferior product quality as well as restrictive Government policies, havehowever been the major obstacles to the growth of the industry.

Table 2.1: GROWTH OF TEXTILE FACILITIES

FY72 FY81 % Growth

Public SectorSpindles ('000) 750 1,057 41.0Looms ('000) 7.0 7.6 9.0

Private SectorPower looms ('000) 1.0 1.2 20.0Hand Looms ('000) 345.0 /a 437.0 26.5

Finishing Plant 11 16 45.0

/a Estimated.

Source: BTMC.

Structure of the Industry

2.04 Since 1974, the textile industry has been administered by theMinistry of Textiles (MOT). 2/ It is responsible for the development of the

1/ Only a very limited amount of cotton was grown in Bangladesh and thiswas unsuitable for producing medium counts of yarn.

2/ Following the recent (November 1981) elections and the subsequent re-structuring of Cabinet positions the MOT has now been merged with theMinistry of Jute to create the Ministry of Jute and Textiles.

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foulr main su'bse>ors of the industry, i.e. the public sector units, privatesector speciaiized mills and powerlooms, the handloom sector, and the readymade garment indust-ry. It liases with the Ministry of Agriculture and theCotton Development Board on GOB's plans for the development of indigenouscotton rescurces- Annex 2.1 shows the organization structure of the CottonTextile k;ing of the Ministry.

2.05 The textile industry is dominated by the 60 large public sectorm11Es which v< ere nationalized in 1972, 1/ leaving only small-scale units ofpowe:rlooms andS handlooms in the private sector. The public sector millsaccount for all spinning capacity, about 60% of finishing capacity and about10% of weaving capacity. About 1.1 million spindles, 7,600 looms and 400specialized looms, were operated by the public sector in FY81. The sectoremploys about 70,000 workers (or 4% of the industrial workforce) contributes15% of manufacturing value added, produces about 70% of the country-s yarnrequirements. and about 11% of cloth requirements.

2.06 Even though the public sector dominates, private enterprise formsan important part of the textile industry, especially in weaving and to alesser extent in ready made garment production. It is estimated that about437,000 handlooms, 1,200 power looms and 300 hosiery units are operated in theprivate sector. 2/ The private sector enterprises are all small-scale unitswith 1 to 25 looms per unit. Only 260,000 handlooms are in operation withthe balance idle through lack of working capital, spare parts or yarn. Mostof the handlooms are pit fly looms (62%) or semi automatic (23%), with thebalance either pit throw or fly shuttle looms. About 25% of the units alsohad dyeing and finishing facilities. The handloom units provide directemployment to about 0.9 million people, of which 57% are family loom ownersand 42% employed weavers. Operating on a full and/or part-time basis, theaverage production per loom year is about 1,700 yds. Overall, the subsectorproduces about 440 million yds. of cloth per annum. This meets about 70% ofthe country's medium/coarse grade requirements. The power loom units accountfor about 5% of the country's cloth requirements.

2.07 The technology used in the industry varies, but in the public sectoris mainly conventional technology based on automatic shuttle looms and ringspindles. Since cotton is not grown in substantial quantities in the country(paragraph 2.02 ), the industry is making increasing use of manmade fibres(mmf) in both staple fibre and continuous filament form adapting existingequipment wherever possible. At present, use of mmf in the public sector islimited to the use of viscose and polyester staple fibre, while the privatesector weaving units tend to use more blended/straight mmf yarn. The produc-tion flow of the industry is essentially horizontal with specialization inyarn production, weaving and finishing. Of the 60 operational mills in

1/ In all there are 74 public sector textile mills although only 60 arefully operational.

2/ Bangladesh Handloom Census - 1978 - Institute of Business Administration,Dacca, March 1979.

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the public sector, 16 are composite, i.e. with finishing facilities, 10 aresemi-composite mills (i.e. with spinning and weaving facilities), while thebalance are spinning mills. The private powerloom weaving units send theircloth to central facilities for finishing and dyeing. The handloom sectoralso concentrates on weaving, sending yarn for dyeing or cloth for finishingto the processing centres operated by the Bangladesh Handloom Board (BHB) orthe private sector. Although specialized, the industry is currently ineffi-cient. At the whole world average rate of production per year per installedspindle (i.e 4.8 oz. per spindle shift), the 1.1 million spindles of theindustry should have produced about 300.0 million lbs. of yarn, more thandouble that actually produced during FY81. However, poor quality raw material,vintage equipment and the lack of maintenance and spare parts constrain pro-duction. Operation of the idle handlooms would have increased cloth produc-tion to about 1.3 million yards, significantly more than the demand projectedin the SFYP.

The Market and Marketing

2.08 The Supply and Consumption of Textiles. Cloth availability percapita has varied considerably during the pre and post-independence periods.While no accurate data of handloom production are available for FY81, thefigures are expected to be similar to those of FY80, in which case per capitaavailability is expected to remain at about 6 yards. This is hardly suffi-cient to make 3 lungis for the adult male or 1 saree for the adult female.This availability is very low considering the 1972 cloth consumption percapita for South Asia was estimated at 20 yards. 1/

Table 2.2: CLOTH AVAILABIILITY IN BANGLADESH(Million yds)

FY69 FY73 FY74 FY77 FY78 FY79 FY80

Mill Production /a 60.8 59.0 79.0 68.1 82.2 85.0 88.7Handloom Production 308.8 265.0 285.0 407.8 445.6 383.4 427.0

369.6 324.0 364.0 475.9 527.8 468.4 515.7

Imports (Net) /b 87.5 40.0 59.0 28.0 40.4 54.9 73.0

Total Available 457.1 364.0 423.0 503.9 568.2 523.3 588.7

Population 72.5 73.4 76.8 83.8 85.7 87.6 89.6

Yards per capita 6.3 5.0 5.5 6.0 6.6 5.9 6.6

/a Actual production, not converted to 54 pics.

/b A considerable amount of cloth is smuggled into the country or importedunder the Wage Earners Scheme. The exact amount of cloth involved is notknown.

1/ FAO - Per Capita Fibre Consumption, 1970-1972 (Rome 1974).

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2.09 Imports of Cotton, Yarn and Cloth. BTMC has been entrusted withall imports of raw cotton and the bulk of staple fibre imports. Annualimports are currently about 120.0 million lbs. of cotton and about 5.0 millionlbs. of mnf. To the extent that production of local raw cotton does not meetthe projections in the SFYP, imports of cotton would continue to strain GOB'sforeign exchange resources. Imports of yarn and cloth are made mainly by theprivate sector using direct import licences and imports under the Wage EarnersScheme (WES) and Import Entitlement Certificates (IEC) (formerly Export Perfor-mance Licences) Schemes. Volumes are difficult to ascertain as imports underthese schemes do not require import licences. In FY80, about 3.2 million lbs.were import under direct licences. Imports by way of direct import licencesattract a tariff and sales duty of about 40%, while imports under the WES areduty free. The regulations for importing finished fabrics are similar to thosefor yarn and cloth. However, in order to protect the handloom sector, importsof gray cloth, cotton sarees and cotton print of less than 38" are banned.Imports thus consist mainly of sophisticated blended fabrics used in the pro-duction of garments and high quality/high-priced sarees. Recently, a consider-able amount of low cost synthetic, international trade rejected cloth has beenimported into the country under WES and IEC Schemes reducing significantlydemand for local yarn and cloth.

2.10 Marketing of Textiles. The distribution of yarn and cloth producedby the public sector has changed several times since independence. However,key to each change has been GOBs conviction that private sector middlemenwere reaping inordinately high margins in channelling yarn from the mills tothe weavers and in turn cloth from the weavers to the consumers. Currently,GOB is using a mixed public/private sector distribution system, with 58% ofyarn and cloth being sold to some 4,000 private dealers tagged to individualmills and 42% to institutional buyers (e.g the BHB and Weavers Cooperatives)(Table 2.3). The dealers have allotments of about 600 lbs. per month securedby cash deposits which are forfeited if the allotments are not lifted.

Table 2.3: ALLOCATION OF YARN PRODUCTION(%)

Actual ProposedFY80 FY81 FY82 FY83

BHB 30 30 31 33Institutional Agencies 8 12 10 7Tagged Dealers 33 40 42 45Other Private Dealers 29 18 17 15

100 10'0 100 100

2.11 The present allocation provides a fair amount of competition betweenpublic and private distribution channels. In the short term, however, thereis still scope for reducing existing mark-ups and securing a more efficientflow of yarn to the consumer. In particular, BTMC should be allowed to disposeof part of its yarn production by direct sales through its retail cloth sales

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centres. 1/ BHB should concentrate its efforts in two crucial areas wherethe private sector might not perform efficiently: supplying yarn to loomlessweavers 2/ who also need credit facilities, and distributing yarn to the moreremote and isolated areas in the country.

2.12 In the private sector, the Weavers Cooperatives and BHB are becomingmore involved in the marketing and distribution of cloth, although most of itis still retailed direct by weavers. About 50% of the handloom sector's outputis sold directly through retail outlets. However, weavers owning 25 looms ormore significantly influence the distribution of cloth. These weavers provideyarn to the 1-2 loom units and in turn lift the finished production at priceswell below market price (in effect the single-loom weaver works on piece rates).About 55% of the small units have contracted loans from the large weaver andare thus bound to them as the main outlet for their production. GOB/BHB areaddressing this issue, but the magnitude of working capital required for theweavers is considerable. Greater use of Weavers Cooperatives is being empha-sized by GOB in order to permit the individual and loomless weaver to receivea higher share of retail profit margins.

2.13 Pricing of Yarn and Cloth. The determination of prices for domes-tically produced yarn and cloth is based on a mix of free market forces andGOB controls. For public sector production the pricing policy and pricestructure is dictated by GOB, which sets product price levels for yarn andcloth on the basis of average "ex post" cost of mill production. This pricingstructure takes no account of the varying qualities and cost structures ofthe individual mills. Prices are reviewed periodically (usually annually)although the review does not automatically result in price increases reflect-ing the whole or part of cost increases that have taken place. Over the pastfour years, yarn prices were increased in April 1976, reduced in July 1978,increased again in July 1980 and in April 1981. It is GOB's policy to sub-sidize the middle range counts (32" and 40") at the expense of the low andhigh counts. In the four-year period 1977-1981, price increases ranged from63% for 10-count yarn to 21% for 4C0-count yarn. The weighted average priceincrease over the period was about 28%, which is considerably lower than the40% increase in raw cotton world market prices during the same period and thecumulative domestic inflation rate of some 53%. While prices of public sectorproduction, particularly yarn prices, are controlled, cloth produced in theprivate sector (i.e. by the powerloom and the handloom sectors) from publicsector produced yarn is not subject to price control and prices are determinedby free market forces of supply and demand. Thus there is implicit subsidiza-tion of cloth production in the harLdloom dominated private sector.

2.14 The industry currently receives protection against imports withnominal tariff rates increasing as the stage of finished product progresses

1/ Such an approach was adopted nmost successfully in FY76 when BMTC wasallowed to sell its yarn directly. As a result of that measure, largestocks of yarn were reducecd from 23.3 million lbs. in FY75 to 7.7 millionlbs. in FY76 and 2.8 million lbs. in FY77.

2/ Weavers who rent looms from loom owners.

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to finished cloth (Annex 2.2). The levy of import duty and sales tax variesaccording to the count of yarn and the source of foreign exchange utilized.The net effect of the tax structure combined with a premium of 20% paid onforeign exchange obtained in the IEC and WES markets effectively raise cifprices by about 50%. 1/ This level reflects the "infant industry" statusaccorded to the sector. With improvements in production efficiency andquality through rehabilitation the present tariff levels could be reducedgradually to a level when the industry is protected from dumping and yetprovided with an incentive for improvement. With the addition of foreignexchange premia and import taxes, the prices of imported and domestically-produced yarn are as follows:

Table 2.4: YARN PRICES (Tk/lbs)

Count Ex-mill /a Cif Landed Cost

20 24.3 20.6 30.932 25.1 24.2 36.340 31.9 27.0 40.560 58.3 42.7 64.080 76.3 55.2 89.4

/a These prices reflect a 10% increase implemented inApril 1981.

Development Strategy

2.15 The textile sector in Bangladesh faces a number of serious problemswhich affect its present performance and future development prospects. Thekey problem areas were identified and analyzed during IDA's survey of the juteand cotton textile industries in 1975. 2/ In the case of the public sector,operational conditions in the mills were characterised by widespread under-utilization of capacity, deteriorated and obsolete equipment, over-employment,low levels of technical skills and lack of raw materials and spare parts.As a result, product quality was poor. In the powerloom and handloom sectors,GOB policies relating to credit allocation, pricing, distribution and invest-ment were having a considerable negative impact. Against this background(and GOB's policy decision to support the continued existence of the textileindustry), GOB agreed to a series of actions which were introduced under theFifth Imports Program Credit and subsequently expanded under the ongoingSixth to Eighth Imports Program Credits (Annex 2.3). First was the intro-duction of a number of actions designed to improve the performance of produc-tion facilities through: (i) increased availability of spare parts; (ii) more

1/ Tariff levels are higher for imported handloom sector items. Rawmaterials and spare parts are subject to import duties of 115%.

2/ Bangladesh: Report NO.883-BD-"Survey of the Jute and Cotton TextileIndustries", September 25, 1975.

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comprehensive maintenance programs; (iii) rationalization of product lines;(iv) implementation of training programs; and (v) upgrading management systems.Additional to these actions, the program provided for a number of studies todetermine the comparative advantages of the industry, the relative efficienciesof the subsectors and the potential for producing indigenous staple fibre.The findings of these studies were to be used to determine an appropriatedevelopment strategy for the industry. Given a situation of comparativeadvantage, the development paths of other countries suggested that a laboursurplus country, such as Bangladesh, could become an exporter of textiles,particularly of medium grade cotton/mmf blends.

2.16 In 1980, a detailed study carried out by Boston University 1/, foundthat the industry, represented by the public sector mills, has positive shortand long-term economic domestic resource costs (DRC) 2/ of 0.40 and 0.70

respectively which are relatively insensitive to considerable changes inprice, and a high level of labor productivity in terms of net value added

vis-a-vis other subsectors. Thus it was economically advantageous for

Bangladesh with its low wage rate labor force to continue to import raw cottonfor conversion into yarn and cloth of the count and pic range currentlyproduced. However, any move to produce more sophisticated products (i.e.50/50 polyester/cotton blend) or to move to more advanced technology wouldrequire a new economic analysis.

2.17 In terms of subsectoral efficiency 3/, the weaving sectors of thelarge mills were shown to have the highest level of output (12,000 yds perloom per loom year 4/) and value added, although these advantages were offset

slightly by a high capital/output ratio. The powerloom sector with an outputlevel of about 8,000 yds. per loom year, demonstrated low costs of production,particularly of specialized fabric and of medium grade cloth, and a low perunit cost of investment. While no firm case for concentrating medium grade

1/ The Industrial Comparative Advantages of Bangladesh - Boston University,June 19,1980.

2/ DRC is the ratio between the domestic resources used in each unit ofproduction and the foreign exchange saved by producing that unit inBangladesh, rather than importing it. The ratios are expressed in Takaper dollar saved. Any ratio below the current exchange rate (FY81:Tk19.0 = US$ 1.0) means that the domestic value of resources used is lessthan the value of foreign iexchange saved or earned at current exchangerates. The methodology used to compute the DRCs is held on the ProjectFile.

3/ (i) "Comparative productives efficiency of Large-scale and Small-scaleCotton Weaving Industry in Bangladesh", Bangladesh Institute ofDevelopment Studies - September 1978, updated December 1980;(ii) Census of Handlooms in Bangladesh; Institute of BusinessAdministration, Dacca, March 1979.

4/ Loom Year = 300 days x 3 shifts of 8 hours per day.

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cloth production in the powerloom sector (or handloom sector) could beestablished on purely technical grounds, the low capital costs per unit ofdomestically manufactured powerlooms makes investment in this sector rela-tively attractive and worthy of further consideration by GOB.

2.18 In the handloom sector, output per loom year is low (about 1,700yds), as is the working capital/value added ratio at 0.43. However, thecapital output ratio is low compared to the powerloom sector (4.77) and thelarge mills (19.01). In FY80, total output of cloth from the sector wasestimated at 427.0 million yards or about 70% of annual consumption require-ments. Given availability of working capital, spare parts and raw materials,production from 437,000 looms worked for an average of 12 hours per day, 300days a year, (assuming 40 picks per inch) could be 1.3 million yards - morethan the targetted requirement in FY85. This level of production could befurther increased by converting pit looms to semi-automatic looms, which havea production capability 200% more than pit looms. As there are no inherenttechnical difficulties to operating looms as single units or in sheds of 2 to20 looms as is presently the case there is strong justification to optimizethe use of existing facilities initially to meet domestic demand and at alater stage produce high quality, high value added items for export. Besidesthe economic consideration, this focus would support GOB's employment andincome distribution objectives.

2.19 Given rising international prices of raw cotton and the slow rateof expansion of local cotton crops, Bangladesh has sensibly decided to reducethe cost of textiles by the use of mmf. Since FY75, the public sector millshave experimented with blends of cotton/viscose and cotton/polyester in blendratios of 60:40 to 80:20. Market resistance to a 60:40 blend of cotton/viscoseresulted in a reduction in the blend mix and the sector is presently producingblended yarn mixes in the ratio of 75:25. In order to reduce further the costof polyester fibre imports GOB has carried out several studies 1/ to determinethe feasibility of producing mmf from local natural gas or the naphtha by-products from the leased Singapore Refinery. These studies indicate thatlocal natural gas is unsuitable for polyester fiber production and that thereis no economic case for manufacturing staple fibres in Bangladesh from im-ported naphtha. It was found that the long-term cost of local productionfrom naphtha would be higher than the cif price of imported staple fibre,although the cost of locally-produced fibre would be lower than the projectedcost of raw cotton imports. Although no firm decision has been taken, GOB isconsidering the construction of a 12,500 MT polyester fibre production plant.This would meet the public sector mills requirements for the immediate futureassuming a yarn blend of 75:25.

2.20 GOB's Objectives FY81-FY85. The SFYP gives high priority to thetextile sector through rehabilitation and investment. In policy terms, GOB'sobjectives are to (i) optimize the capacity utlization of existing mills; (ii)improve the quality of production; (iii) reduce imports of cloth; (iv) reduceimports of cotton/mmf by development of local resources; (v) utilize locally-

1/ Action Program Sixth Imports Program Credit.

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produced textile machinery and spare parts; and (vi) revitalize the handloomsector to provide more employment opiportunities, particularly in the ruraldistricts.

2.21 Projected Supply and Demand. In the SFYP, the per capita consump-tion of cloth is projected to increase from about 6 yds. in FY81 to 12 yds. inFY85. 1/ This implies an annual growth rate of 11.4% which is optimistic.Population is projected to increase from 89.6 million to 100 million by FY85or at 2.3% per annum. Thus, 2.3% of the expected consumption increase wouldcome from population growth. However, with planned per capita income growth2/ of about 4.5% and an income elasticity for cloth of about 1, a more con-servative assessement of the total increase in consumption would be about6.8%, implying a per capita consumption of cloth of about 9.5 yards by FY85,a 44% increase over current levels of consumption. This demand would exceedpresent supply capabilities, and imply that either additional imports or addi-tional facilities would be needed to meet demand.

2.22 While GOB is projecting a 4.5% increase in per capita income, itis difficult to expect any strikiLng improvement in textile availability andthus consumption because of the balance of payment impact of importing rawmaterials and the slow progress in developing indigenous cotton supplies.As noted in paragraph 2.19, there are some prospects of reducing costs of pro-duction by using mmf, but it is unlikely that any effect would be observablebefore FY85. The yarn requirements (in lbs.) for the next five years underdiffering per capita consumption levels are projected as follows:

Table 2.5: PROJECTED YARN CONSUMPTION(Millions lbs.)

FY80 FY81 FY82 FY83 FY84 FY85

Population (millions) 89.6 91.6 93.7 95.8 98.0 100

Consumption (lbs.) /aper capita

6.6 yds. 166 170 174 178 182 1867 yds. 180 184 189 193 1978 yds. 206 211 216 221 2259 yds. 232 237 242 248 25310 yds. 258 263 269 276 28112 yds. 309 316 323 330 338

/a Assuming 4.5 oz./yard of cloth.

1/ SFYP, XIII.14.

2/ SFYP, III.5.

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2.23 To achieve its objectives and planned levels of output, GOB's strat-egy for the development of the industry builds on the findings of the variousstudies carried out under the ongoing import program credits. Recognizingthe comparative advantage of the spinning sector, GOB proposes to expand thenumber of spindles/production of yarn in the sector as follows:

Table 2.6: PROJECTED SPINDLE GROWTH

Spindles lbs. Yarn (million)

(i) Rehabilitation of 50 175,000 38.0Operational Mills

(ii) 9 Mills under Construction 112,500 19.0

(iii) Proposed Private 425,000 81.0Sector Mills 712,500 138.0

In this expansion, the rehabilitation of existing units would be given toppriority, followed by the completion of the 9 mills currently under construc-tion in the public sector. GOB has opened the spinning sector to privateinvestment and has projected investment for about 425,000 additional spindles.However, given the uncertainty of the per capita demand projections, theconstruction of new spinning mills would be allowed only if shown that theywere economically and financially viable. Whenever possible, establishmentof new mills would be used to disperse industries to less-developed areas inorder to generate employment opportunities. To facilitate the rehabilitationof existing mills and the construction of new mills, locally-manufacturedmachinery and spares will be utilized as far as possible. 1/ Initially,BTMC's central workshop is to be developed as a modern workshop and individualmill workshops are to be upgraded. Sophisticated parts, such as ring cups,spindles, bolsters, tension shafts, etc. would be produced by engineeringunits under the control of the Bangladesh Steel and Engineering Corporation.For the handloom sector, GOB has provided additional credit facilities to theWeaver Cooperative through the Commercial Banks to permit the repair andreactivation of idle looms. Additionally, BHB will carry out a program ofloom conversion, converting pit looms into semi-automatic looms (paragraph2.18).

2.24 Planned Investments. To achieve its objectives for expanding thespinning and weaving sectors, GOB has projected the following investmentsin the sector:

1/ "Feasibility Study for Local Production of Spare Parts and TextileMachinery" - A. Kolczynski - UNDIO/UNDP Productivity Team, September1980.

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Table 2.7: PROJECTED INVESTMENT

US$ Million /aFY81 FY82 FY83 FY84 FY85 Total

Public Sector

BMR 12.0 10.0 12.5 7.0 41.5Ongoing Projects 19.0 6.5 3.0 28.5Finishing Plant 3.0 5.0 3.0 11.0Management Training 0.5 0.5 0.5 0.5 2.0Research 0.5 0.5 0.6 0.4 2.0

35.0 22.5 19.6 7.9 .. 85.0

Public/Private

New Mills 9.0 33.0 41.0 33.0 26.0 142.0Hand Loom SectorInstitutions 1.9 2.5 3.0 .3.9 3.9 15.2

45.9 -58.0 63.6 44.8 29.9 242.2

/a FY80 prices.

2.25 Under the SFYP, the role of the private sector is seen to be com-plementary to, rather than competitive with, the public sector. Provisionhas been made in the Plan for the installation of at least 425,000 newspindles in the private sector, although initially, the private sector wouldconcentrate on specialised textile production (i.e. mnnf cloth), weaving andfinishing. At current capital costs of US$400 per spindle, implementation ofthese spindles would imply an investment of about US$170.0 million which wouldabsorb a significant part of the scarce foreign exchange resources availablefor investment in the private sector. If private sector investment of thismagnitude is to come forward, GOB needs to clarify its import, incentive,protection and industrial policies relating to the proposed units (paragraph2.33). With the combined public/private sector investment, GOB anticipatesthe creation of about 500,000 new jobs, of which 92% would be in the privatesector.

Issues and Problems of the Industry

2.26 If GOB is to achieve its objectives and meet the levels of invest-ment planned under the SPYP, major revisions in sectoral policy will berequired in three crucial areas (i) pricing policy for yarn and cloth; (ii)the distribution system for yarn and cloth; and (iii) private sector controlsand incentives. Additionally, to achieve its projected output targets fromthe public sector, revisions will be required to GOB½s public sector policiesaffecting procurement of raw materials and employment.

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2.27 Pricing. The financial viability of the industry and the level ofprivate investment in the powerloom and handloom subsectors has been signi-ficantly affected by GOB's policy of setting ex-mill prices for yarn and cloth.Prices of public sector products are reviewed periodically, but adjustments

are irregular, partial and delayed. As a result of distribution system weak-nesses, the implicit consumer subsidy in the controlled prices for publicsector products has not reached the consumer, as yarns and cloth are sold in

the market at prices considerably above those set by GOB. As controlled priceshave been set at cost or below cost, neither the consumer nor the public sectormills benefit from the policy.

2.28 GOB's pricing/subsidy policies for the textile sector, and theimpact of the policies on public sector efficiency and private sector invest-ment has been the subject of a continuing dialogue with GOB starting at thetime of the Sixth Imports Program Credit. Policy papers have been prepared byGOB and some limited action has been taken to adjust the price structure, butlittle real improvement in rectifying the weaknesses of policy applicationshas been achieved. While price increases appear necessary to improve theprofitability of public sector units and provide more incentive to privateentrepreneurs to invest in new spinning mills and weaving facilities, it isrecognised that any arbitrary increase in the domestic price of yarn overand above the rate of increase in the cost of imported yarn would increasethe attractiveness of imported yarn and could lead to an increase in imports.The problems of the industry can ultimately only be solved through increasedproductivity and through significant improvements in the quality of the yarnproduced. Financial and technical assistance provided under the proposedrehabilitation project will help bring this about. However, competition fromthe proposed private mills and from imports is an important element in pro-viding the necessary stimulus for such a modernisation. This competitionwould be strengthened by a move from controlled ex-mill prices to "freemarket" i.e. market determined pricing. GOB has recognized this need and hasagreed to adopt market determined free market pricing, under existing tariffstructures, for all public sector textile mills in accordance with a timeschedule acceptable to IDA. As a first step in this program 10 mills pro-ducing high quality yarn and cloth have now implemented free market pricingof their products. GOB plans to complete the transition to free market pric-ing as quickly as possible with the present target fixed at June 30, 1985.Progress on transition would be subject to annual review with the objectiveof bringing 15-16 additional mills under the purview of the policy eachyear.

2.29 Yarn Distribution. Although the present system of distribution ofyarn and cloth provides for public/private sector competition, the system needsto be revised. The number of tagged dealers is excessive and should be reduced.Rather than tagging to particular mills, which can be cumbersome and inflexible,a limited number of wholesale dealers should be selected to service particulardistribution areas. A number of small retailers would, if necessary, then betagged to the wholesalers to distribute into smaller markets. The maximum al-lotment of bales per dealers needs to be eliminated or significantly increasedin order to reduce high mark-ups. This is especially so for the average yarncounts (32s and 40s) where dealer mark-ups seem to be the highest, thus neu-tralizing GOB's attempts to subsidise prices for average counts with higherprices for higher counts. Together with the revision of the allotment limits,

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the present system of linking compulsory purchases of slow moving cloth topurchases of yarn should be eliminated. BTMC should rid itself of stocks ofslow moving cloth through independent marketing efforts (paragraph 3.28).

2.30 GOB/BTMC agree on the need to revise the existing yarn distributionsystem. A beginning has been made by changing the policy on direct sales tothe weavers. Sales centres have been established in outlying areas and morerecently direct selling to weavers through the Gram Sarkers (Village Councils)has been introduced by BTMC. To support these actions, GOB has agreed toadopt appropriate measures, along the lines indicated in paragraph 2.29, toimprove the yarn and cloth distribution system.

2.31 Optimum Mill Sizes. For many historic reasons, mills in Bangladeshvary in size from 12,500 spindles to 50,000 spindles and from 100 looms to 55looms. Although this is a wide range of sizes, it reflects differences inthe product range of the mills. Some of the smaller mills, however, make thelargest range of products. Of the 60 operational public sector mills, 22 aremills with about 12,400 spindles. The question of optimum mill size is oftendebated. Today, the industry "standard" unit for spinning an average countof 30s could be said to be the 30,000 spindle ring mill and for highest effi-ciency, units should not produce a count range wider than 20%, e.g. a millof 30,000 spindles could have a count range of 24s to 36s with an averageof 30s. Taking into account the effect of fibre characteristics on machineperformance, the minimum "international" economic unit size for various countsare:

Minimum Economic Units

Average Count Ring Spindles Capacity lbs./Shift

lOs 11,000 10,60020s 20,000 9,70030s 30,000 9,00040s 40,000 8,40060s 50,000 5,70080s 60,000 5,300

lOOs 100,000 4,800

2.32 To date there has been no determination of an economic unit sizefor textile mills in Bangladesh. Mi:ll sizes have been limited (directly andindirectly) as part of the Governmentls policy for promoting regional develop-ment and employment. While these are worthy objectives, the economic andfinancial cost of doing so through controlled mill sizes could be high. Underthe SFYP there is no provision for the construction of additional new mills inthe public sector as GOB anticipates that any additional production capacityrequired in the country would be provided by the private sector. Should thisinvestment be needed and not forthcoming, GOB would consider the constructionof new mills in the public sector to meet the capacity shortage, provided thatsuch investment met normal criteria of economic, financial and technicalviability. In the case of private sector investment, GOB has approved theconstruction of a number of mills of 12,500 spindle capacity with the provisothat the capacity could subsequently be increased to 25,000-30,000 spindlesper unit. However, GOB would monitor total investment to ensure that anexcess of capacity is not created in the country.

2.33 Tre !R..le o-s- Li.-te 17ri-aze Sector. While GOB's stated policy is toexpand the role or' i r5te sectsr in the industry, GOB has not indicatedclearly he,w it pr.390ose3 to foster the involvement. Currently it is adoptinga policy mixin.g ad hoe and infreque-nt d--vestment of mills with a planned pro-gram of extensi-ve si'a sect-cr I,nvestment in new spinning mills. At presentthere is no clear rationale or program f or divesting (or returning to theirformer owners) mLll over at independence. As many of these are unitsof 12,500 spindlies, div, stmert would provide an opportunity for the privatesector to exoanF - ithese Lo mo,e economic unit sizes of 25,000 spindles ata lower overall cap:tal cost than that of constructing new units of 25,000spindles. As of November 3A0, 1981, GOB had divested seven small specializedtextile mills and had set in motion the procedur?7 to wind up (through sale/divestment) four chronically unprofitable mills - (see paragraph 7.08) witha total spindlage of 61,000 and 1,600 looms. Issuance of the Government orderproviding for the winding up/divestment of the four mills is a condition ofeffectiveness of the proposed credit.

2.34 In the case of proposed private sector investment GOB has indicatedthat investors would be afforded the same conditions given to private sectorinvestors in other industrial subsectors. However, given the levels of foreignexchange required to establish new mills and to procure raw material, GOBhopes that private investors would obtain their foreign exchange requirementthrough the WES or by way of access to suppliers credits for equipment pro-curement.

Sectoral Planning

2.35 Both private and public sector units are operated in line withpolicy directives from GOB. The private sector has a fair degree of freedomin interpreting and implementing the policies, whereas the public sector unitscannot (i) set the selling prices necessary to meet profitability targets;(ii) establish a distribution system best fitted for their products; (iii)expand or reduce their production facilities without reference to GOB, and(iv) fix taheir own employment levels. To the extent that these decisionscontinue to be taken at the Governmental level, they should be based on in-depth analysis and appropriate planning. At present, this is not the caseand there is a need to develop the required policy/ planning role within theMOT. Such a function within MOT would (i) liaise closely with and assist thePlanning Commission in its overall planning efforts; (ii) formulate recom-mendations on policy and (iii) assist BTMC implement these policies. MOT'scapabilities to perform this function have to be strengthened, particularlyin areas of in-depth analysis of likely future development, monitoring futuredevelopment, monitoring the effects of existing policy measures againstdesired objectives, and systematic attention to major issues affecting thedevelopment of a medium term strategy for the textile sector. GOB/MOT recog-nize this need and wish to do so with IDA's technical assistance. Accord-ingly, GOB has agreed to employ an economist/econometrician by July 31, 1982for 24 months to assist the Textile Wing of the Ministry in charge of Tex-tiles, establish the planning cell and implement an agreed work program.

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III. THE BANGLADESH TEXTILE MILLS CORPORATION (BTMC) 1/

Background

3.01 BTMC located in Dacca is operated as a wing of the MOT. It wasestablished in 1972 with responsibility for administering the operations ofthe 74 textile mills owned by GOB (Annex 3.1). BTMC is the second largestof GOB's parastatal corporations.

Autonomy

3.02 BTMC. As a wing of the MOT, BTMC is required to operate within theparameters of autonomy and responsibility set by GOB. BTMC's annual operatingbudget is subject to approval by both the MOT and the Ministry of Finance inclose collaboration with the Planning Commission. In this process, productiontargets are set by the MOT. Bulk purchases of raw cotton, (where procurementis above US$1.2 million), a critical element in the efficient and profitableoperation of the mills, is subject to the approval of the MOT. The pricing ofyarn and cloth, ex-mill, is also controlled by GOB. In the area of capitalexpenditure, BTMC's development budget is set in consultation with the MOTand is subject to the approval of four bodies, the Executive Committee of theNational Economic Council (ECNEC), the Ministry of Planning, the Ministry ofFinance and the MOT. 2/ With these numerous layers of review and approval,disruptions in BTMC's operations are frequent, although the incidence hasdecreased during the past two years. BTMC's autonomy is also limited in staff-ing and wage rate determination. In the area of staffing, all directors areappointed by GOB and any appointment to a position with the rank of deputysecretary, which can be made by the Chairman, is subject to veto by the MOT.In the area of salary determination, BTMC is restricted by GOB's civil servicesalary and benefit scale although some flexibility for change is allowed throughappropriate incentive systems (paragraph 3-26). While the autonomy of BTMChas clearly been limited and BTMC is burdened with requirements which make itdifficult to achieve the profitability targets set by GOB (and IDA) 3/, BTMC'sautonomy has increased. Under the action programs of the Imports ProgramCredits, major constraints on spare parts procurement, raw cotton procurement(below US$1.2 million), unit personnel recruitment and marketing have beenremoved and changes have been agreed in the areas of price control and cottonprocurement.

3.03 Mill Management. At the mill level, mill boards of directors/millmanagers have autonomy over a limited number of key areas, such as spare partsprocurement, subject to expenditure limits set by BTMC. BTMC is responsible

1/ BTMC has no shareholdings in the individual textile mills or productionfacilities. References to BTMC in the report relate to the aggregationof the performance of individULal mills.

2/ The Annual Development Plan (ADP) includes funds for rehabilitationand special maintenance prograLms.

3/ Eighth Imports Program Credit (Credit 980 BD).

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for decisions on (i) senior level staffing (e.g. Spinning Masters, WeavingMasters, etc.) although the opinions of mill managers are taken into consider-

ation); and (ii) procurement and allocation of raw materials (e.g. cotton,viscose, polyester staple, etc.).

Organization and Management

3.04 BTMC is headed by a six-member Board, appointed by GOB, comprisingthe Chairman and Chief Executive Officer and five functional executivedirectors. As noted in paragraph 3.02, the Board has limited policy makingpowers. Essentially, it is the operational decision-making organ of the MOT.Through its administrative organisation, the Board controls public sectormills and supervises the construction of new mills. Annex 3.2 shows thestructure of BTMC. The present Chairman was appointed in 1979 and isexpected to be retained in his post for at least three years. With theexception of the Chairman, BTMC's directors have been with the Corporationsince the establishment of BTMC or since the creation of their respectivedepartments within BTMC. Thus, at the Corporation level, there has beencontinuity of top management, although as civil servants the directors couldbe posted to other GOB positions after three years of service with BTMC.

3.05 At the mill level a management committee consisting of the MillManager, Weaving Master, Spinning Master and the Administration Manager monitorday-to-day operational activities. In turn they are supervised by a five-member board of directors responsible, within limits set by BTMC, for theoverall operations of the mill. The Chairman of the Mill (Enterprise) Boardis a director of the BTMC or a senior BTMC officer. Other board members areusually the Zonal General Manager (ZGM), the Mill Manager and representativesfrom the banking system and the private sector (Annex 3.3). Until March 1981the Chairman of each Mill Board was a BTMC director. As there are only sixBTMC directors to serve on 74 enterprise boards, board meetings were heldirregularly, usually at intervals of three months. Wich the greater spreadof Chairmanships, board meetings are now held monthly.

3.06 While the greater spread of Mill Chairmanships amorgst BTMC direc-tors and senior officers (paragraph 3.05) has eased problems of communica-tions and speeded up administrative decisions, extended spans of control andlimited responsibilities are still evident within the present organizationstructure. These weaknesses have been recognized by MOT/BTMC but as yet BTMChas not developed a clearly defined policy of BTMC/Zone/Mill relationships.However, BTMC has agreed to employ a management consultant by July 31, 1982for 12 months to carry out a detailed review of its organization structureand management succession policies and to assist BTMC implement appropriaterevisions.

Production Performance

3.07 Annex 3.4 provides details of the overall operations of BTMC fromFY76-FY80 and FY81, while table 301 below shows some key indicators of BTMC'S

performance and the targets of production agreed for FY80 in connection withthe Eighth Imports Program Credit.

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Table 3.1: KEY PRODUCTION INDICATORS

FY70 FY76 FY78 FY80 FY81… ------ Actual - Actual Target Actual Target

ProductionYarn (in 32s) M. lbs. 115.8 91.1 106.9 112.9 137.5 121.8 129.9Cloth (54 pics) M. yds. 59.1 76.0 84.5 92.4 117.5 88.8 104.0

Efficiency - SpinningCapacity Utilization (%) 88.0 73.0 82.0 79.0 86.0 82.0 85.0Oz./Spindle Shift 2.84 2.44 2.38 2.39 2.51 2.41 2.72

WeavingCapacity Utilization (%) 43.0 63.0 67.0 73.0 85.0 70.0 90.0Yds./Loom Shift 24.0 19.7 20.3 20.8 22.9 21.4 24.0

Wastage (%)Yarn (Raw Cotton) - 12.6 9.5 11.9 9.0 11.5 9.2Cloth (Yarn) 4.8 4.7 4.2 4.4 3.0 4.6 3.0

Source: BTMC Operational Reports.

3.08 During FY81 performance of the mills was mixed. Thirteen millsexceeded the efficiency target, producing yarn and cloth comparable to highquality imported products. Twenty mills fell slightly below the efficiencytargets although they still produced good quality yarn. The remaining mills,including ten chronically unprofitable units, fell below the efficiency targetsproducing poor quality end products. Overall production of yarn was at itshighest level exceeding pre and pos t independence output, although this wasin part due to new mills coming on stream. Production of cloth fell belowthat of FY80 due to the closure of a nxumber of weaving sections for rehabili-tation. Efficiency for both spinning and weaving is still below South Asianorms and is considerably below general international standards. If capacityutilisation/production is based on operational spindles and spindle productiv-ity achieved in other countries in the Region (i.e. about 3.5 oz. per spindleshift), actual spindle capacity utiLisation in FY81 was about 68%. Powerfailures and load shedding continued to affect significantly mill performance,with many mills forced to work four--hour shifts or abandon shifts altogether.Losses of related production time rose from 3% in FY78, to 10% in FY80, toabout 12% in FY81, resulting in a loss of about 11.0 million lbs. of yarn.Loss of cloth production increased also rising from about 6.2 million yds. inFY80 to 7.2 million yds. in FY81. Labor disputes and wildcat strikes continuedto disrupt production notwithstanding iLncreases in fringe benefits and wagerate increases of more than 13% per arnum over the past three years. Lossesin production from industrial unrest normally about 5% of possible yarn andcloth production remained at the FY80 ]Level of about 7%.

3.09 The inadequacy of primary quality control on raw materials has alsobeen a major factor affecting production and product quality. Waste percent-ages for the mills has ranged from 6.7%, to 22.0% for spinning, and from 2.4%

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to 10.3% for weaving. With raw materials accounting for about 65% of totalproduction cost, these high waste levels are untenable. In FY79, as a firststep to controlling the waste levels, BTMC introduced the use of USDA specifi-cations for cotton shipments and in late FY80, strengthened this action byrequiring pre-shipment inspection of all deliveries to BTMC. However, Govern-ment to Government purchases of low grade cotton of short staple length 1/ hasbeen a major cause of disruptions to production, poor machine efficiency andhigh levels of wastage. This form of cotton procurement, whilst made at aninitially low cost, results in batch level wastages of 12%-14% of input ascompared to an average wastage level of 8%-9% when using higher grade USDAspecification cotton. Additionally, as the nominal staple lengths are tooshort for the end use intended, overspinning is often the norm. Much of thecotton procured is also excessively dirty, variable in staple length and otherfibre properties. Normalised to 30s count, the output of yarn per spindle perannum in Bangladesh in FY81 was 150.0 lbs. against figures of 295 lbs. forHong Kong and 300 lbs. for the USA. Some of the difference is accounted forby the low proportion of active spindles, and by the effects of power cuts.However, even if Bangladesh spindles were operated 24 hours per day for 360days without power failure, the output per spindle per annum would only beraised to 170 lbs. With better procurement and greater emphasis upon quality,the spindle output could be increased by about 25%-30%. Some of this improve-ment would come from fewer machine stoppages and breakages of yarn, but mostof the benefit would come from the use of more uniform staple and staplerelevant to yarn count.

3.10 While raw material has influenced significantly the level of wastage,this is due also to a lack of technical knowledge by mill personnel, shortagesof quality control staff at mill level and the absence of adequate qualitycontrol equipment. BTMC's training programs should address the lack of tech-nical knowledge at mill level and BTMC has recently initiated a program torecruit and train about 200 Science graduates to serve as quality controllersat mill level. To support these actions, BTMC proposes to establish sevenzonal quality control laboratories and upgrade existing mill quality controlequipment to acceptable "industry" levels. About US$2.5 million would berequired for this purpose and pending identification of alternative sourcesof financing, GOB/BTMC have requested that the quality control equipment re-quirements be funded as part of Phase 1 of the BMR program. Accordingly, theamount required has been included as part of the total project cost to beconsidered for IDA financing (paragraph 6.1).

3.11 Of the major obstacles to improved efficiency and increased capacityutilisation noted above, only cotton quality and maintenance are within thereal control of BTMC. Scope for improving production efficiency in many millsis limited also by the age of the facilities. However, it is evident thatthere is a need to (i) rehabilitate existing machinery, through the provisionof spare parts and machine assemblies; (ii) transfer equipment amongst mills

1/ Staple lengths of 1.0" and above are required to give satisfactoryproduction. Staple lengths below 1.0" (particularly Pakistan/Russiancotton) result in excessive breakages and knotting.

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to increase equipment standardisation; and (iii) balance operational facili-ties to remove production bottlenecks. Action to rectify these weaknesses,and bring production facilities (and output) into line with South Asian normswill be a long task, but one capaLble of achievement within the context of theaction progr~as already underway in conjunction with the ongoing imports pro-gram credits (Annex 2.3). To supplement these programs, however, there is aneed to address a number of weaknesses in BTMC's production planning and con-trol function. This is presently fragmented within BTMC, and does not functioneffectively at mill level. Despite action under the Fifth Imports ProgramCredit to prune count production, many mills are still producing a wide rangeof counts (10 or more) which affects output and capacity utilisation. BTMCrecognises these weaknesses and gives high priority to their correction. ThusBTMC has agreed to employ a production planning and control advisor by July31, 1982 for a period of 24 months to review its existing production controlsystems and assist BTMC/Mills implement appropriate changes to upgrade theproduction control function. Terms of reference for the assignment are heldon the Project File.

Financial Performance and Prospects

3.12 Aggregate financial statements for BTMC are shown in Annexes 3.5and 3.6 and are summarised below:

Table 3.2: SUMMARIZED INCOME STATEMENTS

(Tk Millions)FY76 FY77 FY78 FY79 FY80 FY81 /a

Sales 1,820 1,813 2,072 2,483 2,535 3,305Gross Profit 124 (10) (7) 148 (73) 160Net Profit Before Tax 19 (138) (79) 47 (187) (110)Net Profit After Tax (51) (166) (114) (22) (209) (168)Gross Profit % - Sales 6.8 (0.6) (0.3) 5.9 (2.9) 4.8Net Profit (AT) % - Sales (2.8) (9.1) (5.5) (0.9) (8.2) (5.1)

/a Provisional.

Source: BTMC, November 1981.

3.13 In reviewing BTMC's performance, it is necessary to note that itis confronted with multiple objectives and must perform multiple roles. Whilemills are expected to operate as efficient autonomous commercial organizations,they are required to contribute to GOB's redistribution of income policies bymaintaining excessive levels of employment (paragraph 3.23) and by being usedas channels for distributing consumer subsidies (paragraph 2.28). GOB hasalso intervened in the operations of BTMC. It has arranged raw cotton pro-curement, sometimes to the disadvantages of the sector. Wage rate increaseshave been awarded by GOB without any linkage to productivity improvements.Further, mill management has been prevented from closing facilities andreducing workforces necessary to optimize production efficiency. Finally,GOB has controlled product selling prices despite general cost inflation.

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3.14 Since FY76, raw cotton prices have risen from 60 cents per lb. to90 cent per lb. or by 51%. Labour costs have risen by about 125% followingsignificant wage rate increases in FY78 and FY79, while power costs haveincreased by about 50%. Overall, the total cost of manufacturing yarn andcloth has risen by about 45% and 38% respectively. The weighted average priceincrease for all BTMC products has been about 28%. Annex 3.7 shows the coststructure/margin on BTMC's products for FY76-FY80.

3.15 Annex 3.8 lists the profits and losses of individual mills forFY76-FY81. In the case of the profitable mills, all were established after1947 and most were established after 1960. In general, their facilitiesare technically more efficient and their capacity utilization and outputis high. Analysis of mill performance shows the following split ofprofitable/unprofitable units:

Table 3.3: MILL PROFITABILITY (Before Tax)

(Tk Millions)/a

FY76 FY77 FY78 FY79 FY80 FY81No. Amount No. Amount No. Amount No. Amount No. Amount No. Amount

ProfitableMills 30 116.2 18 50.5 19 68.4 34 143.1 22 38.8 24 105.4Non-Profita-ble Mills 22 (97.1) 35 (188.5) 34 (147.4) 24 (95.6) 39 (225.6) 36 (216.0)

52 19.1 53 (138.0) 53 (79.0) 58 47.5 61 (186.8) 60 (110.6)

/a Provisional.

Source: BTMC November 1981.

The losses are concentrated in 10 mills which have accumulated losses of Tk551.8 million (US$ 29.0 million) during the period FY76-FY81, without whichBTMC would have made cumulative profits of Tk 220.0 million (US$11.6 million).Six of the ten mills are covered by the proposed project. With the invest-ment and technical assistance proposed, these mills are expected to approachbreakeven in FY84 and to generate profits from FY85 onwards.

3.16 Financial Structure. The aggregated balance sheets of BTMC (Annex3.6) show the deteriorating trend in its overall financial position sinceFY76. The positive equity position of Tk 295.0 million (US$15.5 million) inFY76, has been eroded by successive operating deficits to a negative equityof Tk 101.0 million (US$5.3 miilion) in FY80. Currently, 25 mills havenegative equities and working capital balances and rely upon default onrepayment of long term debts and large working capital loans from the banking

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system via BTMC to remain operational (paragraph 3.18). Under the EighthImports Program Credit, GOB agreed to a program of financial restructuringfor the mills, with target long-term debt/equity ratios of 60:40 for eachmill to be achieved by December 31, 1984 through annually-phased loan conver-sions and cash infusions. In FY80, GOB converted Tk 334.0 million (US$17.6million) of ADP loans into equity and agreed to provide BTMC with five yearlycash infusions totalling about Tk 860.0 million (US$45.3 million) of additionalequity. The total amount of cash infusions would be adjusted to reflect anyprofits and/or losses incurred during the period to December 31, 1984. How-ever, GOB agreed that it would provide a yearly minimum cash infusion equalto the amount required to service mill repayment obligations to the country sdevelopment banks on long-term debt requirements. In August 1980 a contribu-tion of Tk 186.8 million (US$9.8 million) was made to cover part of the totalrequirements for FY80-FY81. Additional to the capital restructuring, GOBagreed to implement by March 31, 1981 such actions as were necessary toprovide the mills with a 10% after tax return on shareholders funds based onan assumed positive equity and debt/equity ratio of 60:40. In July 1980, GOBannounced price increases of 17% and 15% for yarn and cloth respectively, andin April 1981 a further increase of '0% on yarn. These increases have helpedthe mills move towards profitability but have not bridged entirely the consi-derable gap between cost of production and selling prices.

3.17 Notwithstanding GOB's infusion and ADP conversions, the liquidityposition of BTMC has declined, with its current ratio falling from 1.2 inFY76 to 0.85:1 in FY80, although its quick ratio (representing readily dis-posable assets) has remained at about 0.4:1. To operate in this situationof deteriorating liquidity, BTMC has obtained increased credit from theBangladesh Bank. This credit has been channelled through intercompanyaccounts to the individual mills, mainly the chronically unprofitable andspeciality mills which have built up significant negative working capitalbalances and thus do not qualify diroectly for working capital advances fromcommercial banks. Until the profitability of the mills is improved, theirliquidity position will continue to deteriorate as they use their availableworking capital (and additional credLt) to finance their operating deficits.While borrowings from the Bangladesh Bank via BTMC provides a short termsolution, the long term solution rests on improving the profitability of themills through increased production, improved quality and market determinedprices.

3.18 While GOB has converted ADP loans, provided some cash infusionsand increased selling prices, the actions taken have been irregular, delayedand the infusions significantly below the amounts agreed. Accumulated lossesin FY79, FY80 and FY81 have added to the total amount of infusions required.To restore th equity/working capital position of the mills, GOB has agreed toa revised five year program, with a total cash contribution of TK 1.2 billion(US$63.2 million) to be provided by June 30, 1986. The annual contributions(together with the impact of free market pricing) should allow each mill toestablish, and maintain throughout the period of the project, an adequateworking capital balance sufficient to meet operating costs and debt servicingobligations on the basis of a current asset current liability ratio of notless than 1.5:1 and a debt servicing ratio of at least 1.2:1. GOB has alreadymade a contribution of Tk 250.0 million (US$13.2 million), meeting the con-tribution requirements for FY82.

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3.19 Future Prospects. Excluding the impact of the proposed project,BTMC's financial position is expected to show a gradual improvement asa result of the various action program requirements of the ongoing importprogram credits. Spare parts availability has resulted in improved main-tenance and reduced mechanical down time, while the work of the ProductivityTeam has resulted in improved operating performance in the 16 mills coveredby their review. Thus without the Project, net profits after tax are pro-jected to improve from a loss of Tk 209 million in FY80 (US$11.0 million),to a profit of Tk 125.0 million (US$6.6 million) in FY85. BTMC's financialprojections with the Project, but excluding the benefits of price increasesfrom the application of free market pricing, are detailed in Annex 3.09 andsummarized in Table 3.4 below:

Table 3.4: FINANCIAL PROJECTIONS

(Tk Million)/a

FY80 FY81- FY82 FY83 FY84 FY85(actual) ------------- Projected - ------- …-----

Sales 2,535 3,305 4,440 5,000 5,235 6,695Gross Profit (73) 160 610 610 710 900Net Profit (B.T.) (187) (110) 270 295 300 344Net Profit (A.T.) (209) (168) 100 115 120 169Gross Profit % - Sales (2.9) 4.8 13.7 13.9 13.6 13.4Net Profit % - Sales (8.2) (5.1) 2.3 2.3 2.3 2.5Return on Equity % - - 8.0 6.9 6.1 5.4

/a Provisional November 1981.

3.20 The projections show that with the project, BTMC-s aggregate aftertax profit would become positive. The projections are based on the assumptionof (i) increased output from existing and new mills; (ii) adjustment of ex millprices to reflect increases in raw cotton costs; and (iii) reduced interestburdens resulting from capital infusions by GOB. The projections are partic-ularly sensitive to a decrease in sales revenue and raw cotton cost increasesnot accompanied by a related increase in selling prices. A 5% downturn insales revenue in FY82 would result in an after tax loss of about Tk 100 million(US$5.3 million), while a 5% downturn in FY84 on the higher sales volume wouldresult in an after tax profit of only Tk 50 million (US$2.6 million). Similar-ly, an increase in cotton prices of 12.5% in FY83 would produce an operatingloss of Tk 150 million (US$7.9 million). These sensitivities indicate clearlythe urgent need for a comprehensive rehabilitation program to lower conversioncosts; and a rational pricing policy relating BTMC prices to internationalcotton prices/imported yarn.

Personnel Administration

3.21 Employment. As of June 30, 1981, the total personnel strength ofthe BTMC was about 70,100, 1/ with 68,130 (97.2%) located in the general mills,

1/ BTMC also has a constant force of 6,200 temporary workers.

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1,350 (2.0%) located in the specialised mills and 620 (0.8%) located at BTMC'sheadquarters. Studies carried out by the UNIDO/UNDP Productivity Team indicatethat on the basis of South Asian Industry norms applied to BTMCGs installedcapacity, BTMC is overstaffed by about 40%. However, this overemployment hidesa significant shortage at management, supervisory and craftsman level of about1,400. BTMC has accepted this assessment and has adopted a comprehensive train-ing program (paragraph 3.24) aimed al providing qualified individuals to fillthese vacancies. BTMC agrees also that there is a significant level of over-employment in all mills and has placed an embargo upon recruitment of unskilledworkers for mill operations. However, because of social concerns in GOB'slabour policies, BTMC has been unable to reduce the excess, other than throughattrition and transfer to new mills in the public and private sectors as theycome on stream.

3.22 The considerable overemployment in the public textile mills is amajor operational and financial burden which has a nlumber of serious effects.In operations, labour is used as an alternative for quality control, beingused to rectify spinning and weaving faults, but resulting nevertheless inlow quality production. In a profit-oriented operation, this practice wouldnot be tolerated as the costs of the excess labor would not be-justified bythe improved quality and possibly hilgher selling prices. With an imposedlabor force, costs become a fixed element rather than a variable cost, andreduction of cost is out of the cont]rol of individual mill managers. As aresult, production costs are incresased by about 15%, making BTMC's productsless competitive with imports and as exports. The overemployment also limitsmill management from offering more attractive compensation packages to theirproductive workers and has therefore contributed, in part, to low productivityand quality.

3.23 Employment is clearly politically sensitive in Bangladesh and GOB'sdesire to use the textile industry as a vehicle for job creation is understand-able. But employment creation should be compatible with the efficient use ofexpensive capital equipment. For example, the most economically viable way ofproducing yarn is in well-equipped mills of at least 25,000-30,000 spindles.If GOB wishes to use the textile sector as a vehicle for job creation, thereis more scope for employment in weaving. As the major cloth demand is forcoarse/medium grade fabric, the most economic system of production consistentwith the provision of maximum employment is the use of non-automatic powerlooms and handlooms (paragraph 2.18), leaving the production of specialitycloth and higher grade fabrics to the organised and power loom sectors. How-ever, allied to this change in emphasis, should be an attempt to bring spindle/loom:employee ratios more into line with South Asia industry norms. Thus areasonable target would be to improve BTMC's spindle/employee ratio of 18:1and looms/employee ratio of 0.6:1, to levels more comparable to those in otherSouth Asian countries i.e. to 27:1 and 0.8:1 respectively. These norms havebeen accepted by GOB/BTMC as the basiLs for four year (FY82-FY86) program oflabor rationalization which has been agreed with IDA.

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3.24 Training. As noted in paragraph 1.05, current operational conditionsin the public sector industry were characterized by widespread under-utilisationof capacity, over-employment and a low level of technical staff. As a result,product quality is generally poor, waste levels high and productivity low. Asa first step to resolving this problem BTMC, under the Sixth Imports ProgramCredit, undertook a program to train unskilled workers, upgrade the skills ofsemi-skilled workers and establish centres for formal training separate fromon-the-job training. Subsequently, considerable progress has been made inimplementing the program. Since FY78, about 3,000 unskilled workers havepassed through a three-months' spinning course at Kohinoor Textile Mill,which is presently being used as a training mill. The Productivity Team hasdetermined technologist/technician shortages, designed training courses,trained counterpart staff and has given training courses. A training centreis under construction at Savar, adjacent to the Kohinoor Textile (Spinning)Mill. Pending completion of this centre, the Productivity Team's trainingactivities are focused on the retraining of technologists/technicians inthe basic techniques of spinning, weaving and finishing to fill gaps in theknowledge of these individuals who have many years of operational experiencebut little or no formal training. This program is being carried out, onsite, in 16 mills (10 of which are covered by the proposed rehabilitationproject) and will be extended as counterpart training becomes more proficient.BTMC's initial training program is also being revised to reflect the need totrain about 1,500 technologists/ technicians by FY85 to meet the demandsarising from the proposed creation of new public and private sector spinningfacilities. To support the Training Institute at Savar, BTMC is alsocreating a number of zonal in-plant training annexes/centres attached toexisting composite mills. Whenever possible, the centres will be set up inexisting facilities utilizing new equipment or equipment considered surplusto requirement as a result of the balancing of mills under the rehabilitationprogram. The zonal location would permit easy daily travel for participantsfrom surrounding mills.

3.25 As a consequence of GOB's ambitious expansion plans for the industry(paragraph 2.24), the training function of BTMC is undergoing a considerabletransformation, changing from an inward orientation to a broader industry-wideperspective. However, this change is being made without proper considerationof its effect on BTMC's organization, and on the promotional prospects of seniorofficers moved from the mills to staff the training institute and centres. Inthe area of organization, training responsibilities are being fragmented over anumber of directorates with resulting difficulties in developing a coordinatedapproach to training. In the area of personnel administration, no provisionhas been made to provide promotion opportunities within the training functionor to develop a suitable salary structure. To address these issues BTMChas, agreed to employ a management consultant by July 31, 1982 for 12 months(paragraph 3.06) to review inter alia the training structure, and assistBTMC implement appropriate changes.

3.26 Incentives. The current difficulties faced by the BTMC to achievequality production and retain skilled workers are exacerbated by GOB's lowcommon salary and wage structure for all public sector corporations. Thedifficulties facing BTMC are expected to worsen with the establishment of

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new private sector textile mills, which will offer salaries and wages in linewith those currently paid in the private sector and which are two to threetimes higher than those of BTMC. The need to address this issue was recog-nised in 1978 and under the provisioris of the Sixth Imports Program Credit,BTMC introduced a number of incentive systems to foster improled productionand profitability. A scheme to reduce absenteeism has had mixed success,although absenteeism has been helid to 30% of the workforce. A productivitybonus scheme has achieved its objective, i.e. improved production, but asincentives are not related to profitability/quality, there has been no im-provement in these areas. Given GOB"s control of public sector compensation,conditions to develop and implement a compensation system suitable for BTMCwould require a complete revision of GOB½s policies. However, GOB/BTMC areagreeable to reviewing and changing the system, within the framework ofincentive/wage structures approved by GOB and in consultation with the unionswho have resorted to strike action at previous attempts to introduce quality/profitability elements into the system. The terms of reference of an Indus-trial Engineering Advisor joining the Productivity Team have been expanded toallow him to review the present incentive structure and make recommendationsfor revising the systems. These recommendations should be available fordiscussion and agreement with IDA by December 31, 1982.

Manpower and Succession Planning

3.27 The steps being taken (and proposed) by BTMC to address organiza-tional and labour issues are focused on short-term solutions to the problemsthat exist, with little thought being given to the medium and long-term needsthat will arise from GOB's SFYP target of 34 mills (425,000 spindles) for theindustry (paragraph 2.24). The staffing for these mills will, in large part,come from the BTMC and, while reducing BTMC's excess employment, would giverise to severe problems of succession planning in BTMC-s existing mills,particularly in the areas of zonal administration, production planning andcontrol and training. BTMC has agreed to prepare a program to improve itsmanagement succession planning and will employ a consultant by July 31, 1982for this purpose (paragraph 3.06).

Marketing

3.28 Since 1972, the marketing of BTMC yarn and cloth has undergonea number of changes with distribution responsibilities moving from BTMC toother public sector corporations 1/, back to the BTMC and presently to a mixof distribution by (i) BTMC through mill sales centres; (ii) tagged privatesector wholesalers; (iii) BHB; and (iv) Weavers cooperatives. However, inspite of a protected environment, a comprehensive distribution system and acontinued shortage of yarn and cloth in the country, BTMC mills have experi-enced difficulties in disposing of their inventories (especially at timeswhen the supply of imported yarn/cloth is high). This situation resultsfrom weaknesses in quality, product development and market demand knowledge,

1/ e.g. the Bangladesh Small arnd Cottage Industries Corporation (BSCIC)and the Bangladesh Jatiya Samabaya Shilpa Simmy (BJSS), etc.

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weaknesses which must be removed if the mills are to compete against theprivate sector or are to export in the medium term. However, BTMC doesnot have the appropriate marketing research and planning capabilities con-sidered necessary to address these weaknesses. Accordingly, BTMC's Salesand Purchasing Directorate should be strengthened by the establishment ofa marketing cell with the objectives of determining more accurately con-sumer needs and preference to allow production to reflect these needs, andexploring possibilities for product diversification for local and exportmarkets, particularly in the areas of cloth production for use in the ready-made garment industry. BTMC has agreed to establish a marketing section todevelop appropriate strategies for the sale of BTMC's products and has agreedalso to employ a marketing consultant for 24 months to assist it in estab-lishing the section and developing the necessary marketing strategies.

Management Information and Control

3.29 Systems and Procedures. BTMC's management information and controlsystems are based on the use of four sub-systems: (i) budgetary control; (ii)production performance reporting; (iii) financial accounting; and (iv) productcost accounting. The data from these systems is reviewed by way of internalaudit to identify deviations from executive instructions and by the use ofexternal audits to assess the financial stewardship of mill managers. Thesystem is sound in concept, but suffers from a number of defects which weakenit as a basis for management control. Firstly, there is an extended delay inreporting operational and financial performance. Secondly, the system makes nouse of standards for performance review purposes and results are not presentedon an exception basis. Thirdly, reports are voluminous and subject to frequentrevision. Finally, the system focuses on the current year-s operations andlittle attention is given to the requirements of medium term financialplanning.

3.30 BTMC has attempted to rectify these weaknesses by (i) revising thestructure of the system; (ii) recruiting and training accounting staff formills; and (iii) preparing projections for two years ahead. As a result,there has been some improvement in the overall system. However, BTMC recog-nises that more needs to be done at a level beyond its own inhouse competence.Accordingly, BTMC has agreed to appoint three consultants/advisors, by July 31,1982, to assist it further develop and implement improved financial planningand control and management reporting procedures, including five-year rollingprojections. The assistance would be in two stages, the first covering thereview of existing systems and procedures, particularly cash flow forecasting,the design of revised procedures and the preparation of training materialsand operation manuals. The second stage would cover the training of imple-mentation teams, accounting and management staff from Phase 1 mills and subse-quently training of staff from other mills. It is estimated that the consul-tants would be required for about 18 months in order to implement the revisedsystems and procedures in all operational mills by the end of FY83. Duringproject implementation, the consultants would also provide two additionalservices, act as advisors to the Director of Finance and supplement the in-ternal audit and review function of BTMC. The consultants would preparequarterly reports on their progress and within three months of Project com-pletion would present a final report detailing overall results achieved and

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an action program necessary to ensure continued efficient operation of in-stalled systems and procedures.

3.31 Internal Audit. As indicated above, BTMC uses internal audit reviewsto monitor compliance by mill management with (i) financial and administrativeregulations issued by GOB/MOT/BTMC; (ii) accepted accounting standards; and(iii) financial stewardship of mill resources. In FY79, after several yearsof unsatisfactory performance, BTMC reorganized and upgraded its internal auditfunction, creating a separate Internal Audit Directorate with twelve internalaudit teams (each with three members) to review the operations of ongoingmills, project accounting for mills under construction and the activities ofsales and display centres. As of November 30, 1981, the internal audit forFY80 had been completed and the audit reviews for FY81 had been completed for10 mills, was underway on a further 10 leaving the accounts of 37 mills to bereviewed. A two-stage program has been prepared by BTMC for the completionof (i) the internal audit for FY81 for the mills to be rehabilitated underthe Project by April, 1982; and (ii) the remaining operational mills bySeptember 30, 1982.

3.32 External Audits. ln addition to the internal audit reviews carriedout each year, each mill is required to have two annual external audits, onecarried out by joint independent auditors appointed by the MOT and the Ministryof Finance and the other carried out by officers of the Accountant-General'sDepartment. Although there is a neied for a detailed audit of BTMC's operations,the need for three/four audits a year is excessive and places a heavy burdenupon mill accounting staff already carrying heavy workloads as a result ofstaff shortages. As GOB effectively appoints the mills external auditors,it would be sensible to rationalize the audit requirements, by accepting theaudit certificate of the independent auditors in lieu of the certificate fromthe Accountant General. Although all mill accounts for FY80 are availablefor audit, the external audits for 48 mills have yet to be completed. 1/ Thissituation results in part from the delayed appointment of joint auditors foreach mill and in part from the lack of sufficient firms of qualified publicaccountants 2/ to carry out the statutory audits required of limited companiesunder the Companies Act. This situation has been discussed with GOB/BTMC andBTMC has agreed that it shall take the appropriate actions necssary to ensurethat the audit of accounts for FY80 for all mills would be completed by April30, 1982 and for FY81, by September 30, 1982.

IV. THE PROJECT

Origin and Evolution

4.01 In 1978, as a requiremient of the Sixth Imports Program Credit, BTMCengineers carried out a mill-by-mill review of production facilities. This

i/ Audited Accounts for FY79 and prior years have been completed and madeavailable to IDA.

2/ Presently, there are only about a dozen firms of public accountants inBangladesh.

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confirmed the findings of IDA's 1975 survey that there was considerabledeterioration/obsolescence of facilities and indicated also, that there wasan imbalance of facilities in some mills. On the basis of this survey, GOB/BTMC submitted a project proposal to IDA in March 1979 for the rehabilitationof 50 operational mills. Criteria for inclusion of a mill in the proposedproject were that rehabilitation/modernization would give positive incrementalinternal financial and economic rates of return and a level of productioncosts, after rehabilitation, not greater than the landed (Chittagong) cost ofimported products similar to those produced by the mills to be rehabilitated.A conservative estimate of the cost of rehabilitating the 50 mills was US$100million in FY78 prices (US$175.0 million current prices).

4.02 Although GOB had requested financing for all 50 mills as one project,with rehabilitation to be started simultaneously in all mills, it was consi-dered that this would place undue strains on BTMC's limited technical resources.Accordingly, it was decided that the rehabilitation program would be split intothree phases with implementation spread out from FY82 to FY85. Each phasewould be a self-contained, individually appraised project addressing the imme-diate needs of rehabilitation for the mills concerned. 1/ Phase I constitutesthe proposed project and also addresses major policy issues required to allowthe industry to become competitive vis-a-vis the private sector and the worldmarket.

Objectives

4.03 The project has two sets of objectives. The first, relating to tech-nical efficiency, is to (i) increase efficiency and capacity utilization ofexisting mill facilities; (ii) increase output; (iii) reduce production costs;and (iv) improve product quality. The second set of objectives relate toimprovements in sectoral and institutional aspects including: (i) implementingpricing policy adjustments; (ii) developing an effective yarn distributionsystem; (iii) rationalisng labour policies and employment levels in the indus-try; (iv) determining and implementing economic unit levels for new spinningmills; (v) completion of action program requirements under the ongoing importprogram credits; (vi) strengthening BTMC's organizational structure; and (vii)upgrading of management systems in such areas as marketing, production planningand financial management.

Scope

4.04 The proposed Project covers the rehabilitation through BMR of about15 of BTMC-s mills (Annex 4.1), as well as the sectoral and institutionalaspects noted in paragraph 4.03 above. 2/ The project is designed to opti-

1/ Chart 1 indicates the location of the mills to be covered under eachphase.

2/ Subsequent to the appraisal of the Project, GOB initiated action todivest/wind up three of the mills, but will substitute three additionalmills with similar rehabilitation requirements.

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mize the output of existing facilities through relatively inexpensive BMR.On completion of the rehabilitation of the 15 mills, operational spindleswould be increased by about 52,500, operational looms by about 800, spinningefficiencies would improve from 2.22 oz. per spindle shift to 3.40 oz. perspindle shift, with production of yarn expected to increase bJ about 20.0million lbs. per annum or by about 35%. Quality of yarn and cloth outputwould be improved indirectly through the improved technical efficiency of therehabilitated mills. Quality would also be upgraded directly through theinstallation and use of quality control equipment in all mills and in zonalquality control laboratories. No new buildings are envisaged and civil workswill be limited to rehabilitation and repair of floors and ceilings in theexisting mills.

Coordination

4.05 Apart from IDA, other bilateral and multilateral agencies are pro-viding GOB with technical assistance and materials to improve the operationsof the industry. The United Kingdoma, Polish and Romanian Government haveprovided equipment and spare parts to rehabilitate specific mills and UNIDO/UNDP are providing technical assistance. The Netherlands Government is cur-rently considering the rehabilitation of three spinning units, while USAIDis providing technical assistance to the handloom sector through the BHB. Thevarious agencies exchange views periodically to ensure consistency and maximi-zation of impact as well as to avoidl duplication of effort. Coordination todate has worked well and this is expected to continue during the course of 'theproposed rehabilitation and technicaLl assistance programs.

Health, Safety and Environmental Aspects

4.06 Health, safety and environmental aspects of BTMC's mills are governedby the Factories Act of 1965, and the Environmental Pollution Control Ordinanceof 1977. The respective enforcing agencies of GOB are the Factories Inspec-torate (FI) and the Environmental Pollution Control Department (EPCD). Provi-sions of the Factories Act are not being met, a fact reflected in the highincidence of respiratory and digestive system diseases among textile workers.Environmental pollution control standards for the discharge of effluents fromdyeing and finishing facilities have not been officially adopted, but the EPCDis aware that BTMC facilities are polluting, and in September 1980, proposedtentative standards for the industry. Bangladesh would appear to have aneffective legal and administrative maachinery to develop standards for theindustry, and to monitor and enforce compliance. To determine the appropriateactions required to bring BTMC's facilities into line with statutory health,safety and ecological requirements, GOB has agreed to carry out a review ofBTMC's compliance with existing gpuidelines. This should be completed byDecember 31, 1982, with recommendatLons arising from the review implementedpromptly thereafter.

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V. PROJECT IMPLEMENTATION

Management

5.01 Prime responsibility for implementing the requirements of theproject will be split between GOB, MOT and BTMC. GOB will have responsi-bility for developing and implementing key project elements relating tosectoral policy issues. MOT will have responsibility for establishing asectoral planning cell and for the development of a distribution systemto cover the medium-term operations (FY82-FY86) of the industry. BTMC/millmanagement will have responsibility for the rehabilitation aspects of theproject. In this regard technical assistance would be provided to BTMC bythe UNDP/UNIDO Productivity Team.

5.02 BTMC has agreed to create a Project Implementation Cell (PIC) atBTMC headquarters, staffed by a project manager, civil engineer, mechanicalengineer, electrical engineer, procurement coordinator, accountant and threetextile technologists. A Coordinating Committee of concerned directors 1/will exercise overall supervision, and monitor progress. At each mill, aproject team will be formed consisting of the mill's Chief Executive, Tech-nical Manager, and respective Chiefs of Accounting, Procurement, Stores,Production, and Maintenance. Installation and erection of machinery andequipment will be carried out by the mills' own fitters, augmented as neces-sary by roving teams of specialised fitters drawn from the 35 remainingmills. These fitters will be supervised by technical personnel sent by theequipment suppliers, who will be monitored in turn by the mills' projectteam. Overall planning, coordination and monitoring of activities acrossmills will be carried out by the PIC. The PIC in turn will consult theProductivity Team 2/ on technical matters, viz. (i) preparation of biddingspecifications for machinery, equipment, and spares; (ii) bid evaluation;(iii) scheduling of erection and installation, and the activities of theroving teams of specialist fitters; (iv) trials runs, and final dischargeof the erector/supplier; (v) follow-up and entry into commercial production;and (vi) the general planning, execution and monitoring of the project. Thehead of the PIC will be a BTMC textile technologist with 10 to 15 years exper-ience in the industry, including senior management responsibility. Detailedproject implementation plans have been prepared by BTMC showing (i) activityschedules by mill; (ii) PIC and mill management manpower requirements byactivity and skill; (iii) time-phasing of PIC and mill-management manpowerrequirements; and (iv) a summary time-phasing of PIC manpower requirementsaggregated over all 15 mills. The staffing of the PIC appears adequate inrelation to the proposed implementation schedule (paragraph 5.04), and themanagement arrangements appear satisfactory. BTMC will report to IDA of a

1/ Director, Planning and Development, Production, Finance and Purchasing.

2/ Consisting of a Chief Technical Advisor, three Spinning Advisors, twoWeaving Advisors, two Finishing Advisors, one Workshop EngineeringAdvisor, and one Industrial Engineering Advisor.

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mill-by-mill basis quarterly, showing progress, by activity, in relation tothe planned activity schedules. The establishment of a suitably staffed PIC

is a condition of effectiveness of the Credit.

Procurement

5.03 Procurement of equipment, machinery and spares for the rehabilita-tion component of the project will be on the basis of international competi-tive bidding (ICB), with the standard World Bank margin of preference al-lowed to local bidders. In view of the rehabilitation nature of the projectexceptions to ICB will be allowed in the case of proprietary items relatingto spares and assemblies for existing equipment. Such items may be procuredthrough negotiated contracts or limited international tendering, providedhowever that a list of such items is prepared in consultation with the Pro-ductivity Team, and is submitted to IDA for prior approval. Given the lowmaximum value of individual civil works projects (Tk 2.5 million - US$0.13million), civil works would be contracted out on the basis of local competi-tive bidding (LCB), in accordance with standard GOB/BTMC procedures now inforce. Floating of tenders under ICB would be accomplished by (i) advertise-ment in at least one English language Bangladesh daily; (ii) the simultaneousmailing of a copy of this press advertisement to firms on BTMC's procurementmailing list; (iii) the delivery simultaneously of complimentary copies ofthe bidding documents to appropriate foreign consulates in Bangladesh,Bangladeshi consulates abroad, and the World Bank Resident Mission in Daccaand (iv) a general notice in the Development Forum. The proposed pressnotice and the invitation to bid, would be submitted to IDA for prior reviewand approval, at least 30 days before the detailed specifications areavailable to prospective bidders. All contracts exceeding US$50,000 wouldbe subject to post-award review by IDA. Items costing less than US$50,000per contract may be procured through Limited International Tendering (LIT)on the basis of at least three price quotations. A percentage of thesecontracts would be randomly selected for post award review by IDA. Itemscosting less than US$20,000 per contract may be procured through localshopping on the basis of at least three price quotations provided that theaggregate of the items so procured shall not exceed US$500,000. To allowfor the procurement of critical spare parts identified during rehabilitationbut not on order, provision has been made for procurement from BTMC's ownworkshops provided that such procurement shall not exceed the aggregate ofUS$250,000, and is made in accordance with specified procedures designed toensure cost-efficiency. The cost of such procurement would be reviewed byIDA to determine that it has been competitive vis a vis other sources ofsupply. Overall about 30% of the credit amount would be subject to IDA'spost award review.

Implementation Schedule

5.04 The implementation schedule for the project is shown in Table 5.1.It was prepared by BTMC's engineers, reviewed by the Productivity Team andby Gherzi Eastern Ltd., IDA's consultant. It is considered realistic. Theschedule calls for a 30-month implementation period with shipment of machinery

Table 6.1: Project Implementation Schedule

_ _ _ _ _ C T I V I T Y _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ 0 12 8 4- 30 36,

1.0 Procurement _

1.1 Preparation of Tender Documents

1.2 Floating of Tender

1.3 Evaluation of Tenders

1.4 Placement of Orders

1.5 Opening of L/C

1.6 Shipment L_

1.7 Clearing and Forwarding

2.0 Civil Works

3.0 Erection and Installation _ _

4.0 Trial Production

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the most variable element. This would be short for proprietary equipment, butlonger for equipment made to order. Thus, the implementation period wouldvary from mill to mill depending essentially on the nature of the machinery!equipment to be procured. As no major civil works would be involved, it wouldbe carried out in parallel with procurement, with substantial slack time ineven the worst case. In some cases, trial runs could commence about six weeksafter the commencement of erection and installation, and continue for aboutsix weeks. Preparation of the tender documents could proceed prior to crediteffectiveness, and on this assumption, it should be possible to float tenders

about March 31, 1982, implying completion of implementation by the end ofCY84.

Technical Assistance

5.05 In order to support the implementation of the rehabilitation pro-gram and to progress further action program requirements under the ongoingimports program credits, the project includes about 150 man-months of tech-nical assistance for (i) sectoral. planning (paragraph 2.34); (ii) organiza-tion and management succession review (paragraph 3.06); (iii) productionplanning and control (paragraph 3.11); (iv) marketing (paragraph 3.28); and(v) financial management and control, (paragraph 3.30 ). This technicalassistance would be integrated closely with the technical assistance alreadybeing provided to BTMC by way of the Productivity Team. This started workingwith BTMC in FY79 and is currently upgrading procedures in BTMC-s operationalmills, and developing training programs at the Textile Training Institute.Terms of reference for each technical assistance component and the terms ofreference of the Productivity Team are held on the Project File. Selectionof consultants to carry out the various assignments would be made in accor-dance with the Bank's guidelines on the appointment of consultants.

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Monitoring

5.06 BTMC would submit quarterly operational statistics in a format tobe agreed with IDA, together with quarterly progress reports on utilisationof rehabilitation funds by mill and on each technical assistance component.Overall, project progress would be reviewed every six months with BTMC andthe Productivity Team. Six months after the fiscal year end, audited accountsof the project would be submitted for IDA's review.

VI. PROJECT COSTS AND FINANCING

Project Costs

6.01 The total financing required for the project is estimated to be Tk823.3 million (US$43.9 million) including duties and taxes of Tk 70.3 million(US$3.7 million). In addition, Tk 426 million (US$22.4 million) will be re-quired to bring working capital up to and maintained at the levels indicatedin paragraph 3.18. Details of the cost estimates and the assumptions usedare held on the Project File. Annexes 6.1 and 6.2 detail the cost elements,phasing and source of financing. A summary of the estimated costs are shownbelow.

Table 6.1: ESTIMATED PROJECT COSTS

Tk Millions US$ MillionsLocal Foreign Total Local Foreign Total

Equipment & Spares 75.6 345.8 421.4 4.0 18.2 22.2Civil Works, etc. 45.0 45.0 2.4 2.4Quality Control 47.5 47.5 2.5 2.5Technical Assistance 5.7 30.4 36.1 0.3 1.6 1.9

Base Cost 126.3 423.7 550.0 6.7 22.3 29.0Physical Contingency 1.9 9.5 11.4 0.1 0.5 0.6Price Contingency _15.2 49.4 64.6 0.8 2.6 3.4

143.4 482.6 626.0 7.6 25.4 33.0

Duties and Taxes 70.3 70.3 3.7 3.7Total Capital Costs 213.7 482.6 696.3 11.3 25.4 36.7Incremental Working Capital 136.0 136.0 7.2 7.2Total Project Costs 349.7 482.6 832.3 18.5 25.4 43.9

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6.02 Rehabilitation Costs. Equipment and spare part costs have beenestimated by BTMC based on physical requirements determined by a mill-by-mill survey of rehabilitation needs;; and price quotations obtained fromsuppliers in November 1980. Imported equipment costs are based on cifcosts plus ±uLties and taxes. The mujor part of the rehabilitation costsrelates to spare parts and machinery components. As noted in paragraph5.04, civil works costs are minimized through retaining existing buildingsand facilities. Rehabilitation costs include provisions for physical con-tingencies of about 2.5%. Price escalation for imported parts has beencalculated on the basis of projected international inflation rates of 9%,8.5%, 8.0% and 7.5% for FY81-FY84, although recent bulk purchases of partsby BTMC have been made at costs below FY80 list prices. Given the natureof the project and the ready availa'bility of the bulk of the equipment andspare parts requirements, the rehabilitation cost estimates, including con-tingencies, are considered realistic.

6.03 Quality Control Equipment. The assessment of equipment costsby BTMC/UNDP Productivity Team, to establish seven zonal quality controllaboratories, and the provision of basic quality control equipment for the60 operational mills, indicates a requirement of US$2.5 million. This isbased on suppliers prices ruling in March 1981, adjusted for expected infla-tion increases in FY82. While the amount required to equip the 15 mills ofthe proposed project would be considerably below this figure, the benefitsof an overall program of implementation are considerable. Given the well-defined requirements and ready availability of the equipment, the costestimates are considered realistic.

6.04 Technical Assistance. For the advisory services considered ne-cessary to upgrade BTMC's organization/management succession, marketing,production planning and financial control systems, a monthly fee rate ofUS$8,000 per man-month has been assumed. In addition, costs of US$3,000per man-month have been estimated for travel and subsistence expenses.Allowing for some 150 man-months of consultancy/ advisory services andrelated equipment requirements, technical assistance costs have been proj-ected at US$1.9 million.

Financing Plan

6.05 Increased working capital requirements would be financed to theextent possible from the mills internal funds generation, with the balanceto be provided by cash infusions from GOB. This is discussed in more detailin paragraphs 7.10 and 7.12. Inclusive of necessary increases in workingcapital, project financing would be as shown below.

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Table 6.2: PROJECT FINANCING

(US$ Millions)

TotalProject

Sources of funds Local Foreign Costs %

IDA 4.6 30.0 68.3GOB 6.2 25.4 6.2 14.1Mills 7.7 - 7.7 17.6

Total 18.5 25.4 43.9 100

Financing Arrangements

6.06 The project financing would be made available to GOB and onlentto BTMC under a Subsidiary Agreement on terms and conditions satisfactory toIDA. In turn, BTMC, acting as agent for GOB, would make available the fundsearmarked for rehabilitation to designated mills in the form of a loanfrom GOB. The list of mills comprising the project as shown in Annex 4.1.The rehabilitation funds would be onlent to individual mills at a rate ofnot less than 14.0% p.a. 1/, which is the current rate for term lending toindustry in Bangladesh with the rate subject to review, and adjustment, ifneeded, to ensure that the rate remains positive in real terms. Repaymentshould be made over a term not exceeding 15 years, 2/ inclusive of a graceperiod of 4 years. The foreign exchange risk should be borne by BTMC/Mills.Funds for consultancy/advisory services for the upgrading of BTMCs managementsystems would be onlent to BTMC on similar terms and conditions. Funds forthe establishment of the Planning Cell within the MOT would be appropriatedfrom the Credit by GOB.

Disbursement

6.07 For equipment, spare parts, quality control equipment and equipmentrelating to the technical assistance requirements, IDA would disburse against100% of foreign costs, 100% of local expenditures and 70% of other expendi-iture for items procured locally (off the shelf). For civil, electrical andmechanical works and related services IDA would finance 90% of fund require-ments. For technical assistance (e.g. consultancy services) IDA would finance100% of the costs. Given the ready availability of the goods and servicesrequired under the project and the intention to place bulk orders to coverthe requirements of all the mills, the proposed Credit is expected to befully disbursed within 30 months (i.e. by June 30, 1984). Projected dis-bursement is shown in Annex 3.

1/ With inflation at about 12.0% p.a. this rate is positive in real terms.

2/ Many mills would be able to service debt of a much shorter term.Provision for this possibility would be made in the financing agree-ments between GOB/BTMC and the Mills.

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VII. FINANCIAL AND ECQNOMIC ANALYSIS

Financial Analysis

7.01 Projected Production and Sales. For each mill a production buildup has been projected based on production facilities, proposed rehabilitationand capacity utilization/plans efficiency after rehabilitation. On the basisof the rehabilitation proposals, yarn production is projected to increase from35.0 million lbs. in FY81 to 54.0 million lbs. in FY86. Cloth production isexpected to increase from 5.7 million yds. in FY81 to 8.1 million yds. in FY86.In the light of actual production in FY81 these projections are consideredrealistic. Key indicators of production before and after rehabilitation areshown below:

Table 7.1: KEY INDICATORS OF PRODUCTION

Before BMR After BMRProduction FY82 FY84Spinning

Spindle productivity (ozs./spindle shift) 2.22 3.42Capacity utilization 90% 95%Yarn production (million lbs. 132 equivalent) 35.0 54.0

WeavingLoom productivity (yds./loom shift) 21.2 .24.9Capacity utilization 86% 96%Cloth production million yds. 54 picks equivalent) 5.7 8.1

FinishingFinished cloth production (million yds. 54 picks

equivalent) 20.1 43.3

Source: BTMC estimates.November 1981.

7.02 On the basis of the above,, sales forecasts have been made foreach mill. These assume that alL production is sold and that there is nobuild up of finished stocks. Prices as of April 30, 1981 have been used asthe basis for determining sales revenue. Sales prices have however beenadjusted proportionately in line with the projected movements in raw cottonprices on the assumption that GOB would allow a related price increase.Improved quality through the projecit should give BTMC management the oppor-tunity to achieve higher selling prLces.

7.03 Operating Cost Estimates. Assumptions used in the financial projec-tion are detailed in Annex 7.1. Production costs are based on current costsof raw material adjusted to reflect projected increases. 1/ Other conversioncosts have been projected to remain unchanged in constant taka terms.

1/ Bank Commodity Projections, November 12, 1980.

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7.04 Under these assumptions, sales would be about 60% higher with theproject, in the aggregate. Profit before tax would also be about 60% higherin absolute terms, since it would remain constant at about 4.1% of net salesin aggregate terms. The cost structure would show improvement with conversioncost and salaries expense, reducing by 3.0% in the aggregate from 22.4% to18.4% of net sales. This would be due to spreading unchanged fixed cost ele-ments over increased volume of production. This improvement in the cost struc-ture would be offset in the aggregate by a 3.1% rise in increased interestand depreciation expenses which would be associated with the project, thusleaving profit before tax as a percentage of net sales unchanged at about1.4%.

7.05 Financial Projections. Detailed financial projections with, with-out and incremental for the project together with detailed assumptions aregiven in Annexes 7.1 to 7.4. Key financial indicators are summarized belowin constant taka terms.

Table 7.2: KEY FINANCIAL INDICATORS WITH THE PROJECT(Tk million)

FY81 FY82 FY83 FY84 FY85 FY86

Sales 1,510 1,464 2,453 2,545 2,637 2,730Profit before Tax 59 38 96 89 98 116Profit after Tax 49 29 67 60 57 67Profit Before Tax -

% of Sales 3.8 2.5 3.8 3.4 3.7 4.2Current Ratio 1.0 1.1 1.1 1.2 1.4 1.4Debt Service Coverage 4.0 1.7 2.3 1.3 1.3 1.5Debt - % of LT Debt plus Equity 74 68 60 52 46

7.06 The after tax profit projections shown above are a somewhat misleadingindicator of earnings as many of the mills have accumulated tax losses whichcan be carried forward for five years. Similarly no rate of return on equity/shareholders funds is given as many mills have accumulated losses since FY76which have resulted in the erosion of their equity bases, leaving them withnegative shareholders funds. As shown below (Table 7.3) profit before interest,other expenses 1/ and taxes (PBIT) as a percentage of total assets (or totalliabilities when shareholders funds are negative) is used as an earningindicator.

1/ "Other expenses" consist entirely of short term interest charges oncurrent liability accounts.

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Table 7.3: KEY INDICATORS OF PROFITABILITY WITH AND WITHOUT PROJECT

(Net Sales = 100, columnwise) /a

Aggregate FY86 "Best" /b Mill FY86Without With Without With

Indicator Project Project Project Project

Net Sales 100.0 100.0 100.0 100.0Other income 1.7 1.1 0.7 0.5Raw material cost 72.2 72.5 70.3 70.3Conversion cost 21.4 17.8 19.7 17.0Salaries expense 1.0 0.6 0.6 0.4Depreciation expense - 1.3 - 0.6Other expenses 3.0 2.9 2.0 2.1Interest expense - 1.8 - 0.8Profit before tax (PBT) 4.1 4.1 8.2 9.4Profit before interest, other

expenses and tax (PBIT) 7.1 8.8 10.2 12.3PBIT % of total assets 10.8 12.6 15.3 19.3Total asset turnover 1.5 1.4 1.5 1.6Debt service coverage ratio - 1.5 - 3.6Net sales (billion taka) 1.7 2.8 1.3 /c 1.7

/a Unless otherwise indicated.7i "Best" meaning highest profit before tax as a percentage of net sales.Ic Tk million.

7.07 On an asset base increasing from Tk 1.1 billion (US$57.9 million) inFY81 to Tk 1.9 billion (US$100.0 million) in FY86 (Annex 7.2 ) or by 72%, theaggregate PBIT is projected to increase from 10.8% without, to 12.6% with, theproject. In terms of the current long term interest rate of 14% the return islow, and as a private sector project, would be only marginally acceptable.There are two considerations, however, which indicate that 12.6% would be anunderstated measure of earnings power with the project. First, conversioncosts have been estimated on the basis of FY80 actuals and not adjusted forproductivity gains that would flow from rehabilitation. Allowing for these,conversion costs would be reduced by about 10%, 1/ yielding PBIT of 14.4%.Second, the mills in question are overstaffed by about 30% (paragraph 3.23),adding about 15% to conversion costs.

1/ Assuming (a) productivity increase as given in Table 7.1, (b) variableelements of conversion costs of 70% in total, (c) of this variable element(wages 60%, repair and maintenance 13%) would show a cost reduction duedirectly to the productivity increase.

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7.08 While the PBIT of 12.6% is acceptable in aggregate, three 1/ ofthe fifteen mills covered by the proposed project have projected FY86 PBITsof less than 11.0% (Annex 7.5). Even with adjustments for productivityincreases and over employment their PBIT remains unacceptable. Subsequent tothe appraisal of the project, GOB indicated that it would divest the unitsconcerned and with IDA's agreement, would substitute three new mills with(i) rehabiltiation costs equal to those of the three mills to be withdrawnand (ii) incremental economic and financial rates of return not less thanthe average rate of return for the current list of mills. A comparativemill-by-mill statement of financial indicators for the mills appraised forthe project is shown in Annex 7.6.

7.09 Balance Sheet and Cash Flow Projections. Aggregate balance sheetand cash flow projections with the project are shown in Annex 7.2. The FY80balance sheet shows a negative working capital situation (current ratio of0.5:1) and a negative equity of about 40%, in absolute terms, of totalassets. The negative equity reflects accumulated losses of Tk 550 million(US$29.0 million), which have been only partially offset by government con-versions of ADP loans and cash contributions (paragraph 3.16). Thus, oper-ating losses have been financed essentially by a negative working capital ofTk 600 million (US$31.6 million). Of this, "Sundry Creditors" have providedTk 450 million (US$23.7 million), representing more than three year's ofnon-wage conversion costs. The balance sheet projections assume operationalrelations linking current asset and current liability accounts to levels ofsales, raw material costs, conversion costs etc, (Annex 7.1) and the estab-lishment of a current ratio, and debt servicing capability of at least 1.5:1and 1.2:1 respectively (paragraph 3.18). As a consequence, the negativeworking capital situation is projected to be reversed with the requiredworking capital increase provided by government contributions. These con-tributions would transform the negative equity to positive equity, as well asfinancing the required increase in working capital. In effect, it is assumedthat GOB will finance the mills' aggregate accumulated losses to FY81, as wellas projected increases in working capital necessary to undertake increasedvolume of production.

7.10 The gross infusion of Tk 550 million (US$29.0 million) requiredduring FY82-FY86 would be used in part to reduce the mills- liabilities toBTMC which in turn would reduce its obligations to GOB and the Banking System.By this offsetting process actual GOB infusions required with the projectwould be Tk 311.0 million (US$16.4 million). The required infusions wouldpeak in FY82 and FY85 with the initial correction for accumulated losses(FY82), and the impact of increased production (FY85). Allowing for taxes anddividends, wnich are inflows to GOB's budget, the net extra burden on thebudget would be Tk 188 million (US$9.9 million) to FY85; taxes and dividendsare projected to exceed required infusions from FY86 onwards, beginning with anet budgetary inflow of Tk 46 million (US$2.4 million) in FY86. The infusionswould be essential to the continued functioning of the mills, and therefore tothe success of the project. To meet the Project's needs, GOB has agreed to aprogram of estimated annual financial contributions. These would be reviewedannually and adjusted to reflect the mills actual operating results.

7.11 The precise yearly contributions to be made would be based on theprinciple that each mill should receive the amount required to cover losses,

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meet interest and principal repayment obligations, and finance increasedworking capital requirements computed on the basis of agreed coefficients.Although the projections have assumed contributions to be entirely in theform of equity, this is not essential to the success of the project as itbrings the debt equity ratio to 48:52 which is a higher than normal debt/equity gearing. However, the contribution may be modified to a form thatis convenient to GOB, and makes sense in relation to the financial circum-stances of the mill. As establishing a current ratio of 1.5:1 and a debtservicing capability of 1.2:1 through equity contributions would give themills a satisfactory debt/equity ratio, no particular debt equity covenantis proposed for the project. However, the project would be covered by the60:40 debt-equity covenant of the Eighth Imports Program Credit. This wouldgive the GOB considerable leeway in determining the method of infusions itproposes to use.

7.12 Within the limits of GOB's Budgetary constraints, the timing ofthe contributions will be such as to ensure the liquidity of the mills, andtheir ability to purchase needed suppLies in a timely manner consistent withoperational efficiency. The contributions would be at least semi-annuallybased on the half yearly operating statements of BTMC and the Mills.

7.13 The duration of GOB's commitment to underwrite the operationalcash flow requirements of the mills until FY86 is considered sufficient toensure the success of mill rehabilitation in the narrow sense of attainingthe production targets set in the mills' respective spin and weave plans.By FY86, the impact on incremental working capital needs of extra productiondue to rehabilitation would already have been felt. Raw cotton price in-creases subsequently to FY86, continued overemployment in the mills, inade-quate price increases in the face of rising costs, etc., may all contributeto a continued loss-making situation beyond FY86, even if mill rehabilita-tion is successful. GOB may want to continue its budgetary support of theindustry, but it is not felt appropriate, as part of the project design, torequire it. Having carried out a rehabilitation project incorporatingoperational standards, adopted a program of gradual elimination of excessemployment, and adopted a pricing policy, all geared to the creation even-tually of an internationally competitive industry, GOB would be entitled,in FY86, to re-examine its commitment to budgetary support of the industry.

7.14 Debt Service Coverage. On an aggregate basis, the debt servicecoverage ratio after implementation of the Project is acceptable at 2.0:1in FY86. One mill, with a marginally acceptable earnings power of 15.1%, hasalso a marginally acceptable debt service coverage ratio of 1.1 times; allother mills had adequate debt service coverage ratio, ranging from 1.2 to3.4, suggesting that repayment terms could be shortened as appropriate to fitthe circumstances of individual mills. This is reflected in the onlendingterms for the proposed credit (paragraph 6.06).

7.15 Incremental Rates of Return. The incremental financial rate ofreturn (IFRR) and the impact of sensitivity analyses are summarized below,and detailed in Annex 7.6.

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Table 7.5: INCREMENTAL FINANCIAL RATE OF RETURN

(1) Base case 15.7%(2) Incremental working capital up 10% 15.5%(3) Conversion costs up 10% 13.9%(4) Capital cost up 10% 14.0%(5) Incremental sales down 10% 13.5%(6) Incremental sales down 10% without reductions

in conversion cost or working capital 11.1%(7) Raw material costs and working capital up 10% 1.6%

The return is most sensitive to cost price relations: a 10% increase in rawmaterial costs unaccompanied by a price increase would reduce the return to1.6%, emphasizing the importance of an ongoing review of prices coupled withcontinued adjustment of prices to reflect cost changes. Production is alsoimportant; a 10% drop in sales unaccompanied by similar drops in manufacturingcosts would reduce the return to 11.1%. The project is not overly sensitiveto capital cost, incremental working capital and conversions cost increases.Annex 7.7 details individual mill IFRR. One mill has a return which fallsbelow the implicit acceptance hurdle of 14.0% but has an acceptable IERR.

Economic Analysis

7.16 The internal economic rate of return (IERR) exceeds the IFRR, andexceeds an estimated economic opportunity cost of capital of 15%, suggestingthat on an incremental basis, in the aggregate, the project is economicallyas well as financially attractive. The economic adjustments made to the finan-cial benefit stream are favorable on balance, with adjustment for corporatetaxes, and import duties on raw materials offset by adjustments (downward) ofyarn prices by a factor of 0.95 to reflect the ex-mill price differential overc.i.f. prices (Annex 7.1). Although not quantified, the omissions would mostlyhave been favorable: grey cloth and finished cloth prices were left unadjusted,but since ex-mill prices of these items are below production cost, and analysiscarried out prior to this appraisal (see the Boston University Study) suggestthat the domestic resource cost of cloth production in Bangladesh is below theofficial exchange rate, these should be conservative omissions. The otheromission was in not adjusting conversion costs, but based on likely conversionfactors for wages, repair and maintenance, power and fuel, and factory overheadswhich together constitute conversion cost, this omission is also consideredconservative.

7.17 The adjustments made to the cost stream are also favorable. Dutiesand taxes on imported machinery are removed. A conversion factor of 0.6 isapplied against the cost of civil works and installation and erection of equip-ment. 1/ Incremental working capital is left unadjusted, on the worst case

1/ This represents an approximate overall weighted average of the standardconversion factors, prepared by the Planning Commission of GOB for therespective inputs to this activity.

-.48 -

assumption that all incremental working capital is required for imports ofraw material and spares. Finally, since no benefits are quantified for thevarious technical assistance components of the project, the costs of these areomitted, as in the financial rate of return analysis. On these assumptions,the IERR is estimated at 27.5%. The results of sensitivity analyses are shownbelow:

Table 7.6: ECONOMIC RATE OF RETURN

(1) Base case 27.5%(2) Incremental working capital up 20% 26.9%(3) Economic capital costs up 10% 25.3%(4) Conversion costs up 10% 25.4%(5) Yarn and cloth conversion factors down 10% 17.0%(6) Incremental sales down 10%, 25.2%(7) Incremental sales down 10% without reduction

in conversion cost 22.5%(8) One-year lag in benefits 21.7%(9) Raw material costs and working capital up 10% 13.1%(10) Combination of (3) and (8) 12.6%

7.18 The IERR is most sensitive to cost increases unaccompanied by priceincreases. It drops to 13.1% with a 10% increase in raw material costs andworking capital, with border prices of outputs assumed unchanged. The returnis also quite sensitive to the economic prices assumed for finished goods,and would drop to 17.0% with a simultaneous 10% drop in economic prices foryarn, grey cloth and finished cloth. This is still an acceptable return, in-dicating that there is some margin to allow for quality differentials againstinternationally available comparable products. 1/ Individual mill analyses(Annex 7.7) shows the lowest mill IERR to be 17.1%, which is acceptable, asit exceeds the opportunity cost of capital, which GOB estimates at 15%.

Summary of Benefits and Risks

7.19 Rehabilitation is intended to increase production and productivity,and hence profitability, both financial and economic. The base cost esti-mates are considered firm, and proviLsion for physical and price escalationshould be adequate. PIC, with back--up assistance from the Productivity Team,should face little technical risk in carrying out the rehabilitation withinthe estimated time frame. Once the capabilities of the mills have been en-hanced, however, it remains the task of management to make the most of thatcapability. The attractiveness of the project is sensitive to the achievement

1/ It is generally conceded that B3TMC products are inferior in qualityto comparable international products. But this is not intrinsic toBangladesh or to BTMC's facilities, and improvements in productionmanagement addressed under the project should help to reduce oreliminate quality differentialss.

- 49 -

of production and sales revenue targets. This is threatened by relativeuncontrollables such as political disturbances, labor disruptions, powershortages although these factors are common to all industrial units. Theachievement of production and sales targets is also threatened by more con-trollable factors such as the ambitious expansion program proposed for thetextile industry under the SFYP, both in the public and private sectors.Care must be taken to expand and improve the pool of trained textile manag-ers along with the expansion of the industry, otherwise competent managementmay not remain in the rehabilitated mills to exploit fully the rehabilitation.This risk has been recognized and is being addressed by technical assistancemeasures to improve BTMC-s management capability (paragraphs 3.11, 3.28 and3.30), and organizational structure (paragraphs 3.25 and 3.27). Equallyimportant, it would be essential to monitor changes in the cost structure,and adjust prices continually to reflect cost changes. However, it would beimportant also to ensure that prices are not increased to a level relative toimport prices that production goes into inventories rather than sales, thusforcing increased protection measures. The present negative working capitaland negative equity situation point to liquidity problems for the mills,which, if unresolved, could lead to shortages of raw material and operationalspares, and an inability to meet production targets. To address this problem,GOB has agreed to make the contributions (paragraphs 7.10-7.13) necessaryto ensure liquidity. With this and other measures taken to offset the risksinherent in the project, it is felt that these may be contained. The benefitsare clear, and should result in a project that is incrementally attractiveboth economically and financially. On a full as distinct from incrementalanalysis, four of the mills proposed for rehabilitation would be ineligiblefor financing until adequate measures are taken to ensure satisfactory levelsof earnings.

VIII. SUMMARY OF AGREEMENTS

8.01 The action programs concerning the textile industry agreedunder the Fourth to the Eighth Imports Program Credits would be monitoredunder the proposed credit (Annex 2.3).

8.02 GOB agreed that it will:

(a) introduce free market pricing in all public sector textilemills in accordance with a phasing acceptable to IDA (para-graph 2.28);

(b) adopt appropriate measures to improve the yarn and clothdistribution system (paragraph 2.30);

(c) issue the appropriate order to initiate the winding up/divestment of Ardasha, Dahakaswari 1 & 2 and Mohini Tex-tile Mills (paragraph 2.33);

- 50 -

(d) employ an economist/econometrician by July 31, 1982 for24 months to assist the MOT establish a Planning Cell andreview GOB policies and strategies for the textile sector(paragraph 2.34);

(e) provide BTMC and the Mills, by June 30, 1986, with suffi-cient funds to achieve and maintain a debt-equity ratio of60:40, a current ratio of .1.5:1 and a debt servicing ratioof 1.2:1 (paragraph 3.18, 7.10-7.13); and

(f) by December 31, 1982, carry out a review of BTMC's com-pliance with health, safety and ecoological regulations,with recommendations arising from the review implementedpromptly thereafter (paragraph 4.06).

8.03 BTMC agreed that it will:

(a) employ a management consulitant, by July 31, 1982 (for 12months) to carry out a detailed review of its organizationstructure and management succession planning (paragraphs3.06, 3.25 and 3.27);

(b) employ a production planning and control consultant, byJuly 31, 1982 (for 24 months), to review existing productioncontrol systems and assist BTMC/Mills implement necessarychanges to upgrade the systems (paragraph 3.11);

(c) by June 30, 1985, implement a phased program of laborrationalization to improve its spindle/employee ratiofrom 18:1 to 27:1 and its loom/employee ratio from 0.6:1to 0.8:1 (paragraph 3.23);

(d) employ a marketing consultant, by July 31 1982 (for 24months), to assist it to establish a Marketing Cell anddevelop appropriate strategies for the sale of BTMCproducts (paragraph 3.28);

(e) employ three financial management consultants, by July31, 1982, for an aggregate of 55 months to assist it toreview existing systems and procedures and implementnecessary changes (paragraph 3.30);

(f) take appropriate action to ensure the completion of theaudit of its FY80 and FY81 accounts by April 30, 1982and September 30, 1982 respectively, and thereafterensure that BTMC/Mill accounts are audited within sixmonths of the fiscal year end (paragraph 3.32); and

(g) create an adequately staffed Project ImplementationCell at BTMC Headquarters (paragraph 5.02).

- 51 -

8.04 Of the agreements noted in paragraph 8.02 and 8.03 above the fol-lowing have been agreed to be conditions of effectiveness of the proposedcredit:

(a) issuance by GOB of the Government Orders necessaryto wind up selected textile mills (paragraph 2.33);

(b) the creation by BTMC of a suitably staffed ProjectImplementation Cell (paragraph 5.02).

BANGLADESH

MINISTRY OF TEXTILES

Organisation Structure

Ministerof

Textiles

State Minister]

Secretary

I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I,

Joint Secretary

LAdminstration 1 mplementation IiopDeve

BTMC - Bangladesh Textile Mills CorporationBHB - Bangladesh Handlooms BoardBSB - Bangladesh Sericulture BoardSource: MOT. June 30, 1981

- 53 - ANNEX 2.

BANGLADESHTextile Industry Rehabilitation Project

Tax Structure on Textile Products

FY77 FY81

A. Customs Duty

1. Raw Cotton Tk 0.55 per lb. Tk 0.45 per lb.2. Cotton Yarn (below 60 counts) 30.0% ad.val 25.0% ad.val

(60 counts and above) 40.0% " 35.0% '

3. Cotton Fabrics (yarn count 21) 100.0% " 30.0% "(21-35s) 25.0% " 35.0% "(35-48s) 50.0% " 35.0% "(Yarn count 48) 100.0% " 150.0%

B. Excise Duty

1. Cotton Yarn (16-20s) Tk 0.25 per lb. Tk 0.20 per lb.(21-34s) Tk 0.50 " Tk 0.35 " "

(35-47s) Tk 1.00 " Tk 0.80 " "

(48 and above) Tk 1.50 " Tk 2.00 " "

2. Cotton Fabrics(unprocessed) (superfine) & above 80s Tk 0.80 psy Tk 0.20 psy

(fine)above 60 & 80s Tk 0.50 " Tk 0.10(medium) Tk 0.20(coarse) Tk 0.10(drill, curtain bed &table covers) Tk 0.50 " Tk 0.50 psy

3. Cotton Fabrics(processed) (calendered,bleached,

dyed) Tk 0.03 psy Tk 0.05 psy(printed) Tk 0.05 " Tk 0.10(mercerized, sanforized) Tk 0.10 " Tk 0.20 "(embroidered) Tk 0.50 " Tk 0.50

C. Sales Tax

1. Raw cotton, cotton yarn, cotton fabrics (imported): 20% of the value of thegoods including duties paid.

2. Cotton yarn, cotton fabrics (locally produced): Zero

-54-ANNFX 2.3

BANGLADESH Page 1 of 2 pages

TXTILE INDUSTRY REHABILITATION PROJECT

Status of Imports Program CreditAction Programs

Fifth Imports Program Credit Agreed Completion Data Status

(i) GOB to initiate a prefeasibility Initial study financed by ADB completed. Resultsstudy of the potential for manmade indicated that local natural gas unsuitable forfibres March 31, 1977 synthetic fibre productioni. Subsequent feasibil-

ity study to determine viability of producingfibre from imported naptha or polyester chipscompleted. Results not supportive of furtheraction. However, GOB proposes to construct12,500 MT polyester fibre plant.

(ii) GOB to undertake a sample survey December 31, 1976 BT1C did not follow up the study and byof the handloom sector and a census December 1977, it was found that the studyof small-power loom sector. carried out did not serve its purposes. A new

sampling/census was carried out by the BHB andwas completed in March 1979. Findings incorpora-ted into SFYP.

(iii) GOB, through the BIDS, to complete December 31, 1977 The study was completed on schedule, but wasa study of the relative efficiency of found to be inadequate inanumber of areas. TORshandloom small-powered looms vs. for a revised study were prepared by IDA. lhelarger mills. revised study was completed in December 198C.

Findings used as basis for investment proposalsin SFYP.

(iv) BTMC to initiate program to improve December 31, 1976 i) UNIDO/UNDP Productivity Team operational.mill productivity and spare parts Because of delay in locating advisor,manufacture using T.A. assignment extended to August 1984.

ii) Spare parts facility project has beenagreed. GOB/BTMC have made applicationto IDA (October 1978) for projectfinancing. Decision held pendingprogress on BMR program.

Sixth Imports Program Credit

A. Rehabilitation/ProfitAbility Improvement

i) BTMC to prepare, on a mill-by-mill April 30, 1978 Survey completed in July 1978, formal reportbasis, a long term rehabilitation submitted to GOB September 1978.program for the industry to obtaina least cost solution to meet expecteddemand.

ii) On the basis of the mill-by-mill May 31, 1978 Ranking of rehabilitation requirements andsurvey and taking into account the outline implementaion program sunmitted toprojected level of demand, GOB will IDA. Application for BMR financing made tosubmit to IDA with comments, BJMC's IDA March 1979. Project appraised March 1981.recommendations concerning investmentsthat are economically justified as wellas actions to be taken on uneconomicunits.

iii) GOB to prepare a review of its pricing Ongoing Prices revised October 1977, July 1978, Julypolicies, including recommendations 1979, July 1980 and April 1981. Totalfor price increases necessary to restore increase 28%, rate of inflation 55%.the industry's profitability.

iv) GOB to give BTMC autonomy in the purchase Ongoing Autonomy given in July 1977. BTMC hasof raw cotton in order to allow BTMC to prepared and submitted to IDA for reviewtake advantage of seasonal prices, purchase program for FY82 - FY83.

B. Operational Targets

i) BTMC to prepare operational targets for April 30, 1978 Completed and submitted for review oneach mill, with specific targets for schedule.production, spinning efficiency, waste,conversion costs, raw cotton procurementcosts, and profits.

ii) BTMC to prepare consolidated operational May 31, 1978 Submitted on scheduletargets based upon the targets established Annually thereafterfor individual mills.

-55. ANNFX 2.3Page 2 of 2 pages

Agreed Completion Date Status

C. Management and System Improvements

i) BTMC to prepare draft Rules of Business Ongoing Rules of Business accepted and implemented.which include specific definition on Board of Directors established for all umits.degrees of autonomy for the BTMC(particularly raw cotton purchasingand personnel matters) and mills.

ii) GOB to establish a policy that the Understanding already Policy is operational.Chief Executive should remain at his reached with GOB/BTMCpost for at least thiee years andBTMC will reduce inter-mill transferof managers.

iii) BTMC to initiate improvements to Initiate by December 31, During FY78-FY81, two hundred accountingmanagement information and control 1977. officers recruited and trained for systemsystems, together with the increasing improvement work. Additional staff underand upgrading of staff. training. Upgrading of Management systems

under way in mills where recruits have beenposted. GOB/BTMC have requested technical assist-ance to complete system design and implementation.

iv) BTMC to present to GOB proposal for an March 31, 1978. Mill system operational but BTMC staffincentive system for all BTMC and mill incentive system still under consideration.personnel. Mill system requires refinement to convert

it from a bonus system to an incentivesystem based upon better than targetperformance, and efficiency criteria.

v) BTMC to prepare and implement a training March 31, 1978 through BTMC has prepared and is implementing a five-program for BTMC and mill personnel. FY83. year training program. Training mill and

institute operational. About 1200 operatorstrained.

vi) BTMC to prepare an overall program, December 31, 1977 Audit program prepared, additional staffingincluding staff requirement, etc. approved and offers made to staff necessaryfor internal audit systems and procedures. to strengthen audit division. Recruitments

completed December 31, 1978. 12 teamsoperational. All internal audits to FY80completed.

vii) The external audit for BTMC accounts i) Annual audit for FY78 FY79 audited balance sheets completed for allup to FY77 to be completed, thereafter to be completed by June mills; 19 audits completed for FY80, 48 inannual audits to be completed within 30, 1979. progress.6 months of the fiscal year end.

ii) Annual audit for FY79and thereafter to becompleted within 6months of year end.

viii) BTMC to carry out a revaluation of its June 30, 1978 Asset revaluation completed. Final reportassets in accordance with sound and recommendations submitted to IDAaccounting principles. December 1978.

Eighth Imports Program Credit

Profitability

1. GOB shall implement a capital restructuringfor each unit of BTMC to be completed byDecember 31, 1984. The restructuring willconsist of

i) provision of equity to enable mills First tranch June 30, FY80 infision of Tk 186.8 million receivedto achieve a debt/equity ratio of 1980. August 1980.60:40;

ii) conversion of ADP loans, arrears of June 30, 1980 Implemented by conversion of Tk 334 millioninterest thereon, etc. into equity;and

iii) annual cash infusions sufficient for June 30 each year Infusion for FY80 received August 1980;BTMC mills to meet their debt no infusion received for FY81.servicing requirement or long-termdebts to BSB, BSRS and thecommercial banking systems.

2. GOB shall by September 30, 1980 or March 31, 1981 Prices increased on yarn by 10% on April 1,such later date as agreed,take such 1981. Increase did not compensate for rawactions as to provide BTMC mills with material cost increase. BTMC projectsan after tax return on shareholders aggregated loss of Tk 168.5 million.equity of at least 10%.

- 56 -

ANNEX 3. 1

BANGLADESHTextile Industry Rehabilitation Project

BTMC Operational UnitsFY76 - FY81

Forecart

FY76 FY77 FY78 FY79 FY80 FY81 FY81

Operational Units

Spinning Mills 25 24 27 29 31 31 32

Composite Mills 24 25 25 25 25 25 25

Specialised Mills 10 3 3 3 4 4 4

59 52 55 57 -O 60 61

Under Construction

Spinning Mills 10 11 8 6 4 5 4

Specialised Mills 2 1 1 1

12 12 7 _ 4 5 4

Other Units

Workshop 1 1 1 1 1 1 1

Non-Operating 8 8 8 8 8 8

-f 0 9 -9 -9 9 9 9

Total 81 73 73 73 73 74 74

Source: BTMC March 1981

BANG LADESHTEXTILE INDUSTRY REHABILITATION PROJECT

ORGANIZATION CHART: BTMC

Ministryof

Textiles

BTMCBoard of Directors

r …----1Board of Directors

BTMC: ~~~~~~~~ ~ ~ ~~~~~~~~~Chai rman I

r Director Director Director Director CDirector Audit Planning and Purchasing Orto Secretarial Chairman's BTMCFinance (Internal) Development and Sales Operations Department Enterprises

BTMC Audiit an gPurchases ruconBoard Puli CottonAccounts Liaison Planning Cotton Affairs Relations tile Mills

Mill BTMC Implementa- Purchases Product Administration Enquiry SpcializedAAccounts Accounts ion Equipment Design Call Mills

Mill Engineering ChitagnManencEsblhmt MillsBudget Medical UnderAccounts Civil Office ~~~~~~~~~~~~~~~~~~~~~~~~Construction

Costing Engineering Sales: S. O Quality SecurityCosting Mechanical ~~~~~~~~~~~~~Yarn Control Scrt

MIS Engineering Sales: TrainingElectrical Cloth

Sales: ~~~~~~~~~~~Employee Banking Centres ~~~~~~~~~~~~~~~~~~~~~~Relations

Source: BTMC March 31, 1981World Bank - 22856

BANG LADESHTEXTILE INDUSTRY REHABILITATION PROJECT

LIST OF TEXTILE MILLS AND ACTIVITIES(PHASE I)

Boardof

Directorsl]

Mill ManagementCommittee Mill Manager

Administration Employee Spinning Weaving Accounting Commercial t_u

Department Welfare Department Department Department Department |C

_ Laor |; _ Prprto Prprto | _| Fnancial| _ Purchases|Relations Medical Preparation Accounting

Security ~~~~~Processing Weaving ACcountingle

AccountingZ_lEngineering |l Qaiy l Finishing Payroll |

l (Civil) Coto l ll ll

Stores | Quality | | Stores ll l | ~~~~~~~~~~~~~~~~~Control Accounting zz

1/ Board of Directors Consists of: {16

- BTMC Representative- Commercial Bank Representative- Mill Manager- Private Sector Representative World Bank - 22857

- 59 -

ANNEX 3. 4

BANGLADESHTextile Industry Rehabilitation Pro,ect

Operational Data: FY76-FY3l

ForecastFY70 FY76 FY77 FY78 FY79 FY80 FY81 FY 81

Spindle Utilisation

installed Spindles 750.0 905.5 921.3 976.8 972.2 1031.6 1057.5 1093.9(000)zverage Running Spindles 660.0 659.8 685.2 798.7 793.6 810.1 863.1 930.0(000)

Capacity Utilisation (%) 88% 73Z 74% 82% 82% 79% 82% 85%

Soinning Production

Production Target(in 32s) 2/ N.A. 107.5 109.0 110.0 115.0 137.5 129.9 168.0

.<ctual production(in 32s) 2/ 115.8 912. 93.5 106.9 110.6 112-9 121.8

% Performance 88 0 C 85% 86% 97Z 96% 82% 94% 90%Average oz. Spindle/Shifts 2.84 2.44 2.42 2.38 2.36 2.39 2.41 2.72W Wastage 12.6% 10.7% 9.5% 9.9% 11.9% 11.5% 9.2%veavin g, tilisation

installed Looms 7000 7626 7859 7986 7494 7504 7592 7600

Operating Looms 3000 4847 4531 5379 5600 5458 5283 6840

Capacity Utilisation (Z) 43% 63% 58% 67% 75% 73% 70% ?0%

Weaving Production

Production Target (54)_3/ N.A. 95.0 97.0 100.0 100.0 117.5 104.0 135.4Actual (in 54) 3/ 59. 1 76.0 68.6 84.5 88.2 92.4 88.8% Performance - 80% 71% 85% 88% 79% 85% -Average loom shiftProd.(54) in yds. 24.0 19.7 18.9 20.3 20.0 20.8 21.4 24.0% Wastage 4.8 4.7 4.5 4.2 4.1 4.4 4.6 3.0

Source: BTMC Annual Reports

1/ Millions lbs.21 Millions yds.

- 60 -

ANNEX 3.5

BANGLADESH

Textile Industry Rehabilitation Project

BTMC Summarised Income StatementsFY76-FY80

(Tk Millions)

ForecastFY76 FY77 FY78 FY79 FY80 FY81 1/

Sales

Yarn 1385.6 1L300.6 1482.6 1853.8 1861.8Cloth 427.3 499.6 578.4 599.2 634.9Others 7.5 13.2 10.5 29.5 38.5

Total 1820.4 1813.4 2071.5 2482.5 2535.3 3305.0

Cost of Sales

Raw Materials 1008.0 1157.3 1464.3 1461.3 1611.6 2053.0Labour 273.4 276.0 485.4 489.1 574.8 667.0Manufacturing Expenses 248.4 275.1 360.8 365.1 366.1 425.0

Manufacturing cost 1529.8 1708.4 2310.5 2315.5 2552.5 3145.0Inventory Adjustments 167.1 114.6 (12.2) 19.2 55.5 -

Cost of Sales 1696.9 1823.0 2298.3 2334.7 2608.0 3145.0

Gross Profit 123.5 (9.6) (7.3) 147.8 (72.7) 160.0

Operating Expenses

Salaries, etc. 29.8 29.1 40.1 47.1 53.5 103.0Depreciation 2.7 2.8 3.7 5.2 7.1 13.0Other Expenses 85.5 109.2 88.6 103.9 124.7 244.0

118.0 141.1 132.4 156.3 185.3 360.0

Operating Profit/(Loss) 5.5 (150.7) (139.7) (8.5) (258.0) (200.0)

Interest - - - - - -Other Income 13.6 12.9 60.1 56.0 71.2 90.0

Profit/(Loss) before Tax 19.1 (137.8) (79.6) 47.5 (186.2) (110.0)

Taxation 69.7 27.8 34.5 50.0 22.8 58.0

Net Profit/(Loss) after Tax (50.6) (165.6) (114.1) (2.5) (209.0) (168.0)

Source: BTMC Annual Reports FY76-FY80

1/ Provisional

- 61 -

ANNEX 3.6

BANGLADESH

Textile Industry Rehabilitation ProjectSummarized Balance Sheets

FY76-FY80(Tk. Million)

Current Assets - FY76 FY77 FY78 FY79 FY80

Cash and Bank 84.7 76.6 44.5 62.4 53.3Accounts Receivables 164.9 238.8 246.9 332.8 269.9Inventories-Raw Material 388.9 229.4 510.1 368.3 590.0

Finished Products 276.0 117.5 329.1 280.1 224.4Stores-Spares 182.3 179.0 198.7 216.3 251.5Others 91.0 129.2 349.1 404.3 57.8

Advances and Deposits 336.5 413.8 554.1 636.4 816.3

Total Current Assets 1,524.3 1,384.3 2,232.5 2,300.6 2,263.2

Fixed Assets

At Cost 813.6 789.7 1,120.3 1,354.6 1,605.5Less Depreciation 316.0 350.3 401.1 465.9 551.1

Net Fixed Assets 497.6 439.4 719.2 888.7 1,054.4

Intangible/Other Assets

Investments 12.9 18.5 19.8 18.2 13.2Others 61.4 50.8 51.4 149.5 236.7Total 74.3 69.3 71.2 167.7 249.9

TOTAL ASSETS 1,8930 30229 3,357.0 3,567.5

Current Liabilities

BTMC Current Account 352.9 351.3 1,082.6 1,156.1 1,121.7Taxes and Duties 239.6 278.0 373.5 400.7 323.3Loans and Overdrafts 145.3 144.1 244.6 236.2 306.6Advances and Deposits 34.9 91.9 88.7 71.0 99.3Sundry Creditors 776.4 727.5 807.6 718.5 1,040.8

Total Current Liabilities 1,549.1 1,592.8 2,597.0 2,582.5 2,891.7

Long-Term Liabilities

Loans 228.9 182.5 481.0 789.7 776.8Others-Deferred 23.4 - - - -

252.3 182.5 481.0 789.7 776.8

EQUITY

Share Capital 224.2 206.6 217.6 217.6 217.6Reserves 97.5 103.4 92.9 93.8 256.4Profit/Loss (26.5) (192.3) (365.6) (326.6) (575.0)

295.2 117.7 (55.1 (15.2) (101.0)

TOTAL LIABILITIES 2,096.2 1,893.0 3,022.9 3,357.0 3,567.5

Ratios of Asset Utilisation

Fixed Asset Turnover 2.2 2.2 1.8 1.8 1.6Current Asset Turnover 1.2 1.3 0.9 1.1 1.1Stock Turnover 1.8 2.8 1.7 1.8 2.3

Financial Ratios

Current Ratio 1.0 0.85 0.85 0.89 0.78Quick Ratio 0.37 0.45 0.33 0.41 0.39Total Debt/Equity 6.1 100.0 100.0 100.0 100.0Long Term Debt/Equity 0.79 3.1 100.0 100.0 100.0

Earning Ratios

Gross Profit/Sales (%) 7.0 (0.5) (0.3) 6.0 (2.8)Operating Profit/Sales (%) 0.3 (8.0) (6.0) (0.3) (10.0)Net Profit before Tax/Sales(%) 1.0 (8.0) (4.0) (2.0) (7.3)Return on Equity (17) (140) Minus Minus Minus

Equity Equity EquityReturn on Capital Employed (9.0) (55.0) (27.0) 0.3 -Return on Total Assets (2.0) (9.0) (4.0) 0.7 (5.8)

Source: BTMC Annual Reports, March 1981

- 62- ANNEX 3. 7

BANGLADESH

Textile Industry Rehabilitation Project

BTMC Product Cost Structure, 32s Yarn and Grey Cloth

a/ b/ c/ a/Product/Cost Component FY76 FY77 FY78 FY79 FY80

1. 32s Yarn

C&F cost of raw cotton 7.14 8.40 10.78 9.30 10.80Customs duty 0.55 0.55 0.55 0.55 0.55Sales tax 1.54 1.78 2.27 1.97 2.27Other expenses 0.26 0.25 0.30 0.30 0.40

9.48 10.98 13.90 12.12 14.02Wastage 1.19 1.45 1.84 1.58 1.82

10.'? 12.43 15.74 13.70 15.84Conversion cost 4.93 4.90 6.42 6.31 6.86

15.60 17.33 22.16 20.10 22.70Excise duty 0.50 0.50 0.50 0.50 0.35Total per lb. 16.10 17.83 22.66 20.51 23.05Average selling price 15.46 16.40 21.50 20.45 20.30Profit/(Loss) per lb. (0.64) (1.43) (1.16) (0.06) (2.75)

2. Grey Cloth 32x32 36"60x72

Raw material cost (3.60 oz) 3.62 4.01 5.10 4.61 5.18Conversion cost 2.00 1.85 2.94 2.84 2.88Processing duty 0.05 0.05 0.05 0.05 0.05Total per yard 5.67 5.91 8.09 7.50 8.11Average selling price 5.60 6.00 7.70 6.93 6.93Profit/(Loss) per yd. (0.07) 0.09 (0.39) (0.57) (1.18)

3. Long Cloth 32x32 36"70x74

Raw material cost (3.35 oz.) 3.60 3.96 5.03 4.62 5.21Conversion cost 2.06 1.90 3.03 2.92 2.96Processing charges including chemicals 1.20 1.20 1.27 1.30 1.30

6.66 7.U6 9.33 a.c4 9.47Processing duty 0.05 0.05 0.05 0.05 0.05

6.91 7.11 9.38 8.89 9.52Average selling price 7.00 7.20 9.55 8.60 8.60Profit/(Loss) n0no (n.n7) (0.17) (3.20) (0.n07)

4. Saree 30x38 4444x42

Raw material cost (2.78 oz.) 2.90 3.50 3.91 3.85 4.22Conversion cost 1.16 1.08 1.72 1.66 1.70Processing charges including dyes andchemicals 0.98 0.98 1.04 1.16 1.16

5.04 5.56 6.67 6.67 7.08Processing duty 0.06 0.06 0.06 0.06 0.06

5.10 5.62 6.73 6.73 7.14Average selling price 5.08 5.34 6.74 6.46 6.46Profit/(Loss) (0.02) (0.28) (0.01) (0.27) (0.68)

5. Longi 32x32 44,

60x68

Raw material cost (4.12 oz) 4.15 4.59 5.83 5.28 5.94Conversion cost 1.88 1.75 2.78 2.68 2.72Processing charges including dyes and

chemicals 1.42 1.42 1.50 1.65 1.657.45 7.76 10.11 9.61 10.31

Processing duty 0.05 0.06 0.06 0.06 0.067.50 7.82 10.17 9.67 10.37

Average selling price 7.63 7.75 9.36 9.13 9.13Profit/(Loss) 0.13 (0.17) (0.81) (0.54) (1.24)

a/ i) C&F price 40t-604; ii) Exchange rate varying from Tk 14.0-Tk 16.0.bY i) C&F price 500-70i; ii) Exchange rate Tk 15.50.c/ i) C&F price average 70i; ii) Exchange rate Tk 15.50.d/ i) C&F price average 60i; ii) Exchange rate Tk 15.50.e/ i) C&F price 70i; ii) Exchange rate Tk 15.50

Source: BTMC, March 1981

- 63 -BANGLADESH ANNEX 3.8

Textile Industry Rehabilitation Project

Mill Profit and Loss Balance - lY76-FY81(Tk million)

Name of the Mills FY76 FY77 FY78 FY79 FY80 FY81-/

5/ 21. Adarsha Cotton (6.4) (12.4) (7.7) (11.0) (9.5) (7.2) (P)(D)-2. Ahmed Bawany Textile 0.4 (11.4) (5.9) 7.2 (9.5) (.,0) (P)3. Alhaj Textile 4.6 2.9 4.9 10.8 3.5 6.14. Amin Textile 10.5 9.2 8.7 10.1 5.9 13.45. Ashraf Textile 8.4 8.0 10.9 5.1 1.8 8.8 (P)6. Asiatic Cotton 2.9 (0.4) 0.6 0.7 0.3 2.17. Afsar Cotton 0.4 (2.0) (5.5) (2.3) (6.7) (5.3) (P)8. Bengal Textile 6.8 2.2 - 4.7 2.6 6.09. Bogra Cotton (3.8) (7.1) (13.1) (2.9) (8.3) (7.2) (P)10. Bangladesh Textile (0.8) (3.4) (3.6) 0.7 (7.2) (6.6) (P)11. BarisaI Textile - - - (3.3) (6.6) (10.6)12. Chand Textile (2.6) 1.0 0.7 7.0 8.0 9.813. Chisty Textile 1.4 0.8 0.3 2.1 (1.9) (1.3)14. Calico Cotton (2.8) (2.0) (3.4) 0.7 (0.4) 0.415. Chittaranjan (3.3) (10.1) (7.9) (2.9) (7.3) (1.4) (P)16. Chittagong 5.2 (5.0) (1.0) 11.4 0.3 (2.0)17. Dacca Cotton (1.6) (7.1) (7.0) (1.7) (6.4) (8.1) (P)18. Dhakeswari I. (15.0) (17.9) (12.0) (17.2) (14.9) (16.3) (D)19. Dhakeswari II. (15.3) (17.0) (12.0) (10.5) (19.7) (16.3) (P)(D)20. Dost Textile 0.3 1.5 3.5 4.3 0.9 (1.221. Dinajpur Textile - - - - (3.0) (8.6)22. Eagle Star Textile 12.1 6.8 1.2 3.9 (2.7) 2.323. Fine Cotton 7.0 15.2 9.4 9.6 2.5 9.024. Gawsia Cotton (6.7) (10.2) (3.1) (8.0) (7.0) (2.2) (P)25. Goalundo Textile (4.1) (3.3) (1.1) (0.4) (4.0) 0.726. Halima Textile - (4.3) (2.8) (0.2) 0.1 (2.0)27. Habibur Rahman - - - (1.6) (5.1) (4.6)28. Ibrahim Cotton 4.1 (1.0) (0.7) 0.9 (4.0) 2.629. Jalil Textile 4.4 (1.2) 1.0 2.6 3.2 5.i30. Jaba Textile 1.3 (1.6) (0.5) 1.0 (1.5) 0.1 (P)31. Khulna Textile 2.5 (4.4) (1.8) (0.3) (1.3) (0.6)32. Kokil Textile 2.9 0.4 0.3 0.9 (4.0) (5.2)33. Kushtia Textile (2.7) (6.2) (6.2) (2.1) (6.1) (5.6) (P)34. Kohinoor Spg. - - - (3.0) (8.2) (4.4)35. Kishoreganj - - - (1.3) (16.6) (9.5,36. Kuxminarayan (1.3) (7.8) (5.0) (1.5) (3.0) (1.4, (P)37. Mohini Mills (8.7) (11.8) (9.2) (15.4) (21.5) (17.4' (P)(D)38. Monnoo Textile (2.3) (1.3) 1.7 4.5 1.9 3.839. Muslin Cotton (3.3) (4.1) (7.0) 2.7 0.1 (10.1) (P)40. Meghna Textile 5.3 (1.6) (0.9) 6.8 1.0 2.841. Mowla Textile 2.4 2.9 0.3 1.5 1.2 2.542. Mainamati Textile (2.6) (4.4) (3.1) (1.1) (3.5) (2.5)43. National Cotton (1.1) (5.2) (4.0) (1.6) (4.4) (7.7) '0)-44. Olympia Textile (3.2) (3.9) 1.3 3.8 1.0 0.945. Orient Textile 3.8 (1.2) (1.4) 0.7 0.4 1.746. Pahartali Textile 8.4 (2.3) (3.9) 9.6 0.6 (1.6)47. Quaderia Textile 3.2 2.1 1.1 3.4 (3.1) (1.1)48. Quasem Cotton 7.1 5.5 - 4.4 0.6 9.649. R.R. Textile 9.8 5.9 9.6 7.8 1.9 12.450. Raz Textile 2.3 0.9 3.6 1.1 (0.6) 2.951. Rajshahi Textile - - - (0.3) (1.0) 11.852. Satrang Textile - (1.9) (4.8) (0.9) (2.2) (21l53. Sharmin Textile 0.4 (0.3) (1.0) 2.5 (2.9) (2.1)54. Serajgonj Textile 2.0 0.1 (2.2) 0.4 0.9 0.255. Tangail Cotton 1.4 (1.6) 0.4 1.2 (2.8) (4.4)56. Zeenat Textile (4.9) (12.2) (5.5) (2.0) (9.3) (6.2) (P)57. Darwani Textile - - - - (4.8) (8.0)

Sub-total 29.1 (132.2) (79-.3) 44.6 (185.3) (100./fPylon Textile 3.2 0.1 3.5 8.6 2.1 (4.fl)Karalin Textile (1.3) (3.0) (1.5) (2.9) (1.1) (3.7)Valika Textile (3.3) (2.9) (1.6) (0.2) 0.7 0.6Engineering Industry 0.1 - (0.1) - - (0.3)Sofine Textile - - - - (3.2) (2.8)

Sub-total 10.0 5.8 0.3 2.9 1.5 10.2

TOTAL 19.1 (138.0) (79.0) 47.5 (186.8) (110.6)

Mills proposed for Phase 1.2, M'ills to be Divested3/ Losses to be written offa/ FY31 is provisional

ANNEX 3.964 -

BANGLADESH

Textile Industry Rehabilitation Project

Financial Projections: FY81 - FY85(Tk million)

FY80 FY811 1 FY82 FY83 FY84 FY85Actual Actual

Production

Yarn (million lbs) 112.8 121.8 161.8 182.8 191.6 228.5Cloth (million yds.) 92.4 88.8 106.2 110.5 110.5 134.2

Income

Sales 2,535 3,305 4,440 5,000 5,235 6,695

Raw Materials 1,611 2,053 2,564 2,895 3,035 4,022Labour 575 667 775 920 910 1,130Other Expenses 366 425 491 575 580 643

Manufacturing Cost 2,608 3,145 3,830 42390 4,525 5,795

Gross Profit (73) 160 610 610 710 900

Salaries 54 103 136 130 157 174Depreciation 7 13 17 17 18 59Other Expenses 124 244 297 293 365 468

Total 185 360 450 440 540 701

Operating Profit (258) (200) 160 170 170 199Other Income 71 90 110 125 130 145

Profit Before Tax (186) (110) 270 295 300 344

Taxation 23 58 170 180 180 175

Profit After Tax (209) (168) 100 115 120 169

Earning Ratios

Gross Profit/Sales % (2.8) 4.8 13.7 12.2 13.5 13.1Profit Before Tax % (7.3) (6.1) 6.1 5.9 5.7 5.2Profit After Tax % (8.2) (5.1) 2.3 2.3 2.3 2.2Return on Equity 0 0 10.0 10.0 10.0 10.0Return on Total Assets (5.8) 2.5 3.0 3.5 4.0

Asset Utilisation

Fixed Asset Turnover 1.6 1.5 1.7 1.5 1.5 1.9Current Asset Turnover 1.1 1.0 1.6 1.9 2.3 2.6Stock Turnover 2.3 2.5 2.6 2.7 2.8 3.0

Financial Rat os

Current Ratio 0.78 0.8 0.85 0.85 0.85 0.85Quick Ratio 0.39 0.3 0.38 0.38 0.38 0.38Debt/Equity 100.0 100.0 3.3 3.3 2.1 2.0Long-Term Debt/Equity 100.0 100.0 1.0 1.1 0.9 0.9

1/ Provisional

- 65 - ANNEX 3.10

BANGLADESH

Textile Industry Rehabilitation Project

BTMC Employment Levels: FY76 - FY81

FY76 FY77 FY78 FY79 FY80 FY81-/ FY81

Spinning 54,500 55,700 56,265 55,350 35,900

Weaving NA NA 10,500 10,800 11,000 10,800 9,430

Finishing 1,721 1,681 1,972 1,980 1,200

65,061 62,194 66,721 68,181 69,237 68,130 46,500====== ====== ====== ====== ====== __==== "s -M

BTMC , Head Office 556 564 682 640 646 620 500

Specialised Textiles 2,649 1,385 1,451 1,562 1,358 1,350 1,300

Textiles 65,061 62,194 66,721 68,181 69,237 68,13068,266 64,143 68,854 70,383 71,241 70,100 48,3)0

Source: BTMC March 81

1/ BTMC also has a pool of 6,200 non-permanent workers including badlis, trainees and1 .oprentices.

Inclusive of these workers BTMC's total work force is 76,300.

2/ South Asia Norms - Manpower Needs in BTMC - UNIDO Report BGD 73.049, March 198C.

ANNEX 4. 1- 66 -

BANGLADESHTEXTILE INDUSTRY REHABILITATION PROJECT

LIST OF TEXTILE MILLS AND ACTIVITIES(PHASE I)

S W B D P F 0

1. Adarsha Cotton

2. Ahmed Bawany Textile I(Cotton

3. Afsar Cotton BlanketUnit)

4. Bogra Cotton

5. Bangladesh Textile

6. Chittaranjan Cotton

7. Dacca Cotton

8. Dhakeswari Cotton- II

9. Gawsia Cotton

10. Jaba Textile

11. Kustia Textile

12. Luxminarayan Cotton

13. Mohini Mills

14. Muslin Cotton

15. Zeenat Textile m E

S = Spinning P = PrintingW = Weaving F = FinishingB = Bieaching 0 = OthersD = Dyeing

Source: BTMC March 31, 1981 World Bank -22855

TEXTILE INDUSTRY REHABILITATIONSUMMARY PROJECT COSTS, BY CATEGORY AND CURRENCY

Tk Million US$ MillionLocal Foreign Total Local Foreign Total

Rehabilitation ComponentEquipment, Machinery, and Spares 75.6 345.8 421.4 4.0 18.2 22.2Civil Works, Installation,

Erection and Other 45.0 - 45.0 2.4 - 2.4Quality Control Equipment - 47.5 47.5 - 2.5 2.5Technical Assistance Component

Production Planning 5.7 5.7 - 0.3 0.3Marketing and Planning Cells 1.9 7.6 9.5 0.1 0.4 0.5Financial Planning and Systems 1.9 11.4 13.3 0.1 0.6 0.7Organization, etc. 1.9 5.7 7.6 0.1 0.3 0.4

Total Base Cost 126.03 423.7 550.0 6.7 22.3 29.0

Physical Contingencies 1.9 9.5 11.4 0.1 0.5 0.6

Price Contingencies 15.2 49.4 64.6 0.8 2.6 3.417.1 54.9 76.0 0.9 3.1 4.0

Duties and TaxesOn Equipment, Machinery, and Spares 60.8 - 60.8 3.2 - 3.2From Physical Contingencies 1.9 - 1.8 0.1 - 0.1From Price Contingencies 7.6 - 7.6 0.4 - 0.4

Subtotal - Duties and Taxes 70.3 - 70.3 3.7 - 3.7

Total Capital Cost 213.7 482.4 696.3 11.3 25.4 36.7

Incremental Working Capital 136.0 - 136.0 7.2 - 7.2

Total Project Cost 349.7 482.6 832.3 18.5 25.4 43.9

Additional Working Capital 426.0 - 426.0 22.4 - 22.4 _Total Financing Requirements 775.7 482.6 1258.3 40.9 25.4 66.3

Sources of FundsIDA 4.6 25.4 30.0Mills/GOB 36.3 - 36.3

40.9 25.4 66.3Per Cent 61.7 38.3 100.0

- 68 - ANNEX 6.2

B.ANGLADESH

Textile Industry Rehabilitation Project

Phasing of Project Costs(Tk Million)

FY83 FY84 TotalRehabilitation

Equipment 280.9 140.5 421.4Civil Works 27.0 18.0 45.0

307.9 158.5 466.4Quality Control 47.5 - 47.5

Technical Assistance

Sectoral Planning 3.0 2.0 5.0Organization, etc. 4.6 4.5 9.1Production Planning 2.0 3.4 5.4Marketing 2.0 2.0 4.0Financial Planning 7.0 5.6 12.6

18.6 17.5 36.1

Contingencies

Physical 7.6 3.8 11.4Price 43.0 11.6 64.6

50.6 15.4 76.0

Total Base Cost 434.6 191.4 626.0

Duties and Taxes

Equipment 40.5 20.3 60.8Physical Contingencies 1.3 8.6 1.9Price Contingencies 5.1 2.5 7.6

46.9 23.4 70.3

Total Prolect_Costs 481.5 214.8 696.3

- 69 - ANNEX 6.3

BANGLADESH

Textile Industry Rehabilitation Project

Disbursement Schedule(US$ million)

Quarterly Disbursements Cumulative

Year Quarter Eq. a/ QCab/ TA-/ Total Disbursements _

FY82 3

4

FY83 1 0.30 0.30 0.30 0.1

2 0.30 0.30 0.60 a.2

3 4.0 0.70 0.25 4.95 5.55 18.5

4 7.5 0.60 0.25 8.35 13.90 46.3

FY84 1 7.5 0.60 0.20 8.30 22.20 74.0

2 3.5 0.60 0.20 4.30 26.50 88.3

3 1.7 0.20 1.90 28.40 94.7

4 1.4 0.20 1.60 3f.oo 100.0

25.60 2.50 1.90 30.00 30.00 100.0

a/ Equipment, machinery, spares, civil works, erection and installation.b/ Quality control equipmentc/ Technical assistance

- 70 - ANNEX 7.1Page 1 of 5 pages

BANGLADESH

Textile Industry Rehabilitation Project

Assumptions for Financial Projections

1. Projections have been made with, without, and incremental for the Project.Aggregate projections are shown in Annexes 7.2 to 7.4. Mill-by-mill projectionsmay be found in the project files. Each set of projections comprisesa statement of projected sales, debt statement, income statements, balance sheets,funds flow and financial ratios. This Annex gives the assumptions underlying theprojections for individual items.

Income Statement

2. Production. Production projections both with and without the Project arebased on (i) estimates of achievable capacity, defined as installed capacity lessidle capacity, allowances for power failures, absenteeism, repair and maintenancedowntime, machinery breakdown, etc., and (ii) on estimates of productivity, i.e.production per spindle shift in the case of spinning, and production per loomshift in the case of weaving. Increased production from the proposed rehabilitationproject would be achieved in FY85 and onwards. However, FY81 production to thehalf-year ending December 31, 1980 already shows a marked improvement over FY80actual production, attributable to rehabilitation efforts already undertaken tothat time.l/ Thus, increased production attributable to the proposed project isthe difference between FY81 production (assumed to continue into FY84) and FY85production. The post-BMR estimates are based on spin and weave plans drawn up byBTMC engineers, and have been reviewedl by the consultants (Gherzi Eastern Ltd.)retained by the Bank and by the UNDP P'roductivity Team. They are consideredachievable. The detailed spin and weave plans, mill by mill, are available inthe project files. A tabulation showing key indicators of productionpre- and post-BMR is given below.

1/ These efforts have been aided by various bilateral aid sources (U.K., Poland,GDR, India) and imLproved availability of spares due to ongoing Imports ProgramCredits, and the presence of a IJNDP Productivity team assigned to the BTMCunder the Sixth Imports Program Credit.

- 71 - ANEX 7.1

Page 2 of 5 pages

laDie l. Key indicators of production before andafter BMR a/

Before BMR After BMRFY81 FY84

Spinning

Spindle productivity (ozs./spindleshift) 2.22 3.42

Capacity utilization 90% 95%

Yarn production (millions lbs. 32 34.9 54.3equivalent)

Weaving

Loom productivity (yds/loom shift) 21.2 24.9

Capacity utilization 86% 96%

Cloth production (million yds. 54 picksequivalent) 5.7 8.1

Finishing

Finished cloth production (million yds.54 picks equivalent) 20.1 43.3

Source: BTMC estimates.

a! Simple as opposed to production-weighted averages over the fifteenmills constituting Phase 1 of rehabilitation.

3. Sales. All production is assumed sold in the year in which produced.This is a reasonable assumption if it is assumed that BTMC's prices remain stablerelative to international price movements, or that relative BTMC price increasesare first preceded and justified by both real and perceived improvements in quality.If BTMC prices were increased without a corresponding improvement in quality,output would be sold only if increased tariff protection restrictions wereintroduced. The ultimate goal of GOB's continued involvement in the textilesector is the creation of an internationally competitive industry, which would beinconsistent with continually increasing levels of protection. As a rider to theassumption that sales are equal in volume to physical production, it is furtherassumed in the projections that there will be no finished goods price increases,unless brought about by international price movements in inputs.

4. Sales volume is taken as given from the mill-by-mill rehabilitationproposals, and are expressed in 32 counts equivalent for yarn, 54 picks equivalentfor cloth. Prices are the prices prevailing at August 30, 1981 for varn of 32counts and cloth of 54 picks, adjusted for raw material price increases (paragraph 5).Excise duties per pound of 32 counts equivalent yarn are a production-weightedaverage computed separately for each mill, based on the following duty schedulefor individual counts:

Counts 10 20 32 40 60 80Duty (Tk. per lb.) .20 .20 .35 .80 2.00 2.00

- 72 - ANNEX 7.1

Page 3 of 5 pages

5. Finished Goods Prices. Yarn andl cloth prices are taken to be prices

prevailing as of August 30, 1981. However, yarn and cloth prices are projected

to rise or fall by the amount required to cover the change of raw material costper unit of production after allowance for wastage, and interest charges on thechange in working capital that could be attributed to the change in raw cottonprices. It is assumed that price increases due to international price movementsin cotton would be passed on to the consumer without affecting sales.

6. Raw Cotton Prices. Cotton price projections are taken as those given by

the Bank's commodity price forecasts dated November 12, 1980 (for Mexican SM 1 -1-1/6" c.i.f. N. Europe). Projections are in constant 1980 dollars, with aconstant exchange rate of Tk 18.0 = US$1 assumed over the life of the Project.Given the wide geographical spread of Bangladeshi cotton imports (Colombia, USSR,USA, Pakistan, etc.) no adjustments were made to obtain a c.i.f. Chittagong price.

Cotton yarn and cloth price projections are tabulated in the table below. Viscose

prices are projected to remain at the historical figure of about 80% of cotton prices.

Price Projections

FY81 FY82 FY83 FY86 FY91-FY95

Cotton a/ (¢/lb) 93.2 88.7 95.5 113.5 116.7

Cotton a/ (Tk/lb.) 15.5 14.7 15.9 18.9 19.4

Yarn b/ (Tk/lb.) 25.4 24.5 25.9 29.3 29.9

Grey cloth c/(Tk/yd.) 7.8 7.6 7.9 8.5 8.6

Finished cloth c/ (Tk/yd.) 10.1 9.9 10.2 10.8 10.9

a/ Source: World Bank commodity price forecasts for Mexican SM 1 - 1-1/16"

c.i.f. N. Europeb/ 32s equivalent.c/ 54 picks equivalent.

_onversio. osts. Croves 'on costs comprise direct wages and salaries,power and fuel, repair and maintenance., and factory overhead. These are brokeninto fixed and variable elements, which have been estimated based on actual FY80 and year-to-date FY81 results and have been projected to remain unchanged in constant takas. This

is a conservative projection since unitL variable conversion costs are expected

to decrease as a result of rehabilitation, due to increased labour productivityand reduced power consumption per unit of output resulting from increased spindleand loom productivity (Table 1). Thus, the reduction in unit conversion costsimplicit in the projections is due entirely to the fact that the fixed componentof conversion costs is spread over a greater volume of production; no account hasbeen taken of pure productivity gains.

8. Summary. Sales are assum.ed to remain unchanged in physical terms over theyears FY82 to FY85, with the full benefits of rehabilitation assumed to flowbeginning in FY86, in the form of increased production. Lost production during theimplementation period is considered negligible. Raw material costs vary propor-tionately with sales, with a wastage factor built-in, generally 9.5% for yarnmanufacture, 3.0% for grey cloth manufacture and zero or negligible for finishedcloth manufacture. A 80/20 blend of cotton and viscose is assumed in yarn manu-facture. Projected price changes (paragraph 6) in raw cotton are reflected in

yarn price changes, which in turn are reflected in raw material price changes

- 73 -ANNEX 7.1Page 4 of 5 pages

for cloth, which in turn show up in cloth price changes. Conversion costs arecomputed on the basis of actual results in FY80. The components of conversioncosts are split into fixed and variable elements according to the table below:

Table 2. Cost Elements

Element of Cost Fixed Variable

Wages 60% 40%Salary (factory) 100% -Repair and maintenance 25% 75%Power and fuel 20% 80%Factory overhead 100% -

Depreciation/Taxes

9. Depreciation expense associated withthe present project is computed on thebasis of a fifteen-year project life, beginning from the time of capital acquisition,as distinct from the time of project completion. Tax liabilities are computedassuming losses may be brought forward for up to five years. Tax is computed atthe prevailing rate of 55%.

Balance Sheets

10. Current Assets are computed as follows:

(i) Cash and Bank: 5% of salaries expense and other expenses;(ii) Surplus cash: a residual transferred from the sources and

application of funds statement;(iii) Accounts receivable: 13% of sales;(iv) Raw material inventories: 33.3% of annual yarn raw material

costs (i.e. raw cotton and viscose);(v) Finished products inventory: 8.33% of grey cloth raw material

requirements, plus 8.33% of finished cloth raw materialrequirements, plus 8.33% of gross sales;

(vi) Stores and spares inventory: 30% of conversion costs.Other inventory: 2.33% of conversion costs, representing workin process; and

(vii) Advances and deposits: 5% of conversion costs;

11. Current Liabilities are computed as follows:

(i) BTMC current account: 33% of raw cotton and viscose requirements,plus 5% of conversion costs;

(ii) Taxes and duties: previous year's tax liability plus onequarter (25%) of current year's excise duties;

(iii) Loans and overdrafts: Current portion of long-term loans(principal repayments due following year) plus 16.7%(2 months) of raw cotton and viscose requirements;

(iv) Advances and deposits: 8.33% (one month) of sales;

(v) Sundry creditors: declining in a straight line from FY80 actualpercentage of conversion costs, to 8.33% (one month) in FY85.

- 74 -ANNEX 7.1Page 5 of 5 pages

Funds Flow

12. The items in the funds flow statement are self-explanatory with thefollowing exceptions:

(i) Government infusions are the amounts necessary to leave anon-negative surplus cash balance at the end of the year.On the balance sheet statem(ent, annual government infusionsare accumulated in the equily account labelled "Governmentadvances";

(ii) Increase in working capital: this is calculated before surpluscash balance is posted to the balance sheet;

(iii) Dividends are declared out of profit after tax, provided the"Profit/Loss" equity account, in which profits (losses) arerecorded, is positive.

Debt Statement

13. Amount disbursed is based on the disbursement schedule (Annex 6.3). Year 1 isFY82. The credit is assumed available from the beginning of the fourth quarter of FY82.Commitment charges are assumed to fall due at the end of the year in whichincurred, and computed at the rate of 0.75% p.a. on the average of the undis-bursed balances at previous and current years' end. Interest charges arecomputed at the rate of 14% p.a. on the average of loans outstanding previousand current years' end. Repayment is assumed to take place in ten equal annualinstalments, the first of which is assumed to be made at the beginning of thefourth year (FY86) of the Credit.

07/05/818:47 PM

BANGLADESH

TEXTILE INDUSTRY REHABILITATION PROJECT

MILL Aggregate of 15 Phase 1 Mills

PROJECTED SALES, with PROJECT

FY 81 FY 82 FY 83 FY 84 FY 85 FY 86

SALES VOLUME-

YARN (LAKH LB) 349.1 349.1 349.1 349.1 542.7 542.7GREY CLOTH (LAKH YD) 565.8 565.8 565.8 565.8 810.8 810.8FINISHED CLOTH (LAKH YD) 201.0 201.0 201.0 201.0 433.0 433.0

SALES PRICE

YARN (TAKA/L8) 25.4 24.5 25.9 27.0 28.2 29.3 IJ

GREY CLOTH (TAKA/YD) 7.8 7.6 7.9 8.2 8.4 8.7 1FINISHED CLOTH (TAKA/YD) 10.1 9.9 10.2 10.5 10.7 11.0

SALES REVENUE (LAKH TAKA)

YARN 8871.6 8554.3 9035.7 9435.8 15287.5 15909.4GREY CLOTH 4424.6 4315.1 4481.1 4618.8 6814.3 7011.0FINISHED CLOTH 2030.1 1992.3 2049.7 2097.4 4625.5 4730.1

GROSS SALES 15326.4 14861.7 15566.5 16152.0 26727.3 27650.5OF WHICH PROFITABILITY PREMIUMEXCISE DUTIES 221.1 221.1 221.1 221.1 353.9 353.9

NET SALES 15105.3 14640.6 15345.4 15931.0 26373.5 27296.6

x

Fb 0M~t

1-u

OQPico

07/05/818:47 PM

BANGLADESH

TEXTILE INDUJSTRY REHABILITATION PROJECT

MILL

-ILL Aggregate of 15_ 3 J. NillsPROJECTED INCOME STATEMENTS, with PROJECT, FY80 TO FY 86

(FIGURES IN LAKH TAKA)

FY 80 FY 81 FY 82 FY 83 FY 84 FY 85 FY 86ACTUAL

SALES NET OF EXCISE DUTIES 7087.7 15105.3 14640.6 15345.4 15931.0 26373.5 27296.6

RAW MATERIAL COST 4269.0 10492.3 iO055.6 10689.3 11239.6 18917.1 19785.3CONVERSION COST 3419.4 3645.6 3645.6 3645.6 3645.6 4870.1 4870.1ADJUSTMENT FOR WORK-IN-PROCESS -87.6TOTAL MFG. COST 7557.6 14137.9 13701.2 14334.9 14885.2 23787.1 24655.4INVENTORY ADJUSIMENT 507.2COST OF SALES 8064.8 14137.9 13701.2 14334.9 14885.2 23787.1 24655.4

GROSS PROFIT/LOSS -976.5 967.4 939.5 1010.5 1045.7 2586.3 2641.3

SALARIES EXPENSE 175.1 175.1 175.1 175.1 175.1 175.1 175.1DEPRECIATION EXPENSE 99.7 99.7 99.7 425.1 439.6 340.0OTHER EXPENSES 217.4 658.6 425.6 430.1 457.4 617.6 784.8

TOTAL EXPENSES 392.5 933.3 700.4 704.8 1057.6 1232.3 1299.9

OPERATING PROFIT/LOSS -1368.9 34.1 239.1 305.7 -11.9 1354.0 1341.4

INTEREST EXPENSE 150.0 51.5 73.0 340.3 620.3 591.1 524.2OTHER INCOME 289.7 289.7 289.7 289.7 289.7 289.7 289.7

PROFIT BEFORE TAX -1038.4 616.0 576.3 433.9 126.7 1088.5 1141.0NET LOSS 343.7 120.5 178.8 469.3 35.9 34.1TAX 96.1 147.3 153.4 58.2 296.0 449.3

PROFIT AFTER TAX -1229.4 520.0 429.0 280.5 68.5 792.6 691.7

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8: 47 PM V;.IE' 7.2BANGLAOrSH Page 3 or a ?ages

TEXTILE INDUSTRY REHABILITATION PROJECT

MILL

PROOEC'ED SALANCE SHEETS, PROJECT,

AS AT JUNE 30. 1980 TO 1986

IrIGURES IN LAKH TAKA)1980 1981 1982 1983 1984 1985 1986

ACTUAL

ASSETS

CASH AND 8ANK 67.0 224.0 212.3 212.5 213.9 293.1 291.5SURPLUS CASH 1206.9 990.5 439.5 182.6 189.1 727.3ACCOUNTS RECEIVABLE 853.7 1963.7 1903.3 1994.9 2071.0 3428.6 3548.6INVENTORIES

RAW MATERIAL 2036.9 1963.3 1866.4 2006.0 2128.2 3497.8 3687.7fINISHEC °RODUCTS 654.4 1659.6 1608.7 1685.3 1749.3 2927.2 3028.9STORES/SPARES 848.8 1093.7 1093.7 1093.7 1093.7 1461.0 1461.0OTHER 786.7 84.9 84.9 84.9 84.9 113.5 113.5

TOTAL INVENTORIES 4340.0 4801.5 4653.7 4869.9 5056.2 7999.5 8291.1

ADVANCES AND DEPOSITS 16 0.2 182.3 18282. 3 2.3 *S2.3 243.5 243.5

7OTAL CURRENT ASSETS 6930.6 8378.4 7942.1 7699.2 7706.0 12143.7 13102.0

GROSS FIXED ASSETS AT COST 2708.2 2708.2 2708.2 7590.1 78C7.9 7807 9 'SO7.9LESS ACCUMULATED DEPRECIATION 1525.3 8625.0 1724.6 1824.3 2249.4 2689.0 3029.0

NET FIXED ASSETS 1182.9 1083.2 983.6 5765.9 5558.5 5118.9 4778.9

INVESTMENTS 61.5 61.6 61.6 61.6 61.S 51.6 61.6GTHER ASSETS *415.8 1418 S 1415.8 1415.8 1415.8 145.8 9 415.8

SUBTOTAL 477.3 '477.3 1477.3 1477.3 1477.3 1477.3 1477.3

'ITAL ASSETS 9591.1 iC938.9 10403.0 14942.4 14741.8 18740.0 19358.3

LIAR.ILITIES AND EQUITY

9TMr 'JRPENT ACCOUNT 5295.7 2127.9 2031.9 2170.2 2291.3 3709.8 3898.0

TATES AND DUTIES 633.7 55.3 151.3 202.6 208.7 t46.7 384.4LOANS AND OVERDRAFTS 1358.2 t066.3 1017.7 0t87.7 1589.0 2194.1 2289.4ADVANCES AND DEPOSITS 188.4 1258.3 1219.6 1278.3 1327.0 2196.9 2273.8SUNDRY CREDITORS 4484.2 3873.2 2980.8 2088.5 '196.1 405.7 405.7

TOTAL CURRENT LIABILITIES 12960.2 8381.0 7401.3 6827.2 6612.1 8653.1 9251.3

EXISTING LONG TERM LOANS 408.4 245.0 163.4 81.7PROPOSED IDA CREDIT 4207.1 3959.6 3519.7 3079.7

TOTAL LIABILITIES 13368.6 8626.0 7564.6 11116.0 10571.7 12172.8 12331.0

SHARE CAPITAL 723.1 723.1 723.1 723.1 723.1 723.1 723.1RESERVES 237.9 237.9 237.9 237.9 237.9 237.9 237.9PROFIT/LOSS -5069.0 -4927.6 -4715.1 -4680.1 -5090.4 -4333.8 -3934.0GOVT. ADVANCES 330.4 6279.7 6592.7 7545.6 8299.7 9940.2 10000.4

TOTAL EQUITY -3777.6 2313.1 2838.6 3826.6 4170.3 6567.4 7027.5

TOTL IAILTIS-= AN ..U.......... T.. ........ . . . . . ..... .......... ..........

TOTAL LIABILITIES ANU EQUITY 951. 103.2 10403.2 14942.6 14742.0 18740.2 19358.5

07/05/818:47 PM

BANGLADESH

TEXTILE INDUSTRY REHABILITATION PROJECT

MILL

PROJECTED FUNDS FLOWS, FY80 TO FY86, PROJECT

(FIGURES IN LAKH TAKA)FY 81 FY 82 FY 83 FY 84 FY 85 FY 86

SOURCES

INCOME AFTER TAX, BEFORE INTEREST 571.4 502.0 620.8 688.9 1383.6 1215.9

DEPRECIATION 99.7 99.7 99.7 425.1 439.6 340.0

FUNDS FROM OPERATIONS 671.t 601.6 720.4 1114.0 1823.3 1555.9

INCREASE IN SHARE CAPITALINCREASE IN LONG TERM DEBT 4207.1 192.5

DECREASE IN INVESTMENTS I

DECREASE IN WORKING CAPITAL 989.2 17.6 209.2 9

GOVERNMENT INFUSIONS 5949.3 313.0 953.0 754.1 1640.4 60.3 X

TOTAL SOURCES 7609.6 914.6 5880.4 2078.2 3463.7 1825.3

APPLICATIONS

OPERATING LOSSES 343.7 120.5 178.8 469.3 35.9 34.1

INCREASE IN FIXED ASSETS 4881.9 217.7

DECREASE IN LONG TERM DEBT 81.7 81.7 81.7 81.7 521.6 440.0

INTEREST CHARGES 51.5 73.0 340.3 620.3 591.1 524.2

INCREASE IN INVESTMENTSDECREASE SHAREHOLDERS EQUITYINCREASE IN WORKING CAPITAL 5891.0 759.9 882.1 936.4 2308.6 31.0

DIVIDENDS 34.9 96.0 66.6 9.6 257.8

TOTAL APPLICATIONS 6402.7 1131.1 6431.4 2335.1 3457.2 1287.1

BEGINNING SURP. CASH BALANCE 1206.9 990.5 439.5 182.6 189.1

NET CHANGE IN CASH 1206.9 -216.5 -551.0 -256.9 6.5 538.2 0

ENDING SURP. CASH BALANCE 1206.9 990.5 439.5 182.6 189.1 727.3 >4

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BANGLADESH 2Page 5 of 5 pages

TEXTILE INOUSTRY REHABILITATION PRDUECT

MILL

PROJECTED FINANCIAL RATIOS. FY80 TO FY86. PROJECT

FY 80 FY 81 FY 82 FV B3 FY 84 FY 85 FV 86ACTUAL

BALANCE SHEET RATIOS

CURRENT RATIO 0.5 1.0 1.1 1.1 1.2 1.4 1.4LIQUIDITY RATIO 0.2 0.4 0.4 0.4 0.4 0.5 0.5TOTAL DEBT X, OF TOTAL OE8T-EOUITY 139.4 78.9 72.7 74.4 71.7 65.0 63.7LT. OERT % OF LT.OEBT-EOUITY 6B.7 66.7 S3.2 48.4NET FIXED ASSETS % OF TOTAL ASSETS 12.3 9.9 9.5 38.6 37.7 27.3 24.7CURRENT ASSETS % OF TOTAL ASSETS 72.3 -6.6 ?6.3 51.5 52.3 E4.6 67.7LONG TERM DEBT % OF NET FIXED ASSETS 1g5.3 150 4 *46.t 108.1CURR. _IAB. ° OF TOTAL 96.9 97.2 97.8 91.4 62.5 71.1 75.0ACC. GOVT. iNFUSIONS %$ OF EQUITY -8.7 271.5 232.3 '97.2 '99.0 151.4 142.3ACC. PROFIT o OF EQUITY 134.2 -213.0 -166.' -'22.3 -122.1 -56.0 -56.0

FUNDS FLOW RATIOS

OEBT SERVICE COVERAGE RATIO ,.0 3.3 1.7 . .6 1.

EARNINGS RATIOS

PROFITABILIT; PREMIUM % OF GROSS SALESOPERATING PROFIT X OF GROSS SALES 0.2 1.6 2.0 -0. 5.1 4.JPROFIT BEFORE TAX OF GROSS SALES 4.0 3.9 2.3 .3 4. 4.1PROFIT AFTER TAX 'A OF GROSS SALES 3.4 2.9 1.8 0.4 3.0 2.5PROFIT AFTER TAX X OF NET FIXED ASSETS -8C3.3 43.0 43.6 4 9 t 2 1S.5 14.3PROF:T AFTER TAX X OF GROSS FIXED ASSETS -45.4 19.2 *5.4 3.7 0.9 10.2 8.9PROFIT AF7ER TAX X OF

TOT. LIAB. -9.2 6.0 5-7 2.5 0.6 6.5 5.5

PROFIT AFTER TAX % OF EQUITY 32.5 22.5 15.' 7.3 '.-i 12.1 9.aPROFIT AFTER TAX % OF TOTAL ASSETS -12.6 4.S 4.1 1.9 0.3 4.2 3.9PROFIT AFTER TAX % OF CAP. EMPLOYED 37.0 19.2 13,2 3.3 0.8 7.0 569PROFIT AFTER TAX % OF GFASS. RM &SPARES -22.0 9.0 7.6 2.6 0.6 6.2 5.3DIVIDEND 7 OF NONRESERVE EQUITYDIVIDEND 7 OF TOTAL SHAREHOLDERS' FUNDS t.5 3.4 1.7 0.2 3.7

ASSET UTILIZATION RATIOS

CURRENT ASSET TURNOVER 1.8 1.9 2.0 2.1 2.2 1STOCK TURNOVER 1.1 1.1 1.t .1 t.t

GOVT. INFUSION RATIOS

GOVT. INFUSIONS % OF PROFIT AFTER TAX 3374.6 101.5 937.S -188.2 216.3 9.2GOVT. INFUSIONS X OF SALES 38.8 2.1 6.1 4.7 6.1 0.2GOVT. INFUSIONS % OF COST 42.1 2.3 6.6 6.1 6.9 0.2

-NOTE - EARNINGS POWER IS DEFINED AS PROFIT BEFOREINTEREST AND TAX AS A % OF TOTAL ASSETS ORTOTAL LIABILITIES, WHICHEVER IS GREATER.

07/05/818:47 PM

BANGLADESH

TEXTILE INDUSTRY REHABILITATION PROJECT

MILL Aggregate of 15 Phase 1 Mills

PROJECTED SALES, wijth2uZ PROJECT

FY 81 FY 82 FY 83 FY 84 FY 85 FY 86

SALES VOLUME

YARN (LAKH LB) 345.7 345.7 345.7 345.7 345.7 345.7

GREY CLOTH (LAKH YD) 573.6 573.6 573.6 573.6 573.6 573.6

FINISHED CLOTH (LAKH YD) 201.0 201.0 201.0 201.0 201.0 201.0

SALES PRICE

YARN (TAKA/LB) 25.4 25.4 25.4 25.4 25.4 25.4 g

GREY CLOtH (TAKA/YD) 7.8 7.8 7.8 7.8 7.8 7.8

FINISHED CLOTH (TAKA/YD) 10.1 10.1 10.1 10.1 10.1 10.1

SALES REVENUE (LAKH TAKA)

YARN 8785.0 8470.7 8947.5 9343.7 9739.9 10136.1

GREY CLOTH 4485.6 4374.6 4542.9 4682.6 4822.2 4961.9

FINISHED CLOTH 2030.1 1992.3 2049.7 2097.5 2145.3 2193.1

GROSS SALES 15300.7 14837.7 15540.0 16123.7 16707.4 17291.1

OF WHICH PROFITABILITY PREMIUM

EXCISE DUTIES 219.7 219.7 219.7 219.7 219.7 219.7

NET SALES 15081.1 14618.0 15320.4 15904.1 16487.7 17071.4

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07/05/818:47 PM

BANGLADESH

TEXTILE INDUSTRY REHABILITATION PROJECT

MILL

PROJECTED INCOME STATEMENTS, PROJECT, FY80 TO FY 86

(FIGURES IN LAKH TAKA)

FY 80 FY 81 FY 82 FY 83 FY 84 FY 85 FY 86ACTUAL

SALES NET OF EXCISE DUTIES 7087.7 15081.1 14618.0 15320.4 15904.1 16487.7 17071.4

RAW MATERIAL COST 4269.0 10475.5 10040.2 10674.0 11222.8 11771.5 12320.2CONVERSION COST 3419.4 3661.3 3661.3 3661.3 3661.3 3661.3 3661.3ADJUSTMENT FOR WORK-IN-PROCESS -87.6TOTAL MFG. COST 7557.6 14136.8 13701.5 14335.3 14884.1 15432.8 15981.5INVENTORY ADJUSTMENT 507.2COST OF SALES 8064.8 14136.8 13701.5 14335.3 14884.1 15432.8 15981.5

GROSS PROFIT/LOSS -976.5 944.2 916.5 985.0 1020.0 1055.0 1089.9

SALARIES EXPENSE 175.1 175.1 175.1 175.1 175.1 175.1 175.1DEPRECIATION EXPENSE 99.7 99.7 99.7 99.7 99.7OTHER EXPENSES 217.4 656.6 421.8 426.3 453.3 478.6 503.9

TOTAL EXPENSES 392.5 931.4 696.6 701.0 728.1 753.4 679.0

OPERATING PROFIT/LOSS -1368.9 12.8 219.9 284.1 291.9 301.6 410.9

INTEREST EXPENSE 150.0 51.5 40.0 28.6 17.2 5.7OTHER INCOME 289.7 289.7 289.7 289.7 289.7 289.7 289.7

PROFIT BEFORE TAX -1038.4 602.1 580.4 643.5 661.2 680.4 782.8NET LOSS 351.0 110.8 98.3 96.7 94.8 82.3TAX 96.1 154.0 220.9 238.6 241.0 296.8

X================ == = = ==== ======… = ========= === _= === = === 5==5

PROFIT AFTER TAX -1229.4 506.0 426.4 422.6 422.6 439.3 486.1

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07/05/81ANNEX 7.3

BANGLADESH h:7 s Page 3 of S pages

TEXTILE INDUSTRY REHABILITATION DROJECT

MILL

PROJECTED BALANCE SHEETS. PRO.JECT

AS AT JUNE 30, 1980 TO t986

(FIGURES iN LAKH TAKA)1980 1981 1982 1983 1984 1985 19s8

ACTUAL

ASSETS,

CASH AND BANK 67.0 224.7 212.9 213.1 214.5 215.8 217.0SURPLUS CASH 1206.9 99S5.4 765.5 500.1 449.7 722.3ACCOUNTS RECEIVABLE 853.7 1960.5 1900.3 1991.6 2067.5 2143.4 221S.3INVENTOR I ES

Y' RAW MATERIAL 2036.9 1944.2 1848.2 1986.4 2107.5 2228.5 2349.5FINISHED PRODUCTS 654.4 1660.8 1610.0 1696.7 1750.8 1814.8 1878.9STORES/SPARES 846.8 1098.4 1098.4 1098.4 1098.4 1098.4 1098.4OTHER 786.7 85.3 85.3 85.3 85.3 85.3 85.3

TOTAL INVENTORIES 4340.0 4788.7 4641.9 4856.9 5041.9 5227.0 5412.1

AOVAACES AND OEPOSITS 1670.2 183.1 183.1 183.1 183.1 183.1 183.1

TOTAL CURRENT ASSETS 6930.6 83e3.9 7933.7 80.10.2 8007.1 8219.0 87.53.7

GROSS FIXED ASSETS AT COST 2708.2 2708.2 2708.2 2708.2 2708.2 2708.2 2708.2LESS ACCUMULATED DEPRECIATION 1525.3 1625.0 1724.6 1824.3 1923.9 2023.6 2023.6

NET FIXED ASSETS 1182.9 1083.2 983.6 883.9 ; 784.3 684.6 684.6

INVESTVENTS 61.6 51.6 61.6 51.6 61.6 61.6 61.6eTHER ASSETS 14i5.8 1415.8 1415.8 1415.8 1415.8 1415.8 1415.8

sUOToTAL 1477.3 1477.3 1477 3 1477.3 1477.3 1477.; 1477.3

TOTAL ASSETS 9591.1 10924.5 10394.6 10371.5 10268.7 10380.9 10915.7

LIABILITIES AND EQUITY

BTHC CURRENT ACCOUNT 6295.7 2109.8 2014.7 2151.6 2271.5 2391.5 2511.4

TAXES ANO OUTtES 633.7 54.9 151.0 208.9 275.9 293.5 295.9LOANS AND OVERDRAFTS 1358.2. 1056.7 1009.6 1077.9 1138.6 1117.6 1178.3ADVANCES AND DEPOSITS 188.4 1256.3 1217.7 1278.2 1324.8 1373.4 1422.0

SUNDRY CREDITORS 4484.2 3901.1 3002.0 2103.0 1204.0 306.0 305.0

TOTAL CURRENT LIABILITIES 12960.2 8378.7 7393.9 6817.6 6214.8 5481.0 5712.6

EXISTING LONG TERM LOANS 408.4 245.0 163.4 81.7PROPOSED IOA CREDIT

TOTAL LIABILITIES 13368.6 8623.8 7557.3 6899.3 6214.8 5481.0 5712.6

SHARE CAPITAL 723.1 723.1 723.1 723.1 723.1 723.1 723.1RESERVES 237.9 237.9 237.9 237.9 237.9 237.9 237.9PROFIT/LOSS -So69.0 -4948.9 -4733.3 -4522.2 -434T7. -4035.9 -3820.2GOVT. ADVANCES 330.4 6288.8 6608.8 7033.6 7440.7 7975.0 8062.4

TOTAL EOUITY -3777.6 2300.9 2837.5 3472.4 4054.2 4900.2 5203.3

TOTAL LIABILITIES AND EQUITY 9591.1 10924.7 10394.8 10371.7 10269.0 10381.1 10915.9

07/05/818:47 PM

BANGLADESH__________

TEXTILE INDUSTRY REHABILITATION PROJECT

MILL__----------------------------------

PROJECTED FUNDS FLOWS, FY80 TO FY86, PROJECT----------------------------------------------------

(FIGURES IN LAKH TAKA)FY 81 FY 82 FY 83 FY 84 FY 85 FY 86

SOURCES

INCOME AFTER TAX, BEFORE INTEREST 557.5 466.5 451.1 439.7 445.1 486.1

DEPRECIATION 99.7 99.7 99.7 99.7 99.7

FUNDS FROM OPERATIONS 657.1 566.1 550.8 539.4 544.7 486.1

INCREASE IN SHARE CAPITALINCREASE IN LONG TERM DEBTDECREASE IN INVESTMENTSDECREASE IN WORKING CAPITAL 989.2 23.2 1.6 1.2

GOVERNMENT INFUSIONS 5958.4 321.0 423.8 407.1 534.3 87.4

TOTAL SOURCES 7604.8 887.1 974.6 969.8 1080.6 574.6

APPLICATIONS

OPERATING LOSSES 351.0 110.8 98.3 96.7 94.8 82.3INCREASE IN FIXED ASSETSDECREASE IN LONG TERM DEBT 81.7 81.7 81.7 81.7 81.7INTEREST CHARGES 51.5 40.0 28.6 17.2 5.7INCREASE IN INVESTMENTSDECREASE SHAREHOLDERS EQUITYINCREASE IN WORKING CAPITAL 5878.8 766.1 882.8 888.4 916.0 31.7DIVIDENDS 34.9 100.0 113.1 151.3 32.8 188.1

TOTAL APPLICATIONS 6397.8 1098.6 1204.5 1235.2 1131.0 302.1

BEGINNING SURP. CASH BALANCE 1206.9 995.4 765.5 500.1 449.7NET CHANGE IN CASH 1206.9 -211.5 -229.9 -265.4 -50.4 272.6 D tENDING SURP. CASH BALANCE 1206.9 995.4 765.5 500.1 449.7 722.3 X

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07/05/B 1

3'NGLADESH A S:47 PMX 7.3----- A---H Page 5 of 5 pagesTEXTTLE INDUSTRY REHABILITATION PROJECT

PROJECTED FINANCIAL RATIOS. FY80 TO FY86. PROJECT

FY 80 FY St FY 82 FY 83 FY 84 FY 8S FY sACTUAL

BALANCE SHEET RATIOS

CURRENT RATIO 0.5 1.0 1.1 1.2 1.3 1.5 1.5LIUtIDITY RATIO 0.2 0.41 0.4 0.5 0.9 0. 0.6TOTAL DEBT ! OF TOTAL OE9T+EQUITY 139.4 78.5 72.7 66.5 60.5 52.8 52.3LT. DEBT % OF LT.OEST+EQUITYNET FIXED ASSETS Y CF TOTAL ASSETS 12.3 9.9 9.5 8.5 7.6 6.6 6.3CJRRENT ASSETS 5 OF 'OTAL ASSETS 72.3 76.1i 76.3 77.2 78.0 79.2 80.2LONG TERM DEBT Yo OF NET FIXED ASSETSCURR. LIA8. 2 OF TOTAL 96.9 97.2 97.8 98.6 100.0 100.0 100.0ACC. GOVT INFUSIONS " OF EQUITY -8.7 273.3 232.9 202.6 183.5 162.7 154.9ACC. PROFIr ', OF EQUITY 134.2 -215.1 -166.8 -130.2 -107.2 -82.4 -73.4

FUNDS FLOW RATIOS

DEBT SERVICE COVERAGE RATIO 4.9 4.7 5.0 5.5 6.2 90599.0

EARNINGS RATIOS

PROFITABILITY PREMIUM CF GROSS SALESCPERATING PROFIT IX OF GROSS SALES 0.1 1.5 1.8 1.8 1.S 2.4PROFIT BEFORE TAX 'J 3F GROSS SALES 3.Sl 3.9 4.1 4.1 4.1 4.5PROFIT AFTER TAX OF GROSS SALES 3il 2.9 2.7 2.6 2.6- 2.8PROFIT AFTER TAX " OF NET FIXED.ASSETS -103.9 46.1 43.4 47.8 53.9 64.2 71.0PROFIT AFTER TAX X OF GROSS FIXED ASSETS -45.4 1S.7 15.7 *5.6 15.6 16.2 17.9PROFIT AFTER TAX ' OF TOT. LIAR. -9.2 5.51 5.6 6.1 6.8 8.0 8.5PROFIT AFTER TAX X OF EQUITY 32.5 22.0 15.0 t2.2 10.4 9.0 9.3PROFIr AFTER TAX Y OF TOTAL ASSETS -12.8 4.6 4.1 4.1 4.1 4.2 4.5PROFIT AFTER TAX X OF CAP. EMPLOYED 37.0 18.E1 13.1 10.8 9.4 S.1 8.5PRCFIT AFTER TAX X OF GFASS. RN ASPARES -22.0 8.81 7.5 7.3 7.1 7.3 7.2DIVIDENO X OF NONRESERVE EQUITYDIVIDEND % OF TOTAL SHAREHOLDERS FUNDS *.' 3.5 t.3 3.7 0.7

ASSET UTILIZATION RArTIOS

CURRENT ASSET TURNOVER 1.8 1.9 1.9 2.0 2.0 2.0STOCK TURNOVER t.1 1.1 1.1 1.1 1.1 1.1

GOVT. INFUSION RATIOS

GOVT. INFUSIONS % OF PROFIT AFTER TAX 3843.6 101.7 130.7 124.9 155.1 21.6GOVT. INFUSIONS % OF SALES 38.9 2.2 2.7 2.5 3.2 0.5GOVT. INFUSIONS % OF COST 42.1 2.3 3.0 2.7 3.5 0.5

-NOTE - EARNINGS POWER IS DEFINED AS PROFIT BEFOREINTEREST AND TAX AS A r OF TOTAL ASSETS ORTOTAL LIABILITIES. WHICHEVER IS GREATER.

07/05/818:47 PM

BANGLADESH

TEXTILE INDUSTRY REHABILITATION PROJECT

MILL Aggregate of 15 Phase 1 Mills

PROJECTED SALES, incremental Project

FY 81 FY 82 FY 83 FY 84 FY 85 FY 86

SALES VOLUME

YARN (LAKH LB) 3.4 3.4 3.4 3.4 196.9 196.9GREY CLOTH (LAKH YD) -7.8 -7.8 -7.8 -7.8 237.2 237.2FINISHED CLOTH (LAKH YD) 232.0 232.0

SALES PRICE

YARN (TAKA/LB)GREY CLOTH (TAKA/YD)FINISHED CLOTH (TAKA/YD)

SALES REVENUE (LAKH TAKA)

YARN 86.6 83.6 88.3 92.2 5547.6 5773.3GREY CLOTH -61.0 -59.5 -61.8 -63.7 1992.1 2049.1FINISHED CLOTH -0.1 2480.2 2537.0

GROSS SALES 25.7 24.0 26.4 28.3 10019.9 10359.4OF WHICH PROFITABILITY PREMIUMEXCISE DUTIES 1.4 1.4 1.4 1.4 134.2 134.2

NET SALES 24.2 22.6 25.0 26.9 9885.7 10225.2

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07/05/818:47 PM

BANGLADESH

TEXTILE INDUSTRY REHABILITATION PROJECT---------------------------------------

MILL

PROJECTED INCOME STATEMENTS. PROJECT, FY80 TO FY 86

(FIGURES IN LAKH TAKA)

FY 80 FY 81 FY 82 FY 83 FY 84 FY 85 FY 86

ACTUAL

SALES NET OF EXCISE DUTIES 24.2 22.6 25.0 26.9 9885.7 10225.2

RAW MATERIAL COST 16.7 15.4 15.3 16.9 7145.6 7465.1

CONVERSION COST -15.7 -15.7 -15.7 -15.7 1208.8 1208.8

ADUUSTMENT FOR WORK-IN-PROCESSTOTAL MFG. COST 1.0 -0.4 -0.4 1.2 8354.4 8673.9 1

INVENTORY ADJUSTMENT X

COST OF SALES 1.0 -0.4 -0.4 1.2 8354.4 8673.9

GROSS PROFIT/LOSS 23.2 23.0 25.4 25.7 1531.4 1551.4

SALARIES EXPENSEDEPRECIATION EXPENSE 325.5 340.0 340.0

OTHER EXPENSES 1.9 3.8 3.8 4.1 139.0 280.9

TOTAL EXPENSES 1.9 3.8 3.8 329.6 478.9 620.9

OPERATING PROFIT/LOSS 21.3 19.2 21.6 -303.8 1052.5 930.5

INTEREST EXPENSE 33.0 311.7 603.2 585.4 524.2

OTHER INCOME

PROFIT BEFORE TAX 14.0 -4.1 -209.6 -534.4 408.2 358.1

NET LOSS -7.3 9.7 80.5 372.6 -58.9 -48.2

TAX -6.7 -67.5 -180.4 55.0 152.5

PROFIT AFTER TAX 14.0 2.5 -142.1 -354.1 353.2 205.6

OQZ

D

0.

(.1

tJ

- 87--

07/05/818:47 PM ANNEX 7. 4

BANGLADESH Page 3 of S pages

TEXTILE INDUSTRY REHABILITATION PROJECT

MILL-----------------------------------

PROJECTED BALANCE SHEETS. PROJECT.

AS AT CUNE 30, t980 TO 1984

(FIGURES IN LAKH TAKA)19eo 1981 1912 1983 1984 1985 t986

ACTUAL

ASSETS

CASH ANO BANK -0.7 -0.6 -0.6 -0.6 67.4 74.5SURPLUS CASH -5.0 -326.0 -317.5 -260.6 5.0ACCCUNTS RECEIVABLE 3.2 2.9 3.3 3.5 1285.1 1329.3INVENTORIES

RAW MATERIAL 19.1 18.2 t9.6 20.6 t269.3 1338.2FINISHED PRODUCTS -1.2 -1.3 -1.4 -1.4 1112.4 1150.0STORES/SPARES -4.7 -4.7 -4.7 -4.7 362.6 362.6OTHER -0.4 -0.4 -0.4 -0.4 28.2 28.2

TOTAL INVENTORIES 12.6 11.8 13.1 14.3 2772.5 2879.0

ADVANCES AND DEPOSITS -o 8 -0 9 -0 8 -0 8 60 4 60 4

TOTAL CURRENT ASSETS 14.5 8.4 -311.1 -301.1 3924.8 4348.3

IRCSS FIXED ASSETS AT COST 4881.9 5099.7 5099.7 5099.7LESS ACCUM.JLATED OEPRECIATION 325.5 665.4 1005.4

NET FIXED ASSETS 4981-9 4774.2 4434.2 4094.3

INVESTMENTSOTHER ASSETS

SUBTOTAL

TOTAL ASSETS 14.5 8.4 4570.9 4473.1 8359.0 8442.5

LIABILITIES AND EOUITY

RTMC CURRENT ACCOUNT 1l.1 t7.2 18.6 19.8 1318.3 1366.6

TAXES AND4 DUTIES 0.4 0.4 -6.3 -87.2 -146.8 8t.5LOANS AND OVERDRAFTS 9.6 9.1 9.8 450.4 1076.5 111'.1ADVANCES AND DEPOSITS 2.0 1.9 2.1 2.2 823.5 86t.8SUNDRY CREDITORS -27.8 -21.2 -14.6 -7.9 100.7 100.7

TOTAL CURRENT LIABILITIES 2.3 7.4 9.7 397.3 3172.1 3538.6

EXISTING LONG TERM LOANSPROPOSED IDA CREDIT 4207.1 3959.6 3519.7 3079.7

TOTAL LIABILITIES 2.3 7.4 4216.7 4356.9 6691.8 8618.3

SHARE CAPITALRESERVESPROFIT/LOSS 21.3 18.2 -157.9 -742.8 -297.9 -113.8GOVT. ADVANCES -9.1 -17.1 512.0 859.0 1945.1 1938.0

TOTAL EOUITY 12.2 1.0 354.1 114.1 1667.2 1824.2

.......... .......... .. . ....... .......... .......... .. ... .... ..........TOTAL LIAsILITrEs AND EOUITY i4.5 8.4 4570.9 4473.1 8359.0 8442.5

07/05/818:47 PM

BANGLADESH

TEXTILE INDUSTRY REHABILITATION PROJECT---------------------------------------

MILL-----------------------------------

PROJECTED FUNDS FLOWS, FY80 TO FY86, PROJECT----------------------------------------------------

(FIGURES IN LAKH TAKA)FY 81 FY 82 FY 83 FY 84 FY 85 FY 86

SOURCES

INCOME AFTER TAX, BEFORE INTEREST 14.0 35.5 169.6 249.1 938.6 729.8DEPRECIATION 325.5 340-0 340.0

FUNDS FROM OPERATIONS 14.0 35.5 169.6 574.6 1278.6 1069.8

INCREASE IN SHARE CAPITALINCREASE IN LONG TERM DEBT 4207.1 192.5DECREASE IN INVESTMENTS IDECREASE IN WORKING CAPITAL -5.7 -1.6 208.0 X

GOVERNMENT INFUSIONS -9.1 -8.0 529.1 347.0 1106.1 -27.2 co==== === = === = = = == === 5= === === = =- == a= = = = =

TOTAL SOURCES 4.9 27.5 4905.8 1108.4 2383.1 1250.7

APPLICATIONS

OPERATING LOSSES -7.3 9.7 80.5 372.6 -58.9 -48.2INCREASE IN FIXED ASSETS 4881.9 217.7DECREASE IN LONG TERM DEBT 440.0 440.0INTEREST CHARGES 33.0 311.7 603.2 585.4 524.2INCREASE IN INVESTMENTSDECREASE SHAREHOLDERS EQUITYINCREASE IN WORKING CAPITAL 12.2 -6.2 -0.7 48.1 1392.6 -0.7DIVIDENDS -4.0 -46.5 -141.7 -32.8 69.7

=~~~~~~. . . =. = = = = = .. .. . . . = ===========a=s=a

TOTAL APPLICATIONS 4.9 32.5 5226.9 1099.9 2326.2 985.0

BEGINNING SURP. CASH BALANCE -5.0 -326.0 -317.5 -260.6NET CHANGE IN CASH -5.0 -321.1 8.5 56.9 265.7ENDING SURP. CASH BALANCE -5.0 -326.0 -317.5 -260.6 5.0 x

4-.0~

I10

lb

- 89 -

07/05/61 MINEX 7.48:47 PO Page 5 of 5 pages

TNOUSTRY REHABILITATION PROJECT

MILL

PROJECTED FINANCIAL RATIOS, FY80 TO FYS6. PROJECT

FY S0 FY S1 FY 82 FY 03 FY 64 FY 65 FY OfACTUAL

…______ -------- -------- __ --- -------- -------- --------

BALANCE SHEET RATIOS

-0.1~~~~~~~~~~~~..

CURRENT RATIO -0.0 -0.1 -0.1 -0.1LIQUIDITY RATIO -0.0 -0.1 -0.1 -0.1TOTAL DEST % OF TOTAL DEST+EOUITY -O.t 7.9 1t.2 12.2 11.4LT. DEBT % OF LT.OEBT+EOUITY 68.7 66.7 53.2 48.4NET FIXED ASSETS % OF TOTAL ASSETS 30.1 30.1 20.7 1S.4CURRENT ASSETS % OF TOTAL ASSETS -25.7 -25.7 -14.4 -12.5LONG TERM DEBT % OF NET FIXED ASSETS i45.9 150.4 146.1 138.1CURR. LIA8. % OF TOTAL -37.4 -37.5 -26.9 -25.0ACC. GOVT. INFUSIONS % OF EQUITY -1i. -0.7 -5.4 15.5 -11.4 -12.6ACC. PROFIT S OF EQUITY 2.i 0.7 7.9 -14.6 1G64 17.4

FUNDS FLOW RATIOS

DEST SERVICE COVERAGE RATIO 0.1 -0.8 -3.3 -3,9 -4.6 -99997.4

EARNINGS RAtIOS

PqCFITABILLITY PREMIUM % OF GROSS SALESOPERATING PROFIT X OF GROSS SALES . 0.1 . 0.1 -1.9 3.3 2.5PROFIT SEFCRE TAX % OF GROSS SALES 0.1 -1.4 -3.3 -0.4PROFIT AFTER TAX % OF GROSS SALES 0.1 -0.9 -2.2 0.3 -0.3PQOFIT AFTER TAX.% OF NET FTXED ASSETS 1.3 0.3 -42,9 -52.6 -46.7 -56.5PROF'T AFTER TAX % OF GROSS FIXED ASSETS 0.5 0.1 -11.9 -t4.7 -6.1 _9.1PROFIT AFTER TAX X OF TOT. LIA8. 0.2 -3.6 -6.2 -1.5 -2.9PROFIT AFTER TAX X OF EQUITY 0.5 0.1 -4.3 -8.S 3.1 0.SPROFIT AFTER TAX . OF TOTAL ASSETS 0.1 -2.2 -3.7 -0.9PROFIT AFTER TAX % OF CAP. EMPLOYED 0.4 0.1 -7.5 -6.6 -1.1 -2.5PROFIT AFTER TAX X OF GFASS. RM ASPARES 0.2 -4.7 -6.5 -1.1 -2.4DIVIDENO % OF NONRESERVE EQUITYDtVIDEND % OF TOTAL SHAREHOLDERS' FUNDS -0.1 -1.5 -3.5 -0.7 0.1

ASSET UTILIZATION RATIOS

CURRENT ASSET TURNOVER 0.1 0.1 0.2 0.1STOCK TURNOVER

GOVT. INFUSION RATIOS

GOVT. INFUSIONS % OF PROFIT AFTER TAX -469.0 -0.3 S07.1 -313.t 61.7 -12.5GOVT. INFUSIONS % OF SALES -0.1 -O.1 3.4 2.1 2.4 -0.3GOVT. INFUSIONS X OF COST -0.1 -O.t 3.7 2.3 3.4 -0.3

-NOTE - EARNINGS POWER IS OEFINED AS PROFIT BEFOREINTEREST ANO TAX AS A X OF TOTAL ASSETS ORTOTAL LIABILITIES. WHICHEVER IS GREATER.

BANGLADESII

Textile Industry Relhabilitation Project

Comparative Cost Structure of F'ifteen Mills in Pflase 1 witnl Project in FY86

Raw material Conversion Cost Maniufacturing Cost Total Expenses PBT a/ PBIT % of b/

'ill % of sales % of sales % of sales % of sales of sales Total Assets

Ahmned Bawany SWF 75.2 1.7.1 92.3 3.0 4.1 13.4

Adarsha SW 70.6 23.1 93.7 6.3 1.7 9.8 c/

Afsar S 71.1 14.3 85.4 6.6 8.5 16.3

Bogr r SW 72.6 15.7 88.3 5.9 4.2 1.3.8

Bans,iadesh SW SW 71.1 15.9 R7. 6.3 5.5 11.3

ChitLarangan SWF 74.6 16.9 91.5 3.6 4.8 14.6

Dacca SW 70.6 18.1 88.7 7.1 2.9 11.8

Dhai eswari No. 2 SWF 70.1 22.2 92.3 5.6 0=8 4.7 c/

Gadwiid SW".F 70.6 17.5 88 1. 5.6 3.6 15.7

Jabd S 70.8 14.1 84.9 7.6 4.2 15.1

Kushtia S 71.0 13.5 84.5 7.1 8.9 17.8 1

Lu:-ir.arayan SWF 70.3 17.0 87.2 3.1 9.4 19.5 °

M0oh,ir i SW 70.3 26.4 96.7 5.1 0.3 7.3 c/

Muslin SWF 73.0 16.9 89.9 4.3 4.7 14.2

Zeenat SW 69.2 18.4 87.6 4.3 6.6 16.7

Consolidated 72.5 17.8 90.3 4.8 4.1 12.5

a/ Profit before Tax as a percentage of sales

b/ Profit before interest and tax as a percentage of total assets.

c/ It is GOB's intention to divest these mils. Accordingly they have been dropped from the project.

1b,

07/06/8 i8:13 PM

BANGLADESH_____ ____

TEXTILE INDUSTRY REHABILITATION PROJECT

MILL -

INCREMENTAL FINANCIAL AND ECONOMIC BENEFITS, COSTS,---------------------------------------------------

AND RATES OF RETURN OF PROJECT

(COST/BENEFIT FIGURES IN LAKH TAKA)

FIN. ECO. FIN. ECO. NET FIN. NET ECO.BENEFIT BENEFIT COST COST BENEFIT BENEFIT

YEAR

FY81 21.3 20.8 12.2 12.2 9.1 8.6FY82 19.2 20.7 -6.2 -6.2 25.4 26.8FY83 21.6 22.9 4881.2 3526.8 -4859-6 -3503.9FY84 15.9 17.3 265.8 176.4 -249.9 -159.0FY85 1390.8 1573.5 1392.6 1392.6 -1.8 180.9FY86 1478.5 1794.0 -0.7 -0.7 1479.2 1794.6FY87 1361.8 1684.3 2.0 2.0 1359.8 1682.2FY88 1294.0 1617.0 -3.6 -3.6 1297.6 1620.5FY89 1306.3 1629.8 -1.3 -1.3 1307-6 1631.1FY90 1288.7 1612.7 -1.6 -1.6 1290.3 1614.3FY91 1288.5 1613.1 -1.9 -1.9 1290.4 1615.0FY92 1335.0 1660.3 1335.0 1660.3FY93 1296.4 1621.7 -0.6 -0.6 1297.0 1622.3FY94 1297.4 1622.7 1297.4 1622.7FY95 724.1 1049.4 -1438.3 -1438.3 2162.3 2487.6

RATES OF RETURN

FINANCIAL RATE OF RETURN 15.7ECONOMIC RATE OF RETURN 27.5

PRESENT VALUES

FINANCIAL DISCOUNT RATE 15.0NET PRESENT VALUE - FINANCIAL 161.4 xECONOMIC DISCOUNT RATE 15.0NET PRESENT VALUE - ECONOMIC 2276.7

-92- ANNEX 7._7

BANGLIADESH

Textile indLustry RehabUliitalion Project

Cor arative Financial Indicators, Mill-by-Mill, With Project

h/ FY86 C/ FY86 d FY86 e/Mill Name IFRR - IERK -/ Earnings - DSCR CR -

Ardasha 50.5 100.0. 9.8 3.2 L-3f

Ahmed Bawany 15.8 21.6 13.4 1.7 1.6

Afsar 28.9 40.1 16.3 3.3 1.3

Bogra 10.8 * 18.9 13.8 1.6 1.3

Bangladesh 18.9 * 36.6 16.5 * 1-2 * 1.7

Chittaranjan 23.1 33.8 14.6 2.0 1.6

Dacca 7.4 * 14.9 * 11.8 1.4 1.3

Dhakeswari No. 2 11.6 * 18.9 4.7-* 0.9 * 1.4 f/

Gawsia 46.3 100.0 15.7 3.1 1.4

Jaba 15.1 24.1 15.1 1.1 * 1.0

Rushtia 15.1 55.3 17.8 3.0 1.2

Luxminarayan 17.5 20.9 19.5 3.4 1.8

Musli 10.3 * 17.1 14.2 1.4 1.4

Zeenat 28.4 40.6 16.7 3.0 1.5

Mohini 30.9 74.7 14.2 1.1 1. f/

a/ Internal financial rate of return, incremental for project.bI Internal economic rate of return, Incremental for project.c! Earnings power. defined as profit before interest and taxes as a

percentage of total assets or total liabilities, whichever is greater.dl Debt-service coverage ratio, defined as in the ratio of income after

tax, before interest and depreciation to interest and principal repaymentson long term debt.

e/ Current ratio, or the ratio of current assets to current liabilities.

f/ These mills are to be divested by GOB, and are now excluded from the project.

- 93 -ANNEX 8.1Page 1 of 2 pages

BANGLADESH

Textile Industry Rehabilitation Project

Selected Documents, Reports and Data Available in Project File

Chapter I The Industrial Sector

1. Report 2191 BD dated December 8, 1978 "Bangladesh: Issuesand Prospects for Industrial Development".

2. Second Five-Year Development Plan - FY81 - FY85Government of Bangladesh dated 1980

Chapter II The Textile Section

3. Report No. 883 BD dated September 25, 1975, "Bangladesh:Survey of the Jute and Cotton Textile Industries".

4. Resource Allocation in the Handloom Industry in Bangladesh -

Some Findings. Bangladesh Institute of Development Studies -

October 1977.

5. Bangladesh Handloom Census - 1978. Institute of BusinessAdministration, Dacca. March 1979.

6. "The Industrial Comparative Advantages of Bangladesh",Boston University dated June 30, 1980.

7. Study Relative Efficiency Handlooms and Small-Powered Loomsversus Large Mills - Bangladesh Institute of DevelopmentStudies, Dacca, September 1978 and December 1980.

8. Fibre and Resin Products based on Natural Gas - a PreliminaryAppraisal - April 1978 - Industries Division.

9. Feasibility of Producing Man-Made Fibre in Bangladesh - AsianDevelopment Bank - September 1979.

10. "Feasibility Study on Modification and Extension of TextileMachine Workshops in Bangladesh" - Japan Consulting Institute -

August 1975.

11. Feasibility Study for Production of Spare Parts and TextileMachinery - UNIDO - September 1980.

12. Terms of Reference; establishing and staffing of a PlanningCell in the Ministry of Textiles.

94 - ANNEX 8.1Page 2 of 2 pages

Chapter III The Bangladesh Textile Mills Corporation (BTMC)

13. A Management Study of BTMC: Institute of BusinessAdministration, Dacca - August 1978.

14. BTMC Annual Reports - FY74 - FY80.

15. Manpower needs in the BTMC - UNIDO/UNDP ProductivityTeam - March 1980

16. The BTMC Training Centre - UNIDO/UNDP Productivity Team -March 1980.

17. The Establishment of a College of Textile Technology -UNDP/Productivity Team - March 1980.

18. Terms of Reference - Production Planning Advisor - BTMC

19. Terms of Reference - Marketing Advisor - BTMC

20. Terms of Reference - Financial Advisors - BTMC

Chapter IV The Project

21. Individual mill rehabilitation proposals: BTMC - March 1981

22. Industrial Pollution Standards - Textile Industry. March 1981

Chapter V Project Costs and Financing

23. Detailed financial projections by mill (i) with the project;(ii) without the project; and (iii) incremental for theproject.

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A TEXTILE INDUSTRY REHABILITATION PROJECT. .ni Uj t i oi N 1) I A

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