Tax incentives for greening — as demonstrated by the high achievers in Bangladesh’s RMG sector — costs of adopting best practices for cleaner production appears affordable given the reasonable payback periods.
Bangladesh Bank and ministries related to textiles, industries, water, and environment could take the lead in determining what these incentives might be best suited for various factory sizes. The first step would be to hold stakeholder discussion at cluster level to determine how to best motivate RMG factories with economic incentives.
A revision can also be done to the National Board of Revenue’s customs tariff schedules to regularize anomalies in the customs and supplementary duty rates for various green technologies suited to cleaner production. This could be regularly revised in consultation with academic experts in green technology.
In the current budget for 2018-19, the government has increased the tax rate for RMG to 15%. If they are publicly listed, then the tax rate will be 12.5%. Any RMG factory having green building certification shall enjoy a tax rate of 12%. However, the NBR has also imposed a 27% tax on the import of solar panels in 2018 to protect the local solar panel industry. This will impact RMG factories who have planned investments in green energy.
It is worth exploring the green financing mechanisms that are available to RMG entrepreneurs. The Green Transformation Fund (GTF), the Green Islamic Refinancing Scheme, and the Green Refinancing Scheme are the main green financing options suitable for the RMG companies (the last two have identical principles, except that the Islamic fund is only for Shariah-compliant commercial banks, hence in this paper the green Refinancing Scheme refers to both funds).
The GTF is only applicable for green technology that is imported. This leaves out a considerable range of technology options that are easily available in the local market and are the basics of the green manufacturing infrastructure that could possibly be attractive options for medium and smaller companies looking to invest in low hanging fruit.
As we know, LEED certification awards point for using locally sourced construction materials, which will not be eligible for GTF, along with other common technology options like rainwater harvesting tanks or basic plumbing materials supporting an ETP. Local engineering companies cannot access GTF and supply the RMG companies either because the fund is only for companies that export their products.
The GTF has certain criteria for commercial banks that they need to fulfil before being allowed fund access. A commercial bank must have no liquidity or capital shortfall, and its NPL share has to be less than 10%.
At the RMG level, there are certain procedural issues that discourage firms from accessing the GTF. For example, RMG firms tend to apply for composite loads, which means that it is a mixture of machinery, some of which will be classified as green investment. It includes costs for civil construction, sewing machines, as well as replacement parts for an ETP.
This list of machines has to be sorted into green and non-green expenditures, and then green expenditures have to be sorted according to local and international procurement. This process to be undertaken by the commercial banks is cumbersome when compared to loan applications for normal loans.
After the loan application is organized as per GTF requirements, they have to send the application package to Bangladesh Bank, where they aim to process everything in under a working week. However, sometimes this takes longer. For a 4% margin that the commercial bank gets for processing a GTF loan application, if a delay is longer, then the loss to the commercial bank makes it unfeasible.
Related to this is the fact that not many RMG companies are not made aware of the GTF by their commercial banks. GTF is better suited for RMG companies who are looking to invest significant amounts for importing green technology that is not available in the local markets. This means that the GTF funding criteria could be amended to be accessed by medium and smaller RMG companies who need financial assistance in becoming green.
The medium and smaller RMG companies are better suited to the Green Refinancing Scheme fund, which is set up in taka, so there is no issue of a limited number of commercial banks or leasing companies being able to access it. This fund is structured differently from the GTF, in that this fund has 52 categories of green products that each have their own borrowing caps (for example, solar photovoltaic power plant that could be installed in an RMG facility can qualify for a loan of up to Tk30 crores; a solar pump could qualify for a loan of up to Tk3 crores).
Under this fund, Bangladesh Bank lends to the commercial banks at a flat rate of 5%, which the bank lends onwards to the RMG at different rates, ranging from 8% to 9% depending on its maturity period. Disbursement under this fund has been more successful, as detailed in the last chapter. The loan application process is also quicker at Bangladesh Bank when compared to the GTF processing.
Renewable energy currently constitutes only 2.89% of Bangladesh’s energy generation, and the government aims to increase it to 10% by 2020. Bangladesh has a target of increasing the renewable energy generation capacity to 2896.68 MW by 2021, more than half of which (1470MW) is expected to come from solar power. Through their Renewable Energy and Energy Efficiency Program project, GIZ has already worked with the Sustainable and Renewable Energy Development Authority (SREDA) to pilot the uptake of energy efficient LED lights in RMG factories.
The government — SREDA, Bangladesh Bank and other bodies — might look at renewable energy targets for the RMG industry, including efficiency standards and emissions limits. Some of these are already covered under LEED certification, and lessons from those certified companies can be the basis for strategic action. An important enabler would be the development of innovative financing mechanisms to generate interest in solar power use in RMG — these might include fiscal incentives, subsidies or industry recognition for solar champions.
Low-cost energy efficiency measures can often be self-financed, but more expensive or unfamiliar measures may need direct incentives to promote faster uptake, such as subsidies, tax rebates or soft credit. In the interests of keeping the sector secure in a turbulent global market, RMG companies might require stable long-term incentives. Further exploration of the possibility of funding these incentives from carbon markets would be useful.
Looking to the future, we must discuss the opportunities for eco-friendly RMG growth within the planned industrial zones under the Bangladesh Economic Zones Authority (BEZA). BEZA is especially attractive to high-end RMG companies who tend to be green.
BEZA offers a long list of incentives, including a onetime capital subsidy up to 50% of investment costs incurred by the developers for setting up Central Effluent Treatment Plants (CETPs). However, there are no incentives for cleaner production, which the BEZA authorities could easily do by including non-financial incentives, such as quicker processing time for green businesses.
For longer-term financial incentives, the RMG industry could look at the capital markets for raising funds. Unfortunately, most RMG companies are family run businesses without a corporate structure, and as yet cannot be listed in the market. If such long-term financing products are designed, then it will also encourage greening.
Some firms will not be able to transition to international buyer standards, and facing prospects of being phased out of the global apparel supply chain due to non-qualifications to higher green standards, those companies could start looking to expand in the domestic apparel market instead.
Source Dhaka Tribune