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Report: Here’s the Real Cost of Compliance for Bangladesh

The world is quick to harp on either how much or how little progress Bangladesh has made in improving the conditions of its ready-made garment sector, but regardless of which side you’re on, few understand the real costs for compliance there.

Hoping to lend some clarity to the compliance issue, four Bangladeshi economists researched and published a cost benefit analysis of RMG compliance to increasing presence of ready-made garments and a new specialized RMG industry zone.

Bangladesh’s ready-made garment sector accounts for more than 84 percent of the country’s total export earnings and employs roughly 4 million people. And in the coming years, demand for ready-made garments from Bangladesh and elsewhere will increase—though China’s slowing share will mean more chances for other players.

According the report, led by Dr. Wasel Bin Shadat, executive director of the Institute of Policy and Social Sciences, and a lecturer at the University of Manchester, the slowdown in Chinese exports will create a vacuum of more than $100 billion by 2025.

“This legroom will bring opportunities for competing exporting nations like India, Bangladesh, Pakistan, Vietnam, etc.,” the report noted. “For Bangladesh, realizing these potentials and opportunities requires sustainable growth of the industry and addressing major problems such as a lack of compliance, competitiveness, capacity utilization and extension, inadequate infrastructure and shortage of power.”

To do that, Bangladesh will have to relocate factories out of crowded city centers where they are presently strewn in an unplanned way, build new factories to standard from the ground up, and the government may want to start providing incentives for factory improvements.

Compliance—beyond quelling concerns of international buyers who may be wary of Bangladesh in light of past and present incidents—also results in higher worker morality, which leads to higher worker productivity and lower labor unrest, according to the researchers.

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The numbers

“For compliant factories, on an average, turnover rate to initial investment is 334.04%. For non-compliant factories, on average, turnover rate to initial investment is 247.72%,” the report noted, citing research from Baral in 2010.

That means better compliance yields an 86 percent higher turnover rate to initial investment.

Workplace incidents related to non-compliance also have a cost. Using a detailed calculation to assess the cost of lives lost in Bangladesh’s two major tragedies, the Rana Plaza building collapse and the Tazreen factory fire, researchers said the value of one life lost could amount to as much as $30,000. In the last six years, incidents related to non-compliance cost factories in Bangladesh between $15.6 million and $38.4 million.

The average cost to get a factory in Bangladesh up to compliance standards, according to the report, is between $500,000 and $700,000, which means the industry needs as much as $2.1 billion to $3 billion to reach more compliant levels. The annual running cost to maintain a compliant factory is estimated at 10 percent of the initial compliance investment.

Researchers calculated that the benefits of ensuring compliance could increase total export values by 10 percent, prices by 5 percent and volume by 10 percent. If export value for the ready-made garment sector in Bangladesh did increase by 10 percent, the country would hit its $50 billion by 2021 target. Bangladesh’s current apparel exports total $25 million, so the target, while viable in many scenarios, is quite a ways off.

“Ensuring compliance in the industry will contribute to the economic gain for any industry by increasing productivity, lowering worker turnover, reducing probability of accidents, giving price premium or retaining of existing buyers, and/or new buyers,” the report noted.