1. Introduction and Scope & Methodology 1.1 Introduction Sickness in the industrial units is not a new phenomenon as is evident in the developing countries. Even in the industrially advanced countries of the world, varying degrees of sickness are found to occur. An industrial unit may face a number of odds during its implementation and operation stage because of a number of factors in the environment – internal and external. If the problems perpetuate & does not permit the unit to pursue the normal course of operations leading to reasonable utilization of capacity, generation of surplus, debt servicing, etc, it can be presumed that some kind of sickness has engulfed the unit and if this trend grows unchecked, it would adversely affect production and employment in the country besides other socio-economic repercussions. However, it is also recognised that in a market economy, the survival of the fittest and weeding out of inefficient industrial units is a natural outcome which is considered useful as well. Because the exit of the non-competitive and loss-incurring units should not pose difficulty to any society. But sickness assuming an epidemic shape creates concerns to the policy makers and stakeholders. Experience suggests that small scale industries are more prone to sickness as compared to medium and large scale industries. In this context, sickness in small industry should not be left only to the market forces. Creation of objective conditions and enabling environment through suitable policy support are essential for sustained growth of the small industry sector in the developing economies. It is, therefore, imperative to diagnose the causes of sickness so that preventive measures are suggested. Even if a small unit turns sick despite taking all possible precautionary measures, efforts should be made to find out the possibility of its revival. This warrants appropriate package of restructuring and rehabilitation strategies. If the unit’s survival is still under threat, it should be better allowed to die a natural death. 1.2 Scope & Methodology The purpose of this paper is to explain the incidence of sickness and causes thereof in the industry sector of Bangladesh with particular reference to small industry sub-sector and suggest policy measures, both preventive and corrective, to address the problem of sick industries in the backdrop of pursuing the rapid industrialization strategy as the major prop for acceleration of economic growth. For this purpose, extensive survey of literature has been made and relevant Govt. publications, pervious studies and various initiatives taken by the successive Governments have been consulted. Section–II presents the industrial scenario in Bangladesh, Section-III highlights the role of small industries in the economy and polices pursued, Section-IV brings out the sickness syndrome prevailing in the industrial sector of Bangladesh, industrial sickness in neighboring countries is briefly described in Section – V, and Section- VI deals with the suggested policy framework for prevention of industrial sickness and rehabilitation measures. 2. Industrial Scenario in Bangladesh 2.1 Strategy for Industrialization Like many other developing countries, the economy of Bangladesh though agrarian in nature is poised for industrial development. It is an admitted fact that any development strategy which aims at raising output and generating adequate employment opportunities, needs to address the rapid industrialization move. The emphasis on industrialization should not, however, be stressed by undermining the role of agriculture in the economy, rather a case of complementarity has to be established between these two fundamental/vital sectors in order to reap the relative benefits accruing to each other, resulting in acceleration of the economic growth. Again, the argument of structural shift from agriculture to industry sounds to be a welcome proposition in the context of pursuing the export-led growth strategy. The acceleration of industrial growth is thus a crucial goal for reaching the take-off stage of the Bangladesh Economy. In the days ahead, as the increasing trend of liberalization sets on, it will continue to remain as the prime mover in economic modernization, employment generation, expansion and broadening of domestic as well as export markets. The awareness of the successive governments in this regard have been reflected in various policy moves as initiated from time to time for diversification and modernization of the economy with industry and its close linkage with dominant agriculture as the major vehicle in the process. 2.2 Performance of the Industry Sector The achievements so far made in the industry sector are not satisfactory. A vibrant and dynamic industry sector is yet to show up to attain a breakthrough. While several South-East Asian and some other developing countries are fast moving up the ladder of industrial development, the performance of the industry (manufacturing) sector of Bangladesh may be rated below satisfactory level. The contribution of the industry sector to the gross domestic product (GDP) at 1995-1996 prices was 15.58% in 2001-2002, hovering around at almost same figures in the second half of the nineties. Regarding the growth rate, the sector witnessed a declining trend from 8.54% in 1997-98 to 5% in 2001-2002. Over the period from 1990-91 to 1995-96, the manufacturing sector grew at an average annual rate of 6.3%. The share of the manufacturing sector in country’s total employment is 13.1% only. It provides employment to about 5.1 million people in which the share of the private sector is over 95%. (Source: Labour Survey, 1999-2000, BBS). However, the contribution of manufactured exports to the total exports is significantly high which accounts for more than 90% . In terms of productivity (gross output per employee), the manufacturing sector registered poor performance as compared to India, Pakistan and Thailand. The performance of State-Owned Enterprises (SOEs) is quite dismal during the last two decades and its contribution to GDP decreased over time. The net loss of manufacturing SOEs recorded colossal i.e., Tk. 26.32 billion in 2001 as compared to Tk. 6.70 billion in 1991 (Source: Monitoring Cell, MOF & Sector Agencies - November, 2002) The corporate governance and management of SOEs have proved ineffective. Despite the potential for growth, the manufacturing sector in the past failed to meet expectations and presents a disconcerting picture. This sluggish trend has to be reversed for a fast turnaround of the sector. For the last couple of years, GDP growth rate centers around 5% and little above. A minimum of 7% GDP growth rate should be targeted for the economy and all possible efforts for development of various sectors have to be put in place in order to attain the coveted position. Likewise, in the industry sector, at least 25% contribution to GDP and at least employment of the 20% work force have to be achieved by the end of ensuing Sixth Five-Year Plan to support the sustained level of development in the economy. 3. Small Industry in the Economy and Policies Pursued 3.1 Contribution of Small Industry While pursuing the industrial development efforts, the major objectives and strategies should be focused on optimum utilization of indigenous resource endowments (e.g., abundant labour and scarcity of capital), promotion of employment and catalyzing the growth of production and exports. In this regard, the strategy for development of small industries merit special attention of the policymakers in accelerating industrial development of the developing countries. In Bangladesh, the importance of small industry in the economic development process has been recognized in all official documents relating to policy prescriptions for the industry sector. The development of small industry has been justified on grounds of (i) labour intensity (ii) use of indigenous raw-materials, (iii) lower capital-output ratio (iv) generation of employment at minimum investment cost (v) equitable distribution of income, (vi) regional distribution of industrial investment, (vii) reduction in fixed investment costs through sub-contracting tie-ups, (viii) foreign exchange earnings through exports/imports substitution, (ix) building up entrepreneurial base through trial and error at low cost, (x) introduction of new/appropriate technology at low cost, etc. Though the contribution of small industry sector to GDP/Value added has remained almost static (around 5%) for more than a decade in line with the similar trend as noticed in case of contribution of the industry sector, the growth rate witnessed a rise over the period. While the entire manufacturing industry grew at a declining rate over the last 5 years (1997 - 2002), the rate of growth of the small-industry sector increased from 6.77% in 1997-98 to 7.50% in 2001-2002, implying the lower growth rate for the large and medium industry. (Source: Bangladesh Economic Survey-2002, P-152). The contribution of small industry towards employment generation also appears higher at lower cost. The small industry sector employs 5 million people directly and indirectly which accounts for 82 percent of the total industrial labour force (Source: Fifth Five Year Plan, 1997-2002, P-325). Various estimates reveal that the difference in fixed investment cost in the creation of one unit of employment generation amounts to nearly Tk. 100,000 between small scale industry and large scale industry. In the absence of availability of any current national level estimates about the nature and magnitude of contributions of the small scale industry, it is difficult to provide any dependable basis about their importance on the economy. As estimated by different sources, there exist about 42,000 small-scale industries in Bangladesh (Source: Ahmed, 1999 PP. 6-7). Despite their contributions in the economy in terms of employment and value added, the small industries suffer from numerous operational constraints resulting from the scale barriers and resource constraints. Comprehensive policy support including various fiscal and financial incentives are thus inevitable to improve their competitive strength in the backdrop of a liberalized market economy regime. 3.2 Policies in Support of Small Industry A close look at the industrial policies initiated in the nineties in 1991 would reveal that the small industry was identified as a priority sector and a host of useful and innovative incentive measures were proposed for development of the sector. These include decentralization of regulatory functions with BSCIC as the principal functionary, provision of credit facilities to special small industries and credit guarantee scheme, sub-contracting based linkages, tax-holiday, management development and training facilities, extension of industrial estate facilities, review committee to monitor policy implementation, etc. However, the priority status was first accorded to the small scale sector under the revised industrial policy, 1986. A number of promotional measures were found to be contained in that policy which focussed primarily on the preferential access of the small industries to institutional credit. The industrial policy, 1999 up- holding the spirit of liberalized market provided for almost similar facilities and incentives for the growth of the sector, but with no mention as priority sector. No new policy measures or support assistance were found in the 1999 policy document. Since the definition of the industries falling under the ‘Small’ category depends on the fixed investment ceiling, there exists variation in the level of investment to identify small industries under various industrial policies. According to IP-91, an industrial undertaking whose total fixed investment excluding the value of land was limited to Taka 3 crore or 30 million, was designated as small industry. However, the extent of extended investment for BMRE was not more than 50% of the original investment limit. IP-99 provided definition of the small industry on the basis of both number of workers and fixed investment limit. Under this policy, enterprises employing fewer than 50 workers (excluding the cottage units) and/or with a fixed capital investment of less than Tk. 100 million would come under the purview of the small industry. 3.3 Policy Intervention and Implementation Status Though the above-mentioned policy provisions indicate positive direction towards growth of the small scale industry, these mostly remained in paper only. There has been wide gap between policy prescription and policy implementation, rendering much of the needed proposals into pious wishes. A survey on the implementation status of IP–91 reveals that though regulatory functions decentralized with the BSCIC were discharged more or less satisfactorily, some degree of bureaucratic tangles and inefficiency still remained. The policy remained vague in terms of identification of special small and cottage industries (SCIs) for providing credit facilities. BSCIC also did not play its role to procure funds for establishment of special SCIs. No small industry credit guarantee scheme was launched by BSCIC though provided for in the policy. NCBs introduced a credit guarantee scheme with assistance from Bangladesh Bank (Source: Ahmed, 1999 P-11). It is true that financing persists as a perennial problem for the small industries in Bangladesh. But no special credit scheme has been launched under IP-91. No attempt has been made by the BSCIC and no credit provision has been arranged by the banks to facilitate sub-contracting between large and small scale industries. Tax-holiday facilities to be offered to the small industry entrepreneurs by NBR have been reported to be exceedingly complicated and highly bureaucratic. There have been no follow-up arrangements to examine the impact of management training received by the potential entrepreneurs. Further, training had less impact finally as the same was not linked to the provision for credit. The location of the industrial estates have not been selected in many cases by considering their economic and commercial viability. No progress has been made so far in regard to provision of facilities in the BSCIC industrial estates similar to those available in EPZs. As per policy, though the review committee has been formed to monitor the implementation of relevant policies applicable to small industries, the committee has not become active at the desired level. The progress of implementation of the small industry development policies under IP-99 is yet to be assessed. The above analysis suggests that the enabling environment for the growth of small industries has been limited to official documents only, in reality much less has been done to promote the small-industry- oriented industrialization in the country. Moreover, the environment for the growth of the sector has been somewhat hostile due to the ever increasing competition arisen out of the trade liberalization policies of the Government. The protective regime has largely been discontinued leaving the small industries to stiff competition arising from the influx of foreign goods through both official and unofficial channels. This paper does not, however, advocate for generous assistance to be provided to the small industries. Because financial opportunities or higher effective rates of assistance provided earlier have contributed to the inefficiency in the sector, as some studies revealed. Very important to reckon with in this regard is the firm commitment of the relevant agencies to ensure the timely availability of appropriate package of financial and non-financial facilities and incentives for the growth of the sector in the competitive market economy. It is true that small industries are afflicted with a number of built in constraints and are more vulnerable to non-performance/poor performance because of the entrepreneurial and managerial deficiencies. This has largely inhibited their access to formal credit institutions. As stated above, the policy constraints including liberalization as well as internal constraints have compounded the problems besetting the development of the small industries which are largely responsible for growth of sickness in the small industry sector. 4. Sickness Syndrome in the Industry Sector of Bangladesh: Chronology of Govt. Initiatives and Various Studies 4.1 Industrial Sickness and its Incidence in Bangladesh Sick industries refer to those units which perform poorly against expected results, incur cash losses for consecutive years, gradually erode the entire networth and obviously fail to service the debt obligations. The major criteria to identify a sick unit may generally be listed as follows : i. A unit incurring financial loss/not being capable to produce at / above break-even point. ii. A unit incurring continuous cash losses iii. A unit having negative equity iv. A unit having excess of current liabilities over current assets. v. A unit making defaults in payment of principal sums with interest. vi. A unit having low capacity utilisation vii. A unit having worsening debt-equity ratio. However, it is very difficult to recognize a sick unit on some definite criteria as a wide variety of interlinked symptoms characterize the sickness of an unit. Likewise, a number of causes are responsible for turning an industrial unit as sick. These causes prevailing simultaneously in an unit may be closely inter-related or even independent of each other. Some of the causes originate outside the unit (e.g. changes in the structural and environmental factors like infrastructural problem, govt. policies, etc.) and some crop up within the unit itself which relate to the functional areas like management, production, finance etc. Thus, the causes are classified into two categories : (i) external causes (exogenous factors) and internal causes (endogenous factors). The external causes, which are beyond the control of the industrial unit, usually affect the industry group as a whole, while internal causes occur due to some intra-firm weaknesses in various functional areas of the unit and are, therefore, management related. In Bangladesh, the growing incidence of industrial sickness and its adverse impact on the economy in the form of loss of productive capacities, investment potential, employment, etc. drew the attention of the policymakers in the Government first in the late eighties. In the nineties, with the advent of market economy and consequent trade liberalization, the intensity of industrial sickness took a new dimension. The successive governments came up with policy measures at different periods to address the problem of sick industries. 4.2 MOI - Sponsored Sickness Study by the House of Consultants Ltd. In 1988, under the sponsorship of Ministry of Industries (MOI), Government of Bangladesh (GOB), the House of Consultants Ltd. undertook a study to develop criteria and identify the causes of sickness of manufacturing establishments in Bangladesh and find solutions to remove or at least reduce the impact of the causes. According to the study, an industrial unit has been defined to be sick if it fails to cover all the costs of production (including finance cost) and earn normal profit in the long run (i.e., a three – year period). A set of criteria was developed for the study in order to identify an industrial unit as sick which are as follows: i. if it incurs net loss in consecutive years, ii. if its debt-equity ratio deteriorates over time (net loss wiping out the equity base), iii. if it fails to meet debt-servicing liabilities on time, iv. if it defaulted in payment of past taxes, v. if its share price is going down (in case of public limited companies listed in the stock exchange), vi. if it is facing working capital problem and its cash ratio is declining over time (creating liquidity problem). By applying the above criteria to a sample of 300 industrial units, it was found that 67.3% were sick in terms of one or more criteria. The extent of sickness is the highest i.e., 75.8% among the small scale industries. The major causes contributing to the state of sickness are listed below : o Poor entreprenurship o Lack of proper studies o Lack of management & technical know-how. o Low equity base and dishonesty of purpose o Poor market planning o Idle capacity/low capacity o Infrastructure (power, etc) o Shortage of funds (Working capital & BMRE) The study suggested a number of measures to alleviate the cause of industrial sickness. The immediate measures included–Easing debt burden, Reappraisal of sick units, Debt-equity swap, Rescheduling, Funds for BMRE & Working Capital, Manpower training, uninterrupted power supply, etc. On the other hand, the suggested long run measures were – Conducting sector reviews, Developing project preparation capability, Creating an Institute of Technology, Creating management capability, etc. However this study suffers from methodological problem. 4.3 Functioning of Sick Industries Rehabilitation and Revival Cell Under IP-91 In 1991, the announced industrial policy, interalia, included the provision that problems of sick industries will be identified and appropriate measures will be taken for solution of these problems. In line with that, a ‘Sick Industries Rehabilitation and Revival Cell’ was formed in the middle of 1991 at the Ministry of Industries (MOI). The cell headed by the Secretary, MOI, GOB with representatives of all prominent chambers and financial institutions had the following terms of reference – a. to define a sick industry b. to identify sick industries and the reasons thereof on the basis of a survey. c. to submit report with specific recommendations for arriving at the appropriate solutions in each case. The cell defined a sick industry as follows – An industrial unit (a) which could not reach the stage of normal production with normal profit or (b) has incurred loss or remained at the unprofitable level for consecutive 3 to 6 years from the first year of commercial production or (c) could not produce above the break-even point for reasons beyond the control of the entrepreneurs. The entrepreneurs of the problem industrial units were requested to fill up a prescribed application form containing necessary information about the enterprises, their own views on reasons and remedies for sickness and, thereafter, submit the same to the Federation of Bangladesh Chambers of Commerce and Industries. In order to identify the genuinely sick industries, ascertain the reasons and suggest remedies for sickness, ten selection committees comprising eminent persons and specialists were formed for ten- different sub-sectors, viz. Food, Textiles, Engineering, Chemical, Handloom, Service, Pharmaceuticals, Jute, Rubber and Miscellaneous. A total of 1889 applications were received from the industrial units claiming sickness. Of those, 1580 enterprises were identified as sick in which total bank loan outstanding amounted to Tk. 1239 crore. As calculated by the selection committees, the required amount for working capital and BMRE of the identified sick industries were estimated at Tk. 252 crore. The major causes of various types of industries fallen sick as have been mentioned in the reports of the selection committees are compiled as follows: i. Selection and Implementation of Projects without the required feasibility studies. ii. Supply of imbalanced and defective machinery. iii. Inadequate/Non-availability of working capital (in majority of the cases) iv. Non-provision of financial assistance for BMRE, where necessary. v. Lack of timely decision and support by the financial institutions and the related agencies (in majority of the cases) vi. Loss incurred by natural calamities. vii. Unauthorized inflow of smuggled and officially duty-free foreign goods. viii. Frequent power disruption, irregular supply & high price of power ix. Improper utilization of productive capacity. x. Disruption of production due to political unrest, labour unrest, etc. xi. High rate of interest on bank loan xii. Marketing problem for locally produced goods. xiii. Upward movement of exchange rates. xiv. Fiscal anomalies between the imported raw-material of locally produced goods and imported finished goods. xv. Lack of sound management xvi. Lack of proper implementation of industrial policies. A number of recommendations were suggested by the selection committees separately sub-sector-wise in order to rehabilitate and revive the identified sick industries which were finally approved by the sick industry cell. The principal recommendations were here as under : a. Waiver of 100% penal and 50% - 100% normal interest b. Rescheduling of outstanding loan for repayment in easy installments c. Provision of necessary working capital, financial and technical assistance to BMRE cases after conducting fresh feasibility studies. d. Withdrawal of all filed suits. e. Supply of electricity and other utilities on regular basis and discontinuance of peak hours of electricity. f. Unnecessary delays in providing financial assistance and support to be avoided. g. Stoppage of unauthorized inflow of foreign goods. h. Lowering of interest rate on industrial loan. i. Fiscal anomalies to be removed. j. Introduction of special insurance scheme on easy terms for natural calamities. k. Compilation of accurate statistics for investment decision l. In order to provide protection to home industry, local goods which are produced abundantly should be discouraged for import. The report further suggested that as there exists special need for co-ordination between the operations of the different ministries, agencies, banks and financial institutions and the policies and rules of the Govt. and various laws for rehabilitation of sick industries, a "Board for Industrial and Financial Restructuring" may be formed through enactment of special laws. Under the same law, there may be a high level appellate authority to review the appeals of the concerned quarters and provide judgements against the decisions of the said board. The concerned banks and financial institutions were sent letters by the MOI for extending assistance to the respective sick industries as per recommendation. The resolution was also simultaneously communicated to the concerned sick units for individual perusal of the case with the bank(s). Thereafter, the sick industry cell was declared formally abolished. However, the concerned banks provided fresh financial assistance only to a few identified sick units and in other cases expressed their inability in implementing the recommendations. Then, the identified sick industries continued to be pursued by the concerned banks for failing to service their debts. 4.4 Formation of High-Level Review Committee to act on Recommendations for Rehabilitation of Sick Industries In 1992, the Government formed a high-level ‘Review Committee’ to devise a pragmatic and effective solution in regard to the recommendations. The enterprises failing to get financial assistance as recommended, were asked to apply to the Review Committee for reconsideration. However the Review Committee could not proceed with its job as it was facing difficulty in implementing decisions. It was then decided to reorganize the Review Committee with Secretary, Banking Division, Ministry of Finance (MOF) as the Convenor. Even after that, no significant progress did happen in terms of rehabilitation of sick enterprises. Meanwhile, upon assumption of the power by the new government in June, 1996, the MOI reviewed the activities of the previous committees which achieved only marginal success so far in this regard. Hence, the Review Committee was further reconstituted with a modified mandate under the convenorship of Secretary, MOI, to adopt appropriate steps and proper actions in the light of the experiences of the previous committees in order to rehabilitate and revitalize sick industries. The Reconstituted Review Committee (RRC) took two significant decisions – (i) to undertake an in-depth study on the sick industries to be carried out by the Bangladesh Institute of Development Studies (BIDS) and (ii) to update the list of sick industries by inviting applications through advertisement in the newspapers from both "identified" (in 1992) and "newly" sick industries. In February 1997, a Reconciliation Committee was constituted in the MOF to resolve the cases of sick industries which are in litigation with the banks and financial institutions, outside the court premises through a process of arbitration. The progress was, however, slow due to either non-availability of response from concerned banks/financial institutions (FIs) or absence of entrepreneurs in the meetings of the committee. 4.5 BIDS Study on Sick Industries BIDS Sick Industries Study (1998) based on MOI data reveals that the highest incidence of sickness (19.6%) is in the manufacturing of textiles, followed by the sub-sectors-food manufacturing (14.3%), textile manufacturing (8.8%), non-electrical machinery (5.7%) and leather and its products (5.4%). It appears from the study that ‘small scale’ industries is at the top (72.5%) in terms of incidence of sickness, followed by "medium" and "large" scale industries – 19.7% and 4.1% respectively. From the enterprise level survey of the study it is found that among the internal factors causing industrial sickness, the entrepreneurs have singled out use of obsolete technology as the most important one (23%) followed by faulty employee appointment (15%), lack of working capital (13%), marketing problem (11%), poor management (9%), and wrong feasibility (5%). Among the external factors, lack of working capital has been mentioned as the single most important cause (35%) followed by natural calamities (13%), trade liberalization (9%), problems in disbursement of project loan (7.5%), poor infrastructure/utilities (7%), political unrest (5%), and smuggling (3%). The survey further reveals that sick units were concentrated (64.3%) during the 1980s and the mean rate of capacity utilization for the sick projects was 39% 4.6 Study On Sub-Sectoral/Enterprise Level Sickness Saha (1997) carried out a research work on industrial sickness of the DFI- financed projects in Bangladesh. The sample was taken from the identified sick list approved by the Sick Industry Cell in 1992. The principal causes attributed to the sickness of DFI-financed projects are as follows [Figures in parentheses indicate percentages of the total causes of sickness]: Internal: i. Marketing problem (31%) ii. Management inefficiency and lack of entrepreneurial skills (22%) iii. Faulty project planning and appraisal (14%) iv. Imbalance of machinery and inappropriate technology (12%) v. Implementation delay in (mobilization of equity, etc) (12%) vi. Others (diversion of funds, labor problem, etc.) (9%) External: i. Delays in loan sanction and disbursement (22%) ii. Non- availability/ shortage of working capital (21%) iii. Power problem (15%) iv. Changes in Govt. policy (import liberalization) (13%) v. Non-availability/ irregular supply of raw material and other critical inputs (11%) vi. Natural calamities (57%) vii. Smuggling, Political unrest (5%) viii. Others (8%) The important findings of the study included, inter alia, the following: Most of the sick projects (64%) were established during the 1980s’ Average capacity utilization of the sick projects was 41% Working capital finance gap (difference between the required working capital and available working capital) prevailed within the range of 21-80%. for 76.48% of the sample sick projects. Average time overrun (difference between average time planned and average time actual taken at different stages of project implementation) stood at 51 months incase of sick projects. 4.7 Recognition of Sick Industries in the Fifth Five Year Plan (1997-2002) Meanwhile, the Fifth Five Year Plan (1997-2002) was launched by the Government. Unlike the previous Five-Year Plans, the Fifth Five Year Plan recognized the presence of a large number of sick industries and listed the main reasons therefor as follows : a. depreciation of taka in relation to the foreign currency in which loan capital was obtained. b. technological obsolescence c. withdrawal or lowering of protective tariff wall, d. management inefficiency e. inadequate working capital support by the banking system; and f. pilferages by the sponsors, in collusion with the personnel of the lending banks or financial institutions. It has been categorically mentioned in the plan document that during the plan period concrete steps will be taken to remove the relevant causes of sickness through joint efforts of the owners, management, labour and the funding agencies. 4.8 Supportive Measures Proposed in the National Budget of 1998-99 for Curbing Industrial Sickness While announcing the national budget for the financial year 1998-99, the Finance Minister referred to the sick industries in Bangladesh. Though he admitted the realities of sickness in the context of governing principles of capitalism, he attributed the main reasons of sickness to mismanagement, political and economic stability and rapid liberalization and unexpected shifts in economic policy. A package of supportive measures were proposed in the budget speech with a view to scaling down the problems of sick industries which are follows : i. Since small entrepreneurs are adversely effected by the phenomenon of sickness and detailed investment analysis is hardly possible in case of small units, steps would be taken for providing assistance to the small sick industries already registered with MOI. ii. A special committee would be set up to consider remission of interest and penal interest upto 100% of those enlisted sick industries which had borrowed upto Tk. 50 lacs from any state-owned bank. The Government would reimburse 50% of such remitted interest amount to banks. The amount remaining due after remission would become payable by three years in monthly instalments. iii. Sponsors of sick industries having borrowed more than Tk. 50 lacs, and being unable to pay the dues, may submit compromise proposal to the banks for decision on the basis of bank-client relationship. In cases, the sponsors believe that their sick industries can be profitably rehabilitated, they may submit feasibility reports to the concerned banks for taking appropriate steps on the basis of guidelines given by the special committee. iv. Where court cases are pending, all proceedings would be taken within the legal framework without compromising the interests of the banks. v. Upon implementation of the above measures, all Govt. Committees relating to sick industries would stand abolished and hence, all sick industries would have to seek redress under the Bankruptcy Act. vi. The Government will issue bonds worth Tk. 60 crore in FY 1998-99 to compensate the banks for implementation of the above measures. If necessary, allocations for this purpose may be enhanced in the future. The Sick Industries Association (SIA) came up with the following noteworthy observations in response to the package offer announced by the Government: i. The proposed special committee should consider the cases of identified sick industries of 1992 alongwith the sick cases registered later which are in the process of consideration by the Reconciliation Committee. Further, the RRC (1996) should continue to identify sick industries from the fresh applicants. ii. There should have been specific time frame for the special committee for overall implementation of the process. iii. The financial jurisdiction of the special committee upto Tk. 50 lac. project loan has limited the scope for addressing the sick small industries and hence there should be no such limit. iv. The application of the package should be extended to the loan cases involving private banks as well. v. The policies of the review committee in regard to remission of 100% interest and realization of principal should be sustained in the modalities of the proposed special committee. 4.9 Formation of Special Committee on Interest Remission for the Identified Sick Industries The Ministry of Finance considered some observations of SIA and constituted a ‘Special Committee on Interest Remission’ under the convenership of a retired judge. According to the TOR, the committee was empowered to consider the following cases for interest remission on the basis of the stipulated criteria: a. 1580 identified (in 1992) sick industries which are under consideration of the RRC. b. Pending cases lying with the Reconciliation committee c. Out of 1325 new applications (in 1996) which are really sick as received by RRC (Committee to identify sick units on the basis of 1992 definition). The committee has been asked to consider the remission of interest only if the unit is found sick and project loan does not exceed Tk. 50 lacs. The cases involving project loan exceeding Tk. 50 lacs would be sent to the concerned bank(s) for consideration. Only the loan cases of NCBs and DFIs would come under the jurisdiction of the committee. The decisions of committee would be implemented through the process of approval by the Board of Directors of the concerned bank(s). The Government, upon recommendations of the committee, would reimburse 50% of the waived interest to the banks for the sick industries in two phases as compensation. A total of 2464 cases were received by the special committee from the reconciliation committee (MOF) and the RRC (MOI) for consideration. After preliminary screening, 1715 cases were selected for consideration. Originally, the tenure of the committee remained effective upto June 30, 1999. Later on, the tenure was extended twice upto 31/12/2000. Within two years of operation, the committee resolved 1440 cases out of 1715 cases with a note of recommendation to the concerned banks and returned 275 cases to the concerned banks for settlement on the basis of bank-client relationship. The resolution of the cases were done in the presence of sponsors and bank representatives and in many cases by undertaking site visit. While resolving the cases under consideration for remission of interest, the following reasons were found to be dominant in contributing to sickness in industries: a. Selection of project without proper feasibility studies and appraisal. b. Failure in selecting appropriate technology. c. Supply of defective machinery due to inexperience of both entrepreneurs and banks. d. Problem in marketing the produced goods. e. Location problem and lack of skilled manpower. f. Non-availability/Inadequacy of working capital from the financing banks. g. Delay in financing decision and loan disbursement h. Natural disasters i. Smuggling of foreign goods/liberal import policy. j. Frequent power disruption/Non-availability of gas and power connection. k. Frequent changes in exchange rates and fiscal anomalies. l. Lack of co-ordination amongst various ministries and Govt. departments. m. Over-crowding of industries in the same sub-sector. n. Deterioration of law and order, political instability, extortion, strike, etc. o. Management inefficiency, etc. Business leaders opined that positive steps have been taken for revival of sick industries through the interest remission measures for the identified cases. But the discontinuance of the special committee for the purpose has left a number of genuine sick units out of consideration. Moreover, the cases involving project loan of above Tk. 50 lacs falling sick were tipped to be settled through bank-client relationship. No substantial progress has been made so far in this regard. Some of them suggested that interest remission committee should continue to function for the cases which would be identified as sick over time. Further, for the purpose of interest remission, ceiling for project loan of sick cases may be increased upto Tk. 1 crore from the present limit of Tk. 50 lacs. However, in April, 2001 the Finance Minister in his speech remarked that there was no scope for continuing state support for rescue of sick industries. He added that the Govt. tried its best to reduce the number of sick industries from over 1700 to less than 400 through supportive measures. But this should not be looked upon as a permanent phenomenon in a market oriented economy. 5. Industrial Sickness in Neighboring Countries - India 5.1 Alarming Rate of Sickness in the Small Scale Industry Sector In India, Industrial Sickness increased at an alarming rate in the eighties and has also increased in the nineties particularly in the small scale sector. Small Scale industry in India is defined on the basis of investment in plant and machinery. The investment limits varied over the passage of time. This limit was Rs. 35 lakhs from 1985-86 to 1990-91 and Rs. 60 lakhs from 1991-92 as of today. Similarly, the small scale ancillary units are defined as having investment in plant & machinery below Rs. 75 lakhs. The incidence of sickness in the small scale sector is a matter of serious concern in India. SSI sick units which accounted for 94% of the total incidence of industrial sickness in 1980, have increased their share to 99% in the overall profile of industrial sickness in 1990. Large and medium scale sick units account for only 1% of the total incidence of sickness. But in terms of locked up bank credit, they represent 75% of the total bank credit outstanding from all sick units. On the other hand, the locked up bank credit in the small scale sick units which constitute 99% of the total incidence of sickness, represent only 25% of the total bank credit outstanding from all sick units. Again, of the identified SSI sick units, 92% are found to be unviable. 5.2 Definition of Sick Industry by Different Institutions Industrial sickness in India has been defined by different institutions in different ways. The Reserve Bank of India (RBI) has given two definitions – one for large and medium scale units and the other for small scale units. According to the RBI definition, large and medium scale sick unit is one which incurs cash losses for one year and which, in the judgement of the bank, is likely to continue to incur cash losses for the current as well as the following year and which has an imbalance in its financial structure, such as current ratio of less than 1:1 and worsening debt equity ratio. RBI’s definition of a sick small scale unit follows like – if it has (a) incurred cash losses in the previous year and is likely to incur cash loss in the current year and has an erosion of 50% or more of its networth; and/or (b) made defaults in payment of four consecutive quarterly installments of interest or two half-yearly installments of principal on the term loans and there are persistent irregularities in the operation of its credit limits with the bank. The Study Team of the State Bank of India in its report on Small-Scale Industry Advances defined a sick unit as "one which fails to generate internal surplus on a continuing basis and depends for its survival upon frequent infusion of external funds". The Government of India enacted the Sick Industrial Companies (Special Provisions) Act, 1985. As per the revised definition provided by this Act, a sick industrial company would be one which is registered for a period not less than five years and whose accumulated losses are equal to the sum of paid up capital and free reserves. 5.3 Findings of Various Studies about the causes of Sickness A number of studies were conducted to determine the relative importance of different factors in the causation of sickness of the industrial units in India. One study was conducted in 1990 to examine the causes of sickness in the new SSI units. It was found that marketing problems as a whole (resulting from highly competitive markets, unfavourable linkage with ancillary and medium units etc.) were the most important factor (29.6%) for sickness in the group followed by mismanagement (21.9%), inadequacy of working capital (16.6%), time overrun (13.4%) and govt. policy (11%). The total weight of all external causal factors for the group is 59.2 and that of internal causal factor 40.8. It appears that external causal factors are dominant in causing sickness in the new SSIs than internal causal factors. Another study conducted by the Reserve Bank of India on 378 medium and large sized sick industrial enterprises enjoying credit limits of Rs. 1.00 crore and above revealed that 52% of the units fell sick due to management problem, 23% of the units went sick because of market recession, 14% for initial faulty planning, 9% for power-cuts, shortage of raw-materials, etc. and the rest 2% became sick due to labour trouble. 5.4 Govt. Concessions and Incentives for the SSI Sector The Government of India provided various concessions and incentives to the SSI sector for their sustained growth, which have briefly been outlined here as under : a. Assisting new SSI units on soft terms by lending institutions, b. Reservation of Certain Industries for the SSI sector, c. Incentives related to land/shed financing, machinery and raw-materials, d. Provision of facilities within the Industrial Estates, and e. Excise duty exemption and price preference 5.5 Govt. Measures to deal with the Problem of Industrial Sickness Various measures have been initiated by the Govt. of India in order to deal with the problem of sickness in industries. These may be briefly described here. i. The RBI set up a Sick Industrial Undertaking Cell to monitor the performance of the banks in identifying the sick units and initiating appropriate remedial measures, and to co-ordinate the efforts of banks, financial institutions, Govt. and other agencies involved. ii. RBI advised banks to take urgent measures to set up Special Sick Unit Cells to carryout periodical inspection and to undertake diagnostic studies for techno-economic viability. iii. The Ministry of Finance of the Govt. of India and RBI provides supportive measures for rehabilitation of viable sick units in terms of relief in excise arrears, reduction in interest rate on term loans and waiver of penalty applied to cash credit facility. iv. The Industrial Reconstruction Corporation of India (IRCI) was set up by the Govt. of India for industrial revival and rehabilitation of sick and closed industrial units. v. Sick Industrial Companies (Special Provisions) Act (1985), was enacted in 1987 as a landmark in Govt. Policy to combat the problem of sickness. Under this Act, the Board for Industrial and financial Reconstruction (BIFR) came into being with vast powers aimed at assessment and implementation of revival plans for the sick industrial companies. However, this Act has no applicability for the sick SSI units. However, different studies revealed that in some cases liberal policies for the growth of the small industry sector were counter-productive in terms of affecting the viability through unhealthy growth and inefficiency of the units. On the other hand, the measures aimed at revival of sick industries could not achieve a desired breakthrough in curbing the magnitude of sickness due to their inadequacies and implementation bottlenecks. 6. Summary of Causes of Industrial Sickness and Suggested Policy Measures for Prevention and Rehabilitation 6.1 Summary of Causes The deliberations elaborated on the causes of industrial sickness in Section III & IV indicate that a number of factors, both internal and external are responsible for turning an industrial unit as sick. The major causes pushing the industrial units towards sickness in Bangladesh have been summed up in the following table : INTERNAL Sl. # Broad Area Detail Causes 01. Management a. Lack of proper education, training, experience and business outlook of the Sponsors/Entrepreneurs b. Poor Entrepreneurial skills c. Poor Management d. Poor Equity base e. Lack of Integrity/Division of Funds f. Faulty Project Planing and Appraisal 02. Production/ a. Wrong choice of technology Technical b. Improper utilization of production capacity c. Imbalanced and Defective Machinery d. Poor Raw-material Planning e. Inadequate Quality Control f. Poor labour relations g. Location problem 03. Marketing a. Lack of Market Planning b. Inadequate Market Survey c. Poor Collections d. Defective Pricing 04. Finance a. Poor Management of Financial Resources b. Delay in Mobilisation of Equity Funds c. Faulty Costing d. Adverse debt-equity combination e. Lack of Proper Accounting system 05. Personnel a. Lack of Competence b. Lack of Loyalty c. Lack of Professionalism EXTERNAL Sl. # Broad Area Detail Causes 01. Govt. Policy & a. Frequent Policy changes Implementation b. Lack of Proper Implementation of Industrial Policies c. Liberal Import Policies d. Poor Infrastructure / Frequent Power Disruption e. Smuggling f. Fiscal Anomalies g. Exchange Rate Fluctuation h. Lack of Co-ordination between various ministries and Govt. Departments, etc. i. Over-Saturation of particular industry type / Sector due to wrong policy j. Non-availability of Raw-material, etc. 02. Bank & a. Non-availability/Inadequacy of Working Capital Financial b. Lack of required financial assistance for BMRE Institutions c. High rate of Interest on bank loan d. Lack of timely decision & support by the banks and financial institutions. 03. Environment a. Political Unrest b. Labour Unrest c. Market Recession d. Delay in Project Implementation 6.2 Preventive Measures Experience indicates that small industrial units fall sick much to the occurrence of external causes while medium and large industries get exposed to sickness largely due to internal causes. Though it would be hardly impossible to eliminate the causes altogether, attempts should be made to undertake measures that would reduce the magnitude of ailment in the industrial units for healthy survival and growth. Viewed in this context, the following measures may be suggested to prevent industrial sickness: (i) Macro-economic Policy changes: The industrial entrepreneurs should make their own appraisal within a predictable macro-economic environment. For this, policy changes should not be abrupt, have to be pre-announced and gradual. (ii) Sub-Sectorwise Long term Policy: For each sub-sector, the long-term policy (e.g. for a period of 5 years) should be announced by the Government so that entrepreneurs’ appraisal of the policy implications do take a near-accurate shape. (iii) Implementation of the Announced Polices: There should be effective co-ordination amongst the various ministries, Govt. Departments and relevant agencies involved for proper implementation of policies related to industrialization. (iv) Development of Small Industry Sector: The small industry sector is characterized by low-level of technology, low equity base, traditional management practices, poor marketing outlets and undeveloped sub-contracting arrangement. The small industries should not be left to the market forces only. The following measures may be taken for preventing sickness in the small scale sector : a. Arranging access to institutional credit at reasonably lower rate of interest. b. Industrial Estates equipped with the required facilities should be set up in suitable locations. c. Entrepreneurship and Technology training should be arranged and then linked with the provision of credit facilities. A national level training institute for entrepreneurship development in the small scale sector should be set up. Meanwhile, BSCIC Training Institute and DCCI Business Institute may be strengthened for upgradation of capability of the existing entrepreneurs. d. Sub-contracting arrangements should be made by establishing complimentary relationship with the medium and large industries. Government supplies may be procured from small industries as far as possible. e. Data Bank should be developed at the Chamber Bodies/BOI/BSCIC to facilitate the adequate flow of market-related information. f. There may be one marketing agency entrusted with the responsibility of purchasing all goods manufactured by SSI units (Say, upto Tk. 10 million investment) and the task of channeling sales through various sales depots. (v) Rationalization of Tariff : In cases where deemed necessary, some protective measures should be taken by restricting import of the locally produced finished goods so that fiscal anomalies could be removed. (vi) Improvement of Infrastructural Facilities: Insfrstructural facilities including utilities should be made available to the entrepreneurs at low cost and at the appropriate time. (vii) Monitoring of Saturation in Particular Industry Sub-sector: There should be some agency entrusted with the task of monitoring the establishment of too many units in the same sub-sector so that over-crowding could be prevented. (viii) Development of Linkage Industries: In order to mitigate the problem of non-availability/scarcity of raw-material as well as marketing of finished goods, backward and forward linkage industries should be set up in a planned way. Moreover, close linkage of Industry with agriculture will help ease problem of scarcity of raw-material. (ix) Active Support of Banks and Financial Institutions: a. In case of industrial units where term loan is needed, the availability of working capital should be ensured as part of the financial package. b. Banks should provide due attention to process the working capital needs of the industrial units without any delay. c. BMRE Loan should be actively considered by the banks and financial institutions for the existing industrial units undergoing the reality of rapid change in technology so that productive capacities are not rendered idle/underutilized. d. Interest rate on loan should be made lower by improving operational efficiency of the banks. This will help reduce financial costs of the industrial units and thus gain access to competitiveness. e. Bank-client relationship should be based on understanding of the mutual problems and prospects for greater interest of survival of both the entities. f. Banks should improve the quality of project appraisal in order to prevent the growth of born-sick projects and for that, availability of adequate and accurate data and skilled manpower have to be ensured. g. Banks could fix up a time limit for sanction and disbursement of loan limits for helping timely implementation of the projects/utilization of capacity of the borrowing industrial units. h. Monitoring system of the projects financed by the banks should be thoroughly intensive and for this, both off-site and on-site mechanisms should be used in conjunction with each other in order to take timely steps for prevention of sickness. i. Educated entrepreneurs with technical know-how should be encouraged to set up industrial units. They should be provided with all possible support, both financial and non-financial without emphasis on collateral. (x) Expansion of Market Base through Increased Exports : Domestic market is gradually getting squeezed due to the influx of officially imported foreign goods and smuggled goods. On the one hand, export market should be expanded by increasing the number of exportable products. On the other, anti- smuggling drive should be strengthened. For this, import policy should be restructured in a way that discourages smuggling to a great extent. (xi) Use of Predictive Models : Banks and entrepreneurs should follow some predictive models for early detection of sickness on the basis of evaluation of financial health of the industrial units. (xii) Facilitation of Enabling Environment: Deterioration of Law and Order, extortion, harassment etc. should be checked at any cost. In case of natural calamities, special assistance should be provided for resilience. 6.3 Remedial Measures Despite all preventions and sincerity of the policy-makers and stakeholders, some industrial units would genuinely face sickness. In order to provide scope for timely revival of those units, efforts should be underway from all concerned. However, some unviable units should be allowed to die a natural death without delay. The suggested remedial measures for the industrial units approaching towards sickness and already turned sick, are as follows : (i) Every bank and financial institution should have a "Project Rehabilitation Cell" manned by the experts of various disciplines. There should be ongoing process of evaluation of the heath of the assisted units by the banks to detect early warning signals. For this, congenial bank-client relationship is a must for extending co-operation to each other. i. Genuine sick units capable of being revived should be allowed rehabilitation package by way of rescheduling of existing loans, waiver/remission of interest payments, conversion of short term liabilities into long term obligations, etc. depending on the merit of the each case. ii. There might be one "Interest Remission Committee" to be formed by the Govt. from time to time to address the genuine problems of small sick units (where investment ceiling may be upto Tk. 1 crore). However, this step should not encourage the non-sick units to avail of this temporary facility. The screening process should be strict enough to select the genuine sick units for such concession. As it was followed previously, the Govt. may compensate upto 50% of the waived interest to the concerned banks. iii. If necessary, change of management of the sick units should be brought in to facilitate successful running of the projects. iv. Only financial and management rehabilitations of the sick units will not bring the desired result unless Govt. assistance in the form of reduced taxes, duties, concessions on various charges like gas, electricity, etc., imposition of restriction on related import items etc are made available. v. Bangladesh Bank may set up a Sick Industry Cell to monitor the performance of the lending institutions in handling the problems of sick units and to co-ordinate the rehabilitation efforts of banks, financial institutions, Govt. and other agencies involved. vi. Possibilities of mergers and acquisitions may be explored in case of sick industrial units not capable of being revived by their own strengths. Suitable policy guidelines may be framed in this regard. vii. SOEs found chronically sick should not be allowed to operate in the limping state any further. In case of sick SOEs capable of being revived, disinvestment process may be expedited. viii. The provisions of Bankruptcy Act should be strictly enforced in case of sick industrial enterprises with liabilities for exceeding assets.
"Transformation of Sick Industries"