Cluster-based development spurs industrialisation

Md. Joynal Abdin
The Financial Express on October 30, 2013
‘Cluster’ is a concentration of interrelated industries in a particular geographical location. In Bangladesh, the SME Foundation has adopted a definition of clusters: “A Cluster is a concentration of enterprises producing similar products or services and is situated within an adjoining geographical location around a 5-kilometre (km) radius and having common strengths, weaknesses, opportunities and threats” (SME Clusters in Bangladesh).
According to a recent study, there are 177 clusters in the country. As many as 69,902 enterprises in the clusters employ 1,937,809 workers. The Handicraft and Miscellaneous sectors have the maximum number of about 38 which is 21.5 per cent of clusters, followed by the Agro-Processing/Agri-business/Plantation sector, Light Engineering and Metal Working sector, Knitwear & Ready-made Garment sector, Fashion Rich Effects, Wear & Consumers Goods sector, Leather Making & Leather Goods sector, and Handloom & Specialised Textiles sectors with about 34, 31, 22, 16, 13 and 10 clusters respectively throughout the country.
Most of the barriers to development of these clusters are common but unique in forms in different clusters. For example:
1. Access to finance: Access to finance is a common problem in almost every cluster. But the demand for finance is unique in each of the clusters. Entrepreneurs at the Bhairab Shoe Cluster, located at Bhairab upazila and the adjoining areas, demand low interest loans, from Tk 300 thousand to 1.00 million (three to ten lakh). But the distinctive character of their demand is that they are unable to pay twelve installments of the loans in a year, because during December, January and February of each year they face off-pick season for their sandals and shoes. As a result, they are unable to repay installments of their bank loans during these three months. They demand bank loans, which will be payable in nine installments in a year.
The same barrier (access to finance) has a different form in the Agar Wood and Agar Oil Cluster, located at Suzanagar, Barolekha, Moulvibazar. Entrepreneurs of that cluster seek large amounts of loans, amounting to Tk 50 million to 100 million (5 to 10 crore), may be as group loans. The Agar wood gardens of the Bangladesh Forest Department are the major source of raw materials for the agar wood and agar oil producers. The government Agar wood gardens are tendered by the Bangladesh Forest Department (BFD). If the genuine entrepreneurs cannot buy the gardens through tender, then middlemen purchase the gardens and resale those to the entrepreneurs at double or triple the original price. Sometimes, the middlemen resale the gardens to foreign buyers at comparatively higher price, leading to the country’s loss of huge foreign currency. This is because it is a highly value-added sector. A simple processing ads 500 times more value than that of the raw materials (garden-stage tree).
A single agar wood-agar oil producing enterprise is unable to purchase a whole garden while tendering. As a result, they form syndicates and go for bidding. Sometimes, they face dearth of liquidity within a short notice-period. Due to this, entrepreneurs seek large amounts of bank loans which may be provided to a ‘syndicate’.
According to the entrepreneurs of the Satranji Cluster, located at Nishbet Gaon, Rangpur, banks and different NGOs (non-governmental organizations) provide up to Tk 25 thousand as loans to them. But they need Tk 200 thousand to 300 thousand (2-3 lakh) to operate one small enterprise.
2. Access to technology: Access to/adoption of proper technology is another common problem in every cluster. According to the entrepreneurs of the Plastic Goods Cluster located in the Lalbagh, Islambagh, Kamrangir Char area, they lag behind when it comes to price competitiveness due to their ignorance about import of relevant technology used in the sector.
Entrepreneurs of the Home Textile Cluster located at Kumarkhali, Kushtia say that they want to adopt new technology to produce European-standard products, but they do not know which machinery should be imported from which country. Fund is not a problem for them. Lack of information in the selection of proper technology is the major problem in producing export-quality products.
Entrepreneurs of the Agar wood and Agar oil cluster, located at Sujanagar, Barolekha, Moulvibazar, claim that they are using the best technology. But a study shows that there is much wastage in the prevalent technology of producing agar oil (Ator). But modern technology is available in Vietnam, Malaysia and Cambodia.
3. Availability of raw materials: Availability of raw materials is another common problem in almost all clusters in Bangladesh. The plastic goods manufacturing industry mostly depends on imported raw materials (though a few recycled raw materials are also available). For example, small entrepreneurs are unable to import raw materials of plastic goods (mainly polyethylene, polypropylene, poly vinyl chloride, polyethylene terepthalate etc.). Only a few Bangladeshi importers and large companies import raw materials of plastic goods. As a result, local importers control market-price of the raw materials up to their expectations (it may be illogical with the international market). Small entrepreneurs of plastics goods manufacturing industry of Lalbagh and Islambagh want central bonded warehouse facility from the government to import raw materials. The the existing ‘syndicates’ will have to charge prices for raw materials up to a logical level, keeping uniformity with international market price.
Agar wood and agar oil cluster mainly depends on its own gardens (social forestry) and government gardens under the Bangladesh Forest Department (BFD). Sometimes, BFD sells agar wood trees to the middlemen, who do not have agar processing industry. It encourages smuggling of agar wood trees to India, while the local industry suffers from scarcity of raw materials. As agar wood is a premium product with high price in the world market, Bangladesh has an opportunity to promote this sector and earn foreign currency out of it. Studies show that the world’s total production of agar wood can fulfill only 35 per cent of the global demand. As a result, its price is going up. Bangladesh has enough opportunity to increase Agar production under social forestry if proper awareness campaigns are launched.
4. Lack of marketing facilities: Lack of marketing facility, market focus and export facility is the common problem in almost all the clusters. As for example, entrepreneurs in the Bhairab Shoe Cluster say they are facing trouble in transporting products to Chittagong or the eastern region because the train carrying goods to the eastern part of the country starts its journey from Dhaka and gets filled up before reaching Bhairab. For this entrepreneurs cannot send their products to Chittagong by train from Bhairab. Prices go up when they carry goods by road. They demand special space in goods trains for carrying their items from Bhairab Shoe Cluster.
In the Plastic Goods Manufacturing Cluster of Lalbagh and Islambagh we find that only a few plastic goods manufacturing enterprises have their own outlets for direct sales. Others depend on dealers and wholesalers. Sometimes, dealers make delays in making payment of the small suppliers.
Products made at Kumarkhali Home Textile Cluster are distributed through local wholesale markets. Middlemen in the local wholesale market invest money for the small weavers, and purchase their product at a comparatively lower price. As a result, genuine weavers are not getting the logical price for their items.
Satranji produced at Nishbet Gaon Satranji Cluster is sold for Taka 35-45 per square feet in Rangpur, while it is about Taka 100-150 per square feet in Dhaka. Weavers are not getting the just price. They do not have ability to supply the product to Dhaka or export it due to their extreme poverty and limited ability.
Agar wood and oil are exported to Dubai through hand luggage or via courier service. It is completely informal trade based on mutual trust of the suppliers and buyers. The formal channel for export of agar wood and oil is still very complicated. At the same time, the importing governments charge higher duties on formal exports of agar wood and agar oil. The government may negotiate on the issue to allow export of Bangladeshi Agar wood and oil duty free to Dubai and other Middle-East markets.
The barriers to cluster development in the country can easily be removed if government patronage is available. Cluster-based development approach will accelerate the process of industrialisation.

Published by

Md. Joynal Abdin

Development Researcher, Columnist and Author

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