Prospect of leather industry should be sustained

The industry is entirely in the private sector which has proved to be fully capable of handling it. At the time of independence of Bangladesh the leather tanning sector was already well established. About 30 tanneries were abandoned by their non-Bengali owners and were taken over by the government. Some of these were shut down and the remainder was eventually transferred to the Bangladesh Chemical Industries Corporation (BCIC). Subsequently, the BCIC disinvested itself of all its tanneries. A significant change in the orientation of the leather industry occurred after 1982 with the production of crushed and finished leather.

Industry profile

With the exception of ten tanneries located in Chittagong (and a few in other cities) the leather tanning industry is concentrated at Hazaribagh area in Dhaka. The industry, however, is in the process of shifting to Savar (Nayarhat) in consideration of the pollution in Dhaka city and lack of space for expansion and modernisation. Most of the small tanneries are family owned and operated as cottage type industries. Many are established as proprietorship or partnership. The larger tanneries are established as public or private limited companies. Few tanneries have adequate accounting practices and financial controls to define their profitability and financial condition.

Raw materials

The principal raw materials dustry are cowhides and goatskins. Though there has been some appreciable improvement in animal husbandry and butcher's techniques in Bangladesh in recent times it may take quite some time to reach the international standard. On the other hand, Bangladesh goatskins enjoy an excellent reputation for quality. The goatskins are usually pulled from the animal rather than flayed, thereby avoiding damage to the flesh side and the grain side is usually free from defects.

Marketing

At present leather sector accounts for 3-4 per cent of total export earnings. Of the total 214 tanneries in the country the majority are wet blue producers. Hardly 45 per cent of the total hides and skins is now processed into finished leather -- 18 per cent low grade for local consumption and 27 per cent for export either in the form of finished leather or leather products. Only a few tanneries are capable of producing export quality finished leather for export. There are about 15 export oriented shoe manufacturing units located mostly in and around Dhaka city. There are more than 2000 shoe making units supplying the domestic market. Leather and leather products have the potential to make a major contribution to export earnings and to the economic development of the country.

In the leather processing industries there are three categories of producers, large industries, small/medium size industries and commercial exporters. The large industries with bonded warehouses pay no import duties or VAT. They are not eligible for duty draw-back and have to operate on a virtual 100 per cent export basis. There are 6-7 large producers, estimated to be 60 per cent of the total country leather output. Small/medium size industries pay import duties or VAT on chemical and other items at differing rates. These industries take duty draw-back at pre-fixed rates after each consignment of export is executed. Commercial exporters are engaged in the export of crust and finished leather purely on a job-work basis. All their production inputs are from local suppliers. They also claim duty draw-back.

Leather footwear sector has two categories of exporters, those with bonded warehouses and those with no bonded warehouses. Those with bonded warehouses do not pay import duties or VAT. They are not eligible for duty draw-back but receive a cash incentive of 15 per cent on the export (FOB) value of their products. Only 6-7 producers are responsible for 40 per cent of footwear exports. The exporters without bonded warehouse pay all import duties and VAT on duty paid values. They are eligible for duty draw-back and receive 15 per cent cash incentive on the export (FOB) values.

Processing and products

Leather processing and leather manufacturing in Bangladesh is almost entirely export-oriented. 95-98 per cent of the leather produced is for export in one form or the other because of the limited local consumption. The essential import of many materials such as chemicals, equipment, accessories, is subject to delays and cumbersome custom duties and procedures. Considering the very bright growth potential, the government may seriously consider allowing all necessary imports on a duty-free or on a flat rate basis.

At present the larger producers operate well below capacity. It is reported that misuse of the bonded warehouse system is providing some illegal and inappropriate income. As bonded warehouses are costly to implement (involve more bureaucracy and provide opportunity for corruption and additional costs) majority of tanneries do not favour the system. Though small units are more active their production costs are distorted by leakage of chemical from the bonded warehouses of the larger units. They also have to deal with bureaucracy, unofficial costs and delays due to importing and claiming draw-back.

To obtain maximum added value from leather exports a radical change in the import controls has to be brought in. The sector has good potential for growth but it needs the right conditions for achieving full potential.

ABMS Zahur is a retired joint secretary.