Corruption and mismanagement threaten jute mills
The jute sector was dominant in the economy in terms of manufacturing sector output, employment, and foreign exchange earnings. It contributed 87% of total merchandise export earnings at the time of the country’s independence. The change of government in 1975 paved the way for a change in the nationalisation policy and a process of privatisation was initiated. This report discusses the impact of the nationalisation and later privatisation of the jute mills on the national economy and on the jute workers.
Bangladeshwon its independence on 16 December 1971 after a nine month long liberation war.Much of the country’s infrastructure was devastated during the war. A largenumber of industrial and commercial enterprises were damaged and abandoned bytheir Pakistani owners, creating a managerial vacuum. In a difficult situation,the government tried to move the wheels of commerce and industry by undertakingtheir management by its own hand. Further, the socialist ideology of the leadingAwami League led to the nationalisation of the manufacturing, banking, finance,transport and communication sectors in March 1972. As a result, the State cameto own 92% of the fixed assets of the modern manufacturing sector. As part ofthe programme, all 77 jute mills of the country were nationalised. The jutesector was dominant in the economy in terms of manufacturing sector output,employment and foreign exchange earnings. It contributed 87% of totalmerchandise export earnings at the time of independence.
Ithas been argued that nationalisation was undertaken without much preparation forefficient management of the nationalised industries. Lack of efficientmanagement, lack of operational autonomy, a rigid wage structure, controlledpricing policies, corruption, and other problems turned the State-OwnedEnterprises (SOEs) into money-losing enterprises. These concerns depended onhuge state subsidies, which proved to be very costly. Against this backdrop, thechange of government in 1975 paved the way for a change in nationalisationpolicy and a process of privatisation was initiated.
Nationalisedbusinesses served political objectives and fed corruption
Criticshold that nationalisation had been carried out quite mechanically without anyattention to the capacity of the public sector to run the mills. As mentioned,there were vacuums in the top managerial positions caused by the exodus of thePakistani management during the war. These positions were filled by mid-levelofficials and even by clerks on some occasions. The nationalised mills thus hadweak management from the beginning.
Afternationalisation, the higher authorities, the mill managers and the CollectiveBargaining Agents started misappropriating the funds and resources of the mills.The number of officers and staff members was raised by about 35% to 40% abovethat in the pre-liberation period. Another round of increases in managementpersonnel, by another 30% to 40%, took place after the violent political changesin the country in 1975, following a series of coups and counter-coups. On bothoccasions the appointments were based on political considerations. On manyoccasions the mill authorities showed inflated figures for purchase of jute andin order to cover up this mischievous act, set fire to the jute in thewarehouses, burning the whole stock to ashes. Consequently, the quality ofproduction suffered and the mills began to lose money. The mounting losses andinefficiency of the enterprises began to negatively impact on the economy. Theinefficient operation of SOEs led to a massive drain of resources,conservatively estimated at 4.9% of GDP annually since 1991. The publicfinancial institutions have also performed poorly, suffering from significantand understated losses and capital shortfalls. The inefficient services of SOEsin energy, telecommunications, banking, railways, ports and other publicutilities have increased the cost of doing business in other sectors of theeconomy and have reduced consumer welfare.
Mixedresults of non-transparent privatisation process
Thegovernment, instead of trying to address the real problems of the mills throughbetter management, better labour relations and improved productivity, initiateda process of privatisation of the SOEs, including the jute mills, under theadvice of the World Bank. The overall experience with privatisation, however,has not been encouraging. A World Bank study of the performance of theprivatised units divested during the 1980s reports that nearly 50% of theenterprises (or 245 out of 497 small industrial enterprises, excluding largejute and cotton textiles) have been closed down. A depleted asset base, highdebt liabilities and inefficient management are responsible for this deplorablesituation. The privatised large-scale jute and cotton textile mills have alsoexhibited mixed results in terms of investments, productivity, profitability andother measures of efficiency.
BinayakSen, analysing a sample of 205 manufacturing units, found a high incidence (40%)of post-divesture closures with 5% of the units not traceable at all. The study,however, observes two areas of improvement: out of the 112 enterprises currentlyin operation, 40% diversified their businesses by introducing new products and60% showed profits as against 38% before divesture.
Itis difficult to provide any conclusive judgement on the true magnitude ofprivatisation because of a lack of hard statistics. A World Bank study in 1997showed that a total of 1,089 enterprises were privatised in Bangladesh between1972 and 1996. A study by the International Labour Organisation estimates the number of such enterprises at 1,083, ofwhich 610 were industrial enterprises. Between 1978 and 1986, 43 jute mills were privatised.It should be noted that between 1986 and 1991 not a single SOE was privatisedand 26 enterprises have been privatised since 1993. It may be further noted thatthe government has also resorted to closing enterprises to solve problems in thenationalised sector. Closure of unviable mills has been limited to six mills injute manufacturing since the early 1990s so far, while a larger number oftextile and steel and engineering mills were closed in recent years. The mostnotable example is the recent closure of the Adamjee Jute Mills.
Theprivatisation process was not transparent. There was no open bidding, and thevaluation of jute mills that were privatised was not done in a transparentmanner. Just prior to privatisation, profitable SOEs became losing concerns, andmills were sold at a very low price through an unholy alliance between theowners and policymakers. Furthermore, corruption took place in managing themills even after they had been privatised. It very often happened that the ownerhimself overvalued the price of purchased jute or other raw materials, as wellas the machinery, and showed a loss on the balance sheet. This enabled the ownerto default on bank loans. Some of the mills that had been restored to theirformer owners were later sold to new, inexperienced entrepreneurs. Privatisationwas not to be the answer to the problems of the ailing jute industry.
Thesituation of the mills has also been made worse by some other factors such asexcessive manpower, outdated machinery, and declining demand in both domesticand international markets. This has resulted in continuous losses and closure ofsome mills, resulting in the loss of jobs and production.
Thesocial impact of privatisation has been heavy. About 89,000 workers were laidoff during the 1995-97 period. Studies of the employment situation based on asurvey of 205 privatised enterprisesindicate that the workforces of the firms still in operation have been reducedby about 25%. When taking into account those privatised firms that closed,nearly 40% of the workers previously employed in the SOEs lost their jobs.Furthermore, there has been a tendency to replace permanent workers withtemporary workers, decreasing the job security of those who remain.
Ithas been very hard for the workers who have lost their jobs to find alternativeemployment. There are few jobs available and there is little retraining ofworkers to facilitate reemployment. Consequently, some workers have entered theinformal labour market doing odd jobs like rickshaw pulling and working as daylabourers.
Whilethe mills were in operation, the workers used to live reasonably good lives.Since they lost their jobs, they have faced adversities. Many of them have notbeen able to feed their children properly let alone send them to schools orprovide them with needed healthcare services. Some of the workers have sold theassets accumulated during their working lives, and some have sold the landinherited from their parents. In addition to losing their assets, laid-offworkers face rising indebtedness, as most of them are living on borrowed funds.
Asmentioned earlier, some of the privatised mills were sold again to new owners.They, too, were inefficient in running the mills and had to eventually closethem. The new owners did not even meet the legal severance payments to theworkers when the mills closed.
Womendo not work in the mills and hence the privatisation process did not directlyaffect them. But as part of a family that is undergoing economic hardships,women bear disproportionate amount of the burden. They will be the first to bewithdrawn from schools, for example, and they often have to sacrifice theirshare of food for other members of the family.
Thegovernment has tried to safeguard workers’ interests recently by offeringcompensation packages to the retrenched workers. Some of these compensationschemes are “golden handshakes” and “voluntary departure schemes”. Whilethe financial packages seem generous, they cannot be a good substitute forlife-long employment when jobs are scarce. The government is also arranging forretraining of workers.
Managementvacuums and socialist ideologies motivated nationalisation of enterprises inmanufacturing and commerce, including the jute manufacturing sector. The sectorsuffered from weak management and corruption from the beginning. Instead ofaddressing the real problems of the nationalised sector, the governmentundertook privatisation of the SOEs, including the jute mills. The privatisationprocess was itself non-transparent, and the private owners proved to be asinefficient and corrupt as their predecessors. Throughout the whole period thepolitically powerful were able to appropriate the assets of the mills and getricher. The ordinary labourers have suffered and their sufferings have increasedwith the closure of the mills. Government should undertake effective safety netprogrammes to safeguard labour interests.
MomtazUddin Ahmed. Privatisation in Bangladesh: Minimising Negative Social Effectsthrough Restructuring. Geneva: ILO, 2002.
WorldBank, Bangladesh: Implementing Structural Reform, Dhaka, 1993.
 R. Sobhan. “Disinvestment and Denationalisation Profiled Performance”, in The Bangladesh Journal of Political Economy, Vol. 6, No. 2, 1985.