Supplier Finance Handbook:
Technical guidance documents for factories:
After an inspection takes place and attention shifts to remediation, the Alliance works with factories to appropriately address safety violations. The intent of the Alliance remediation program is to substantially improve structural integrity, electrical and fire safety by guiding factories through the Corrective Action Plan (CAP) process to ensure credible and compliant upgrades. The Alliance also commits to providing compensation to workers that have been negatively impacted by factory closure, and to addressing financial obstacles to remediation such as access to loans and reductions in tariffs on remediation equipment.
Guiding Remediation with Corrective Action Plans
After receiving inspection reports, each factory enters the remediation phase. Some items can (and need to) be addressed immediately, but some items (such as sprinkler installation and structural retrofitting) can take over a year to complete. Remediation continues until the factory closes all non-compliances in its Corrective Action Plan (CAP), at which time the factory will undergo a final inspection.
It is important to note that all factories will need to continue undertaking measures to maintain safety after the final inspections have been completed, including improvement of lower-risk safety items over time, scheduled maintenance of equipment and installed systems, and on-going training of technical staff. The Alliance will work with members to ensure that the factories from which they source remain compliant with the Alliance Standard during the lifetime of the initiative.
Access to Finance
Remediation is estimated to cost approximately $250,000 to $350,000 per factory on average, and many factories will require external financing to make the necessary safety improvements. Due to prohibitive factors within such Bangladesh – such as high interest rates – many factory owners lacked access to affordable finance during the early stages of remediation. The Alliance is determined to improve access to finance for Alliance factories and has created several opportunities for financial support.
Member Commitments: Bilateral Loans
Individual Alliance members have already committed to providing a combined total of $100 million in financing to factories in their supply chains through direct loans, loan guarantees and other supplier financing.
International Finance Corporation (IFC): Access to Low-Cost Loans through Local Banks
The Alliance has partnered with the IFC to provide financing to local banks to increase lending to garment factories as they undertake remediation. This partnership with the IFC, the first of its kind, will provide a total of $50 million in low-cost, long-term financing. Five banks in Bangladesh will each receive $10 million from the IFC to make low-cost loans to factory owners undertaking safety repairs. This facility will offer factory owners lower interest rates and longer payback periods, dramatically lowering the risk of borrowing money. In addition to playing a catalyzing role in establishing this facility, the Alliance has directly contributed $250,000 to fund its operation.
USAID Development Credit Authority (DCA): Increasing SME Access
The Alliance worked with DCA to create a facility targeting smaller factories which may not be eligible for the IFC program. This facility will make $18 million in financing available to small- and medium-size, export-oriented factories. The partnership marks the first time that a DCA credit facility was established directly with an industry coalition. DCA will work with two local banks to extend credit to factories. Loans will only be available to factories that have already undergone an inspection and have a CAP in place. The Alliance contributes $1.5 million to the risk-sharing facility.
The net effect of both facilities will be to reduce the cost of credit for Bangladesh factories from 18 percent to less than 7 percent. As these financing facilities are launched, the Alliance team in Bangladesh has also been training the banks currently lending to garment factories on the remediation and corrective action plan process, while providing insights into the cost of addressing fire safety and building structural issues. The Alliance will provide technical support to the banks going forward, as they make additional loans to factory owners.
No worker in the ready-made garment sector in Bangladesh should have to put him- or herself at risk in order to earn a living. In line with our commitment in this regard, the Alliance works with factory owners to pay 50 percent of workers’ salaries for up to four months when workers are displaced due to closures for safety risks or remediation. Payments are disbursed through the Worker Displacement Fund. Since beginning our work, the Alliance has made payments to more than 6,000 displaced workers.