The zone, the collateral, and the origin finance sheet

The meeting where the zone was decided on the wrong numbers

Tamarask has an export processing zone forty minutes from Rhamsan. Semarra Apparel has been offered a unit in it. The case put to the board is a customs case: inside the zone there is no duty on imported inputs, no guarantee to post, no claim to file and no reconciliation to chase.

All of that is true. Here is what it is worth, using lesson 5's arithmetic and assuming Semarra has already put the export credit agency's counter-guarantee in place.

• Guarantee fees no longer paid: 11.71 orders a year at USD 272.04 — USD 3,184.52
• Bank limit released: the counter-guaranteed weight on four live guarantees, at USD 0.7929 of contribution per dollar of limit a year — USD 14,723.99
• Total benefit: USD 17,908.52 a year

And here is what the unit costs.

• Rent: USD 2.85 a square metre a month against USD 1.10 on the mainland, over 4,200 square metres — USD 88,200 a year
• Zone licence: USD 14,500 a year
• Zone declaration charge: USD 65 a declaration, 96 a year — USD 6,240
• Total cost: USD 108,940 a year

The zone loses by USD 91,031 a year on the case that was presented. It is not close. And the whole discussion in the board room was about whether the customs saving was really USD 17,908 or a bit more.

Run the break-even and you can see why it will stay a loss. Hold the rent and the counter-guarantee where they are. The zone then pays for itself when the duty Semarra has tied up per order reaches about USD 158,738, which is roughly 6.8 times its actual USD 23,212.80. A zone is a good answer for a business whose imported inputs dwarf Semarra's. It is not a good answer for a shirt factory buying USD 193,440 of cloth a time.

The number that was not in the paper

None of that is the important arithmetic, and it is not the reason the board should have said no.

Ardhen Bank's USD 900,000 limit rests on a first mortgage over the Rhamsan site, which Semarra owns. That is lesson 1's security row, and it is doing more work than anybody remembers. Inside the zone, Semarra would not own anything. It would hold a lease from the zone authority, over a building it did not build, and it could not transfer that lease without the authority's consent. Ardhen will not take security over it. Not because it is unwilling to lend to zone companies, but because a security right it cannot realise is not security.

Ardhen's own answer, when finally asked, was that the facility inside the zone would fall to what the receivable and the cash margin support on their own: USD 280,000.

Rerun lesson 1's four lines:

• Orders a year: 3.64, against 11.71 on the mainland
• Contribution a year: USD 222,007, against USD 713,593

USD 491,586 a year of contribution, lost to a decision that was minuted as a customs matter. It is twenty-seven times the customs benefit and five times the rent. It was not on the paper, because the paper was written by people who had correctly identified the subject as duty.

And the same zone, for a different factory, is free

Now suppose Semarra had already taken the Tamarask Export Guarantee Fund's pre-shipment guarantee from lesson 3. Ardhen's limit would then rest mostly on the state's undertaking rather than on the land. Ardhen's answer changes. Inside the zone the limit would be USD 2,100,000, down from USD 2,600,000, because only the unguaranteed residual has lost its collateral.

At that limit Semarra could draw 19.28 orders a year, and its sewing floor makes 15.0. The floor binds, not the bank. The move into the zone costs nothing in capacity at all.

Same zone, same rent, same duty, same order. The answer flips on a decision taken in a different department eighteen months earlier. That is the honest general rule of this whole course: the finance properties of an origin are not fixed facts about a country. They are the current state of a set of arrangements, and some of them you control.

Act as a trade finance analyst working for a garment exporter, not for a bank and not for a promotion agency. I want an ORIGIN FINANCE SHEET: the costs of getting paid that belong to the country rather than to the instrument, expressed per garment on one named order, so I can subtract them from a making-cost advantage. My order: product [PRODUCT], units [NUMBER], FOB [CURRENCY AND AMOUNT], buyer [BUYER AND MARKET], payment term [TERM AND FROM WHAT EVENT], imported inputs [CURRENCY AND AMOUNT], local conversion cost [AMOUNT], cash cycle from first outflow to money received [DAYS]. For each origin I will name, I will give you what I know and I want you to ask me for the rest rather than assume it: bank facility limit, advance percentage against order value, interest rate and day-count basis, arrangement fees, any blocked cash margin and what it earns, what the bank takes security over, whether a correspondent in my buyer's market will confirm a credit advised into that country and at what rate per quarter, any requirement to repatriate export proceeds and within how many days of the bill of lading, any share of proceeds that must be surrendered and at what rate against the rate I actually buy foreign currency at, the days and fill percentage of my last foreign currency allocations, every export incentive with its face percentage, and the duty rate on my imported inputs with the relief regime available. Then do the following. First, build one table with a row for each of these seven: cost of money over the cash cycle, blocked cash margin, confirmation, surrender of proceeds, allocation queue, incentives at their realised rather than face value, and the duty regime including any bank limit a guarantee occupies. Give every row per garment and on the order. Second, compute the facility limit as a TURNOVER CEILING: limit divided by advance percentage times order value, times 365 over the cash cycle in days, times order value. Third, state my contribution per dollar of bank limit per year and use it to price anything that occupies the limit. Fourth, set the total against the making-cost difference between the origins and tell me which is genuinely cheaper. Fifth, split the losing origin's column into rows that are properties of the country and rows I could change within a season, and name what I would have to do for each. Say clearly which figures you have assumed and which you need from me, and never fill a row with a plausible number.

The origin finance sheet

Here is the course on one page: the costs of getting paid that belong to the address rather than to the instrument, per garment, for the same order at two of the three factories.

The gap is USD 0.8755 a shirt, or USD 42,024 on this order. That is 68.9% of the margin the cost sheet promised.

Now set it against the reason Callowmere Group came to Tamarask in the first place. Semarra converts for USD 3.10 a shirt; Ovanden converts for USD 3.94. Tamarask is USD 0.84 a shirt cheaper to make in, and that advantage is real, durable and the entire basis on which the order was placed.

USD 0.84 of making advantage against USD 0.8755 of finance disadvantage. On the order as it was actually run, Tamarask was the more expensive origin by USD 0.0355 a shirt. Every person involved believed it was the cheaper one, because the comparison was made on the only document that gets compared.

What is fixed, and what is a fortnight's work

Split the Tamarask column into what Semarra can change and what it cannot.

Cannot, or not this year: confirmation at USD 0.2268, the surrender at USD 0.2903 and the allocation queue at USD 0.0965. Those are the country. They are worth knowing, worth quoting for and worth telling a buyer about, and they are not a project.

Can: the blocked cash margin and part of the cost of money, both released by the export guarantee in lesson 3. The incentive shortfall, removed by quoting gross and applying lesson 4's multiplier of 0.61. The duty regime's limit cost, cut from USD 0.1433 to USD 0.0332 by the counter-guarantee in lesson 5.

Do those and the column becomes:

Against Ovanden's USD 0.1981 the gap is now USD 0.6158, inside the USD 0.84 making advantage. Tamarask wins the order by USD 0.2242 a shirt, or USD 10,762 on it. The difference between winning and losing was four decisions, and none of them required a machine, a buyer or a better price.

Filling the sheet for an origin you do not know

Seven rows, and every one of them can be filled by asking somebody who already knows the answer.

1. Cost of money and advance rate — from a facility letter. Blend the bank's rate and your own funding rate over the cash cycle.
2. Facility limit as a turnover ceiling — lesson 1's four lines. This is the row that tells you whether the origin can carry the programme at all.
3. Repatriation and surrender — the window in days, the surrendered share, and the gap between the official rate and the rate you buy at. Your own bank's trade desk knows all three.
4. Allocation queue — your own fill record: days waited and share received.
5. Incentives, discounted — face value times your own realised multiplier, less the cost of claiming.
6. Duty regime — fees plus the bank limit the guarantee occupies, priced at your contribution per dollar of limit a year.
7. What you can pledge — and what happens to the limit if that changes.

What you should be able to do now

Fill the seven rows for your own factory and for the origin your buyer keeps mentioning. Then do the subtraction the cost sheet cannot do: making advantage, less finance disadvantage.

If the answer is negative, you now know by exactly how much and which rows it came from. And you know, from the second table above, which of those rows are the country and which are a fortnight of somebody's attention.