If anyone examines the below optimum capacity utilization of any industry in the country, the blame could only go the successive governments and policy planners. The most common complaint is high cost of doing business in the country. Some of the industries currently victim of this contentious problem are cement, fertilizer, textiles and clothing, sugar and crude oil refining. The worst affected are consumers and the shareholders of these companies and suppliers of raw material to these industries. Imposition of high taxes on one hand raises cost of finished goods and on the other hand erodes dividend payment to the shareholders.
Let the story begin with cement industry which pays 17% sales tax and 5% federal excise duty. One completely fails to understand the logic behind imposition of tax on the commodity that constitute the largest percentage of cost of construction of domestic housing units, infrastructure projects, industrial and commercial buildings. On top of all, one-third of the profit earned by the listed cement manufacturing companies is snatched by the government under the disguise of corporate tax. Interestingly, in an attempt to boost export the government is willing to pay subsidy, but not willing to bring down cost of doing business by bringing down electricity and gas tariffs, sales tax and excise duty rates.
At present the government owes millions of rupees to the private sector in terms of rebates. One completely fails to understand the logic behind collection of those taxes that have to be refunded ultimately. On one hand the government has to have an elaborate tax collection regime and on the other hand corrupt elements in the FBR demand bribe for issuing rebate cheques for the money that belong to the exporters. Delays in receiving refund cheques also force the exporters to borrow money to overcome liquidity crunch, which further erodes their profitability.
Lately, operations of fertilizer manufacturers faced serious problems, when the inventory surpassed one million tons. The government approved export of 0.6 million tons urea and promised to pay subsidy to the manufacturers. There were significant delays in the settlement of subsidy claims. In the 2015-16 subsidy payment scheme, FBR was involved in the verification process which resulted in the payment being delayed by 6 to 8 months. However, the subsidy claims for 2016-17 are still pending due to 1) procedural delays, 2) non-involvement of FBR in the verification process, 3) unnecessary involvement of provinces and worst of all 4) lack of funds. A meeting was held in the Prime Minister Secretariat in July 2017 where it was agreed that 80% of 2016-2017 pending claims would be released immediately and remaining 20% would be released after third party audit. In this regards tender has been issued for the appointment of a Chartered Accountancy firm.
However, no significant payment has been released in on the pretext of lack of funds. According to industry sources, manufacturers exported urea at an average FOB price of US$ 225/ton. All costs, including port clearance, were borne by the exporters without any subsidy from the government.
It seems that policy makers have no knowledge of the ground realities because now import of urea is being considered to ensure adequate availability. National Fertilizer Marketing Company (NFML) has requested the government to approve import of half a million tons urea to meet the demand of farmers for the Rabi season. If this import is allowed it would not only erode foreign exchange but also hurt the manufacturers. According to sector experts, urea price has surged to US$ 290/ton due to seasonality factor as well as hike in international price of crude oil and add to the growing current account deficit.
Sugar mills have expressed fear of default on payment Rs189 billion to the growers due to the delay in government’s indecisiveness to allowing rebate of the export of sugar as the industry also faces liquidity crunch due to the supply glut. According to Chairman, Pakistan Sugar Mills Association at least nine sugar mills have gone bankrupt in the past couple of years, while four are at the verge of shutdown. The industry will start the new sugarcane crushing season with surplus of almost 3 million tons. Local sugar manufacturers just can’t compete in the global markets due to high cost of production. The government has been increasing sugarcane support price to please feudal lords but mills can’t pass on the increase to consumers already complaining of higher price of the commodity in the country. Both the farmers and millers are inefficient, farmers have been failing in improving yield and mills continue to produce sugar only. The mills also prefer to export molasses rather than producing other products from it, about 150 products can be produced from molasses.
Absurdity of government policy regarding unchecked import of furnace oil had attracted criticism in the past but business continued as usual. Regulators have suddenly woken up from deep sleep and are contemplating immediate ban on the import of furnace oil. It has also asked some of the oil-based power plants to lift some stocks for easing pressure on refineries. This shift in policy has comes after the country’s largest refinery – Byco Refinery – was compelled to closed down its major refining plant of 120,000 tons capacity and all other refineries running at sub-optimum capacity. On top of this, six shipload of furnace oil belonging to the largest oil supplier – PSO – lined up for arrival at Karachi. According to informed sources, an understanding has been reached when heads of all the refineries in the country and PSO had a meeting with secretary petroleum on this Wednesday. The secretary petroleum and secretary power are scheduled to hold another round of internal consultations before taking up the matter for a decision by prime minister.