GETTING READY FOR WTO ERA CHALLENGES
The business and industry, however, can improve weak areas over which they control and that too up to a limit
By Muhammad Bashir Chaudhry
May 26 - Jun 01, 2003
Pakistan is a member of the World Trade Organization (WTO), which is the international organization dealing with the rules of trade between nations. The goal of WTO is to help producers of goods and services, exporters, and importers conduct their business. All trade quotas would be abolished effective January 1, 2005. Many sectors of our economy particularly trade, agriculture and industry shall then be fully exposed to the globalization challenges. I have no doubt in my mind that the Pakistani people would effectively meet the competition on quality, price and delivery schedule basis, as they have the tenacity and ingenuity to successfully face all such challenges. However, for that they have to plan now and improve their weak areas to the international standards. Moreover, their efforts would only succeed if concurrently there were similar improvement actions by the government of Pakistan and its various agencies for creating conducive environment. Twenty months is not much of a time for the gigantic restructuring tasks ahead. The nation may have to burn the mid-night oil to make up for the easy life we had in the past over fifty years. Once the improved systems and physical infrastructures are in place, the whole nation would be experiencing the benefits that go much beyond the local and export trade of goods and services. Economic activity would accelerate with greater employment opportunities and prosperity of the people.
Major improvements are to be implemented by the entrepreneurs as well as the government. The entrepreneurs would largely be removing the weaknesses on the cost or quality of inputs/utilities, the machines/technology involved, capitalization structure, organisational set up, knowledge of WTO and other rules, technical/marketing tie ups with experts and making realization to the personnel on buyers' prescribed quality, cost and delivery schedule of the goods being produced. However, the government has to implement the main improvements in areas that are beyond the control or capacity of the entrepreneurs. The areas in the government domain include the overall business environment, law and order situation, security to investors, attitude of the government officials towards industry/business, suitability of the applicable laws/rules/regulations and their fair implementation, adequate physical infrastructure, utilities and their tariff structure, etc. These are more difficult areas to improve. Suggestions to improve some of the weak areas are discussed below.
Every country has natural comparative advantage in one or more agriculture produce, manufactured goods or services. The government should see that the entrepreneurs concentrate on manufacturing or marketing only such products and services for which the country has strong comparative advantage. This advantage might be enhanced through better technology, innovations, technical/marketing tie up with experts and training of the personnel. The research at the PCSIR and local universities/institutions may also be exploited for overcoming some of the production/process problems or for producing new products for a niche market. The entrepreneurs who are able to attract to Pakistan the special status manufacturing facilities under joint venture arrangements with foreign investors might also be supported. Policies might be developed to attract such projects to the country.
The entrepreneurs, in their effort to effectively compete internationally, should in a planned manner re-examine the cost, quality and quantity of all inputs including utilities. This is expected to result in considerable savings and thus enhance the competitive advantage of the company. They should also critically review the capitalization structure and organisational set up of the company for efficient operations. They should also train the company personnel in the WTO and other rules as well as the laws, rules and regulations of the government of Pakistan. Training of the production personnel particularly labour is called for making them aware of the buyers' prescribed quality, cost and delivery schedule of the goods being produced. These measures are expected to have positive impact on the morale of the employees. This should result in higher productivity, lower unit cost of manufacture, less rejection or wastage and better profits for the company.
Power and/or gas are used in manufacturing process for all products. Some products use more units of energy and therefore are more sensitive to the price paid per unit of energy. For such products electric power/gas may be provided by the utilities at rates that are reasonable and are not likely to make the products expensive compared to the competing products. Presently Wapda distribution companies provide electric power to most of the industries in Pakistan. The rest are served by the KESC or are using self-generation. Due to various reasons the tariff is high and there is little likelihood of the tariff coming down in the next year or so. Wapda as well as the distribution companies has weak financials and therefore there is no chance of lowering the tariffs unless all the issues are examined threadbare and the solutions implemented properly. It would provide some relief if the government, as has been done for agriculture, lowers the industry tariff. For a sustainable solution of tariff, the government might set up a special committee to review the power situation in the country and suggest ways and means to strengthen Wapda on the one hand and on the other to make recommendations for lowering the high tariff.
Some of the industries have already established captive power plants to meet their requirements. It has been reported in the press that such industries are apparently having more reliable power at a cost that is lower than that of Wapda or KESC. These industries feel, and rightly so, that reliable power is more important for producing quality products and the ability to meet the tight delivery schedules prescribed by the buyers. Existing utilities must improve their operations with lower tariffs if they wish to arrest the trend of self-generation by the industry. The industry may be able to enhance power reliability through installation of stand-by generators, financed by the local banks that have excessive liquidity these days.
Non Performing Loans (NPLs) have adversely affected the operations of many of the banks and financial institutions. Further, a number of industries have become sick and have either been closed or are limping along but without making any profits or debt servicing. A large number of experienced entrepreneurs are also included in the list of defaulters. It is apprehended that these NPLs would be a drag on the country's efforts to successfully meet the challenges in the WTO era. Therefore, the government might consider drastic measures to resolve the NPLs issues and thus bring the entrepreneurs as well as the manufacturing capacity in the mainstream for accelerated economic activities and employment generation. The CIRC has made a dent in the existing NPLs but it appears the full benefits originally envisaged by the government/the nationalized commercial banks through this exercise have yet to be realized.
The business and industry, however, can improve weak areas over which they control and that too up to a limit. There are a large number of weak areas the improvement of which is beyond their control or capacity and only the government can bring an improvement. These areas include the overall business environment, law and order situation, security to investors, attitude of the government officials towards industry/business, suitability of the applicable laws/rules/regulations and their fair implementation, adequate physical infrastructure and utilities with their tariff structure. Despite claims by the government authorities, the law and order situation is not ideal. The power looms operators in Lahore area, after suffering at the hands of armed robbers, had complained through press about the armed robberies and the forcibly taking out costly parts from the weaving machines. The Punjab government moved quickly and arrested the culprits and recovered the machine parts. This is an isolated case but it shows the government resolve. Similar actions by the law enforcement agencies in other areas can help build the confidence of the investors.
Recently the exporters and industrialists of Sialkot expressed their anxiety over the indifferent attitude of the government departments towards their problems. The president of the Sialkot Chamber of Commerce and Industry reportedly said that a one-window operation should be made applicable to revenue collection and various federal and provincial taxes. He said that the delay in the refund of duty and sales tax was a big problem affecting the exports. Another office bearer of the Chamber reportedly said that the government should create a business-friendly atmosphere and announce incentives for the small and medium industries. He further said that the rising POL prices had raised the cost of production, making it hard for the Pakistani exporters to compete with exporters of India, Thailand, Korea and China. The grievances of these and other exporters/industrialist of the country might be removed by the government as soon as possible.
It is not uncommon that the attitude of the government functionaries towards the industry and business people is harsh. Instead of helping them and guiding them to be in full compliance of the prescribed requirement, they are reminded of the possibilities of big fines and punishment when not in full compliance of the rules. The government has to streamline the workings of various departments that come into contact with the trade and industry. It is imperative that the government motivates civil servants properly so that the cost of doing business in Pakistan is not excessive. This cost may be financial or the time of the entrepreneurs or their senior teams who may be obliged to repeatedly work with these officials for sorting out refund or other matters. Income tax and sales tax matters are complex but the refund of duty or sales tax on exported goods is quite cumbersome. Large amounts are stuck for quite some time. This adversely affects the working capital situation and the businesses suffer substantially. The government is urged to let the business people concentrate on producing quality goods at competitive rates. The government has already initiated the reforms in the civil services. Reforms in the Central Board of Revenue are also on the cards. The reforms in the civil services coupled with increased emoluments and training of the government employees can make a big difference and therefore might be pursued by the government without further delays.
Trade and industry appreciate the importance of pollution control measure and in due course would be in full compliance of the prescribed standards. This however, might be planned for gradual implementation. In the meantime, the government functionaries might work with the industry and businesses in stages moving towards full compliance by controlling production process, by treating effluents and by installing the necessary equipment for the purpose. The government might consider providing or arranging concessional loans and grants for the installation of equipment for pollution control and effluent treatment.
The government has to take steps to provide good roads, ports, bridges, efficient railways, etc. with a view to make the transport of raw material, finished goods as well as produce from the agriculture fields easy and at a much lower cost than what is actually spent at present. The private-public airport projects such as the Sialkot Airport must be supported and its implementation expedited. Wastage of allocated funds and delays in the implementation of infrastructure projects has to be eliminated for accelerated economic activity.
Existing laws, rules and regulations in Pakistan are termed as somewhat harsh by the affected people and some of the government functionaries misuse their authority/discretion while implementing such rules. This decreases the confidence of the investors in the governance in Pakistan. The laws, rules and regulations have to be fair and equitable, made in a transparent manner and implemented fairly. Arbitrariness and discretion has to be minimized. Legal and judicial reforms through a loan from the Asian Development Bank might be implemented at an early date. The government might also associate the local trade and industry in all the forthcoming WTO negotiations. The government may also realize that the local businesses and industry are the mainstay of our economy and the local entrepreneurs might be accorded the place they deserve.
The entrepreneurs might enlist the support of the provincial government in redressing the problems or difficulties faced by them at the federal level. All the provincial governments are taking keen interest in the industrial development as is evident from some of the reports that recently appeared in the press:
a. The Punjab Chief Minister, while presiding over a meeting on the working of the Punjab Small Industries Corporation (PSIC), constituted a committee on 2nd May 2003 to recommend amount of industrial loans, reduction in markup rate and introduction of a scheme regarding government bank-sponsored industrial loans. The Chief Minister reportedly said that the role of the PSIC would be expanded and investors provided soft loans and technical assistance to restart stalled industrial activity in the province. He said facilities like power, water, gas, telephone, roads, etc., would be provided in the industrial estates so that investors did not face any problem. He directed the industries department and the PSIC to approve on merit and in a transparent manner, applications for loans within 30 days of their receipt. He further said that the markup and other charges on loans payable against disabled and people who died had already been waived.
b. The Sindh Chief Minister on 3rd May 2003 underscored the need for industrial progress to eliminate unemployment in the province and said that agro-based industries should be promoted to improve the agriculture sector and provide just prices to the growers for their crops. Speaking at a reception hosted for him by the Hyderabad Chamber of Commerce and Industries, he reportedly attached great importance to the rapid industrial progress so that smaller cities could be brought at par with the big cities. He said the government had introduced one window operation to provide facilities to the business community.
The federal government has been taking measures for making the country investor friendly. Therefore, the government is expected to take all steps that are required for making Pakistani industry and agriculture competitive internationally. However, there are possibilities that the government might be distracted in the implementation of these measures due to political or other considerations. The business and industry are urged to be vigilant and do not let any distractions delay the implementation by the government. Moreover, at times they might have to guide and support the government so that the required actions are actually implemented within the timeframe envisaged for the purpose.