Moving from low capacity utilization to massive expansion

Aug 22 - 28, 2005

The growth in large scale in the recent years has been driven by some sub-sectors like textiles, sugar, fertilizer, cement and automobiles. The growth in all the sectors has been driven by higher demand emancipating from higher per capita income and availability of credit on easy terms. Till about five years back almost all these sector were suffering from poor capacity utilization. But the recent surge in demand has forced the sponsors to add new capacities and attain higher value addition. Profit margins have also improved due to economies of scale and higher efficiency levels. Availability of credit on softer terms has encouraged the sponsors to add substantial capacity, keeping in view the surge in demand.

Textile sector has been the main focus and over the last three/four years more than 4 billion dollars have been invested for BMR and creation of new production facilities. New technologies are being deployed to attain higher efficiency and cost optimization. The huge investment has already started yielding results. The most conspicuous achievement in the quota free regime is substantial growth in export of textiles and clothing. This is contradictory to the general perception prevailing in the minds of many analysts. They were of the view that Pakistan will not be able to retain its share in the global textile markets after the complete phase-out of textile quota regime. However, it is necessary to keep in mind that in the quota free regime incidences of antidumping proceedings and imposition of countervailing duties will be common. Pakistan has a strong manufacturing base, but it lacks very badly the expertise to counter dumping allegations. Till today the country has to rely mainly on the foreign attorneys, who charge fabulous fee.

Sugar industry is agro-based and mostly located in the rural areas. It is the driving engine of rural economy and also the user of second largest cash crop, sugarcane. Despite having such an important role to play it has been a victim of gross negligence by the government. Failure to increase sugarcane production has kept average capacity utilization at around 50%, which is also responsible for higher cost of production and at times forces the country to import sugar to bridge the supply gap. Many experts are of the opinion that sugarcane production in the country can be doubled without increasing area under sugarcane cultivation. However, to achieve this, the government has to stop fixing sugarcane support price and let the market forces play their role.

Till recently the country was self-sufficient in urea production. However, after the announcement of Fertilizer Policy in 2001 no grassroots plant has been added and the country has once again become a net importer of urea, an added burden to the foreign exchange reserves. Pakistan is already deficient in the production of DAP and its quantum is increasing with the passage of time. Almost all the urea plants are working above designed capacity, because of debottlenecking. Prior to the announcement of Fertilizer Policy, the consensus was that the country had to add capacity to produce additional 2 million tons urea per annum to maintain self sufficiency. However, achieving this remains a far cry. Lately, a committee constituted to come up with suggestions to remove the constraints did not allow addition of new capacities. However, the committee has already taken more than desired time. The only impediment is unwillingness of the government to guarantee gas (feedstock) prices. Unless the price of feedstock is guaranteed for 10 years, at least, the dream of establishment of new urea plants could not be materialized.

Automobile sector has registered phenomenal growth over the last couple of years. Till about three years around 50,000 cars were being produced annually. The production exceeded to 1,25,000 units during last financial year. This would have not been possible without component manufacturers meeting the enhanced demand for parts. Lately, parts manufacturers invested a huge amount for capacity expansion. However, the fear regarding discontinuation of deletion program and permission to allow completely built units (CBUs) poses a major threat. Some of the analysts are of the view that neither the hike in interest rates nor the permission to import CBUs of higher capacity engines is a potential threat to the local assemblers, simply because of growing demand for around 1,000 cc vehicles.

Another sector experiencing substantial increase in installed capacity is cement. The ongoing rift between the government and the cement manufacturers, regarding prices of cement, poses a threat to cement export. It seems that the government wants the manufacturers to discontinue export shipments due to prevailing shortage in the domestic market. It may be true that there is a looming shortage of cement, but embargo on export could be a bad omen. If the government believes that local manufacturers are selling cement at inflated prices, it should allow import of cement rather than stopping export shipments.

The above mentioned sectors are just a few. There are other sectors, where investment can yield astonishing results. Each sector has to be put under the microscope to determine its true potential and the weaknesses. The government wishes to follow export-led growth. However, the objective cannot be achieved without linking joint venture agreements with buyback agreements. Pakistan has not been able to attract foreign investment in textiles and clothing sector - its strongest hold. It is only because the government has not been able to remove the negative perception about the country. The realty is far better than the perception; why not put the things in their true perspective?