HOW TO REDUCE INDUSTRIAL COST OF PRODUCTION!

SADAF AURANGZAIB
June 18 - 24, 2007

In an interview given to PAGE, the Vice Chairman SITE Association of Industries, M. Asif Siddiq pointed out various factors that are adding up to the industrial cost of production. He also reiterated various measures that could be taken to reduce the cost of production.

PAGE: What are the major factors that contribute towards the cost of production?

MAS: Manufacturing cost basically consist of three factors, utilities, labour and raw material. As far as utilities are concerned, the prices have substantially increased over the years. Prices were much lower three to four years back and the sudden increase in the prices has had a bitter affect on the industrial sector. The manufacturing sector is finding it difficult to absorb this acute hike in such a short span of time. Taking the example of gas, at one point in time, the government was giving a subsidy to encourage the industrialists to import gas generators and when we did so, the government has raised the gas prices and today it is at par with the diesel and petrol prices. These drastic measures on the part of government has substantially added to the cost of production especially for textile units because with the use of gas these units do not only produce power but also consume it for producing steam which is a basic raw material for any textile unit. Another cost which is a huge cost for us is the water cost. We are sitting in the SITE area which is the oldest and the biggest industrial area of Pakistan and still we are at the mercy of the water tankers. All the industries whether small or big are paying from an amount of 100,000 rupees to 150,0000 rupees monthly for getting these water tankers. This is an added cost which is a big burden too. Water is our right and the government should supply us with this basic necessity.

PAGE: What about labour costs?

MAS: Textile production has always shifted to countries where the labour is available at a cheap rate as it is not an industry which is very knowledge based. Labour prices have also increased on a fast pace in the last two to three years and basically the reason is that we have a high economic growth and now the local industries can absorb labour on much higher wage rates. As far as the textile industry is concerned, we can ill afford such a high increase.

PAGE: What is the immediate solution to the labour problem?

MAS: One of the ways to solve this problem is to bring the second gender into the market. Almost half of our working population in missing in Pakistan, however India and Bangladesh has an edge over us in this regard. By increasing the supply of the workers, I think we can control the cost of labour. The second way is to improve the productivity, with which help we can minimize the effect of an overall increase in the labour prices.

PAGE: As compared to the regional products, why are our export oriented products are not that competitive in the international market?

MAS: For exports, you need two things, one is the export surplus and the other is the competitive strength. In Pakistan, the biggest surplus capacity lies with textiles. The foremost competing industry is our textile industry but we are not that competitive in terms of our pricing because of the high cost of production. Today Pakistan is moving from a manufacturing base to a trading base country. Unfortunately the government policies are also not indicative of the fact that manufacturing has an important and critical position.

We have too many costs to look at, labour costs, land costs, utilities costs, water costs, indirect taxes, EOBI , social security and so on. All of these add up to the cost of production. Even the industry is rendered so uncompetitive that several industrial zones which are available in throw away prices are lying vacant as it is not easy to survive in such an environment.

PAGE: What about value addition production?

MAS: It's easier said than done. In order to create value added products, we need to have that sort of material and skilled labor. In Pakistan, we lack in both these categories.

PAGE: How has Bangladesh progressed in this development?

MAS: There are two reasons for that. First is that they have huge access to labour at very low costs. Secondly, for the last twenty years they have focused on textiles and garments. They have trained their labour according to their requirements. Another advantage that the Bangladesh has is the GSP (Generalized system of preferences) as it is an underdeveloped country. The Bangladesh government has also provided its full support to the sector in order to reduce their cost of production. For example, the steam and gas prices are of much cheaper rate in Bangladesh than ours.

PAGE: How has the Export Refinance Scheme helped exports?

MAS: If you compare our interest rates with regional countries, then at the moment either it is at par or a bit higher. This is a relief that the government has given and an incentive which greatly help us meet out productivity at a low processing cost.

PAGE: What is your view on the price policy structure?

MAS: I think we urgently need to make textile a zero rated sector and all the items that have been required by the textile sector should be zero rated. In this budget the government has given consideration by bringing few items into zero rated spheres but the net and the base should be expanded so that the textile can get its maximum.

PAGE: How successful do you think would this budget be in curtailing the cost of production and what is your point of view on import duty?

MAS: This budget is an inflationary budget. The government has introduced a 1% import surcharge across the board which will further enhance the cost of production for industrialists. The governor State Bank has said that they have rationalized the tariffs but this is something which come to light in near future. We still believe that with this additional surcharge, our cost of production would get higher. If government wants to curb the non-essential imports then there must be a monitoring body and government should impose additional surcharge on unnecessary items. We the industrialists are already paying 5% duty on our imports and the introduction of zero rate regime is not that significant as it hasn't encompassed all the items hence this 1% surcharge is not a sane decision on the part of government.

PAGE: Lastly, if you can list your suggestions to reduce the cost of production?

MAS: The biggest reduction could happen by reducing the gas prices. The government should not give cross subsidy to fertilizers to the cost or expense of industries. All sectors are essential for the growth of economy so one should not be given preference on others. Secondly, if in Karachi, we would be provided with water on a reasonable rate, then this will be a boon for the industrialists and it will greatly reduce their cost of production. Lastly, government can also modify the labour laws and in a way reduce the cost.