PLASTIC INDUSTRY STRUGGLING FOR SURVIVAL
Demands facility of duty-free import of raw material to compete in the international markets
By Amanullah Bashar
Oct 19 - 25, 1998
Plastic industry, which has assumed the role of the largest manufacturing sector in the developed world, is struggling for its survival in Pakistan despite its significant contribution of Rs8 billion to the revenue and job opportunities to more than 0.2 million people throughout the country.
Plastic, which has become an integral part of the modern living, with an estimated consumption of 140kg per person per annum in the developed world, against the per capita consumption of 1.4 kg in Pakistan is reflecting how the country has been left behind of the pace of growth and how lethargic is the economy here towards value-addition activities in this country.
Emotionally charged, Zakarya Usman, former vice president of Karachi Chamber of Commerce and Industry (KCCI) and a prominent industrialist in the plastic sector, remarked, "The economy in Pakistan is surviving on the basis of prayers." Those who are at the helm of affairs consume their time and energy in talking about a good crop of cotton and rice and every year they offer prayers for timely rains for a bumper crop. Other areas of non-traditional items, where real value-addition is possible through human resource development, have been left neglected like wildlife.
It is interesting to note that Malaysia, a giant in plastic industry, had organized an international plastic fair in 1996. The organizers of the exhibition had arranged a display of different models of plastic machinery and equipment in order to narrate the history of growth of the plastic industry the world over. The sequence of the plastic machinery development was, however, incomplete without hand-molding machines which have become outmoded elsewhere in the world and the organizers were facing it hard to find one for display in the exhibition. Pakistan was, however, the country from where that hand-molding machine was especially flown to Malaysia as a large number of small plastic units are still using that hand-molding machines.
Almost entire raw material, i.e. 0.3 million tonnes, used in the plastic industry in Pakistan, is imported at a cost of $200 million dollars against a negligible export of $20 million and that is, too, shrinking fast owing to in competitive cost of production.
The export figure of $20 million attained by the local plastic industry not because of quality products but only for the items like jugs, mugs and can etc which are no more produced elsewhere in the developed world and are imported from Pakistan.
As against five Hydrocracker plants operating in our neighbouring India, Pakistan's petrochemical industry has not been successful to set up one during the past fifty years. It is an irony of the fate that despite availability of indigenous Neptha, required for establishing a Neptha cracker plant, which produces a variety of different raw materials like plastic, polypropylene, and synthetic fibre, the state run petroleum sector has failed to develop a hydrocracker plant.
The State Petroleum refining and Petrochemical Corporation (PERAC) had entered into a joint venture agreement in 1992 with a Sharjah-based Crescent Refining and Marketing Company (CRMC) for setting up a hydrocracker plant adjacent to National Refinery. A 256 acre piece of land adjoining to the National Refinery, was allocated in 1983 and World Bank loan of $3.2 million (Engineering Designed System) was arranged in 1984-85. CRMC was involved in the project during 1989 following the federal government's policy to associate the private sector in the petroleum business. The project is, however, pending since then on account of non-serious partners. It also gives way to the doubts that the vested interests are against the establishment of a hydrocracker plant in Pakistan as local production of various petrochemical based raw material would hurt their interest. Currently around $500 million import bill is a burden on the economy despite the fact that not only we can get rid of this import bill but can also export the surplus if the petroleum sector succeeds in setting up a hydrocracker project within the country.
The Sharjah-based partners have miserably failed in meeting the financial close of the project, estimated at a cost of $350million at that time. The ministry of petroleum favoured them out of the way by allowing them several extensions for meeting the financial close but the things are at status quo even today.
During these six years the cost of project has been escalated from $350 million to $650 million. While the hydrocracker project is pending since last six years on one hand while a number of inquiries and proposals are in the pipeline from various multinational companies which are willing to go into joint venture agreement for the hydrocracker project.
According to Zafar Saeed, President, Pakistan Plastic Manufacturers Association (PPMA), currently around 0.4 million tonnes of Neptha, produced within the country, is being exported at a throw away price.
Plastic, which has assumed such a significant place in every sphere of the developed economies that it helped the Asian countries, except Indonesia, to bail them out of the recent economic crisis, claimed Zafar Saeed.
Not only the household goods, such as electronic items, TV. radio and other equipment, the plastic has overwhelmingly taken over the automobile industry and other auto parts, oil industry, machinery parts, medical and surgical items, syringes, and above all the leading role in the packaging industry the world over. Plastic has visibly replaced most of the metals and is being used even in the furniture industry and construction sector and packaging industry.
Pakistan is manufacturing household goods, like hot pots, water coolers and some parts for the radio and TV industry, batteries for motor vehicles and containers for the oil industry. The industry has progressed gradually despite difficulties and the Pakistani plastic products are comparable to any other products in the world in design, durability and quality.
In spite of all efforts, the industry is still in its initial stages in Pakistan. It has a long way to go, as a large number of sectors where plastic has a prominent role to play throughout the world, still remains to be explored in Pakistan.
Commenting on the causes of industry's progress at snail's pace, Zafar said, it is largely due to the lack of support on the part of government. The industry has always been receiving a step-motherly treatment from the concerned quarters. Duties on the import of raw materials for the plastic industry have always been at the maximum level.
On the export front, there is a tremendous scope for exporting locally manufactured plastic products to various markets in the Middle East, Africa and even USA, to fetch millions of dollars. Pakistani plastic products have already been introduced and accepted in these markets.
Many countries like Taiwan, Hong Kong, Thailand, Indonesia, Korea and neighbouring India are exporting plastic products worth millions of dollars to the above mentioned markets. Export of plastic products forms a major part of export earning of these countries.
Zafar said. "We have the same machines, same raw materials and use the same type moulds as the above exporting countries. We have cheap skilled labour available in our country. We have an added advantage of proximity to the major markets i.e Middle East and can secure favourable freight rates There is no reason why we cannot export our products."
However, this could only be possible when we are in a position to offer competitive or comparable prices against the established countries like Korea, Taiwan, Hong Kong, India, Indonesia etc.
However, he mentioned, "We are unable to offer competitive prices because of the unfavourable duty drawback rates wherein we are not even being refunded the actual amounts of customs duties and taxes, paid by us at import stage. We are paid only a part of the same and
That also with great difficulties and after a long time.
We have been made incompetitive at every stage. At home front where our raw materials are used in the exportable products become over 30 per cent more expensive as compared to the same materials used by our competitors in other countries. How can we offer competitive prices in the international market and how are we expected to claim our share in these markets."
"Our simple demand is that we want to come at a level of our competitors. For this, we are not asking for any compensation or any back door favours, all we are demanding is that the government should refund the amount of actual duties and taxes paid by us at the import stage on the raw materials, used in the production of goods exported. In this way we will be getting our raw material at C&F cost same as our competitors and we will be able to match their production costs with them. Once we are in a position to do that there is no reason why we will not be able to sell our products in the international market and claim our fair share in exports and earn valuable much needed foreign exchange for the country."
"In spite of above difficulties our member industries have taken the initiative on their own to introduce our plastic products in the international markets and have been successful in doing so in many markets like Dubai, Saudi Arabia, Bahrain, Doha, Sudan, Somalia, North Yemen, South Yemen and the USA, where the products were previously accepted being comparable in quality design features and strength but since the prices, offered to them were not competitive, massive sale was not possible.
Time and again these businessmen have got firm inquiries and big orders, subject to competitive prices, the industry had to refuse owing to its setback of incompetitive cost of production, Zafar observed.
The PPMA has also undertaken various efforts to promote exports and has participated in many fairs and exhibitions like SAARC Fair, India, Jeddah single country exhibition, Nairobi exhibition and others and at all these places. Consequently the industry had quite a few serious inquiries from buyers who could have bought large quantities but for the price factor.
Pakistan's water coolers have been quite popular in the Saudi Arabia and the UAE markets and also in the USA. The Duty Drawback on these was 28.8 per cent of FOB. All of a sudden due to unknown reasons and without consulting the association or the EPB, the CBR reduced the rate to 12.5 per cent. It naturally created a big gap of margin and the export of water coolers virtually came to a halt. A word not be out of place to mention here that these are highly value-added non-traditional items of exports.
Such actions discouraged exports. How can a manufacturer or exporter make long term commitments for obtaining bulk orders when he doesn't know what is going to happen tomorrow. "Our smart bureaucracy is going to reduce the duty drawback by half or even two thirds and the exporter could find himself in a fix one fine morning. In a situation like this, the exporter generally avoids taking a risk with such an unpredictable policies and policy makers. Why not sell locally where the margins are confirmed and there is no risk, no running around in the customs and appeasing them for clearance of duty drawback claims.
What actually required, is a long term policy supported by legal cover for encouraging exports, simple procedures for duty drawbacks or the best possible alternate NO DUTY NO DRAWBACK (NDND) which would solve most of the problems of the exporters and save them from a lot of undue harassment and problems.
Zakarya Usman, who is also the former president of PPMA said that a large number of traders and industrialists are involved in the stuck-up loans of the banking system which according to an estimate have gone beyond Rs.357 billion, however, no member of the plastic industry involved in the bad loans racket. The entire plastic industry units are working on the self-finance basis. Those industries which are heavily involved in default have been given numerous incentives.
Zakarya suggested that instead of involving the industry in to refunds, there should be a system that the raw material imported by the plastic industry be registered after weighing at the customs stage and the same weight be deducted of the duty at the export stage. Zakarya, however, felt that now the government is serious towards exports and the new trade policy for 1998-99 is a step in the right direction, the 'No Duty No Drawback' concept is also taking shape for small exporters.
The plastic industry is ready to participate in the efforts of the present government and the EPB to increase the exports of Pakistan and earn the much needed foreign exchange to tide over the POST SANCTIONS difficulties.
The PPMA chief, while spelling out the export potential of the plastic industry, pointed out that the procedure should be simplified for export of plastic goods from Pakistan, as a large majority of the industrialists in plastic manufacturing, generally avoid to involve in the cumbersome procedure of duty rebate/refund etc.
As far as the government policies are concerned, there is of course a firm commitment of the government that the refund claims would be settled within a certain period of time exceeding not more than 30 days, practically speaking the policy is never implemented in letter and spirit and the industrialists, instead of concentrating on their business have to run from pillar to post to get back their refunds in the face of limited cash flows.
Plastic industry, which has ample scope for enhancing exports is facing a tough competition in the international market specially with neighboring countries where exports of plastic are exempt from. Income Tax, Labour Levies etc., etc., in addition to Low Wages Rates. High Rate of Duty Drawback with fast refund procedures, Duty-Free Import of machineries and spares and other incentives.
In order to boost exports, the PPMA has recommended three measures which need immediate attention of the government.
Issuance of SRO for import of duty-free plastic raw material against actual export of plastic goods. (SRO already prepared by CBR and agreed upon by SPMA awaiting issuance.
Import of duty-free raw material.
Inclusion of plastic goods in SRO 818/1I)/89 dated 09.08.1989.
A formula was evolved by which the exporters would have been allowed duty-free raw materials equivalent to the quantity exported by them duly certified by the customs authorities. Accordingly, an SRO was drafted and forwarded to the PPMA by Masud A. Dahir, Additional Secretary, Ministry of Commerce dated 08.02.1994.
The above draft SRO was duly agreed by the PPMA and the acceptance conveyed in writing to the ministry. Thereafter another meeting was held at Export Promotion Bureau with Abdul Karim Ansari, Joint Secretary, Ministry of Commerce and Sajjad Akhtar Additional Secretary on November 02,1994 wherein again the acceptance to the draft SRO was conveyed followed by letter dated November 03, 1994 However, even after the passage of a long time the industry is still waiting for implementation of the said SRO in its spirit.
Responding to the government efforts for promotion of exports, PPMA had also agreed to the EPB proposal for active participation in the international fairs.
However, PPMA was of the view that forming a trade delegation without being in a position to quote competitive prices to our international buyers may not produce any tangible results unless the industry is provided a duty-free raw material cushion on its back, otherwise it may be a futile exercise and waste of country's precious foreign exchange spent on the joy rides for participating in the international fairs.
PPMA expressed the hope that EPB will take up the matter with the Ministry of Commerce and something concrete should be done in this regard as a lot of precious time has already been lost.
PPMA regretted that the finished goods and raw material (primary forms) have once again been brought into the 35 per cent bracket thus negating the cascading duty structure announced by the Federal Government. This is an anomaly which needs to be redressed immediately.
Imposition of Excise Duty on plastic industry is being considered as a great nuisance by the plastic manufacturers as they feel that this duty is imposed to discourage the use of any product elsewhere in the world but in this country. It is contradictory to the government policies to promote exports. The PPMA demanded that the Excise Duty be eliminated forthwith from plastic industry.
In order to enhance exports a concrete Export Policy on the "PASS BOOK" procedure be given to the plastic manufacturing units in which duty-free material be allowed and adjustable against exports within one year.
Due to continuous negligence on the part of CBR and imposing of the highest rate of import duty on their raw material plus excise duty on manufacturing stage, is killing the export potential of this industry.
The present status of plastic industry in Pakistan comprising of different sectors with number of units and their exportable products.
Describing the current status of 5000-6000 units of plastic industry in Pakistan which are 100 per cent self-financed, Zafar said that in the Budget 1995-96, 5 per cent and 10 per cent CED was imposed on plastic industry and cassettes manufacturing industry at manufacturing stage in lieu of 5 per cent Sales Tax by reducing the Sales Tax from 15 per cent to 10 per cent. This step was taken to provide protection to local industry against those industries which were running in Sales Tax exempted areas.
This step , however, caused severe hardship to local industry without any substantial addition in government revenues because of the following reasons:
As CED and Sales Tax are collected by two different collectorates, the manufacturers are facing undue problems and hardship in dealing these departments for a single sort of taxation which are contradictory to each another.
Various units of this sector were closed during that period due to higher cost of production i.e by introduction of 5 per cent to 10 per cent CED
The overall impact of closure of various units was quite evident from the fact that the revenue of Rs. 8 billion contributed towards national exchequer suffered a severe blow.
Pakistan is lucky to have skilled and cheap labour. Another positive point of the industry is that it is close to the export markets. The industry has potential to enjoy mass production and meet the export commitments if some certain incentive and relaxations are offered to it.
The industry is optimistic that as soon as the plastic industry is recognized as an export oriented industry and the valid support is provided, there would be marked increase in the export of plastic goods and gradually the industry will prove to be a major foreign exchange earning industry in the non-traditional sector.