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Cash Security Deposit will undermine industrial output in Karachi

By Syed M. Aslam
Jul 17 - 23, 2000

Unmindful to the drastic decrease in the electricity consumption growth in the 1990s, the killing of the proverbial golden-egg-laying goose continues unabated. Electricity consumption which registered a healthy growth of 6.5 per cent in the first half of the '90s slowed down drastically to just 3 per cent in the second half due primarily to substantial increase in prices.

Increasing the power tariff on one pretext or the other has remained the favourite past time of policy makers in the last decade. This time around the increase in the power tariff has come from the imposition of 15 per cent sales tax on the power bills which are already subjected to surcharge, additional surcharge and income tax.

The heavy toll increased electricity prices have taken on the industrial sector is obvious from the fact that its percentage share in the total electricity consumption has fallen from 35.6 per cent in 1990-91 to 27.9 per cent in 1998-99. Industrial sector, which was the top consumer of electricity till 1991-92 (36.3 per cent), started losing its top position soon afterwards and today trails much behind the household consumption. According to official figures the share of household consumption increased to 47 per cent while that of the industrial sector slumped to 29.3 per cent during July last year and March this year. In simple language it means that the bulk of electricity today is consumed for non-productive household comfort at the cost of the productive industrial activities. Needless to say the cost to economy has been immense.

Talking to PAGE the past chairman of SITE Association, the biggest industrial area in the country housing thousands of units, Majyd Aziz welcomed the imposition of sales tax on electricity saying that like everything else it is imperative for the much-needed documentation of the economy. It's a good system and encourages the industries to get registered under the sales tax regime by assuring full adjustment of sales tax not only on electricity but at all other levels, he added.

However, Majyd said that the Karachi Electric Supply Corporation, the sole power generator and distributor of electricity in Karachi, has started sending not only the bill but also a cash security deposit equivalent to two-and-half-month of the bill to the industries. The cash-starved and financially-troubled KESC has obviously taken the measure to boost its revenue the ultimate sufferer of which will be the industrial sector and the national economy.

This poses many problems for the industries based in Karachi as it means that an industrial unit whose monthly electricity bill was Rs 1.2 million is asked to pay not only the bill but also a security deposit of Rs 3 million in cash. KESC's seemingly compassionate measure to allow the industrial owners pay the security deposit in installments over eighteen months helps nothing to lessen the difficulty of the industrialists to raise the huge cash security deposit nevertheless, Majyd added.

Secondly, the refusal of the KESC to make a name change of many of the industrial units also poses problems for the units which though registered under the sales tax regime under the new name could not benefit from the adjustment of the sales tax on the electricity. This is a catch 22 situation as sales tax adjustment on electricity is given to only those companies whose bill carry their names. Many companies whose KESC bills are still delivered under the old names have no legal recourse to claim the adjustment and the matter is not helped by KESC's refusal to change the name, he added.

Majyd said that though the industrial associations of Karachi have been pursuing the name-change issue since January the issue remains yet unresolved despite assurances given by the top government officials. The issue has become all the more important with the KESC's decision to ask the cash guarantee this month and demands immediate solution, he said.

Majyd said that the recent imbroglio is started by the vested interests to destroy Pakistan's industrial base aimed at increasing the country's dependence on imported and smuggled goods on the one hand and loans from the multi-lateral agencies on the other.

Talking to PAGE the chairman of Council of Karachi Industrial Associations, Farooq Bakaly, said that the 15 per cent sales tax on electricity imposed in January has rendered Pakistani exports incompetitive to its major rivals in the region including India, Bangladesh and Sri Lanka who offer a similar range of products in the international market.

The KESC has seen it fit to demand payment of cash security deposit, which is not implemented elsewhere in the country, from industries which are facing severe liquidity and cash crunch due to sluggish economy locally and global recession internationally could mean a death toll for the local industry, Farooq warned.

Sources informed PAGE that the security deposit scheme will help KESC raise Rs 35-40 billion in eighteen months, the period allowed to pay the amount in installments. What's the guarantee that this additional monthly revenue of over Rs 2 billion in cash would not be squandered by the cash-starved Corporation, the sources said. One thing is, however, certain; the unusual practise of demanding the security deposit in cash, instead of bank guarantee by other public utilities company such as Sui Southern, would not offer any benefit to the industrialists in return, the sources added.