In Pakistan, the industrial sector appears to be highly regulated


Aug 09 - 15, 2004





Industry, services and agriculture are the mainstay of any economy, the growth and resilience of which would increase prosperity. The entrepreneurs can manage growth through competitive production only up to a limit if the government policies including regulatory environment are not fully supportive. This piece is an attempt to list the main factors that are inhibiting many industries from attaining cost competitiveness.

Competitiveness of industry would increase if the manufacturing costs as well as the costs associated with doing business locally are brought down. The manufacturing including financing costs are generally managed well by industry, provided utility services are regular and are not priced unreasonably high. Sometimes, manufacturing costs experience increases due to intervention of the authorities by way of change in duties or the delays caused by their actions or inactions on different matters concerning industry. Changes of import duties on raw materials or components, delay in refund of excise duty or sales tax in case of exports, etc create problems for industry and increase overall costs, which adversely affect competitiveness.

In Pakistan, the industrial sector appears to be highly regulated. Regulations, if excessive or implemented poorly or selectively, can stifle initiative and growth. The SECP regulates corporate sector whereas regulations of stock exchanges apply if the company is listed. Besides, industry has to deal with telephone, water, gas and power utilities as well as with income tax, sales tax and excise duty, all of which impose additional requirements. These authorities belong to the federal, provincial or the city governments. There is need to provide one-window facility to the industry at least at the level of federal, provincial, city government and the utilities. This would reduce cost and more importantly save time. The entrepreneurs would be able to give more attention to planning of production, financing, marketing and sale of their products.

Dealing with the bankers is also sometimes cumbersome. Now that the interest rates are low and the liquidity with the banks is high, the industrialists find it easy. However, it could be short-lived. There is need for streamlining the operations of different banks and DFIs, for which the State Bank of Pakistan has already taken a number of measures. However, more needs to be done in this regard.

Pakistan is gradually bringing its corporate regulations in line with the international standards/best practices. However, the regulatory hassles of compliance are adding considerable costs to the small and medium industries by way of management time and money. Mainly due to these hassles and the associated costs, private limited companies are not inclined to convert to public limited and the non-listed companies are shying away from listing. In fact, some of the listed companies have applied for delisting. However, some of the large companies are becoming larger through mergers or acquisitions in their effort to attain world-class status. These companies are increasing investment through flotation of term finance certificates and making their financial position more robust. But these are exceptions.

The clusters of industrial units suffer losses owing to poor infrastructure facilities. Many industrial estates give a poor look as the roads are full of potholes. Waste water with stinking smell can be seen overflowing sewers. Large industrial units, at least some of them, once disappointed by the water and power utilities started their own arrangements for supply of water or power or both. Lack of regular and reliable power supply had been a major issue in smooth production and industrial activity. But those who are not fortunate enough to have additional financial resources are still suffering and their production is interrupted every now and then. Most of these industrial units are involved in production of textiles, readymade garments, weaving, plastic, marble and onyx, pharmaceutical and engineering goods. These are mostly small and medium industries which do not posses enough financial resources to arrange power and water through installation of power generation plants and by sinking deep wells.



The Punjab government has reportedly initiated restoration of various industrial estates in the province in collaboration with the private sector through the Punjab Industrial Estates Development and Management Company. The restoration of the industrial infrastructure through public-private partnership has been launched from Multan with a sum of Rs100 million on experimental bases. The venture would be expanded to other areas after the successful completion of the Multan project. It is felt that the rehabilitation of infrastructure in different industrial estates has to be started simultaneously and completed before 1st of January 2005, the date for the end of quotas under WTO arrangements as in the absence of quality infrastructure all the industrial units would suffer badly.

The establishment of new textile and garment cities as well as Export Promotion Zones (EPZs) at different places including at Quetta are much talked about. However, it is felt by the existing industries including those located in EPZs at Karachi or other places that resolution of their problems are not getting due attention. Existing industrial areas are lacking infrastructure and other basic facilities. Winder Industrial Estate in Balochistan is without gas and the government is said to be taking steps to provide gas there and to the township in Lasbela district. It is imperative that these industrial estates are provided with proper infrastructure in the first instance and the prices of utilities are kept reasonable.

In some small industrial estates, the plots have reportedly been occupied illegally. The Nazim Karachi has reportedly asked to end encroachments. Some of the industrial undertakings in EPZs, unable to export due to various reasons, are not allowed to sell locally more than 20% of their output even after payment of duties as applicable. The withdrawal of special facilities originally allowed for industries located in Gadoon Amazai, NWFP led to the closure of many industrial units causing financial loss to the investors and their financiers and layoff of large number of workers. The government of NWFP has reportedly sought relief in the trade policy on exports of marble, granite, furniture and tobacco. The NWFP has also sought for industry reduction in the power tariff. Industries located in Nooriabad, Sindh were also adversely affected due change in incentives as well as the deterioration of law and order. The government claims that the law and order in the country are good. However, the importers and investors have their own perception of the conditions on ground. Odd and rare cases of kidnapping of a trader, a businessmen or an industrialist, shatter the confidence of the whole community. They lose peace of mind if they have to be looking over their shoulders all the time. Most of the foreigners be they investors, importers or tourists avoid visiting the country. This adversely affects local business/industry and many potential business opportunities are lost to other countries due. If there are apprehensions on the safe movement of goods or labour at any hour of the day or night, it limits flexibility to industry and thus adds to the cost of doing business.

The Chief Minister of Sindh, while briefing the Commerce Minister on trade policy, reportedly said that law and order is the first and foremost priority of his government because exports are the lifeline of the country and a peaceful environment is a must for economic activity. He said that the government would provide infrastructure to the old industrial estates and he would sit with the business community to know and solve their problems. This is very re-assuring. However, practical remedial steps actually taken with positive outcome would give more confidence to the industry.

There are few effluent treatment plants or facilities for disposal of solid/municipal waste.

It is not easy for many industries to individually tackle the disposal of industrial waste. Collective disposal plants are more appropriate but these entail large capital and operating costs. The Environmental Protection Agency, Sindh, has reportedly issued show-cause notices to different industries located in the SITE, Kotri, as their effluents, based on laboratory analysis of samples, were found exceeding the prescribed standards. The untreated effluents discharged directly into the Kotri Barrage Feeder (K B Feeder) pollute the water supplied to the people from Kotri to Karachi. The tanneries effluent plant in Korangi, Karachi has also been delayed due to various reasons. As such most industrial estates in the country generally depict poor environment. The government is urged to give more attention and financial support to this aspect for enabling industries to comply with environment requirements under WTO arrangements effective 2005.

In a few months, our industries shall be fully exposed to the quota free regime under WTO arrangements. It is said that there have not been enough of efforts to fully protect the local industry from the adverse effects of the free market economy. In the free market only those countries manage to survive that are competitive, maintain quality and ensure timely delivery of goods. But in our case, it might not be possible to meet all these challenges when there are frequent disruptions in power supply, which results in high cost of production, low quality and delay in meeting the shipment schedule. Frequent load-shedding, power breakdowns and low voltage cause damage to costly machinery and equipments. Low voltage causes high ampere power supply with potential for over heating of internal cables, sometimes resulting into fires, and also higher billing due to higher use of power. This is in addition to production losses and possible cancellation of export orders. There is hardly a day when the industry is not confronted with power crisis. Moreover, for export eligibility the industry has to be in full compliance of the environment and social requirements, the cost of which would reduce competitiveness.

The Commerce Minister on 15th July 2004 reportedly said that he was persuading the federal government to allocate substantial funds in the Federal Budget every year for rehabilitation of infrastructure in the industrial estates. He was responding to various proposals of the Sindh government for incorporating in the next trade policy. The Sindh Governor, briefing the Commerce Minister pointed out that infrastructure facilities in SITE were at the verge of collapse and the Sindh government could not alone rehabilitate it. The situation in the industrial estates in other provinces is likely not to be much different. The Commerce Minister reportedly pointed out that Pakistan and other countries were engaged in Doha Round of WTO in order to seek market access for their agricultural and industrial products. Regarding EXPO Pakistan 2005 it was said that it will be one stop event showcasing the premium products manufactured in Pakistan. Serving as a global market place for interaction, Expo aims to bring together buyers and sellers. This may help to some extent. However, to boost competitiveness of our industries, the government is urged to initiate and finance rehabilitation programme for industries on priority basis along with remedial measures on issues listed above.