NATIONAL INDUSTRIAL POLICY
The new challenges
By Muhammad Bashir Chaudhry
June 07 - 13, 2004
The Federal Minister for Industries and Production has, according to press reports, asked the Ministry to formulate a National Industrial Policy (NIP) covering all the potential sectors for foreign and domestic investment within two months. He constituted the Committee on 7th May at Islamabad while presiding over a meeting attended by the Secretary to the Ministry, the chairmen/heads of all the public sector corporations/organizations and other senior officials. Talking to newsmen after the meeting, the Minister said that the Committee headed by the Secretary Ministry of Industries and Production would comprise all the stakeholders. In view of the importance of the Small and Medium Enterprises (SMEs), an SME convention would also be held in all the four provinces and the President is likely to inaugurate one of them. At this occasion, he said that the government would not compromise on quality of locally manufactured vehicles and in this regard the Engineering Development Board (EDB) has been asked to submit its report by May 31, 2004.
At one time industrial policy mainly comprised Industrial Investment Schedule, List of Priority Industries, principles, incentives for locating industries in under-developed areas, guidelines, etc. The Schedule specified investment in monetary terms by the private and the public sectors to manufacturing units — Medium and Large; and Small during the Five Year plan period. List of Priority Industries divided the industries into different categories such as Industries that were open to all; Industries that could only be established with specific government permission; and Industries which were not allowed to the private sector. The NIP, however, is expected to be different in many respects and also more complex due to the factors and challenges that are discussed below.
The NIP is being revised after quite a while. In the meantime the ground realities have considerably changed. Things are expected to change further from January 1, 2005 when all quotas would come to an end under WTO arrangements. It is good that because of the NIP exercise many areas and challenges would come to the attention of the policy makers. However, the exercise is considered unlikely to be completed soon due to the discussion and spadework needed on industrialization in the light of local and international factors/challenges, some of which go beyond the purview of the Ministry of Industries and Production (MI&P) to a number of other Ministries. This paper is an attempt to list such challenges, for consideration by the Committee as well as other stakeholders in the private sector.
The Federal Minister, while talking to the journalists that day also said that the EDB has been asked to consider the deletion policy for new investors with some incentives as China, Russia and France have expressed their interest in auto sectors. In due course more such interest from prospective investors would become evident. However, all these matters should be examined in the best interest of the country. It has also been said that the EDB would issue its study report on investment, tariff, WTO regime for engineering, surgical and auto sector by end June 2004. It is suggested that the EDB report might also be shared with the general public by placing it on the website of MI&P. Other reports on textile, engineering and chemicals — the sectors preferred for future — might also be released on the Ministry's web page. Wider participation might help generate more ideas for preparation of an improved NIP. Investment in traditional industries such as cotton spinning, sugar and cement might not be restricted.
It is imperative that our industry has close linkage with our agriculture and mining. Agro-based as well as mineral-based based are expected to be preferred. Instead of exporting surplus cotton to earn foreign exchange we should be exporting value-added fabrics. This would promise us many times more foreign earnings as well as creating of more job opportunities in the country. We can meet many of our chemical or other requirements from minerals found in the country, waiting for proper exploitation. As mining is not developed and the industries based on local raw mineral would face teething problems, some sort of incentives might be required to pull them through the initial years. Cattle-farming might be an attractive sector for promotion in the NIP.
Pakistan has since embarked on privatisation of public sector enterprises (PSEs). Privatisation is picking up speed and the process is expected to continue. At the same time, some of the PSEs are planning for expansion or for the setting up of the new plants. Policy decisions for addition in capacity in different sectors would help clarify things for possible implementation in a systematic manner. At present almost all sectors once reserved for the PSEs are open to the private sector. It is expected that investment by PSEs will continue in sensitive industries or in industries where private sector is shy or return is low. It is also expected that public-private-partnership will see more activity in future.
Income Tax Holiday and concessions in import duties due to plant location in under-developed areas was an important element of the industrial policy in the past. This policy did attract industries to the underdeveloped areas away from the market but in many cases it also exposed the industries to extra transportation costs of raw material as well as the finished goods. Over the long-term such costs adversely affected profitability of such industries. All the same, there is justification for balanced development of the under-developed areas. Appropriate measure might have to be provided to develop these areas to provide more employment opportunities to the people. Cottage, non-traditional and SMEs have the potential to bring more economic activities to these areas. The areas might attract more industries if proper roads and other infrastructure is there. The government might take urgent steps for improving infrastructure in these areas.
At one time, industrial units in certain industrial estates were allowed lower rates of taxes or utilities were provided to them at lower costs. This attracted a large number of industries. However, once a large number of industries became operational, the government withdrew these incentives. The investors as well as the creditor institutions suffered badly. The social-economic objectives envisaged originally for the people of the areas were also not fully realized. Sudden changes in such policies breed industrial sickness. Smuggling of goods adversely affects the local industry and should be effectively discouraged.
The local investors feel sort of left out, due to government's emphasis in conducting investment conferences for attracting foreign investors. The government might take measures to remove such an impression. The foreign investors would normally not believe in the government policies unless they see the local investors making big investment. The government is urged to provide level playing field for large industries to all investors while the SMEs might be reserved exclusively for local investors.
The government allows guaranteed return on investment in petroleum refineries or some specified industries. Also, the government guarantees maintaining of import duties at agreed minimum level for a specified period say ten years to certain chemical industries owned particularly by the multinational companies. These measures introduce unfair advantage to certain investors. An account of all such cases might be taken as part of the NIP exercise. For future transparent and fair procedures might be introduced.
Many industrial estates, once outside the populated areas, due to growth in cities, are now in the midst of residential areas. Karachi is a typical example. There are pros and cons of the prevailing situation. It is considered proper that the industrial units that contribute more pollution or create traffic congestion are relocated away from the populated areas in a planned manner. Other industries might be asked to control pollution by different means including installation of effluent treatment plants. Under WTO arrangements, all exporting industries will be required to be in environment and social compliance. The government might have to apply the principle "the pollutant pays".
Labour laws and practices might be brought by the government in line with our commitments to the International Labour Organization (ILO). As part of social compliance, the labour might be provided congenial work atmosphere, living accommodation, schools for their children and health facilities for their families. All future special zones and industrial estates must have such facilities for the labour. Motivated labour can make the industries prosper.
The NIP should also have within its scope a built-in mechanism for the rehabilitation of sick or closed industries, which number thousands at present. There are apprehensions that after January 1, 2005 many local industries might not survive the competition if these industries are not supported now and guided to prepare for the international competition in the coming days. Provision of conducive environment by the government would help.
In Pakistan, many SMEs are handicapped as they are obliged to comply with tax and return-filing requirements reserved for large industries. These are big obstacles and the Committee is urged to find a satisfactory solution to them. Promotion of the SMEs might be dealt in a separate section in the NIP, in consultation with SMEDA and other stakeholders.
The Export Processing Zones (EPZs) have been set up at Karachi and a few other places. Special Economic Zones, Textile Cities, Textile Engineering Parks, Engineering Parks, etc are being announced for establishment. It is expected that the manufacturing units set up in all these areas would enjoy certain incentives that are presently not available to the industrial units located in regular industrial estates or in the rural areas. The industrial units in the special areas would largely be export-oriented but a major part of their output would also be disposed in the local markets. The NIP must take account of all these developments and the Committee might provide level playing field to all.
Many new manufacturing/production activities are presently being undertaken; the plants enjoy the status of industry but are not in the purview of the MI&P. Power generation plants in the private sector fall in this category and are being looked after by the Ministry of Water and Power (MW&P). Housing construction and hotels might be other example. Possibly there are many other industrial activities that are monitored by Ministries such as Ministry of Petroleum and Natural Resources (MP&NR) or the Ministry of Tourism. The Textile Ministry at the federal and the provincial level is also about to be established. This might oblige the MI&P to share the load with the new ministry. The Board of Investment (BoI) is providing one-window facility to investors. It is evident that the industrial/manufacturing activities and investments are these days handled by a number of ministries in addition to MI&P. It is suggested that clear-cut guidelines might be issued for handling of such industries by different ministries.
These days all provincial governments are vying for attracting industries to their respective areas. Balochistan is conducting an international investment conference. It is understood that each province would encourage industries that have comparative advantage for location in particular areas. The provincial governments are urged to provide and improve physical infrastructure such as roads and bridges to reduce the transportation time and costs. Similarly, they are urged to liaise with the utility companies to provide power, gas telecommunication services, etc to the industries located in the area. Law & order and security of life and property are important for attracting investment and for successful operation of the plants. The provincial governments should ensure full security. These measures are important for creating conducive environment for industry to flourish.
The provincial authorities are urged to reassure the investors by resolving the problems in a timely manner and thus reduce their cost of doing business. It is suggested that Sub-committees might be constituted in each province to study the existing situation including problems/irritants and to make recommendations for inclusion in the NIP. The aim should be the reduction in the number of departments coming into contact with the industry/investors at approval, construction and operation stages. Each provincial government might release on its website the facilities being extended to the industries. Further, special reports prepared by the experts or the special committees might also be released on the website for general information. This should bring more transparency, better governance and create atmosphere of goodwill and credibility.
The MI&P might be concerned with the resolution of genuine operational, financial or regulatory problems faced by the industry, with other ministries and Departments. The MI&P and other Ministries as well as the provincial governments, in their respective areas, are urged to act more like facilitators and less like regulators, as otherwise Pakistani industry might not become competitive internationally after all quotas are abolished under WTO arrangements effective January 1, 2005. The working of the Ministries/Departments has to be streamlined for cutting delays/red-tape and thus reducing cost of doing business. There should be one-window facilities at the federal and provincial levels so that the industrialists deal with a small number of authorities and have more time to improve operations and market their products.