CARS, PETROL PRICES AND CONGESTION

Road infrastructure need to be redesigned

By AMANULLAH BASHAR
Nov 14 - 20, 2005

Exceptional growth in vehicular population on the back of 33 percent increase in domestic production of automobiles coupled with a mad rush for imports of new and used cars is posing a serious threat to the local infrastructure which was not designed to accommodate such a huge influx in the major cities of the country.

Despite a rapid growth in the number of cars plying on roads in major cities like Karachi, Lahore, Islamabad, Peshawar and Quetta the gap between demand and supply continues to widen amazingly, showing ample scope for enhancing production capacity by the car manufacturers in Pakistan.

Though the robust growth in the auto sector is a strong macroeconomic indicator and will certainly stabilise the engineering industry in Pakistan, yet the unplanned growth in automobiles is entailing serious health and social problems in the urban areas of the country.

Consequently, the road occupancy is being sharply reduced which is resulting in traffic congestions at almost all major traffic intersections of the city, besides contributing smoke and noise pollution in the sidelines.

According to senior medical practitioners associated with Pakistan Medical Association the outburst of allergy-borne diseases like asthma, skin allergies, anxiety and hyper tension are some of the serious contributions of the unplanned growth in the number of vehicles in Karachi.

It is the road congestion which causes such health hazards besides road accidents. They strongly suggested for a master plan designed in a manner that the capacity of the roads can accommodate the existing and future growth in vehicular population.

The newly elected city Nazim Mustafa Kamal has taken notice of the road infrastructure and has decided to take remedial measures immediately to resolve the issue. He has also asked the relevant department that in future no road will be constructed without sideline rain drainage facility as the standing rain or overflowing sewerage water usually damage the roads. Hopefully, the road conditions will improve as the new city Nazim is taking special care of the civic infrastructure in the city.

Meanwhile, Pakistan's macroeconomic indicators have shown optimistic and positive progress in the past five years. This has a direct bearing on automobile demand, and consequently, the automobile marketplace in Pakistan has experienced unanticipated growth in demand in the last five years. This increase was not foreseen by the government, the car manufactures or even the vendors.

IMPORTED NEW AND USED VEHICLES

Government significantly reduced duties on imported cars in the budget for the financial year 2005-06, in order to lessen the demand-supply gap in the short term. These duties had already been substantially reduced in the last 2004-05 budget.

Within the last five years, duties on the import of new cars have been reduced by almost three times and by more than half in the last two years only. This reduction is bound to have an unfavorable impact on local automobile manufacturing and does not augur well for increasing foreign investment in this sector in the country.

Additionally, the rate of depreciation allowed on import of used cars has increased from 1% per month to 2 % per month on used cars below 1800 cc. To this, if we add up to 50% depreciation allowed by customs on used cars imported under the baggage scheme, the landed price of used cars has reduced considerably.

Under the revised Trade Policy, which was announced on July 22, 2005, numerous changes have been made in the Personal Baggage, Transfer of Residence and Gift Schemes (import of vehicles) Rules 2004 that have a negative bearing in the automobile industry. For example, cars up to three years old can be imported under the Gift and Personal Baggage Scheme as against two years old previously. Also, the clause for mandatory registration in the name of importer under the Transfer of Residence Scheme and Personal Baggage Scheme has been abolished. Previously, under the Transfer of Residence Scheme, the vehicle had to be registered in the name of the applicant for at least 365 days prior to departure for Pakistan and under the Personal Baggage Scheme the vehicle had to be registered in the name of the applicant for at least 60 days prior to departure for Pakistan.

The implication of this policy is that a flood of imported cars particularly in the range of 4 x 4 pick ups and SUVs have inundated the local market. The impact of reduced duties can be gauged from the fact that the reduction in duties in the last budget 05-06, in the first quarter of the new fiscal year, the imported new and used cars constituted more than 30% of the total imports for the year 2004-05. Even at a conservative estimate, if the imports continue at the same rate, it is expected that 30,000 to 40,000 new and used vehicles will be imported during 05-06. On a calendar year basis, compared to 2,325 new and old vehicles imported in 2004, 5108 new and old vehicles have been imported till September 2005. This indicates an increase of more than 200%.

The absence of NTN certificate requirement for purchasing imported cars in Pakistan clears the pathway for under invoicing and forged documentation. From data received through Pakistan Revenue Automation Limited (PRAL), it is evident that rampant under invoicing is being done by importers of used cars. In numerous cases, the value of the vehicle assessed by the customs authorities is more than thrice the value declared by the importers. This only corroborates the trepidations voiced by the car manufactures, that used car imports are not properly regulated and always lead to under invoicing, procedural irregularities and loss of revenue to the government. Thus importers and buyers of imported cars are still exempt from documentation and tax net, while all sales of locally manufactured cars are fully documented with NTN certificate.

When we take a look at the recent policy change, it is very important that there is a candid appraisal of the positive and negative affects on the market, the industry and the country's economy. Apparently the recent policy decision of the government not only aims at slashing its own revenues, but also slows down future investment and expansion plans of the auto manufacturers who are already under tremendous pressure due to the government's strict regulations on localization and price control. On one hand the auto manufacturers have been asked to increase production and maintain quality, while no incentives have been offered to facilitate expansion and quality assurance. It may be noted that a car may have 7,000-10,000 parts, and with government enforced localization targets of 50 % to 75% for cars, there is pressure on local auto parts vendors to increase production, while in chorus maintaining quality.

In addition to the flood of used cars, major local manufacturers are now shifting focus by concentrating on imported vehicles. Dewan Farooque Motors Ltd has introduced the BMW and the Mitsubishi, followed by Nissan who has brought in Sunny, Cefiro, Patrol and X-Trail. Pak Suzuki is currently importing the Liana, APV and Grand Vitara, while Indus Motor Company on the other hand is importing the Camry, Hilux Vigo and Prado. Honda has shifted focus to the imported Accord and new models have been brought in by Bibojee Group (Manufacturers-Ssang Yong Motor, Korea). Chery QQ by Chery Automobile Co of China, New Chairman and New Rexton by Ghandhara Nissan and Bibojee Group (Manufacturers - Ssang Yong Motor, Korea) and Range Rover by Sigma Motors (Manufacturers Land Rover, UK).

Pakistan has begun to face the aftermath of the government's inconsistent policies. Contrary to the government's expectations of a positive impact through duty reduction on import of reconditioned cars, industry experts feel that the government needs to choose if they want to convert the Pakistani market into an international dumping ground of used and reconditioned vehicles or help it to develop a strong industrial base, making cars locally. However, the former is not in the interest of either the consumer or the country, whether in the long term or in the short term. Data Source: PRAL & PAMA

CUSTOM DUTY

NEW PASSENGER CAR

2001-02

2002-03

2003-04

2004-05

2005-06

1801 cc ~

250%

200%

150%

100%

75%

1601~1800 cc

150%

125%

125%

80%

65%

501~1600 cc

150%

100%

100%

70%

65%

1301~1500 cc

150%

100%

100%

70%

50%

1001~1300 cc

120%

100%

100%

50%

50%

~1000 cc

100%

75%

75%

50%

50%

 

05-06 (Jul - Sept)

2004-05

2003-04

 

New

Used

New

Used

New

Used

Passenger Cars

924

799

2778

1887

885

298

SUV's

110

260

226

866

50

452

Pickups/ 4 x 4

451

110

1722

534

617

292

Total

1,485

1,169

4,726

3,287

1,552

1,042