Pakistan’s Automotive (Car) Assembling Industry

The following article has been published in Daily Nation, dated 30^th March 2015

(E-Paper (Print Edition): http://nation.com.pk/E-Paper/lahore/2015-03-30/page-9 )

(Online: http://nation.com.pk/business/30-Mar-2015/car-industry-needs-transfer-of-technology )

Car industry needs transfer of technology

By: Omer Zaheer Meer

WTO changed the global attitude towards business competition and generally opened up markets globally as compared to before. However some countries still choose to protect certain local industries in view of supporting local populace and enhancing regulatory protection of consumers. Pakistan’s automotive (car) industry has also been amongst such industries, protected from outright direct competition in some ways by the Government. The question then is whether this industry has passed on the desired benefits to the populace in Pakistan?

The automotive sector in Pakistan is not your typical manufacturing or technology based but rather focused on local assembly. The sector has seen growth for quite some time with exponential growth in 2006 and 2007 fuelled by low-interest auto-loans from the banking sector. The growth slowed and did not reach the same levels again. It employs between five to seven thousands people and has been amongst the leading sectors of indirect taxes for the treasury. The annual turnover is claimed to be PKR 300 billion with a contribution of 2.8% to GDP.

The sector has great potential for growth as not only does Pakistan possess one of the largest proportion of young population with an urbanization trend, the car to people ratio of approximately 1/100 is still one of the lowest in emerging economies. Despite this huge potential, there are some serious issues hindering the sector from realizing its full potential which needs to be addressed.

Despite a lapse of sixty two years since the start of the automotive industry in Pakistan, no significant transfer of car manufacturing technology has taken place. The local manufacture of car components is minimal with that of the vital components virtually non-existent. To make matters worse there are only three major car assemblers in Pakistan namely Pak Suzuki Motors, Honda Atlas Cars and Indus Motors with only Pak Sukuzi Motors focusing on smaller cars.

Some of the most worrying issues facing the automotive sector are as below:

• Weak regulations governing the sector
• Lack of attention to international standards of safety particularly in the small car sector
• Failing to meet the demand possible with available capacity
• High prices with illegal premiums charged for newly assembled cars
• Price fixation practices amongst the cartel of the three major players
• No real progress towards car manufacturing technology transfer to achieve the goal of self-reliance
• Extensive barriers to entry for new aspirants
• Lack of ability to compete with cost-effective and high quality products from neighboring countries, should open trade was to take place

What’s most worrying is the undocumented cartel system that seems to be operating amongst the three major assemblers resulting in exorbitant prices as well as lower quality products. Pakistan shares economic pressures, a large middle class and high demand for small economical cars with its’ arch-rival India. While in neighboring India cars have long been manufactured locally, we’re still priding ourselves on mere assembly.

Perhaps what’s more relevant is that while TATA India has successfully provided economical cars like TATA Nano, initially launched for just one hundred thousand Indian Rupees, the most economical in Pakistan is still costs almost 5 times that price. Initiative like Nano attracted the burgeoning middle class in India particularly families, away from the two wheelers with significant growth in market demand for cars. The importance of volume and expanding the market is apparently missed on the major players in Pakistan with extreme focus on excessive margins at the peril of the ordinary consumer already hit by a lack of sufficient competition.

Pak Suzuki Motors which holds the lion’s share of almost 60% of the four-wheeler industry sells smaller cars with despicable security features despite sky-high prices as compared to smaller cars in neighboring India. Similarly the quality of bigger cars manufactured by all three leaves much to be desired with “Pakistan assembled” still being a symbol of lower quality instead of the prestige that should be associated with it.

All this is happening despite the favorable Government policies of the past and present like reducing the age limit of imported used cars from 5 to just 3 years as well as imposing other restrictions on imports of used vehicles. Such restrictions resulted in a massive decline of almost 62%in the import of used cars in just the first half of the last fiscal year (2014) alone.

This obviously helped the local automotive assembly sector to grow sales volume but instead of passing some of the benefits to the consumers, they choose to increase the sales prices too despite the strengthening of Pak Rupee and reduced input costs. To make this point clear, consider that just during the first quarter of the last fiscal year (2014) all three local car assemblers reported solid growth. The smallest of the three, Honda Atlas Cars with approximately 17% market share reported a strong increase in profitability of 170% to PKR 632 million. Similarly both Indus Motor (assemblers of Toyota) and Pak Suzuki Motors registered growth of 29% and 22% respectively. As outlined above, the increase in sale volumes, the increased sales prices and the exchange gains were the main factors for this high growth.

The truth is that the automotive (car) assembly industry is heavily concentrated with consumers paying a substantial sum for cars that are not worthy of their costly price tags. High custom duties and import restrictions strengthen this monopoly of the prevailing cartel, leaving the consumer with very few options. To improve the situation and grow the automotive sector in Pakistan, the Government should undertake the following major steps:

• Strong regulation to protect consumer interests
• Legislation against cartels
• Remove regulatory barriers to entry
• Promote and encourage transfer of technology to Pakistan
• Tax breaks and incentives for new investors to enter the market
• Lesser restrictions on import of vehicles including used ones to allow greater competition and hence better deals for the consumers
• Stronger legislation regarding cars safety and emission standards

The automotive sector has the potential to rise from the current state of a purely assembly operation to an indigenous manufacturing one while increasing the market demand many folds. With the above recommended steps and a strong political will the dream of self-reliance and earning foreign exchange through quality exports of cars can become a reality.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, chartered financial analyst, qualified fellow accountant and anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

The automotive sector has the potential to rise from the current state of a purely assembly operation to an indigenous manufacturing one while increasing the market demand many folds. With the above recommended steps and a strong political will the dream of self-reliance and earning foreign exchange through quality exports of cars can become a reality.

IMF-driven Policies: Destroying Economy

The following article has been published in Daily Nation, dated 16^th March 2015

(E-Paper (Print Edition): http://nation.com.pk/E-Paper/lahore/2015-03-16/page-9 )

(Online: http://nation.com.pk/business/16-Mar-2015/imf-driven-policies-destroying-economy )

IMF-driven Policies: Destroying Economy & inciting Revolts

 

 By: Omer Zaheer Meer

Pakistan is going through an economic slump; some would even argue a meltdown. With rampant lawlessness, terrorism, rising inflation and severe electricity and gas load management especially for industry, the economy is in dire need of a revival. Many of these problems were inherited by the incumbent administration from the previous PPP government with the economy on the verge of collapse. It was against this backdrop that the PMLN government decided to go to the International Monetary Fund (IMF) for a $ 6.7 billion loan.

The IMF offered a package based on austerity, asking to cut subsidies in a very short duration, seeking reduced public spending and privatization of national institutions like PIA in addition to devaluation of Pak Rupee.

These measures led to unbearable levels of inflation, making an already tough situation worse. Even the prime constituency of the incumbent Government, the business community has been protesting but at the end of the day they will still be able to simply pass on the effects to the consumer. It’s the masses that would ultimately be hit the hardest. With the industry already in tatters due to the energy crisis, law and order situation and ever increasing input costs, they are shifting base overseas resulting in a flight of local capital. The gigantic increases in the power tariffs until recently were serving to worsen an already dire situation for the local industry. On the other hand national institutions, instead of being revamped and properly managed are being planned to be sold off in non-favorable conditions when they could end up being sold for peanuts.

POL products are treated as a cash-cow for revenue generation, ignoring the super-inflationary effects of increases in their prices. It is indeed ironic that while the prices in international market fell, the benefit was only partially passed on to the consumers in Pakistan and that too owing to the political pressure from the opposition of Pakistan Tehreek-e-Insaf.

While the IMF program may serve to stabilize the national exchequer in the longer term, the economic opportunity costs, resulting unemployment and the high risk of an economic meltdown makes it a non-prudent choice. Instead it is pretty obvious that Pakistan’s economy requires an impetus, a stimulus to revive the economic activity and not the program agreed with the IMF.

While we can give some space to government’s economic team citing the tough challenges they inherited and are facing, what is unfortunate though is that even the steps possible within the ambit of Finance Ministry are not taken. There seems to be a lack of understanding and political will to actually carryout the reforms necessary to resuscitate the failing economy.

Financial management and transparency is one such area. I’ve written before that the manner in which the circular debt of app PKR 500 billion was paid to private power generators and similarly the funds released for Petrol import earlier this year were astounding to say the least. There were no audits, no checks and no proper incentives negotiated for the masses. Whether right or wrong, some sections of the intelligentsia believe these crises to be manufactured, aimed at getting around the checks and balances in order to oblige party financiers and key supporters.

For example, despite claims of around 40 % unused capacity of private power companies, un-tapped owing to the outstanding circular debt, the promised increase in the electricity generation was never delivered despite payment of the same. Pakistan had to approach IMF for $ 6.7 billion to be released over several years, while 75% of that amount was distributed to private power companies without any verification as if it was an immaterial amount. What’s more, the genie of the circular debt in the power sector is back to haunt the nation again.

We must ask the finance ministry why no proper audits were performed? Why could we not negotiate with the power companies the terms for payments in four or six installments with the next installment payable only on achieving an additional power generation as agreed? Furthermore, there has been no effective national energy conservation drive or campaign to cut the line losses to the minimal possible. Similar mismanagements resulted in the infamous petrol crises too.

Furthermore, the painful but obvious fact remains that the necessary reforms required to revamp the tax system and structures are not been followed either. Instead of extending the tax base by bringing in Agriculture and other exempt areas in the tax net the existing base is being taxed more along-with higher indirect taxes imposed on the common citizen, both of which are disastrous in the long run. Had we actually taken the tough but necessary decision to broaden our tax base and executed proper financial management especially in the power circular debt payment we would not need to go to the IMF. The lack of these reforms has led to exorbitant borrowing with the internal borrowings alone reaching the mark of a trillion.

Alarmingly, there are noises about a very powerful industrialist from Punjab with stake in the power sector besides others, dictating the economic policies of the current government. On the backdrop of this, a list of public sector power companies was also announced for privatization. Guess where are they based? Yes, all of them are based in Punjab. The Prime Minister needs to take corrective measures. As a minimum the finance ministry should be directed to undertake independent forensic audits into all future payments as well as those made till now including circular debt payments to the power companies in addition to the implementation of other measures to ensure transparency. Corruption scandals of the likes of the last PPP Government should not be tolerable anymore. This, along with tough decisions to extend the tax base with a focus on direct instead of indirect taxation and proper financial management can still lead to a turn-around.

The biggest question is will the present Government review its IMF driven economic policies and carryout the necessary reforms while providing relief to the ordinary citizen or will it continue to focus exclusively on temporarily filling up the coffers of the national exchequer without any bearing to the economic condition of a common man and risk a revolt? It should remember empty stomachs breed anarchy.

The author is Director of the think-tank “Millat Thinkers’ Forum”. He is a leading economist, chartered financial analyst, fellow chartered certified accountant and certified anti-money laundering expert with international exposure who can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk

Is Privatization right for Pak?

The following article has been published in Daily Nation, dated 2nd March 2015
(E-Paper (Print Edition): http://nation.com.pk/E-Paper/lahore/2015-03-02/page-9 )
(Online: http://nation.com.pk/business/02-Mar-2015/is-privatisation-right-for-pakistan )

Is Privatization right for Pak?

By: Omer Zaheer Meer

Privatization is coined as a solution to many economic woes facing Pakistan’s economy. It has been hailed as a solution to the woes facing PMLN’s government. The privatization commission has even shortlisted 31 institutions to “sell”. A very competent Mr. Zubair Umar, the brother of the youth icon and PTI MNA Mr. Asad Umar is heading the commission. On the face of it, the arguments appear to be logical and make sense. It’s pointed out that a government’s primary function is to run the state affairs and should facilitate the businesses instead of running them. The “white elephants” in the shape of public sector enterprises (PSE) are costing the national exchequer billions of Rupees annually which can be saved and spent on public welfare.

However once we start to dig deeper the situation is not as glossy as it may appear at first. First of all a successful privatization exercise has some pre-requisites like a conducive environment with investors’ confidence, a strong government able to enforce the agreements, proper selection of non-vital PSE’s and a fair process carried out in a transparent manner. Sans this, privatization cannot turn-around the state of PSE’s or the economy. Past experiences are a testament to this.

Once again the incumbent PMLN government is focused on privatization but unfortunately is ignoring the vital pre-requisites. The faulty selection of profitable and strategically vital entities, the extreme haste in the proceedings, missing policy guidelines, a lack of clarity and transparency in processes, non-conducive investment atmosphere and a less-than-desirable track record all warrants caution in examining the proposed solution of privatization.

Amidst the noise of overhauling loss-leaders several profitable institutions are also earmarked for privatization, which besides funneling billions to the treasury are also providing products/services at cheaper rates to the public as compared to the private sector in the international market.

One such example is the Oil and Gas Development Company Limited (OGDCL) which generated a profit of approximately PKR 91 billion in last fiscal year while providing the gas at 40 to 50% of the prices offered by private sector in international market. Another example is Pakistan State Oil (PSO) generating an after-tax net profit of approximately PKR 12,558,000,000 in the year ended 30^th June 2013, a 39% increase from the previous financial year. Privatizing such institutions would not only lead to loss of billions to the exchequer but also an increase in the comparatively cheaper prices currently offered to the masses.

A case in point is the handing over of PTCL control to Etisalat by the Musharraf regime in which a minority shareholder effectively got all of PTCL for a paltry sum to be paid in installments, still partially outstanding. What is iconic is the fact that Etisalat itself is a Public Sector enterprise of UAE. This means that although the proponents of privatization strongly believe that “state cannot run vital services”, they have no qualms about a foreign state owned enterprise coming to Pakistan and doing the same. And just to analyze how effectively has this privatization venture gone we should realize that the same PTCL which was generating profits of billions of PKR but is now reporting heavy losses despite increased tariffs and with a falling standard of customer service often complained about. Similarly KESC which was sold on the hopes of a turnaround with substantial investments expected in infrastructure by the private party. Unfortunately it has instead become a much bigger white elephant requiring continuous rescue by the government while the new private owners continue to remit their profits abroad. Their failure to even invest in the necessary infrastructure maintenance has lead to undue load-shedding over and above that necessitated by load-management. Not only has the government of Pakistan lost revenues from healthier dividends and resulting taxes, it has also lost by falling share prices of its remaining stake in these entities. The public has suffered a deteriorating service and higher prices.

To put things in perspective let us also recall the privatization of MCB to Mian Mansha’s group, undoubtedly amongst the strongest business conglomerates in Pakistan. The deal was done at a fraction of the fair value of the tangible assets of MCB let alone considering the value of the brand and goodwill. Obviously such moves do not boost confidence particularly when the same group’s head attends important government policy meetings is said to be interested in getting “good” deals on more national assets at the cost of the nation.

It had been reported that the incumbent government sent a letter to IMF claiming a consensus of all political parties and parliament to privatize the national institutions. This obviously points towards the pressure emanating from the terms of the IMF package accepted by Pakistan and explains the underlying motive. This undue urgency leading to lack of planning should be avoided. The government needs to ensure it is not selling off profitable and strategically vital PSE’s in the name of privatization for short-sighted capital injections at the cost of long-term stability and revenues. Furthermore institutions providing vital services to the masses should not be on the wish-list of the potential sell-offs either.

As for those entities generating losses like PIA we need a proper plan of action. One leading argument for privatization is that since the private sector is driven by profit, the efficiency and performance of institutions is supposed to improve in private hands. Unfortunately the past record of privatization in Pakistan does not support this argument. Be it PTCL or KESC, not only their profits but the standard of services too has fallen in private hands. Also it brings up an interesting question as to why the government cannot introduce checks and balances along with incentives to ensure a turnaround they expect from private entities. Moreover, in developed countries strict legislation has been introduced to ensure avoidance of the common pitfalls of privatization, protecting the interests of all shareholders and safeguarding the continuation of service(s). Same needs to be done in Pakistan to address the issues already facing us from past public-private venture which effectively handed over whole PSE’s for a paltry minority stake in ownership.

While some proponents of the privatization point out the previously failed attempts at turning-around of state institutions but they conveniently ignore the major reasons of failure in undue interference, political appointments and misappropriation by government officials. The success stories like the last major successful turnaround of a loss-making steel mill into a profit generating venture are also conveniently swept under the carpet. They also choose to forget that if enterprises like PIA are privatized, which have the highest ratio of employees per aircraft of 500 compared to international standards of fewer than 150; it will still lead to layoffs and resulting backlash. Ideally a better option will be to establish an independent and empowered restructuring institution (RI) to overhaul PSE’s, which if handled properly will make the process less painful compared to a private venture while ensuring cost-effective quality services from a revenue-generating asset of the nation.

All that is required by the RI is to place competent professionals of utmost integrity at the top positions based solely on merit to run the PSE’s, introduction of a system of appropriate checks and balances run by professionals whose life is driven by measuring performance against goals, spurring motivation and ensuring excellence via improved performances. If for some reasons a privatization is deemed mandatory then a hurried privatization without a proper policy, appropriate selection of PSE’s and laws safeguarding the national interests as well as protecting the masses should be avoided as it will only lead to less efficiency by investors with conflicting interests, more unemployment, resulting lawlessness, inflation, loss of revenues and government bailouts.

The author is a leading economist, chartered certified analyst, qualified chartered accountant and anti-money laundering expert with international exposure who is helping reshape businesses at Millennium Law Company. He can be reached on Twitter and www.myMFB.com @OmerZaheerMeer or omerzaheermeer@hotmail.co.uk