IN the late 1980s and till the mid-1990s, many textile manufacturers relocated their factories from Karachi to Lahore and elsewhere in Punjab, owing primarily to growing lawlessness in the port city. However, that wasn’t the only reason behind their decision.
Most of them were attracted by the investment-friendly policies of Nawaz Sharif, first as chief minister of the province and then as prime minister. A number of incentives were offered to manufacturers who wanted to invest in industry in Punjab; tax holidays and breaks were announced for new investments; and a new industrial estate — no matter how unorganised — at Chunian was set up.
The trend continued for quite some time and the province’s textile manufacturing capacity boomed. The expansion in basic textile capacity also led many to invest their money in the downstream value-added industry.
Indeed, Punjab’s textile industry was also a major beneficiary of historically low credit cost under the military regime of Gen Pervez Musharraf in the early 2000s. The bulk of the $5bn spent by the country’s textile producers on modernisation and capacity expansion during that period was invested in Punjab.
“If you read through our quarterly reports, you will trace eroding profitability to energy bills and rupee appreciation,” says Mian Mohammad Mansha, chairman of the Nishat Group
But this has not only stalled for some time, but also appears to be reversing because of growing gas and power shortages and a significant increase in electricity prices over the last one year.
“The growth in textiles is shifting from Punjab to Karachi for the last one year. Higher energy costs and crunch in Punjab have created a big disparity within the country,” says M.I. Khurram, one of the major exporters of knitwear and yarn.
The reasons for this changing trend are obvious. “The energy bills of textile factories in Punjab have doubled to 12pc of their turnover ever since the government raised electricity prices a year ago. And availability of gas in the province was further cut to just 6-9 hours a day,” points out Gohar Ehaz, former chairman of the All Pakistan Textile Mills Association and a vociferous advocate of the energy rights of Punjab’s textile industry.
In contrast, the energy cost of textile manufacturers in Karachi and elsewhere remains at 6pc of their turnover because of uninterrupted supply of gas to them for self-generation.
“As if an increase in our energy costs wasn’t enough, power cuts of 10 hours a day mean that factories without gas-based captive power facilities will face 40pc drop in their production; those with captive power will suffer 10pc production losses,” Gohar asserts.
The average energy bill of a textile mill with annual turnover of Rs3bn has shot up from Rs180m to Rs360m or more, according to financial accounts of three spinning mills. A similar trend is visible in the weaving sector.
Many textile manufacturers say energy shortages and rising power bills have hit the entire textile chain very hard. “Almost half a billion dollars have been spent by the textile industry during the last year. Much of this amount has been spent by manufacturers in Sindh on modernisation of their machines and capacity expansion. Whatever we have spent in Punjab is on finding solutions to reduce our energy bills,” says Ahmed Kamal, former chairman of the Pakistan Textile Exporters Association.
Punjab’s industry has invested only a fraction of what it spent during the early 2000s on modernisation and capacity expansion in the last 5-6 years, mainly because of gas shortages and high credit cost. Most have actually offloaded their debt.
“If Punjab’s industry is still standing on its feet despite the erosion in profits on the back of rising energy bills and the exchange rate shock earlier this year, it is because most of it has become debt-free over the years. But how long can we go on without replacing our machines and increasing our production capacities? Not forever,” says Gohar.
The last six months have been bad for every textile manufacturer in Punjab. Rising energy bills and the sudden revaluation of the exchange rate didn’t spare even the country’s largest textile exporter, Nishat Group. “If you read through our quarterly reports, you will trace eroding profitability to these two factors,” Mian Mohammad Mansha, chairman of the Nishat Group and MCB Bank, had told Dawn earlier last month.
In fact, the financial accounts of almost all major textile mills point out energy shortages and rising power costs as major factors responsible for their losses or significant reduction in profits during the last financial year. Cotton inventory losses and influx of Indian yarn in the local market were other factors pointed out by the mills that are exacerbating their energy and exchange rate-related losses.
Seth Mohammad Akber, a progressive farmer and yarn exporter, estimates that Punjab’s textile industry suffered an additional financial burden of Rs144bn during 2013-14 on account of higher energy costs, high-priced cotton inventories and exchange rate revaluation.
“With the new cotton crop coming in the market and its prices being low, some textile producers in Punjab may recover going forward. But not all can do it. You will see some casualties over the next several months if the availability of energy is not improved and the cost-disparity between Lahore and Karachi not removed,” he warned.
Published in Dawn, Economic & Business, September 22nd, 2014