KARACHI, Nov 11: The WTO quota-free regime is now only 50 days away but value-added textile exporters are in a dilemma as to how they would face the challenges of the free market when production cost of their goods remains much higher than their competitors , mainly India and China.

In a changed market scenario where buyers will be in a dictating position from January 1, 2005, the suppliers will not only be facing a cut-throat competition from 'within', but also from other nations, particularly India and China, two major players along with Pakistan in textiles and clothing in the post-quota era.

While India and China took necessary measures in this respect by giving incentives, subsidies and price cuts on inputs to their exporters, Pakistani exporters are fearful of the situation and feel that they may remain incompetitive in the field of textiles and clothing trade. They feel the government has failed to take concrete steps to reduce the 'cost of doing business' to face the free-market challenges.

The biggest factor that leads to higher cost of production is sales tax on exports of textiles and clothing. Exporters lament that since exports are exempted from ST, why it is being collected in the first place and refunded thereafter. They allege that this exercise does not only deprive them of the much-needed liquidity to meet their export commitments, but also promotes corruption.

They complain that delays in getting refunds result in shortage of cash-flow and a certain percentage of the due amount has to be paid as a 'speed money' for early release of the ST refund. This indirectly leads to higher cost of production as manufacturers have to borrow from banks or open market at certain cost. They demand that apparel and other value-added textiles should be exempted from sales tax.

The finance minister in his budget (2004-05) speech exempted ginned cotton from sales tax on the plea that ginners were paying ST on one hand and received it on the other hand. It is a good and pragmatic step because the entire exercise was in futile. The exporters have demanded similar treatment to the value-added textile sector.

At present four major value-added sectors of the textile industry - garments, knitwear, bedlinen and fabric - earn over $1 billion each on export annually. With regard to other inputs, the electricity cost is highest when compared to countries of the region, including India, China and Bangladesh. According to World Bank's cost structure of electricity, the per unit cost of power in Pakistan is 3.5 cents, Bangladesh 0.7 cents, India 0.9 cents and China provides electricity free of cost to its apparel industry.

However, the exporters even dispute the WB figures and say that the actual cost of electricity they pay is at around nine cents per unit. Apart from being most expensive, they complain that the quality of electricity in terms of voltage, fluctuations, breakdowns, and shutdowns play havoc with their costly equipments. This results in loss of production hours and material wastage, besides causing damages to plant and machinery. "Now, if all these factors are taken into consideration they lead us to higher cost of production."

According to the 2004 Annual Report of the US-China Economic and Security Review Commission to the United States Congress, China continued to practice a wide array of unfair and WTO illegal trade practices.

The report concluded: "Chinese unfair and mercantilist trade practices have tilted the playing filed unfairly against US interests. China continues to heavily subsidize its manufacturing sector - in the form of tax incentives, preferential access to credit and capital from state-owned financial institutions, subsidized utilities, and other measures."

Similarly, India has also taken certain measures to bring down cost of production of its apparel industry. Instead of creating new industrial zones India started giving incentives and concessions to existing industrial areas to ensure that their exports stay competitive in the free-market era. They have decreased their power and water charges by 20 per cent and exempted export-oriented industry from local taxes.

Without giving direct subsidy, India has removed the restriction of selling imported raw material in the local market on the export-oriented industry. This way the industry will get some cushion by selling raw material in the local market at higher rates.

They have selected cluster of apparel industry in the state of Gujarat where these and other measures have been implemented to ensure that they could face the free market challenges and stay competitive and cost effective.

An exporter has to deal with as many as 29 provincial departments and their agencies and around 14 federal government agencies throughout the year. Besides paying official taxes and levies, a huge amount towards illegal gratifications has to be paid. Most of these agencies have land revenue powers and can twist the arm of exporters to extract any amount. Most of these agencies are now redundant and no more than a source of corruption.

The requirements and documentation asked by these agencies on visits to export-oriented manufacturing industries now hold no purpose except that they waste exporters' time that have to devote themselves to product development and quality production, besides dealing with their buyers.

Since buyers are reluctant to come to Pakistan, exporters and their technical teams have to make frequent visit to third country like Dubai, Singapore and Hong Kong to meet their buyers. Thus the law and order situation was also causing a lot of damage to the export-oriented industry, resulting in higher cost.

The exporters say that they have to pay higher freight for their exports and port charges are also among the highest in the world. They complain that despite paying huge amount towards withholding tax and the Export Development Fund at 0.25 per cent along with other local taxes, the infrastructure of industrial areas is in deplorable condition and many industrial units have to arrange for their water and have their own power generation, thus putting burden on cost of production.

Looking at the state of affair, the exporters believe that if the government is not in a position to take a host of measures and disrupt present working the least it could do is to give the export processing zone status to all the export-oriented industry. By doing so a lot many issues and problems with regard to cost and smooth working of the export industry would be resolved.