KARACHI, Sept 6: Under the proposed deregulation of the pharmaceutical industry, the government is looking at an option of capping the price increases of drugs at the inflation level, sources in the Pharma Bureau (PB), a representative body of the multinationals, disclosed here.

In any given year, the price increases should not be allowed to exceed the CPI (Consumer Price Index) rate of inflation, is one of the suggestions put forward by the government in talks with the stakeholders.

This proposal is being now considered by an ECC committee set up under the chairmanship of Razzak Dawood, Minister for Industries and Commerce. According to PB, the committee is in the process of finalizing its report.

In discussions on deregulation, a PB spokesman said, the issue of linking drug prices to inflation came up in the context of the SRO that entitled pharma companies to price changes based on the rated index of inflation and devaluation.

The SRO was not implemented. It turned out to be a contentious argument on the levels of inflation and devaluation.

Since the impact of devaluation is reflected in the CPI rate of inflation, it was thought that linking prices of medicines to inflation should suffice.

The multinationals are not averse to the proposal as PB officials say, “although it is a low figure, we can at least, say we can make some business forecast and plan investments. We have something; there was nothing with us. We might get a price increase in three years or we might get nothing at all.” The rationale for price increases or otherwise has never been transparent and decisions have been arbitrary, they added.

Whether the CPI, with the current basket of currencies, would have relevance to the cost of pharma products, is one of the issues that needs to be considered, both from the point of the industry as well as that of the consumer.

Incidentally, some years ago, the idea was floated that the wages of workers should be linked to inflation. The the FPCCI, presented this suggestion at a function in which former finance minister and ex-president of Pakistan Ghulam Ishaq was chief suggest. He retorted back: “Do you know what you are talking about?”

Often, the official rate of inflation is not perceived as a true index of price increases. For example, the Asian Development Bank says, a point-to-point comparison of CPI of June 2002 with June 2001 gives an annual inflation rate for fiscal year 2002 (on the new base of 2001-02) of 4.4 per cent as opposed to 3.5 per cent based on comparison of period averages, indicating an upturn in the inflation on the latter part of the year. The forecast is that inflation rate would pick up in the current fiscal.

It may be recalled that deregulation introduced in 1993 was withdrawn the following year because of its demerits.

The MNCs say that they are not asking for any greater deregulation than in India or Bangladesh. Both these countries are more liberal in prices than Pakistan. We have 28,000 products of which the prices are regulated by government. This represents 850 drug molecules against 74 in India. In Bangladesh, it is 117 molecules. If controls of a fewer number of drugs in neighbouring states can serve essential requirements, why should Pakistan need to control prices of every single drug or formulation, questions a multinational executive.

What the multinationals want the government to do is to have “clarity and transparency of policy”. Deregulation, says PB, does not mean freeing of prices.

In the absence of any policy changes, the MNC representatives do not see any strategic investment which requires substantial capital. That strategic nature of investment is not happening. Investments may be made in modernization and replacement, to sustain businesses as long as they are viable.

While the deregulation of pharma industry is on the cards, Pakistan proposes to take up the issue of transfer pricing at the 3-day annual moot of Organization of Economic Cooperation and Development (OECD) due to begin on Sept 18.

Multinationals are often making handsome profits on raw materials imported by subsidiaries in Pakistan. To quote press reports, the Benazir government pressured the MNCs to reduce prices of imported raw materials by 5-20 per cent, resulting in a gain of US$11 million to the national exchequer. The exercise was repeated in February 1999 and prices of 79 components of raw material were cut by 5-28 per cent. Yet another saving of US$20 million.

The PB says that the problem is not as significant as it is perceived in the context of the overall size of the $1 billion pharma industry.

The total estimate that the ministry is throwing up is in the range of $20-30 million says PB official and adds “in the context of the size of the industry, is it the germane number to chase?”

The PC officials estimate that multinationals have a share of 50 per cent of the domestic market.

A PB spokesman admitted that the government has been able to substantiate that someone has imported at slightly higher prices than the market price. “We do not know the specifics. But it is an erroneous comparison in a number of cases, between a regional and pirated product and a patent product. Then, in a number of cases, comparison is made with the lowest price at which someone may have imported, a low quality component that cannot match the quality imported by the MNCs.

There were many cases that we have won against the tax authorities. If the imports are made at the global prices valid for other countries, there is no transfer pricing for any component bought from any source.

The PB spokesman says that it is a fallacy that the MNCs import raw materials from parent companies.

In his own case, he said, it was a mere 15-20 per cent. We are buying from free sources, i.e third parties who have no relationship with our parent companies.