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Opportunities missed

March 13, 2011

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THE treatment meted out to cement industry is a case study in how to stifle a sector where Pakistan enjoys substantial comparative advantages and where regional demand presents a huge opportunity that is slipping out of its hands.

While the private sector performed magnificently whenever provided with an enabling environment, the response of the present government remains mired in confusion and inertia. Installed capacity was a paltry nine million tons in 1990, much of it being grossly inefficient as it was based on the outmoded wet process technology. As demand rose, the industry responded by launching a massive expansion programme. Over time, the installed capacity rose to nearly 44 million tons, a magnificent feat by any standards and a credit to the entrepreneurial spirit of the private sector.

However a number of adverse developments from 2007 onwards have brought the GDP growth to some two per cent. It is being reported by the media that the revised allocation after the latest cut, is a measly Rs180 billion. High inflation combined with slump in real estate and increase in the cost of production due to weakness of the dollar, resulting in a spike in coal prices, electricity and freight rates and accounting for 70 per cent of the cost, has adversely affected consumption while production cost soars, retarding construction activity in the private sector.

The current economic environment including low public spending has had disastrous consequences for the cement sector.

Local sales during the first half of the current fiscal year have witnessed an eight per cent year on year drop to around 10.1 million tons. Simultaneously, exports fell from 5.6 million tons to 4.6 million tons. The bad news does not end here. On top of low volumes, the average cement FOB prices fell to $48 per ton during the corresponding period--- a level low enough to  hardly break even.

Consequently cement sales through the sea route alone declined by about one third. Cement sales to India were also hard hit on account of non renewal of BIS certification (a quality control licence). Burdened with high energy and freight costs as well, the manufactures are desperate for some government support.

But no support is forthcoming. One would expect the government’s economic planners to appreciate the tremendous odds against which the industry is battling. If care of the cement industry is in short supply, then some thought may be given to the enormous exposure of the banks which have provided financing to the tune of $1.5 billion to the sector during 2003-2008.

If the cement industry were to go under, it is sure to take some banks down with it.

The government can help ease the industry’s burden by giving some relief on taxes and levies on cement. Tax on cement in Pakistan is perhaps the highest in the world. Federal exercise duty is Rs700 per ton in addition to 17 per cent GST, one per cent special excise duty, as well as provincial duties, taxes and royalty payments. The taxes add up to Rs80 per bag— the highest in the world.

The high incidence of taxation on this sector may be adding to the woes of the manufacturers in another way as well on account of possible evasion of government duties because of discontinuation of the supervised clearance system. The continuing decline in reported cement dispatches from a peak of 72.6 million metric tons in 2007-2008 to 20.5 million tons in 2008-2009 and a continuation of the declining trend in the first eight months of the current fiscal year strongly suggests a possible evasion of taxes as some units take advantage of unsupervised clearance.

The industry’s mechanism for self policing by posting auditors of reputable firms of chartered accountants also had to be discontinued as a result of misunderstandings about the . role of monitors. Since this harms the predominantly bonafide producers as a result of unfair competition, the Federal Board of Revenue must act immediately and restore the supervised clearance system.

If this cannot be done immediately, the All Pakistan Cement Manufactures Association may be permitted to appoint independent auditors at it’s own expense to ensure that no unrecorded dispatches take place.

Excise duty is basically a tax to discourage consumption the primary targets being products like cigarettes and alcohol.

Given the huge shortage of housing, cement should be the last product to deserve this rap on the knuckles. Currently, Pakistan has a per capita consumption of 131 kg of cement, well below the world average of 270 kg. The average per capita in the case of Iran and China is 470 kg and 625 kg respectively. Why must we be so out of sync with basic common sense?

The cumulative effect of market forces and government short sightedness is a sharp decline in consumption, which fell 15 per cent during the previous year. Consumption continues to show a negative trend, with most companies recording unbearable losses due to low demand and reduced capacity utilisation.

The failure of the government to make good on it’s duly notified commitment to encourage export of cement by sea, means that an opportunity to increase cement export to more than $1 billion per year has been lost. All that was needed was to provide a freight equalisation mechanism to units located at large distances from Karachi, making it possible for them to export greater quantities of this high volume, low value commodity by absorbing part of the freight cost.

Considering that 80 per cent of the capacity is located in the North of the country, this would have had a huge impact on export volumes. The government agreed to provide a freight equalization subsidy and notified the decision along with the procedure. More than a year has passed but it has failed to disburse a single rupee.

Is this the way to treat an industry which meets the demand for an input so vital for creation of physical infrastructure and which provides jobs to more than 150,000 persons directly or indirectly? And it is an industry which doubled it’s contribution to government revenue from Rs15.65 billion in 2001-2002 to Rs30.89 billion in 2009-2010.

The way forward must be based on spending and developing ourselves out of trouble. Growth in the GDP can only be reinstated by spending more on development of infrastructure and the housing market. Unfortunately, our economic team has adopted exactly the opposite strategy. All the steps they have taken adversely affects aggregated demand, thus pushing the economy in a further downward spiral.

If growth in the construction business can be reinvigorated, this will have a salutary effect on about 40 associated industries and provide employment to the teeming young unemployed. The question to ask is that while ‘we have a large unutilised base of cement capacity, why do our economic planners continue to take measures which exacerbates the problems rather than alleviate them?

The writer is former chairman All Pakistan Cement Manufacturers Association