Shahid Sattar and Eman Ahmed
In the Prime Minister’s address to the nation this week, he lauded the export growth achieved over the past 2 years, particularly through textiles which are the country’s top export. It is important to highlight that this unprecedented growth is the result of concerted efforts and investments, which must be continued in light of the visible progress made by the economy through industrial development. In further good news for the industry, the Prime Minister announced a five-year tax exemption for overseas investors to bolster investment in Pakistan. “No country can become great without a manufacturing base and industrial growth,” he said.
The details of the PM’s new industrial package are yet to be made public, but matters seem to be improving for industries, as the 2022 industrial policy’s overarching objective is to incentivize investment in industry, acknowledging the fact that industrial growth is critical for sustainable economic prosperity due to its role in generating jobs, achieving higher exports and meeting goals/targets. The Prime Minister also mentioned that this policy would divert money invested in plots into industrial growth.
While these are positive indicators for the future of the industrial sector, the growth of exports and industrial competitiveness is largely dependent on regionally competitive energy tariffs. With $21 billion textile exports expected in FY22 (a 36% increase), the industry has set a target of $26 billion for the following fiscal year. The cost of RCET is equivalent to 2.5% of export value and exponential economic growth can be achieved once industry is provided with a stable and secure energy environment. At present, RCET is applicable till June ’22, while the industry requires a 5-year predictable supply and competitive tariffs across the entire value chain to sustain growth.
Policymakers in Pakistan must also remain cognizant of new and emerging textile exporting countries, such as Uzbekistan which has full market access to the Eastern bloc and has now been granted GSP+ status by the EU. With energy costs lower and cotton quality better than that of Pakistan, Uzbekistan is a promising new entrant, set to capture high market shares.
The export growth achieved so far in Pakistan has been in spite of a wide array of issues in energy. Power supply, reliability, quality, pricing and gas availability are at the core of Pakistan’s bid to accelerate economic development, yet concerns abound. Due to the intense competition among regional countries, even a minor cost difference in relative terms has an exponential impact on competitiveness in the international market. Our regional competitors are offering stable and consistent supply of electricity and gas/RLNG at much lower rates than Pakistan.
Meanwhile, Pakistan’s Balance of Payments crisis is spiraling out of control, with the country heading towards a historic $20 billion deficit mark. Without ensuring that exports are supported to reach their maximum potential, the economy is at risk of sinking deeper into the debt trap. For decades, we have sought loans to achieve economic stability, which come with countless conditions. We must not neglect the local business community – particularly the export-oriented industry – which surely has the potential to steer sustainable economic growth as long as it is provided with basic policy support, and in particular, competitively priced energy.
Issues of energy supply are another key impediment to the country’s progress. The Gas / RLNG supply to export-oriented industries was inexplicably cut off on December 15, 2021, and then only 38 percent to companies signing affidavits under duress restored on December 29, 2021, resulting in a permanent loss of 30% of exports for the month of December and January whereas capacity was $ 2 billion.
The Ministry of Energy (MoE) had committed to restore full gas supply to captive power plants of the export sector with effect from 15th February 2022. With disregard to this commitment, MoE subsequently notified the industry that only 75 percent gas will be provided, only to the mills that have submitted an affidavit which will effectively suspend supply to units that do not comply with “unachievable” efficiency criteria – 70% of industry. Surprisingly, SNGPL still continues to supply gas to the non-export industry, which is a clear violation of the merit order which reduces the gas available for the export sector and violates established principles over the last several years.
The requirement of the affidavit goes against the legal rights of the mills, for which it is critical to ensure uninterrupted gas /RLNG supply. Mills who have not signed affidavit have been deprived of gas/RLNG supply as a result of this illogical policy distortion. For the sector to get back on track, it is essential to restore supply expeditiously and make amends. Meanwhile the industry is still waiting for MoE to arrange a consultation on the TORs for the NEECA efficiency audit despite being promised the consultation in a plethora of meetings.
This raises questions on power supply reliability as the alternative source of energy in addition to the countless pending cases of extension of load and new connections. Most mills at present cannot fulfill the energy needs for power or gas as each connection in itself is insufficient to function optimally.
Furthermore, as modern textile machinery involves sensitive equipment, it requires consistent standard power supply without interruptions or variations. Unwarranted interruptions, inordinate breakdowns, fluctuating voltage and flicker are resulting in huge financial and performance losses, and consequently lower exports. Sample details of shutdown, unstable voltage, tripping, jerks and mainline failure from 1st January to 6th February on actual grids is give in table below.
Each stoppage/jerk leads to the halting of machinery from 30 minutes to 2 hours. This loss is in addition to the in-process material that is lost. As a result, the output of textiles is therefore hovering at less than 75% of installed capacity. While it may appear that shutdowns, breakdowns and tripping can be somewhat mitigated, in reality the issue of non-standard supply requires concerted technical corrections which can only be carried out at the DISCOs level through changes in perception.
Previously, NEPRA has allowed the power supply to B3 consumers, which include the majority of the textile sector, to be increased from 5 MW to 7.5 MW. However, all B3 consumers are subsequently being charged for grid sharing, including transmission line charges, as well as the full cost of land for enhanced full sanctioned load whereas the incremental load is only above 5 MW’s, even though it is logical to place this requirement on incremental loads above 5 MW.
The loads up to 5 MW’s are already approved, processed, and paid for. Sunk costs cannot be redeemed or recovered, nor can investments that have already been made and correctly accounted for in records/yearly balance sheets. Nonetheless, demand notifications have been issued to the sector for the whole load, including existing sanctioned load / capacity, which is obviously not commercially viable and tantamount to denying load extension. This runs counter to the governments stated objective of maximizing electricity usage.
Apart from issues in energy, the lack of investment in the cotton sector presents further impediments to economic growth:
- Cotton seed which is unproven, substandard and not resistant to pests and diseases (old generation BT cotton)
- Seed supply chain completely destroyed needs to be restructured for the supply of quality seed
- Lack of the International Transgenic technology through proper channel.
- Cotton Seed Variety approval system is very slow and it takes years to make a variety commercially available to the cotton farmers. Private R&D seed companies are ignored in the approval process
- Plant Breeder rights have been formulated but not implemented to confirm stewardships of the variety
- The currently available Pesticides have failed to yield results on the major cotton pest i.e. White Fly, contrary to the claims made by various companies
- One major reason of the cotton crop diminishing is sugarcane cropping up in the best cotton sowing area.
Measures to improve the country’s exports necessitate a greater focus on cotton sector improvements. Future policies must be geared towards an improved, genetically modified and certified seed system, an efficient variety approval system, support for private sector R&D organizations, linkages with research bodies (public, private, local, international), seed companies and other stakeholders, innovative technology using advanced mechanization, targeted input and production subsidy to farmers, and lastly the implementation of Pakistan Cotton Control Act and Cotton Standardization Act 2009 to improve the quality of cotton.
Building the economy necessitates identifying gaps, devising effective policies and working towards consistent improvement despite daunting challenges. The textile industry has invested $5 billion in new plants, machinery & equipment, and more capacity is being added, the results of which can be seen in increased production and exports, but all of this is now risked due to energy concerns. This appears to be a repetition of the past as, whenever the textile sector begins to grow, irrational policy changes destroy the upward momentum. To support the sector’s development going forward, the government must ensure uninterrupted and regionally competitive gas and electricity supply to the entire value chain to enable the sector to keep on marching towards success.