Monday, October 30, 2017

Local businesses lose big under CPEC

https://www.dawn.com/news/1367136/local-businesses-lose-big-under-cpec

Nasir JamalUpdated October 30, 2017

For 30 years, Kamal Amjad Mian’s family resisted the temptation to invest heavily in their electricity cable manufacturing business to avoid creating surplus capacity. Instead, they chose to make regular but smaller investments to keep up with growing market demand.

But then Nawaz Sharif returned to power in 2013 with a promise to tackle the nationwide blackouts through massive investments in new power generation and by upgrading the country’s rundown transmission network. On top of that, China also agreed to pour in billions in Pakistan’s power infrastructure under the multibillion-dollar China Pakistan Economic Corridor (CPEC) initiative.

Both developments offered electricity cable manufacturers an unprecedented opportunity to grow big fast. It was at that time Mr Amjad’s family decided to set up their second plant in Sundar near Lahore. They thought that the new state-of-the-art plant would help their company win business as new power projects under the CPEC initiative got under way.

But the dream of growing bigger remains unrealised as Mr Amjad’s Fast Cables, like other manufacturers, has yet to reap any benefit from the CPEC-related power projects. The Chinese firms working on power projects prefer to import equipment from China rather than source from Pakistan.

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“We could utilise only 40 per cent of our capacity last financial year because of lack of demand,” Mr Amjad said. “The government has also given the Chinese a big advantage instead of giving us a level playing field.

“On the one hand, it has given them relaxation on their imports, but on the other, it has raised the cost of our raw materials by increasing taxes and placing regulatory duty on raw materials used by local producers. The total federal and provincial tax burden on our products has increased to 45pc in the last three years.”

The government says the Chinese investors were allowed tax relief on their imports for power projects in order to ensure their timely completion. “Moreover, our local industry does not have enough capacity to meet the needs of these projects,” a Pepco official argued.

But a senior executive of another cable manufacturing company rejected this claim as frivolous. “If they had any doubt about local suppliers’ ability to meet demand the government could have talked to us. The manufacturers could also invest and increase their capacity if they had enough orders.

“In the worst-case scenario, the government could allow Chinese investors to meet the shortfall with imports. But keeping us out of the competition is not going to help the local industry and jobs,” he contended, requesting anonymity because of restrictions from his employer.

Mr Amjad, whose company became the first Pakistani cable manufacturing facility to have obtained KEMA gold certification from Holland earlier this year for mid- to low-voltage electricity cables because of their international quality, says his company could create another 300 jobs at its second plant if 100pc capacity was used.

“Because of the underutilisation of capacity, our payback period on new investment has increased to seven years from four and a half years earlier. Who would want to invest in these conditions?” he asked. “If the government cannot withdraw tax exemptions for Chinese companies, it should refund us all taxes it charges from us to give us an even playing field.”

Recently, there’s talk of some Chinese investors venturing into electricity cable manufacturing in Pakistan. “That’ll be a good development. But the government should ensure that local investors also receive the same treatment as the Chinese companies. And it should also ensure that they employ local labour and don’t import labour as well.

“We certainly require foreign private investment in the industry. But it is the job of the government that foreign investors don’t get any advantage over local investors or new jobs don’t go to (Chinese) workers. It is time we realised that exemptions to foreign investors and contractors are hurting domestic industry and jobs. At present there is no incentive for local businesses to expand or set up new projects,” insisted Mr Amjad.

However, not everyone is unhappy. The steel factories are in an expanding mode because they are getting orders for CPEC projects. Construction chemical manufacturers are also glad because the Chinese are using their materials instead of importing them.

“Our chemicals are widely being used for CPEC power and other projects. A major reason is that we are cheaper than imported Chinese chemicals and we also have a network of backup services,” said Ahmed Naveed Chaudhry, chief executive of Sika Pakistan.

But he acknowledged that not every industry is reaping the benefits of the investments around the China-Pakistan trade route initiative. “I think the government should put in place a framework to ensure 100pc utilisation of local industry. If we want to benefit from the corridor initiative we have to give our companies their share in the projects.”

Published in Dawn, The Business and Finance Weekly, October 30th, 2017

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