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The contours of the much anticipated AIDP-II have been under discussion in the media for over past two months, with contradictory news reports agreeing at least on one point: the policy will be announced before the end of CY13.
The second iteration of the auto program is a highly debatable issue, as it is expected to set duty structures for the industry for next five to ten years. To recall, at the last stakeholder meeting in October, the assemblers and importers were at daggers drawn, protesting over the mere presence of the opposing party. Ever since, the representative associations of the two sides have engaged in a media war, accusing each other of consumer exploitation. While the contentious nature of the policy may play a part in its delay, it is important to bring to light prospective solutions to the auto sectors current problems.
In its February 2013 report on the car industry, the Competition Commission of Pakistan recommended the "opening up of domestic market to the import of new cars-and reducing protection of local industry to allow foreign competition for the benefit of consumers," and "[in order to] bring in new technology and offer more choice to the consumers". The report charges AIDP-I of placing implicit barriers to entry on new entrants by imposing "discriminatory" restrictions deterring small and medium sized manufacturers.
Using the Herfindahl-Hinrschman Index to measure market concentration, the CCP report demonstrated the highly concentrated nature of the passenger cars segment, which allows the three big players to enjoy undue pricing power. Discussing the supply situation between FY07 to FY12, the report suggests that the industry "failed to meet production targets set in AIDP-I", while it operates at an average capacity utilization of less than 50 percent, which further deters potential new firms from entering the market.
Addressing the question of car import, the report suggests that "allowing imports has a disciplinary impact on domestic firms". It recommends that allowing used-car import "provides a better competitive environment", while criticizing the reduction in allowable age limit and depreciation allowance as moves that "reduce consumer welfare".
The volatile FX reserves situation of the economy has often been trumpeted as a reason to impose high duties on car import. At the same time, it is also arguable that the local assemblers have not come any close to achieving the indigenization levels promised back in the day. According to the report, the effective rate of protection enjoyed by assemblers, ranges from 58 to 70 percent, signifying the added advantage enjoyed by manufacturers over importers due to high tariffs on imports. The high tariffs eat away at potential demand of cars in the country, hurting the consumer and restricting economic growth.
Ideally, the objective of any regulatory policy should be maximization of overall benefit for the economy as a whole. While, the upcoming policy may not be completely successful in achieving the same, it should at the very least aim to strike a balance between the two sides.
The industry has been on a free flight ever since the end of AIDP-II last year, with upward revision in car prices seen on multiple occasions. Still, as CY13 draws to a close, no updates on progress over policy formulation are in sight. While observers may be tempted to accuse the Federal Government of indifference, the progress achieved over GSP+ status for textile sector persuades us to give the government some benefit of doubt. Let us hope that they don jinx it.

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