Textile woes: solution to problem is in consolidation of sector

Since the Textile Policy announced this week failed to point out significant actionable steps - leaving much to be dealt with later, we at BR Research thought it would the right time to suggest some of our own. In this article we argue that all policy measures should be directed towards consolidation of the sector using both the principles of market and moral suasion.
Pakistans textile industry confronts four major, partly interrelated, problems: an energy crisis, lack of value addition and branding, technological standstill and over burdening debt. Central to these is a fifth impediment: fragmentation crisis, particularly evident by the industrys rising marginal cost of production and failure to compete in the international market despite gradual currency depreciation.
For the past many years, the industry has been receiving various sorts of benefits, subsidies, incentives, or other types of support programmes from the government. While many such programmes fell short of meeting the industrys demand, many were also poorly placed "band-aid" style measures which aimed at treating the symptom and not the cause.
But it wasnt the governments fault entirely. Many of the well-intended programmes, such as those for supporting research and development (R&D), export refinancing schemes, and low priced loans, were ill-used by the industry. Sources reveal that a great amount of such funding found its way to unproductive avenues such as real estate and stock market punting, or otherwise used for trading and hoarding practices.
Hence, the case for consolidation is not just based on gaining the economies of scale, but also that regulatory oversight becomes easier and cost effective if the subjects are not countless, small and dispersed. In this context, trade policies that have historically focused mainly on textile have been unable to achieve any good so far. But a good textile-specific policy action can flip this dynamic.
Five basic elements should constitute the framework:
-- Send long-term price signals to promote vertical & horizontal integration and boost value addition in the industry. These measures may include:
-- Pegging R&D support to both the size of the firm and the level of value addition it has.
-- Providing tax incentives. For instance: allowing a n-year tax discount to firms following their amalgamation
-- Set up a special textile specific cell in the Securities Exchange Commission Pakistan to promote sector consolidation. Such a wing should work on listing, monitoring and ensure effective regulation amongst other ancillary measures.
-- Likewise, the textile ministry should set up a body to liaison with banks - keeping the central bank in the loop - to come up with ways and means to resolve the industrys debt burden by means of refurbishing and restructuring. Albeit with strict supervision to ensure that textile businesses do not misuse the facilities. Again, such supervision can be more economical and effective if the players are consolidated.
-- Revamp labour laws such that labour unions do not become a deterrent for sector consolidation
-- Bring together those textile players that need power and those that have spare power generation capacities. A special cell can be established to facilitate inter-industry transmission/distribution of power. One way to resolve this is to ask discos like KESC and Wapda to act as intermediaries, set up transmission/distribution lines, and charge fees for their services. Yet again, such a system would be more feasible if the industry is consolidated.
Like most processes of change, the proposed flurry of mergers and acquisitions will not be taken with open arms, but creating synergies is the only way forward. No consolidation means no serious innovation at scale, resulting in fewer success stories.
If these small and scattered Pakistani textile producers continue the way they are at present they will not have the capacity to compete with their global peers. It simply isnt logical to have a bout between a feather weight and heavy weight boxer, is it? At least, not in the post-WTO free-market regime.