Policy making in Pakistan suffers from a rare and hard to cure disease, and that sickness may very well be dubbed ‘politicization of economy'. The recent case of Punjab government's repeal of excise duty on production of ethanol presents a basket case of our national ailment.
Few clarifications, first. Governments, present or past, are not alone to blame for the perception challenge facing the ethanol sector. Ethanol manufacturers, as all profit-motive driven enterprises, are no angels. For example, given the contribution margins posted by the sector over the last decade, it should be on the top of policymaker's priority list of export-oriented sectors. Similarly, despite its potential as biofuel to reduce oil import by 10-20 percent per annum, the sector prefers to operate in shadows, doing little to lobby its case in public or media.
Over the years, industry's poor rapport has in some part resulted from its upstream linkages with the much-politicized sugar milling sector. Moreover, industry association's reluctance to share official estimates of installed capacity or annual domestic output has also led to speculation, as has lack of clarity on the uses of ethanol for various food- and industrial purposes.
And therein lies the rub. Theoretically, ethanol products, such as rectified spirits, may be used as raw material that can be used in manufacturing of liquor. Officially, all distilleries in the country are export-oriented, with distilleries in Punjab claiming to export as much as 98 percent of their output, which from their perspective is mostly sold to industrial buyers in export markets for uses in production of pharmaceuticals, aerosol products, perfumes etc.
The last Punjab government, in its imposition of Rs 2 per litres excise duty on all ethanol production in the province, clearly took a dim view on this subject. Because theoretically distilleries' output may be used for production of controlled substances such as liquor, whether by local or foreign players, it felt justified in imposing the levy under the Punjab Excise Act, 1914.
When nine out of ten distilleries in the province (save the ex-chief minister's own), petitioned the High Court, it issued a ruling in 2016 noting that the levy was lawful. Now that the levy has been reversed – equally a prerogative of the incumbent government – the issue has been politicized, with little attention being paid to the materiality of the levy.
According to news reports, since its imposition in 2012, up to Rs4 billion had been collected under the levy from 10 distilleries in the province until last fiscal year. Back of the envelope estimates of provincial output suggest that the number being bandied in the media adds up, putting the loss to provincial ex-chequer at no more than rupees six to seven hundred million per annum.
Without questioning the fiscal materiality of that number, it will be far fetched to claim that the government has made a major concession to a ‘favoured' industry. On one hand, eighth distilleries from Sindh enjoyed a cost advantage over distilleries in Punjab as no such levy existed in the southern province, in addition to their proximity to port – which together added up to a significant cost differential to exporters from that region. In its decision to reverse the levy, Punjab government has only created a level playing field.
Second, even if Punjab-based industry's claim of over '98 percent exportable output' were to be disputed, there is weight in the argument that the levy had in effect created double taxation. Consider that the levy was also imposed on liquor-producing distilleries in the province, meaning that even if most of the output were being sold to local liquor producers, the levy had to be paid both at input and output stages.
Nevertheless, the industry must shoulder some part of the blame. For one, it doesn't help that Pakistan's annual ethanol export volume during FY18 exceeded estimates of domestic production. To add insult to the injury, local brewers privately confirm that they procure substantial quantities of ethanol as raw material from distilleries, which raises suspicion on the '98 percent export claim'.
Even so, a good decision has been taken but with bad optics. It would help if the industry association is more forthcoming in future in sharing of details of sector's output, which will not only help highlight its contribution to country's export, but also add transparency to policymaking.
Note: as 7 out of 10 ethanol distilleries in Punjab are private limited, annual production volume of 8 distilleries from Sindh and KP has been used as proxy to reverse-engineer Punjab's share in annual output. Total PEMA members: 18 (used as proxy for industry size); 4 listed Sindh distilleries operated at an average 90% utilization level, used to extrapolate production for 4 non-listed units in the province, whereas 1 KP distillery has been out of operation since 2015