Difficult times for Organised sector

Since 1984, Tariq Sayeed Saigol has been Chairman of the Kohinoor Maple Leaf Group, which has interests in textiles, cement manufacturing and energy.
The author of Textile Vision 2005, adopted by the Government in 2000, Saigol has also served on several government commissions and committees, and has been Chairman of the All Pakistan Textile Mills Association and the All Pakistan Cement Manufacturers Association. Until recently, Saigol was also a member of the Central Board of State Bank of Pakistan. Saigol, an Aitchisonian, has keen interests in education, and serves on the boards of some renowned educational institutions of the country.
DIFFICULT TIMES FOR ORGANISED SECTOR In his conversation with BR Research, Tariq Saigol touches upon various issues in the textile and construction industry. He is also critical of SBP''s tight monetary policy stance stressing the need to properly administer the pricing side. He is all for increasing tax revenue and eliminating subsidies from the system. Following are the edited transcripts:
BR Research: As an industrialist, who was on the board of the central bank''s monetary policy committee until recently, what''s your view on the hawkish stance adopted by the SBP? Tariq Saigol: High inflation is not only a monetary phenomenon; it is a combination of other factors as well.
Blindly pursuing a tight monetary stance, without an adequate fiscal response would lead to a slowdown in growth and crowd out the private sector, which is already facing a large number of problems. Ever increasing interest rates are not really going to reverse high inflation. Of course, there is the element of government borrowing and note printing, but high inflation isn''t only because of excess money supply. It is also due to the government''s pricing administration. They keep increasing the prices of energy, petroleum, wheat, which keeps feeding into the system.
BRR: Do you think the central bank should have stopped lending to the government?
TS: In its present form, article 9 of the State Bank Act, squarely places the responsibility for fixing the level of government borrowing on the part of the central bank''s board of directors.
There are some amendments on the anvil, for the State Bank Act that might reinforce the position of the State Bank to quantify the amount that government may borrow -- 10 percent of there net collections. But even in its present form, there were sufficient powers for the Board to have acted with more resolve.
My feeling was that the board of directors was inadequately acting in allowing unabated borrowing by the government. We should have stopped the tap of borrowing, even if it meant dishonouring the cheques of the government.
It would be unfair for me to comment on what other directors thought, but I certainly did record my voice there, because I thought we were in the default of our fiduciary responsibility. However, I was outvoted there.
Being on the Board is an honorary position; there is no financial benefit and one serves at the pleasure of the government. So, in the end, they could have removed us and put certain fellows who would agree with everything that the government desired. But at least we should have been more resolute to speak up and perform our duties.
BRR: Would the amendments in SBP Act correct the situation?
TS: I feel the amendments are much-trumpeted; it will not change the ground reality. The ground reality is that we have a very serious fiscal mismatch, which can only be gradually reduced in two ways.
Firstly, you have to generate more income, such as by increasing tax revenue and taking serious steps to eliminate the subsidies and exemptions, and secondly by doing something with the public sector corporations.
BRR: How do you see things moving ahead?
TS: It''s a mix bag at the moment; the likes of the FMCG, auto and fertiliser sectors are doing great business. But if you look at construction industry, such as steel and cement, they are in a mess.
For the parallel economy, the unrecorded economy, which I think is bigger than the popular estimates of around 30 percent, things are relatively better. Those who happen to be in the unfortunate position of being in the documented part of the economy have to go through this messy period. However, several small and medium businesses, for instance, retail trade, they don''t pay anything in taxes.
Similarly, power tariffs are clearly on the wrong side of the Laffeur curve. Increasing power tariffs by 2 percent every month is actually pushing those that pay to the wall. The more you push prices up, the more you induce people to steal.
So for a large part of the organised sector I see a very difficult time. I don''t see interest rates coming down and I don''t see energy piece falling into place.
CEMENT & CONSTRUCTION
BRR: With the rural economy growing, do you think the transition from ''kacha'' to ''pakka'' houses will help boost cement demand?
TS: There has been negative growth in cement consumption in the last six months, which is contrary to our earlier assumption that cement consumption would increase after the floods.
My colleagues argue that because the government spending is next to nothing, demand is tapering off. But we don''t have statistical data to make an assessment. We cannot answer, whether only diminished demand from the government is the culprit or is it due to falling consumption by the private sector. However, one thing is certain, aggregate demand has contracted.
But you have to understand that if it is the kacha house that has been destroyed, then they will again build kacha house and not concrete house.
The problem is that cutting PSDP further adversely impacts large and medium scale industrial growth. Its concurrent affect, on around 40 industries, like steel hardware, pipes, sanitary ware, steel, electric meters and wires etc, is huge.
BRR: What are the recent trends in domestic demand?
TS: Up until 2006 and 2007, growth was much bigger in the north of the country compared to the south. However, in the past two years cement demand in south has increased.
The reason could be the fact that political problems have contracted demand in Khyber-Pakhtunkhwa, and therefore the economy is not growing there. It could also be because normal activity has resumed in Karachi and Hyderabad. It is guess work, but figures show that growth in Sindh has been better than Punjab.
BRR: Is your cement firm, Maple Leaf, out of troubles?
TS: We are currently operating at 60 percent capacity, as consumption remained subdued at 23 million tons.
Export from the north is very difficult. Freight expenses from our plant to Karachi kill us; we cannot compete with manufacturers located in the south. So, although we have been exporting on marginal cost, we only sell if the price is over and above variable expense.
As for the debt, we went to creditors and restructured our debts last year. The loans have been rescheduled, and the banks insisted that sponsors should put more money. So we injected Rs 1 billion in the capital. Still, until and unless there is growth in the consumption, we will be in a precarious position. We all are fighting for market share and selling below cost.
BRR: What steps are you taking to turn Maple back into profits?
TS: We have set up a waste heat recovery plant, which basically captures heat and converts it into steam to make electric power. It is a cheaper source of electricity. This project will commence operations in early February, and we will be relying less on Wapda.
Secondly, we have revamped our distribution network, and also our logistics department. All of these are cost saving measures and we would be able to generate positive cash flows.
We are also trying to build a market in Afghanistan and further north. All of these efforts are taken to reduce loss, but the bottomline is dependent on consumption growth and higher sales.
BRR: How long would it take to come out of losses?
TS: A lot depends on pricing. Lots of manufacturers have now realised that it is a kind of zero sum game to keep trying to sell goods at loss just for the market share. So I have seen some sensible pricing these days. Although they are selling much below total cost but at least prices are now covering more than just the variable expense.
BRR: What about export to India?
TS: India is raising more and more non-tariff barriers. They are delaying the renewal of BIS certificate license, and so we are unable to export at present.
BRR: Could taxation benefits help?
TS: The cement industry is really overtaxed; it is subjected to both excise duty and sales tax. Our argument is that this is not a luxury item, not an item where you want to discourage consumption like cigarettes.
So they must not charge excise tax. The government is earning around Rs 100 per bag by charging Rs 650 excise duty per ton, 2 percent special excise duty, and 17 percent sales tax. The price of one bag of cement is currently Rs 320, and if taxes and duty fall to Rs 50 per bag, then there are chances that demand will increase.
TEXTILE
BRR: There are many people who think that textile exports can be doubled. What''s your take on that?
TS: Exports might increase this year because of cotton price hike but they cannot be doubled overnight.
First, because there has hardly been any investment in the textile industry in the last few years, as banks are shy to lend. Non-availability of credit is a very serious problem. And second, because we have not made a breakthrough in cotton production. We are very late in adopting BT cotton; it should have happened long time ago.
BRR: Where do you see cotton production in Pakistan by 2015?
TS: If they properly adopt BT cotton and water availability remains satisfactory, it is possible to reach 18 million bales.
BRR: What is your take on EU Trade?
TS: The recent concessions would have minimal impact. You see the deal was badly negotiated. It was mostly for items which we don''t encourage to export, such as yarn or greige cloth. We wanted concession on value added item, but they didn''t give waiver on value-added items because there is a huge Indian and Bangladeshi lobby against Pakistan.
BRR: Should there be a separate textile ministry?
TS: I don''t think so. In fact, I think there is no need for commerce ministry as well. Trade and commerce and industries should be under one ministry as in Japan, an MTI type approach. But in Pakistan, it is a fashion to create more and more ministries to accommodate members of the Parliament.
BRR: What''s your view on RGST?
TS: I support a value-added tax in principle provided it is administrated properly. They should zero rate the sector. There is still an element of implied taxation at input stages, which needs to be drawn back.
I fear that if the exemption from RGST is taken away and textile is brought into RGST claim, there will be long delays in payment of funds and filing of spurious claims as happened with flying invoices during 2001 to 2004.
I think zero rating and automatic refund of taxes is of paramount importance. I am pro-RGST -- even for textile. But until and unless I am not sure that the past mistakes will not be repeated, I would not support its implementation.
From my last experience, I am not sure of change -- because it''s the same people and the same system. But as far as the principle of taxation is concerned, I am not against it.
Interview by Ali Khizar Aslam