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Current RCET policy can lead to shutdown of textile industry: PIDE

Pakistan Institute of Development Economics (PIDE) launched a comprehensive report, on energy tariffs arguing that PTI govt's decision to abandon the RCET policy will make country's exports uncompetitive and risk losing gains of the past 18 months. The RCET rate should not be above 7.5 cents/kwh, it argued.

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Pakistan Institute of Development Economics (PIDE), Islamabad based respected think tank, launched its comprehensive report on energy tariffs through an impressive webinar on Saturday and argued that Imran Khan government’s policy of “Regionally Competitive Energy Tarrifs (RCET)” had boosted textile exports and brought economic stability – and its abandoning by the government will have dangerous consequences for the industry.

In late 2018, the Government of Pakistan had introduced the Regionally Competitive Energy Tariff (RCET) policy. PIDE report argued that which RCET benefitted the textile sector of the country and helped boost the exports. However, the change in September 2020 that has raised the energy tariffs has been worrisome for the industry – since of all the factors that make exports regionally uncompetitve the most important one is energy tariffs.

In this webinar launch of the PIDE report on 27th March, the impact of the RCET policy on the competitiveness of the textile industry was discussed from several angles. Razzaq Dawood (who is practically Commerce Minister), ex-finance minister Sartaj Aziz and several key industry leaders including Bashir Mohammad of Gul Ahmed and Gohar Ejaz, Parton in Chief of All Pakistan Textile Mills Association (APTMA) participated.

PIDE Webinar was live broadcast on YouTube and its recording can be seen at:

PIDE Webinar on RCET for Textile Exporters

The webinar was hosted by Dr. Nadeem ul Haque, Vice-Chancellor PIDE. Dr. Nadeem Ul Haque is a respected economist who has previously served as the Deputy Chairman of the Planning Commission of Pakistan and has worked with IMF for more than 20 years. Many stakeholders of the textile industry attended and even spoke at the webinar.

Major discussants – as pointed out above – included: Abdul Razak Dawood, who is the Adviser for Commerce and Investment to the PM; Gohar Ejaz, Patron-in-Chief All Pakistan Textile Mills Association; Bashir Muhammad, CEO Gul Ahmed; Dr. Khadija Malik Bari from Islamabad Business School and Dr. Aqdas Afzal from Habib University. Senator Sartaj Aziz, Former de-facto Foreign Minister in PMLN government and many other distinguished guests participated.

Pakistan’s textile sector, comprises 8.5 percent of the country’s GDP, employs 40 percent of the labor force (19 million workers), and contributes 60 percent to Pakistan’s export sector. All in all both directly and indirectly the textile sector impacts the lives of 25 million people out of a 220 million population.

After the opening statements introducing the webinar, the report was presented by PIDE.

Read More: Fall in textile exports put on seasonal slowdown in February 2021

PIDE Report on RCET

PIDE report is titled, “Regionally Competitive Energy Tariffs and Textile Sector’s Competitiveness.”

Under the Regionally Competitive Energy Tariff (RCET) policy, the government of Pakistan offered tariffs at par with the regional players like Bangladesh to make the industry regionally competitive.

The challenges identified by the 40 page long PIDE report are in three major fields, namely policy, raw materials, and energy tariffs.

From October 2018 onwards, under RCET policy, the government of Pakistan offered Regassified Liquified Natural Gas (RLNG) tariff at $6.5/mmbtu, and similarly since January 2019 electricity tariffs were 7.5 cents/kwh. However, the electricity tariffs were suddenly raised to 9 cents/kwh in September 2020.

PIDE report argues that the regionally competitive tariffs that the government has adopted since late 2018 of 7.5 cents/kwh contributed to the recent outshining performance of the textile sector. However, now revision of the tariffs can have adverse impacts – feared PIDE.

Pakistan’s regional competitors – that compete against its products internationally across the EU and the North American markets – all have lower tariffs compared to 9/kwh as shown below in the table:

RETC Regional Comparison

Source: PIDE, 2021

It must be noted that Bangladesh’s tariffs (9 cents/kwh) looking similar on the face, are not equal to the ones in Pakistan due to the difference in the kind of textile industry that has developed there.

Bangladesh now has a prevalent downstream industry (the one which makes products closest to the consumers) that produces high-value goods and Pakistan has an upstream industry (like weaving and spinning) that produces low value-added products.

This high tariff of 9 cents/kwh, since September 2020, according to the PIDE report can potentially lead to a “near shutdown of the upstream industry” as Pakistani textile manufacturers will have to compete with cheaper imported products.

PIDE report pointed out that raised energy tariffs would lead to a decrease in investment in the textile sector, arguing that a 10 percent increase in the tariffs would decrease investment by 1.1%.

Pakistani Policies or state of crisis?

The second issue addressed by the PIDE Report was “Policy”. The report identifies arbitrariness of government policies, their unpredictability, inconsistency and non-conclusiveness. Dr. Nadeem, Vice Chancellor PIDE, remarked during the webinar, “our government makes policies like they are made in a state of crisis.”, implying that there is a lack of long-term policy making by the governments.

PIDE report also pointed out that the raw materials being used the country have poor quality, area of production of cotton is falling and lastly no research and development is being done to improve the quality of textile sector’s raw material.

PIDE report concluded its diverse findings by arguing that though various factors are adversely affecting our export potential but among all the factors hampering our textile sector’s competitiveness, energy tariff is at the top; making up for 35-40% of the conversion cost.

The study also found that tariff above 7.5 cents/kwh is clearly not competitive, rendering the current policy of 9 cents/kwh inefficient and risky in the long run.

Read More: Standing Committee on Commerce concerned over high textile tariffs

Pakistani Exports: Challenges beyond RCET

After the presentation of PIDE report, firstly the academics Dr. Aqdas Afzal from Habib University and then Ms. Khadija Malik Bari from IBS commented on the findings of the report.

Dr. Aqdas’ main points were that government, and the researchers should focus on why the cotton production is falling and he pointed out that the biggest challenge was innovation. He said that the textile sector is going through technology shocks, and the Pakistani textile industry is not catching up.

Dr. Aqdas also argued that research is needed to find out if the consumer preference has changed to synthetic fibers rendering low demand for original cotton products.

Dr. Khadija had a major contention with the ongoing discussion. She argued that the Regionally Competitive Energy Tariff (RCET) is not the permanent solution and is only a temporary fix to a huge problem. She said Pakistan’s textile industry is stuck in a ‘low skill-low competition trap’, where the textile sector is not improving itself as no innovation is taking place in the sector.

She added that no improvement in the supply chain mechanism has taken place over the years. Universities and other research centers have not been approached by the textile sector for any mechanism to judge the performance of the sector.

Dr. Khadija argued, “export is not the only metric of performance” and making products cheaper on the back of low wages and subsidies is making the industry weaker. She reiterated Dr. Afzal’s points that innovation is the only long-term solution to increase the competitiveness of the industry.

Read More: Textile sector fears losing orders due to unavailability of cotton yarn

Analysis of Industry’s challenge by Mr. Gohar Ijaz

Gohar Ejaz, ex-Chairman APTMA and currently its Patron-in-Chief participating in the debate commented on the PIDE Report and also responded to the earlier comments made by the academics on the challenges of innovation in textile industry.

He said that the energy cost as a percentage of sales is 12 percent when the RCET is 7.5 cents/kwh. He gave an excellent analysis of the current situation and challenges being faced by the textile sector in Pakistan.

Gohar Ejaz explained to the audience that are only three variable costs other than raw materials for textile industry namely labor cost(wages), energy cost, and depreciation of the capital goods(machinery).

He argued that if we look at the balance sheet of the top ten textile companies in Pakistan, which have done innovation, and have huge domestic footprint like Gul Ahmed textile (one of the largest companies in Pakistan) then we get a very discouraging picture regarding the return on innovation. Gul Ahmed is worth around $ 500 million, has a sale of Rs. 80 billion Rupees per annum. 50 % of the sale is domestic and has created huge impact though its innovative product line, “IDEAS”.

Gohar Ejaz pointed out that last year’s net-profit for Gul Ahmed Textile was only 3.2% of sales, and if we take the 10-year average, the profit is 5% of the sales. Explaining further the challenges of textile industry he argued that textile industry was previously taxed equal to 1 percent of sales, which is equal to 20% of the profit. Last year this turn over tax was increased to 1.5 percent of sales, so it is 30% of the profit.

This example literally poked a hole in the academic argument of “need for innovation” pointing out the government policies in Pakistan are not favouring innovation either.

Gohar Ejaz added that even if the companies don’t make any profit this tax is still charged on the turnover. He disagreed with Dr. Khadija’s earlier argument when she had said that textile sector is not innovating. He argued in turn saying that Pakistan is a country where unfortunately no Research and Development (R&D) is being done in any sector at all, and only the textile sector cannot be singled out.

Explaining the cost of energy he told the audience of the PIDE webinar that where in-house energy generation is being done, the cost of energy is 6.5 cents/kwh, in line with the cost anywhere in the region. However, he said only 15% of textile companies in Pakistan are vertically integrated where they have their own gas power plants running without any subsidy.

Gohar Ejaz told the attendees that he had requested the incumbent government to give subsidies for SMEs at 7.5 cents/kwh equal to regional cost. He argued that the government has given only subsidies that are 1.4% of the revenue of the textile industry, of value Rs. 29 billion.

He said that if these SMEs don’t get regional tariffs, they will get disconnected and shut down. Pointing to the NEPRA ads he said that last month according to NEPRA cost of producing electricity was 3 cents/kwh.

Even after line losses and profits by NTDCs and DISCOs, it all costs Rs.11/unit. However, the 7.5 cents/kwh is 12.40 Rs/unit, which is more than all the costs and profits that can be deducted.

Thus, he said that the government is not doing any favors by giving this RCET at 7.5 cents /Kwh and that government should not pass, “others’(government’s/NTDCs) losses on the textile industry and price the industry fairly”.

He said when the cost is Rs 11/unit and the government is charging Rs. 26 per unit and is calling it a subsidy, it is simply not fair.

Mr. Gohar said that his only demand for the textile industry is “do not put us in the system”. The government according to him wants to regulate the IPPs in textile sector producing energy for their own purposes and wants to sell it back to them with higher tariffs and higher costs than what they are producing it at.

This will lead to further shrinkage of the 5% profit that the companies are making. He said, these policies have led to less capital accumulation by the textile industry, and thus hamper the exports.

He said that the textile sector is back in Pakistan after 15 years and it needs capital accumulation. He also commented on the low worth of the top 100 companies in the country and suggested that the minimum wage be increased by 20%.

Read More: Gohar Ejaz: Textile Vision 2025

Razzaq Dawood explains govt’s position 

Abdul Razak Dawood, Adviser for Commerce and Investment, and de-facto Commerce Minister, participating in the debate said that everyone in the PTI government wants the RCET for the exporters. However, he added, the major hindrance is differentiating the exporters from the local manufacturers.

Painting a positive picture of the situation, he said that recently, under the SBP’s recent loan applications for a temporary economic relief facility (TERF), around 60% came from the textile sector alone.

Mr. Dawood added, agreeing with the PIDE Report, that the textile sector has also experienced approximately $1.60 billion investment during the first half of the current fiscal year. He argued that these overwhelming loan demands for new investment from the textile sector are partially due to competitive energy tariff rates and partially due to concessionary mark-ups.

He argued that in the short-term country is dependent on the textile sector to carry it forward, and the government is working on incentivising technology textile in Pakistan.

Sartaj Aziz, agreeing with Razzaq Dawood, said that we will have to depend on the textile sector in the short run. He said that Pakistan is still stuck with 1st generation of BT cotton while the world is at 4th gen.

He argued that we must work on the reasons for people substituting cotton with sugar cane as cotton production is down by 18 percent and sugarcane is up by 27%.

Speaking at the conference, the Founder of Bareeze, Mr. Hamid Zaman, said that the domestic industry is giving the government 5 times more taxes than exporters however, the government does not want the same RCET for domestic industry.

The rest of the speakers also pointed that Pakistan’s policy inconsistency on all different levels is the major problem. All speakers agreed that the RCET policy is not a subsidy but a fair price. All agreed that value chain analysis is needed by the industry to improve efficiency.

Read More: Is India the answer to Pakistan’s current cotton yarn crisis?

Closing remarks

In the closing remarks, Dr. Nadeem Ul Haq added that the situation is dire. He countered Mr. Gohar saying corruption is not the problem and rather the incompetence is. Policies are being rushed, not being presented in the parliament, not being debated in public, not being shared with anyone outside a little circle. He said it’s like a tale of a messy house, and that when one keeps messing up the house and when the house falls, he or she blames it on somebody.

He added that the policies are made without any proper framework and it is like the country is always in crisis. Agreeing with Dr. Khadija, he said at the end that long-term solutions are needed for the industries to prosper in the long-term.

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