Regionally Competitive Energy Tariffs and Textile Sector’s Competitiveness: A report by PIDE

Pakistan Institute of Development Economics (PIDE) has launched its comprehensive report on energy tariffs through a special webinar. The report summarized the Textile sector’s competitiveness in the region and the current Government’s policy of “Regionally Competitive Energy Tariffs (RCET). PIDE report has discussed three major fields:

1. Policy
2. Raw materials
3. Energy tariffs.

According to the report of PIDE, RCET had boosted textile exports and brought economic stability, and its abandoning by the Government will have dangerous consequences for the industry. The RCET policy was started in late 2018. The policy benefitted the textile sector of the country and helped boost exports. However, the change in September 2020 that has raised the energy tariffs has been problematic. All the factors that make exports regionally uncompetitive, the most important one are energy tariffs.

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. The textile sector impacts the lives of 25 million people out of a 220 million population. 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, revising the tariffs can have adverse impacts where the rate is 9 cents/kWh ahead of Vietnam, India, and China.

Similar tariffs of Bangladesh’s (9 cents/kwh) are not equal to those in Pakistan due to the difference in the textile industry that has developed there. Bangladesh now has a prevalent downstream sector (the one that makes products closest to the consumers) that produces high-value goods. 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 the textile sector investment, arguing that a 10 percent increase in the taxes would decrease investment by 1.1%. The study also found that tariff above 7.5 cents/kWh is not competitive, rendering the current policy of 9 cents/kWh inefficient and risky in the long run.

Gohar Ejaz, ex-Chairman APTMA and 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 the 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 faced by the textile sector in Pakistan.

He explained that there are only three variable costs other than raw materials for the textile industry: labor cost(wages), energy cost, and depreciation of the capital goods(machinery). He said that if we look at the balance sheet of the top ten textile companies in Pakistan, which have done innovation, and have substantial 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.

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 the textile industry’s challenges, he argued that the textile industry was previously taxed equal to 1 percent of sales, which is equivalent to 20% of the profit. Last year this turnover tax was increased to 1.5 percent of sales, so it is 30% of the profit.

This example of Gul Ahmed Textile poked a hole in the academic argument of “need for innovation,” pointing out that Pakistan’s government policies are not favoring innovation either. Explaining the cost of energy, he told 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 price anywhere in the region. However, he said only 15% of Pakistan’s textile companies are vertically integrated where they have their gas power plants running without any subsidy.

Gohar Ejaz told the attendees that he had requested the incumbent Government to give SMEs subsidies at 7.5 cents/kWh equal to regional cost. He argued that the Government had allocated only 1.4% of the textile industry’s revenue, 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, 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 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 reasonably.”

In a nutshell, the Government should revise the textile industry’s tariff to survive and be competitive in the region.


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