Bailout packages harm competitive sectors, reward bad businesses

LAHORE: All the large business sectors got a bail out once or more to come out of tight situations; benefiting from government largesse instead of improving their business model. Nowhere else are bad business decisions rewarded by the state.
In contrast, the small and medium sector has to survive on the strength of their business acumen. They pay higher interest rates, higher power rates (as some do not have industrial connections); but still survive and graduate up without any government support.
When they suffer loss it is reflected in their lifestyle. Those that weather ups and downs in business without government support come out healthier in the end. Since they operate on their own strength they are more confident in their business dealings. Sometimes those that graduated from small to medium unit also become eligible for government dole out provided to their sector (like apparel exporters in textiles).
They save that subsidy instead of passing it on to their foreign buyers because they owe their existence in export markets to efficiency and quality. Since they are already competitive, they do not need to further reduce their export prices.
There are only 23 cement manufacturing companies in Pakistan. They have increased their capacities from 9.90 million ton in 1999 to 46 million tons now. It is interesting to note that the sector posts heavy profits, but no new investor has entered the cement market. A foreign investor did operate a cement unit for a while, it sold out to an existing cement mill.
It seems that the existing players have firm hold on the market. The cement sector gets protection from imports through protective duties and when at the start of this century Indian cement started penetrating Pakistani markets, a regulatory duty was imposed to protect the cement industry.
Cement rates in Pakistan remain higher than the global cement rates. Imports are curbed through duties.
The Monopoly Control Authority (MCA) in 1999 imposed fine on cement producers on overcharging the consumers and asked them to sell the cement bag at Rs165. The chairman of MCA was removed and fine was never imposed.
Then the Competition Commission of Pakistan found the cement sector operating as a cartel, and fined them Rs6 billion in 2003. The case is still pending in superior courts.
In the same way, the number of sugar mills has remained static at around 70-74 units. The capacity to produce sugar has more than doubled in last 15 years. Pakistani consumers pay very high price of sugar compared with its global price. The millers increased their production capacities on their own will; knowing well the additional capacities could not be exported.
This was their business decision. They ask government to subsidise exports or they will default. They violate laws to increase capacities and now want government to subsidise their exports. They have up till now been obliged by all governments and might well get the subsidy this year as well.
Textile sector made heavy investment in 2003-06 when the interest rates were low. They could have hedged the rate for entire debt period by giving the banks 1-2 percent extra on their low interest loans.
It was their business decision to take the risk. When the interest rates increased from 5-13 percent, the interest of their loans naturally increased accordingly.
The sector representatives asked for interest relief as high interest rates were not factored in their business plan. They claimed that if they default it would be circumstantial default.
They did not realise that in their desire to take maximum benefit from low interest regime they failed to cover their risks.
In the same way they are now demanding subsidy to cover their inefficiencies because they are operating on obsolete technology.
They succeeded in obtaining a subsidy package from the former prime minister. Now that a new PM has come they are demanding more.
They themselves claim that the textile exports have gone up by eight percent in four months because of the PM package, while conveniently ignoring that non-textile exports have increased by over 13 percent during the same period.
Most of the non-textile exports that increased were not included in the PM package and thus received zero subsidies.
The non-textile sectors increased exports on the strength of their better business acumen and efficiencies.