Reducing cost of doing business must, not concessions

LAHORE: Now that the new government is fully functional, its economic managers would have to be very careful in announcing government concessions to the businesses, as such steps have failed in the past because of inherent weaknesses in the economic system.

The government should focus on reducing the cost of doing business by removing the many hurdles like delayed decisions that are meant to grab money from the businessmen. The emphasis should be on full transparency and equal opportunity to all. Monetary concessions should be the last thing on the agenda of new economic team. The state should not pay for the inefficiencies of the business enterprises.

If the enterprise systems in Pakistan operate at least at regional efficiency, the need for concessions would be drastically reduced. On the government side as well, if it succeeds in bringing the power and energy sector to the regional level, the cost of doing business would decline appreciably.

It would be better if the government concentrates on improving the efficiencies of public utilities in the first 100 days, and persuade the private sector to make similar improvements in the next three months. Once efficiencies improve on both sides, it would be possible to assess the gap in cost of doing business with the competing economies. Immediate concessions would increase inefficiencies of the private sector.

We all know that cost of doing business is high not only due to government policies but also due to lethargy on part of the productive sectors that continue to operate with low power and energy efficiency, lower workers’ productivity, higher wastages and low marketing skills. The private sector in Pakistan in general is far behind the competing economies in all the above spheres. As a first step, the new government should ask all factories to conduct energy audit in their concerns. Energy audit conducted in the basic textile sector has already proved that mills can save 10-25 percent electricity through minor and costless changes in the set up of their production halls. Further savings can be made by improving the quality of electrical equipment currently in use. The investment required in this regard is so small that it can be recovered through savings in electricity bills within four to nine months.

Small mills that improve their electricity efficiency through energy audit should be rewarded with lower mark-up on investment they make for this purpose. The energy saving of 15-25 percent would bring down the production cost substantially. If the government succeeds in improving the efficiencies of power and energy sector in next 100 days it would result in tariff reduction. This would further help the manufacturers. It is worth noting that procedural inefficiencies in exporting industries also increase the costs substantially.

Foreign productivity experts engaged by Small and Medium Enterprises Development Authority (SMEDA) in apparel and auto parts sector have demonstrated that the efficiencies in delivery, set-up time, labour, wastage control, repetition of work could be improved simply by streamlining the procedures without any financial investments. The industries should be encouraged to improve their procedural efficiencies. Any concession that the government decides to give to the manufacturers should be based on the cost of industry that was energy as well as procedural efficient.

Productivity improvements of up to 40 percent have been recorded in both apparel and auto parts sectors when they achieved both energy and procedural efficiency. The entrepreneurs in Pakistan tend to neglect the good management policies and capacity building of their human resource.

The improvement in productivity of reformed industries should be highlighted and appreciated at the highest level to motivate over 99 percent of our industries that operate inefficiently due to simple procedural flaws. The new economic managers should realise that less than one percent of the 3.2 million small and medium enterprises in the country were in the documented sector. Even these enterprises operate at low efficiencies.

The situation in remaining 99 percent SMEs is much worse. While announcing a relief package for the regular industries, the government should motivate the non-documented SMEs to improve energy and procedural efficiencies. It should provide concessionary credit to these enterprises to upgrade their technology.

Larger industries like spinning, weaving and processing should also be asked to upgrade their technology as new energy efficient machines in these sectors consume 40 percent less energy. They should be asked to upgrade within a period of three years or shut down. All the three are high power and energy consuming sectors and are wasting thousands of megawatt power due to inefficient technology.