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May 16, 2019

Bailout blues: In low-subsidy, high-cost milieu, only efficient will endure


May 16, 2019

LAHORE: The hike in the cost of doing business that would follow the International Monetary Fund (IMF) deal would make most of the industrial sector uncompetitive.

Their survival is linked to improving efficiencies, cutting costs, and waste, and prudent interventions by the cash-starved government. All of these things would become hard to come by down the line.

It would be even harder for the government to match the facilitation to the manufacturing sector with the concessions provided to their counterparts by the competing economies. It is not even certain whether the government would be able to continue with the subsidy that it has been providing to five exporting sectors in power and energy.

However if it is able to continue this facilitation even with reduced subsidy it should be tied to improvement in their efficiencies. Subsidies are granted to the industry when they are unable to operate due to high cost of doing business.

The high cost could be due to flawed government policies or the lethargic attitude of the industries that look towards the government to finance their inefficiencies through subsidies. The government in fact should remove policy flaws and refrain from subsidising the inefficiencies of the industries.

One particular inefficiency common in all industrial sectors is the energy mismanagement. It may be owing to the power guzzling equipment or bad management at the manufacturing floor. Periodic upgrade of technology is essential to improve energy efficiency.

In recent years the difference between the energy efficiencies of even ten-year-old technology and latest technology is very high. An old plastic moulding machine for instance consumes the same amount of energy that latest equipment with four to five times higher productivity consumes. A modern spindle consumes 60 percent less power than a 10 year old one.

Its production speed is also higher. The industrial sector continues to mostly operate with old technology because its inefficiencies are covered either by straight government subsidies or corrupt practices (power theft).

Bad management at the manufacturing floor also contributes to higher use of energy. For instance it has been observed that a machine that operates at low temperature is installed beside a machine that operates at very high temperature. It takes lot of energy to lower the temperature of cold operation machine when there is high temperature equipment installed besides it.

Similarly it would require to heat the hot operation machine kept beside cold machine as it lower the temperature of the surrounding. The absence of aeration on the manufacturing floor makes the atmosphere suffocating and impacts productive of workers and machine operations. The answer lies in energy audit of all manufacturing floors so that proper relocation of the equipment is done and exhausts could be installed at proper places.

A few hundred industries that went for energy audit were able to save 15 percent power or gas cost after they acted on the advice of the energy auditors without incurring any additional cost. With minor investments recoverable in a year the savings went up to 25 percent. It is unfortunate that 95 percent of the industries in Pakistan are operating without energy audit. The high cost of manufacturing is passed on to the consumers on domestically used products. Since this cost could not be transferred on exports the government mostly bears the subsidy or the exports stagnate or decline.

The other factors contributing to inefficiency include lower worker productivity, higher wastage, and low marketing skills. Procedural inefficiencies also add to the cost particularly that of exporting industries. Foreign productivity experts engaged by Small and Medium Enterprises Development Authority in apparel and auto-parts sector have demonstrated that the efficiencies in delivery, setup time, labour, waste control, repetition of work could be improved simply by streamlining the procedures without any financial investments.

As a result of this exercise productivity improvements of up to 40 percent have been recorded in both the sectors. The entrepreneurs in Pakistan tend to neglect the good management policies and capacity building of their human resource.

The authorities should realise that less than one percent of the 3.2 million small and medium enterprises (SMEs) in the country are in the documented sector. Even these enterprises are operating at low efficiencies.

The situation in remaining 99 percent SMEs is much worse. While announcing any relief package for the regular industries the government should motivate the undocumented SMEs to improve energy and procedural efficiencies. It should provide concessionary credit to these enterprises for the upgrade of their technology. The growth of SME sector is critically important for pushing the economy forward as that’s where major job creation happens.

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