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August 5, 2020

Innovation and entrepreneurship

Opinion

August 5, 2020

In order for Pakistan to emerge from the shackles of poverty and ignorance, we need to follow the same path as that taken by Singapore, Korea, China and Vietnam – taking measures so we can manufacture and export high technology goods, which is where the real money lies.

We have had much lip service paid in the past to the importance of a knowledge economy but little has been done in terms of changes of policies, laws and duty structures.

The tax structures are lopsided, to say the least, with duties being lower or negligible on finished products while they are high on parts used for their manufacture. This has had a negative impact on the entire industry. In order for manufacturing and assembly to develop, raw materials and other inputs must be zero-rated at all stages of the product life cycle – from the import stage to sales stage.

The present tax and duty structures ensure that Pakistan will never stand with dignity among the major manufacturers of the world. Special incentives also need to be introduced for raw material distributors who import the microprocessors and other items into the country as well as those local assemblers who import various components.

Another important step is for the government to support the local manufacture of products by becoming the major purchaser. We can learn from India in this respect, where the Indian government allowed purchase of only those vehicles that were completely manufactured locally; even the prime minister and federal ministers were required to use only these locally made cars. Our federal and provincial governments must change their procurement rules and encourage purchase of locally manufactured products.

When I was the federal minister of science and technology, that included the IT/Telecom Division as its integral part, I changed many policies to encourage local manufacture. Within a few years, a number of local assemblers had started local manufacture of PCs in Pakistan. The environment was thus created for the assembly, manufacturing, testing, supply, repair and maintenance of IT products in Pakistan. Double digit growth rates were witnessed as local assemblers enjoyed GST & duty exemptions.

Technology providers who resold the locally assembled products also found it profitable to expand to IT services to meet the growing demands of the IT industry. The steps taken to encourage local assembly saved valuable foreign exchange; reduced dependency on foreign goods and created employment opportunities for entrepreneurs and technicians. In 2005, alas, many tax exemptions were removed and many industries collapsed. The industry has never recovered since then.

To get back on track we need to take the following steps: the federal and provincial governments must give a clear preference to locally manufactured or assembled products in all purchases through introducing a system of substantial weightages in the evaluation process.

There is a huge amount of smuggling being carried out right under our noses through the collusion of government agencies. Smuggling by air has been somewhat curtailed due to the Covid pandemic but can only be truly stopped by nation-wide sting operations and strict punishments to corrupt customs officials. There are many electronic items older than five years that are imported as scrap. This must be banned to allow local manufacture to proceed competitively.

Imposition of GST at the import stage, incorrect treatment of PCT codes for microprocessors, ad-hoc assessment, and valuation at customs results in high input costs. This needs to be quickly corrected. Many items manufactured in Vietnam, Bangladesh and other countries, where labour and other costs are low, make it very difficult for our local industry to compete. As a result, imported electronic items have grown at the expense of local assemblers – most of which were forced to shut down due to myopic government policies. There is therefore an urgent need to provide local assemblers relief and exemptions from all tariffs in order to make local assembly viable. Tax exemption must be given for 15 years so that local manufacturers are better able to manage and plan their investments.

There are other major structural problems that need correction. Ashar Aziz, a Pakistani-American entrepreneur and businessman, is the CEO of SkyElectric – a solar energy company operating in Pakistan. He was appointed as a key member of the Knowledge Economy Task Force that is chaired by the prime minister and of which I happen to be vice-chairman. When consulted on the issue of Ease of Doing Business, he stated: “At present, there are a number of hurdles for investing in a Pakistan based entity. While this has the potential to bring in badly needed foreign exchange, issues such as registration of equity to foreign shareholders, and the required pre-registration of loans from foreign entities have made the task of doing FDI business highly problematic.

“If a foreign entity invests USD in return for shareholding in a Pakistani entity, the approval of the State Bank of Pakistan is needed as part of the share registration process. The backlog of share registration now runs in years. In respect of foreign loan processing, [the] SBP has issued new rules to pre-register all loans prior to their wiring into Pakistan…. make Pakistan an undesirable place to start building technology companies, especially if they are based on foreign exchange funding.”

Another important suggestion made by Mohsin Qazi, CEO COMCEPT, relates to the ensuring of contractual rights between inventors and private investors. This is important since startup financing is rarely provided by the banks or financial institutions using traditional loan instruments. The major proportion of seed capital is funded through venture capital firms or through private investors (angel investors). Since this mode of financing is outside traditional banking and the relevant regulations, it is important that the contractual rights be ensured otherwise the likelihood of attracting private investment would be very low.

If Pakistan’s economy is to grow and survive in an increasingly competitive global market then it too has to transition to an efficiency driven, innovation and knowledge based economy. The measures described above are some important steps in this direction that the ministries of commerce, industries, finance as well as the FBR and the Board of Investment must urgently implement.

The writer is the former chairman of the HEC, and president of the Network of Academies of Science of OIC Countries (NASIC).

Email: [email protected]