Supporting our textile exports

Can local levies drawbacks replace regionally competitive energy tariff?

For Pakistan’s textile industry, energy is the leading component in the conversion cost. According to a recent study by Pakistan Institute of Development Economics (PIDE), among all the factors that make the textile sector regionally uncompetitive, energy tariff lies at the core, since it makes up 35-40 percent of the total conversion cost. Therefore, it is critical to ensure the availability of energy at regionally competitive tariffs.

To address this issue, the government of Pakistan introduced Regionally Competitive Energy Tariff (RCET) policy in 2018. Under this policy, the government offered a regionally competitive gas tariff at the rate of $ 6.5/mmbtu and fixed electricity tariffs at 7.5 cents/kWh for export-oriented units of the zero-rated sectors.

In September 2020, the electricity tariffs were revised from 7.5 cents/kWh to 9 cents/kWh. The textile industry is doing great even after the increase in electricity

However, another mechanism for concessionary energy tariffs has been proposed recently to replace the RCET policy with a duty drawback scheme on local taxes and levies (DLTL). The proposed scheme will be offered to export-oriented units of the zero-rated sectors. Under this scheme, they will receive a refund against the energy tariffs paid during the production process after filing a refund claim at the export stage.

Will such a schemes work more efficiently in making the sector regionally competitive?

First, let us examine the primary rationale for the demand and introduction of the competitive energy tariff. The rationale for the competitive energy is to provide a regional level-playing field to our export-oriented units of the five zero-rated sectors. The provision of a direct concession based on the unit of service cost of energy, which is termed as the competitive energy tariff, is an efficient way. The DLTL, by comparison, involves extra costs through delay and required documentation.

In September 2020, the electricity tariffs were revised from 7.5 cents/kWh to 9 cents/kWh. The textile industry is doing great even after the slight increase in electricity tariffs.

The DLTL is a refund mechanism, which mostly involves the release of claims at the end of a fiscal year. The recent release of Rs 5.5 billion in DLTL claims, due since 2014, shows that the delay cost can be quite high in Pakistan.

The submission of a refund claim also involves significant documentation and shoe-leather cost, for instance, audit and verification of claims by an authorised bank before submitting the refund claim.

The core objective of making the textile sector competitive will therefore not be realised by providing delayed concessions. The sector is emerging strong and needs finances at this stage to grow. A direct and timely provision of relief will have far-reaching effects.

Now consider replacing the competitive energy tariffs with a DLTL. Under such a scheme, the textile units will have to pay the high energy tariffs that make them uncompetitive - the electricity tariff is 14 cents/kWh. The output cost will rise and become regionally uncompetitive.

Since the inputs imports are subject to a zero rate, a unit at the middle of the value chain or downstream will prefer imported inputs over costlier domestic inputs. Domestic units upstream of the value chain will suffer the most. Such a policy will be catastrophic for the spinning sector as it will be difficult for the spinners to stay in the market by offering competitive rates.

The introduction of a DLTL scheme for energy tariffs is based on the supposition that it will have a trickle-down effect for the whole value chain. This is not a realistic assumption. Exporters in the textile sector (merely 28 percent of the listed textile units) seldom share the benefits of such a scheme with their suppliers. The main beneficiaries of such a scheme will be the vertically integrated units, which represent only a minuscule part of the industry.

A textile unit not directly involved in the export business will not be able to obtain any benefit from such a scheme. It will also lose its domestic market share.

No wonder most of the business community has rejected the DLTL proposal.

The writer is a research economist at Pakistan Institute of Development Economics (PIDE), Islamabad

Supporting our textile exports