The Concessionary Statuary Regulatory Orders (SROs) are discouraging local investment in some steel segments as the current system for listing a product in the category of locally manufactured products faces problems.
Allowing imports of steel items not being manufactured locally discourages local investors to opt for further investment as the country's need is met through imports. A local entrepreneur should come up with a plant capable of catering country's entire requirement increasing the risk.
This was observed at a meeting of Engineering Development Board's (EDB) committee on iron and steel sector for competitiveness and efficiency improvement exercise for coming budget 2007-08. High investment required serves as entry barrier as only a few can come up with huge projects in the sector. Smaller projects are not acceptable on the premise that the industry would not get its raw material.
The board felt that if concessions were not given then buyers would co-ordinate with suppliers to come up with localised products because then cost of locally produced goods would be less than imported goods (imported at statutory rates).
Moreover, size of the plant could also be small because there would be no need to install a plant capable of meeting entire country's demand.
Presently, there are many products which are being manufactured locally and being imported and the prime example is Pakistan Steel Mill Ltd (PSM).
PSM produces around 400,000 (max) tons (all grades) of prime quality billet while the requirement is a lot more than that. Therefore, the shortfall is being met through imports. This show that imported and locally produced goods can work side by side irrespective of the quantity being produced locally.
Tariff serves as protection to the local industry but it discourages foreign investment. Due to concessionary SROs, import is allowed at reduced duties. Therefore, there is no need for foreign companies to invest in the country as they can export their products.
The board believes that the current cascading structure should be followed forcing foreign companies to invest in the country, if the foreign companies want to capture the local market.
The board also observed that the disadvantage of SRO serves as an entry barrier in order to set up a company. It is imperative that all necessary SROs are obtained otherwise the new plant would not be able to compete. This serves as 'entry barriers' as raw material is restricted to a select few who are organised enough to obtain SROs.
This especially hurts the small and medium enterprises (SME) sector, which is not geared up to deal with government, making it difficult for SMEs to start businesses which require obtaining SROs for their raw material. Only manufacturers can import items under SRO, eliminating the role of traders who serve as a material bank.
The traders support the SME sector as they can import in bulk for onward supply to such sector. Due to these SROs unnecessary record keeping is required to comply with regulations. This increases cost of doing business and is against government's objective of minimising interaction with government employees. The board strongly believes that concessionary SROs are discouraging localisation. The tariff should remain the same irrespective of the fact whether a goods is being manufactured locally or not.
Moreover, as per board assessment, there is no disadvantage of abolishing SROs because goods, materials can be imported at statutory rates vide the cascading duty structure. Sanctity of the cascading duty structure should be maintained at all cost.
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