Board of Investment (BoI) is said to be using all its 'energies' for three percent increase in tariff to make local PTA industry competitive with China and India despite stiff resistance by other relevant ministries. Official documents available with Business Recorder suggest that the Imperial Chemical Industries (ICI) invested an amount of $490 million on establishing a PTA industry in Bin Qasim, Karachi in the late 1990s.
An additional amount of $340 million was invested on infrastructure such as water pipelines, electricity connectivity, chemical jetty and tank farms, and by auxiliary industries etc. The total investment of $830 million was thus the single largest foreign investment in the petrochemical sector.
The investment led to major economic benefits to the country's economy in terms of $100 million per annum of import substitution and value addition, and the vast element of technology transfer. Support to ICI for its investment from the government was characterised by 15 percent net tariff protection for 10 years and other concessions on the import of plant and machinery.
The documents further disclose that the PTA project was acquired in 2009 by Lotte Korea which is the fifth largest investor group of South Korea. The new owners have since invested an amount of approximately $50 million on a Captive Power Plant with a capacity of 50MW, which will enable KESC to divert 35MW of electricity to other consumers.
The plant will also have surplus capacity of 10-12MW that can be transferred to the national grid. Lotte Korea has also acquired Kolson Food and is expanding to other sectors too, such as engineering and construction.
Most significantly, Lotte Korea has a $400 million expansion plan on the anvil, comprising a second PTA plant; thereby enhancing PTA to an annual production of 13 to 15,00,000 tons. Pakistan currently imports around 150,000 tons of PTA annually and it is expected that imports could increase to about 400,000 tons per year by 2014.
The anticipated benefits from the anticipated expansion are: (i) growth of downstream man-made fibre and PET industry in Pakistan, that will result in an increase in exports of textiles and PET; (ii) export of 500,000 tons of PTA per annum to the region at the same time will generate foreign exchange of over $500 million per annum and lead to savings of approximately $80 million per annum from import substitution; (iii) expansion in the PTA industry will provide an opportunity of growth to supporting infrastructure; and (iv) in the long term, growth in the PTA industry will lead to large petrochemical upstream investments, such as naphtha cracker etc.
According to the BoI, the PTA industry has in the recent past been beset by adverse tariff revisions. The PTA tariff was slashed by 50 percent to 7.5 percent in 2008 despite the fact that the National Tariff Commission (NTC) had recommended 10 percent tariff. The tariff was again revised downward in 2010, this time by 60 percent to only 3 percent by the ECC despite the fact that the NTC had recommended 4 percent tariff. In a recent development, import of PTA has been allowed from India through land route, which could adversely affect the profitability of the country's only PTA industry. Accordingly, the current PTA tariff has placed the industry under serious threat and could force the owners to shelve the expansion plans and to re-locate the new plant elsewhere.
PTA is a highly capital-intensive industry and its viability requires adequate protection even in developed economies. Leading textile economies like China and India, despite attaining economies of scale, continue to protect their PTA investment through adequate tariff regimes. Under this scenario, no local or foreign company is likely to make investment in this sector unless the government renders substantial tariff protection.
BoI, which falls under the purview of Prime Minister, Syed Yousuf Raza Gilani, reveals that the cost of PTA production in Pakistan is 3-4 percent higher as compared to China and India, mainly due to high overhead costs. Therefore, the PTA industry in reality requires a high level of protection as compared to China and India.
In view of the comparative tariff structure of 6 and 5 percent in China and India, respectively, it is recommended that the present 3 percent tariff may be increased to the previous level of 7.5 percent to be competitive with the regional economies, BoI maintained.
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