BR Research recently visited the entrepreneurial city of Sialkot to discuss the issues faced by export industries with the President of the Sialkot Chamber of Commerce and Industry (SCCI), Mr. Majid Raza Bhutta and industry representatives. The conversation highlights the importance of Sialkot as a major exporting hub of Pakistan and the steps needed to promote the various entrepreneurial ventures the city is home to. Below are edited excerpts from the interview.

BR Research: Let’s start with the kind of industries present in Sialkot and the variety of goods they produce for exports. Also, how has the historical trend changed to cater for diversifying global demand?

Majid Raza: Sialkot is a purely export-oriented city with five main SME export sectors based here. About 30 years ago, there were only two sectors that Sialkot used to be prominent in. One of them was surgical instruments and the other sports goods, especially football and hockey. Other than that, tennis rackets, squash rackets were also produced. But due to technological changes, their production has been reduced. However, since brands started coming to Pakistan, with Adidas being the first to come, the industry that was first based on only two products (football and surgical) later started flourishing. This resulted in diversification and an expanded product range.

Surgical instruments have seen a lot of expansion due to technological advancement as well as diversification in dental, veterinary, and beauty products. If we consider sports, it is also divided into two parts: sportswear and sports goods. In sports goods, football production was stopped here when we started dealing in composites, but as the technological advancements increased in this sector, the production of footballs surged. If we compare sports industries in Sialkot with those in Gujranwala and others, they are only catering to the local needs, unlike the Sialkot industry, which exports its sports products and has the most value addition despite being an SME industry. Other sports goods like hockey, ice hockey, etc. are also being produced here now.

In sportswear, we have two lines again: textile and leather. Leather-based includes motorbike-riding business, shooting, riding, and horse-riding products. We also produce handmade and machine-made badges here. Sialkot produces goods on international standards, which is why it is much ahead in technology than other cities producing the same goods. Long boots, dancing shoes, and car-racing shoes are also produced here.

If we consider the martial arts industry today, more than 100 small companies are in this segment and they hold considerable export volume. If we are further provided with export-friendly policies, as in Bangladesh, Vietnam, Sri Lanka, and Thailand, then we can improve the scale of exports. These countries have progressed more than us due to their export-oriented policies.

Sialkot also produces badges, safety wear, and gloves. Gloves are a really big sector and include sportswear such as football gloves, cricket goalkeeper gloves, etc. This category also includes industrial gloves in which four companies are leading from Pakistan. America is the biggest export market for us currently in this sector. Retail chains like Wal-Mart, IKEA, Embassy, etc. are our buyers.

BRR: Which other international brands import from Sialkot?

MR: Sialkot has almost 40 brands of international level, including NIKE, Adidas, and Puma buying from us. In addition, more than 100 regional brands which include European, Scandinavian, African, and Middle Eastern companies also procure from Sialkot.

BRR: How many companies are there in Sialkot?

MR: There are approximately 6,000 companies which are active currently. Out of those, manufacturing and exporting companies are 5,000. If we consider the $10 billion exports of Faisalabad or Lahore, only $1 billion is distributed in wages and salaries in these big cities, whereas here in Sialkot, out of $2 billion, about $500-600 million dollars are distributed in labour wages and salaries (which is 25-30 percent). So that’s the difference in value-addition, which is more in Sialkot. Unfortunately, due to non-friendly policies drafted by our bureaucrats, our exports are falling and due to these policies, the readymade garment industries in Karachi and Lahore have started selling their products locally instead of exporting them.

BRR: The leather sector has deteriorated considerably in the past few years. What can be done to get it back on its feet?

MR: Leather exports of Pakistan were $500 million in 2003-04 while India was at $300 million. We touched a peak of $1 billion. Right now, it has declined to $700 million dollars. India has progressed in the past 10-12 years and has now $7 billion leather exports. Manmohan Singh, while keeping in view the new environmental standards and regulations, built tannery zones and this is why their leather industry has flourished. Sialkot Chamber of Commerce, with the support of the government and some donor companies, has planned to install 450 acres tannery zone in 2019 which will improve the export of leather industries.

BRR: How much increase will there be in the size of exports due to this zone?

MR: There will be an increase but you have to realise that the overall leather exports of Pakistan are diminishing. Unless these tannery zones are not constructed in the main cities such as Karachi, Lahore, Hyderabad, Peshawar, and Rawalpindi, the exports will continue to fall. Water treatment plants should be installed in these tannery zones. We need at least 10-15 such zones in Pakistan. India has 30 each in the government sector and the private sector. Big sized companies have installed their own treatment plants there. Pakistan also has 10-15 private companies which have installed their treatment plants but they are not on that level, plus they are also not value-addition companies. Instead, they export raw materials such as skin/hides. Karachi has 80 percent share of leather exports in raw material exports and only 20 percent in value-added products. Sialkot, however, is purely an exporter of value-added leather products.

Eventually because of this zone, 400-450 industries will relocate and about 60,000 people will benefit. In total, about 400,000 people in Sialkot are affected by such a small amount of exports. This is why this industry is more important than the $10 billion industry of Lahore and Faisalabad. Our (Sialkot’s) sportswear industry is labour-intensive and also includes import of special fabric from Japan and other technical fabrics used in safety wears imported from Germany, France, Japan, etc. The cost of these imported raw materials is not more than 40 percent of our total production cost but they result in huge value-additions.

BRR: What is the value-addition in these raw materials that are imported?

MR: If it is for a minimum of $1, then after value-addition it becomes of $3-3.5, which means almost 300 percent value addition. However, there is a restriction which asks us to import special fabric under Duty and Tax Remission Scheme (DTRE). Under the DTRE, the condition of value-addition is 20 percent. However, we are pushing for a separate SRO because SMEs do not fall under DTRE. Now we have asked the government to design a separate SRO for us, other than DTRE, and we have guaranteed providing a value-addition of more than 50 percent. The current DTRE has a very lengthy and complicated procedure. We want a new SRO that facilitates all SMEs. The benefits include the creation of more employment, foreign exchange, tax revenues, and value-addition.

BRR: So basically you want to make it easier for the SMEs to import raw materials for their products?

MR: Precisely. Take the example of Bangladesh where the exports are equal to $27 billion and imports are $20 billion roughly. They have very soft terms that you cannot imagine. We have asked the government to implement the same scenario as in Bangladesh. The absence of these soft terms hinders the diversification of products; we cannot play in anything other than the cotton. I am talking about just not Sialkot but Pakistan generally.

There is no representation of exporters on any forum and we seldom get to talk about our issues. The Export Development Fund (EDF) board is dominated by bureaucrats and there is no proper representation the textile value-added sector. For the first time there is someone from Sialkot to represent the sports sector. We want that the majority should be of those who are exporters and realise the issues.

Whenever you make a policy of taxation, it’s a global practice to evaluate that policy and see if it affects your country’s exports negatively. If it does, then you give exemptions to exporting companies. There is an institution where bureaucrats and experts on exports sit, and whenever there is a taxation policy affecting exports, they speak up on the behalf of exporting companies and illustrate how that policy will impact the cost of production. However, sadly, such a mechanism is missing in Pakistan, as the majority of tax policies are decided without proper stakeholder input.

BRR: What kind of taxation issues does the industry face, especially when it comes to exports?

MR: Ideally, all of the five sectors that I mentioned above should fall under the zero-rated tax regime. However, if we say that the refund is on 100 percent of our inputs, that is not the case. Instead of making it zero-rated, many of our products have had their cost of packaging excluded for refund purposes.

We cannot compromise on the packaging since it’s the image of the product. At the same time, it is also a big component of our product cost – sometimes as much as half. For example, an item with an export price of $2 and a packaging cost of $1. So, this export of $3 involves a packaging cost of one-third. So we say that the zero-rated means should be on all inputs. I should be refunded on the total cost that I am incurring. Why should I pay extra? If this rule is changed, there will be a decrease in frauds.

BRR: Could you please provide some recommendations that the government should adopt to aid the ailing export sectors?

MR: Firstly, the government should identify high priority sectors and potential sectors for export and provide special incentives to encourage exports. In addition, businessmen and investors should be encouraged to invest in support industry, which would ultimately lead to import substitution.

Another measure that should be taken is the provision of interest-free loans equivalent to 10 percent of total exports for import of new technology.

The Ministry of Commerce in collaboration with the Trade Development Authority Pakistan (TDAP) and trade associations should work on streamlining the existing markets and identify potential markets for exports. This is vital given that the decline in exports is also a result of our exports targeted to specific regions which are facing economic slowdown such as the United States, European Union, and the Middle East. These markets are also saturated with strong penetration by our competitors such as Bangladesh, Vietnam, Thailand, and India.

Another area where focus should be given is the appointment of specialist marketing personnel for the jobs of Commercial Officers in missions in foreign countries to encourage and promote “Made in Pakistan” brand. These officers should help the producers and exporters in gathering market intelligence regarding demand of commodities, competitive prices, and overall market trends.

One important step is to allow the facility of zero-rated regime on all inputs of five export sectors, including packaging materials by suitable amendments in SRO 1125(I)/2011.

The State Bank of Pakistan should create provision for allowing back-to-back L/C for the export sector. A similar model is used in Bangladesh and it has really helped the country’s exports takeoff.

Finally the government should clear the pending sales tax refunds and duty drawback claims of the export sector on an urgent basis. It has been emphasized countless times that SMEs cannot afford delay in payment of such claims and refunds because of the limited access to bank financing and the severe liquidity constraints it results in.