BR Research recently sat down with Aamir Fayyaz, Chairman of the All Pakistan Textile Mills Association. With the current disarray in the sector, textile exporters and manufacturers have been pressing the government to bring down the cost of production and improve the implementation of the textile incentive package. Aamir is also the CEO at Kohinoor Mills Ltd. and possesses deep knowledge of industry specific issues. We discuss the impact of these incentives for the sector, the high cost of production for domestic manufacturers and the way forward to increase value added textile exports.

Below are edited excerpts of the interview.

BR Research: How have Pakistan textile exports fared when compared to other players in the region over the past few years?

Aamir Fayyaz Sheikh: If you look at export date for other countries, India has grown its textile exports from $27 billion in 2010-11 to $36 billion last year, which is an increase of 31 percent. Bangladesh’s textile exports were at $19 billion during the same period and grew to $32 billion, an increase of 63 percent. Vietnam increased from $15 billion to $31 billion which is more than a 100 percent increase.

Pakistan is the only country in this region which has shown a negative growth of 10 percent in its textile exports during this period. We dropped from $13.8 billion in 2010-11 to $12.5 billion last year.

The surprising aspect is that the government’ strategy in the past four years has been to borrow in order to finance the current account deficit. We have been telling the government that the only sustainable way forward is to bridge this gap through export led growth policies.

BRR: The Ministry of Commerce is working on trade agreements and the Strategic Trade Framework. They are aiming for exports to grow to $61 billion by 2020. Initially the Planning Commission set exports target to be around $150 billion by 2025 in their Vision 2025. Do you think these targets are realistic to begin with?

AFS: Certainly not. There is no point in making figures out of thin air without any proper game-plan. Export figures will not rise by simply putting out ambitious targets. If we have to increase our textile growth, the focus has to be on value-added segments.

There are two ingredients required to promote value addition. One is the enabling environment which the government has to create. The other factor is private sector participation in the sector.

In the past few months, APTMA has been pushing a plan with the government to increase our textile and clothing exports. Pakistan is still primarily a raw-material driven exporter of textile products. We mostly export cotton thread, raw cotton cloth and finished fabric. But when it comes to value-added products, there is still a lot of untapped potential.

BRR: Can you please elaborate on this plan to increase value-added exports?

AFS: If you look at garment factories in Pakistan that have export quality production capability, the number is less than 200 in the entire country. In Bangladesh, there are more than 4000 garment factories which possess export capabilities. So, we have 5 percent of the capability that Bangladesh has.

APTMA believes that 1000 garment factories need to be set up in the next five years to promote value-addition in textile exports. One medium sized garment factory can produce 10,000 garments in a day and operates for 300 days in a year. That’s about 3 million garments in a year. The value of the garment quality that we produce fetches around $6-7 per piece. That’s about $21 million in export generating potential for a single medium-sized factory in a year.

If we can manage to set-up 1000 factories, it will result in $20 billion in export potential in a year. On the other hand, the capital cost for setting up a medium-sized brand compliant garment factory is around $7 million. This has an export potential of $21 million per year. The export to capital cost ratio is 1:3 in a year.

BRR: What’s the gestation period for setting up this medium-sized garment factory?

AFS: Setting-up a garment factory from ground-breaking to completion takes around a year.

BRR: How will these garment factories be financed and who will put these up?

AFS: It will not be possible for the existing players in the textile sector to set up these 1000 garment factories. For this you will need young people who are not already in textiles to come into this field and set up this type of venture.

However, this fresh blood can only be attracted if there is a profitable outcome for them. Young people who have graduated from universities and have some seed capital can be attracted if the government provides financing for the majority chunk.

No one can put up $7 million up-front. The government currently has Long Term Financing Facility (LTFF) which is provided by the State Bank of Pakistan (SBP). This is a ten-year loan on 2-3 percent interest per annum. However, the catch is that only machinery financing is allowed under this scheme, whereas 65 percent of the total cost in a government factory is the building infrastructure while machinery holds a smaller fraction.

APTMA is asking the government to allow LTFF for entire financing of garment factories which includes building costs as well. If 20 percent of the total $7 million is equity by the investor, the remaining 80 percent should be financed under LTFF facility.

BRR: How else can the enabling environment be made more conducive for textile manufacturers and exporters?

AFS: The government should reduce the energy costs for textile sector. Electricity cost in India and Vietnam is around 7 cents whereas here in Pakistan it is around 11 cents. Even this is expected to increase in the near future to 13 cents. There is also disparity between Punjab and other provinces when it comes to gas rates.

Then there is the duty drawback policy. Government announces duty drawbacks for a year. If there is an entrepreneur who is setting up a new factory, it will take him a year just to set up the factory. The current duty drawbacks will expire on 30th June, 2018 but APTMA is pushing to get them extended for at least five years.

One other factor is the presence of foreign brand houses in the country. Foreign brands that had offices in Pakistan previously are now based in our competitor countries after the security situation deteriorated here. GAP has an office in Delhi while H&M has one in Dhaka. This means we get leftover businesses after order capacity has been reached in these countries.

APTMA has proposed that commercial enclaves should be set up in major cities like Karachi, Lahore and Faisalabad where brands are provided space and security to open their offices. This is similar to the concept of a diplomatic enclave in Islamabad.

Another pressing issue is our pending sales tax refunds for textile sector which still face erratic payments. At the moment, the government owes the sector Rs120 billion in pending sales tax refunds. There should be a proper mechanism which shouldn’t have to involve us running after the government. These should be cleared within 90 days from the date of export.

BRR: One of the most pressing issues these days for APTMA seems to be the pricing of gas for the Punjab based textile industry. Given the political dynamics after the 18th Amendment, is it reasonable to ask and expect for a standardized rate for all provinces by your association?

AFS: There is no other way around it. Almost 70 percent of Pakistan’s textile sector is based in Punjab. How will you manage to increase your export growth if the industry here is economically unviable and unable to compete not just globally but on a domestic front as well?

In the next four to five years, system gas will eventually be replaced by R-LNG in the entire country because system-gas is being depleted at a very rapid pace. But for the short-term, there should be some relief provided to the textile industry.

We propose that a subsidy of Rs30 billion will enable Punjab’s industry to get gas at a similar rate to the other provinces. The federal or Punjab government should pick up this differential.

BRR: What have been the results of the Rs180 billion textile package announced last year by the government?

AFS: The results have been positive so far which is why there has been an 11 percent increase in textile exports. However, there are certain rebates and drawbacks whose payment were due in April last year but exporters are receiving them just now. The commitment had been that as soon as the goods are exported, the rebate will be given. In a nutshell, there has been improvement; but it could have been much better if these commitments were honoured in a timely manner.

BRR: There has recently been 5 percent depreciation in the value of the Pakistani Rupee (PKR) against the US dollar (USD). What impact will there be on the textile sector?

AFS: Export sectors will benefit from devaluation and APTMA believes that the rupee is still over-valued. It should ideally be 120 PKR/USD and we are gradually moving towards that.  Look at all those economies that have managed export led growth in the past 50 years, such as Japan and China. All of them have kept their currencies undervalued.

International tradable cost which includes energy and raw material is 65 percent of our total cost. This proportion will increase by the amount of devaluation. The remaining 35 percent cost is not linked to the devaluation, so there will be an advantage here. As a result of this devaluation and other dynamics, I believe from March onwards, textile exports will start showing an increase of around 15 percent.

BRR: How can the textile sector in Pakistan benefit from the China-Pakistan Economic Corridor?

AFS: World textile exports currently stand at roughly $800 billion. Pakistan’s share is at $12 billion which is 1.5 percent of total world exports whereas China’s share is 30 percent. If we can manage to take even 1.5 percent out of China’s share, our textile exports can double.

APTMA is interacting with textile associations in China to pitch setting up either wholly owned or joint venture garment factories in Pakistan. Chinese will get GSP plus as a result, zero import duties to Europe as well as rebates provided by our government. Currently, China incurs 7-12 percent duties exporting to Europe.

BRR: Man-made or synthetic fibers constitute almost 65 percent of global fiber consumption now while Pakistan’s export base is still primarily cotton-based. What is being done to embrace this shift?

AFS: One reason for reliance on cotton-based products is that apart from polyester, nothing gets made in Pakistan. We import virtually all synthetic fibres including nylon, viscose etc. The government had previously imposed custom duties on import of these synthetic fibres but they have recently removed them. It is a welcome move and benefits will eventually materialise as a result.

BRR: Textile-specific LSM index shows almost negligible growth in the production of cotton cloth and cotton yarn for the past three years. What will you attribute this sticky growth to?

AFS: Our spinning sector has been losing money. Due to these consecutive losses over the past few years, there has been no further investment in the spinning sector. APTMA had more than 450 members five years ago. Today there are less than 325 which shows that more than 100 companies have shut down completely.