Capacity is the ability to contain, absorb, receive or hold. It can exemplify the quantity or people that a container or space can hold e.g. the theater has a seating capacity of 2,000 or a fuel tank may contain 50 litres. It can also be provided without citing a number, e.g., the hall was filled to capacity. A fraction of rated capacity may be taken as economic capacity by the one charged for working such capacity of a venture of the specie of Pakistan Steel Mills (PSM).
Economic capacity of PSM can be asserted and worked in numerous ways. It is a myth shrouded by fixed cost, variable cost and contribution margin, having direct nexus with the projected market yield. There can be many figurative expressions of PSM's economic capacity. With an eye on the objective, one can have varying expressions for economic capacity.
Capacity of a plant is expressed in terms of the final produce which all sections of the plant, put together, are capable to turn out. For example, overall capacity of a plant is 20,000 gallons. However, one of its segments can produce 15,000 gallons. Such being the limiting produce, working capacity of the plant will be held at 15,000 gallons. Unable to yield adequately to pay off its liabilities, it may be branded 'uneconomic'.
With variation in yield - this way or that way, our steel mill may be taken with 'appropriate capacity' or a 'deficient capacity' proposition. In comparison with a similar plant in another country, it may be smaller. However, going through the accounting gaming, input : output, it can, without hassle, be converted into a project with appropriate or optimum capacity.
Not on a given set of tautology, viability of an enterprise depends on a lot many factors. This writer finds it difficult to stomach that determinants of total benefits of PSM are the figures that 'traditional accountants' determine and report. For monetized expression or statistical inferences of the steel mills gains, traditional accounting could only be a good help. Steel mills should not be expected to turn-up with gains through traditional accounting, like other enterprises. Assertion of this writer is that the dogma of our steel mills being with uneconomic capacity, lesser than the economic size, has to be gone over again and again. An economic size is one, proceeds of products turned out by which can adequately pay for the relevant 'accounting costs' in disregard of other facets viz. GNP, defence, educational or intellectual or technical advancement, national pride and so on. This takes one to the resolution of the whole fuss about return on investment - a summation which has many facets. That is crude mercantilist approach! However, gains out of steel mills go farther than what money flow can measure.
An acceptable operation level or economic size of the plant is dependent on so many factors. It is no ritual. It may be the issue of higher production cost due to the plant not being able to produce at competitive cost, thus lending into a loss situation. 'Non-production at competitive cost' has so many non-yielding factors. Thus to say that our PSM does not have appropriate or economic size may be a fallacious. To turn the table, most convenient way is to take out from cost 'state's booty', meaning all levies, taxes, duties, surcharges and interest, etc., in the first instance. The state should forget its levies till the mill achieves acceptable capacity operations. It will be investment for the future. Simultaneously, income statement of the mills should do away with depreciation on idle assets.
With operations picking-up, the contribution margin registers increase. Other things remaining the same, reduction in cost of production, particularly fixed cost, lowers the breakeven point and increases profit or reduces loss.
Commercial or industrial activities attract government levies: customs and excise duties, sales tax, income tax, withholding tax by different authorities, to cite a few. Our steel mill is subject to all these. If there is no PSM production, revenue to the state on these accounts is nil on cessation of the mills operations. While the mill is operating, doing away with the governmental levies will reduce cost, boost revenue of PSM. As to the question whose account should instead be debited for lost government levies, the answer is: debit who may get credit for, i.e., the state'.
It is argued that one of the causes for an enterprise lacking potential of being economically viable, despite being capable of turning quality products, is higher cost of production, fixed, variable or both. The state may have a big role in relation to cost of production. The state may do away with corporate taxes and taxes on utilities to the steel mill. You have to take all tax debits out, because you would be dealing with a situation where you don't and should not live with plans for milking enterprises like PSM. There are always incentives and exemptions in anticipation of gains for posterity as also to other sectors of the economy. Foregoing the cited levies, benefit should be passed to PSM to provide it strength in financial terms. With picked-up strength, the production and inflows can be subjected to the 'normal recovery' of taxes and other levies. What should not be lost sight of is that to recover the tax arrears, there is no away other than sale of mills' assets as junk. Sale of these as assets locally at a proper price is not in sight for so many reasons. The way out left for government shall be writing back the tax arrears.
FBR should forego taxes for a few years, past and future, considering that it is investment being undertaken in the hope of future fruits. In cases with the size and type our steel mills is, self reliance and growth nurtured otherwise, including by way of experiments and accretion to the treasure of knowledge besides national 'pride', should always be accounted in pre-investment or disinvestment decisions.
Taking a multidimensional view - including increasing exports potential, replacing imports, passing on gains to posterity or addition to expertise that manning mega units like steel mills, require would be invaluable.
This writer is of the view that whether PSM is economic or uneconomic capacity-wise should not be determined by a traditional accountant. It is for a multi-disciplinary think tank to do that. Traditional accountants should be doing 'accounting profit', focusing on what is known as 'book profit' and research on improved reporting. The appraisal exercise should be assigned to an enlightened group with engineering and development economics background.
PSM appears to be a fit case for two sets of accounts. One, which incorporates depreciation on the entire structure, i.e., normal accounting. The other set of accounts should cater depreciation and up-keep on assets actually employed. It would be profit computation by sale minus (virtually) variable cost. The traditional accounts will be the corporate accounts prepared in keeping with corporate and tax laws. The other set of accounts would reflect the real story, divorced from the legal version.
This writer is of the view that PSM should not only be overseen by a traditional Board which, he believes, may be a stumbling block. Besides a traditional Board of Directors. It should also have several independent working overseers, capable to take decisions, as do the conventional boards - not requiring any further Board stamping to be effective. There has to be a galaxy of engineers, organization and marketing experts, accountants and economists etc. on the steel mills boards of directors. Regular items on the agenda of the Board(s) should be gains through downstream projects, value additions, contribution to pool of knowhow, enhancing skills for earnings and the mills' addition to strength of the nation. They should not be burdened with replying to Section Officers, sitting far away from the battle ground, divorced of 'real' issues.
A committee of elders, with multi-disciplinary mix, the government may have for the purpose of resolution of issues of the different steel mills Boards inter se, suggested hereinabove, as also with the government. A highly, ongoing, intellectual discourse would be required of them in view of importance, size, issues and typical objectives before the steel mill. This committee or the super Board should be an independent organ of the federal cabinet, not sub-ordinate to it, for the simple reason that the cabinet and the government may not be possessed with the acumen the committee members may be called to have. The training program of PICG to qualify for directorship should not be enough. The committee of elders' job should also be to report the technical delinquencies of government officials, if any, to the Establishment Division. This proposal is in the wake of findings that generalists often adversely contribute to working of institutions like PSM.
(The writer is former Chairman Joint Committee of ICAP & ICMAP, the writer is a Corporate Counsel. E-mail: mufti1002001@yahoo.com)