Abstract: Unlike other industries in Pakistan which have trade associations to lobby for government support, Information Technology (IT) industry Pakistan remains fragmented & in critical need for state patronage. At a federal level, the MoIT supports the growth of Information Technology & Telecommunication. Given the demand for low-cost voice communication, Pakistan has seen investment in telecommunication sector whereas Information Technology remains is in dire need of nurturing. Recent initiatives by Government of Pakistan to encourage local assembly and manufacturing of Personal Computers (PCs) are steps in the right direction. For these initiatives to be successful, a number of structural reforms are required.
The tax regime on PC products has had a retrogressive impact on the entire industry. For local assembly to flourish, raw material & inputs have to be zero-rated at all stages of the product life-cycle i.e. from the import stage to sales stage. Special incentives have to be considered for raw material distributors who bring in microprocessors, chipsets into the country as well as those local assemblers who source these components to enable manufacturing.
Background: Before 2005, a number of local assemblers emerged on the scene to enrich the PC industry in Pakistan. This created a healthy environment for the assembly, manufacturing, testing, supply, repair and maintenance of IT products in Pakistan. Local assemblers enjoyed GST & duty exemptions and the industry witnessed double-digit growth rates. Technology providers who resold the locally assembled products were also expanding to IT services to meet the growing demands of the industry. Furthermore, local assembly was able to save valuable foreign exchange; reduce dependency on imported goods and create employment opportunities for enterprising youth and innovators.
Tax exemptions were removed in 2005 and the industry has been afflicted with structural problems ever since. Opportunities for local assembly, joint-ventures and subcontracting still exist to manufacture a range of PC products (Desktops, Laptops, Servers, Tablets) in Pakistan. By training the work-force, local assemblers can meet requirements for the industry and the relatively large domestic and export market potential of IT in the region.
The multifaceted benefits of local manufacturing will require that MoIT recommends simplification of tax regime & issues procurement guidelines to its own departments to prefer locally assembled and manufactured products. The objective of this paper is to encourage the MoIT, Government of Pakistan to encourage firms which can manufacture PC products & components. This can help Prime Minister Nawaz Sharif’s vision of a resilient Pakistan.
Pakistan is well positioned to utilize the manufacturing sector to accelerate creation of opportunities such as local & international investment, research & development, creation of employment and availability of affordable products.
The following roadblocks serve as impediment to Pakistan’s emergence as an IT hub in South Asia.
Recommendations:
Reduction in input costs: GST at import stage, incorrect treatment of PCT codes for microprocessors, adhoc assessment, and valuation at customs results in high input costs. Imported PC products have grown at the expense of local assemblers as they are manufactured in countries which provide cheap labor and subsidies for local products. On the contrary, local distributors and assemblers face constant harassment due to issues with assessment and valuation of imports. There is an immediate need to provide local assemblers the relief and exemptions from all tariffs that made local assembly viable.
Low productivity levels: Due to reduction in the total number of PC assemblers in the country, overall productivity in the IT market is low. Many assemblers have ceased to exist and the adverse business environment has resulted in innovators to become traders. Less than desirable government support has resulted in high levels of uncertainty in the business climate, diminished expected returns on investment due to high costs, and lack of long-term financing.
Inefficient flows of goods and services: Low levels of PC assembly have resulted in sub-optimal availability of specialized ways of transportation and logistics. This impacts local manufacturers’ competitiveness compared to their global counterparts thereby diminishing potential of IT exports.
Glut of smuggled & used goods: As per industry estimates, more than 50% of the PC products in the country are smuggled and brought into the country through hand-carry channels. While this deprives the government of valuable revenue, it makes the local assembly of PC products unattractive. Furthermore, due to lack of affordability, the market is now flooded with PCs which are more than 3 year old. These products are harmful for environment & consumers, have high running cost due to energy sapping power consumption, are incompatible with most software and deprive the consumers of real value.
Local assembler expectations:
In order for the local industry to compete with international brands, the local assemblers expect the following:
Preference for local brands: Currently a number of government institutions specific “foreign brands only” in their tenders. This discriminatory practice has hurt local assemblers. It is therefore expected that the Government will provide more weightage to goods assembled in Pakistan.
Tax exemption for five years: In order for local assemblers to invest in assembly lines, the government should provide tax exemption for 5-years so that they are better able to manage and plan their investments.
Discouragement of used PC: It is expected that a complete ban on used PCs and IT scrap is enforced so that the local IT demand can be catered by products manufactured locally.
Benefits of local manufacturing: The country will benefit in the following ways
1) Creation of jobs, development of higher level of skills.
2) Development of new technologies, innovation in industry, transfer of knowledge
3) Economic development, opportunity for government to document
4) Encouragement of R&D culture
5) Ripple effect benefits in greater broadband adoption
6) Saving of foreign exchange, lesser reliance on foreign countries to fulfill local needs
7) Potential emergence of viable specialized logistics catering to manufacturing companies
8) Wide-spread utilization of IT due to affordability of locally assembled products
9) Respectability of products “Made in Pakistan” due to government support. Revival of industry & association of quality with local products
10) Increase in Foreign Direct Investment
CONCLUSION
Countries across the globe have seen transformation impact of their economic indicators by due to local manufacturing. A good example is China, Vietnam, Portugal, Argentina etc. Pakistan has the potential to do the same however the above mentioned recommendations will serve as guidelines to accelerate the prospects and improving the economy.
Government must set milestones and announce IT Vision 2020 so that IT is leveraged as the greater accelerator of economic growth by setting aggressive goals to increate automation in industry and increasing PC penetration in households across Pakistan.
The writer is the head of marketing Viper Technologies
