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    Process Industry in Pakistan Process Industry in Pakistan Document Transcript

    • Analysis of The Process Industry of Pakistan 1.INTRODUCTION TO PROCESS INDUSTRY.........................................................................................2 2.EVOLUTIONARY PROCESS:...................................................................................................................3 2.1.Long Run Changes in Growth.................................................................................................................3 2.2.Reduction in Uncertainty.........................................................................................................................3 2.3.Diffusion of Proprietary Knowledge.......................................................................................................4 2.4.Accumulation of Experience....................................................................................................................4 3.EXPANSION..................................................................................................................................................4 4.MARKET CONDITIONS............................................................................................................................6 5.LIFE CYCLE.................................................................................................................................................6 6.industry analysis............................................................................................................................................7 6.1.Survival....................................................................................................................................................7 6.2.Strategies.................................................................................................................................................7 7.buyer’s power.................................................................................................................................................8 8.supplier’s power.............................................................................................................................................9 9.threat of new entrants...................................................................................................................................9 10.degree of rivalry...........................................................................................................................................9 11.new competitors entry...............................................................................................................................10 12.competitive advantage of industry...........................................................................................................10 13.corporate governance, vision, mission, targets and policies..................................................................11 14.assessment...................................................................................................................................................11 14.1. Safety & Health..................................................................................................................................11 14.2. Accounting Standards.........................................................................................................................11 14.3. Trade Standards.................................................................................................................................13 14.4. Contract Management System / Labour Union / CBA.......................................................................14 15.Conclusion..................................................................................................................................................14 Page 1 of 14
    • Analysis of The Process Industry of Pakistan 1. INTRODUCTION TO PROCESS INDUSTRY Industrial processes are procedures involving chemical or mechanical steps to aid in the manufacture of an item or items, usually carried out on a very large scale. Most processes make the production of an otherwise rare material vastly cheaper, thus changing it into a commodity; i.e. the process makes it economically feasible for society to use the material. Production of a specific material may involve more than one type of process. Most industrial processes result in both a desired product(s) and by-products, many of which are toxic, hazardous, or hard to deal with. Some major sectors associated with the process industry include: • Chemicals • Metal and Steel production • Petroleum refining • Fertilizer • Medicines & basic drugs • Beverage • Pharmaceutical • Food Processing etc. Some major companies doing business in process industry in Pakistan are mentioned below: • National Refinery • Pakistan Refinery • Pak-Arab Refinery • Pakistan Steel Mills • Engro Chemicals • Fauji Fertilizer • ICI • Nestle Page 2 of 14
    • Analysis of The Process Industry of Pakistan • Pepsi Co. • GlaxoSmithKline • Abbott 2. EVOLUTIONARY PROCESS: 2.1.Long Run Changes in Growth In 1947 only some 5 percent of the large-scale industrial facilities in British India were located in what became Pakistan. The country started with virtually no industrial base and no institutional, financial, or energy resources. Three small hydroelectric power stations provided limited electricity to a few urban areas. Further, there was a shortage of management personnel and skilled labor. Processing industry base in Pakistan is very low. The industrial base is low because of basic structural weaknesses not rectified over the years. The processing industry has not developed like other developing countries. This sector contributes almost 25 per cent to the GDP in developing countries but in Pakistan we have not developed like others. 2.2.Reduction in Uncertainty Under the current situation and past history, the processing industry should continue growth and government should play the role of promoter and facilitator. Foreign investment would also be encouraged. Under the present depressed economic conditions, the government through authorities should play a catalytic role in order to provide boost to industrial activities in the country. Page 3 of 14
    • Analysis of The Process Industry of Pakistan 2.3.Diffusion of Proprietary Knowledge There is a lack of diffusion of proprietary knowledge in the processing industry which is hindering the evolution of this industry in Pakistan. The share of knowledge and technology intensive Engineering, electronics, pharmaceutical, chemical and non-metallic mineral products, should be strengthened and enabled through fiscal and tariff means as well as building of alliances with international partners and technical institutions. 2.4.Accumulation of Experience The processing industry lacks highly experienced professionals. This can be related to the literacy rate in Pakistan which is still low. Although the number of universities has increased from four to 25 and there are an equal number of private universities, including specialized management, engineering, and medical universities. There is a very small number of professionals in this field that can excel by international standards. Most of the expertise in this industry is outsourced from foreign developed countries. However, efficient use is the key and this is an area where things can be improved by developing managerial and labour skills and technology upgradation. 3. EXPANSION The pace of growth in processing industry since independence has not been up to the requirements. It has fluctuated in response to changes in government policy and to world economic conditions. That’s why there are tremendous chances of expansion in this industry owing to ever growing demand. There are only a few industrial units of processing in the country which cannot even fulfill the demand of the domestic market and ultimately the Page 4 of 14
    • Analysis of The Process Industry of Pakistan requirements are fulfilled by importing. The expansion and growth chances for particular sectors of process industry are discussed below: • Petroleum refining, is one of the industries where in the medium to long term, excess demand situation appears prevailing in the economy. • Cement is another sector where the demand is expected to remain strong. The country at present has 29 cement plants with an installed capacity of producing around 37 million tones of cement. Development Programs, an increasing number of real-estate development projects for commercial and residential use, demand in the external markets like Afghanistan, Iran, Bangladesh and Middle East are all indicators of possible expansion opportunities in this sector. • In fertilizer sector the level of consumption in Pakistan is one of the lowest among agrarian economies. This sector is still facing a urea supply shortfall problem, though its severity has declined. Over the last 5 years, the average fertilizer off take growth was 2.1 percent. Fertilizer manufacturers are running at 100 percent plus capacity utilization levels and many are also in the process to expansion. This excess demand coupled with the government efforts to encourage farmers to raise the fertilizer off-take; it will not be unrealistic to foresee an increasing demand for fertilizer going ahead, which would force the expansion of this sector and ultimately the process industry. • Pharmaceutical is another sector where if appropriate measures are taken, domestic consumption can see substantial growth going forward. At present a large segment (almost 50 percent) of population in the country lacks access to medicare. • Steel and metal processing is also a sector which is undergoing immense expansion and the gap in demand and supply is ever increasing due to large scale development projects. The steel sector is Page 5 of 14
    • Analysis of The Process Industry of Pakistan not able to fulfill the demand of the domestic market and occasionally steel items are imported to balance the demand supply situation. Pakistan’s process industry has expanded very slowly and does not fulfill the demand situation of even the domestic market. But in the last decade this expansion process has intensified but the demand of the products of processing industry has risen exponentially, which invites more expansion opportunities. 4. MARKET CONDITIONS The market of the processing industry products is highly open and buyer’s are actually waiting for the output of the industry. The recent boost in industrialization and urbanization, the need for the products like chemicals, steel and other processed products has increased in Pakistan. Although the economy of Pakistan has suffered in the past from decades of internal political disputes, a fast growing population, mixed levels of foreign investment, and a costly, ongoing confrontation with India and Terrorists. The market is partially independent of the above mentioned conditions as their products are essential part of the economy and life in Pakistan. So the market condition is still favourable to the new entrants. 5. LIFE CYCLE The life cycle of the process industry is depicted in the following curve. The industry is in growth stages as there is a lot of growth and expansion opportunities. The production of the industry is not able to meet the domestic demand and h wt hence not in o the maturity Gr region. y tr us d In Page 6 of 14 Introduction Growth Maturity Decline Time
    • Analysis of The Process Industry of Pakistan 6. INDUSTRY ANALYSIS 6.1.Survival The survival of the process industry in Pakistan is due to the following reasons: • Excessive demand of process industry products • Pressure on Government of Pakistan for imports to fill the demand supply gap. • Growth opportunities for investors. • Global competition due to imposition of WTO The factors limiting the survival of process industry are as follows: • Lack of technical expertise and experience for setting up the processing plants. • Growing power shortages • Heavy and long term investment involved in setting up processing plants. • Heightened political tension • Deteriorating law and order situation • Cumulative impact of monetary tightening and rising cost of doing business 6.2.Strategies The process industry must put greater emphasis upon strengthening the basic competitive position of the industries through modernization, quality Page 7 of 14
    • Analysis of The Process Industry of Pakistan control and standardization rather than seeking excessive protection to survive with their own weaknesses and inefficiencies. Vertical integration & supply chains may prove to be an attractive strategy for the industrial units. For example in sugar sector vertical integration can deliver results and can produce products such as ethanol, Bio ethanol, a direct by-product of sugar production. Chemical industries can also benefit from vertical integration. Production of naphtha is a case in point. Produced in oil refineries, naphtha can be further processed to create a large number of chemicals and pharmaceuticals. To achieve this, naphtha cracking plants need to be set up in the country. Domestic production of chemicals generated from naphtha will not only help meet local needs but will be exported to a growing international market.10 Today, India is the only south Asian country to have Naphtha cracking facilities. Given the size of Pakistan’s own domestic market, the future lies not only in terms of an inward-looking domestic market approach, but also in boldly facing the competition and aggressively seeking higher share of the world market. This will require that we improve our skills, modernize the industries technologically, ensure availability of raw material at competitive rates and undertake an aggressive marketing initiative to get a better market share internationally. 7. BUYER’S POWER Traditionally buyer’s of the products of processing industry have no option but to buy from them because of few or no competitors. For example ICI is the only plant manufacturing a chemical PTA. So, all buyer’s of PTA have no choice but to buy from ICI. Similarly the competition in Fertilizer, Steel, Oil and chemicals is also limited and the buyer’s do not possess a bargaining position. Page 8 of 14
    • Analysis of The Process Industry of Pakistan Recently due to the ease of import procedures and growing demand of the products, buyer’s are able to import the products from international market. This import trend has given some bargaining power to the buyers. 8. SUPPLIER’S POWER The suppliers are very powerful in the processing industry as majority of the processing plants in Pakistan are designed for a specific type of raw material. The raw material suppliers trade in the international market and the industry has to follow their dictating terms. An example is of oil refineries for which the raw material is crude oil. All refineries in Pakistan are designed for the crude oil of Middle East. So they have to import the crude oil from these countries. Due to this the recent up-surge in the crude oil prices has to born by the refineries and they had to purchase the crude oil at sky scraper prices. 9. THREAT OF NEW ENTRANTS The economies of scale in industry particularly in China and India pose a threat to Pakistan’s processing industry. The Planning Commission official warned that the industrialized nations including Japan and America were making India the hub of major trade and industrial activities and it should be noticed by the policy makers. 10.DEGREE OF RIVALRY Since the processing industry is in growth phase of it’s life cycle that’s why the competition among the different sectors of the industry is negligible. Hence the degree of rivalry is almost nil. For example in oil refining sector there are only five refineries in the country and their production quotas are fixed by the government. Hence the competition and rivalry is not present. The only situation of rivalry and Page 9 of 14
    • Analysis of The Process Industry of Pakistan competition exist in low cost operation better customer services. The companies in processing sector are now focusing towards better customer services. 11.NEW COMPETITORS ENTRY New players are entering in the process industry which is increasing the competition in the industry. But this introduction of new entrants among the small number of industrial units in the processing industry will not create much competition. The demand of the products of this industry is immense and all new entrants will have the buyers lined up to consume their products. However in the long run as the process industry will move towards its maturity stage of life cycle, the competition will increase. 12.COMPETITIVE ADVANTAGE OF INDUSTRY The processing in Pakistan has many competitive advantages which are discussed below: • After comparing a number of countries it can be concluded that utility costs are not high and cost of doing business in processing industry is much less. • Government has recently imposed a zero import duty on the raw material for many sectors of processing industry. • Demand for processed products is increasing day by day and it can be safely predicted that the demand will continue to grow in the future. • The processing plants requires heavy initial investment but gives continued profits in long run. For example Pakistan Steel Mills has paid an amount of Rs.76.7 billion towards duties and taxes to the Government since 1984-85 to February, 2008. The project has thus repaid more than Rs.24.70 billion which was spent on creating it. Page 10 of 14
    • Analysis of The Process Industry of Pakistan 13.CORPORATE GOVERNANCE, VISION, MISSION, TARGETS AND POLICIES Pakistan government targets industrial production to increase to 25 per cent of the gross domestic product (GDP) by 2015 from the current 19 per cent, to be supported by increased output from five ‘priority sectors’ like engineering, chemicals and fertilizers. Government is also pursuing the Privatization Program through which it aims to achieve enhanced quantity and quality of goods and services, strengthen public finances, broaden and deepen capital markets, reduce opportunities for corruption as well as to avoid mismanagement. 14.ASSESSMENT 14.1. Safety & Health Safety and health were not given much importance in the Pakistani processing industry but now in the rise of globalization and increasing international pressure many companies in Pakistan are seriously pursuing the Health and safety standards. The trend of appointing a full time Health Safety and Environment (HSE) Manager is now increasing and companies are investing on trainings and equipment for health and safety of employees as well as the equipment. 14.2. Accounting Standards The ICAP has adopted all (International Accounting Standards) IASs without modification except IAS 29 (hyperinflation). State bank of Pakistan and Securities and Exchange Commission of Pakistan (SECP) are responsible of enforcing these standards. Usually the companies listed in Stock Exchange are enforced to present their account status and balance sheets according to these standards. These standards include: • IAS 1 Presentation of Financial Statements (Revised 1997) Page 11 of 14
    • Analysis of The Process Industry of Pakistan • IAS 2 Inventories (Revised 1993) • IAS 4 Depreciation Accounting (Reformatted 1994) • IAS 7 Cash Flow Statements (Revised 1992) • IAS 8 Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies (Revised 1993) • IAS 10 Events After the Balance Sheet Date (Revised 1999) • IAS 11 Construction Contracts (Revised 1993) • IAS 12 Income Taxes (Revised 1996)* • IAS 14 Segment Reporting (Revised 1997) • IAS 16 Property, Plant and Equipment (Revised 1998) • IAS 17 Leases (Revised 1997) • IAS 18 Revenue (Revised 1993) • IAS 19 Employee Benefits (Revised 1998) • IAS 20 Accounting for Government Grants and Disclosure of Government Assistance (Reformatted 1994) IAS 21, The Effects of Changes in Foreign Exchange Rates (Revised 1993) • IAS 23 Borrowing Costs (Revised 1993) • IAS 24 Related Party Disclosures (Reformatted 1994) • IAS 25 Accounting for Investments (Reformatted 1994) • IAS 26 Accounting and Reporting by Retirement Benefit Plans (Reformatted 1994) • IAS 27 Consolidated financial Statements and Accounting for Investments in Subsidiaries (Reformatted 1994) • IAS 28 Accounting for Investments in Associates (Revised 1998) • IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions (Reformatted 1994) • IAS 31 Financial Reporting of Interests in Joint Ventures (Revised 1998) • IAS 32 Financial Instruments: Disclosure and Presentation (Revised 1998) • IAS 33 Earnings Per Share (1997) • IAS 34 Interim Reporting (1998) Further SECP is considering the implementation of latest accounting standards i.e International Financial Reporting Standards (IFRS), some of which are: Page 12 of 14
    • Analysis of The Process Industry of Pakistan • IFRS 1 First-time Adoption of International Financial Reporting Standards • IFRS 2 Share-based Payment • IFRS 3 Business Combinations • IFRS 4 Insurance Contracts • IFRS 5 Non-current Assets Held for Sale and Discontinued Operations • IFRS 6 Exploration for and Evaluation of Mineral Assets • IFRS 7 Financial Instruments: Disclosures • IFRS 8 Operating Segments 14.3. Trade Standards The trade standards in processing industry is regulated by Pakistan Standard Trade Classification (PSTC) which were introduced for categorization of exported commodities and the previous group classification, i.e. primary products, semi-manufactured commodities and manufactured goods was replaced by the 10 sections of PSTC as under:- From July, 1984, the commodity list was further expanded by adoption of 4-digit commodity codes in accordance with the Standard International Trade Classification (SITC) Volume II Revision 2 (1981). Currently Harmonized System is used as a commodity classification system in which articles are grouped largely according to the nature of the materials of which they are made. HS Coding System was developed under the auspices of the Customs Cooperation Council (CCC) now known as the World Customs Organization (WCO). Few Trade organizations and treaties which apply on the processing industry are: • ECO (Economic Corporation Organization) • SAFTA (South Asian Free Trade Agreement) Page 13 of 14
    • Analysis of The Process Industry of Pakistan • ASEAN (Association of Southeast Asian Nations) • WTO (World Trade Organization) 14.4. Contract Management System / Labour Union / CBA The process industry of Pakistan employs a large base of skilled and non- skilled labour. These industries are bound by the Labour Laws stated in the constitution of Pakistan and guidelines issued by the International Labour Organization (ILO). The Constitution of Pakistan contains a range of provisions with regards to labour rights found in Part II: Fundamental Rights and Principles of Policy. Every employer in an industrial or commercial establishment is required to issue a formal appointment letter at the time of employment of each worker. The obligatory contents of each labour contract, if written, are confined to the main terms and conditions of employment, namely nature and tenure of appointment, pay allowances and other fringe benefits admissible, terms and conditions of appointment. 15.CONCLUSION The provision of facilities for testing laboratories, R&D, vocational and technical training, infrastructure and communications, are all necessary inputs which are regarded as being imperative for the processing industry. Value additions in products and processes also have to be strengthened through backward and forward linkages. The process industry is no doubt a gold mine for investors and there are tremendous growth opportunities in it’s product market. Page 14 of 14