Agriculture is the only profitable sector which gives return after every 3 months. If only the government starts providing loans on less interest rate to private investors with consistent policies, this sector can grow immensely. Ali Akbar Group is a reputed name in Pakistan’s agricultural sector, dealing with fertilizers, seeds and irrigation. Mr. Saad Akbar, one of company’s Director speaks with IBEX on the agriculture sector of Pakistan.
Pakistan’s Agriculture Industry- At a Glance:
Currently, Pakistan’s agriculture sector is not at a prosperous stage. The reasons for this deterioration may include government policies, focus on short term plans and taxation measures. Tax measures are devised exclusively and these decisions do not include the various chambers and associations of different industries. The measures are also coupled with massive corruption making it difficult for the industry to thrive.
Unfortunately, the Government has never encouraged the business community including agriculture sector. That is the reasons that most of the business community have been unable to develop into global multinationals. In Pakistan, as soon as an industry begins to thrive and start making profits, the government increases the taxes on that industry. Pakistan’s GDP is not more than 3%. With this growth rate, interest rates are reduced to increase the liquidity in the market. In Pakistan, however, it’s the opposite. For almost 4 years, the interest rates have been static in the domestic market and last year, the interest rate was reduced by only 4%.
For a better understanding, let’s consider the following example. India’s KIBOR is about 6-8% and their total cost of loan is about 8.5%. Presently, Pakistan’s KIBOR is at 12% and some time ago the cost of loan was around 16% to 18%. Suppose if a project of Rs. 1 billion is initiated with a bank loan for 10 years with a 15 % interest rate, the investor has to pay 150% back after 10 years which makes the total amount to Rs. 2.5 billion. With such a high payback, the incentive for launching a massive project gets diminished. From a bank’s point of view, the biggest client is the government of Pakistan. Due to the difference in the government’s income and expenses, banks lend it on the basis of its sovereign guarantee. Consequently, the interest rates become high due to the budget deficit. The same rule, however, does not apply to a corporate enterprise.
The public sector engages in printing currency to repay the loan which in-turn increases inflation. The inflation rates are on a higher side of the double digit figure. In 2008, the diesel price was less than Rs. 50 per liter and now the price has hiked to Rs. 115 per liter. Globally, crude oil prices were high in 2008-2009 which have now reduced but in Pakistan the prices have increased. This increases the cost of projects, circling back to the difficult economic climate for any successful business to thrive.
Need for Brand Awareness
Pakistan lacks professionalism in business functioning. In the manufacturing sector, there are many factories which produce products for international brands but unfortunately they don’t have any brand of their own. If we study the textile industry, a consistent development phase can be observed within the 1970s due to an increase in government subsidies. Unfortunately, the local manufacturers failed to specialize in any specific segment. The raw material available in the Pakistani market is of the best quality but unfortunately lacks in product finishing, value addition and subsequent branding. This has created an immense need for investing in labor training, developing a sense of pride and ownership among the manufacturing employees and also introducing quality control procedures. Quality control is an integral part of building a brand name. Therefore, before investing in corporate branding, quality assurance at all levels of the value chain should be introduced. Keeping the quality consistent is the key in launching a successful brand. Emphasis should be laid on training and HR development.
Ventures of Ali Akbar Group
Our company also deals with the LPG refilling and distribution by the name of Soneri Gas. We also have Spinning Units by the name of Ali Akbar Textiles and a trading division based in Dubai by the name of Global Trading. The company also has the credit of High Efficiency Irrigation System. To overcome water shortages, High Efficiency Irrigation System is the best solution. We are also providing solar water pumps to farmers. We have our own patents in agriculture seeds. The company has a strong focus on R&D which continues to make our plans possible.
Major Issues in the Agriculture Sector
One major issue of our agriculture sector is the cash flow of an ordinary farmer. In 2011, government imposed taxes across the broad spectrum of farmers through fertilizers, seeds, agrochemicals and agriculture machinery. When such taxes are imposed, even companies like ours push the cost towards the end consumer –in this case, the farmer. Farmers cannot pass it on further down the utilization chain and lose many of their purchase capabilities. They cannot increase the price of commodities because they have to compete with imported products. Eventually, they have to reduce their profit margins putting the entire burden of taxes on the farmer. Price of everything in the market is increasing but commodity prices of farmers have gone on a five year low owing to foreign competition. Yet, they also suffer the most from the tax burden. Their output prices decrease and input prices become high because of taxes, shrinking their profit margins. This is the most unfair form of taxation.
According to the statistics division, almost 92% of farmers own less than 12 acres of land and their income does not fall in the tax net. They can hardly earn Rs. 3000 to Rs. 4000 per acre but still they are paying 16% tax plus the value addition tax making a total of 25% tax. This has been happening since 2011.
Opportunities in the Agriculture Sector
For the first time in the history of Pakistan, due to power shortages laborers’ have started the return immigration to their native villages leaving farming as the only option for the workforce. However, farming is one profession which comes naturally to the rural population. Companies need to develop the right marketing channels to exploit the full potential. The government can allow small scale loaning or the private investors can start establishing their small manufacturing plants near the fields which will be helpful in saving the transportation costs for farmers and investors can also get commodities on cheaper rates. By value addition, they can produce export quality material.
India is a good example of agricultural reforms. By engaging in agricultural zoning, they advised their farmers that their produce should be divided between two or three crops all year around in different regions. On the other hand, they asked the industries to establish their plants near these fields by offering them land on cheaper rates and reducing the taxes. Through this model, all the industries have moved from cities to villages, creating employment opportunities and reducing the transportation cost. Farmer production and net profit also increased with these steps.
All over the world, when production increases, farmers earn more profit whereas in Pakistan farmers bear losses when production is high because there is no purchasing mechanism. There is a huge need for making warehouses in rural localities so that the farmers can use these facilities for crop storage until they find suitable buyers for their produce. Similarly, farmers can ask warehouse owners to lend them 25% advance for the next crop. The investor can give the farmer 25% advance by keeping their produce as a form of security and can sell the crop to recover the 25% with profit percentage. The remaining produce can be given to the farmer. There are various systems available but implementation is required. Government should facilitate these systems but shouldn’t be overly involved in these systems.
Agriculture is the only sector of Pakistan profitable enough to give a return on the investment after every 3 months. Grading and marketing is a great opportunity in agriculture sector. Exportable produce should be facilitated and packaging and grading plants should be established. It requires only Rs. 3 million to establish a grading plant and a packing plant costs not more than Rs. 4 million. Within Rs. 7 million, investors can establish both a grading and a packing plant as well. Our labor is so cheap that manual grading can easily be done. In fact, manual grading is being done worldwide. Government should facilitate by enacting supplementing policies but not interfering in the management since both the private sector and the farmers lack trust on public institutions.
According to government statistics, 40% of vegetable and 50% of fruit is lost by the time they reach the markets. Cold storage facilities should be made available for the produce. If a farmer has to pay Rs. 10,000 to the storage facility, he cannot take his vegetable or fruit back unless he pays. After an agreed maturity time, if the farmer is not paying, the storage facility will sell a certain quantity of the commodity to recover their charges. There are no chances of losses in cold storage facility. The reasons why investors are hesitant in establishing cold storage facilities is the construction of these facilities and the land cost. If government starts providing loans for agricultural related initiatives on less interest rate, it will become feasible for investors. Government should also make sure that this percentage remains constant.
Future Expansion Plans of Ali Akbar Group
Our main work area is Agro Chemical, Seeds and Fertilizers. Agro Chemical and Fertilizer are considered as one industry and its total size in Pakistan is about Rs. 32 Billion (including local and multinational companies). Ali Akbar’s share in this is approximately Rs. 7-8 billion. We are investing in the seeds segment, research and development, production technologies, marketing chains and cold storages. Heavy investments are being made in the High Efficiency Irrigation System (HEIS). The biggest project is in Punjab which is spread over 100,000 acres. Ali Akbar Group has already installed 6500 acres and already has orders for 12000 acres. USAid is supporting this project by providing Rs. 8.5 Billion. If this project completes successfully, there will be a drip line of water on 850,000 to 900,000 acres in the next 5 years. This will help in water savings of 30% to 40% per acre against flooding. This model is being implemented worldwide. If we want to stick with the old water pumping method then we have to shift towards solar water pumping because of power shortage in the country. Until new dams are made, our canal system is insufficient for the agricultural land and needs massive expansion.
High Interest Rates and Related Problems
To control Inflation, interest rates are increased. For finding solutions, we first have to figure out what the actual problem of Pakistan is; is it unemployment, inflation or insufficient industrial growth? GDP Growth of around 3% in a country with population of 180 million is a negative factor actually. Currently, the increase in exports is not an increase in growth but due to devaluation of rupee, countries have started buying more from Pakistan which is negatively impacting the economy in the form of inflation, also increasing our deficits. Once the economies are revived, inflation can automatically be controlled. If the overall economic situation is bad and you increase the interest rates, it can never control the inflation nor can the economy recover.
Our textile industry is so powerful that even in today’s power crises, people are making profits. The downfall of the textile industry and many other industries actually started when the interest rates drastically increased at the time when industries were upgrading which also caused huge loses. Similarly, in every industry, the growth not only depends on the interest rates but also the consistency of the government policies.
Future of Agricultural Industry
We expect a growth in the market as we feel that the level of agricultural awareness is on the rise. Government should not come under the pressure of IMF and World Bank. Our economic agenda and long term vision should be same for all major political parties. Agriculture should be on top priority. The government should focus to increase the per acre yield. We need to lay emphasis on export oriented systems and should make policies accordingly. Kenya has far less agricultural land than Pakistan and their annual exports of fruit and vegetable is around 18.5 billion dollars whereas Pakistan’s exports are around 300 to 400 million dollars. If we manage to only save the produce which is presently being lost due to incompetent transportation, we can increase the export opportunity by more than 20 billion dollars.
Regardless of the political party which comes to power, there should be long term economic policies that are sustained with each political transition to rebuilt trust of the local and international investors. Even if the government changes, the economic policies once approved by political parties should not be changed. Only then investors can make long term feasibility of their businesses and start investing in different industries. Also there should be a limit to government lending which is affecting the industries.