Sick industries getting ‘sicker’ still

By Majid Sheikh

Dawn, May 19 , 2003







The State Bank of Pakistan (SBP), from time to time, comes up with “innovative” ways to restart the sick industrial sector of Pakistan. All the defaulters, who in any sane society would all be behind bars are free to flex their muscles again.

Recently the SBP decided to advise banks to just simply write-off all bad debts if they so wished. If anything could be worse for the confidence of savers, especially small savers, it was this announcement.

The last move with regard to the sick industrial sector was that the SBP undertook a reassessment of all the sick units. Following that effort, banks were given a new set of rules which allowed owners to pay ten per cent of the Forced Sale Value assessed as a down-payment, with the rest being paid over a three-year period. It sounded reasonable, at least on the face of it, especially to those not involved in the manufacturing process. In reality it was the opposite, and there are cogent reasons for this being the case.

When it came to the crunch, barely a handful of business houses out of thousands decided to take up the offer. Why would such a situations arise? After all businessmen know full well what is a viable solution and what is not, and they decided, by their actions, that it was not a viable solution. The reasons are simple.

Sick industries take a much bigger effort and much more investment to resurrect than does setting up a new business. With sick units most of the assumptions are given, and within the confines of a restricted business space the edifice of a new superstructure has to be erected. It is costly and needs considerable business skills, not to speak of patience.

To add to this is the fact that banks, thanks to the “prudential regulations”, are not allowed to lend any money to any sick unit. So completely starved of cash, without any official assistance and with over 27 departments breathing down your neck for ‘cash handouts’ to pay to the entire network that survives on corrupt practices, an entrepreneur sets off to weave his alleged magical skills. Talk of Alice in Wonderland.

The reality is so very different. Nothing but a set of scientifically predictable methods have to be applied to restart a manufacturing process, a process that costs a lot of money. In the current environment of a recession, the going is definitely not easy. For these simple set of reasons, no man in his right frame of mind would go for such a scheme. This is simply why the SBP scheme was a resounding failure, no matter how skillfully officials explain them. In the end, good PR does not mean good business. Only good business means good business.

Let me explain the process with a small example. The IDBP in Lahore has on its “sick list” a packaging project that has, just a few months ago, been assessed at over Rs45 million being its ‘forced sale value’. It is in a three acre, two kanal and 180 sq ft plot near Sheikhupura Road. Land prices there are between Rs275,000 and Rs300,000 an acre.

The report assumes a price of Rs500,000 an acre. The over 47,000 sq ft of building, now 23 years old and in a state of disrepair with huge holes in the roofs is assumed at over Rs. 400 a sq ft. Experts feel that any price over Rs100 is gross. A similar brand new construction even today would not exceed Rs. 200 a sq ft.

The machinery is assumed at prices well over 400 per cent above similar machinery available in the open market today. An official concerned with the process was of the “view” that such assessments have been dictated from above. The end result desired is that none of these sick units should be sold. No straight entrepreneur would touch any of these sick units with anything, let alone a mile-long pole.

A list of land, building and machinery provided to a highly qualified researcher.He came up with a ‘forced sale price of Rs7.0 million as against the SBP assessment of over Rs45 million. What should one do in such circumstances? The answer is simple, and the businessmen answered it by just ignoring the scheme.

It seems our bureaucrats and bankers just do not tire of coming up with hair-brained schemes to make everything look rosy and on the up. Makes one wonder, up what? Any economist worth his salt will tell you that business is not on the up,and all those “rescheduled” reserves are basically of no use to the business environment where bankers still remain the main stumbling block to meaningful honest investment and lending.

With the failure of the last scheme, the SBP has come up with an even more crazier scheme in which they just want to write off all debts and start anew. I cannot think of anything more irresponsible. Let me say with considerable confidence that this scheme is doomed to utter failure. The bankers and bureaucrats who suggested it need to be forced to take up these closed factories free of cost and forced to show profits within three years given the environment in which other businessmen operate. It is like punishing PTV officials by making them watch their own programmes.

But then, you might ask, what needs to be done, especially given the circumstances in which banks are not finding savers, neither are they finding businessmen willing to take loans,and neither do they find their bad debts being reduced. It is a quagmire from which this country needs to escape very quickly if any sense is to be made of the direction ahead.

It needs to be recognised that any factory set up 20 or more years ago, will probably not be worth resurrecting. This does not mean that all manufacturing units over 20 years old need to be scraped,but that, depending on a case-to-case basis,most will probably die anyway irrespective of how much money is pumped in to them. So this needs to be treated in a manner in which, within the next two years, all, yes all, sick industries should have been dealt with. The only way possible is suggested below.

All units should invite potential buyers. These buyers, preferably sets of two or three equal stakeholders, and preference should be given to young educated professionals working in a similar industry, be asked to pool as much money as they can, no matter how much it be, and get an honest assessment made of the assets available.

Once such an exercise is completed, the potential buyers should be asked to prepare a business plan with their contribution being presumed as their equity. Then an agency should, based on the strategic business plan, search for banks from which to borrow and get the new owners going. No former owner should be allowed to own these old sick businesses, at least not for the next ten years. A reasonable repayment period of 11 years should be allowed to such units.

In this way new entrepreneurs mostly younger lots and who would not mind taking a risk or two, would be launched into the system. As a bonus the bureaucracy should be forced to stay away from such units for at least five years. Other facilitating measures should be taken to assist these new Pakistani business houses. Only, and only in this way will we be able to get our sick units going. A few will have to be sold as scrap, the bricks of the buildings sold and the land sold at the best price possible. End of matter and enterprise.

But what about the former owners who have still not paid a single rupee against old loans. The answer lies in letting the law take its course quickly.




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