Authored by: Qura tul Ain Hafeez
Edited by: S. Sadia Kazmi
STRATEGIC VISION INSTITUTE (SVI), ISLAMABAD
Upholding the tradition of conducting intellectually stimulating discussions on various issues of strategic importance, the SVI in collaboration with Pakistan Business Council (PBC) held an Inhouse seminar / Panel discussion on an important issue entitled “Prospects of Cooperation between Civil and Military Industries for Indigenous / National Manufacturing” on 7th May, 2018. Worthy panel of discussants included Mr. Ehsan Malik (CEO, Pakistan Business Council), Mr. Syed Nasim Raza (Advisor to Chairman POF Board), Air Commodore Dr. Muizuddin Shami (Pakistan Aeronautical Complex Karma), and Lt. Gen. (R) Naeem Khalid Lodi HI (M) (former
Secretary Defense/former CEO/MD Fauji Fertilizers). The event was attended by the research scholars, academicians, journalists, students and members of private and civil society.
Lt. Gen. (R) Syed Muhammad Owais (former Secretary Ministry of Defence Production/Member Board of Governors, SVI) inaugurated the session with a warm welcome to the speakers, guests and participants and expressed gratitude for their kind participation. He gave a brief introduction of Pakistan Business Council and the three Military Industries of Pakistan. While introducing the Pakistan Business Council (PBC), Lt. Gen. (R) Syed Muhammad Owais briefed that it is a platform which represents all the business congregates of Pakistan and also the multinational firms and serves an institution that provides guidelines to the business community in Pakistan. PBC holds different conferences and seminar in this regard to facilitate people nationally and internationally. Apprising the audience about the second important part of the seminar i.e. Defence Industry, Lt. Gen. Owais explained that the military industry comprises of two domains. One is the defence industry that purely deals with the military potentials of Pakistan. Second is the industry which works under the Fauji Foundation industry that also belongs to the defence industry but does not fall under the domain of defence but deals with purely civil matters. He explained that the purpose of holding this interactive session is to bring into limelight the prospects of co-operation between civil and military industries for indigenous / national manufacturing so that a strong interaction can be developed between the defence industries and the business community of Pakistan.Furthermore he stated that there is a lot of potential where both the civil and military industry can work together and enhance the economic potential of Pakistan and thus formulate recommendations for the policy makers.
Lt. Gen. (R) Syed Muhammad Owais invited Mr. Ehsan Malik to give his valuable deliberations on “Make in Pakistan: Pakistan Business Council’s (PCB) Approach to Increasing the Share of Local Manufacturing in Pakistan’s Economy”. Mr. Ehsan Malik, while giving the brief overview of PBC, explained that it is a relatively young organization established in 2005. As of now PBC is composed of 75 leading private sector corporations of Pakistan including 27 multinational companies from 14 different countries – which cater to 13 different sectors and cover a broad spectrum of business. Altogether PBC shares almost 11% of the GDP of Pakistan, generating about quarter of the total exports and tax revenues. PBC’s mission is to foster growth. Having said that Mr. Malik defined the three imperatives that are earmarked for the PBC. The most important is to offer jobs in manufacturing and services. If a country is unable to create jobs for a population of two and a half million then it would risk social discord. Explaining his argument with example, Mr. Ehsan Malik said that when investment promoters go around the world they quote Pakistan as the 6th largest population of the world out of which 50% is under 20 years of age with highest urbanisation rate, etc. This is only interesting for investors if people have jobs. If they don’t, then this becomes less meaningful. The attraction of a large population is spending power. Without jobs there is very limited disposable income. Without jobs, the large population is a burden on the state. Therefore, creating jobs is the first premise of “Make in Pakistan”. The second most important imperative for the PBC is value added exports and imports substitutions because, just as a business can’t survive without remaining solvent, a country gets compromised if its external account is under pressure. It is similarly important that the country’s external accounts are balanced. One needs to have value added exports that will employ people so the country can earn foreign exchange. Along with this there must be the industry that promotes import substitutions. Mr. Malik opined that Pakistan is a consumption based society that is largely dependent upon imports as a result of which Pakistan has approached the IMF on 12 different occasions in the last 28 years. He stressed upon the immediate need to bring in economic reforms to put an end to or at least address this depressing situation. The third imperative is a broad and equitable fiscal policy. You cannot place 59% of the tax burden on 13.5% of the GDP. This is the burden that manufacturing carries in Pakistan.
Continuing with his views Mr. Ehsan Malik highlighted that the country’s trade deficit is growing and the balance of payment is moving negatively. Pakistan’s share of the world’s exports over the last 13to 14 years has come down. He quoted the example of Bangladesh which has followed a value added, employment generating export policy. Its share of world exports has doubled in this period. He said that it is not necessary to produce everything by yourself as one can see that Bangladesh is not producing any cotton. Even Vietnam hardly produces any cotton in fact it imports cotton from other countries and adds value to it. Mr. Malik further explained as to why he gave the example of textiles, because it represents 65% of country’s exports, and hence is very important. Mr. Malik also expressed his concerns regarding the premature de-industrialization of Pakistan and the impediments to its growth. When even an economically stable country like the US cannot afford to de-industrialize then how can Pakistan with its large population with many unemployed and 2 million coming into employable age each year? Answering his own question Mr. Ehsan Malik said that obviously we are not in a position to outsource jobs. In Pakistan the percentage of manufacturing contribution in GDP is going down and manufacturing is overburdened with taxation. Manufacturing represents 13.5 % of GDP yet carries 58% of total tax burden. Agriculture does not produce more than 1%; the retail and whole sail sector which represents almost 20% of the GDP also contributes about 1% of tax revenue. So agriculture and retail representing 40 % of GDP contribute just 2% of the tax revenues. Growth of manufacturing in Pakistan lags behind India, Bangladesh, and Vietnam mainly because these countries have prioritized their local production and we unfortunately have not done that.
He further explained that one of the key impediments to the external trade is poorly negotiated Free Trade Agreements (FTA) which Pakistan has signed with various countries. When Pakistan signed an FTA with China in 2006 it had a trade deficit of US $3 billion. This has grown to $16 Billion by 2017. Still we are very keen to sign FTAs with other countries. In comparison, countries like Thailand and Turkey have significantly stronger export capability than Pakistan. Currently whatever Pakistan exports to Turkey and Thailand already enjoy favorable tariffs. Non-cascading tariffs hurt the local manufacturing which can be best explained by quoting the example of Pakistan’s footwear industry. In this daily use item there has been a threefold increase in the import of footwear from 2007-2016; 90 % being imported from China. A high percentage of shoes come are imported and the same applies to other items like blankets, tiles, and so on. The tax on the components of soles is 20 %. Same is the tax on the finished product of shoe. It is because of these faulty policies and poorly negotiated FTA that we are relaying on China for the supply of shoes.
Our tax rates are high, and the fiscal regime is very complex. Drawing comparison of the taxes with other countries like Singapore, Bangladesh and Vietnam, Mr. Ehsan Malik said that with the imposition of super tax, workers’ welfare fund, and workers’ profit participation fund, our corporate tax rate is 38 %. The sales tax rate is 17 % which is very high for an undocumented economy. Although the economies like EU have sales tax rate of 20 % but they also have a highly documented sector. However, for an undocumented economy like Pakistan the tax rate of 17 % encourages the people to remain outside the tax net instead of joining it. Our fiscal policies are not supportive to capital accumulation, capital formation and retention of profit so that one could feel motivated to invest. The reason behind this is the super tax.
He further said that it is the ‘consumption’ not ‘investment’ which drives the economy and leads to the FDI. 80 % of Pakistan’s economy is composed of private consumption which is very high, even higher than India which is 60 %. Talking about the foreign direct investment Mr. Malik elaborated that if one looks at all the big-ticket FDIs, excluding CPEC, all are in the consumption space. Moreover, their payback time is short at between three to five years. So, every US $100 that comes today, as soon as three year later, same is the net out flow of money going from Pakistan. Hence, it is important that Pakistan should be pursuing the kind of FDI that generates jobs and exports.
Mr. Malik opined that Pakistan’s investment in capital formation is less than half as compared to its Asian peers – India, Bangladesh, Sri Lanka and Indonesia at 31.5%, 31.3%, 32.2%, and 32.8 % respectively. He reiterated on the greater need for investment and for the robust custom regulations. He pointed out that a huge amount of under invoicing is happening. The difference of export record of China to Pakistan and Pakistan’s import from China is US $3.5 billion and if other countries are added to it such as EU, UAE, UK, USA, Thailand, and Turkey etc., the value would be around US $ 5.6 billion. Therefore, a lot of revenue and jobs are being lost. There is a dire need to fix the trade, fiscal, and energy policies and a due attention to be given to the neglected housing policy as well. Housing sector if promoted properly has the potential to bring growth in 35 different sectors. He opined that there is a 10 million housing short fall in Pakistan and an annual need for half a million new houses. Hence, investment should be brought in this sector. Agricultural policy is another area that needs attention. Unfortunately, our output per hectare is less than 50% of the global best. Pakistan used to produce only slightly less volume of cotton than India until few years ago but now India produces three times more cotton than Pakistan. Since 65% of our exports are cotton based textiles, we have no choice left but to import cotton in order to keep the textile industry running. Due to a government support price for wheat and sugar-cane, Pakistan witnesses surpluses in both, whilst we suffer shortage of cotton. Mr. Ehsan Malik concluded his argument by stating that the thing of paramount importance by the end of the day is employment/jobs. There is a need to generate at least 2.5 million jobs, which if is not done in due time will lead to a social discord. We need to become solvent to find feet in the external account as well as find a global base. Having explained the view of PBC on economy he was eager to know and understand the point of view of the Defence industry in order to find a way forward altogether.
Mr. Syed Nasim Raza appraised the audience on “Cooperation between Civil & Defence Industry: Significance of Indigenous Production” and gave an overview of major defence production capabilities of Pakistan which are:
1. Pakistan Ordnance Factories (POF) Heavy Industries Taxila (HIT) – which basically makes tanks and armored vehicles for APCs. In addition to this, they build bullet proof waists and other commercial items.
2. Pakistan Aeronautical Complex (PAC),
3. Air Weapons Complex (AWC),
4. Military Vehicles Research and Development Establishment (MVRDE),
5. Armament Research and Development Establishment (ARDE),
6. Institute of Optronics (IOP),
7. Defence Science and Technology Organization,
8. Karachi Shipyard and Engineering Works (KSEW),
9. National Development Complex (NDC)
10. Pakistan Navy (PN) Dockyard,
11. Dr. A.Q. Khan Research Laboratories (KRL),
12. National Radio Telecommunication Corporation (NRTC).
Mr. Raza briefed the audience about the mandate of the POF and shared that the POF started in 1951 but the mandate came later in 1961. It manages and administers the affairs of the factories and run them on sound commercial line so as to adequately meet the needs of the defence of the country during war and peace times and to utilize the surplus capacity of the factories to meet the needs of civilian population. While explaining the physical infrastructure and statistics of the POF industry, Mr. Raza mentioned that the total cantonment area of the POF comprises 26 sqkm with a total population of 400,000, out of which the work force is 24,000 comprising 602 engineers and scientists. Besides this, the POF has 14 defence units and 14 subsidiaries – purely civil organizations that operate under the company law while commercially no funding is given by the government. The profit is earned and dedicated to the national economy by giving the tax duties and the dividend goes to the POF. Moreover, the POF has 19,267 plants and machines. It also has some education institutions including 131 schools and collages with a literacy rate of 98%. POF consists of two divisions: defence division and the commercial division. The defence division makes 62 types of products including arms and ammunition where 95% of these products go to the Pakistan army. Mr. Raza explained that POF is an assured supplier of arms to the armed forces of Pakistan for the last 65 years. The commercial divisions of the POF – the subsidiaries are to meet the need of the civilian population.
Talking about Wah Industrial Limited (WIL), he explained that after the inception of Pakistan, the POF established WIL as a commercial window to utilize the surplus capacity available during peace time. WIL is a bridge between the production units of POF and commercial user in the local sector. POF served as mother defence industry, landed technical manpower, expertise, technical know-how and retired manpower to support the civil industry to stand on its feet. Its 100% shares are owned by the POF Board.
POF owned civil industries include:
1. Wah Nobel (Pvt) Ltd, Packaging Factory
2. Shot Gun Ammo Factory
3. Hi-Tech Plastics Factory
4. Wah Brass (Pvt) Ltd
5. Sanjwal Solar Power (Pvt) Ltd
6. Wah Clothing (Pvt) Limited
7. Wah Construction Pvt Limited
After giving the overview of the commercial industries of POF, Mr. Raza elaborated on the important component of the POF owned civil industries-Wah Nobel (Pvt) -a joint venture of Wah industries limited. It includes:
1. Wah Nobel Chemicals Limited
2. Wah Nobel Acetates Ltd
3. Wah Nobel Baluchistan Explosives (Pvt) Ltd
4. Wah Nobel GilgitBaltistan (Pvt) Ltd
5. Nobel Energy Ltd
6. Gezhouba Wah Services Ltd.
At the time of establishment of POF industry in Pakistan, it was not adequately equipped to manufacture precision parts needed for military hardware production facilities. Therefore, they had to be setup covering end-to-end production i.e. from raw material to finished product. In early sixties, a policy decision was taken by the POF Board to outsource some operations and for this purpose a Trade Development Department (TDD) was established for the support of vendors/civil industry. Different production units of POF were asked to outsource the manufacturing of parts for arms and ammunition to various civil industries. The POF now has achieved these goals and has been able to develop quite a number of civil industries with excellent success rates. Civil industry like Daud Sons Armory Peshawar, Alsons Industries Karachi, Machine Craft Lahore, Service Industries Gujrat, PSM Karachi and many more have been the partners in Defence Production. POF established Wah Nobel Private Limited as a Civil Sector Organization way back in 1964 which has grown over the time and has become a group of six companies.
In addition to this, the civil industry development increased productivity and gave way to cost effective output. Low cost of ammo/equipment is now being produced by the civil industry. Moreover, it increased the production without additional investment from the public sector and increased the economic activity in private sector resulting in the industrial growth and creation of jobs in local sector thus, resulting in alleviation of poverty by providing jobs at the door step.
Another aspect of POF is that it discourages migration to already congested cities. The POF vision 2025 is to become a technology provider and limit itself to designing, assembling, filling and proofing of end products allowing civil industry to handle the production of various parts and materials.
While talking about the importance of civil industry Mr. Nasim Raza opined that in the industrial development of a country, importance of the civil industry sector cannot be over emphasized. However, unlike large enterprises in the public sector, a civil sector organization is constrained by financial and other resources. This inherent characteristic of a civil industry makes it imperative that there should be a mechanism through which it may get support in different functions of business including technical upgradation, marketing, financial and human resource training and development.
While highlighting the current status of civil industry in Pakistan Mr. Raza said that MoDP is mandated to provide necessary services to help the civil industry overcome weaknesses that are endogenous to their very nature through the creation of a conducive and regulatory environment, development of industrial clusters, and provision of business development services in all areas of business management. Unfortunately, till now MoDP has not been able to effectively implement this part of the mandate. In Pakistan with the exception of a few civil industry organizations, the rest are relying on old and obsolete technology and lack technical skills needed for producing quality products. Civil industry has never been encouraged to invest in developing new products or carrying out pioneering innovations resultantly very few in civil industry have acquired competence to develop, manufacture and upgrade defence systems. He also said that unlike the rest of the world, development of civil industry has never been on the priority list for any government in Pakistan. On the contrary, civil industry has been playing an important role in the growth process of our geographical neighbor’s economy since independence, despite the stiff competition from the large sector, mainly due to government support.
Civil industry has been universally accepted as one of the key players in defence production. But in Pakistan not enough attention has been paid to their involvement in the defence industry. Presently they are peripheral players and are producing low tech items. POF has been forced to carry the entire burden on its own. Due to the absence of a clear cut defence production policy for civil industry by the GOP, no solid efforts have been made by the concerned ministries to fully exploit their potential and capabilities to innovate.
Highlighting the role of civil industry, Mr. Raza further deliberated that civil industry plays a vital role in modern economies as it not only creates a significant number of job opportunities but also provides support to large scale public sector manufacturing organizations. Civil industry is all the more essential for public sector organizations so that the latter can concentrate their activities on integrating systems and rely on civil industry that is more specialized to provide the critical components for the production of defence systems. Increase in the role of civil industry in defence production will result in lesser investment per job created, wider geographic, social spread of investments, and better income distribution. He also said that for major acquisitions, civil industry can become sub-contractors to prime contractor for the supply of parts and sub-assemblies either developed in-house or as per design provided by the prime contractor.
Deliberating upon the global importance of civil industry Mr. Raza stated that the importance of civil industry can be gauged from the fact that every technologically advanced nation has accorded due recognition to their involvement in defence production. Civil industry is the backbone of UK, USA and Europe’s high value manufacturing and services industries in aerospace, defence, security and space. At least 9,000 companies make up these highly diverse skilled engineering and support sector. Every single large aerospace or defence equipment contract is underpinned by the hard work of hundreds of civil industries. This enables the civil industries of these countries to respond to the needs of the armed forces as a priority, speeding up the deployment of life saving battlefield capabilities. As per our defence procurement policy, large foreign contractors are supposed to provide off-set programs. Civil industry can play a major role and become partner of the foreign companies.
Mr. Naseem Raza then discussed the significance of SMEs and the role they are playing globally. The most important sources of employment in the EU are small and medium sized enterprises. The government therefore encourages people to become entrepreneurs and also make it easier for them to set up and grow their businesses. Effective utilization of potential and innovation of SMEs was considered to be the key factor in the success of European Defence Technological and Industrial Base (EDTIB). As per Defence Production Policy (2011) of Indian Ministry of Defence Production, SMEs have been recognized as a major player for indigenization and have been offered major incentives like allocation of funds and necessary resources to support R&D.
While raising an important point Mr. Syed Nasim Raza questioned what issues of civil industry in Pakistan are in the context of defence production and why it is not being invested heavily. Answering the question himself he said that adequate financing arrangements for capital is needed to procure precision machines and equipment to produce quality products. Availability of skilled manpower is also capacity building of freshly recruited manpower.
In the last part of his presentation he gave the way forward that like other developing countries, Pakistan needs a policy which should aim towards adding civil industry in the supply chain of high technology products and services related to defence sector. The policy must provide a level playing field for civil industry with public sector defence units and foreign suppliers. To provide a coherent policy mechanism, there is a need to develop comprehensive civil industry policy for defence production that defines the role of concerned public sector institutions. Such policy framework will provide the required direction and focus for achieving private sector led economic growth resulting in job creation and reduction in poverty. The objective of the civil industry policy should be to provide a short and long-term policy framework with specified implementation mechanisms and timelines. Any policy for civil industry involved in defence production should include, at a minimum, the following components:
1. Financial resources allocated specifically for civil industry development.
2. Access to information regarding future defence requirements.
3. Incentives in taxation.
4. Investment incentive for entrepreneurs in setting up civil industry for defence production.
About the significance of indigenous production, Mr. Nasim Raza mentioned that the following benefits would accrue over the long term Indigenous manufacturing:
1. Ensure steady supplies and prompt maintenance support as and when the country would require it.
2. Indigenous manufacturing would always be cheaper than imports and would lead to a smaller defence budget,
3. Allowing the country to allocate higher budgets for education, health and improvement of infrastructure.
4. Growth of the domestic manufacturing industry and the creation of a strong defence manufacturing ecosystem.
5. Growth of design and R&D agencies, both in the private and public sectors, leading to the establishment and growth of a strong technology innovation ecosystem.
6. Technology spin-offs to non-defence technology areas such as healthcare, medical diagnosis, automotive engineering, inland security, maritime shipping, etc.
7. Potential for the country to grow into a defence exporter over the long-term.
8. Overall potential for growth of industry in general leading to employment generation.
Air Commodore Dr. Muizuddin Shami from Kamra represented Pakistan Aeronautical Complex (PAC) and presented his views on “Prospects of Cooperation between Civil and Military Aviation Industries in Promoting Indigenization”.His main focus was on the vision of Pakistan Air Force and Pakistan Aeronautical Complex, their overall capabilities and the contributions that PAC is making towards the development of an Aviation City. PAC not only fulfills operational needs of its Air Force and armed forces, but earns foreign exchange from measured exports of aviation nature. Pakistan happens to be amongst very few countries that are producing fighter aircrafts, and other high-tech components mainly used in the military aviation. The aviation manufacturing happens to be confined to public sector concentrated at Pakistan Aeronautical Complex Kamra, without any participation of private industries. Now it is determined to expand beyond military usage to the commercial one, with some additions in its infrastructure. While doing so, it intends to significantly accumulate towards country’s economy and technological strength. In its expanding effort, it also wants to integrate and consolidate academia particularly the one related to aviation industry and affiliated Research & Development.
Dr. Shami explained that for better understanding of this integrated approach; Pakistan Aeronautical Complex has also concentrated on academia, research, and development industry. Pakistan Aeronautical Complex was established in 1972 for the maintenance of war fighting machine of Pakistan Air Force. Before that, Pakistan Air Force was totally dependent upon the foreign sources of maintenance that remained a challenge due to continuously changing regional and global strategic calculus. Since its establishment in 70s the only Aeronautical Complex of the country continues to expand in passing years thus absorbing a number of military technologies taking care of all the needs of the Air Force and Pakistan Armed Forces. This capability manifests itself as a complex of four factories; three related to aircraft manufacturing and one to avionics production. It is a modern complex spread over 10 sqkm employing about 15,000 highly skilled personnel. Dr. Shami told that PAC is headed by high powered autonomous executive body and is working with a vision to provide support to in-country and foreign customers. It is assigned to develop into a sustainable and trustworthy aviation corporation, catering to various segments of global aviation market, while ensuring that Pakistan’s defence needs are met optimally.
Furthermore, the complex began with the maintenance of Chinese origin F-6 aircraft in 1982 and since then has taken over all the other Chinese origin aircrafts being operated in the PAC, with JF-17 thunder being the latest one. In addition, PAC sustained operational readiness of the older and most diverse Mirage aircraft field in the world. Initially starting from the assembling of the Mushshak aircraft in 1975, PAC progressively built up to manufacturing complete aircraft from raw materials during 80s and 90s. Thus building on its initial manufacturing strength in early 2002, Pakistan decided to undertake development of fighter aircrafts. In this regard it is self relying in collaboration with China for co-development of JF-17 after modernizing and expanding its production facilities. Due to this capability it is now equipped with the state of the art manufacturing machines equipment testers. The production potential has enabled Kamra to produce more than 100 JF-17 that exhibits strong talents of air warfare of both space superiority and surface attack. In addition to it PAC also possesses a comprehensive engine and propeller maintenance infrastructure for western and Chinese engines of fighters, transport and air surveillance aircraft.
Dr. Shami further explained that the avionic setup was initially established in 1983 as radar making incentive for the overhauling and rebuilding of ground based radar systems. However, this capability has grown over the years and at present it is capable of designing and developing avionic systems based on customers’ requirements. In realm of avionics and electronics, PAC has state of the art production line of electronic items used for high volume production. The facility also carries out automatic testing and environmental stress feeling for air on electronic components. It is also now producing advanced avionic system used for JF-17 fighters including radar, electronic warfare weapon, computers etc.
Moreover, the weapon system integration technology directly enhances the legality of the fighter jets. Our facility is a certified avionics and weapons integration for advanced fighter jets. Today Pakistan Aviation Industry sector stands as a comprehensive capability to fulfill national defence requirement and at the same time exhibits capacity to absorb the sizeable commercial requirements. This dimension of PAC is now determined to bring in aviation related technological strength of Pakistan inside the private sector for its participation in such technological and industrial pursuits other than human resources.
Air Cdr. Dr. Muizuddin Shami also mentioned that while Kamra embarks upon various ventures to contribute towards country’s economy and technological strength, this effort confronts some fundamental challenges as well.
The first challenge remains the strategic and diplomatic difficulties that Pakistan continues to face resulting in denial of high-end technologies that hampers the aviation manufacturing sector research and development. Second limitation is unfavorable policies for the private industry. Innovation and development is usually funded by the government and facilitated through favorable policies for the private industry. However, owing to our limitations as an under develop nation no such mechanism exists. Therefore, policies and funding generally fall short of crossing the threshold for sustainable industrial growth. Third is the dearth of aviation based Research and Development (R&D) Organizations. Fourth, educational institutions offer limited specialized education in specific aviation related fields. Similarly, in-country vocational institutions do not offer training commensurate with the needs of high end industry thus the gap between the required and the well skilled human resource remains quite open.
Contrary to this, Pakistani private industry at this time is more focused on maximizing profits through short term goals, rather than synergizing their individual strengths. In the face of these challenges PAC intends employing its strength and capabilities in pursuit of futuristic aviation industry in the country on the basis of public-private sector partnership. In this context fundamental considerations are kept paramount including global and regional aviation trends.
Air. Cdr. Dr. Shami opined it is important to note here that globally the aviation industry is one of the strongest rising markets and remains directly linked with the economic growth. Air transport has grown by 60% in the last decade. By 2036, it would account for roughly US $ 6.0tn with induction of 34,000 new aircrafts. In this commercial aviation growth, Asia Pacific would account for 41% of this expansion as it would absorb over 14,000 new aircrafts from now till 2036. The drivers of this aviation sector growth are the raising middle class with high living standards, competitive air fares, growing global tourism resulting in 6% travel growth over the past few years. As of today, air travelers per year exceed 3 billion passengers at the regional level. This number would blow exponentially with expected upper economic trajectory. Alongside commercial maintenance overall Maintenance, Repair and Operating (MRO) is fast improving and by 2020 its revenue generation would stand at US $18bn per year.
The expansion in aviation sector results in massive research and development curriculums including composite metallurgy structures, modern electronics, avionics, propulsion system, and alternate fuels in the realm of oil sciences. Therefore, these areas remain key research disciplines in future aviation technological growth. Picking upon these trends, Kamra aviation industry will aim to cap on the dividends of emerging aviation markets into bringing technological and economic strength to Pakistan. There is a need to improvise along commercial lines while retaining strong military manufacturing, consolidate applied aviation engineering, faster research and development, and the need to aim at developing right type of human resources. This will also include creation of industry cluster around Kamra thus evolving private aviation industry. This project has already started under the name of Pakistan Aviation City.
Briefing about the Pakistan Aviation City, Dr. Shami told that it is being raised incrementally with Pakistan Aeronautical Complex Kamra being its nucleus. The construct would be based on existing industrial, academic and R&D infrastructure which after progression would transform into advanced component of aviation city. The ultimate objective of such efforts is to encourage development of production units to form aerospace industry hub. Once the link with academia and research is established it would ensure grooming of applied engineers in advanced technological engineering. To form rich academia industry, Pakistan Aeronautical Complex has built Teaching Industry. For this purpose, campuses of Air University and other renowned universities are being co-located at Kamra. Not only that, Aviation City would also feed its requirements to universities all around the country for subjects having direct relevance to aviation usage. Vocational training is planned as part of Aviation City that would benefit the local populous other than serving the aviation industry. Other than academia industry, R&D curriculum would remain the nucleus of such construct. Realizing this, an R&D body named Aviation Research Innovation & Development (ARI&D) has been established which focuses on key aviation areas including design, advanced materials and structures, bio sciences, electronics, etc. On top of this research center an innovation incubator body is planned. The young minds under this R&D incubation center will be encouraged to focus on innovations related to futuristic aerospace designs, development and objectivity. In raising the national aviation status, full involvement and commercial manufacturing and related curriculum is a must at Kamra. Besides this, Pakistan Aeronautical Complex aims to build a commercial passenger aircraft and business executive air jets. This is aimed at capitalizing the regional and global aviation trends for which we are already equipped with state of the art manufacturing hardware. Commercial aircraft maintenance, repair and overhaul for Airbus 320 family and Boeing 737 & 777 series is also planned and by 2020, its revenue generation would stand at US $ 80bn per year. For this purpose the aerospace industry and foreign manufacturers would be attracted by establishing advanced Town composed of modern infrastructure and facilities. In this regard Special Economic Zone is being established around Kamra Aviation City which would offer tax rebates, competitive labor costs, and lucrative business incentives. New town would also contain Expo Center built on modern lines of technology and performance demonstration while retaining strong military manufacturing. He stated that consolidating applied aviation engineering with R&D cultures results in developing right type of human resource. Creation of industrial cluster around Kamra will help evolve private-public aviation industry inside Pakistan. However, he emphasized that the PAC alone cannot do everything by itself. The efforts towards establishing Aviation City, especially in terms of indigenization, requires active participation of civil sector.
The last speaker of the seminar Lt. Gen. (R) Naeem Khalid Lodhi HI (M) (former CEO/Managing Director, Fauji Fertilizer Company) talked at length about the “Role of Fauji Foundation in Developing/Managing National Industries”. He started by clarifying this misconception that the Fauji Foundation works only for the army, it is in fact meant to facilitate the retired personals and their families but not the serving officers. There is a designated a wing that deals with funds generation for the welfare activities. The origin of this very organization lies in ‘Military Re-construction Fund’ established in 1945 by the Gov. of British India for the post-war welfare & rehabilitation of Indian War Veterans who served the British Crown during WW-II. After independence in 1947, proportionate share of balance fund was transferred to Pakistan. This share stood at Rs. 18 Million. Until 1953, the fund remained in government’s custody and later was transferred to Army. In 1954, the Fauji Foundation was founded as a Charitable Trust incorporated under “Charitable Endowment Act, 1890”. The reason of creation of Fauji Foundation is welfare of its beneficiaries i.e. ex-servicemen & their dependents.
The welfare services include free healthcare, subsidized education, stipends, and vocational and technical training etc. Fauji Foundation is one of the largest business & welfare conglomerates in Pakistan having a unique working model. It works on a complete self-sustaining basis, receives no grants or assistance from any governmental or non-governmental organization. Welfare expenditures are generated from indigenous resources i.e. industrial and commercial projects. Fauji Foundation channels more than 80% of its profits into welfare services. Talking about the beneficiaries of the Fauji Foundation, Lt. Gen. (R) Naeem Khalid Lodhi apprised the audience that they are the released, retired, and discharged personnel of armed forces/defence service guards & operationally deployed civil armed forces, and their wives, widows (unless they are re-married), and sons up to the age of 18 years. There is no age limit for education stipend, un-married dependent daughters including divorced/widowed, invalid sons, irrespective of age – parents and families of martyrs (Shuhada), ex-cadets and recruits invalided out of service, disability attributable to military service. It is important to note that the Foundation takes care of an overall beneficiary population of about 9 Million (5% of country’s population).
The Fauji Foundation has two boards of committee: Committee of Administration, and Central Board of Directors. It is important to understand that this organization runs under these two key management and governance units. The Committee of Administration is chaired by the Secretary Defense, mostly a person from forces. While the Managing Director has to be a retired personal from Army, an Adjutant General or a Chief Logistic Officer from army, or could be the Deputy Chief of Naval Staff from navy. The only function of the committee of administration is to ensure and watch how the welfare activities are going on and how the profits are being utilized. They don’t interfere into the commercial activities and decisions instead all the commercial decisions are taken by the Central Board of Directors. Administration of this board comprises of civilians who are the actual force behind the Fauji Foundation. Similarly, Managing Director is usually the retired Lt. Gen., Director Finance and Investment is a professional civilian, Director welfare (health and education) is the retired officer, Director HR can be a civilian or a retired officer, Director Planning and Management is usually a professional civilian, and same is with the Director R&D and Industries, while the Secretary Fauji Foundation is usually a retired Brigadier. While further explaining about the two wings of Fauji Foundation, he mentioned that one is the commercial wing and the other is the welfare wing. The commercial wing further has two types of companies: one is the wholly owned such as Fauji cereals and Fon gas etc. The second is the associated companies which comprise of large number of other companies. Some of the prominent among them are Fauji Fertilizers, Fauji Fertilizers bin Qasim, Mari Petroleum, Pak Morac, Kabir Wala Power Company and Dharaki Power Company, Fotco and Akbar Portia Great Terminal etc. There is also Fauji Cements and Askari Cements. The Army Welfare Trust is also part of Fauji Foundation subsidiaries.
He explained that the welfare wing also consists of education and healthcare. Over the last 20 years, Fauji Foundation education system has matured into a progressive, comprehensive and a well-rounded system. It also offers high quality English-medium education both in urban and rural areas with best academic results. It operates 177 academic and training institutions in a wide geographical spread across the country. While sharing some facts about the education, he briefed that the faculty strength at the technical and vocational institutions is over 1700. There are over 47,000 students currently enrolled, and over 6,000 persons are trained annually at these technical & vocational centers. As far as the health care is concerned, Fauji Foundation has established vast networks of healthcare over a wide geographical spread across the country. The beneficiaries are provided a comprehensive medical coverage from basic to advanced levels of treatment. The medical infrastructure varies in levels and scales from dispensary level to large size hospitals and comprises of hospitals, medical centers, static dispensaries, mobile units, and artificial limb center, which is a unique distinction. Through mobile dispensaries, needy beneficiaries are provided medicines and medical checkup facilities at doorstep in remote areas. The integrated and progressive healthcare system is equipped to diagnose and treat medical, surgical, obstetrics and gynecology, eye, ENT, pediatrics, psychiatry and disabled patients.
While highlighting upon the mix of people working at Fauji Foundation, Lt. Gen. (R) Naeem Lodhi told that not a single army person is working there. All the workers are the civilians and retired personals of forces. In the officers’ cartel only 12% are the officers while the remaining 88% are the civilians. Within the staff 43% are the ex-army servicemen. Overall out of 14,000 people who are employed at the Fauji Foundation, almost 9,000 are civilians. Lastly, he explained the contribution of Fauji Foundation towards the national economy. To begin with, Fauji Foundation is the highest tax payer. It contributed Rs.102bn to the national exchequer in the form of taxes, duties & levies in year 2012-13. 60% of the share of earnings in the public quoted companies is distributed to the common shareholders. Almost 9,800 jobs have been provided to the civilians by the Fauji group which constitutes about 68% of the strength. Over 47,000 students are currently enrolled in more than 175 educational institutions. Once all the talks were delivered, the session chair Lt. Gen. Syed M. Owais opened the floor for Question & Answer session.
Mr. Pervaiz Butt (former Chairman PAEC) quoted some examples of the rise and fall of indigenization of different industries in Pakistan. Talking about the indigenization of PAEC, he shared that it was forced to indigenize in 2006 because in 1976 after the Indian explosion of 1961 all the technical support, spare parts and equipment brought from outside Pakistan was stopped. Later the Karachi Nuclear Power Plant which started operation in 1971 also underwent indigenization. It is still doing its job continuously in spite of total ban on all technical support and embargoes since 1976. Similarly, the Precession Engineering Complex (PEC) established By Mr. Fazal Ahad in Karachi in 1970 was exporting the equipments made for Boeing (Now being built in Kamra), however it collapsed because it was working under the PIA which itself collapsed. Lastly, he gave the example of the Karachi shipyard which was built in 1960s as the most impressive and modern shipyard. It was Pakistan who gave China the technology for the ship building and Chinese first ship YOYI 1 was designed and built by Karachi shipyard. Later YOYI II was built in China with Pakistani assistance. Mr. Butt explained that the reason behind quoting these examples is to give a food for thought and a question to ponder that what are the reasons that a functioning industry in 80s underwent a collapse and if it is being indigenized now then why it is not being expanded simultaneously? Are there some political reasons behind that? Mr. Ehsan Malik answered the questions by presenting the private sector perspective. He opined that the mass nationalization of the private industry is a major setback to the indigenization of scale in Pakistan. When that happens, it actually destroys the back bone of private sector, which is unfortunately the reason in this case too. Second, there hasn’t been any long term policy to promote an industry. There are short bursts and provision of transactional stimulus, but none of them are transformational in nature. So, this is the other reason that private sector has not been able to build that scale and could become more competitive where it could have been able to fight the imports and exports. Adding to the discussion Mr. Prevaiz Butt said that there is also a need to highlight the increased cost of energy that makes the running of industry a costly business because our electricity is quite expensive as compared to India and Bangladesh. The reason behind this high cost of electricity is massive corruption. The KANUP and CHASHMA power plant produce electricity at a cost of 4-5 rupees after covering their investment cost. We should highlight this because the greatest hurdle in the indigenization and non-attractiveness of industrialization is the cost of manufacturing in Pakistan.
Amb. (R) Fozia Sana (Director GPRS, NDU, Islamabad) opined that a correct and implementable tax policy is required for country’s economic growth. Major drawback is that the government does not make effective policies to be implemented. Although in the past we have had the five years plans etc. There was once a time when we helped China in building ships and Singapore in developing airlines and we helped countries to improve their banking systems, which mean we do have great pool of talent and dedication but some where we got dissolution, because the merit was not given the due credit. She expressed concern that this talent is not being effectively utilized. She quoted the example of Saindak Copper-Gold project in Baluchistan, where China is still mining and digging minerals out of the area while Pakistan gets nothing from the project. She questioned why is it so? Under which domain does this project come? Are we using those facilities to build our shipyards, propellers or ports? Lt. Gen. (R) Syed M. Owais responded that the Saindak project does not come under the defence industries instead it falls under the domain of Ministry of Mining Industries. Mr. Pervaiz added that the Saindak project was mutually signed between the government of Pakistan and China. Unfortunately, it was signed by the non-technical people from the government. The technical task of the project was not effectively completed before embarking upon this project so, now after having an agreement it is difficult to step back. Amb. (R) Fozia Sana further expressed her apprehensions regarding the CPEC project lest it become another poorly negotiated project like Saindak. Mr. Ehsan Malik added that there is a need for greater transparency in CPEC projects.
Ms. Puruesh Chaudhary (CEO, Agahi), aimed her question at Air Cdr. Dr. Muizuddin Shami mentioning that while we are talking about futuristic things we lack the essential foresight. The way the future of war is progressing, it is a combination of different forces coming together and not much of it is either transparent or known to the public. People who face day to day issues are much more grappling with the challenges, than people in very confined institutionalized systems. So, within that context how do you plan to get at the imaginative ideas and process? Second, do you think there is a need for institutions like Defence Advanced Research Projects Agency (DARPA)? Dr. Shami contended that the future of war is definitely being taken into account at all the levels. A new project has been introduced having aviation research and development centers. It is being headed by Air vice Marshal who has been assigned various segments such as new next generation air craft carriers. The new wars would be based on new unarmed vehicles. It is going to be a different technology as far as the weapons are concerned and we are working on that. Beside this, due focus is being given to the avionics where the collaborative efforts are underway with other sister organizations like NESCOM etc. As far as the foresight is concerned, the civil organizations need to jump in because PAC can’t alone take on the vision. We want private sector also to chip in. Although we also have few reservations with the private sector that they have some short term goals which is their basic right and they should be looking into the profit but PAC’s priority is to develop the technology so that it can be used for the future war. He acknowledged the SVI efforts in providing an efficient forum to interact with the private sector. Answering the second question Dr. Shami said that PAC already has an Aviation Design Institution that works on the same lines as DARPA. It has project and system managers and the projects are given to various organizations to manage. Lt. Gen. (R) Owais added that the PAC has two sides: the conceptual and developmental side. Conceptual side consists of particular service domain i.e. the JSHQ and the aviation departments that are carrying out extensive research on future of war fighting. Similarly, on the developmental side also various institutions are working. Moreover, there are DARPA like programs running in National University of Science and Technology (NUST) as well. Lt. Gen. (R) Naeem Khalid Lodhi said that we need to make our future strategies keeping in mind the future of war. This would include development strategies as well, for example the focus on micro drones. Unfortunately, in our country this process is yet not organized enough. First there is a need to think about how the war is evolving and only then one would be able to make the development strategy.
Mr. Saud Bangash (Resident Director, PBC) questioned how the defence industries can help the private sector in the process of indigenization. Data shows thatin producing a car in Pakistan, assuming that the cost of production per unit is Rs. 100, Rs. 30 rupeesis paid in taxes,Rs. 44 is the cost of local content used in the car and the remaining Rs. 26 is the cost of imported content which includes the engine of the car. The level of deletion achieved in car production is therefore about 64%. It is evident that our industry is not producing the relatively hi-tech components such as the engines, silicon chip, laptops,mobile phones etc., which results in the high import bill. Mr. Nasim Raza responded that producing an engine is not a problem; the real issue is the government’s policies coupled with the monopoly of the few companies like Honda and Toyota which do not let this happen. Dr. Zafar Iqbal Cheema (President/ Executive Director SVI) said that the policy lies in the hands of the government. It should be the government to decide these policies not the multinational companies. This is not commercially viable for the defence industry to produce an engine.
Dr. Cheema asked about the reasons of premature de-industrialization in Pakistan as he didn’t consider electricity as the only reason. He added it might also be attributed to the import duty as the import duty on the raw material is the same as the import duty on the finished goods, which discourages people to buy raw material and instead opt for the finished product. He asked whether it is this inadvertent folly or there is something else behind this? He highlighted that it is an important point that a country like Pakistan which is a developing country is facing de-industrialization. Mr. Ehsan Malik said that in order to find an answer to this question, it is important to figure out that under the tenure of which government the industry was doing well and what good and bad things were happening when the industry was rising and falling. This might help identify the real reasons behind the de-industrialization.
Mr. Ibrahim khan (Student of Law, International Islamic University, Islamabad) gave his comments about the Special Communication Organizations (SCO) that recently has been allowed to communicate and operate 3G communication cellular services in Pakistan. He asked about the views of the speakers on the current trend of military joining hands together with the private sector especially in the field of telecommunication. Mr. Ehsan Malik answered that there are some cellular services in Kashmir and along the border areas. They do have the expertise and potential to carry out relevant tasks and provide services. But there is still a need to focus on the affordability of imports.
Mr. Atta Ur Rehman (Research officer, National Assembly of Pakistan) asked why have the small industries in Darra Adam Khel been destroyed when they were self-sufficiently producing small arms. Mr. Nasim Raza explained that twice there have been efforts to streamline these small arms industries and to educate the people of Dara Adam Khel so that they could contribute to the national produce. But they categorically refused to accept this. Around 300 person were also employed from the same area in POF and were treated at par with other permanent employees but they showed reservations against the package which the POF was offering to them. Reason being they are used to earning the black money which is far higher than the normal cost of weapon. Lt. Gen. (R) Naeem Lodhi added that a better strategy would probably be to ask the people how they wanted to be helped instead of just going ahead helping them, which might not necessarily be what they wanted. The problem arises when we help them on our own terms and conditions instead of taking their perspective into account.
Mr. Lokhaze Ali (Environmentalist) asked if there is some way that the imports are indigenously produced by the military and private industry so that the revenue stays inside the country and large part of finances could be saved? Mr. Ehsan said that it is possible only through a long term consistent policy and there is also a need to undo all the poorly negotiated free trade agreements. Thirdly there is an immediate need to allow the two hundred billion populations to build the scale.
Brig. (R) Dr. Tughral Yamin (Associate Dean, Department of Peace and Conflict Studies, NUST) questioned about the lack of interaction between the university industry linkages. He said there is a lack of vocational training and our ratio of trained and skilled manpower is very low. He asked how does the PBC view this anomaly. Mr. Ehsan Malik on behalf of the PBC agreed that education is very important but counted mental stunting of the children as an even bigger issue. He explained that 43% children in our country are mentally stunted who are under the age of 12 and 14 years hence it becomes almost impossible to educate them. Similarly, financial inclusion and many other important factors also need to be addressed.
Mr. Muhammad Abdul Hannan (consultant on CPEC) stated that becoming a manufacturer is not an easy task in Pakistan. He asked if there is any policy in practice that outlines as to how can one become a manufacturer and how many taxes would one have to pay for that? Mr. Ehsan Malik replied that there are certain guidelines available according to which so far 56 different kind of taxes apply on an average businessman in Pakistan and if one is a manufacturer then there are even more taxes. This indeed shows that there is a dire need to introduce incentives for the local manufacturers and to ease the working of business community in Pakistan.
Dr. Cheema asked Mr. Ehsan Malik if he could shed some light on how much indigenization has happened in the civil industry until now and what plan does the PBC have to interact and connect with the defence industry? Mr. Ehsan Malik replied that the indigenization in the private sector is labeled by the market demand. What is lacking in our tariff and input policies is that they’re not intended to help Pakistani industry transform and integrate into the global value chain. Answering the second question Mr. Malik opined that it required a long term policy to bring in all the public, private, and defence sectors together. It is a thought process which must go on in greater concentration. Interaction among civil and military industries is required and today’s seminar is a reasonable start in this direction.
Dr. Cheema asked Dr. Muizuddin Shami that while it is heartening to know that Kamra is producing parts for the Boeing aircrafts, it is yet not a public knowledge. Shouldn’t there be a need to advertise this success story? Dr. Shami replied that this information is available on their official website which can be accessed by the common public. In addition to this, Karma has been manufacturing parts of Boeing aircraft since long that too of high standards. Dr. Zafar Iqbal Cheema and Lt. Gen. Syed M. Owais concluded the seminar by offering thanks to all the worthy speakers and extending gratitude to the audience for their active and productive participation.
Seminar proceedings were covered by the print media as is evident from the hyperlinks given below: