The automobile policy

When the PML-N government came to power in 2013 it was felt by many that the automobile market in Pakistan left much to be desired. Many consumers believed that they weren’t getting a lot of choices, and that even with the limited choices they had they still had to pay more than what was paid by consumers in other countries for similar models.

The government believed that there wasn’t enough localisation of parts, and critical parts (such as the engine and the transmission) were still being imported thus jacking up consumer prices. And the existing companies weren’t doing enough to introduce newer models, make more parts or transfer technology to Pakistan.

Finally, car manufacturers reasoned that the car market in Pakistan was too small to allow them to make critical parts in Pakistan and that the prices were high because of high import duties and taxes imposed on car manufacturers. The car manufacturers also complained about the large number of imported cars that were allowed into Pakistan. The government, on the other hand, was worried about the long delays in delivery of locally assembled cars and couldn’t in this situation deny consumers the right to buy imported cars. Truth be told, the tax collector was also addicted to the duties collected on imported cars.

It is against this backdrop that the Economic Coordination Committee (ECC) of the cabinet formed a committee, under the chairmanship of then-federal minister Khawaja Asif, to recommend a new ‘Auto Policy’. The committee had me as chairman of the Board of Investment (BoI), chairs of the Federal Board of Revenue and the Engineering Development Board and the secretaries of industries, finance and the BoI as members.

As you can imagine, there was considerable lobbying by the industry while the committee was deciding on the policy. But it is because of Khawaja Asif’s leadership that we were able to come up with a bold and successful policy. Once we all agreed with the big picture reforms we were going to recommend, he assigned me the task of thrashing out the technical bits with all the stakeholders and bringing the policy together. He also told me that he would take all the political pressures, and insisted that we do only that which we considered in the best interest of the country. Whenever we got stuck in our discussions, he moved us along.

Mr Tariq Bajwa, the current governor of the State Bank of Pakistan, who was then a member of the committee, convinced me and others that we needed to give more incentives to new entrants to Pakistan so as to level the playing field. His argument was that the existing car manufacturers already had a dealer network, a vendor network and factories – and thus their cost of introducing new cars was much less than the cost of any potential new entrants.

As a political economist, I understood that when it comes to regulatory agencies, consumers always have less influence than the industry. This is not just a Pakistani phenomenon but is true the world over. After all no individual consumer, who perhaps buys one car every few years, has the incentive or the wherewithal to travel to Islamabad, attend meetings and convince the regulator to be more consumer-friendly. The industry, on the other hand, has all

the incentives in the world to lobby policymakers

(As an example consider the example of airfares in America. As long as they were regulated, presumably to protect the consumers, fares were higher but when there was deregulation in America airfares dropped substantially. So really the regulators were, all those years, only protecting the airlines).

So we had no reason to think that our regulators would be able to convince our car manufacturers to reduce prices, or introduce newer models or localise their production.

Instead, we put our faith in the market. We believed that if we could design a policy that would get new automakers into the Pakistani market, the increased competition would lead to better models and lower prices. Moreover, provided with the right incentives, car manufacturers in order to lower costs would manufacture more and more parts in Pakistan. The resulting decrease in car prices, along with increased consumer wealth and a growing middle class (remember this was 2016 so we had reasons to be optimistic), would result in an increase in the auto-market size, allowing our car manufacturers economies of scale.

Luckily, our policy worked. As soon as our policy was announced the two largest Korean car manufacturers, Hyundai and Kia, announced plans to invest in Pakistan. Soon Renault of France announced plans to invest in Pakistan along with Al Futaim group of UAE and a local company Ghandhara Motors. But their agreement fell through so Renault along with Al Futaim decided to invest on their own and bought land in Pakistan to build a plant. Not to be outdone, Ghandhara made a deal with Nissan and started the process of bringing Datsun cars to Pakistan. Finally, a few months before our government ended, the Volkswagen group announced plans to assemble commercial vehicles with a Pakistani company.

All of this means that the Pakistani car industry will have several players and there will be fierce competition. This will result in newer models, better prices, better fuel economy and higher safety standards. And ,rather than the premium consumers often have to pay to get the car of their choice, we will all get a discount from the dealerships when we go to buy a new car.

Now of course the new government is trying to take credit for all the car companies coming to Pakistan. But all these companies announced plans for, and started the process of, investing in Pakistan during the PML-N’s government and as a result of the Auto Policy approved by the government headed by Mian Nawaz Sharif. In reality, though, it doesn’t matter who gets the credit as long as new car companies are investing in Pakistan and bringing jobs for

our people and greater choices for our consumers.

There was one difficult decision our government had to make and this concerned Pak Suzuki Motors. A wonderful company and a good corporate citizen, Suzuki had been wanting to invest in a new plant in Pakistan and had requested us for the same concessions we gave new entrants.

However, we refused as that would have gone against our policy and also the implicit promise we had made to the new companies entering Pakistan. We also reasoned that as new competitors will introduce newer models in Pakistan, the existing car manufacturers would be forced to further up their game anyway. (Renault executives had assured us that their cars running on the streets of Karachi would be as good as the cars running on the streets

of Paris).

I hope Suzuki invests in Pakistan – and without the government going back on the existing policy. In this case, I would be happy to give the new government credit for bringing in the Suzuki investment and will not claim, with considerable justification, that this too is the result of the successful Auto Policy written by the Khawaja Asif committee.

The writer has served as federal minister for finance, revenue and economic affairs.

Twitter: @MiftahIsmail