Theory of power

LAHORE: The concentration of wealth in Pakistan can be judged by the fact that the capacities in cement, basic textiles, sugar, and fertilisers have increased phenomenally by entrenched players only.

There has hardly been any new investor in these sectors although demand in all these have sectors has multiplied in the last three decades. In 1990s, the total cement production in the country was 9.9 million tons that has increased to over 48 million ton.

Yet the number of cement mills remained 23-24. It is indeed beyond logic why no new investors have jumped in when the demand was increasing and still going up. All the owners of cement plants are from the wealthiest business families of the country.

These cement owners have been accused of operating as a cartel. Cartels operate in many ways. One is through uniform price; the other is by allocating specific markets to different mills.

But one factor that is ignored is that these cartels erect entry barriers for newcomers. Cement is a capital-intensive industry and no investor could dare to establish a mill if he fears that the cartel could reduce the prices to lower than the cost.

Entrenched mills through cartelisation have enough reserves to scare away new investors and force him/her to sell their shares to any existing player. Another barrier is the cumbersome procedure for getting the mining right and permissions from the bureaucracy.

The established mills know how to get things done. Now there are at least three cement units each having higher capacity than 10 million tons. One player that succeeded in entering the cement club was a Pakistani British.

He was granted extraordinary concessions of waiver of sales tax for three years and a natural gas connection that was not available to other mills even after 10 years. That mill had an upper hand as its production cost was very low compared with others.

Pakistan’s sugar sector is also monopolised similarly by the political elite. Around 76-79 mills have been operating for decades. This is because establishment of new sugar mills was banned by the government (on pressure from political families). The argument in favour of the ban was that sugar production was higher than the country’s needs, and export of sugar was not possible as its production cost in Pakistan was much higher than global rates.

Yet we saw existing mills increasing their capacities and many establishing new setups far from the original plants in the name of balancing and modernisation. We saw Jahangir Tareen establishing new sugar making facility in south Punjab from central Punjab.

Humayun Akhtar and family did the same and the last to do so was the Sharif Family (Shariff family’s expansion from central Punjab to south Punjab was rolled back by the courts).

It is indeed surprising that newcomers were barred from investment in new sugar mills, but the existing players could expand at will. Political dominance in the sugar sector created a new rich class by exploiting farmers and milking state subsidies. This class was separate from the other industrial rich.

In textiles, 90 percent of the investments were made in the spinning industry, which was dominated by a famous clan.

There are hardly 400 spinning mills (including 130 closed units). These mills continued increasing their capacities with few newcomers entering this sector. The average size of one spinning mill in Pakistan is 25,000 spindles; it includes 5-17 units belonging to the same families. Some of the rich families have increased the spindles from 25,000 to 100,000 spindles.

Most of these families can also be seen in the cement sector as well. Three of the top ten Pakistani banks are owned by these families. Through diversified investment some textile families have covered their risks as decline in one sector is covered by the growth in the other two sectors. They are among the richest families of the country.

Two of these families have ventured into automobiles as well. The investments all over are coming mainly from these rich families only. Most of them have also ventured into real estate after they saw some builders overtaking them in wealth.

The investment avenues where there are chances of rapid profits are dominated by the richest families in Pakistan, who maintain a monopoly on the sector they invest in. Sectors where entrepreneurs must work very hard have been left to the medium sized investors.

The rich are awaiting these to become lucrative so that they could jump in to share the booty. We have seen the mighty spinners eyeing the apparel market now that the smaller entrepreneurs have shown the way.