Services Sector
As an agri-based economy it is easy to understand why easy credit was available early on in Pakistan in this sector in the 50 years or so of our existence as a nation. To ease the pressure on agriculture, large-scale diversion into the manufacturing sector was carried out in the 60s and 70s, embarking on a virtual industrial revolution that spent large amounts of money on textile mills as well as a whole range of small, medium and heavy industries. On the Harvard model as applicable in Japan, exports became the key. China and the four Asian Tigers followed the same model. Maximum credit was directed primarily to support industries churning out traditional exports of cotton and cotton-based derivatives and secondly to building up non-traditional exports. Whatever gains were made in the medium and heavy industries was wiped out by the sweeping nationalisation of the early 70s by the Bhutto regime, during late Zia’s regime both industrialists and agriculturists became entrepreneurs. Loan default became a business in its own right despite the authoritarian nature of the regime, there being a lack of street credit control with the advent of controlled democracy in 1985. The years 1998, 1993 and 1997 are landmarks inasmuch as each successive political regime force-multiplied the loan default by interfering politically in the recurring process specifically and in the nationalised banking industry, both with nationalised commercial banks (NCBs) and development finance institutions (DFIs), generally. With the “Day of Redemption”, Nov 16, only a couple of days or so ago, it is time to take stock of why so much credit was showered on virtually one sector alone, with a negligible amount in comparison to the agriculture sector and almost nothing if any, to the services sector.
Whereas credit directed to agriculture must certainly be enhanced many times over in order to bring more acreage under cultivation and increase the yield per acre, a comprehensive policy for credit to the services sector must be evolved. Services are so ignored that there is no separate heading for it in any policy consideration. It is mind-boggling that a sector which is the dynamic driving forces behind the economies of the world’s premier nations does not get any direct recognition in Pakistan. For a country with a low literacy rate, the creation of blue-collar jobs in abundance is a dire necessity. The traditional way of creating jobs is in the manufacturing sector but that costs money estimated at US $ 50,000 per job unit. And that job unit continues to eat into the resources of the State directly insofar as industries use electricity, gas, water, etc. In direct contrast, job creation in the services sector costs nothing or almost nothing and there is little use of utilities if at all at any stage.
The model of the Armed Forces where all the services are in-house i.e. medical, workshop, engineering services such as maintenance, house repair, painting, plumbing and electrical etc makes for a bad example for corporate entities. Unfortunately our first corporate model par excellence, PIA, adopted in-house services in the absence of an organised services sector that could support the airline competing internationally. Instead of being confined to cockpit crew, aircraft maintenance engineers, cabin crew and airport traffic staff, PIA ventured into all fields including security, medical, cleaning services, ground maintenance staff, etc not to mention areas such as hotel management, poultry farming, horticulture, flower production etc. Given the situation in the 60s this was understandable but subsequently almost all corporate entities tended to follow the all-inclusive PIA model, without regard to cost efficiency, etc with disastrous results for corporate efficiency, profit margins and the development of the services sector.
The name of the game for economic expansion is to encourage the services sector by out-sourcing. This means that corporate entities must focus on their primary goals and out-source services to the private sector in which they do not specialize. This will not only help in creating more blue-collar jobs but competition among the bidding companies would make the services to the corporate entities far more efficient. With salaries spread over large base of people, there will be an increased cash flow in the economy.
Let us take the security services sector as an example. The guards PIA employs directly cost PIA Rs 16,000 to 16,500 per month inclusive of his post-retirement pension and benefits, whereas PIA simultaneously takes security services guards to meet the shortfall from at least 4-5 private security companies at Rs 4,300 p.m., barely 25% of the amount it pays for the guards it employs directly. This does not take into account the free/discounted airfares for the PIA employee and his family. At the same time, PIA has a problem getting the best performance out of the guard whereas in the case of the private sector PIA can ask that anybody be changed on its own will. Similarly if a person is sick, the private security services company will give a replacement without any additional cost, PIA has to worry about the overtime it pays for the substitution by another PIA employee. For PIA, out-sourcing means considerable savings, manifold increase in efficiency as well as flexibility without the hassle of maintaining executives to manage the guard force and its own inherent discipline problems. The same is the situation in other corporate entities, both in the public and private sector, though increasingly both the sectors now seem to be looking for out-sourcing given the cost efficiency.
Now let us see what support the guard services company gets from the Government of Pakistan (GoP), hardly any. Because of the proliferation of private security companies, it is taken to be a lucrative business and therefore any “easy target” for some in the bureaucracy at the lower level who have decided to get into the act. The Income Tax Department has started to levy a maximum of 5% withholding tax at source and the Provincial Government have given notices to private security companies in their respective areas for phenomenal registration fee as well as annual fees and fees for branch offices, unheard of in corporate circles for other Corporate entities threatening to close down business if their demands were not acceded to. The transition from “democratic rule” has given some breathing space but the “natives are getting restless again.”
Banks find it almost impossible to give credit because of Prudential regulations, after all what does a private security company have assets except vehicles, weapons and communication equipment, none of which falls in the category of tangible collateral? To some extent security service bills are being discounted, but at a very high rate of mark-up. In fact, instead of tax incentives and easy credit to create more jobs, the present GoP policies act as a disincentive. Companies of the All Pakistan Security Agencies Association (APSAA), i.e. those having NOCs from the Government of Pakistan (GoP), having over 100,000 security guards add Rs 3.6 billion to the economy annually in salaries for blue collar workers alone. It is the same for courier companies, cleaning and maintenance companies, direct marketing companies, credit and personnel verification services etc. All of them make significant contribution to the economy, this can be force-multiplied.
A comprehensive services sector policy is a must consideration for the military regime. Somebody has to give concerted thought to developing the services sector to create more jobs, maximum of them blue collar ones. The type of credit and tax incentives that are available for the industrial sector may not be similarly forthcoming, but even a fraction of that will help in doing what is most needed for Pakistan’s economy, creating more employment at the bottom end of the scale, i.e. among blue collar workers. The regulation of the services sector in a sophisticated, purposeful manner will dynamise the economy.
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