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Engineering Development Board

Ministry of Industries, Production & Special Initiatives


Government of Pakistan
Islamabad
15-11-2006

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C o N T E N T S
S. No Page #

OVERVIEW OF AUTO INDUSTRY 1


1- Current Status 2
2- Auto Industry Development Programme (AIDP) 5
3- Recommended Government Intervention 7
4- Tariff Initiatives in the AIDP 7
5- Auto Industry Investment Policy (AIIP) for Car/LCV 9
5.1 Definition 9
5.2 Eligibility Criteria 9
5.3 Benefits 10
5.4 Business Plan 10
6- Non-Tariff Policy Initiatives 11
7- Productive Asset Investment Incentive (PAII) 12
7.1 Qualifying Vendors 12
7.2 Incentives 12
7.3 Qualifying Assets 12
7.4 Qualifying Value of Assets 13
7.5 Non-Eligible Assets 13
7.6 Business Plan 13
7.7 Claims for PAII 13
7.8 Sale of PAII Credits to OEMs 14
7.9 Procedure of Sale of PAII Certificates 15
7.10 Processing of Claims 15
7.11 Claims for Subsequent Year’s PAII Certificate 15
7.12 Monitoring and Review of PAII 16
7.13 Withdrawal of PAII Certificates 16
8- Technology Acquisition Fund 17
8.1 Eligibility Criteria 17
8.2 Eligible Expenditures 17
8.3 Documentation 17
8.4 Processing of Claims 18
8.5 Discretion of EDB / Ministry of Science and Technology 18
8.6 Withdrawal of Technology Acquisition Fund (TAF) 18
8.7 Size of TAF 18

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9- Research and Development Incentives 18
9.1 Eligibility Criteria 18
9.2 Eligible R & D Activity and Eligible R & D Project 19
9.3 Non-Eligible R & D Projects 19
9.4 Eligible R & D Expenditure 20
9.5 Assessment of Applications 20
9.6 Merit Criteria 20
9.6.1 Caliber of New R & D Activity to be Generated in Pakistan by ..... 21
Proposed Project
9.6.2 The Technical Merit of Proposed Projects 21
9.6.3 The Level of Benefit, Including Environmental Benefit to the 21
Wider Community of Proposed Projects
9.6.4 The Contribution of Proposed Projects to the Sustainability of 21
an Internationally Competitive Automotive Industry in Pakistan
9.7 Administration of the Scheme 22
9.8 Documentation 22
9.9 Claims for R & D Benefits 22
9.10 Monitoring and Review of R & D Scheme 23
9.11 Withdrawal of R & D Matchmaking Grants and Tax Incentives 23
9.12 Tax Incentives on R & D 24
9.13 Size of R & D Fund 24
10- Human Resource Development (HRD) 24
10.1 Factory School Concept 24
10.2 Incentives 24
10.3 Eligibility Criteria 25
10.4 Duration of Training 25
10.5 Approval of Curriculum 25
10.6 Administration of the Scheme 25
10.7 Business Plan 26
10.8 Documentation 26
10.9 Monitoring and Review of Factory School Scheme 27
10.10 Withdrawal of Incentives to the Factory Schools 27
11- Auto Clusters 27
12- Motor Vehicle Examination (MVE) 29
13- Emission Control Policy 30
14 - Road Network Programme 30
15- Safety, Standards and Accreditation 31
16- Used Vehicle and Components Import 32
17- Auto Sector Export 33
18- Auto Industry in Perspective of FTAs 34
19- Computerization of Vehicle Registration and driving licensing 34
20- Auto Industry Development Committee (AIDC) 35

CONCLUSION 37

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Draft Auto Industry Development Programme (AIDP)

AUTO INDUSTRY DEVELOPMENT PROGRAMME (AIDP)

OVERVIEW OF AUTO INDUSTRY

Pakistan Automobile Industry dates back to 1953, when the National


Motors Limited established its assembly plant in Karachi to assemble Bedford
Truck. Subsequently buses, light trucks and cars were assembled in the same
plant. The industry was highly regulated until early 1990’s. After deregulation
major Japanese manufacturers entered in the market thereby creating some
competition in this sector. Assemblers of HINO Trucks, Suzuki Cars, Mazda
Trucks, Toyota and Honda in particular, entered once deregulation was
introduced. Assembly of Daihatsu and Hyundai cars LCVs and range of mini-
trucks commenced recently.

The new phase of auto industry emerged during the year 2001-02 when
the auto industry entered into a rapid growth phase. The rapid growth has been
triggered by a regular high growth in economy, increase in the purchasing power
of consumers and availability of credit and financial options coupled with low
interest rates. The growth in demand surpassed supply, particularly in the
Motorbike, Car and Tractor sectors. To overcome demand-supply gap
Government had to allow used car imports by relaxing the rules permitting such
imports. Despite a production of 160,642 cars by the close of 2005-06 and
import of 48,692 cars including 43,295 used cars, supply side has improved to
some degree but the gap still exist.

Production of Vehicles
(No. of Units)
2001-02 2002-03 2003-04 2004-05 2005-06
CARS 40,088 62,073 98,461 126,403 160,642
TRUCKS 1,134 1,929 2,022 3,204 4,518
BUSES 1,086 1,296 1,380 1,762 825
LCV 9,055 12,548 14,896 25,177 32,053
FARM TRACTOR 23,801 26,240 35,770 43,200 48,887
MOTORCYCLE 120,627 175,169 371,007 570,085 751,667
TOTAL: 195,791 279,255 523,536 769,831 998,592

Major growth drivers of Auto Industry were the car/ LCV, Tractors and the
Motorcycles. The Auto Industry products expressed compounded growth rate of
50%, during last five years, out of which the cars registered 41%, Motorcycles
58%, LCVs 37%, Buses (-7%), Trucks 41%, and Tractors 20%.

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Despite rapid growth, Pakistan’ Auto Industry contribution in global terms


is still very low i.e. 0.3% of world production of 66.5 million passenger and
commercial vehicles. World installed capacity for passenger and commercial
vehicles is 85 million units. Similarly export of auto products was only US$ 35
million which is negligible in the world trade. The annual world trade of auto
products is over US $ 800 billion (components constitute about 40% of World
Trade).

Auto Industry: A World Overview

World Vehicle Percentage


Year Production Increase/ decrease
(Unit in Million)
1997 55.87
1998 53.20 (-) 4.77
1999 55.74 4.77
2000 58.33 4.64
2001 56.17 (-) 3.70
2002 58.45 4.05
2003 60.09 2.80
2004 64.16 6.77
2005 66.46 3.58

Pakistan Auto Industry, during the rapid growth phase achieved rapid
localization through adoption of Deletion Programmes (1985 to 2005-06).
Regulatory mechanism for the Deletion Programmes in the form of Industry
Specific Deletion Programmes (ISDP) played their part. ISDP’s mandated
compulsory local content targets for each model of a vehicle through allocation of
certain indices (points) to the components. An assembler had to choose
components from the basket to meet its deletion targets fixed for that year. The
Auto Industry localized most of the sheet metal parts, plastics & rubber parts and
aluminum parts such as radiators, wire harnesses, chassis, tyres & tubes, wheel
& rims, interior TRIMs, car seats and lights etc.

1- CURRENT STATUS

To honor Government’s commitment to WTO‘s TRIMs agreement on


phase out of Deletion Programmes, an alternative system known as Tariff Based
System (TBS) was introduced in the budget 2005-06. The industry, experts and
Engineering Development Board with cooperation of Central Board of Revenue
deliberated for over two years, on the lists of parts, modalities and notifications to
implement the TBS. That was a remarkable achievement and a rare example of
policy instrument made by the Government and the private sector together. The

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industry owns TBS. TBS discourages Rollback of locally developed parts and
components and provides an inducement to the industry on further localization.
This has led to a transparent, predictable and a competitive environment based
on higher rate of duty on the import of localized parts and components.

A detailed assessment however, would be made by the close of the year


on the system as to what have been the possible achievements, losses, pitfalls
and to identify certain areas which could be further improved in the TBS.

The industry is faced with various challenges, importantly being the


capacity constraints at both OEMs and vendors, issues of competitiveness which
are due to productivity on account of both level and infrastructure, low technology
levels, innovation, human resource development, absence of R&D, drawing,
designing and styling capability, absence of any standards, certifications and
accreditation. The focus on emission controls, road infrastructure and auto
vehicle examination is vital issues which have been remained unattended so far.
A strong commitment for improvement is needed through persistent and
concerted efforts at the Government and industry level.

The industry is also faced with dilemma of governments’ liberal policy on


used car, tractor, bus & truck imports under various schemes. Pakistan is already
producing competitively priced agriculture tractors, with high indigenization level
and having potential to export to the world markets. Import of tractors both new
and used free of duty is expected to jolt this industry shortly on two fronts firstly,
the local assemblers falling under the TBS regime are subjected to 35% custom
duty on import of their indigenized parts, while the CBU duty remains at zero
percent. Secondly, investments by the existing assemblers or new investment
would not take place when there is no tariff protection.

Industry is at a disadvantage as none of the major materials is available


locally except few grades of steel. In steel the right specifications in desired
quantities are never available. Despite the industry allowed to import raw-
material at zero rate of duty under SRO 655(I)/2006 conditions to buy steel from
Pak Steel remains major hurdle for long term sourcing. Establishing coil centers
would be one viable option to remove this hurdle.

Auto Industry is volume driven industry and a certain critical mass is a pre-
requisite for attracting the much needed investment in certain sub-sectors of the
industry. Pakistan Auto Industry is fast approaching to that level and as the
numbers grow, investment in manufacturing certain critical components would
become more viable.

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Draft Auto Industry Development Programme (AIDP)

Auto Industry due to its multiplier affect and strong backward (materials
such as steel, copper, aluminum etc., plastics, glass, paint, electronics, capital
equipment, trucking, warehousing & logistics) and forward linkages (dealerships,
credit & financing, logistics, advertising, repair & maintenance, petroleum
products, goods stations, insurance, service parts), is considered, world over, as
the key industry.

The job multiplier in Auto Industry is high, the ratio of employment in the
OEM to vendors is nearly 1 : 10 in Pakistan. A total of 192,000 direct jobs have
been created in the sector. Likewise the ratio of direct employment in the Auto
Industry to jobs created outside the vending and OEM sector would safely be
1 : 12

Auto Industry in Pakistan because of its gross sales turnover of Rs 214


billion during 2005-06 contributed to GDP by 2.8% and its contribution to indirect
taxes i.e. Rs 63 billion was over 9% of country’s indirect taxes. Auto Industry
share in the total manufacturing sector remains at 16% by the close of 2005-06
which was only 6.7% during 2001-02. Auto Industry claims to have invested Rs
98 billion by the year 2005-06. The industry forecast on investment for the next 5
years amounts to approximately Rs 184 billion out of which assembler’s
investment is projected at Rs 39 billion, while the vendor’s estimated investment
would be around Rs 145 billion.

Auto Sector Indicators

Manufacturing Share of Auto % Share of Auto


GDP
Years Sector Share Sector in GDP Sector in
Growth (%)
in GDP (%) (%) Manufacturing Sector
2000-01 1.8 15.9
2001-02 3.1 16.1 1.09 6.77
2002-03 5.1 16.4 1.25 7.62
2003-04 6.4 17.6 2.7 15.34
2004-05 8.4 18.3 2.8 15.30
2005-06 6.6 18.20 2.8 15.93

Despite an impressive growth in auto sector during the last 5 years, trade
deficit in the Auto Industry is whooping and a source of major worry for the
Government. Total exports were to the value of US$ 35 million only during 2005-
06, against the import of US$ 1,115 million (including CBU imports).

The industry is working under high protection tariff due to which the
business environment has been competition free. Market is monopolized by few
OEMs, and the products are characterized by relatively low quality, high priced

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Draft Auto Industry Development Programme (AIDP)

fewer models, long delivery times and poor service to the customers.
Recognized auto parts suppliers would not be more than 300 and are placed
mainly in and around Lahore and Karachi. They are mostly small and medium
enterprises and are fragmented. Most of the vendors are new business entities
who have limited financial capacity, low manufacturing base, know how and
skills, poor technology levels, and lack the vision to transform the existing levels
despite huge potential in the sector. Most of the vendors are vulnerable to
business shocks in the TBS environment as their price competitiveness, terms of
supply and quality would now be challenged by the OEMs.

Vending industry can meet such challenges through restructuring their


businesses in numerous ways i.e. by improving management, investment in
capacities, technology acquisitions, automation, relocation and meeting OEM’s
satisfaction criteria.

The recent rapid growth phase has challenged the quality and safety
standards, emission controls, roads and parking infrastructure, which is far from
satisfactory.

2- AUTO INDUSTRY DEVELOPMENT PROGRAMME (AIDP)

AIDP aims at doubling the contribution of auto industry to GDP and its
turnover to 600 billion rupees in the next five years and reaching to an export
level of US$ 350 million for components mostly to the international after market
and to the OEMs. Motorcycles, tractors and cars are expected to identify
markets for themselves, thus raising export potential to US $ 300 million by the
year 2011-12.

The Auto Industry in Pakistan does not produce critical components such
as engine parts, transmission and gearing, as the volume of cars is less than
what actually is needed for such manufacturing. However, the vendors are
supplying forgings and castings, certain machined parts, sheet metal, plastic and
rubber parts, chassis assembly, fuel tanks and certain electrical components.

The fragmented location of auto vendors remains a barrier to sustainable


growth of vending sector. There are indications that in future the OEMs will
encourage those vendors who are in their proximity rather than the ones located
remotely. JIT concept will take roots soon. Such an imminent threat could be
tackled through “cluster development” one at Lahore and Karachi each.

The low motorization at the existing level of 8 cars per 1000 persons and a
huge potential for the Auto Industry to grow supported by market oriented and
deregulated Government policies, suitable macro economic environment, credit

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Draft Auto Industry Development Programme (AIDP)

& financial options and regular increase in disposable income of the consumers,
the industry needs to exploit this potential through supply of high quality,
competitively priced innovative products with high safety, environment friendly
and consumer satisfying features.

The Government aims to encourage growth, promote domestic


competition, enhance competitiveness and stimulate innovation through AIDP.
Government’s policy on tariffs and non-tariff measures will lead to competitive
and sustainable development of industry. Certain weaknesses in the industry
such as training of manpower, facilities for testing, certifications and
homologation remain the cornerstone of such policy initiative.

AIDP envisage a production turnover of Auto Industry to reach Rs 600


billion by 2011, the contribution of Auto Sector to GDP to reach 5.6% and the
share of Auto Industry in the manufacturing sector to reach 25%. Likewise, the
employment level to increase from 192,000 to 250,000 as direct jobs and from
around 1 million jobs to 2.5 million as indirect jobs in the service sector such as
retails, repair & maintenance, petrol stations, car wash, logistics, insurance,
publication and advertisement services.

The Auto Sector export of components and CBUs is expected to reach to


US$ 650 million by 2011. The core strength of Auto Sector remains the small
and low priced, fuel efficient Cars, Motorbikes and 3-Wheeler. Light commercial
vehicles have high potential to grow, more so in the backdrop of envisaged trans-
freight stations, outside cities, allowing only LCVs to carry goods inside urban
areas. Multiple uses of LCVs in Pakistan economy will lead to high growth of this
sector in next 5-6 years. LCVs show high potential for export in the region as
well.

Tractors, because of highest indigenization levels and price


competitiveness would remain the competitive sector, provided Government
removes certain distortions on import tariffs.

The Trucking Sector through implementation of “National Transport


Corridor” and implementation of “Modernization of Trucking Sector”, replacing the
aging fleet of trucks and replacement with multi-axle rigid trucks and prime
movers will give boost to truck manufacturing industry. Trucking sector has high
potential to grow as Pakistan road freight has already touched 95%. With the
anticipated increase in trans-border trade and the start of local assembly of high
horsepower prime-movers, truck sector will register high growth in future.

The demand will further increase once Government implements


modernization of trucking sector through a suitable buy-back scheme, better

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financial alternatives, corporatization of trucking sector, trans-freight stations,


load management, emission controls and revamping of motor vehicle
examination and registration system.

3- RECOMMENDED GOVERNMENT INTERVENTION

The industry is operating under high import tariffs both for CBU and
CKD’s. Deletion Programmes ensured purchasing of parts manufactured by
vendors, as the violation by OEMs would result into penalty at the rate applicable
to import of CBU’s. The environment has been non-competitive, relatively non-
transparent and was inhibitor rather than promoter of efficiency on a long term
base.
The successor system i.e. Tariff Based System on the other hand gives an
option to the OEMs to import certain components or buy them locally purely
based on economic principles. This system certainly promotes competition in the
vending sector and drives them to provide right quality, price and in time
deliveries. Vendors except few may face difficulty in making quick adjustment to
this system. TBS on the other hand has created plus 400 tariff lines for the parts
and components for the Auto Sector which nearly covers 6% of total tariff lines.
This would remain a major challenge for the Government negotiators on how to
gain or provide market access to the partner countries in future FTAs. Final
outcome of NAMA negotiations may also catch industry unaware.

Certainly there has to be a phased reduction of tariffs for the high tariff
rates of localized items. It would be more appropriate if the tariffs come down by
at least 15 percentage points for the localized components, within next five years
but still remaining higher than CKD tariffs for non-localized components.

4- TARIFF INITIATIVES IN THE AIDP

Despite reasonable localization levels achieved during recent years, the


imported CKD is a major cost component in the local production of cars. This
hampers price reduction and achieving competitiveness in the case of small car
models in the region. There is a need of pre-announced phased reduction of
import duty on CKD kits for the assembly of vehicles. Pre-announced tariffs will
help auto industry in making long term planning on investment, productivity,
marketing and exports. This will also help in attracting foreign investment.

Import tariffs on CBU’s is high and the total incidence of duty/ taxes i.e. by
adding sales tax, withholding tax and CVT on compounded bases — leads to
high protection. Removal of water from existing tariff structure and unification of
tariff slabs on different engine capacity cars will lead to simple, competitive and

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yet reasonably protected tariffs for the industry. At such levels industry would not
be at risk to have influx of new cars.
Following reduction of tariff is proposed for the next five years.
2.1 Five Year Tariff Plan for Vendors / Manufacturers of Parts / Components
2006-07 2007-08 2008-09 2009-10 2010-11
Vendors Raw Material 0% → → → →
(Manufacturers of Sub-Components 5% → → → →
parts/components) Components 10% → → → →

This is proposed that import duty on CBU cars may not be further lowered,
Relatively high CBU tariff encourage investment in the auto sector, components
manufacturing, job creation and exports.

2.2 Five Year Tariff Plan for Car/ LCV


2006-07 2007-08 2008-09 2009-10 2010-11
Car CKD Localized Parts 50% 50% 45% 40% 35%
Non-Localized Parts 35% 32.5% 30% 27.5% 25%
CBU Cars up to 1500 cc. 50% → → → →
Cars 1500 cc to 1800 65% 60% 55% 52.5% 50%
cc.
Cars exceeding 1800 75% 70% 65% 60% 50%
cc.
LCV (g.v.w not exceeding 5 tons)
CKD Kits 20% 19% 18% 17% 15%
CBU 60% 58% 55% 53% 50%

2.3 Five Year Tariff Plan for Two Wheelers

2006-07 2007-08 2008-09 2009-10 2010-11


Two wheelers
CKD Kits 30% 27% 25% 22.5% 20%
CBU 90% 80% 70% 65% 60%

2.4 Five Year Tariff Plan for Tractor and HCVs

2006-07 2007-08 2008-09 2009-10 2010-11


CKD – Localized Parts 35% 32% 29% 27% 25%

2006-07 2007-08 2008-09 2009-10 2010-11


CKD 0% 0% → → →
Agricultural Tractors CBU 0% 10% → → →
Prime Movers CKD 10% 5% → → →
Up to 280 HP CBU 30% 25% → → →

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Draft Auto Industry Development Programme (AIDP)

Prime Movers CKD 0% → → → →


Above 280 HP CBU 15% → → → →
Buses CKD 0% → → → →
(Fully CNG CBU 15% → → → →
Dedicated)
Buses – CKD 5% → → → →
Non CNG CBU 20% → → → →
Trucks CKD 10% 5% → → →
CBU 30% 25% → → →
Trailers CKD 5% → → → →
CBU 25% → → → →

Pakistan Auto Industry has the potential to produce large scale,


competitively priced, small capacity cars and competitively priced LCVs. A
gradual reduction of CKD rates will help achieving the desired objectives.
Government has reduced duty to 0% on the import of raw-materials and there
are evidences that OEMs have already started gaining the benefit.

Reduction of import duty on trucks in the budget 2005-06 from 60% to


30% and elimination of sales tax on CBU and CKD kits has not affected the
industry adversely. Industry has rather expressed signs of healthy growth in
local production, price reduction and competition due to this tariff rationalization.

5- AUTO INDUSTRY INVESTMENT POLICY (AIIP) FOR CAR/LCV

To encourage healthy competition, introduce new products and to bridge


demand-supply gap in the car/LCV sector, Government has approved new
entrant policy. The fact that new entrant will not be able to immediately adapt to
TBS, Government has allowed the assembly to new entrants, through import of
100% CKD (complete knocked down) kit at the rate of duty applicable to non-
indigenized parts. However, Government would ask new entrants to provide a
commitment to develop and purchase local parts for fitment in the locally
assembled cars.

5.1 Definition
New Entrant means a potential assembler/ manufacturer of Car/LCV who
has no direct or indirect relationship with the present assembler/ manufacturer
and had never undertook assembly/ manufacturing of cars/LCV’s in Pakistan in
the past. The New Entrant may fulfill the eligibility criteria under these rules.
5.2 Eligibility Criteria
i) Companies producing more that 500,000 units of Cars/LCV’s
annually in countries other than Pakistan.

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ii) The New Entrant has serious and significant global presence in auto
manufacturing.
iii) Present Car/LCV manufacturers/ assemblers will not qualify as New
Entrant even for their new models.
iv) Registration to produce road worthy Cars/LCV’s, with the
Engineering Development Board, Ministry of Industries, Production &
Special Initiatives.
v) Production of at least 10,000 Cars/LCV’s on one standardized
platform in the first year of production.
vi) Proof of land acquisition in the case of a green field project or an
agreement with the owner, in the case of existing assembly
facilities.
vii) Complete in-house assembly/manufacturing facilities as provided in
SRO 656 (I) 2006 dated 22-6-2006.
Assembly of cars / LCVs from the imported SKD (semi knocked down) kit would
be considered contrary to this policy and the benefits under this policy will not be
admissible.
5.3 Benefits
New Entrants will be allowed to import 100% CKD kit/ components, at
leviable customs duty applicable to the import of components not manufactured
locally, for a period of three years from the start of assembly/manufacturing.
5.4 Business Plan
A qualifying New Entrant will be required to submit a business plan to
demonstrate whether and to which extent:-
i) Total unit production will increase substantially in a period of three
years from the commencement of production.
ii) International competitiveness will be achieved, and of steps to be
undertaken for the purpose.
iii) The human resource will be developed through extensive training.
iv) Acquisition and improvement of technology will be undertaken.
v) The assembly / manufacturing will lead to creation of jobs, including
retail sales, aftermarket, repairs and service facilities etc.
vi) Local content in the assembly / manufacturing operations will
increase gradually.
vii) EURO-II compliant environment friendly cars/ LCV’s will be
produced, besides conforming to other national standards.

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viii) Effect on the balance of payment will be positive by three years,


through export of CBUs and components.
ix) Protection of consumer interests will be supported.
x) The agreement of new entrants with their principals will have a
provision to clearly define the territory outside Pakistan for export of
vehicles manufactured locally.

Business plan containing above details, separately in annexure form, will


be submitted by the New Entrant to the Engineering Development Board,
Ministry of Industries, Production & Special Initiatives. This will be in addition to
other documents/information as provided in the rules or as demanded by the
Engineering Development Board, from time to time.

The business plan will be evaluated by the Engineering Development


Board and the Auto Industry Development Committee (AIDC) on yearly basis to
assess the performance and commitment made in the plan. AIDC will have the
right to define the course of action against the new entrants who fail to honor
their commitment and the business plan, which may amount to a penalty and
withdrawal of benefits allowed under the AIIP.

6- NON-TARIFF POLICY INITIATIVES

The Auto Industry particularly the vending sector is facing serious capacity
constraints and there are fears that OEMs, in post deletion programme scenario
may shift part of their procurement to the overseas suppliers, on price, quality
and timely supply issues.

The vending sector in Pakistan consists of small and medium enterprises.


Most of the entities were established during the last 5 to 7 years with small
capital base, few of them re-ploughed their profits into expansions but majority
could not. Vendors have low manufacturing capacities, low technology level,
R&D and do not possess modern processes which have posed a great challenge
to them.

The only way out is to increase the capacities through massive investment
which may lead to the tune of 140 to 150 billion rupees in the next five years.
There is need that Government may introduce some innovative approach to
attract and facilitate such investment and to create an environment which is risk
free for the vendors and which could encourage interdependencies between
OEMs and Vendors for the sustainable development of vending sector.

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7- PRODUCTIVE ASSET INVESTMENT INCENTIVE (PAII)

The benefits of this scheme would be allowed to the vendors and OEM’s
with the following objectives:-
i) To expand and modernize capacities in vending sector.
ii) To encourage localization of components for the local production of
vehicles and for export.
iii) To encourage rationalization of platforms by the OEMs.
iv) To encourage development of critical components and economies of
scale for global supply.
v) To promote interdependence between OEM’s and vendors.

7.1 Qualifying Vendors


An existing or new automotive component manufacturer registered with
EDB and is contracted or has a letter of intent to supply locally manufactured
components to one or more assembler of vehicles which are duly recognized by
the EDB.
7.2 Incentives
i) PAII will be in the form of customs duty credit equal to 25% of the
value of productive assets invested by the recognized vendors duly
registered with EDB and sales tax department. The duty credit will
be spread equally over a period of 5 years and which can be used to
offset duty on eligible imports.
ii) The duty credit will be transferable to an OEM and will remain non-
saleable in the open market.
iii) Against duty credits, a vendor can import his inputs or can transfer
the credits to an OEM, who can use such credits for the import of
CKD kits, jigs & fixtures and tooling and other productive assets.
7.3 Qualifying Assets
Qualifying assets under PAII includes jigs, dies & moulds in-plant logistics
(software & hardware), production testing & designing equipment, heat
treatment, machining centre, sheet metal facilities, production testing &
designing, sintered products, plastic working machines, electronic connectors
and plant and machinery.

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7.4 Qualifying Value of Assets

The qualifying value of productive assets means the value of the


productive assets capitalized in the balance sheet of the claimant according to
the general accepted accounting practices. The installed assets will have a
recognized marking which will be duly entered into the asset register kept in the
premises of the vendor.

7.5 Non-Eligible Assets


PAII however, will not include the assets for qualification to such
incentives, as commercial vehicles, passenger cars, loose implements/ hand
tools, concessionaries, crockery & cutlery etc., canteen and catering equipment,
training equipment, side services, warehousing & storage, assets outside the
production premises, maintenance, spares & equipment, land and buildings.

7.6 Business Plan


The component manufacturer while making claims under the PAII will
submit a business plan to the EDB as to whether and to what extent;
i) Total production will increase substantially over a period of two years
from the commencement of production.
ii) A contract has been / will be awarded or a letter of intent has been
received for the manufacture of components for supply to an OEM.
iii) International competitiveness will be improved.
iv) The investment will contribute to employment and technology
enhancement.
v) Value of local content will be increased.
vi) Consumer interest will be supported.
vii) Net foreign currency usage will be reduced.
viii) The investment will provide for high standard production facilities to
produce components to the quality standards required for the export.
A detailed marketing sales plan, a production plan, budget and financial
statements for the project for a period of five years, as well as the most recent
company statement will be submitted as part of the business plan.

7.7 Claims for PAII


i) Complete documented capital expenditure, certified by the accredited
chartered accounting firm shall be submitted to EDB.

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ii) A detailed factory layout, clearly showing the productive assets


installed must be included in the claim, for technical assessment by
the EDB, including the site inspection by its engineers.
iii) EDB reserves the right to have an independent audit done in respect
of the financial statements that substantiate the claim for PAII.
iv) A claimant may submit one claim within six months from the closure
of its financial year, for all qualifying assets that were taken up in its
asset register during that financial year. Unless written authorization
from EDB is obtained, late claims will not be entertained.
v) A comparison between the actual achievement and the information in
the approved application and business plan, and previous years’
claims on the project as applicable, must be submitted with the
claims.
vi) The claim must be signed by authorized person of the board of
directors of the company.
vii) All claims must be audited by external auditors before submission to
EDB.
viii) The claims also include a schedule of previously authorized
productive assets which were taken into the asset register with their
asset numbers, capitalization values, date of acquisition, date of
production of each asset, or expected date of production, along with
the report from qualified independent auditors.
ix) Each asset must be provided with a unique asset number that must
be affixed or engraved on the asset installed wherever possible.
x) Claims must be submitted to:
Chief Executive Officer,
Engineering Development Board (EDB),
Ministry of Industries, Production and Special Initiatives,
SEDC (STP) Building,
5-A, Constitution Avenue,
Islamabad.

7.8 Sale of PAII Credits to OEMs

Vendors will be allowed to sell their PAII certificates and duty credits
thereof to only those OEMs who have rationalized their platforms. Rationalization
of platforms has the objective to reduce the proliferation of light motor vehicle
models, produced in the country at an annual quantity of not less than 30,000
units.

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7.9 Procedure of Sale of PAII Certificates

A vendor will submit an application to the EDB to get the permission to sell
PAII certificate to the OEM. The application will indicate the following;

i) The amount in Rupee of total duty credit intended for sale.


ii) The price agreed for the sale of duty credit.
iii) Any other consideration besides the price for sale of PAII certificate,
such as an agreement for sale of components produced by them, for
certain period of time or any other consideration.
iv) Is the buying OEM following the rationalization of platform policy? If
yes, his undertaking and proof to this effect will be duly submitted.

7.10 Processing of Claims


An assessment committee of the Auto Industry Development Committee
(AIDC) after scrutiny and verification of such claims placed before it will
recommend the case on the basis of merits to EDB for crediting of duty credits in
the balance of claimant.
EDB, based on the recommendations of AIDC will then forward the case
to CBR for the benefit under this scheme.

7.11 Claims for Subsequent Year’s PAII Certificate

For the release of ongoing PAII certificates (i.e. the balance of certificates
after the first year’s 5% of claimed capitalized investment) subsequent claims
must be submitted. The subsequent claims must have the following detailed
information.

i) The claimants must provide an updated business plan with any


change in the ownership or legal status of the company
ii) The claimant must confirm that the qualifying assets contained in the
asset list on which the duty rebate certificates for the PAII were
based are still reflected in the asset register and balance sheet of the
claimant.
iii) The claimant must provide information on any change in the manner
of use or purpose of use of qualifying assets, as well as the resulting
financial implications.
iv) Material deviations from the approved business plan are to be
pointed out and motivated.

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v) The claimant must provide a copy of its most recent financial


statements.
vi) Each page of the application as well as all separate pages attached
to the application must be initialed by the authorized person of board
of directors of the company. In addition, the authorized person must
sign a declaration to be included on the last page of the claim. A
certificate of authorization signed by the directors of the company is
also submitted with the claim.
vii) Claims have to be submitted by 30 June of each calendar year in
order to qualify for issuing of that year’s certificates. Claims submitted
later may not be considered on merit.
viii) Claims must be submitted to:
The Chief Executive Officer,
Engineering Development Board (EDB),
Ministry of Industries, Production and Special Initiatives
SEDC (STP) Building,
5-A, Constitution Avenue,
Islamabad
EDB after the approval of AIDC will submit these claims to Central Board
of Revenue (CBR) for the benefit.

7.12 Monitoring and Review of PAII


EDB will present to AIDC Summary of productive assets invested, by
different vendor’s duty credits earned and such credits utilized by the
beneficiaries, on annual basis.

Monitoring and review of the component development strategies will also


take place by the end of each year, up to year 5 to assess the effectiveness of
PAII as an industry development instrument.

7.13 Withdrawal of PAII Certificates


EDB reserves the right to withdraw the PAII with retrospective effect for
non-performance by the beneficiary. EDB also have the right to withdraw the
benefits of PAII, if any irregularities have been observed or incorrect information
was furnished with regard to the obtaining or utilization of the certificate pending
the outcome of any civil, legal or criminal proceedings against the beneficiary. In
such an event, if beneficiary is being deregistered or if the unutilized portion of a
certificate is withdrawn in terms of this paragraph any benefit obtained as a result
of such certificate shall become repayable on demand to the government.

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8- TECHNOLOGY ACQUISITION FUND (TAF)

The level of technology in the vending sector is low mainly due to the high
cost of technology acquisition. Most of the vending entities are still adopting the
primitive ways of manufacturing despite high growth in the Auto Industry. With
such technology level, competitive production at high volumes and entering into
export markets looks a daunting task for the vendors. In order to overcome
technology shortages, a Technology Acquisition Fund (TAF) is proposed.

Technology Acquisition Fund (TAF) provides matching grants to support


the efforts of component manufacturers (vendors) to enhance their technology
level and production processes.

8.1 Eligibility Criteria


The component manufacturers who are registered with EDB and sales tax
department are eligible to participate in this scheme.

8.2 Eligible Expenditures

Following are the eligible expenditures under this scheme.

i) Procurement of technologies through licensing.


ii) The technology to be acquired should include design, manufacturing
know how, technical support, training and proprietary equipment. The
cost of the equipment must not be more than 20% of the licensing
cost.
iii) Procurement of patents or manufacturing rights and registered
design.
iv) Procurement of prototypes and its related technology transfer to
facilitate the physical development of automobiles other than
2-Wheelers and 3-Wheelers.
8.3 Documentation

All assemblers/manufacturers of car/LCV and component manufacturers


who wish to apply for TAF match making grants under this scheme will be
required to provide the following information;

i) Detailed business plan as to what and to which extent technology


acquisition will lead to competitive and innovative production of
CBU’s or components. The business plan will also provide the
estimates on technology enhancement, employment generation,

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HRD, exports, consumer protection, increase in local content,


productivity levels and high standard production facilities.
ii) A copy of agreement containing details of technology provider / seller
and type and kind of technology and payment made to the seller of
technology, details of terms and conditions and equipment, payment
procedure, mode of payment copy of invoice.

8.4 Processing of Claims


An industrial engineer of EDB and a cost accountant will visit the factory
and verify the provided information and claims correctness and will submit his
report to the assessment committee of Auto Industry Development Committee
(AIDC). The AIDC will examine the case as deems fit and will provide
recommendations to EDB, which will then recommend the case to the Ministry of
Science and Technology for disbursement of grant.

8.5 Discretion of EDB / Ministry of Science and Technology


Any benefit with respect to Technology Acquisition Fund will be at the sole
discretion of EDB and the Ministry of Science and Technology.

8.6 Withdrawal of Technology Acquisition Fund (TAF)


EDB reserves the right to withdraw the TAF match making grants with
retrospective effect for non-performance by the claimant. If any irregularities have
been observed or incorrect information was furnished with regard to the obtaining
or utilization of the TAF pending the outcome of any civil, legal or criminal
proceedings against the claimant. In such an event, if claimant or beneficiary is
being deregistered or if the unutilized portion of TAF is withdrawn in terms of this
paragraph any benefit obtained as a result of such scheme shall become
repayable on demand to the government.

8.7 Size of TAF

9- RESEARCH AND DEVELOPMENT INCENTIVES

9.1 Eligibility Criteria

All assemblers / manufacturers of vehicles and component manufacturers


registered with EDB and sales tax department are eligible to participate in this
scheme. Contract R & D company may also be eligible for similar incentives. The
Research and Development project will have access to matching grants and tax
concessions on the following criteria;

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9.2 Eligible R & D Activity and Eligible R & D Project


An eligible R&D activity is an activity
i) That is systematic, investigative or experimental
ii) That involves innovation or technical risk
iii) The objective of which is the acquisition of new knowledge;
creating new or improved materials; products, devices or new
production processes and
iv) That is directly related to the design, development,
engineering or production of passenger cars, light commercial
vehicles, engines, engine components, automotive
components, automotive machine tools or automotive tooling.

A project is an eligible R&D project only if the project includes one


or more eligible R&D activities.

9.3 Non-Eligible R & D Projects

The followings are not eligible for tax concessions or match making grants
of an eligible R&D project

i) The design of a building (whether or not the building is to be


used to house R&D activity);
ii) The design and installation of financial systems;
iii) Market research, market testing, market development or sales
promotion including customer surveys;
iv) Routine quality control;
v) Management studies or efficiency surveys;
vi) Routine collection of information (other than for the purpose of
R&D);
vii) the protection of industrial property rights by legal action;
viii) test and evaluation once a prototype becomes a production
model;
ix) staff selection system;
x) the sales by passenger car/light commercial vehicle
manufacturer or vendor of existing know-how, including off the
shelf computer software and that can be applied without
modification to the needs of persons other than the passenger
car/light commercial vehicle manufacturer or vendor

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If passenger car manufacturer/vendor undertakes an eligible R&D project


as a joint-venture, the passenger car manufacturer/vendor must not claim R&D
costs for the project that are incurred by the joint venture partner.

9.4 Eligible R&D Expenditure

All expenditures on eligible R&D activities and projects are considered


eligible R&D expenditures for tax concessions and matching grants.

9.5 Assessment of Applications

EDB will verify whether the proposed projects are eligible R&D projects.
An auto Industry Development Committee (the assessment panel), will provide
recommendations to the EDB including:

i) Assessment of the relative merits of projects against the scheme’s


merit criteria; and
ii) Assistance in the monitoring process where there has been a project
variation.

The EDB will have the final decision in determining which projects will
receive credits under the scheme and will consider the factors including;

i) The merit ranking provided by the Assessment Panel


ii) Available credit
iii) The amount of credits already issued to individual assemblers /
manufacturers of car and LCVs and component manufacturers.

9.6 Merit Criteria

Each R&D project will be ranked by the Assessment panel in order of


merit in relation to all other projects on the following merit criteria.
i) The application for claim of R&D expenditure will be accompanied
with a detailed business plan covering details of R&D activity,
technical merits of project, environment benefit, benefit to the entity
and the community.
ii) Business Plan will also include a commitment to the sustainability of
internationally competitive Auto Industry in Pakistan through such an
R&D activity.

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iii) This will also include a commitment on increase in value of local


content and production of CBU’s and components of quality
standards required for export.

9.6.1. Caliber of new R&D activity to be generated in Pakistan by


proposed project.

Under this criterion, projects will be assessed by the assessment


panel according to the caliber of new R&D activity that will be
undertaken in the projects. R&D projects that may involve higher
technical risk will be regarded more highly than projects that involve
further development of current lines of R&D or new lines of R&D
that are part of an applicant’s existing expenditure base.

9.6.2 The technical merit of proposed projects

Under this criterion, projects will be assessed by the assessment


panel according to the technical merit of the R&D to be undertaken
in the projects.

9.6.3 The level of benefit, including environmental benefit to the


wider community of proposed projects.
Under this criterion, projects will be assessed by the assessment
panel according to the economic and environmental benefits likely
to accrue from the proposed R&D. Economic benefits include
benefits that arise from the dissemination of new knowledge and
techniques through the automotive industry and wider economy.
Examples of environmental benefits include emission reduction,
fuel consumption improvements and waste minimization.

9.6.4 The contribution of proposed projects to the sustainability of


an internationally competitive automotive industry in Pakistan.

Under this criterion, projects will be assessed by the assessment


panel according to their contribution to the sustainability of an
internationally competitive automotive industry. The project and the
R&D undertaken should be part of a longer term strategy for
automotive operations in Pakistan. A project that is supported
under the scheme should be forward looking and growth oriented.

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9.7 Administration of the Scheme

Auto Industry Development Committee (AIDC) will undertake detailed


assessment of the application, documentation, business plan and monitoring the
performance of participating assemblers / manufacturers of vehicles and
components. Auto Industry Development Committee will also provide advice on
project performance and may make recommendations to the EDB.

9.8 Documentation

All the assemblers/manufacturers of vehicles and component


manufacturers who wish to apply for R&D tax concessions and matching grants
under this scheme will be required to complete and lodge an application on the
prescribed format along with the detailed business plan. Each page as well as
separate pages of application must be initialed. Claimant will also submit the
financial statements including income statement, balance sheet of last year and
of the relevant year. Declaration on the last page of application must be signed
by an authorized director of company. The application should contain details of
expenditure on R&D, production, etc., through verifiable source.

The applicant will also submit an undertaking that R&D expenditure


incurred will be capitalized in his balance sheet, as a capital expenditure for that
year.

9.9 Claims for R&D Benefits

i) EDB’s industrial engineer shall submit his report of findings to auto


Industry Development Committee.
ii) The claims shall be lodged by the accredited Accounting Firm, on
behalf of the beneficiary.
iii) A detailed factory layout, clearly showing the R&D to be installed/
carried out must be included in the claim for technical assessment by
a suitably qualified engineer appointed to do the site inspection.
iv) A claimant may submit one claim within six months from closure of its
financial year, for all R&D expenditures that were taken up in that
financial year. Unless written authorization from AIDC, late claims will
not be entertained. A comparison between the actual achievement
and the information in the approved application and business plan,
and previous years’ claims on the project as applicable, must be
submitted with the claims.

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v) The claim must be signed by authorized person of the board of


directors of the company.
vi) All claims must be audited by external auditors.
vii) Each R&D project must be provided with a unique asset number that
must be affixed or engraved on the R&D machinery wherever
applicable as well as entered in the asset register.
viii) EDB reserves the right to have an independent audit/inspection done
in respect of the financial statements that substantiate the claim for
R&D incentives.
ix) Claims must be submitted to:
Chief Executive Officer,
Engineering Development Board,
Ministry of Industries, Production and Special Initiatives,
Islamabad

Auto Industry Development Committee (AIDC) will recommend or reject


these claims for final disposal by the Engineering Development Board (EDB).

EDB, based on fulfilling all the qualifying criteria and the merit criteria of
the assessment panel of AIDC, and after due diligence and verification by its
experts, will recommend the case for disbursement of matching grant to the
Ministry of Science & Technology.

9.10 Monitoring and Review of R&D Scheme

EDB will present to AIDC summary of R&D grants recommended/availed


by different vendors and assemblers duty credits earned, on annual basis.

Monitoring and review will continue up to 5 years to assess the


effectiveness of scheme under AIDP.

9.11 Withdrawal of R & D Matchmaking Grants and Tax Incentives

EDB reserves the right to withdraw the R & D matching grants and tax
concessions / incentives availed with retrospective effect for non-performance by
the claimant. If any irregularities have been observed or incorrect information
was furnished with regards to the obtaining or utilization of the match making
grants / tax incentives pending the outcome of any civil, legal or criminal
proceedings against the claimant. In such an event, if claimant or beneficiary is
being deregistered or if the unutilized portion of a grant / tax concessions is

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withdrawn in terms of this paragraph any benefit obtained as a result of such


scheme shall become repayable on demand to the government.

9.12 Tax Incentives on R&D

An entity qualifying for R&D claims and as recommended by the EDB and
AIDC will be entitled to 100% deduction on expenditure on in-house R&D
facilities.

Tax authorities will make use of recommendations of EDB and


assessment of AIDC, while considering the case for tax deduction.

9.13 Size of R&D Fund

10- HUMAN RESOURCE DEVELOPMENT (HRD)

The skill level in Auto Industry and more so in the vending sector is
dismally low and disappointing. OEMs however, entail in-house training both at
worker and managerial levels. Skilled human resource, nevertheless is of huge
significance in the Auto Industry for which Government is proposed to establish
Auto Engineering Departments in the Universities and the Poly Technical
Institutes. However, for on job training for the students, Government may
consider attachment of such institutes to some accredited auto-engineering units
for training at the shop floor.

10.1- Factory School Concept


Government is proposed to allow tax incentives for the auto sector entities
to establish in-house factory schools for the training of employees from within the
entity and from the auto industry including the vendors.

10.2 Incentives
Tax incentives in the form of deductions equivalent to 125% of the net
expenses (total expenses – revenue (factory school) × 1.25) from the annual
taxable income of such entities operating Factory Schools for the in-house
training of its management, supervisors & workers and for the rest of Auto
Industry including vendors.

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10.3 Eligibility Criteria


i) Only those entities which have got both the assembly and component
manufacturing facilities will be allowed to establish Factory School, to
avail the tax incentives there on. Total trainees in one financial year will
not be less than 500 and will include at least 50% of trainees from the
auto industry, excluding that of entity, operating such a factory school.

ii) Tax incentives will be linked to the quantity and quality of trainees
produced, content of the courses, assessment of classrooms, practice
areas, laboratories, quality and number of automotive instructors with
certain benchmarked credentials. The incentives would also be linked
to the assessment, as to what extent the cutting edge technology
exposure was provided to the students.

iii) The major areas of training will include product designing, production
processes, enterprise research & planning, improving technology
processes, supply chain management, shop floor management, quality
testing and standardization, cutting the wastages, complementation of
processes, inventory management, customer education, innovation
concepts and overall efficiency improvement. Curricula will also
include the safety and security of personnel, equipment and
environment.

10.4 Duration of Training


For the tax incentives, duration of each course will not be less than
eight months out of which half the training will be imparted at the classroom level
and the rest at the shop floor, laboratories and at various areas of production/
dispatch / stores etc.

10.5 Approval of Curriculum


AIDC will evaluate the curriculum submitted to it by the interested
entity wishing to open up a Factory School and to avail the tax incentives under
this scheme. AIDC may approve, reject or recommend for certain improvements
on need basis through consultation with the industry i.e. both assemblers,
vendors and other technical institutes internationally or at local level.

10.6 Administration of the Scheme


AIDC will undertake detailed assessment of the application/
documentation and the business plan submitted by the Factory School
management at the close of the respective financial year. AIDC, based on
detailed scrutiny and evaluation of the activity sheet will recommend or otherwise
for the tax incentives to the CBR through the EDB.

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10.7 Business Plan


The entity operating a Factory School will submit a business plan to
the AIDC as to which and what extent the objectives of training will be met and
including the following:

i. The total number of courses and details of contents designed for


training to the management, supervisors and workers of the Auto
Industry which include both the assembly and vending sectors.
ii. Details of physical infrastructure and trained faculty (including
individual qualifications) available for such a factory school.
iii. The duration of courses to be conducted and the total number of
people would be trained at the Factory School in one year.
iv. A statement duly substantiated with facts on the sustainability of
training at the Factory School.
v. A statement that the quality and quantity of training at the Factory
School will lead to improvement in efficiency, productivity and overall
human resource improvement in the Auto Industry.
vi. A commitment to the effect that international accreditation/
collaboration will be obtained in near future (3 to 4 years) based on
qualitative training imparted in such institutions, due to the physical
infrastructure, qualified instructors, course content, duration and
indiscriminate knowledge sharing, whether the trainees are from the
same entity or across the various entities of Auto Industry.
vii. Motivation that the quality and quantity of trainees will not be
compromised merely for saving the cost incurred on training,
equipment, infrastructure, trainers and other facilities at the Factory
School.

10.8 Documentation

i) The owner of such facilities (Factory School) will submit claims on the
prescribed format for the tax incentives based on the training imparted
during a financial year. The application will be duly supported by the
financial statements including the income statement and balance sheet
of the relevant year and the previous three years. The declaration on
the last page of application must be signed by an authorized Director
of the company.

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ii) The claims may be lodged by an Accredited Accounting Firm giving


details of activities including the expenditure incurred on training for
which the incentives will be claimed. This will also include the fee/
remuneration received from the trainees or his company/ companies.

iii) The management of such schools will also submit details of trainees
qualified in that financial year. This will also include the break up of
trainees i.e. from within the entity and from the rest of auto industry.

EDB or AIDC may ask for any other document or information as


deemed appropriate.

10.9 Monitoring and Review of Factory School Scheme

AIDC will monitor and review the Factory School Scheme, its
contribution to the competitive development of Auto Industry through
improvement in the quality and quantity of human resource, economical viability
improvement and accreditation issues every year for unto five years. The
assessment will also be made to see the effectiveness of the scheme, any
bottlenecks and constraints in the smooth running of such Factory Schools and
will recommend measures to further improve and enhance the scope and
efficiency wherever necessary.

10.10 Withdrawal of Incentives to the Factory Schools

EDB reserves the right to disapprove and withdraw the tax incentives
recommended, with retrospective effect due to non-satisfactory performance of
such schools or the misuse of tax incentives, based on the AIDC
recommendations. Likewise, if any irregularities have been observed or incorrect
information was furnished with regards to obtaining or utilization of tax incentives
pending the outcome of any civil, legal or criminal proceedings against the
claimant, in such an event, if claimant or beneficiary is being deregistered or if
any tax concession is withdrawn in terms of this paragraph, any benefit obtained
as a result of such scheme shall become repayable on demand to the
Government.
11- AUTO CLUSTERS

The vendors are fragmented and no complementation takes place in the sector.
Component sector lacks sophisticated manufacturing processes which otherwise
could have been strengthened through mutual support, had there been
recognized clusters. Country needs at least two clusters or automotive parks.

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¾ Near Steel Mills, Port Qasim, Karachi.


¾ Near Motorway at Lahore.

There is a dire need to develop such clusters to achieve 0.5 million car
production target by 2011-12. Auto Clusters will bring together the competencies
of its members along with the supply chain and will act as platform for
technological innovations, national and international cooperation, consultancy,
training, marketing and distribution. Clusters also enhance the development of
efficient communication among its members. It enhances all activities connected
with the research and development of new products and services with greater
added value. Clusters provide important links between members, supporting
synergy with suppliers of machines, tools, manufacturing, design, logistics and
other services.

A detailed working and requirements of proposed automotive cluster at Karachi


to achieve the target of 0.5 million cars is given in table below:

Projections; Capacity and Other Materials Needed for an Auto Cluster


Total Total
Required for
Average For existing Required for After Required for Annual required Plot size Plots Space
Process additional
per car 160,642 0.5 M cars Market 0.5 M Cars Capacity for unit required required
339,358 Cars
till 2010 (Acres)
7,000 Tons per
Casting 130 Kg 20,883Tons 44,117 Tons 65,000 Tons 27,950 tons 92,950 Tons annum 5 Acres 10 50
3,000 Tons per
Interiors / trims 30 Kg 4,819 Tons 10,181 Tons 15,000 Tons 4,500 tons 19,500 Tons annum 5 Acres 5 25
5,000 Tons per
Forging 30 Kg 4,819 Tons 10,181 Tons 15,000 Tons 3,000 Tons 18,000 Tons annum 5 Acres 3 15
1,500 Tons per
Plastic 120 Kg 19,277 Tons 40,723 Tons 60,000 Tons 12,000 Tons 72,000 Tons annum 4 Acres 40 160
2,000 Tons per
Rubber 64 Kg 10,281 Tons 21,719 Tons 32,000 Tons 6,400 tons 38,400 Tons annum 4 Acres 16 64
3178 510,520,276 1,078,479,724 1,589 million 318 million 1,907 million 250 million nos. per
Fasteners nos. nos nos nos. nos nos annum 4 Acres 6 24
6,000 Tons per
Sheet metal 450 Kg 72,288 Tons 152,711 Tons 225,000 Tons 78,750 Tons 303,750 Tons annum 3 Acres 38 114
50,000 units per
AC 1 nos. 160,642nos 339,358nos 500,000 nos. 25,000 nos 525,000 nos annum 3 Acres 10 30
Wire Harness 10 Kg 1,606 Tons 3,394 Tons 5,000 Tons 250 Tons 5,250 Tons 1,000 Ton per annum 3 Acres 5 15
0.4 Million 2.4 million 500,000 pcs per
Shock absorbers 4 nos. 642,568nos 1,357,432nos 2.0 Million pcs. pcs pcs annum 3 Acres 4 12
61.5 million 12.3 million 73.8 million 15 million nos. per
Ball Bearing 123 nos. 19,758,966nos 41,741,034nos nos. nos nos annum 3 Acres 4 12
Aluminum 1,000 tons per
Castings 80 Kg 12,851 Tons 27,149 Tons 40,000 Tons 2,000 Tons 42,000 Tons annum 2 Acres 40 80
Machining 6,000 Tons per
(casted parts) 65,000 Tons 27,950 Tons 92,950 Tons annum 2 Acres 11 22
Radiators 3 Kg 482 Tons 1,018 Tons 1,500 Tons 225 Tons 1,725 Tons 150 Tons per annum 2 Acres 10 20
Machining (Al. 5,000 Tons per
Parts) 40,000 Tons 17,200 Tons 57,200 Tons annum 2 Acres 8 16
Heat treatment
Plants (contract) 2 Acres 8 16
Lights 8 Kg 1,258 Tons 2,715 Tons 4,000 Tons 2,000 Tons 6,000 Tons 800 Tons per annum 2 Acres 5 10
Silencers 4 Kg 643 Tons 1,357 Tons 2,000 Tons 200 Tons 2,200 Tons 400 Tons per annum 2 Acres 5 10
Door Hardware 5 Kg 803 Tons 2,500 Tons 250 Tons 2,750 Tons 500 Tons per annum 2 Acres 5 10
Brake Assemblies 2 Acres 5 10
0.375 million 1.625 million 300,000 m2 per
Glass 2.5 m2 401,605 m2 848,395 m2 1.25 million m2 m2 m2 annum 2 Acres 4 8

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Die & Mold


making 2 Acres 4 8
Pattern shop 2 Acres 4 8
Machining 6,000 Tons per
(Forged Parts) 15,000 Tons 750 Tons 15,750 Tons annum 2 Acres 3 6
250,000 nos. per
Batteries 1 no. 160,642nos 339,358nos 500,000 nos. 250,000 nos 750,000 nos annum 2 Acres 2 4
2,500 Tons per
Friction material 9.5 Kg 1,526Tons 3,224 Tons 4,750 Tons 2,708 Tons 7,458 Tons annum 2 Acres 2 4
100,000 units per
Audio Systems 1 no. 160,642nos 339,358 nos 500,000 nos. 25,000 nos 525,000 nos annum 1 Acre 5 5
150,000 nos. per
Speedometers 1 no. 160,642nos 339,358 nos 500,000 nos. 50,000 nos 550,000 nos annum 1 Acre 4 4
Paint Shops
(contract) 1 Acre 4 4
Engine
Manufacturers 250,000 nos 5,000 nos 255,000 nos 10 Acres 2 20
TIER 1 VENDORS

Gear Box /
Transmission 250,000 nos 5,000 nos 255,000 nos 10 Acres 2 20
1,545,000
Axle 1,500,000 nos 45,000 nos nos 10 Acres 2 20
Suspension /
Mcpherson struts 10 Acres 2 20
Steering / Power
steering
Assemblies 10 Acres 2 20

For an auto cluster having around 280 companies along with a common
training institute, testing and certification centers, designing and styling centers,
residential accommodation for workers and other facilities, a total of 1,200 acres
would be required for each cluster. Each of such clusters is expected to generate
around 35,000 - 40, 000 direct jobs and many indirect jobs in the warehousing,
logistics, material supplies etc.

12- MOTOR VEHICLE EXAMINATION (MVE)

MVE in its present form is highly deplorable as the MVE Inspectors are
neither properly equipped nor they are skilled to examine vehicles due to which a
large number of auto population in the country is un-road worthy. This has
resulted into high rate of accidents on roads and high mortality ratio than
anywhere in the competing countries. While for the efficient development of Auto
Industry, Government needs to strengthen MVE by undertaking large investment
in their equipment, infrastructure and remuneration package besides entrusting
this responsibility to a company formed in the private- public partnership or to a
private entity.

Revamping of MVE system has separately been proposed in the


document for modernization of trucking sector.

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Draft Auto Industry Development Programme (AIDP)

13- EMISSION CONTROL POLICY

This is believed that old vehicles are the gross polluters and can
contribute up to 80% of the pollution load in the major cities. The new vehicles
with efficient technologies even deteriorate rapidly if not maintained properly.

In order to protect our environment from this major source of pollution,


federal and provincial Governments are needed to introduce, a system of
periodic fitness tests.

The Government has been contemplating on Emission Control Policy for


the locally produced or imported vehicles to become EURO-2 compliant for the
petrol and diesel vehicles by the end of 2008 and 2009 respectively. Industry
fears that the fuel available in the country is not environment friendly because of
high Sulfur, Benzene and Lead content. In order to achieve the expected goals,
Government may announce clear time lines for its implementation along with
encouraging the use of catalytic converters. This however, should be well in
advance so that industry could gear up to technology requirements to meet the
targets.

An increasing population of vehicles warrants definition of emission control


standards and their enforcement. Incentives on conversion to Euro –II and III
standards may be allowed under the proposed R&D scheme of AIDP.

i) This is proposed that emission control may be made applicable for


new models; one year after desired fuel is available.
ii) For existing models, new emission norms may be made effective one
year after emission norms for new models are introduced.
iii) A minimum gap of four years is reasonable between each successive
stage of emission norms, for incorporation in the national emission
roadmap.

14- ROAD NETWORK PROGRAMME

Rapid modernization and estimated high production of vehicles by the


year 2010-2011, would put high pressure on the existing road infrastructure. For
sustainable auto industry development, efficient infrastructure such as roads,
highways, bridges, parking areas and for projected exports, efficient port
infrastructure would be required. World class infrastructure will save fuel cost,
time and better contribution to the economy. Efficient physical infrastructure will
also help in attracting foreign investment in the sector.

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Draft Auto Industry Development Programme (AIDP)

15- SAFETY, STANDARDS AND ACCREDITATION


There are different laws and motor vehicle acts to ensure the
roadworthiness of vehicles plying on the roads. Section 39 of the Motor Vehicles
Ordinance, 1965, and Section 35 of The Motor Vehicle Rules, 1969, deals with
the issue and renewal of certificate of fitness. Section 8 and Section 39 of MVR
1969; deal with issue of driving license and issue of duplicate certificate of
registration and certificate of fitness respectively. Chapter 6 of MVR 1969 deals
with details of body construction, essential equipment and requirements of
maintenance of a motor vehicle.

The emphasis of these laws is clearly on the management aspects and


the safe operation of the vehicles. However, some sections deal with the
environmental aspects or the emissions from the vehicles in a rather general
way. Sections 154, 158 deal with the horns and noise, whereas section 163
deals with emission of smoke vapor of grease. The prohibition in these sections
is of a general nature and no standards and testing procedures have been
specified.

On realizing the importance and development of Metallurgy, Standards,


Testing and Quality infrastructure, the government has established Pakistan
Standards and Quality Control Authority by merging the three organizations
namely Pakistan Standards Institution (PSI), Central Testing Laboratories (CTL)
and Metal Industry Research Development Centre (MTRDC) by enactment
through Act No. VI of 1996.

Presently facilities and resources available with PSQCA are inadequate in


relation to the duties and responsibilities assigned to them. PSQCA need to build
up their core competencies and to establish links with the international
counterpart agencies to get accreditation of its labs and standards. There is also
a need to increase the skill levels and capacity of auditors and inspectors through
training and the capacity of inspection and testing system by enhancing the level
of equipment and professional education in the present testing laboratories.

Auto Industry cannot make any headway without the establishment of


strong standards and accreditation within the country. PSQCA has developed
standards only for the Motorcycles so far. There is need to develop standards for
rest of the vehicles produced locally and for imports. PSQCA need to invest
heavily in establishing infrastructure throughout the country.

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Draft Auto Industry Development Programme (AIDP)

16- USED VEHICLE AND COMPONENTS IMPORT


The industry may not have a direct pinch of used car imports during last
year, which reached to 43,295 units — a record number. During the year 2004-
05 used car imports were limited only to 3,297 units only. This may jolt the
confidence of industry and may delay their investment plans. This also does not
auger well for the sustainable development of auto industry. Almost all the auto
manufacturing countries have put stringent restrictions in their policies to
discourage used vehicle imports.

Besides used car imports, liberal baggage rules led to high import of
buses and trucks. Bus sector has registered negative growth (-7%) during last
five years despite this period of buoyant growth. This also badly affected the bus
body building sector. Besides used imports, regulated fares for inter and intra city
routes is another factor.

Import of used dump trucks and concrete mixers has hurt truck
assemblers adversely. Bus/truck assemblers have been utilizing only 19% of
their production capacity due to these misdirected policies and poor controls by
regulators.

Government policy to allow regularization of smuggled trucks, against


30% redemption fine, without time limit continues bleeding truck assembly sector.
Such an amnesty should have been rather for once and for a limited period only.

Volumes are critical in auto industry, based on which certain critical


components are developed alongside automatic increase in investment in
vending sector, local content, technology enhancement and exports. This
necessitates that industry produce fewer car models and which are changed
rather less frequently.

Used vehicle import would not benefit the consumer or the industry and
Government should rather make its long term policy on this issue, which may
include strict implementation of Transfer of Residence (TR) and Baggage Rules
with compulsory registration of vehicles in the name of returning Pakistanis, for at
least one year. Under TR rules, vehicles may only be allowed if these are
registered in the name of importer for at least one year in the country of
residence.

Government may reduce liberal depreciation on import value of used cars,


from 2% per month to 1% per month and total depreciation limiting up to 25%
only.

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Draft Auto Industry Development Programme (AIDP)

National standards may be developed for the car, bus, trucks and tractors
which may strictly be applied to used vehicle imports. Efficient testing facilities
may be established at the ports and within the cities, for this purpose.

17- AUTO SECTOR EXPORT


Auto Sector registered the highest ever trade deficit during last year by
importing CKD kits of around US $ 804 million and CBUs around US$ 311
million. Against imports of US $ 1,115 million, exports were as negligible as US
$ 35 million.

Amongst the important factors for dismally low exports are low assembly
and components manufacturing capacity and high local demand which remains
unmet by around 20%. Export surplus can only be achieved through high
investments in productive capacities, bringing more technology and innovations,
developing high value added critical components and the existing assemblers
making supplies to their regional hubs.

This is feared that in the coming years trade deficit in auto sector will
further increase warranting Government to tighten, the liberal used car import
schemes.

Various incentives have been provided to auto sector for exports,


including duty free import of CKD kits for CBU exports under SRO 656(I)/2006
and 0% import of raw-materials to make components competitive. DTRE
scheme is being revisited in close cooperation with CBR to make it suitable for
auto engineering sector export.

The Government is proposed to waive off income tax on export of


components and CBU’s. This is expected that AIDP’s incentive scheme on
productive asset allowance, technology acquisitions, R&D etc., would create
capacity, competitiveness and export surplus on sustainable basis.

Government is proposed to undertake “Exploring New Market” initiatives,


together with industry and explore special measures under the market access
scheme. In this regard, car and tractor OEMs would be required to renegotiate
their agreements with their principals for territorial distribution of their products
produced in Pakistan. This also includes initiating serious efforts to develop
certain components locally for supply to their regional hubs.

In order to encourage two wheeler exports, which have the necessary


surplus, 100% sea freight subsidy for two years is proposed. Furthermore, to
make their cost competitive to their international competitors, refund of entire

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Draft Auto Industry Development Programme (AIDP)

amount of indirect taxes paid by the assemblers directly and by their vendors
which comes to around 12 – 13% of FOB is proposed to be refunded to them.
This is anticipated that R & D fund would facilitate in re-designing / styling certain
parts such as fuel tanks, seats, lights, handle, etc.

AIDP provides for compulsory provision of export plans in the agreements


of new entrants in the car, LCV and tractor sector, with clearly defined markets,
volumes and time lines.

To have a critical export surplus, the auto sector policies which are in
place need to be revisited such as used car/ bus or truck imports under baggage
scheme and zero import tariffs on agricultural tractors.

18- AUTO INDUSTRY IN PERSPECTIVE TO FTAs

Auto industry may remain in highly sensitive list mainly due to the factors
that it is in the development stage, high jobs are at stake and that industry will
enter into export market in next 2 – 3 years.

Pakistan is located in a region where the industry has reached to a mature


stage and produce products which are competitive, innovative with high
technology attributes.

Any reduction of further tariffs or providing some excess through FTA’s to


any of these countries will be a set back for the local industry. Industry has
invested substantially and promising amount of investment is in the pipeline
which needs to be protected and sustained.

19- COMPUTERIZATION OF VEHICLE REGISTRATION AND


DRIVING LICENSING

Number of vehicles in Pakistan is increasing every year and which is


expected to continuously grow in double digits in the coming years. This entails
the Government, municipalities, town planners, car assemblers, traffic and tax
authorities and many others, an instant access to a countrywide reliable data on
the vehicles.

At present, information on countrywide vehicles is variable and relatively


inaccessible, posing many problems to the relevant authorities. There is an
urgent need to devise standardized set of information, computerized and
accessible on all Pakistan bases.

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Draft Auto Industry Development Programme (AIDP)

20- AUTO INDUSTRY DEVELOPMENT COMMITTEE (AIDC)


With the elimination of deletion programmes from 1st July, 2006, the major
objectives of Indigenization Committee (I.C) have also been met. I.C. was
established during May, 1995 by an order of the Federal Cabinet to effectively
oversee the indigenization of automotives and other goods in the country.

With the changing WTO scenario and our commitment to TRIM’s


agreement Pakistan had to eliminate the compulsory local content conditions in
its industrial policies. With the elimination of over 23 deletion programmes in
various engineering goods by the year 2003, the only remaining deletion
programmes in auto sector were also done away with, this year.

Auto Industry Development Committee (AIDC) is proposed to replace the


I.C. with the objective to provide focused and continued attention to the Auto
Industry at a higher Government – Private level. AIDC aims to have a regular
dialogue and effective communication with the industry. AIDC will encourage
private – public partnership for the sustainable development of Auto Industry.

AIDC will continue identifying the regulatory and administrative problems


and potential bottlenecks which could affect the competitive development of Auto
Industry and would recommend various options and solutions to the relevant
Government departments and advise to the industry.

AIDC will have the mandate to provide its findings to EDB after making
necessary documentary verifications, reviewing inspectors reports or through
personal hearings or by any other means on the claims for the benefits under
various incentives proposed in the AIDP. Such incentives include productive
asset investment allowance, technology acquisition fund, R&D, Human Resource
Development and other incentives.

AIDC will have regular deliberations on quality, standards, development


and regulatory framework of the Government to encourage emission controls,
WTO issues, tariff structure, investment issues, export policies, trade policy
issues and other regulatory matters relating to the auto industry.

AIDC will provide a vision for the auto development and will continue
reviewing the progress, effectiveness of incentive regime and to propose
corrections and improvements in the AIDP wherever necessary.

AIDC will promote industry – university linkages, development of


technologies, improvements of HRD and creating awareness amongst the
academia.

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Draft Auto Industry Development Programme (AIDP)

Composition of AIDC
1. Vice Chairman/ Chief Executive Officer, Chairman,
Engineering Development Board AIDC
2. General Manager (Policy Development), Secretary
Engineering Development Board
3. Joint Secretary, M/o Industries, Production & Special Initiatives Member
4. Joint Secretary, M/o Science & Technology Member
5. Joint Secretary, M/o Commerce Member
6 Joint Secretary, M/o Environment Member
7. Chief Customs (Tariff & Trade), Central Board Member
of Revenues
8 One private sector Economist (preferably having experience in Member
Policy Development in Industrial economics).
9. One private sector qualified chartered accountant. Member
10. Vice Chancellor, University of Engineering & Technology, Member
Lahore or his representative.
11. Vice Chancellor, NED University, Karachi or his Member
Representative.
12. Vice Chancellor, GIK or his representative. Member
13-14. Two experts from Private Sector. Preference would be given to Member
those experts who have been working with Auto Industry
during the last 5-10 years. They should have consultancy
experience with sound background of tariff, management and
knowledge on the fundamentals of industry.
15. Managing Director, Pakistan Standards and Quality Control Member
Authority (PSQCA) or his representative.
16. Chairman, PAAPAM Member
17. Vice Chairman PAAPAM Member
18. Chairman, PAMA Member
19. A Representative of Car Assemblers on rotation basis for one Member
year (out of three leading assemblers).
20. A Representative of Motorcycle/tri-wheeler Sector on rotation Member
basis for one year (out of five leading assemblers).
21. A Representative of Tractor Assemblers on rotation basis for Member
one year (out of two leading assemblers).
22. A Representative from Truck/Bus Sector on rotation basis for Member
one year (out of three leading assemblers).

AIDC will meet at least once a month or as and when convened by the
Chairman, AIDC. AIDC would be empowered to constitute various sub-
committees from its members on need basis.

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Draft Auto Industry Development Programme (AIDP)

CONCLUSION

Auto Industry, globally, as well as in Pakistan is one of the key sectors of


economy. Because of its strong backward and forward linkages with various
sectors and due to its high economic multiplier effect, auto industry is considered
as one of the drivers of economic growth. Auto Industry therefore needs a
carefully drafted policy with clear objectives in view. This will help industry to
make long term investment, production, marketing and export decisions. In our
perspective, medium term policy framework is much needed as the industry
switched-over from highly regulated to an open and competitive environment this
year.

The industry needs safe transition alongside its development on


sustainable basis, to continue its impressive growth, registered in recent years.
Certain issues which have been remained unattended such as capacity
expansions through investment in critical infrastructure, technology acquisition,
R&D, human resource development, cluster development, safety and emission
standards, vehicle examination system and correcting certain distortions such as
used vehicles and component imports, and foreign investment, have been
highlighted in AIDP, along with proposed solutions and incentives. AIDP is
expected to make an end to yearly changes in tariff structure of auto sector by
announcing predetermined tariffs for at least 5 years.

Continuing the past trends of strong private – public partnership in crucial


decision making, AIDC having a mix of private and Government representatives
to assess, verify and recommend certain incentives and proposals on the
sustainable development would maintain and strengthen the healthy tradition in
the auto industry.

*******

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