draft aidp by edb 15-11-06

8/8/2019 Draft Aidp by Edb 15-11-06

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Engineering Development BoardMinistry of Industries, Production & Special Initiatives

Government of Pakistan

Islamabad15-11-2006


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C o N T E N T SS. 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 137.7 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 Years PAII Certificate 15

7.12 Monitoring and Review of PAII 16

7.13 Withdrawal of PAII Certificates 16

8- Technology Acquisition Fund 17


8.2 Eligible Expenditures 17

8.3 Documentation 178.4 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


9.2 Eligible R & D Activity and Eligible R & D Project 199.3 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 .....

Proposed Project

21

9.6.2 The Technical Merit of Proposed Projects 21

9.6.3 The Level of Benefit, Including Environmental Benefit to the

Wider Community of Proposed Projects

21

9.6.4 The Contribution of Proposed Projects to the Sustainability of

an Internationally Competitive Automotive Industry in Pakistan

21

9.7 Administration of the Scheme 229.8 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


10.4 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 3318- 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)

DRAFT Auto Industry Development Programme Engineering Development Board1

AUTO INDUSTRY DEVELOPMENT PROGRAMME (AIDP)

OVERVIEW OF AUTO INDUSTRY

Pakistan Automobile Industry dates back to 1953, when the NationalMotors Limited established its assembly plant in Karachi to assemble BedfordTruck. Subsequently buses, light trucks and cars were assembled in the sameplant. The industry was highly regulated until early 1990s. After deregulationmajor Japanese manufacturers entered in the market thereby creating somecompetition in this sector. Assemblers of HINO Trucks, Suzuki Cars, MazdaTrucks, Toyota and Honda in particular, entered once deregulation wasintroduced. 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 whenthe auto industry entered into a rapid growth phase. The rapid growth has beentriggered by a regular high growth in economy, increase in the purchasing powerof consumers and availability of credit and financial options coupled with lowinterest rates. The growth in demand surpassed supply, particularly in theMotorbike, Car and Tractor sectors. To overcome demand-supply gapGovernment had to allow used car imports by relaxing the rules permitting suchimports. Despite a production of 160,642 cars by the close of 2005-06 andimport of 48,692 cars including 43,295 used cars, supply side has improved tosome degree but the gap still exist.

Production of Vehicles(No. of Units)

2001-02 2002-03 2003-04 2004-05 2005-06CARS 40,088 62,073 98,461 126,403 160,642TRUCKS 1,134 1,929 2,022 3,204 4,518BUSES 1,086 1,296 1,380 1,762 825LCV 9,055 12,548 14,896 25,177 32,053FARM TRACTOR 23,801 26,240 35,770 43,200 48,887MOTORCYCLE 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 theMotorcycles. The Auto Industry products expressed compounded growth rate of50%, during last five years, out of which the cars registered 41%, Motorcycles58%, LCVs 37%, Buses (-7%), Trucks 41%, and Tractors 20%.


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Despite rapid growth, Pakistan Auto Industry contribution in global termsis still very low i.e. 0.3% of world production of 66.5 million passenger andcommercial vehicles. World installed capacity for passenger and commercial

vehicles is 85 million units. Similarly export of auto products was only US$ 35million which is negligible in the world trade. The annual world trade of autoproducts is over US $ 800 billion (components constitute about 40% of WorldTrade).

Auto Industry: A World Overview

YearWorld Vehicle

Production(Unit in Million)

PercentageIncrease/ decrease

1997 55.87

1998 53.20 (-) 4.771999 55.74 4.772000 58.33 4.642001 56.17 (-) 3.702002 58.45 4.052003 60.09 2.802004 64.16 6.772005 66.46 3.58

Pakistan Auto Industry, during the rapid growth phase achieved rapidlocalization through adoption of Deletion Programmes (1985 to 2005-06).

Regulatory mechanism for the Deletion Programmes in the form of IndustrySpecific Deletion Programmes (ISDP) played their part. ISDPs mandatedcompulsory local content targets for each model of a vehicle through allocation ofcertain indices (points) to the components. An assembler had to choosecomponents from the basket to meet its deletion targets fixed for that year. TheAuto Industry localized most of the sheet metal parts, plastics & rubber parts andaluminum parts such as radiators, wire harnesses, chassis, tyres & tubes, wheel& rims, interior TRIMs, car seats and lights etc.

1- CURRENT STATUS

To honor Governments commitment to WTOs TRIMs agreement onphase out of Deletion Programmes, an alternative system known as Tariff BasedSystem (TBS) was introduced in the budget 2005-06. The industry, experts andEngineering Development Board with cooperation of Central Board of Revenuedeliberated for over two years, on the lists of parts, modalities and notifications toimplement the TBS. That was a remarkable achievement and a rare example ofpolicy 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 andcomponents 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 yearon the system as to what have been the possible achievements, losses, pitfallsand to identify certain areas which could be further improved in the TBS.

The industry is faced with various challenges, importantly being thecapacity constraints at both OEMs and vendors, issues of competitiveness whichare due to productivity on account of both level and infrastructure, low technologylevels, 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 autovehicle examination is vital issues which have been remained unattended so far.A strong commitment for improvement is needed through persistent andconcerted efforts at the Government and industry level.

The industry is also faced with dilemma of governments liberal policy onused car, tractor, bus & truck imports under various schemes. Pakistan is alreadyproducing competitively priced agriculture tractors, with high indigenization leveland having potential to export to the world markets. Import of tractors both newand 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 zeropercent. Secondly, investments by the existing assemblers or new investmentwould not take place when there is no tariff protection.

Industry is at a disadvantage as none of the major materials is availablelocally except few grades of steel. In steel the right specifications in desiredquantities 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 fromPak Steel remains major hurdle for long term sourcing. Establishing coil centerswould 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 theindustry. Pakistan Auto Industry is fast approaching to that level and as thenumbers grow, investment in manufacturing certain critical components wouldbecome more viable.


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Auto Industry due to its multiplier affect and strong backward (materialssuch as steel, copper, aluminum etc., plastics, glass, paint, electronics, capitalequipment, trucking, warehousing & logistics) and forward linkages (dealerships,

credit & financing, logistics, advertising, repair & maintenance, petroleumproducts, goods stations, insurance, service parts), is considered, world over, asthe key industry.

The job multiplier in Auto Industry is high, the ratio of employment in theOEM to vendors is nearly 1 : 10 in Pakistan. A total of 192,000 direct jobs havebeen created in the sector. Likewise the ratio of direct employment in the AutoIndustry to jobs created outside the vending and OEM sector would safely be1 : 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 indirecttaxes i.e. Rs 63 billion was over 9% of countrys indirect taxes. Auto Industryshare in the total manufacturing sector remains at 16% by the close of 2005-06which was only 6.7% during 2001-02. Auto Industry claims to have invested Rs98 billion by the year 2005-06. The industry forecast on investment for the next 5years amounts to approximately Rs 184 billion out of which assemblersinvestment is projected at Rs 39 billion, while the vendors estimated investmentwould be around Rs 145 billion.

Auto Sector Indicators

Years GDPGrowth (%)

ManufacturingSector Sharein GDP (%)

Share of AutoSector in GDP

(%)

% Share of AutoSector in

Manufacturing Sector

2000-01 1.8 15.92001-02 3.1 16.1 1.09 6.772002-03 5.1 16.4 1.25 7.622003-04 6.4 17.6 2.7 15.342004-05 8.4 18.3 2.8 15.302005-06 6.6 18.20 2.8 15.93

Despite an impressive growth in auto sector during the last 5 years, tradedeficit in the Auto Industry is whooping and a source of major worry for theGovernment. 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 thebusiness environment has been competition free. Market is monopolized by fewOEMs, and the products are characterized by relatively low quality, high priced


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fewer models, long delivery times and poor service to the customers.Recognized auto parts suppliers would not be more than 300 and are placedmainly in and around Lahore and Karachi. They are mostly small and medium

enterprises and are fragmented. Most of the vendors are new business entitieswho have limited financial capacity, low manufacturing base, know how andskills, poor technology levels, and lack the vision to transform the existing levelsdespite huge potential in the sector. Most of the vendors are vulnerable tobusiness shocks in the TBS environment as their price competitiveness, terms ofsupply and quality would now be challenged by the OEMs.

Vending industry can meet such challenges through restructuring theirbusinesses in numerous ways i.e. by improving management, investment incapacities, technology acquisitions, automation, relocation and meeting OEMssatisfaction criteria.

The recent rapid growth phase has challenged the quality and safetystandards, emission controls, roads and parking infrastructure, which is far fromsatisfactory.

2- AUTO INDUSTRY DEVELOPMENT PROGRAMME (AIDP)

AIDP aims at doubling the contribution of auto industry to GDP and itsturnover to 600 billion rupees in the next five years and reaching to an exportlevel of US$ 350 million for components mostly to the international after marketand to the OEMs. Motorcycles, tractors and cars are expected to identify

markets for themselves, thus raising export potential to US $ 300 million by theyear 2011-12.

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

The fragmented location of auto vendors remains a barrier to sustainablegrowth of vending sector. There are indications that in future the OEMs will

encourage those vendors who are in their proximity rather than the ones locatedremotely. JIT concept will take roots soon. Such an imminent threat could betackled through cluster development one at Lahore and Karachi each.

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


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& 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 domesticcompetition, enhance competitiveness and stimulate innovation through AIDP.Governments policy on tariffs and non-tariff measures will lead to competitiveand sustainable development of industry. Certain weaknesses in the industrysuch as training of manpower, facilities for testing, certifications andhomologation remain the cornerstone of such policy initiative.

AIDP envisage a production turnover of Auto Industry to reach Rs 600billion 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, theemployment level to increase from 192,000 to 250,000 as direct jobs and fromaround 1 million jobs to 2.5 million as indirect jobs in the service sector such asretails, repair & maintenance, petrol stations, car wash, logistics, insurance,publication and advertisement services.

The Auto Sector export of components and CBUs is expected to reach toUS$ 650 million by 2011. The core strength of Auto Sector remains the smalland low priced, fuel efficient Cars, Motorbikes and 3-Wheeler. Light commercialvehicles 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 thissector in next 5-6 years. LCVs show high potential for export in the region aswell.

Tractors, because of highest indigenization levels and pricecompetitiveness would remain the competitive sector, provided Governmentremoves certain distortions on import tariffs.

The Trucking Sector through implementation of National TransportCorridor and implementation of Modernization of Trucking Sector, replacing theaging fleet of trucks and replacement with multi-axle rigid trucks and primemovers will give boost to truck manufacturing industry. Trucking sector has highpotential to grow as Pakistan road freight has already touched 95%. With theanticipated increase in trans-border trade and the start of local assembly of highhorsepower prime-movers, truck sector will register high growth in future.

The demand will further increase once Government implementsmodernization 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 vehicleexamination and registration system.

3- RECOMMENDED GOVERNMENT INTERVENTION

The industry is operating under high import tariffs both for CBU andCKDs. Deletion Programmes ensured purchasing of parts manufactured byvendors, as the violation by OEMs would result into penalty at the rate applicableto import of CBUs. The environment has been non-competitive, relatively non-transparent and was inhibitor rather than promoter of efficiency on a long termbase.

The successor system i.e. Tariff Based System on the other hand gives anoption to the OEMs to import certain components or buy them locally purely

based on economic principles. This system certainly promotes competition in thevending sector and drives them to provide right quality, price and in timedeliveries. Vendors except few may face difficulty in making quick adjustment tothis system. TBS on the other hand has created plus 400 tariff lines for the partsand 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 togain or provide market access to the partner countries in future FTAs. Finaloutcome of NAMA negotiations may also catch industry unaware.

Certainly there has to be a phased reduction of tariffs for the high tariffrates 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 yearsbut still remaining higher than CKD tariffs for non-localized components.

4- TARIFF INITIATIVES IN THE AIDP

Despite reasonable localization levels achieved during recent years, theimported CKD is a major cost component in the local production of cars. Thishampers price reduction and achieving competitiveness in the case of small carmodels in the region. There is a need of pre-announced phased reduction ofimport duty on CKD kits for the assembly of vehicles. Pre-announced tariffs willhelp auto industry in making long term planning on investment, productivity,

marketing and exports. This will also help in attracting foreign investment.

Import tariffs on CBUs is high and the total incidence of duty/ taxes i.e. byadding sales tax, withholding tax and CVT on compounded bases leads tohigh protection. Removal of water from existing tariff structure and unification oftariff 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 notbe 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

Raw Material 0% Sub-Components 5%

Vendors(Manufacturers of

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, componentsmanufacturing, job creation and exports.

2.2 Five Year Tariff Plan for Car/ LCV

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

Localized Parts 50% 50% 45% 40% 35%Car CKDNon-Localized Parts 35% 32.5% 30% 27.5% 25%Cars up to 1500 cc. 50% Cars 1500 cc to 1800cc.

65% 60% 55% 52.5% 50%CBU

Cars exceeding 1800cc.

75% 70% 65% 60% 50%

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%

CKD 10% 5% Prime MoversUp to 280 HP CBU 30% 25%


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CKD 0% Prime MoversAbove 280 HP CBU 15%

CKD 0% Buses(Fully CNGDedicated) CBU 15%

CKD 5% Buses Non CNG CBU 20%

CKD 10% 5% TrucksCBU 30% 25%

CKD 5% Trailers

CBU 25%

Pakistan Auto Industry has the potential to produce large scale,competitively priced, small capacity cars and competitively priced LCVs. Agradual reduction of CKD rates will help achieving the desired objectives.

Government has reduced duty to 0% on the import of raw-materials and thereare evidences that OEMs have already started gaining the benefit.

Reduction of import duty on trucks in the budget 2005-06 from 60% to30% and elimination of sales tax on CBU and CKD kits has not affected theindustry adversely. Industry has rather expressed signs of healthy growth inlocal 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 newentrant policy. The fact that new entrant will not be able to immediately adapt toTBS, Government has allowed the assembly to new entrants, through import of100% CKD (complete knocked down) kit at the rate of duty applicable to non-indigenized parts. However, Government would ask new entrants to provide acommitment to develop and purchase local parts for fitment in the locallyassembled 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/ manufacturerand had never undertook assembly/ manufacturing of cars/LCVs in Pakistan inthe 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/LCVsannually in countries other than Pakistan.


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ii) The New Entrant has serious and significant global presence in automanufacturing.

iii) Present Car/LCV manufacturers/ assemblers will not qualify as New

Entrant even for their new models.

iv) Registration to produce road worthy Cars/LCVs, with theEngineering Development Board, Ministry of Industries, Production &Special Initiatives.

v) Production of at least 10,000 Cars/LCVs on one standardizedplatform in the first year of production.

vi) Proof of land acquisition in the case of a green field project or anagreement with the owner, in the case of existing assemblyfacilities.

vii) Complete in-house assembly/manufacturing facilities as provided inSRO 656 (I) 2006 dated 22-6-2006.

Assembly of cars / LCVs from the imported SKD (semi knocked down) kit wouldbe considered contrary to this policy and the benefits under this policy will not beadmissible.

5.3 Benefits

New Entrants will be allowed to import 100% CKD kit/ components, atleviable customs duty applicable to the import of components not manufacturedlocally, 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 todemonstrate whether and to which extent:-

i) Total unit production will increase substantially in a period of threeyears from the commencement of production.

ii) International competitiveness will be achieved, and of steps to beundertaken 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, includingretail sales, aftermarket, repairs and service facilities etc.

vi) Local content in the assembly / manufacturing operations willincrease gradually.

vii) EURO-II compliant environment friendly cars/ LCVs will beproduced, 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 aprovision to clearly define the territory outside Pakistan for export ofvehicles manufactured locally.

Business plan containing above details, separately in annexure form, willbe submitted by the New Entrant to the Engineering Development Board,Ministry of Industries, Production & Special Initiatives. This will be in addition toother documents/information as provided in the rules or as demanded by theEngineering Development Board, from time to time.

The business plan will be evaluated by the Engineering DevelopmentBoard and the Auto Industry Development Committee (AIDC) on yearly basis toassess the performance and commitment made in the plan. AIDC will have theright to define the course of action against the new entrants who fail to honortheir commitment and the business plan, which may amount to a penalty andwithdrawal of benefits allowed under the AIIP.

6- NON-TARIFF POLICY INITIATIVES

The Auto Industry particularly the vending sector is facing serious capacityconstraints and there are fears that OEMs, in post deletion programme scenario

may shift part of their procurement to the overseas suppliers, on price, qualityand 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 smallcapital base, few of them re-ploughed their profits into expansions but majoritycould not. Vendors have low manufacturing capacities, low technology level,R&D and do not possess modern processes which have posed a great challengeto 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 toattract and facilitate such investment and to create an environment which is riskfree for the vendors and which could encourage interdependencies betweenOEMs 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 OEMs

with the following objectives:-i) To expand and modernize capacities in vending sector.

ii) To encourage localization of components for the local production ofvehicles and for export.

iii) To encourage rationalization of platforms by the OEMs.

iv) To encourage development of critical components and economies ofscale for global supply.

v) To promote interdependence between OEMs and vendors.

7.1 Qualifying VendorsAn existing or new automotive component manufacturer registered with

EDB and is contracted or has a letter of intent to supply locally manufacturedcomponents to one or more assembler of vehicles which are duly recognized bythe EDB.

7.2 Incentives

i) PAII will be in the form of customs duty credit equal to 25% of thevalue of productive assets invested by the recognized vendors dulyregistered with EDB and sales tax department. The duty credit willbe 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 transferthe credits to an OEM, who can use such credits for the import ofCKD 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 connectorsand plant and machinery.


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7.4 Qualifying Value of Assets

The qualifying value of productive assets means the value of theproductive assets capitalized in the balance sheet of the claimant according tothe general accepted accounting practices. The installed assets will have arecognized marking which will be duly entered into the asset register kept in thepremises of the vendor.

7.5 Non-Eligible Assets

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

7.6 Business Plan

The component manufacturer while making claims under the PAII willsubmit a business plan to the EDB as to whether and to what extent;

i) Total production will increase substantially over a period of two yearsfrom the commencement of production.

ii) A contract has been / will be awarded or a letter of intent has beenreceived for the manufacture of components for supply to an OEM.

iii) International competitiveness will be improved.

iv) The investment will contribute to employment and technologyenhancement.

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 toproduce 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 recentcompany statement will be submitted as part of the business plan.

7.7 Claims for PAII

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


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ii) A detailed factory layout, clearly showing the productive assetsinstalled must be included in the claim, for technical assessment bythe EDB, including the site inspection by its engineers.

iii) EDB reserves the right to have an independent audit done in respectof the financial statements that substantiate the claim for PAII.

iv) A claimant may submit one claim within six months from the closureof its financial year, for all qualifying assets that were taken up in itsasset register during that financial year. Unless written authorizationfrom EDB is obtained, late claims will not be entertained.

v) A comparison between the actual achievement and the information inthe approved application and business plan, and previous yearsclaims on the project as applicable, must be submitted with theclaims.

vi) The claim must be signed by authorized person of the board ofdirectors of the company.

vii) All claims must be audited by external auditors before submission toEDB.

viii) The claims also include a schedule of previously authorizedproductive assets which were taken into the asset register with theirasset numbers, capitalization values, date of acquisition, date ofproduction of each asset, or expected date of production, along withthe report from qualified independent auditors.

ix) Each asset must be provided with a unique asset number that mustbe 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 creditsthereof to only those OEMs who have rationalized their platforms. Rationalizationof platforms has the objective to reduce the proliferation of light motor vehiclemodels, produced in the country at an annual quantity of not less than 30,000units.


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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, forcertain period of time or any other consideration.

iv) Is the buying OEM following the rationalization of platform policy? Ifyes, 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 willrecommend the case on the basis of merits to EDB for crediting of duty credits inthe balance of claimant.

EDB, based on the recommendations of AIDC will then forward the caseto CBR for the benefit under this scheme.

7.11 Claims for Subsequent Years PAII Certificate

For the release of ongoing PAII certificates (i.e. the balance of certificatesafter the first years 5% of claimed capitalized investment) subsequent claimsmust be submitted. The subsequent claims must have the following detailedinformation.

i) The claimants must provide an updated business plan with anychange in the ownership or legal status of the company

ii) The claimant must confirm that the qualifying assets contained in theasset list on which the duty rebate certificates for the PAII werebased 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 resultingfinancial implications.

iv) Material deviations from the approved business plan are to bepointed out and motivated.


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

vi) Each page of the application as well as all separate pages attached

to the application must be initialed by the authorized person of boardof directors of the company. In addition, the authorized person mustsign a declaration to be included on the last page of the claim. Acertificate of authorization signed by the directors of the company isalso submitted with the claim.

vii) Claims have to be submitted by 30 June of each calendar year inorder to qualify for issuing of that years certificates. Claims submittedlater 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 InitiativesSEDC (STP) Building,5-A, Constitution Avenue,Islamabad

EDB after the approval of AIDC will submit these claims to Central Boardof Revenue (CBR) for the benefit.

7.12 Monitoring and Review of PAII

EDB will present to AIDC Summary of productive assets invested, bydifferent vendors duty credits earned and such credits utilized by thebeneficiaries, on annual basis.

Monitoring and review of the component development strategies will alsotake place by the end of each year, up to year 5 to assess the effectiveness ofPAII as an industry development instrument.

7.13 Withdrawal of PAII Certificates

EDB reserves the right to withdraw the PAII with retrospective effect fornon-performance by the beneficiary. EDB also have the right to withdraw thebenefits of PAII, if any irregularities have been observed or incorrect informationwas furnished with regard to the obtaining or utilization of the certificate pendingthe outcome of any civil, legal or criminal proceedings against the beneficiary. Insuch an event, if beneficiary is being deregistered or if the unutilized portion of acertificate is withdrawn in terms of this paragraph any benefit obtained as a resultof 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 theprimitive ways of manufacturing despite high growth in the Auto Industry. Withsuch technology level, competitive production at high volumes and entering intoexport markets looks a daunting task for the vendors. In order to overcometechnology shortages, a Technology Acquisition Fund (TAF) is proposed.

Technology Acquisition Fund (TAF) provides matching grants to supportthe efforts of component manufacturers (vendors) to enhance their technologylevel and production processes.


The component manufacturers who are registered with EDB and sales taxdepartment 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, manufacturingknow how, technical support, training and proprietary equipment. The

cost of the equipment must not be more than 20% of the licensingcost.

iii) Procurement of patents or manufacturing rights and registereddesign.

iv) Procurement of prototypes and its related technology transfer tofacilitate the physical development of automobiles other than2-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 berequired to provide the following information;

i) Detailed business plan as to what and to which extent technologyacquisition will lead to competitive and innovative production ofCBUs or components. The business plan will also provide theestimates 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 oftechnology, details of terms and conditions and equipment, paymentprocedure, mode of payment copy of invoice.

8.4 Processing of Claims

An industrial engineer of EDB and a cost accountant will visit the factoryand verify the provided information and claims correctness and will submit hisreport to the assessment committee of Auto Industry Development Committee(AIDC). The AIDC will examine the case as deems fit and will providerecommendations 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 solediscretion 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 withretrospective effect for non-performance by the claimant. If any irregularities havebeen observed or incorrect information was furnished with regard to the obtaining

or utilization of the TAF pending the outcome of any civil, legal or criminalproceedings against the claimant. In such an event, if claimant or beneficiary isbeing deregistered or if the unutilized portion of TAF is withdrawn in terms of thisparagraph any benefit obtained as a result of such scheme shall becomerepayable on demand to the government.

8.7 Size of TAF

9- RESEARCH AND DEVELOPMENT INCENTIVES


All assemblers / manufacturers of vehicles and component manufacturersregistered with EDB and sales tax department are eligible to participate in thisscheme. Contract R & D company may also be eligible for similar incentives. TheResearch and Development project will have access to matching grants and taxconcessions 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 experimentalii) 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 newproduction processes and

iv) That is directly related to the design, development,engineering or production of passenger cars, light commercialvehicles, engines, engine components, automotivecomponents, automotive machine tools or automotive tooling.

A project is an eligible R&D project only if the project includes oneor more eligible R&D activities.

9.3 Non-Eligible R & D Projects

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

i) The design of a building (whether or not the building is to beused to house R&D activity);

ii) The design and installation of financial systems;

iii) Market research, market testing, market development or salespromotion including customer surveys;

iv) Routine quality control;

v) Management studies or efficiency surveys;

vi) Routine collection of information (other than for the purpose ofR&D);

vii) the protection of industrial property rights by legal action;

viii) test and evaluation once a prototype becomes a productionmodel;

ix) staff selection system;

x) the sales by passenger car/light commercial vehiclemanufacturer or vendor of existing know-how, including off theshelf computer software and that can be applied withoutmodification to the needs of persons other than the passengercar/light commercial vehicle manufacturer or vendor


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If passenger car manufacturer/vendor undertakes an eligible R&D projectas a joint-venture, the passenger car manufacturer/vendor must not claim R&Dcosts 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 consideredeligible 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 providerecommendations to the EDB including:

i) Assessment of the relative merits of projects against the schemesmerit criteria; and

ii) Assistance in the monitoring process where there has been a projectvariation.

The EDB will have the final decision in determining which projects willreceive 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 ofmerit in relation to all other projects on the following merit criteria.

i) The application for claim of R&D expenditure will be accompaniedwith 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 ofinternationally competitive Auto Industry in Pakistan through such anR&D activity.


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iii) This will also include a commitment on increase in value of localcontent and production of CBUs and components of qualitystandards required for export.

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

Under this criterion, projects will be assessed by the assessmentpanel according to the caliber of new R&D activity that will beundertaken in the projects. R&D projects that may involve highertechnical risk will be regarded more highly than projects that involvefurther development of current lines of R&D or new lines of R&Dthat are part of an applicants existing expenditure base.

9.6.2 The technical merit of proposed projects

Under this criterion, projects will be assessed by the assessmentpanel according to the technical merit of the R&D to be undertakenin the projects.

9.6.3 The level of benefit, including environmental benefit to thewider community of proposed projects.

Under this criterion, projects will be assessed by the assessmentpanel according to the economic and environmental benefits likely

to accrue from the proposed R&D. Economic benefits includebenefits that arise from the dissemination of new knowledge andtechniques 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 ofan internationally competitive automotive industry in Pakistan.

Under this criterion, projects will be assessed by the assessmentpanel according to their contribution to the sustainability of an

internationally competitive automotive industry. The project and theR&D undertaken should be part of a longer term strategy forautomotive operations in Pakistan. A project that is supportedunder 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 theperformance of participating assemblers / manufacturers of vehicles andcomponents. Auto Industry Development Committee will also provide advice onproject performance and may make recommendations to the EDB.

9.8 Documentation

All the assemblers/manufacturers of vehicles and componentmanufacturers who wish to apply for R&D tax concessions and matching grantsunder this scheme will be required to complete and lodge an application on theprescribed format along with the detailed business plan. Each page as well as

separate pages of application must be initialed. Claimant will also submit thefinancial statements including income statement, balance sheet of last year andof the relevant year. Declaration on the last page of application must be signedby an authorized director of company. The application should contain details ofexpenditure on R&D, production, etc., through verifiable source.

The applicant will also submit an undertaking that R&D expenditureincurred will be capitalized in his balance sheet, as a capital expenditure for thatyear.

9.9 Claims for R&D Benefits

i) EDBs industrial engineer shall submit his report of findings to autoIndustry Development Committee.

ii) The claims shall be lodged by the accredited Accounting Firm, onbehalf 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 bya suitably qualified engineer appointed to do the site inspection.

iv) A claimant may submit one claim within six months from closure of itsfinancial year, for all R&D expenditures that were taken up in that

financial year. Unless written authorization from AIDC, late claims willnot be entertained. A comparison between the actual achievementand the information in the approved application and business plan,and previous years claims on the project as applicable, must besubmitted with the claims.


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v) The claim must be signed by authorized person of the board ofdirectors 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 thatmust be affixed or engraved on the R&D machinery whereverapplicable as well as entered in the asset register.

viii) EDB reserves the right to have an independent audit/inspection donein respect of the financial statements that substantiate the claim forR&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 rejectthese claims for final disposal by the Engineering Development Board (EDB).

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

9.10 Monitoring and Review of R&D Scheme

EDB will present to AIDC summary of R&D grants recommended/availedby different vendors and assemblers duty credits earned, on annual basis.

Monitoring and review will continue up to 5 years to assess theeffectiveness 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 bythe claimant. If any irregularities have been observed or incorrect informationwas furnished with regards to the obtaining or utilization of the match makinggrants / tax incentives pending the outcome of any civil, legal or criminalproceedings against the claimant. In such an event, if claimant or beneficiary isbeing 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 suchscheme 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 andAIDC will be entitled to 100% deduction on expenditure on in-house R&Dfacilities.

Tax authorities will make use of recommendations of EDB andassessment 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 isdismally low and disappointing. OEMs however, entail in-house training both atworker and managerial levels. Skilled human resource, nevertheless is of hugesignificance in the Auto Industry for which Government is proposed to establishAuto Engineering Departments in the Universities and the Poly TechnicalInstitutes. However, for on job training for the students, Government mayconsider attachment of such institutes to some accredited auto-engineering unitsfor training at the shop floor.

10.1- Factory School Concept

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

10.2 Incentives

Tax incentives in the form of deductions equivalent to 125% of the netexpenses (total expenses revenue (factory school) 1.25) from the annualtaxable income of such entities operating Factory Schools for the in-housetraining of its management, supervisors & workers and for the rest of AutoIndustry including vendors.


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i) Only those entities which have got both the assembly and componentmanufacturing facilities will be allowed to establish Factory School, toavail the tax incentives there on. Total trainees in one financial year willnot be less than 500 and will include at least 50% of trainees from theauto industry, excluding that of entity, operating such a factory school.

ii) Tax incentives will be linked to the quantity and quality of traineesproduced, content of the courses, assessment of classrooms, practiceareas, laboratories, quality and number of automotive instructors withcertain benchmarked credentials. The incentives would also be linkedto the assessment, as to what extent the cutting edge technologyexposure was provided to the students.

iii) The major areas of training will include product designing, productionprocesses, enterprise research & planning, improving technologyprocesses, supply chain management, shop floor management, qualitytesting and standardization, cutting the wastages, complementation ofprocesses, inventory management, customer education, innovationconcepts and overall efficiency improvement. Curricula will alsoinclude the safety and security of personnel, equipment andenvironment.

10.4 Duration of Training

For the tax incentives, duration of each course will not be less thaneight months out of which half the training will be imparted at the classroom leveland 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 interestedentity wishing to open up a Factory School and to avail the tax incentives underthis scheme. AIDC may approve, reject or recommend for certain improvementson 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 Schoolmanagement at the close of the respective financial year. AIDC, based ondetailed scrutiny and evaluation of the activity sheet will recommend or otherwisefor 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 tothe 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 oftraining 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 theprescribed format for the tax incentives based on the training impartedduring a financial year. The application will be duly supported by thefinancial statements including the income statement and balance sheetof the relevant year and the previous three years. The declaration onthe last page of application must be signed by an authorized Directorof the company.


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ii) The claims may be lodged by an Accredited Accounting Firm givingdetails of activities including the expenditure incurred on training forwhich 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 traineesqualified in that financial year. This will also include the break up oftrainees i.e. from within the entity and from the rest of auto industry.

EDB or AIDC may ask for any other document or information asdeemed appropriate.

10.9 Monitoring and Review of Factory School Scheme

AIDC will monitor and review the Factory School Scheme, itscontribution to the competitive development of Auto Industry throughimprovement in the quality and quantity of human resource, economical viabilityimprovement and accreditation issues every year for unto five years. Theassessment will also be made to see the effectiveness of the scheme, anybottlenecks and constraints in the smooth running of such Factory Schools andwill recommend measures to further improve and enhance the scope andefficiency wherever necessary.

10.10 Withdrawal of Incentives to the Factory Schools

EDB reserves the right to disapprove and withdraw the tax incentivesrecommended, with retrospective effect due to non-satisfactory performance ofsuch schools or the misuse of tax incentives, based on the AIDCrecommendations. Likewise, if any irregularities have been observed or incorrectinformation was furnished with regards to obtaining or utilization of tax incentivespending the outcome of any civil, legal or criminal proceedings against theclaimant, in such an event, if claimant or beneficiary is being deregistered or ifany tax concession is withdrawn in terms of this paragraph, any benefit obtainedas a result of such scheme shall become repayable on demand to theGovernment.

11- AUTO CLUSTERS

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


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Near Steel Mills, Port Qasim, Karachi. Near Motorway at Lahore.

There is a dire need to develop such clusters to achieve 0.5 million carproduction target by 2011-12. Auto Clusters will bring together the competenciesof its members along with the supply chain and will act as platform fortechnological innovations, national and international cooperation, consultancy,training, marketing and distribution. Clusters also enhance the development ofefficient communication among its members. It enhances all activities connectedwith the research and development of new products and services with greateradded value. Clusters provide important links between members, supportingsynergy with suppliers of machines, tools, manufacturing, design, logistics andother services.

A detailed working and requirements of proposed automotive cluster at Karachito achieve the target of 0.5 million cars is given in table below:

Projections; Capacity and Other Materials Needed for an Auto Cluster

ProcessAverage

per car

For existing

160,642

Required for

additional

339,358 Cars

Required for

0.5 M cars

After

Market

Total

Required for

0.5 M Cars

till 2010

Annual required

Capacity

Plot size

for unit

Plots

required

To

Spa

requ

(Acr

Casting 130 Kg 20,883Tons 44,117 Tons 65,000 Tons 27,950 tons 92,950 Tons7,000 Tons perannum 5 Acres 10 50

Interiors / trims 30 Kg 4,819 Tons 10,181 Tons 15,000 Tons 4,500 tons 19,500 Tons3,000 Tons per

annum 5 Acres 5 2

Forging 30 Kg 4,819 Tons 10,181 Tons 15,000 Tons 3,000 Tons 18,000 Tons5,000 Tons perannum 5 Acres 3 1

Plastic 120 Kg 19,277 Tons 40,723 Tons 60,000 Tons 12,000 Tons 72,000 Tons1,500 Tons perannum 4 Acres 40 16

Rubber 64 Kg 10,281 Tons 21,719 Tons 32,000 Tons 6,400 tons 38,400 Tons2,000 Tons perannum 4 Acres 16 64

Fasteners

3178nos.

510,520,276nos

1,078,479,724nos

1,589 millionnos.

318 millionnos

1,907 millionnos

250 million nos. perannum 4 Acres 6 24

Sheet metal 450 Kg 72,288 Tons 152,711 Tons 225,000 Tons 78,750 Tons 303,750 Tons6,000 Tons perannum 3 Acres 38 11

AC 1 nos. 160,642nos 339,358nos 500,000 nos. 25,000 nos 525,000 nos50,000 units perannum 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 1

Shock absorbers 4 nos. 642,568nos 1,357,432nos 2.0 Million pcs.

0.4 Million

pcs

2.4 million

pcs

500,000 pcs per

annum 3 Acres 4 12

Ball Bearing 123 nos. 19,758,966nos 41,741,034nos61.5 millionnos.

12.3 millionnos

73.8 millionnos

15 million nos. perannum 3 Acres 4 12

Aluminum

Castings 80 Kg 12,851 Tons 27,149 Tons 40,000 Tons 2,000 Tons 42,000 Tons1,000 tons perannum 2 Acres 40 80

Machining

(casted parts) 65,000 Tons 27,950 Tons 92,950 Tons

6,000 Tons per

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.Parts) 40,000 Tons 17,200 Tons 57,200 Tons

5,000 Tons perannum 2 Acres 8 1

Heat treatment

Plants (contract) 2 Acres 8 1

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

Glass 2.5 m2 401,605 m2 848,395 m2 1.25 million m20.375 millionm2

1.625 millionm2

300,000 m2 perannum 2 Acres 4 8


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Die & Mold

making 2 Acres 4 8

Pattern shop 2 Acres 4 8

Machining

(Forged Parts) 15,000 Tons 750 Tons 15,750 Tons6,000 Tons perannum 2 Acres 3 6

Batteries 1 no. 160,642nos 339,358nos 500,000 nos. 250,000 nos 750,000 nos

250,000 nos. per

annum 2 Acres 2 4

Friction material 9.5 Kg 1,526Tons 3,224 Tons 4,750 Tons 2,708 Tons 7,458 Tons2,500 Tons perannum 2 Acres 2 4

Audio Systems 1 no. 160,642nos 339,358 nos 500,000 nos. 25,000 nos 525,000 nos100,000 units perannum 1 Acre 5 5

Speedometers 1 no. 160,642nos 339,358 nos 500,000 nos. 50,000 nos 550,000 nos

150,000 nos. per

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

Gear Box /

Transmission 250,000 nos 5,000 nos 255,000 nos 10 Acres 2 20

Axle 1,500,000 nos 45,000 nos1,545,000nos 10 Acres 2 20

Suspension /

Mcpherson struts 10 Acres 2 20

TIER

1VENDORS

Steering / Power

steeringAssemblies 10 Acres 2 20

For an auto cluster having around 280 companies along with a commontraining institute, testing and certification centers, designing and styling centers,residential accommodation for workers and other facilities, a total of 1,200 acreswould be required for each cluster. Each of such clusters is expected to generatearound 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 areneither properly equipped nor they are skilled to examine vehicles due to which alarge number of auto population in the country is un-road worthy. This hasresulted into high rate of accidents on roads and high mortality ratio thananywhere in the competing countries. While for the efficient development of AutoIndustry, Government needs to strengthen MVE by undertaking large investmentin their equipment, infrastructure and remuneration package besides entrustingthis responsibility to a company formed in the private- public partnership or to aprivate entity.

Revamping of MVE system has separately been proposed in thedocument for modernization of trucking sector.


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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 vehicleswith 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 ofperiodic fitness tests.

The Government has been contemplating on Emission Control Policy forthe locally produced or imported vehicles to become EURO-2 compliant for thepetrol and diesel vehicles by the end of 2008 and 2009 respectively. Industryfears 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 withencouraging the use of catalytic converters. This however, should be well inadvance so that industry could gear up to technology requirements to meet thetargets.

An increasing population of vehicles warrants definition of emission controlstandards and their enforcement. Incentives on conversion to Euro II and IIIstandards 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 successivestage of emission norms, for incorporation in the national emissionroadmap.

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. Forsustainable auto industry development, efficient infrastructure such as roads,highways, bridges, parking areas and for projected exports, efficient portinfrastructure would be required. World class infrastructure will save fuel cost,time and better contribution to the economy. Efficient physical infrastructure willalso help in attracting foreign investment in the sector.


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15- SAFETY, STANDARDS AND ACCREDITATION

There are different laws and motor vehicle acts to ensure theroadworthiness of vehicles plying on the roads. Section 39 of the Motor VehiclesOrdinance, 1965, and Section 35 of The Motor Vehicle Rules, 1969, deals withthe issue and renewal of certificate of fitness. Section 8 and Section 39 of MVR1969; deal with issue of driving license and issue of duplicate certificate ofregistration and certificate of fitness respectively. Chapter 6 of MVR 1969 dealswith details of body construction, essential equipment and requirements ofmaintenance of a motor vehicle.

The emphasis of these laws is clearly on the management aspects andthe safe operation of the vehicles. However, some sections deal with theenvironmental aspects or the emissions from the vehicles in a rather generalway. Sections 154, 158 deal with the horns and noise, whereas section 163

deals with emission of smoke vapor of grease. The prohibition in these sectionsis of a general nature and no standards and testing procedures have beenspecified.

On realizing the importance and development of Metallurgy, Standards,Testing and Quality infrastructure, the government has established PakistanStandards and Quality Control Authority by merging the three organizationsnamely Pakistan Standards Institution (PSI), Central Testing Laboratories (CTL)and Metal Industry Research Development Centre (MTRDC) by enactmentthrough Act No. VI of 1996.

Presently facilities and resources available with PSQCA are inadequate inrelation to the duties and responsibilities assigned to them. PSQCA need to buildup their core competencies and to establish links with the internationalcounterpart agencies to get accreditation of its labs and standards. There is alsoa need to increase the skill levels and capacity of auditors and inspectors throughtraining and the capacity of inspection and testing system by enhancing the levelof equipment and professional education in the present testing laboratories.

Auto Industry cannot make any headway without the establishment ofstrong standards and accreditation within the country. PSQCA has developedstandards 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 investheavily in establishing infrastructure throughout the country.


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16- USED VEHICLE AND COMPONENTS IMPORT

The industry may not have a direct pinch of used car imports during lastyear, 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 theconfidence of industry and may delay their investment plans. This also does notauger well for the sustainable development of auto industry. Almost all the automanufacturing countries have put stringent restrictions in their policies todiscourage used vehicle imports.

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

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

Government policy to allow regularization of smuggled trucks, against30% 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 invending sector, local content, technology enhancement and exports. Thisnecessitates that industry produce fewer car models and which are changedrather less frequently.

Used vehicle import would not benefit the consumer or the industry andGovernment should rather make its long term policy on this issue, which mayinclude strict implementation of Transfer of Residence (TR) and Baggage Ruleswith compulsory registration of vehicles in the name of returning Pakistanis, for atleast one year. Under TR rules, vehicles may only be allowed if these areregistered 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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National standards may be developed for the car, bus, trucks and tractorswhich may strictly be applied to used vehicle imports. Efficient testing facilitiesmay 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 byimporting CKD kits of around US $ 804 million and CBUs around US$ 311million. 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 assemblyand components manufacturing capacity and high local demand which remainsunmet 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 assemblersmaking supplies to their regional hubs.

This is feared that in the coming years trade deficit in auto sector willfurther increase warranting Government to tighten, the liberal used car importschemes.

Various incentives have been provided to auto sector for exports,including duty free import of CKD kits for CBU exports under SRO 656(I)/2006and 0% import of raw-materials to make components competitive. DTRE

scheme is being revisited in close cooperation with CBR to make it suitable forauto engineering sector export.

The Government is proposed to waive off income tax on export ofcomponents and CBUs. This is expected that AIDPs incentive scheme onproductive asset allowance, technology acquisitions, R&D etc., would createcapacity, 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 accessscheme. In this regard, car and tractor OEMs would be required to renegotiate

their agreements with their principals for territorial distribution of their productsproduced in Pakistan. This also includes initiating serious efforts to developcertain components locally for supply to their regional hubs.

In order to encourage two wheeler exports, which have the necessarysurplus, 100% sea freight subsidy for two years is proposed. Furthermore, tomake their cost competitive to their international competitors, refund of entire


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amount of indirect taxes paid by the assemblers directly and by their vendorswhich 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 agreementsof 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 inplace need to be revisited such as used car/ bus or truck imports under baggagescheme 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 factorsthat it is in the development stage, high jobs are at stake and that industry willenter into export market in next 2 3 years.

Pakistan is located in a region where the industry has reached to a maturestage and produce products which are competitive, innovative with hightechnology attributes.

Any reduction of further tariffs or providing some excess through FTAs toany of these countries will be a set back for the local industry. Industry has

invested substantially and promising amount of investment is in the pipelinewhich needs to be protected and sustained.

19- COMPUTERIZATION OF VEHICLE REGISTRATION ANDDRIVING LICENSING

Number of vehicles in Pakistan is increasing every year and which isexpected to continuously grow in double digits in the coming years. This entailsthe Government, municipalities, town planners, car assemblers, traffic and taxauthorities and many others, an instant access to a countrywide reliable data onthe vehicles.

At present, information on countrywide vehicles is variable and relativelyinaccessible, posing many problems to the relevant authorities. There is anurgent need to devise standardized set of information, computerized andaccessible on all Pakistan bases.


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20- AUTO INDUSTRY DEVELOPMENT COMMITTEE (AIDC)

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

With the changing WTO scenario and our commitment to TRIMsagreement Pakistan had to eliminate the compulsory local content conditions inits industrial policies. With the elimination of over 23 deletion programmes invarious engineering goods by the year 2003, the only remaining deletionprogrammes in auto sector were also done away with, this year.

Auto Industry Development Committee (AIDC) is proposed to replace theI.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 regulardialogue and effective communication with the industry. AIDC will encourageprivate public partnership for the sustainable development of Auto Industry.

AIDC will continue identifying the regulatory and administrative problemsand potential bottlenecks which could affect the competitive development of AutoIndustry and would recommend various options and solutions to the relevantGovernment departments and advise to the industry.

AIDC will have the mandate to provide its findings to EDB after makingnecessary documentary verifications, reviewing inspectors reports or through

personal hearings or by any other means on the claims for the benefits undervarious incentives proposed in the AIDP. Such incentives include productiveasset investment allowance, technology acquisition fund, R&D, Human ResourceDevelopment and other incentives.

AIDC will have regular deliberations on quality, standards, developmentand regulatory framework of the Government to encourage emission controls,WTO issues, tariff structure, investment issues, export policies, trade policyissues 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 proposecorrections and improvements in the AIDP wherever necessary.

AIDC will promote industry university linkages, development oftechnologies, improvements of HRD and creating awareness amongst theacademia.


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Composition of AIDC

1. Vice Chairman/ Chief Executive Officer,Engineering Development Board

Chairman,AIDC

2. General Manager (Policy Development),Engineering Development Board

Secretary

3. Joint Secretary, M/o Industries, Production & Special Initiatives Member4. Joint Secretary, M/o Science & Technology Member5. Joint Secretary, M/o Commerce Member6 Joint Secretary, M/o Environment Member7. Chief Customs (Tariff & Trade), Central Board

of RevenuesMember

8 One private sector Economist (preferably having experience inPolicy Development in Industrial economics).

Member

9. One private sector qualified chartered accountant. Member

10. Vice Chancellor, University of Engineering & Technology,Lahore or his representative.

Member

11. Vice Chancellor, NED University, Karachi or hisRepresentative.

Member

12. Vice Chancellor, GIK or his representative. Member13-14. Two experts from Private Sector. Preference would be given to

those experts who have been working with Auto Industryduring the last 5-10 years. They should have consultancyexperience with sound background of tariff, management andknowledge on the fundamentals of industry.

Member

15. Managing Director, Pakistan Standards and Quality ControlAuthority (PSQCA) or his representative.

Member

16. Chairman, PAAPAM Member17. Vice Chairman PAAPAM Member18. Chairman, PAMA Member19. A Representative of Car Assemblers on rotation basis for one

year (out of three leading assemblers).Member

20. A Representative of Motorcycle/tri-wheeler Sector on rotationbasis for one year (out of five leading assemblers).

Member

21. A Representative of Tractor Assemblers on rotation bas

draft aidp by edb 15-11-06

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