policy analysis on the competitive advantage of the food processing sector in pakistan

DRAFT Policy Analysis on the Competitive Advantage of the Food Processing Sector in Pakistan: Focus on Quality, Safety and Standards

May 2007

Competitiveness Support Fund

Policy analysis on the Competitive Advantage of the Food Processing Sector in Pakistan: Focus on Quality, Safety and Standards

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DISCLAIMER The CSF’s experts endeavor, using their best efforts in the time available, to provide high quality services hereunder and have relied on information provided to them by a wide range of other sources. However, they do not make any representations or warranties regarding the completeness or accuracy of the information included this report. The information provided in this is report does not necessarily represent the views or positions of the U.S. Agency for International Development, or the Ministry of Finance, Government of Pakistan.

About the Competitiveness Support Fund (CSF)

The Competitiveness Support Fund (CSF) is a joint initiative of the Ministry of Finance (MoF), Government of Pakistan and the United States Agency for International Development (USAID). The concept of the CSF is based on similar funds established in other economies (i.e., India, Thailand, Turkey, Ireland and Finland) and benchmarked against these funds, structured according to the international best practices and tailored to the current Pakistani economic environment.

The CSF has been established to support Pakistan’s goal of a more competitive economy by providing input into policy decisions, working to improve regulatory and administrative frameworks and working to enhance public-private partnerships within the country. The CSF will also provide technical assistance and co-financing for initiatives related to innovation and competitiveness, the private sector with research institutes, universities and business incubators that contribute to creating a knowledge-driven economy. The report has been prepared by FoodWorks Company Limited of Hong Kong on behalf of the Competitiveness Support Fund.



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CONTENTS

ACRONYMS ----------------------------------------------------------------------------------- 6EXECUTIVE SUMMARY ------------------------------------------------------------------ 8 CHAPTER 1.0 INTRODUCTION ------------------------------------------------------ 191.1 Background ------------------------------------------------------------------------------ 191.2 Objectives and Scope of the Study --------------------------------------------------- 201.3 Research Methodology ---------------------------------------------------------------- 20 CHAPTER 2.0 THE FOOD INDUSTRY --------------------------------------------- 232.1 Global Approach to Food Processing ----------------------------------------------- 242.2 Approach to Food Processing in Pakistan------------------------------------------- 292.3 Agricultural Raw Materials in Pakistan---------------------------------------------- 342.4 Review of Principle Primary Processing Sub-sectors------------------------------ 42 CHAPTER 3.0 FOOD DEMAND AND INTERNATIONAL TRADE----------- 473.1 Demand for Food: Demography, Poverty, Nutrition------------------------------ 473.2 International Markets and Exports of Food Products----------------------------- 52 CHAPTER 4.0 THE VALUE CHAIN IN FOOD PROCESSING----------------- 574.1 Overview of Global Value-added in Food Processing----------------------------- 594.2 Pakistan’s Value-chain in the Food Industry---------------------------------------- 624.3 Value-added Case Studies-------------------------------------------------------------- 66 CHAPTER 5.0 COMPETITIVENESS ISSUES IN FOOD PROCESSING----- 805.1 Comparative Production Costs-------------------------------------------------------- 805.2 Other Critical Competitive Elements------------------------------------------------- 865.3 Summary of Competitiveness Indicators for the Food Industry------------------ 99 CHAPTER 6.0 SUGGESTIONS FOR INCREASED COMPETITIVENESS IN THE FOOD INDUSTRY

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APPENDICES: APPENDIX I: LIST OF PERSONE CONSULTED DURING THE STUDY 108APPENDIX II: LIST OF REFERENCES & PUBLICATIONS CONSULTED 132APPENDIX III: LIST OF 101 MAJOR AGRO-PROCESSING COMPANIES REVIEWD BY THE STUDY 138



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LIST OF TABLES Page 1 PERCENTAGE DISTRIBUTION OF FORMAL AND INFORMAL

ESTABLISHMENT BY TYPE OF INDUSTRY IN RURAL PAKISTAN--- 302 LARGER-SCALE FOOD PROCESSING UNITS IN PAKISTAN------------ 313 MAJOR CROP OUTPUT (‘000 tons)---------------------------------------------- 364 PROPORTIONS OF MAJOR CROPS IN TOTAL AGRICULTURAL

VALUE ADDED---------------------------------------------------------------------- 36

5 HORTICULTURE PRODUCTION------------------------------------------------ 406 PAKISTAN LIVESTOCK POPULATION (‘000 Head)------------------------ 417 MILK IN THE ECONOMY--------------------------------------------------------- 418 DEVELOPMENT OF THE SUGAR MILLING INDUSTRY------------------ 439 MAIN DEMOGRAPHIC INDICATORS FOR PAKISTAN------------------- 4810 VALUES IN AGRICULTURAL TRADE----------------------------------------- 5411 PRODUCTION COSTS AND MARGINS OF APPLE JUICE----------------- 6812 OPPORTUNITY COST LOSSES FOR APPLE JUICE------------------------- 7013 PLANTATION OUTPUT VARIABLES FOR MALAYSIAN ESTATES

AND ASSUMED FOR SINDH SMALLHOLDERS---------------------------- 7114 PROCESSING PARAMETERS FOR HYPOTHETICAL MILLS IN

MALAYSIA AND IN SINDH----------------------------------------------------- 7215 POSSIBLE COMPARATIVE COSTS OF PRODUCTION FOR CRUDE

PALM OIL---------------------------------------------------------------------------- 7316 SUPPLY AND DEMAND OF MILK-------------------------------------------- 7517 COMPARATIVE PRODUCTION COSTS OF MILK--------------------------------- 7818 COMPARATIVE RAW MATERIAL AND INPUT COSTS----------------- 8119 CENTRES IN PAKISTAN WITH MAJOR BIO-TECH CAPABILITY 8820 FOOD ALERTS NOTIFIED TO THE EU 9321 MAJOR SPS ISSUES FACING PAKISTAN 9422 SPS ISSUES IN HORTICULTURE 9423 SPS ISSUES IN MEAT 9524 SUMMARY OF COMPETITI8VENESS INDICATORS--------------------- 99



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LIST OF FIGURES Figure 1 26Figure 2 33Figure 3 35Figure 4 55Figure 5 59Figure 6 62Figure 7 76



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ACRONYMS

ABDP Agribusiness Development and Diversification Project ADB Asian Development Bank ACMA Auto Component Manufacturer’s Association (India) AIDP Auto Industry Development Program (EDB) AMS Aggregate Measure of Support ASF Agriculture Support Fund CABB Centre of Agriculture, Biochemistry and Biotechnology CAJ Concentrated Apple Juice CBR Central Board of Revenue CBU Completely Built-up Unit CC Cubic Centimeters CEO Chief Executive Officer CPO Crude Palm Oil CSF Competitiveness Support Fund EPA Environmental Protection Agency FDA Food and Drug Administration FELDA Federal Land Development Authority FFB Fresh Fruit Bunch FOB Free on Board FTA Free Trade Agreement GoP Government of Pakistan HACCP Hazard Analysis and Critical Point System IFPRI International Food Policy Research Institute JV Joint Venture LCC Low Cost Countries LUMS Lahore University of Management Sciences MI Micronutrient Initiative MINFAL Ministry of Food, Agriculture and Livestock MoF Ministry of Finance, GoP MoIP&SI Ministry of Industries, Production and Special Initiatives MoS&T Ministry of Science & Technology MRL Maximum Residue Levels NARC National Agricultural Research Centre NBP National Bank of Pakistan NBFI’s Non Banking Financial Institutions NCEMB National Center of Excellence in Molecular Biology NIAB Nuclear Institute of Agriculture and Biology NIBGE National Institute for Biotechnology and Genetic Engineering NNSP National Nutrition Strategic Plan NTB Non-tariff Barriers OEM Original Equipment Manufacturer PAEC Pakistan Atomic Energy Commission PARC Pakistan Agricultural Research Centre PCSIR Pakistan Council of Scientific and Industrial Research



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PFMA Pakistan Flour Miller’s Association PK/O/M Palm Kernels/Oil/Meal PMDC Pakistan Mineral Development Corporation PNAC Pakistan National Accreditation Council PNBC Pakistan National Bio-Safety Committee PORIM Palm Oil Research Institute of Malaysia PSQCA Pakistan Standards and Quality Control Authority PPTA Project Preparation Technical Assistance PTA Preferential Trade Agreement R&D Research and Development RBD Refined, bleached and deodorized SBP State Bank of Pakistan SDC Skills Development Centers SME Small and Medium Enterprise SMEDA Small and Medium Enterprise Development Authority of GoP SPS Sanitary and Phyto Sanitary SRO Statutory Regulatory Order (also referred to as a Statutory Notification) SWOG Strategic Working Group SVT Sun Valley Thailand TBS Tariff Based System TBT Technical Barriers to Trade TDAP Trade Development Authority of Pakistan (earlier known as the Export

Promotion Bureau) TRQs Tariff Rate Quotas TUSDEC Technology Up-Gradation & Skill Development Centre UHT Ultra High Temperature UNFAO United Nations Food and Agricultural Organization USD United States Dollar VAT Value Added Tax VCA Value Chain Analysis WB World Bank WTO World Trade Organization



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EXECUTIVE SUMMARY CHAPTER 1.0 INTRODUCTION This Study was undertaken during February and March 2007. The aim of the Study was to describe the main elements of the food processing industry in Pakistan. Food processing or manufacture is part of an integrated industry that takes agricultural raw materials and moves them through a complex value chain. This value chain connects the farmer often located in impoverished rural areas of the country, to consumers in cities both domestically and overseas. The key to success in this endeavor is to develop a fully advanced supply chain in every sub-sector of the food economy. In Pakistan this supply chain is either missing or highly distorted. A supply chain that does not adequately transmit information from the consumer to the producer accounts for the failure of the system to produce products efficiently or of the correct quality. Approach and Methodology The Study undertook to examine each sub-sector of the food economy via both field work and desk research. Extensive interviews were held in each part of the country with agriculturalists, those working in research and extension (including the Agricultural University at Faisalabad and the National Agricultural Research Centre), market traders, food manufacturing companies and exporters. Also consulted were other stakeholders including consumers and those working in enterprises related to the industry, for example, entrepreneurs building food processing machinery and supplying packaging materials. The Study includes the views of government officials from the major line agencies including the Ministry of Food and Agriculture (MINFAL) and its related agencies (e.g., the National Oilseeds Development Board, the Pakistan Agricultural Research Council, the Livestock and Dairy Development Board and the Pakistan Horticulture Export Development Board). Pakistan has been the recipient of very considerable funds received from both bi-lateral and multi-lateral donor agencies and development banks. USAID, the World Bank, the Asian Development Bank and the European Community have all provided finance for loans to the agricultural and food sectors. These agencies were consulted during the Study. Extensive discussions were held with the ADB’s Agribusiness Development & Diversification Project (ABDP) and the Agriculture Support Fund (ASF). Particular mention should be made of the assistance received from the various Strategic Working Groups formed under the USAID PISDAC project. All these persons and organizations consulted during the Study are listed in the Appendix. In addition to interviews and field visits (e.g., to factories), the Study utilized a wealth of written material. The agriculture and food industries of Pakistan have been studied extensively by academics and by those preparing or implementing development projects. Some of these reports are in hardcopy while many others are available via the Internet. The principle documents consulted are listed in the Bibliography and are referenced in the text.



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CHAPTER 2.0 THE FOOD INDUSTRY

The Study analyses the food processing industry in Pakistan and benchmarks it against the approach taken in other countries. Most of the world’s major food processing companies are American or European. US food technology and standards tend to set a worldwide benchmark. The aim of Chapter 2 is to help the reader understand the complexity of a group of industries that is based on the transformation of perishable biological materials. In this respect the food industry differs significantly from any other kind of manufacturing and so requires an entirely different approach to investment, policy and regulation. Globally the industry is driven by value-added products. Advances in freezing technology have seen the value of frozen products expand in the United States from US$7.9 billion in 1970 to now more than an estimated US$100 billion. Frozen food products have notched double-digit growth in Europe.

Benchmark against the global food industry

There are two particular features of the global food industry that are noted in the Study. First, nearly most growth will come via consumer health concerns. Higher income consumers continue to focus on healthier foods and eating habits, and the food and beverage industry is following this market via products identified as better-for-you, organic, obesity-addressing and “nutraceutical” (foods that provide medical or health benefits). In general, consumers in developed countries are willing to pay more for higher quality food.

The second feature of the global industry is that companies are highly integrated, combining an enormous range of in-house professional expertise (e.g., financial, technical, management, engineering etc.) with supply chains in which the company supports and sometimes finances external input suppliers at every level e.g., from the supply of agricultural raw materials via contract farming to machinery produced at least cost worldwide.

The food industry in Pakistan

The opposite is the case in Pakistan where a more conventional model would be a small-scale family owned business in a rural or peri-urban area which faces competition at every level (from raw materials to markets) from a large number of similar “copy cat” processors. The technology is highly labor intensive and so the sector is a major employer. Lack of integration from the farmer to the consumer along the supply chain is the principal reason why Pakistan food processors are uncompetitive compared with overseas companies.

Chapter 2 describes the main elements of the food industry from the supply of raw materials to final production. At the start of the value chain, the ability of food processors at whatever level of the industry (primary extraction, intermediate processing or final manufacture of packaged products) depends absolutely on the availability of raw materials. Pakistan is a major producer of commodity and industrial crops (such as wheat, rice, sugarcane and oilseeds) and these are important raw materials the supply and quality of which often falls short of industry requirements. Livestock and horticultural products are



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also important elements in agriculture and provide additional raw materials for processing and export. These last sub-sectors were identified by the Study as essential for the growth of food processing, in particular for exports.

Agricultural growth has kept pace with population increase and overall there have been successes in improving yields at the farm level. However, there are deficiencies in post-harvest handling and storage as well as primary processing that often lose the gains made at the field level. For example, the wheat sector is inefficient from the moment the grain is threshed and then stored in open fields to await collection through to the maintenance of flour mills where extraction rates (of flour from wheat) are low and of poor quality. Wastage of second and third grade fruit because of inefficiencies in post-harvest cooling, storage, transport and the lack of pulping capacity is another example; milk provides a third, where due to the thinly spread cattle herd milk is collected by numerous individuals and much is wasted in an overly complex supply chain.

There are successes in the industry. The milk industry in particular has made an effort (fully supported by the Government) to introduce modern systems and to revitalize the hitherto moribund processing industry. There is evidence that serious efforts are being made in the horticulture industry to introduce best practices at the farm level (e.g., to certify farms under the EuroGAP system) and to encourage exporters to integrate backwards along the supply chain (e.g., by investing in cool storage). Much more can be done and the major sectors of agriculture (i.e., the commodity and industrial crop sectors) need to be fully restructured.

CHAPTER 3.0: FOOD DEMAND AND INTERNATIONAL TRADE

Demand for food

Demographics are the key to understanding the food industry in any country. Chapter 3 provides the demand side of the food equation with an analysis of the effective demand for processed and packaged food in Pakistan. The Study finds that the effective demand for processed food derives mainly from the urban areas and that the total population capable of buying any kind of cheap or low quality processed food item is between 30 and 50 million – a large enough population to sustain a food processing sector that supplies such products (which is what we indeed find). Incomes are growing, but they are unequally distributed. Poverty remains a problem and malnutrition is a pressing issue; it can be tackled via food processors such as the flour millers who are willing and able to participate in programs that improve the quality of basic food items. The Study finds that there is a market of perhaps 5-10 million persons who require food items that conform to the standards of the industrialized countries and are willing and able to pay for this level of quality. Economic growth is strong and the efforts to move people into the modern economy are increasingly successful; this suggests that at the less technology-intensive and less sophisticated levels of the industry (i.e., not the hi-tech firms that behave like the multi-national food processors) there are interventions that can be made to improve basic processed foods for ordinary people.



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International trade in foodstuffs

With regard to trade, it is important to understand that Pakistan’s large and growing population will absorb a large part of the agricultural surplus. It is wrong to assume that simply because Pakistan produces agricultural raw materials these will automatically be available for export. Nor should they be; exports of wheat represent the value of that wheat as flour being transferred out of Pakistan rather than remaining in Pakistan as biscuits. Agricultural exports have contributed to overall export growth but nevertheless remain a small proportion of total exports. Pakistan has an apparent advantage in the production for exports of rice and horticultural products. In recent years, horticultural exports have increased rapidly, with little by way of subsidies. The country's climate and location give it an advantage in accessing a number of niche markets and it is generally considered that, given an enabling environment, horticultural exports could grow substantially.

CHAPTER 4.0: THE VALUE CHAIN IN FOOD PROCESSING

Challenges along the value chain

There are failings at every point in the food processing value chain that lead to very substantial opportunity cost losses. Although these are not quantified, they surely run into the hundreds of millions of dollars1. The food sector in Pakistan faces a number of critical challenges along the value chain that impact the competitiveness of the sector.

These include:

• Integrating the individual food factories with backwards and forwards linkages

• Strengthening links with science-based organizations and technology resources

• Improving post-harvest and process efficiency and minimizing waste (and managing biological effluent disposal)

• Improving the standards of safety both within the workplace and most particularly of the food products themselves with regard to ingredients and overall hygiene

• Strengthening consumer awareness of the nutritional and health benefits of good food

Each of these elements has a cost implication and there are also administrative, structural and management aspects related to them. Covering the entire spectrum is the question of governance which starts at the factory site with management of the company’s finances and accounts and reaches to, e.g., inspection of food products for export quality by independent surveyors. Cross-cutting issues such as infrastructure and the judicial system also affect the industry at every level.

1 The case study of the apple juice value chain in Chapter 4 suggests that opportunity costs in just this sub-sector alone run to about $70 million annually.



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Main issues along the value chain

The main issues that arise in Pakistan’s food value chain are as follows:

Agriculture – Agricultural output has performed well in Pakistan but much remains to be done especially in the area of variety improvement and the provision of seeds. Water is another issue. The main issue for food manufacturers is the generally poor quality of crop and livestock produce at the farm gate. Reliability of supply is of major concern. The problems in agriculture are fundamental, long-term and are the subject of various development programs.

Intermediate processing – Wastage at the immediate post-harvest stage is a fundamental cost and competitive issue. Very often this is not because the technology is lacking (although e.g., lack of cooling systems for milk or fruit is a problem) but because the market structure from the farm gate to the intermediate processor is inefficient. It cannot be said too strongly that these issues are primarily social and economic (probably more social than economic) and not technical.

Food manufacturing – the food manufacturers have mentioned the following 5 issues that principally affect their competitiveness

• Inability to manage raw material supply – because many food manufacturers have been mis-located, or constructed in the expectation that there would be raw materials available, fluctuation in raw materials supply and a failure to establish strong backward linkages through the VC mean that many manufacturers report under capacity and a destructive competition for scarce supplies.

• Erratic inputs and poor labor skills – in particular supplies of potable water often present problems and add to costs because manufacturers have to deal with this problem directly themselves. Poor literacy levels and basic artisan skills also present management with problems e.g., relating to the operation of complex machinery such as packagers.

• Poor financial support – Companies report that commercial banks often fail to understand that their businesses depend on the natural environment, so that credit is extended or only short periods of time that does not fit with the agricultural crop supply calendar. Equally, because these businesses are often only marginally profitable, the lending institutions are reluctant to lend for re-investment in new technology or for R&D.

• Poor technical choices and a lack of innovation – a common feature of the food manufacturing facilities visited during the Study is the poor choice of machinery or processes. Innovation is poor or non-existent.

• Poor or non-existent standards of safety in the workplace and for the consumer –this reflects a society-wide challenge in the area of hygiene. Food standard factory construction is almost totally absent except in the large companies. Old machinery often operated without preventative dust masking or other safeguards for the



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workers. Food products are often adulterated and packaging is provided that is aimed at short shelf lives and to be as cheap as possible

Chapter 4 provides a comparison between the global food processing value chain and that found in Pakistan. It goes on to present detailed value-chain case studies covering the production of apple juice, vegetable oil (palm oil) and buffalo milk.

CHAPTER 5.0: COMPETITIVENESS ISSUES IN FOOD PROCESSING Comparative production costs For most processed foods the costs of necessary raw materials and factor inputs are higher in Pakistan than in either comparable neighboring countries or in the developed countries (e.g., USA). The developed countries are able to generate a far larger surplus of agricultural raw materials than are the developing countries including Pakistan. This raw material is more reliable in terms of its supply, more stable in terms of price. With respect to processing, food manufacturing has a range of technical choices for the same product that can in many instances favor the developed countries. Economies of scale, access to state-of-the-art machinery, access to capital to invest in that machinery all lead to lower unit costs of production and better quality products. Main factor markets A focus on improved competitiveness has led to some improvement in the functioning of factor markets. These essential changes have impacted favorably on the food industry. The privatization of large parts of the financial sector has improved matters in capital markets. Reforms to codify labor legislation are a good start and the Government is moving forwards to prepare a new Employment Services Act that will increase labor market flexibility through the use of temporary labor contracts. Health and safety at work regulations also need to be tackled. Land reform has proven a difficult area. The challenge is to ensure clear title for new transactions while at the same time settling a host of property disputes. Such uncertainty affects decisions about the location of food factories that can damage their efficiency. Chapter 5 provides a detailed analysis of every factor of production as it affects the competitiveness of the food industry in Pakistan. The principal elements (land, labor and capital) have been mentioned. In addition the Chapter covers aspects of support for agriculture (R&D and extension), the availability of essential additives (sugar, salt, edible oil), packaging, light engineering, and infrastructure. Also included is analysis of the regional development of the industry and the institutional structure. Sanitary and phyto-sanitary (SPS) measures An important section in the Study is devoted to sanitary and phyto-sanitary (SPS) aspects of the industry. A key theme in the Study is the need for a focus on quality and food standards. This Chapter discusses these issues and refers to the food laws and various agencies that are involved in Pakistan’s food sector.



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Pakistan faces significant non-tariff barriers to trade related to poor performance in the area of SPS compliance. Pakistan has been subject to a number of bans, for example most recently fish and seafood exports have been banned to the EU following a 2007 inspection of Karachi Fish Harbour that found unhygienic conditions. During 2004-05 the country was subject to 26 EU food alerts. Pakistan’s food industry is generally deficient in food quality and standards for reasons that have been mentioned repeatedly in this Study. Product standards are usually deficient because consumers are often unwilling to pay for high quality products and don’t insist on adequate packaging and labeling. Equally there is a lack of enforcement (e.g., of laws dealing with adulteration) and a lack of knowledge by manufacturers of what is required. This is especially true when it comes to process standards. Poor understanding of technical processes and the need for “food standard” buildings and machinery is a major characteristic of the industry.

MAJOR SPS ISSUES FACING PAKISTAN Measure Issues and actions Awareness and recognition Consumers and other stakeholders must be aware

of the issues of hygiene and contents. The link between nutrition and health must be established

Application of good basic practices Such as EuroGAP and HACCP including traceability

Suitable and applied regulations Food laws and regulations must be relevant, in place and enforced

Clarity of institutional structures and roles

Functions of various institutions often overlap or are dysfunctional. Some necessary institutions may be lacking

Risk management National competent authorities have to be able to respond to the development of the more basic elements of the SPS measures

SPS diplomacy WTO members need to set agreed international standards

Source: UNIDO and the World Bank Study Summary of competitive issues for Pakistan’s food industry The following Table (from Chapter 5) summarizes the key competitive issues for the food industry in Pakistan. Competition dimension

Core indicators Second tier indicators

Economic

Incomes

Incomes in Pakistan are rising but so is inequality. Urban demand for semi-processed and processed food is increasing, mainly for high-energy and low-cost food items. Quality



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Employment – providing jobs for a growing and youthful population is a principle challenge for economic policy Fixed capital formation Markets

is not a prime consideration. Consumers have to be made aware of the benefits both for health and nutrition of good quality, safe food. The food industry has the capacity to provide jobs. However there is a lack of skilled labor in all parts of the industry, but especially in professional and technical areas such as laboratory workers, food technologists, and food engineers. Performance in this area in the food sector is poor. Most manufacturers are small scale and cannot re-invest from tight profit margins. Maintenance of capital assets is poor and replacement periods are too long. Agriculture itself has been neglected and there is a general lack of investment in the supply chain. There needs be a stronger information base for farmers. Basic R&D conducted at universities and at NARC is good, but it fails to reach the producer. Primary marketing channels are complex and distorted. There is a general failure in the supply chain International market access is restricted by poor product quality and inadequate packaging. SPS issues are paramount for horticulture and for meat. Much is being done but there is a lack of a coordinated approach.

Social

Poverty – between 20 and 30% of persons are below the poverty line Health and education

Rural poverty and malnutrition still provide a challenge. Large numbers of persons do not have the financial resources to buy processed food. The effective domestic market for high-value foods is between 5-10 million persons. This is still a large market and can be serviced with high quality local foods rather than expensive imports. There needs to be a greater emphasis on nutritional information in schools and in the general public. Quality awareness is very low even among educated persons. Hygiene



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standards are poor in both processing facilities and in markets.

Environmental

Natural resource stocks Waste disposal

Pakistan has a wonderful agricultural resource base in some areas (mainly Punjab). Water availability is of greatest importance to maximize output. Water management is the single most important aspect of food raw material production in Pakistan. The food processing industry is largely unconscious of its environmental impact. Biological waste from processing needs far better control and management.

Process

Consistency Institutional capacity

Many of the necessary institutional pieces are in place in Pakistan. However there is an overall lack of coordination between line agencies and between federal and provincial agencies. Institutional capacity is poor often because public servants are qualified administrators but lack any technical know-how.

CHAPTER 6.0: SUGGESTIONS FOR INCREASED COMPETITIVENESS IN THE FOOD INDUSTRY Pakistan is not far from a “tipping point” where with more effort and organization a food industry could emerge that would provide a significant regional competitor capable of supplying neighboring markets. On the demand side of the industry there are two key aspects to policy intervention. First, Government must be concerned with the health of its population and must ensure that the food that is served is safe to eat. Second, a large part of the population needs to be educated about proper nutrition and hygiene in the market and in the products offered for sale. Pakistan’s trade in agricultural products is dominated by the export of raw materials. The key to export success is to add value and quality in the country and then to export finished products. Pakistan also faces significant non-tariff barriers related especially to the quality of its food exports. The Government must provide (a) a coherent institutional strategy for promoting SPS systems and (b) targeted incentives where all the agents in the food value chain are encouraged (or compelled) to participate in some form of certification or control.



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The supply chain is often dysfunctional. Solutions emerge when larger scale enterprises from the private sector become involved. These businesses must be encouraged by investment incentives (to domestic and foreign companies) and by a removal of red tape. On the supply side of the food industry problems are well-understood but there is lack of effective action to tackle them. This Study has found that three areas are of outstanding concern:

• Research and development • Restructuring of basic industries • Investment in processing

There needs to be a thorough and high level review of research projects being undertaken in the agriculture and food industry in Pakistan and a re-allocation of resources to those areas that are really necessary. The basic agricultural and intermediate food product industries of Pakistan need to be restructured. Whatever gains are made by dedicated agriculturalists working on the farm are more often than not lost immediately after harvest. The food manufacturing industry is under-invested, both in terms of recurrent invest in maintenance and worker health and safety, and in terms of investment in replacement machinery and in innovation (in both processes and products). Pakistan’s food manufacturing companies must be encouraged to develop linkages with each other and through the entire value chain from farmer to exporter. These efforts must be supported by government and by the financial sector. One valuable approach is to establish effective industry associations that can introduce common facilities for training and research. Chapter 6 recommends two specific “high level” interventions by the Government: 1. Consumer Awareness Campaign - The Government should develop a consumer awareness campaign aimed at promoting better nutrition and health via better quality food. This campaign needs to include every aspect of the media from TV to posters, newspapers and workshops (e.g., with women’s groups). The objective of this campaign will be to energize individual consumers to demand better quality food and to change their diets to a more diverse and healthier mix of foods. Not only will the health of the population be improved (and thus the productivity of the workforce) but new market opportunities will be created for domestic food processors. 2. Task Force for the Food Industry - The Government should create a Task Force headed by the Prime Minister that includes every agency involved with the food industry. The participants should be ministers from line agencies (or their permanent secretaries), heads of universities and CEOs of major companies. In some respects this task force would resemble a SWOG, but it would be focused on action and implementation rather than discussion. The aim of the Task Force would be to ensure that all the various efforts that are being made currently by a multiplicity of different agencies are coordinated and based on a sound understanding and overview of the food sector as an integrated industry in



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which linkages between sub-sectors are critically important. The objective of the proposed Task Force would be to take Pakistan’s food industry (including the entire value chain from farm to exporter) past the “tipping point” to become an internationally respected and competitive industry.



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CHAPTER 1

INTRODUCTION

1.1 Background

Pakistan is primarily an agricultural country with a high proportion of its population living in rural areas. Agriculture and fisheries provide the raw material for an extensively developed food processing industry that accounts for between 25 and 30 percent of GDP. With a host of sub-sectors it is the largest industry in Pakistan and it continues to grow as the use of processed food becomes popular especially in the cities. The list of sub-sectors includes beverages, dairy, fruits and vegetables (horticulture), snack foods and cereal-based foods (wheat and rice), meat, confectionery and vegetable oil (including vegetable ghee). Most of these industries are located around the cities, but many have their roots in the rural areas. In this respect cottage-based food processing (e.g. of traditional pickles, jams, marmalades and beverages and brown sugar) provides employment for a growing population. Rural food industry also impacts particularly on gender and poverty aspects of society. Intermediate agro-industry such as sugar refining and flour milling adds an industrial scale to the industry. While some sectors such as sugar are relatively well-developed (at least from a technical perspective – Pakistan has recently manufactured and exported a state-of-the art sugar refinery) others, e.g., the dairy industry, lack modern structure and approach (with notable single exceptions such as Nestle). It is probably fair to say that the food processing sector overall lacks the innovation to be found in similar industries, say in Europe or even South-East Asia (e.g., Thailand). Given its geographic location and natural endowment, there appear to be good reasons why Pakistan should develop a competitive food processing industry. It is ideally located for trade with the rich Middle-east (which lacks the capacity to produce large quantities of raw material which need to be near the factories where they are processed) and is also well-placed to trade with China, India and the countries of Central Asia. Afghanistan and Iran are two close neighbors where already fierce competition exists. Pakistan must focus on the twin aspects of competition: technical innovation, or at least the ability to catch up with and adopt advanced food processing technology at an efficient economic scale, and to create the conditions in the market that encourage investment, both domestic, and wholly foreign. In this respect the success of the Pakistani food industry depends on wider aspects of the economy and indeed of governance. Another aspect is more specific: it relates to the need for Pakistan (especially in the export sector) to understand that quality products sold at premium prices are the way forward. In this sense Pakistan needs to transform itself from a traditional developing country market with low quality, low-priced products to one in which consumer demand for good quality, safe and healthy food products is paramount.



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1.2 Objectives and Scope of the Study Perhaps more than other kinds of industrial or manufacturing activity, food processors require a highly vertically integrated structure. One of the most common errors made by investors in food processing is to say “but the farmers will grow what I need to process”; they may not and the world is littered with factories that have cost millions of dollars that have failed because of lack of raw materials. At the same time, simply processing the raw material is not enough. The Pakistan dairy industry is a case in point. The country may be the fifth largest producer of milk in the world and on the consumption side milk and dairy products play a key role in the diet. Despite this, the dairy industry is highly disorganized. Various attempts have been made to develop a modernized milk industry and in the 1970s 23 pasteurization plants were built. All failed. A second attempt was made in the 1980s with UHT milk; once again there was an over-expansion and severe losses. The key element is to balance the raw material supply with available processing capacity and the requirements of the market, especially to produce products that consumers want at prices they can afford. All too often food processing operations are driven by technical considerations and little attention paid to normal business judgment. As a general approach, therefore, a study of the competitive advantages of the food processing sector must take into account the entire industry structure and the value chain including the supply of raw material from agriculture, the intermediate processing of the material, the core industry itself and the market environment, both domestic and external. A fundamental aspect of this approach is to understand the basic advantages (or disadvantages) with which the specific industry is endowed. Take, for example, the nascent oil palm industry in Pakistan. As a major consumer and importer of palm oil, it made sense to at least consider the possibility that there should be a domestic industry. However, development has gone ahead (in Sindh) without careful consideration of agronomic factors and without an understanding of the industrial scale of investment that an oil palm industry requires competing with producers such as Malaysia and Indonesia. Furthermore, no account was taken of the reason why Pakistan as a major producer of other oilseed crops (e.g., cotton seed, soybeans, canola/rapeseed and sunflower) was not already self-sufficient, let alone competitive with other vegetable oils. Again this is a case of the industry being considered as its parts and not the sum of these parts. 1.3 Research Methodology The Study has considered the Pakistan food processing industry in its global context. This has been done by considering the way agribusinesses and food processing/manufacturing is undertaken in advanced countries compared with the more traditional means used in Pakistan. Policy advice and formulation needs to combine simple quantitative measurements with clear and practical understanding of how an industry needs to operate in order to become competitive at an international level. Quantitative methods are best not adopted by the policy-maker, although if secondary data can be obtained that casts light on the circumstances of the industry so much the better. However, a purely quantitative study



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would take time and leaves the results open to questions that relate more to the individual “trees” that the “forest”. In this respect the Study was primarily qualitative, focusing on the key aspects suggested above and aims at providing clear guidelines for intervention by the public sector and to suggest opportunities for investment or restructuring by the private sector. In this regard, therefore, the Study covers inter alia, the following aspects all of which bear on the competitiveness of an individual sub-sector:

1. Overview of main agricultural sub-sectors and the supply of raw materials together with other essential inputs;

2. Current structure of key sub-sectors including value-chain analysis of primary

post-harvest processing through secondary to tertiary processing;

3. Comparative costs of production within the value chain (where possible using secondary data);

4. Import parity pricing (where information is readily obtained);

5. Technical and innovation aspects of individual sub-sectors, including factors

affecting adoption of technology;

6. Marketing, including packaging, eco-labeling, design, distribution, market access (tariff measures, i.e. changes in the tariff structure, especially in developed country tariffs which impact on developing country exporters and product pricing and non-tariff measures, e.g. sanitary and phyto-sanitary (SPS) measures, technical barriers to trade (TBTs);

7. Distribution and market access which is also affected by tariff measures.

8. Social aspects, (including labor supply, ethnicity and gender);

9. Physical environmental issues (such as effluent disposal);

10. Major infrastructure and public goods (ports, communications, markets, transport);

11. Financial environment (e.g., interest rates, subsidies, tariffs, duties, exchange rates,

banking systems, non-fiscal inducements for investment);

12. Civil society and government, including the justice system (dispute settlement) and contract law

The Study provides key “competitiveness indicators”.



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Competition dimension


Economic

Real income Employment Fixed capital formation

Levels of production, trade, income levels of different stakeholder groups, expenditure, consumption - payment in kind, Govt. revenues (license fees, taxes, etc); Levels of employment Scale and type of equipment or machinery and other processing infrastructure; etc

Social

Poverty Health and education Equity

Indebtedness*, nutrition data, female headed households*, livelihoods and development, rural-urban migration; Primary health care, primary education levels, especially in satellite communities Income distribution, Asset ownership* (; Gender distribution – income and assets*

Environmental

Natural resource stocks Environmental quality Biodiversity

Change in raw material production; Change in environment; If it impacts the industry

Process


Domestic policies, international food standards and regulations (e.g., FDA), Government capacity and commitment, government use of revenues from the industry; public intervention and civil society, internal management capacity.



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CHAPTER 2

THE FOOD INDUSTRY

The food industry is the complex of diverse businesses that together supply much of the food energy consumed by the world’s population. Only subsistence farmers, those who survive on what they grow, can be considered outside of the scope of the modern food industry. In value terms, the food industry is probably the largest single aggregate of economic activity in the world. Whereas in developed countries this may be skewed towards activities that are more manufacturing, science or retail based, in developing countries such as Pakistan most of the activity is either in agriculture itself or in primary processing with only a small proportion of the industry in the advance sub-sector based on high value addition. It will be seen therefore that since most of the world’s population fits into this latter category, the possibility for economic growth based on adding value to basic crops and animal products is enormous. This is the case in Pakistan.

The food industry includes as its main elements:

• Agriculture: raising of crops and livestock, seafood • Food processing: preparation of fresh products for market, manufacture of prepared

food products • Marketing: promotion of generic products (e.g. milk board), new products, public

opinion, through advertising, packaging, public relations, etc • Wholesale and distribution: warehousing, transportation, logistics • Retail: supermarket chains and independent food stores, direct-to-consumer,

restaurant, food services

In addition, the industry requires the following:

• Regulation: local, regional, national and international rules and regulations for food production and sale, including food quality and food safety, and industry lobbying activities

• Research and development: food science and technology • Manufacturing: agro-chemicals, seed, farm machinery and supplies, processing

machinery, specialized civil works construction, etc.

The scope of this Study covers as wide an overview of the competitive aspects of the non-cultivation, i.e., post harvest, aspects of the above list as possible. In this Chapter a global overview of the food processing sector is presented in order to provide a perspective or benchmark for consideration of Pakistan’s experience. The aim of the Chapter is to help the reader understand the very great complexity of an industry, or more correctly, a group of industries that is based on the transformation of dynamic, perishable biological materials. In this respect the food industry differs very significantly from any other kind of manufacturing and so requires an entirely different approach to investment, policy and to regulation.



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2.1 Global approach to Food Processing

Food processing is the set of methods and techniques used to transform raw agricultural ingredients into food for consumption by humans or animals. The industry takes clean, harvested crops or slaughtered and butchered animals as ingredients and uses these to produce attractively packaged and marketable food products. Often the package and the product brand name are of more importance to the sophisticated consumer than the actual ingredients. That said, the idea of “truth in labeling” (a campaign initiated in the 1990s in the USA) has sensitized consumers to the health aspects of what they eat. So-called “organic” foods attract premium prices and are a sector of the market that is growing rapidly. Similar processes are used to produce animal feed which often result as a by-product from a main process (e.g., protein meal for animal feed is a by-product of the oilseed extraction industry).

Common food processing techniques include:

• Cooling and post-harvest handling and storage of raw materials • Milling or extraction of an ingredient (e.g., wheat milling for flour, sugar refining,

oils and fats) • Pasteurization and heat treatment of milk • Removal of unwanted ‘outer layers, such as potato peeling or the skinning of

mango for canning • Chopping or slicing, of which examples include diced bananas or sliced potato

chips • Mincing and macerating • Pulping or liquefaction, used to make fruit juice • Cooking, such as boiling, broiling, frying, steaming, grilling, deep frying • Mixing (e.g., of various ingredients for a final product such as dough for biscuits) • Addition of gas such as air entrainment for bread or gasification of soft drinks • Spray or ultra quick or freeze drying

These technologies are aimed at toxin removal, preservation, improving flavor, easing marketing and distribution tasks, and increasing food consistency. In addition, they increase the seasonal availability of many foods, enable transportation of delicate perishable foods for export, and make many kinds of foods safe to eat by removing the microorganisms. The quality/safety aspect of food processing is a recurring theme in this Study. Urban food supply (i.e., via supermarkets and convenience stores) would not be feasible without modern food processing techniques. However, unless it is properly controlled food processing can lower the nutritional value of some foods. Some preservatives added or created during processing such as nitrites or sulfites may cause adverse health effects on some consumers. In addition, high quality and hygiene standards must be maintained to ensure consumer safety and failures to maintain adequate standards can have serious health consequences.

Modern food processing technology was first developed to serve military needs and indeed an almost military approach is still taken in the highly organized, disciplines and systematic approach to the industry. In part this is necessary because of the biological nature of the



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raw materials and thus the possibility of contamination and adverse impacts on the health of the consumer. A vacuum bottling process to supply troops in the French army with food and this led to tinning and then canning. Pasteurization, discovered by Louis Pasteur in 1862, was a significant advance in ensuring micro-biological safety of food. UHT or heat treatment of milk is based on this process, serving the purpose of longer shelf lives.

The largely urban consumer society in the developed world furthered the development of food processing with advances such as spray drying, juice concentrates, freeze drying and the introduction of artificial sweeteners, colorants, and preservatives such as sodium benzoate and saccharine. Convenience products such as dried instant soups, reconstituted fruits and juices, and self cooking meals (“TV dinners”) are now the prime focus of the industry. From a commercial point of view the industry is driven by these value-added products. For example, advances in freezing technology have seen the value of frozen products expand in the United States from US$7.9 billion in 1970 to now more than an estimated US$100 billion. Frozen products have notched double-digit growth in France, the United Kingdom and other European countries.

It is impossible to put an accurate global dollar value on the food processing industry. Individual countries have attempted their own estimates and it is helpful to look at the major examples. The United States’ food processing industry has the second highest value of shipments compared to all other industry sectors. Direct employment in food factories totals over 2 million persons with probably another 10 million employed in support industries and many more in the food retail sector2. The US food industry is growing, with value of shipments increasing three-fold in the last twenty years. The typical US household devotes 15-20 percent of after-tax income to the purchase of food and beverage products. Exports of food items from the USA outnumber imports and have increased at a greater rate than imports as well.

The European food industry is a major generator of added-value, growth and employment Approximately 2.5 million people are employed in the EU food processing industry. Based on turnover the major European companies are Nestlé (Switzerland), Unilever (Netherlands/UK), Grand Metropolitan (UK) and Danone (France). The large companies account for two-thirds of the total turnover. At the same time, they create an advantage in research and development, essential to meet ever-increasing quality standards.

The food processing industry sector in India is one of the largest in terms of production, consumption, export and growth prospects. The government has accorded it a high priority, with a number of fiscal reliefs and incentives, to encourage commercialization and value addition to agricultural produce, for minimizing pre/post harvest wastage, generating employment and export growth. The turnover of the total food market is US $ 69.4 billion. Value-added food products comprise US $ 22.2 billion of which semi-processed and ready to eat packaged food is about US $ 1 billion with an annual growth rate of 20%. Foreign direct investment in the sector is estimated by GoI at US $ 18.2 billion.

2 The number of persons employed in the USA appears low in relation to the size of the population; the reason is that whereas in developing countries the technology is labor intensive, in the developed countries it is highly capital intensive.



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Most of the world’s major food processing companies are American or European with US food technology and standards tend to set a worldwide benchmark. Global-scale food processing companies are now led by Tyson Foods Inc. (sales of more than $25 billion) which topped Kraft (sales US$22 billion) in the world 100 Food Companies listing. Tyson is a meat processing company showed 8% growth last year and achieved this via 400 new product introductions and double-digit sales increases in its chicken and pork segments, the latter up 29 percent. Third after Kraft is Pepsico (US$19 billion sales). Other well-known major names include Nestle, Mars, Heinz, Cargill. All of these companies are global in scale and represent a standard for food processors everywhere.

Foods that have undergone energy intensive processing have become increasingly popular in both domestic and foreign markets. Industrialized country consumers spend less of their food budget on meat, eggs and dairy, and more of their food budget on higher value-added foods. These value-added foods include prepared foods, nonalcoholic beverages, table spreads, and confectionery products. At least 40% of the industry shipment value is added through energy intensive manufacturing.

Nearly two-thirds of these companies indicate their company’s greatest growth will come via products identified as better-for-you (see chart). Higher income consumers continue to focus on healthier foods and eating habits, and the food and beverage industry is following this market via products identified as better-for-you, organic, and obesity-addressing and nutraceutical (foods that provide medical or health benefits). In general these consumers are willing to pay more for higher quality food.

Figure 1

Source: Grant Thornton Food Industry Survey

What these global companies have in common is the vision that food manufacturers must be able to market what consumers want (i.e., they are “demand driven”, adding value through innovation or new products). All of the companies spend large amounts on in-house R&D and have established strong links with universities and other technical institutions. Procter & Gamble, for example, finances its own food “university” in Cincinnati, Ohio and encourages staff to undertake pure scientific research to PhD level and above. More specifically, the companies are highly integrated, combining an enormous range of in-house professional expertise (e.g., financial, technical, management,



27

engineering etc.) with supply chains in which the company supports and sometimes finances external input suppliers at every level e.g., from the supply of agricultural raw materials via contract farming to machinery produced at least cost worldwide.

The diagram below illustrates one such company, Sun Valley Thailand (SVT), a wholly-owned subsidiary of Cargill Inc. It produces a wide range of cooked chicken products exported to Japan, Europe, Canada and Hong Kong. In Asia, Sun Valley's customers are large food manufacturers and distributors such as Nicherei, McDonald's Japan and McDonald's Hong Kong. It serves the Canadian and European markets by supplying other Cargill business units. The basic provider of poultry in a developing country in Asia is thus linked to a logistics and management chain that in this case has 150,000 employees in more than 60 countries worldwide.

It will be seen from the diagram that the linkages enjoyed by SVT are both forwards and backwards. The forward links are to the main global supply chain and to the technical and financial support provided by a parent holding company with a turnover in the billions of dollars. Backwards the linkages are at a micro-level to contract farmers. SVT supplies these farmers with chicks and other technical support (e.g., how to construct and manage hygienic chicken houses) via annual contracts under which the grown-out chickens are purchased at an agreed price. SVT is not a large company ($30 million dollar investment) in itself and as a stand alone company may not easily survive strong competition. However, as part of a global network of integrated companies, it has established a pre-eminent position in sales of quality value-added products. This is a model that is replicated throughout the food industry in every sub-sector in which multi-national companies are involved.



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2.2 Approaches to Food Processing in Pakistan

In strong contrast to the described approach adopted in industrialized countries, food processing in most developing countries (including Pakistan) involves very basic and sometimes crude approaches. These include slaughtering (in the case of Muslim countries according to religious practice), various types of cooking, such as over fires, smoking, steaming, oven baking, fermenting, sun drying and preserving with salt. Foods preserved this way serve the vast majority of the population with the few more sophisticated methods aimed at the small group of wealthy persons and for export. Far from an integrated approach, the opposite is the case in Pakistan where a more conventional model would be a small-scale family owned business in a rural or peri-urban area which faces competition at every level (from raw materials to markets) from a large number of similar “copy cat” processors. As noted, the technology is highly labor intensive and so the sector is a major employer.

The food and its allied products industry is considered Pakistan's largest industry, and is believed to account for 27% of its value-added production, and 16% of the total employment by the manufacturing sector. It is estimated3 that in Pakistan there may be around 80,000 small businesses and more than 2 million micro-enterprises many of which are food manufacturers4. Very many of the SMEs and micro-enterprises are in rural areas and fall into the category of food processors, depending heavily on agricultural raw materials and poorly skilled non-farm labor. About 40% of these small businesses are in the milling sub-sector (wheat and rice). Table 1 places agro-based enterprise in the overall context of all rural enterprises. About 75% of the rural-based food manufacturers are in the so-called informal sector. This informal economy is unregulated and finds difficulty in accessing essential raw materials and other resources especially finance skills, knowledge and management. Marketing and quality (especially hygiene) standards are especially lacking. Employment pays low wages and uses the skills of the most ill-educated.

3 SMEDA, referenced under the ADB Loan No. 2066, SME Development Program. 4 The informal sector as defined by the structure of the organization and the size of the establishment includes family enterprise/industrial establishment with less than 10 workers and non-industrial establishments with workers not more than 20



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TABLE 1: PERCENTAGE DISTRIBUTION OF FORMAL AND INFORMAL ESTABLISHMENT BY TYPE OF INDUSTRY IN RURAL PAKISTAN

Industrial establishments Formal Informal Total surveyed Mining 89.70 10.30 29 Food manufacturing 25.40 74.60 185 Textile manufacturing 29.80 70.20 738 Wood & paper manufacturing 11.20 88.80 143 Chemical, metal/nonmetal 56.20 43.80 338 Other manufacturing 33.80 66.20 68 Electricity & gas 98.30 1.70 120 Construction 15.70 84.30 1,220 Wholesale & retail trade 2.10 97.90 1,814 Transport & comm. 21.70 78.30 980 Finance & insurance 46.40 53.60 56 Social services 83.10 16.90 1,486 Household/personal services 5.60 94.40 716 Total (%) 30.20 69.80 Total (#) 2,383 5,510 7,893

Source: Labor Force Survey (2001-02) Geographically, data shows that food industry commercial activities are increasing in Punjab and NWFP. Both these provinces favor agro-based industry. In the case of Punjab, mainly wheat where Lahore is the main centre for agro processing whilst for NWFP their advantage lies in fruit growing and juicing (pulping). Other horticulture based industry is also productive in NWFP where there is a range of micro-climates and adequate water. The situation in Balochistan and Sindh is less clear. Balochistan has some food processing activity around Hub on the coast near Karachi, but very little inland (where in any event the agricultural potential is limited by water supply). However, Sindh shows potential in livestock-based activities (dairying) and there are many food processing factories located in and around Karachi and Hyderabad. There may be more than 1,000 larger-scale food processing enterprises in Pakistan (see Table 2). In terms of overall capacity these form a small proportion of the activity being undertaken. Consequently direct employment by these enterprises is also relatively small (probably less than 200,000 persons). It should be apparent from the data on food processors in developed countries that the technical growth trend involves a shift from more labor intensive to more capital intensive as scale increases as well as increased emphasis towards quality and food safety. For example, a 3,000 ton per day flour mill in the USA might employ only 3-5 workers per shift because the machinery is highly computerized; by contrast a 10 ton/day potato chip factory in a developing country such as Pakistan would employ about 50 persons per shift and a fruit canning factory in e.g., Thailand, 150 persons per shift. This perspective suggests that policy for food processing in a developing country with under-employment especially among a youthful and relatively poorly educated population should be oriented towards strengthening the very small-scale industry and not the larger scale processors. That said, there are aspects of value-added which need to be considered, since the greater value, especially in exports can be gained only from larger-scale modern factories.



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TABLE 2: LARGER-SCALE FOOD PROCESSING UNITS IN PAKISTAN Type of processor Factory

units Approximate Annual or Daily Processing Capacity

Estimated Ouput

Estimated Direct

Employment

Persons Commodity crop-based Rice husking and polishing 500 7 myn tons/annum 5 myn tons 20,000

Flour milling 470 25 myn tons/annum 19 myn tons 15,000

Biscuits and bread 46 46,830 myn tons/annum 37,464 mt 10,000

Cereals 1 675t/day N/A 250 Sub-total 1,017 45,250 Industrial crop-based

Edible Oil 155 2.7 myn tons/annum 1.87 myn tons 12,000

Cooking oil/ghee 166 1 myn tons/annum 0.7 myn tons 20,000

Sugarcane milling 77 355,160 tons cane/day

200,000 tons cane/day 10,000

Gur (brown sugar) 350 480,000 tons/annum 480,000 tons 15,000

Sub-total 748 57,000

Horticulture and fruit tree-based Fruit and vegetable 25 45,000 mt/annum 30,000 mt 15,000

Fruit juice 30 500,000 myn tons/annumt N/A 8,500

Sub-total 55 23,500 Livestock-based Seafood 26 50,000 mt/annum 25,000 mt 12,000 Meat 4 6000 myn tons/annum N/A 500 1 800 birds/hour N/A 1,000

Dairy 38 79.5 myn liters/annum 5.4 myn liters 15,000

47.5 myn liters/annum N/A Sub-total 69 28,500 Other unspecified

Beverages 100 600 myn liters/annum 540 myn liters N/A

TOTAL UNITS & EMPLOYMENT 1,989 154,250

Source: Consultant’s estimates based on Report of the APO Multi-Country Study Mission on Rural-Based Food Processing Industry, Abdul Hafeez Chaudhry, APO 2004

Figure 2 illustrates the usual structure of the food processing industry found in Pakistan, but it is not unique to the country; as mentioned above, most developing countries have



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followed this model partly because the structure of the demand for processed food has been quite different from that found in the industrialized countries with their high income urban populations and overriding requirement for convenience and quality. Developing countries populations are found in rural areas close to fresh produce, time is less important to such folk and with low incomes most people prefer to spend time to find cheap food in its raw form.



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Figure 2



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There are modern thinking larger food processing companies in Pakistan. One such example is Rafhan Best Foods Limited of Peshawar (head office in Karachi) which was listed on the stock exchange in 1998 and which manufactures food products under the brand names of Rafhan (corn oil), Energile (a juice mixture of mixed fruit, orange, pineapple, peach, mango and lemon flavors) , Glaxose-D and Knorr (a soup brand). This company illustrates an important point: it is a subsidiary of Unilever N.V. Holland which is a leading multinational food company. Such links are critical for Pakistani companies to gain the latest technical knowledge. The other important feature of the company is that it perceives its customers as requiring “food solutions”. It says that the solutions vary as widely as their customers - products that add the right seasoning, flavor or texture; prepared ingredients that save time in a busy kitchen and new ways of serving food on a large scale at constant quality.

2.3 Agricultural Raw Materials in Pakistan

The ability of food processors at whatever level of the industry (primary extraction, intermediate processing or final manufacture of packaged products) depends absolutely on the availability of raw materials. It is the most common mistake that a factory is built and a processing line installed before adequate provision has been made to obtain the supply of raw materials to ensure a reasonable amount of the installed capacity is utilized. Simply because there appears to be an agricultural industry in a given area does not at all mean that farmers will be willing to sell to a new factory or that the locally grown material is in fact suitable for processing. In this respect, just because Pakistan is primarily an agricultural country (based on the facts that a majority of persons live in rural areas and that a large part of GDP is based on agriculture) does not mean that there is always an adequate supply of raw material for food processing or the manufacture of packaged and high value products.

GDP for Pakistan in 2005 was estimated at approximately $368 billion. Agriculture accounts for about 22 percent, a decline in the last 15 years from 26%. However, agriculture was about 9 percent of the country’s export earnings. Theses figures are the bare facts of the supply side of raw materials for food processing. One salient feature must therefore be born in mind: while it is clear that Pakistan apparently has a major raw material source for food factories, the demographics show that most of that resource will not be available for significant value-added processing simply because it is needed for the local, poor population who produce it5. As the population grows, unless there is a significant reduction in poverty and shift to urban areas, local demand for unprocessed or semi-processed agricultural raw materials will increase placing price pressure on the raw materials that could in fact make value-added processing uncompetitive internationally.

A feature of the agricultural sector in Pakistan is the relative disinterest of both public and private sectors until fairly recently. Public investment in agriculture has declined partly because the international donor agencies have switched their interest more to the social sector (e.g., direct intervention in poverty reduction that to some extent disguises the fact that such interventions usually impact the rural sector and agricultural activities). The

5 See the discussion on demographics in this Study. Over three-quarters of the population are to be found in rural areas and are dependent mainly on agriculture. According to Labor Force Survey 2001-02, 67 percent of the country’s labor force belongs to rural areas out of which 42 percent is employed in the agriculture sector.



35

private sector has looked to more remunerative and less risky investments in other industries. This is partly because with a reduction in public support and increase trade liberalization, the margins in food processing and other agricultural commodity related trade have declined.

Fig. 3 DECLINING INVESTMENT IN AGRICULTURE IN PAKISTAN (%)

Source: Presentation by Sohail Malik for WTO

Pakistan’s major crops consist of two cereal crops (wheat and rice) that meet the major basic dietary needs of the population and two industrial crops, sugarcane and cotton, the latter providing the raw material for Pakistan’s most important export, textiles. Production of these crops is shown in the following table. From the data it will be seen that there has been little significant change in the output in the last decade. What change has occurred can be accounted for largely because of changes in weather between years and consequent variations in yields, rather than any significant changes in land area or technological change. The exception to this is possibly sugarcane where the market factors have encouraged farmers to move into other crops.

0 .0 0

5.0 0

10 .0 0

15.0 0

20 .0 0

25.0 0

30 .0 0

35.0 0

40 .0 0

% sh

are

Private Public



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TABLE 3: MAJOR CROP OUTPUT (‘000 tons)

Year Wheat Rice Sugarcane Cotton

1996-97 16,651 4,305 41,996 1,594 1997-98 18,694 4,333 53,104 1,562 1998-99 17,858 4,674 55,191 1,495 1999-00 21,079 5,156 46,333 1,912 2000-01 19,024 4,803 43,606 1,826 2001-02 18,226 3,882 48,042 1,805 2002-03 19,183 4,478 52,056 1,737 2003-04 19,500 4,848 53,419 1,709 2004-05 21,612 5,025 47,244 2,426 2005-06 21,700 5,547 44,312 2,122 Average 19,353 4,705 48,530 1,819

Source: Economic Survey of Pakistan 2005-06

The major crops account for about 32% of total agricultural value added with livestock about 50%. Probably 35 million persons are engaged in livestock activities which makes it overall the most important element in agriculture. For the crop sector (see table), rice, wheat and sugarcane represent 67% of value-added. Minor crops such as chilli, bananas, dates, fruits and vegetables account for about 12% of total agricultural value added but play an important role in livelihoods. A little less than 30% of the land area of Pakistan is cultivated because much land is either without water or else with only saline water resources; the latter have increased in recent years in the coastal areas of Sindh. Water supply, distribution and management is the single most important aspect of agriculture in Pakistan and constrains the growth of the entire sector.

TABLE 4: PROPORTIONS OF MAJOR CROPS IN TOTAL AGRICULTURAL VALUE ADDED

CROP 1999-00 2005-06 % % Commodity crops Rice 15.40 17.23 Wheat 41.30 38.34

Sub-total 56.70 55.57

Industrial crops Sugarcane 11.00 9.66 Cotton 24.00 24.37

Sub-total 35.00 34.03

Other crops 8.30 10.40 TOTAL CROP VALUE-ADDED 100.00 100.00

Source: Economic Survey of Pakistan, 2005-06



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As shown in Table 4 the crops are divided into three “baskets” of crops and also one of livestock. These are described only briefly, since there is a wealth of information on agriculture in Pakistan which will not bear repeating in any detail in this Study6. Nevertheless, for the sake of completeness, there follows an overview of the main sub-sectors of agriculture that highlights the principal raw material supply issues:

“Commodity” crops – grains (wheat, rice)

Wheat

Wheat is Pakistan's largest food grain crop, and accounts for a large proportion of the total area under cultivation (about 40%). Probably 80% of farmers in Pakistan cultivate wheat. The country ranks within the top-10 of the world’s wheat producers with the majority of wheat grown in the Punjab. Wheat production has increased somewhat over the last decade due mainly to yields (area increased by only 2%). There have been some improvements in critical factors such as better seed and more fertilizer. That said, most wheat remains irrigated which is a high cost method to produce a commodity crop. Despite increased fertilizer usage and the government's drive towards self-sufficiency, local demand usually outstrips supply, although this year some wheat has been available for export. Exports are targeted to Iraq, Iran and Afghanistan.

Rice

Wheat production in Pakistan follows a pattern of double cropping with rice. Punjab is the largest rice-producing province (60% of rice planted area followed by Sindh with 32%) and the “Kalar” tract - where Basmati rice is grown - is located between the Ravi and Chenab rivers. To most farmers rice is a cash crop (rather than a food crop). Sustainable rice production, therefore, depends more on the prices of rice on the international market, especially for the Basmati type. The development and deployment of high yielding varieties of good grain quality and introduction of technologies that reduce production costs would have positive effect on sustainable rice production. The major problem is that the international rice market is quite “thin”. Only a small proportion of rice is traded internationally, by far the most is consumed in producing countries. As a result the world price of rice can move within a wide range from year to year adding instability and uncertainty to the market. Instability in the world market impacts directly on farmers’ decisions to add inputs and thus to increase yields.

Since these crops require different input technologies, one main concern is that productivity cannot be improved because of the impact on the soil. Intensive use of soil, with high levels of water application, increase soil degradation (mainly via compaction and increase salinity). In this sense, Pakistan is locked into a commodity crop system that is sustainable only with relatively low yields. Assuming that most of the land that is cultivated for these cereal crops is currently under cultivation (i.e., that there is not much additional land available) then it is highly unlikely that cereal output will increase by much above a long-

6 An excellent and recent overview of agriculture is “Agriculture in Pakistan and the Doha Development Agenda: Challenges and Opportunities, EC Trade-Related Technical Assistance Programme (TRTA) for Pakistan, September 2006



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run average of 25 million tons. In this case, questions arise both about the possibility of Pakistan being a consistent exporter of cereals (especially as production costs may rise) and whether it can even maintain cereal self-sufficiency.

“Industrial crops” – Sugarcane, Oilseeds

Sugarcane and sugar

Sugar derived from sugarcane or beet is the most important additive input (i.e., beyond the primary raw material – e.g., flour for biscuits) for the food processing industry. The Government of Pakistan has been heavily involved in the sugar industry, regulating mill construction, trade and prices, and influencing farmers' crop decisions in various ways. Sugar is the second most important cash crop in Pakistan after cotton. Self-sufficiency in sugar is a goal, but one that to date has proven elusive. The major sugar crop is sugarcane, but there is a small sugar beet industry in the cooler high elevations of the Northwest Frontier Province.

Pakistan grows about 1 million hectares of sugarcane, more than all other cane producing countries except Brazil, China, Cuba, India and Thailand. Cane is also used for non-centrifugal sugars and seed, so that the amount of land harvested for centrifugal sugar each year is only about two-thirds of the total. Punjab accounts for about 65% percent or about 650,000 ha of the area under sugarcane. Rice, cotton, and sunflowers are major competitors for land use among farmers in that province. Other producing areas include Sindh which accounts for about 30% percent of sugarcane land, the Northwest Frontier Province (NWFP) about 10%, and Balochistan which accounts for less than 1%. In Sindh, cotton, wheat, rice, bananas and sunflower are alternative crops. Due to higher yields, the share of Sindh Province in total sugar production is about 40% (Punjab produces more volume because of the larger land area under cane).

Pakistan's sugarcane yield averages about 46 tons per hectare, well below the world average of above 60 tons, and below neighboring India's yield of 65 to 70 tons. Yields in the Punjab, were relatively constant at 37 tons per hectare for about 10 years and only recently started rising to over 45 tons per hectare. However, individual farmers have obtained yields of 120 tons per ha. Precipitation averages only 335 ml a year in the Punjab, so irrigation is crucial, but the total supply of water is limited. Equally, irrigated sugarcane is a high cost raw material, so production costs are higher than in e.g., Thailand. Yields in Sindh Province are above 50 tons per hectare, significantly higher than in Punjab but could fall due to the increasing salinity of the water supply because of encroachment by the sea. Sugarcane land in Sindh is also being transferred to sunflowers which better cope with both drought and salinity (see below).

Oilseeds and vegetable oil Vegetable oil is the other key ingredient in food processing and a major direct consumer item both in the form of liquid refined oil and hardened (hydrogenated) oil. It is highly unlikely that Pakistan will ever be self-sufficient in vegetable oil because the principle source of local vegetable oil is cottonseed. Cottonseed is grown primarily for lint, the basic input for Pakistan’s textile industry. Oil and meal are secondary products. This oilseed



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accounts for about 90 percent of total domestic oilseed production and so cannot be increased except as a function of the cotton/textile industry. The other issue for cottonseed oil is one of quality. The seed contains a poisonous substance known as gossypol. Poor quality seed contains high levels of this substance and produces dark colored oil that requires more refining adding to cost. Because cottonseed oil is a by-product of the cotton/textile industry very little can be done about this because the main value of the crop comes from an industry unrelated to vegetable oil. There are other sources of vegetable oil, but they are relatively minor. Traditionally, rapeseed is produced for use in fodder (mixed with wheat) and for oil. Rapeseed accounts for 6-8 percent of total oilseed production. The Government’s stated goal is to increase production of canola, but has made little progress towards achieving this goal during the last few years. Efforts to replace rapeseed and mustard seed with high-yielding canola have not advanced substantially due to lack of good quality seed, low farm-gate prices and problems marketing the higher value product. Sunflower is a crop very well suited to dry and drought-stricken areas and has expanded in Sindh. Sunflower seed produces a high quality cooking oil and can substitute for cottonseed oil in a variety of domestic and industrial uses. However, the seed is difficult to process and the oil tends to be expensive relative to its main competitor, which is palm oil. Palm oil, imported from the world market (mainly from Malaysia and Indonesia) provides the balance in the domestic supply deficit. The import of palm oil is discussed below, and Chapter 3 of this study provides a detailed analysis of the domestic efforts to develop a local oil palm industry in Sindh. So far only 2,000 hectares have been planted with generally poor production results.

Horticulture and tree crops

Pakistan’s climate is suitable for the production of various horticultural crops (see Table 5)7. As with other crops, it is the Punjab that dominates the production of both fruits and vegetables, accounting for 63% of fruits and 60% of vegetables. Citrus, especially the small fruit known as “kinnow” is produced in the largest volume around Sarghoda and forms the basis for a commercial juice industry in that area. Mango is also heavily produced in Punjab and comprises the second largest volume of fruit. It is consumed fresh and used for juice manufacture. Together these two fruits in Punjab alone account for 48% of all fruit produced in Pakistan. Balochistan produces the second largest volume of fruit, mainly apple and dates.

For vegetables, once again Punjab dominates with the production of potato. This vegetable represents 30% of all vegetables produced in Pakistan and is followed by onion. All other green vegetables are lumped into an “Other” category and are almost all consumed locally at a subsistence level.

7 The most recent study of the industry is the report by Dr. David Picha for the Horticulture SWOG entitled “Pakistan Fruit Sector Analyses and Recommendations” 2007, unpublished.



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TABLE 5: HORTICULTURE PRODUCTION

Item Punjab Sindh NWFP Balochistan Pakistan 000 tons

Citrus 1,872 29 37 6 1,944 Mango 1,312 350 6 7 1,675 Dates 43 318 9 252 622

Banana 12 130 13 3 158 Apple 4 128 220 352 Other 954 118 320 495 1,887

All Fruits 4,197 945 513 983 6,638 Potato 1,850 3 125 48 2,026 Onion 265 711 211 579 1,766 Other veg 2,069 198 369 412 3,048

All Veg 4,184 912 705 1,039 6,840 TOTAL 8,381 1,857 1,218 2,022 13,478

Source: Pakistan Agricultural Statistics 2004/05

Little has changed in production technology, harvesting practices, packaging and post harvest care within the horticulture industry over the last decade. As a result the industry has been unable to establish itself in export markets or indeed to significantly improve the volume of output.

The lackluster performance of the horticulture industry in Pakistan is due to a multitude of factors. These include old cultivars, poor production practices (e.g., flood irrigation of fruit tress), poor pest management, inadequate harvesting and post-harvest procedures and a lack of infrastructure, especially cold storage. In summary, at least according to expert agronomist, there is not one single aspect of the horticulture industry in Pakistan that is undertaken properly. As a result, the availability of fruit for export and for processing is limited.

Livestock

The domestic livestock population is about 23 million cattle, 25.8 million buffalo, 25 million sheep and 53 million goats8. Livestock accounted for about 39 percent of agricultural value added and about 9.4 percent of GDP. Net foreign exchange earnings from livestock products and by products like meat, skins, hides etc were more than Rs. 53 billion in 2003-04, about 11 percent of the overall export earnings of the country.

8 Official estimates 2006 Livestock and Dairy Development Board



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TABLE 6: PAKISTAN LIVESTOCK POPULATION (‘000 Head)

Species Punjab Sindh North West Frontier

Baluchistan Northern areas

Total

Goat 17,102 10,741 6,673 11,606 1493 47,615 Sheep 8,765 3,430 2,925 14,568 844 30,532 Buffalo 14,719 4,251 1,678 83 1 20,732 Cattle 9,007 3,957 3,355 1,182 415 17,916 Camel 397 270 87 432 1 1,187 Poultry 215,160 79,132 63,460 21,676 572 380,000 Source: Ministry of Agriculture, Livestock and Animal Husbandry Department Pakistan claims to be the fifth largest producer of milk by volume in the world. Average daily production of milk is about 130 million liters. The value of milk production outstrips that of all other agricultural produce. TABLE 7: MILK IN THE ECONOMY

Importance of Milk versus Major crops

Sector Production Rupees/Ton Value

Milk 21-b Lits Rs. 10,000 Rs. 210-b

Cotton 10-b Bales Rs. 12,000/bale Rs. 150-b

Wheat 19-m Tons Rs. 75,000 Rs. 140-b

Sugarcane 44-m Tons Rs. 1,250 Rs. 55-b

Rice 4-m Tons Rs. 8,500 Rs. 34-b

Source: ADB PPTA 4525, SCICDP, 2006 Livestock husbandry is an essential, and often the only element in the lives of many of the poorest in Pakistan. Crop farming assumes reasonable access to land and water, both in scarce supply in the project area. Most of the arable land that is left is under the control of landlords and is governed by crop-share agreements. It is difficult to maximize the benefits from investments in crop in favor of the large proportion of landless as a large portion of profits generally go to the landlords. The poorest of the poor, often landless laborers, are able to store wealth, generate income and protein nutrition (particularly milk and eventually meat) through livestock. Analysis for Pakistan found that the most livestock net income comes from local cows, male buffalo, female buffalo and bullocks9. These animals account for 80 percent of net annual per capita livestock income. The poorest households in Pakistan receive over 85 percent of their net income from local cows or female buffalo. 9 Net livestock income can be calculated from the following: Net income/animal = gross Output for the animal – Gross input for the animal



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2.4 Review of Principle Primary Processing Sub-sectors

Commodity crops

Wheat flour milling The total number of small and medium wheat flour mills is estimated at 700. The number of “mini flour mills” is around 8,000. Most of the consumers prefer to use their own wheat after getting it milled individually. Most of the “mini flour mills” and about half of the medium-scale mills are located in rural areas. Each province has its own association of flour millers and the entire industry is represented by the Pakistan Flour Miller’s Association.

There are three principle problems connected with flour in Pakistan. First, the large number of small-scale mills compete for raw material supply both between themselves and with the government procurement agencies that intervene in the market to manage prices and food security. Media coverage of the industry is replete with quarrels between the government and the PFMA relating to the availability of wheat.

In general (there were exceptional years in 2000 and 2001) the country does not have a wheat surplus and the strong demand from the large number of millers bids the local price of raw material up and so squeezes processing margins (i.e., the difference between the cost of wheat and the sales price of flour determined by the extraction rate of flour from wheat).

Second, the scale of the mills is small (perhaps the largest might be 200-300 tons per day (compared with 3,000 tons per day in the USA) and the machinery used is old and inefficient. This leads to losses of flour and the production of poor quality flour. Flour milling is not a particularly complex technology but it does require careful attention to critical items of equipment e.g., roller mills, that need to be maintained and replaced periodically. If this is not done (perhaps because the profitability of the business will not encourage re-investment) then the extraction rate of flour from wheat will be reduced compounding the loss making process.

Third, aside from the basic quality of the flour (which as stated is relatively poor) the smaller manufacturers cannot afford to include the necessary additive to fortify the flour that make the product into a useful part of the diet (aside from simply being a source of carbohydrate. In this respect the PFMA has joined with the government to work on a program that does encourage the fortification of flour (see below in Chapter 3 on demand and nutrition).

Rice milling

Basmati and IIRI are the two main types of rice cultivated, consumed in and exported from Pakistan. Basmati is a traditional, long-grain (indica), aromatic variety especially suited to the Kalar tract of Punjab province. Pakistan enjoys a natural comparative advantage in basmati rice production, which has an assured market in several foreign countries where aromatic, long-grain rice is preferred. This has led to the growth of a major processing industry that is generally well-attuned to foreign requirements for quality. As for wheat, the



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milling sector has a very large number of participants (Sindh and Balochistan have over 750 mills while Punjab runs to over 1,000) but the mills are better maintained and more commercial in their approach since customers are not local but international.

Industrial crops

Sugarcane and oilseeds are the main industrial crops used by the food processing industry in Pakistan. Sugar is extracted from cane by mills that operate on an industrial scale using cane brought to them by truck from a large number of small farms, usually spread over a wide area. One of the main issues at this level is that the logistics of moving the cane to the mill means that the sugar content of the cane is reduced because of long waiting periods. This is because the cane arrives in a large number of small vehicles each owned by a separate farmer each of whom has to be dealt with separately.

There is overcapacity in the sugarcane industry that leads to loss of profitability for the individual mills, some of which have closed. The existing capacity requires a cane production of about 70 million tons while the actual availability is around 37 million tons. Overcapacity resulted from favorable market conditions that encouraged investment. Unfortunately the agricultural output failed to keep pace with the expansion of capacity.

TABLE 8: DEVELOPMENT OF THE SUGAR MILLING INDUSTRY

Period

Number of mills

established

Capacity (myn tons

cane Location Operational

Up to 1950 2

Up to 1986 41 1.2 Punjab - 86 Sindh - 16

1987-2004 36 5.5 NWFP - 5 Punjab - 39 38 Sindh - 32 28 NWFP - 6 5

Total 79 6.7 71

Vegetable oil

Pakistan is a deficit producer of edible oil, able to meet only 30-33 percent of consumption requirements despite best efforts by the government to increase domestic production of oilseed crops. The main crop processed is cottonseed where about 3 million tons is crushed annually to produce 300,000 tons of oil which then requires extensive processing to remove unwanted substances. Because of the distribution of the industry and its connection with the textile trade, the cottonseed oil extraction sector is not well-organized and equipment is generally old leading to poor quality. Other oilseeds (rapeseed/canola, sunflower seed, sesame) account for quite small amounts of raw material for processing.



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Pakistan therefore depends on importing palm oil in its crude (CPO) or refined form. In recent years the trend has been to import the crude oil (formerly exports of crude oil were banned by Malaysia, the world’s largest producer) and refine it to a “Refined, Bleached, Deodorized” (RBD) quality in Pakistan. This is a sensible approach that allows the refining margin to be captured by local companies.

These companies have worked closely with the Malaysians to develop a refining industry. So far, Malaysia's FELDA (Federal Land Development Authority) has been playing the lead role in Karachi with three major projects of combined investments of Rs. 155 million. The first joint venture in 1995, between Pakistan's Westbury Group of Companies and FELDA and IOI Group, was for a storage facility of edible oils at Port Qasim. These storage tanks were constructed to expand the capacity to 100,000 tons. A second collaboration took the form of a modern edible oil refinery (the MAPAK refinery) at a cost of $14 million that can process 240,000 tons of palm oil and 60,000 tons of soya oil, sunflower oil, canola oil and cottonseed oil a year. Major shareholders were Westbury, FELDA and Kuala Lumpur Kepong Bhd who together invested RM60 million in the refinery. The third joint project between FELDA and Westbury involved a liquid cargo terminal at Port Qasim.

This JV approach is exactly what is required generally in the food processing sector in Pakistan. In this case the Malaysians are the world leaders in palm oil production technology via the Palm Oil Research Institute of Malaysia (PORIM). The Malaysian can gain by locking in a market for crude oil as well as from off-shore investment. The result is that high quality RBD oil can be delivered to the food processing industry at the lowest possible cost. This correct approach is adopted by the private sector, whereas a misguided attempt to replace Malaysian/Indonesian CPO undertaken by the Government’s National Oilseeds Development Board is quite wrong. The analysis that leads to this conclusion is set out in Chapter 4 on value-addition.

Fruits and vegetables

Most of the fruit and vegetable production is consumed in fresh form. However, there is a small fruit and vegetable processing industry, which is concentrated around the major cities. There are 25 small and medium industrial units, having an estimated capacity of 45,000 mt, engaged in the production of squashes, jams and jellies, pickles and a small quantity of canned fruits and vegetables. The production of canned fruits is estimated at 15,000 mt; jams, jellies and marmalades at 2,000 mt; pickles and sauces at 10,000 mt and syrup and squashes at 18,000 million bottles. Most of the producers of these products are based in the urban areas. Approximately 30 fruit juice pulp processing plants with an installed capacity of 500,000 mt per annum are engaged in the production of fruit juices and fruit drinks The traditional fruit and vegetable processing industries preserve a large quantity of various fruits and vegetables, by using traditional methods of preservation. The fruits and vegetables are dehydrated by exposing them to strong sunshine and hot wind. The use of dried fruits and vegetables was quite common in the past. With the development of modern means of transportation, cold storage the use of dried vegetables and fruits has reduced and as a result the production of dried fruits and vegetables is gradually decreasing.



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The use of “Murabbajat” marmalades, traditional preparations from various fruits, is quite popular. Fresh fruits are converted into marmalades and used as a health food and medicine. Traditional doctors (Hakeems) treat a number of diseases with these marmalades. These marmalades are generally produced by the rural-based cottage industry, not using modern processing techniques or machinery. The annual production of Murrabajat marmalades is estimated as 30,000 mt/annum.

Dairy and Meat

The introduction of modern milk processing occurred in the 1960’s and ‘70s when 23 milk pasteurization plants were built by the private sector. These plants were located near the major population centers of Karachi, Lahore and Islamabad with the intention of supplying good quality milk to the fast-growing urban population10. These “first generation” in plants all closed. Their failure was related to the weak acceptance of “recombined milk” (i.e., fresh milk combined with skimmed milk powder received from the World Food Programme) and the short shelf life of the product. The “second generation” dairy plants introduced ultra high temperature (UHT) treated milk in the 1980s. This process has a high bactericidal effect. When packed aseptically it also has a long shelf life. Aseptic packaging was introduced by TetraPak on a monopoly basis. The product was successful and encouraged by tax incentives there was a renewed interest in milk processing. This initial enthusiasm was curtailed somewhat by the overexpansion of UHT capacity as a result of government incentives and liberal lending policies. There are now seventeen units, including three run by multinational companies, engaged in the manufacture of dairy products in Pakistan. The industry is now dominated by Nestle Milk Pak. Ltd., a joint venture with Nestle of Switzerland. Nestle is focused on developing the dairy industry in Punjab and has developed a milk collection system modeled on the Indian example. The system includes over 2,500 milk collection centers from where the milk is transported to the 520 chilling centers within 4 hours. Chilled milk is then transferred to two factories (at Sheikhupura near Lahore and Kabirwala near Multan) in refrigerated trucks. The strategic development of the dairy industry is being managed by the Ministry of Industries, Productions and Special Initiatives as one of the key sectors for development on priority basis. A Strategy Working Group (SWOG) was set up in 2004. The SWOG includes members from prominent stakeholders in the industry who are working together voluntarily to identify issues and propose a strategic framework. SMEDA has provided support and facilitated the group. In addition, the Pakistan Dairy Development Company “Dairy Pakistan” was registered as an independent not-for-profit company to further refine sector strategy and design, implement initiatives identified for the development of the sector.

10 For a detailed treatment of the early history of the milk processing sector in Pakistan see ‘Pakistan’s Dairy Industry: Issues and Policy Alternatives”, Muhammad S. Anjum, Kamil Lodhi, Agha Abbas Raza, Forrest Walters, Stanley Krause, Special Report Series No. 14, Pakistan Economic Analysis Network Project. Islamabad July 1989



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Meat Pakistan is said to be one of the most protein-deficient countries of the world. Per capita animal meat consumption, including fish is about 8.8 kg. This statement seems a little hard to fathom given the large animal population and a steady increase in beef and poultry production. Furthermore, the statistics do not reconcile with other data. In 2002-03 production of beef increased from 963 to 1060 thousand tons and mutton from 633 to702 thousand tons. Karachi is reported to slaughter 175,000 animals daily. However this information is anecdotal and no sure statistics exist. Meat processing is uncontrolled. Like milk, most meat is consumed in the countryside or via small-scale slaughters in the urban areas. There are very few large-scale animal slaughterhouses and meat packing factories. Modern slaughterhouses have been constructed under various programs and in theory each provincial capital is supposed to have such a facility. In practice these slaughterhouses are not used because the costs of bringing the animals to the facility are high as are the fees. In such case, almost all animals are slaughtered at local shops or even at home. In this respect, Pakistan is probably one of the world’s least efficient users of livestock resource since home-based slaughtering generally does not make most efficient use of the by-products. That said, of course, Pakistan is a major producer of animal hides and skins and leather, so not all by-products are wasted.

Meat Supply Chain Issues Activity Issues Requirements Livestock production Poor herd health management

Limited vaccination cover Unhealthy stock and breeding lines

Shift to feed lots or farmer cooperative groups Improved veterinary services

Slaughter Abattoirs in disrepair or unused Few regulated slaughterhouses No chilling facilities



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CHAPTER 3

FOOD DEMAND AND INTERNATIONAL TRADE

3.1 Demand for Food: Demography, Poverty and Nutrition

Demographics are the key to understanding the food industry in any country. The absolute size of the population (in the case of Pakistan officially about 160 million persons but unofficially estimated at nearer 200 million) is merely the starting point of the analysis. In order to understand the requirement for processed food one must know about the age structure of the population since older people have different consumption requirements than the young and the distribution both geographically (especially the proportions of urban and rural dwelling persons) and in terms of incomes. Thus poverty indicators are an important feature of this document. Demographics will ultimately determine the nutritional status of the population and suggest where the most attention should be paid both by policy makers and by those wishing to invest in capital-intensive food processing and manufacturing. To put this simply: a country with a large, ageing and relatively high income urban population (such as found in Japan) will be a prime market for high quality convenience foods which are marketed on the basis of the so-called “neutroceuticals” mentioned earlier in this document. Alternatively, a country with a large rural-dwelling population, where poverty is a significant factor and where the age structure is skewed towards the younger age cohorts will likely have a food industry profile where the manufacturing sector is small and the opportunities for investment in food manufacturing limited to low quality “energy”-type products based on carbohydrates and sugar.

Table 9 is taken form the Official Census of 1998 which was the last time a full official census was conducted in Pakistan. Nevertheless, for want of more up-to-date data this Study uses those that are available.

The data shows that at the time of the Census11, the population was heavily concentrated in Punjab (56%) and Sindh (23%), however, the population of Sindh is mainly concentrated in Karachi (which may have a population of upwards of 15 million persons) which in some sense can be considered an enclave separate from the rest of the province which is relatively lightly populated. Other provinces have small populations and are of course much poorer. In fact the population of Pakistan (as might be expected) is highly concentrated down the flow of the Indus river system and the related road network that follows the river. From any industrial viewpoint this makes for an easily served market.

11 for the sake of this analysis we assume the proportions remain roughly similar, though clearly migration occurs, especially to the richer urban areas



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TABLE 9: MAIN DEMOGRAPHIC INDICATORS FOR PAKISTAN (1998 CENSUS)

Indicators Pakistan NWFP* FATA# Punjab Sindh Balochistan Islamabad

Area (Sq. K.Ms) 796096 74521 27220 205345 140914 347190 906

Population (in thousand) 132352 17744 3176 73621 30440 6566 805

Male (percentage) 52.03 51.22 52.01 51.74 52.88 53.4 53.93

Female (percentage) 47.97 48.78 47.99 48.26 47.12 46.6 46.07

Urban Proportion 32.50 16.87 2.70 31.27 48.75 23.90 65.70

Population Density (Person per Sq. K.M.)

166.3 238.10 116.7 358.52 216.02 18.9 880.8

Sex Ratio (Male Per 100 Female)

108.50 105.02 108.40 107.23 112.24 114.60 117.00

Average Annual Growth Rate(1981-1998)

2.69 2.82 2.19 2.64 2.80 2.47 5.19

Population Under 15 (%) 43.40 47.20 25.90 42.52 42.76 46.67 37.90

Population 15 - 64 Years (%) 53.09 49.79 24.30 53.46 54.47 50.81 59.40

Population 65 & Above (%) 3.50 3.01 1.80 4.02 2.77 2.52 2.70

Age Dependency ratio 88.34 100.83 114.00 87.07 83.58 96.79 68.40

Literacy Ratio (10+) 43.92 35.41 17.42 46.56 47.29 24.83 72.40

Male 54.81 51.39 29.51 57.20 54.50 34.03 80.64

Female 32.02 18.82 3.00 35.10 34.78 14.09 62.39

Enrollment Ratio (5-24) 35.98 31.46 - 39.38 32.78 23.53 57.50

Male 41.19 40.99 - 43.83 37.35 29.49 57.70

Female 30.35 21.30 - 34.63 27.70 60.40 57.30

Economically Active Population (%)

22.24 19.41 - 22.55 22.75 24.05 23.00

Labor Force Participation Rate (10+)

31.98 29.09 - 31.98 32.73 36.45 30.68

Un-employment Rate 19.68 26.83 - 19.10 14.43 33.48 15.70

Disabled Population (%) 2.54 2.12 - 2.48 3.05 2.23 1.05

Source: Federal Bureau of Statistics, Official Census 1998

One odd feature of Pakistan is that the male: female ratio is biased towards males. For the country as a whole, the Census data show that there were 52% males compared to 48% females.

The urban population is relatively small (under 33%) and is concentrated in a few large cities. Both Sindh (Karachi, as mentioned above) and Punjab (Lahore) are the main urban centers, but even in Sindh, the urban population may be less than 50% of those dwelling in the province. For the sake of this analysis we can assume a round figure of say 40% (allowing for rural-urban migration between 1998 and 2007) in the urban areas. If the population is now somewhere between 160 and 200 million persons (take a mid-point) the urban population would be approximately 70 million persons. This, therefore, is the base target for processed rather than fresh food. It is not the enormous population usually mentioned in studies, but it is nevertheless a sizeable starting point for understanding the consumer base.



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The 1998 census found that for Pakistan as a whole just over 43% of persons were under the age of 15. Given the high population growth rate (2.7%) this proportion could be higher; it might be reasonable (and this is an assumed figure) to think that 50% of the population of Pakistan is now under the age of 25; certainly observation and other anecdotal evidence suggests that the youth population is very large indeed. Young people between the ages of 15 and 25 tend to leave home in rural areas to seek work in cities, so again (this is based on rough calculation not careful study that is outside the scope of this work), there may be an urban population that in fact has a higher proportion of young persons than the rural areas which (in most developing countries and Pakistan is no exception) are the places where the very young, the infirm and the elderly are left. This has important implications for agricultural productivity since such persons are not the best able to undertake field labor, but it also has implications for the type of food that is required. Once again, it is suggested this will be high-energy, cheap food that can be consumed “on the run” as young persons in the cities put in long hours at factories and other time-intensive activities. On the basis of this admittedly heuristic analysis there may be a youth population in the urban areas (more male than female) of about 40 million persons.

Turning now to the question of incomes, since the demand for different foods is highly responsive to increases in incomes (positively income-elastic). According to the World Bank estimates for 2006 per capita income comes to US$72012. This represents a doubling in a decade, which is no mean achievement. The income on some sectors (e.g., the use of mobile telephones) has been considerable and a similar response for processed food items could be expected, although no surveys have been undertaken. Anecdotally, however, food processors (e.g., in the low quality, cheap biscuit and fruit juice sub-sectors) report booming demand and good profits. Overall rising incomes, at least in urban areas, suggest that the prospect for the food industry in Pakistan might be good.

That said, the broad aggregate figures provide little real information about the market. Research by the International Food Policy Research Institute (IFPRI) suggests that the direct, immediate effects of agricultural growth in Pakistan have gone mainly to those households that own land: the rich13. The question then becomes one about quantifying the “rich segment” of the population and what that means for processed food demand.

Another feature of the IFPRI report shows that poorer households tend to move in and out of poverty. Changes in physical assets (such as landownership) and the household labor force (through education and migration) account for about one-quarter of the changes in income of the poor. Until ways can be found to distribute land more evenly in Pakistan, future policies need to be designed that recognize the dependence of the poor on sources of income outside the agriculture sector, such as non-farm and livestock. But it is these areas where the challenge lies since only lately have any achievements been found in livestock and few in value-added to dairy, while non-farm jobs are more difficult to create. As far as demand for food products is concerned, these may change slightly with improved incomes, but may not be easy to sustain if the household expects to fall back into poverty. 12 Pakistan Country Overview 2006, the World Bank 13 Sources of Income Inequality and Poverty in Rural Pakistan, Research Report 102 by Richard H. Adams, Jr. and Jane J. 1995



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Poverty in Pakistan is an increasing social problem and represents the critical challenge to be addressed by the Government of Pakistan. It is estimated14 that about 32% of Pakistan's population are below the food poverty line rising from a level of 26% in 1988 (GoP, 2002), and about 44% were below the poverty line on the human poverty index (UNDP, 2002)15. The implication here is that a significant proportion of Pakistan's population does not have adequate levels of food, access to basic services and opportunities and hence are particularly vulnerable to economic, environmental and political shocks. Differences in income per capita across regions have persisted or widened as have gender gaps in education and health.

Once again here are significant differences between rural and urban areas. As may be expected, the urban areas have a lower incidence of poverty than in the countryside. From 1993 to 1999 the incidence of poverty is estimated (by ADB) to have increased by 7 percentage points, a telling fact when at the same time agricultural production was supposed to have increased. Thus increase in agricultural output have apparently not translated into higher rural incomes, perhaps because of a failure to ad value to raw materials or because of failures in a marketing system that does not “net back” value added to the farmer.

Various sources suggest that the incidence of poverty in urban areas (and it is these areas in which we find the demand for processed food) is between 20 and 30%. Take a mean point and say that 25% of the urban population is so poor that they cannot afford any kind of manufactured food item. This reduces the base urban population of possible processed food consumers to around 50 million persons. Still sizeable, but possibly (using the figures for the age structure) a high proportion of these will be youth. Youth is likely to be proportionately poorer; if one took the entire population of youth and said that in general they will not consume highly processed foodstuffs (because they are all poor) then our possible consumer base is about 30 million persons, but this may be double counting; clearly there is an overlap between the urban very poor and the urban youth population, but it would require much additional field research to find out what it is. That said, the possible market for processed food of any type is in the region of 30-40 million persons.

However, this number must be considered in a different way, based on the fact that in most industrialized countries it is the relatively well-off (not the lower income brackets) that are the target markets for the main food brands. The poor person may buy a cheap bag of potato crisps and a Coke, but the higher income earner will choose “Pringles” and a bottle of wine at three times the cost. So the market needs to be segmented into those that are capable of buying high quality foods.

Measured by purchasing power, the State Bank of Pakistan estimates that the country has a 30 million strong middle class enjoying per capita annual incomes of $8000-$10,000. This figure seems to be high. It does not fit at all with the analysis of the demographic structure of the urban sector that suggests a total possible “above the poverty line” population of about 50 million persons, certainly not all of which would be in the middle-class bracket. 14 Asian Development Bank work on poverty 15 Other sources show lower figures for poverty. The fact is that the basic population data are uncertain and this makes calculations very difficult.



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Neither does it fit with observation; probably not 10% of persons observed in any major city appear to have what might be called a genuine middle-class appearance or lifestyle. If this figure of 10% were nearer the truth then the number of urban middle class would be around 5 million. To support this argument in late 2006, the Central Board of Revenue estimated that there were almost 2.8 million income-tax payers in the country.

According to the UN Statement of Pakistan’s Food Security (2000), about 42 million people in Pakistan lack adequate income to purchase the food they need for a healthy life. Food products constitute 48 percent of household consumption expenditure (39 and 54 percent in urban and rural areas respectively) in the fiscal year (FY) 2002.4 In the Pakistani diet cereals remain the main staple food providing 62% of total energy. Compared to other Asian countries, the level of milk consumption is significant in Pakistan, whereas the consumption of fruits and vegetables, fish and meat remains very low16. The consumption of fruit and fresh vegetables, which are highly dependent on local seasonal availability, is also limited by the lack of organized marketing facilities throughout the country. Fluctuations in the availability of these important foods are likely to be one of the factors responsible for the micronutrient deficiency disorders observed in Pakistan. People in Pakistan suffer from four types of deficiencies: zinc, iron, vitamin A and iodine. In 2002 it was found that 12.5 percent of women were malnourished, with the figure jumping to 16.1 percent for lactating mothers; 6.5 percent of school children aged six to 12 years were found to have palpable or visible goitre, with the percentage rising to 21.2 in the case of mothers; while 22.9 percent of school children and 36.5 percent of mothers were found to be severely iodine-deficient17. An estimated 38 percent of children between the ages of six months and five years reported underweight, and another 36.8 percent stunted,

There are significant provincial variations in malnutrition rates in Pakistan, whereas no differences in malnutrition rates are apparent between sexes. The prevalence of stunting appears to be associated with the overall level of development of the provinces, being lowest in Punjab and highest in Balochistan, the least developed province. Unfortunately, since 2002 no more recent nation-wide food consumption surveys are available, no information on the adequacy of present food consumption can be given. However, given the high growth rate of the population combined with relative stagnation of agriculture (often due to drought) it is unlikely to have improved.

The GoP is acutely conscious of this problem and a Nutrition Cell in the Ministry of Health took over the coordinating role in 2002 and embarked on a process of national consensus building. Between 2002 and 2004, a multi-sector team developed an outline for investment in the fortification of atta (wheat flour), cooking oil and complementary foods. In early 2005, these activities culminated in the release of a 10-Year National Nutrition Strategic Plan (NNSP) paper, along with a National Plan of Action for the Control of Micronutrient Malnutrition. An analysis of existing data by the Pakistan Institute of Development Economics in 2002 projected that in 10 years, 22,000 maternal reproductive deaths and US$4.6 billion lost productivity could be prevented by eliminating iron deficiency anemia, and that the elimination of folic acid deficiency would prevent 40,000 deaths from birth 16 http://www.fao.org/ag/agn/nutrition/pak-e.stm 17 Pakistan Institute of Development Economics (PIDE), conducted the National Nutrition Survey 2001-2002 on behalf of the Planning Commission of Pakistan.



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defects and heart disease over the same time period. The Pakistan Flour Millers Association (PFMA) has collaborated in awareness campaigns and seminars to advocate for universal flour fortification. With MI support, tests of feasibility, stability, acceptability and bio-availability of iron were conducted during 2002 and 2003 in selected flour mills in Faisalabad, Islamabad and Peshawar. There is an aim to build capacity in 300 roller mills and national resources are planned to take over in the aim to fortify all of the roller-milled atta by 2010. The Micronutrient Initiative, Pakistan is delivering technical assistance for micro-feeders, premix, flour production QA and fortification management. All these are essential elements in developing proper food security to the majority of the population.

What can be concluded from the above analysis? It must first be said that this Study does not pretend in any sense to be other than a fairly cursory review of the available data. These data are very poor indeed. Official population figures are from 1998 and some sources suggest that even that census was plagued by inaccuracy. The short answer is little is in known with certainty about the demographics or the real income or poverty levels in Pakistan in 2007.

Some informed general statements and guesses can be made about the possible size of the market for processed food:

• The effective (as opposed to notional) demand for processed food derives from the urban areas

• It is possible that the total population capable of buying any kind of cheap or low quality processed food item is between 30 and 50 million – a large enough population to sustain a food processing sector that supplies such products (which is what we indeed find)

• Incomes are growing, but they are unequally distributed and we suspect that the official measure of income distribution (i.e., the Gini coefficient) is not accurate

• We think that there may be a market of perhaps 5-10 million persons who require food items that conform to the standards of the industrialized countries and are willing and able to pay for this level of quality

• Poverty in Pakistan is a major problem and malnutrition is a pressing issue; it can be tackled via food processors such as the flour millers who are willing and able to participate in programs that improve the quality of basic food items

• Economic growth is strong and the efforts to move people into the modern economy are increasingly successful; this suggests that at the less technology-intensive and less sophisticated levels of the industry (i.e., not the hi-tech firms that behave like the multi-national food processors) there are interventions that can be made to improve basic processed foods for ordinary people.

3.2 International Markets and Exports of Food Products

Agricultural exports have contributed to overall export growth but nevertheless remain a small proportion of total exports. Pakistan has an apparent advantage in the production for exports of rice and horticultural products. In recent years, horticultural exports have increased rapidly, with little by way of subsidies. The country's climate and location give it



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an advantage in accessing a number of niche markets and it is generally considered that, given an enabling environment, horticultural exports could grow substantially.

Government policy is to reverse the neglect of the agricultural sector by continuing to liberalize its import regime while insisting on improved access for its exports, especially key items such horticulture, meat and dairy products. At the same time the Government is aware that a more liberal trade regime for these items goes hand-in-hand with a range of agronomic, technical and phyto-sanitary issues, all of which require attention by the concerned agencies. Pakistan originally liberalized its trade regime as part of the structural adjustment under IMF and World Bank programs. In general, non-tariff barriers (NTBs) were removed with the exception of a few retained for moral and religious reasons. These NTBs included outright import bans, licenses, and negative lists. Subsequently Pakistan comprehensively liberalized its import and export procedures albeit in a context of a legal framework that protects domestic industry from unfair trade practices such as dumping. Maximum tariffs have been scaled down from as high as 225% to 25%. (edible oil is an exception where the tariff is set at 60%). Because of its dependence on agriculture (and agricultural based manufactures - textiles), considerable attention has been paid to restructuring the trade in agricultural products. The Government sometimes waives import tariffs for food security reasons on products such as wheat and sugar. Pakistan has a long history of subsidizing imports of such basic food items to maintain low prices. In general, the rate of protection for domestic agricultural products has been much lower than required by international agreements. Unfortunately Pakistan’s access to global agricultural commodity markets is often restricted. More than 70% of tariff rate quotas (TRQs) are on products of export interest to Pakistan – fruits and vegetables (26%), meat products (18%), cereals (16%) and dairy products (13%), as decided at the Doha Conference. Exports of processed hides and leather are subject to high tariffs. Pakistan also suffers considerably from low phyto-sanitary standards. Failure to successfully upgrade the Karachi Fish Harbour has resulted in the de-listing of 10 fish processors and exporters and the loss of a $60 million export market for seafood to the EU. With regard to support for agricultural products, Pakistan has recourse only to specific and non-specific de minimis support under the Amber box and Article 6.2 subsidies of the current WTO round (Doha)18. These include investment subsidies into agriculture, input subsidies, generally available to low income or resource poor countries and domestic support fro the prevention of the growing of narcotics. However, Pakistan can use Green box subsidies which are more flexible. Even with these advantages for support, Pakistan has not used much domestic support. Indeed, the country’s Aggregate Measure of Support (AMS) has always been negative.

18 The de minimis limits allow expenditures for developing countries up to 20% of the value of production. In fact budget constraints do not allow Pakistan expenditures of this magnitude.. Moreover, it has been shown that such programs do not improve competitiveness in agriculture.



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Equally export subsidies have hardly been used. The only area that has received support on a consistent basis is fresh fruits and vegetables. Pakistan’s exports are dominated by primary products. Semi-processed products are an insignificant proportion because they tend to be used as raw materials locally. The share of processed exports rises significantly in years of larger sugar exports.

TABLE 10: VALUES IN AGRICULTURAL TRADE

Level of processing Exports Imports $''000 Raw materials 1,069,727 1,200,440 Processed or intermediate 15,252 963,598 Manufactured products 140,391 27888 TOTAL VALUE 1,225,370 2,191,926

Source: 2004 data from FAO, MINFAL and WTO The share of Pakistan’s exports in world agricultural trade has declined. This is principally because of changes in the textile industry. In general the low growth in the volume of exports has derived from the inability of Pakistani exporters to meet health, safety and quality standards. The case of fish exports to the European Union is a case in point, where despite several attempts to rectify matters, the EU de-listed fish exporters in 200719. Rice is the major source of export earning of the food crops produced by Pakistan. Unfortunately the growth rate of exports has declined to about 12% annually (although that is a respectable number it is far lower than the near 50% recorded several decades ago. As mentioned elsewhere in this report, Pakistan has a world recognized “brand” in Basmati Rice, and this has been fiercely protected by exporters. The important feature about rice is that in general it can only be exported as a basic low value, high volume commodity foodstuff or in semi-processed form as par-boiled rice. This locks the Pakistani agricultural export economy into a low value-added product from which there appears to be no exit. 19 The issue of fish exports to the EU is dealt with in a separate report by CSF entitled “Action Plan for Karachi Fish Harbour’



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Fig. 4 SHARE OF PAKISTAN RICE EXPORTS IN THE WORLD MARKET

Source: Presentation by Sohail Malik for WTO

By contrast wheat is a crop that is never consumed in its raw form, but rather must be processed to flour (as an intermediate product) and then to final products such as biscuits, cakes, cookies and other confectioneries. In this case wheat allows the capture of the value-added by the local producer of the raw material. It is surprising that Pakistan (a) has an overcapacity of flour mills, and (b) is only an occasional exporter of wheat. Part of the explanation is that Pakistan in most years records a net deficit in wheat and has to rely on imports. Exports have been small, and it is only recently that enough surplus has been generated for export. Even then, it is probably the case that wheat exports are made when surplus milling capacity remains. Each ton of wheat exported therefore represents a lost opportunity for adding value in the domestic economy Pakistan imports sugar in most years to fulfill its domestic demand. Exports are minimal and occur only in years when total sugar production has exceeded local demand. The fact is that Pakistan has only a very slight or no comparative advantage in sugarcane production (for reasons cited elsewhere in this Study). Palm oil is a major import by Pakistan, originating in Malaysia and Indonesia. For reasons again cited elsewhere in this Study, Pakistan cannot produce an adequate supply of vegetable oil for cooking and food product manufacture and depends on the supply from overseas.

The world horticulture market is valued at $80 billion to which Pakistan contributes an annual $130 million. Only about 16% of fruits are being processed although this activity offers great opportunities to augment volume of value added products using modern technology. The fruits and vegetables exported in fresh form attract discount prices because exporters are unable to provide adequate grading and packing. Once again value is lost from both the fresh fruits and vegetables and also from no-export grade produce that could be processed into e.g., juices, but which isn’t because the processing capacity is not in place. To make this clear: Pakistan can produce a large range of tropical and temperate fruits and vegetables. The country loses value immediately at the post-harvest stage and

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then more value at the exporter level because of inability to meet standards. The non-export grade fruit swamps the domestic market, dropping prices while 3rd grade produce is lost entirely because it exceeds the capacity of the industry to process it into manufactured products.

Despite this situation the prospects for Pakistan’s horticulture export industry remain good. Its share in the world market has risen steadily from about 5% in 1991 to 12% (value 2004). Potential markets exist in Europe and the Middle East but they need to be developed by the industry itself.

Export performance for livestock products has been poor to non-existent. Although Pakistan is a major milk producer, almost none of the milk is of the quality that could be exported. Instead Pakistan is a net importer of milk and milk powder (especially for baby food). Regarding meat, there is negligible export of processed meat products despite the fact that Pakistan has a “brand” advantage as a guaranteed producer of “halal” products. Live cattle and buffalo are exported, however. There has been an increasing trade with Afghanistan of cattle on the hoof that drives up the price of animals in the domestic market.



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CHAPTER 4

THE VALUE CHAIN IN FOOD PROCESSING

4.1 Overview of Global Value-added in Food Processing

The food sector in Pakistan faces a number of critical challenges that impact of the competitiveness of the sector.

These include:

• Integrating the individual food factories with backwards and forwards linkages

• Strengthening links with science-based organizations and technology resources

• Improving the process efficiency and minimizing waste (and managing biological effluent disposal)

• Improving the standards of safety both within the workplace and most particularly of the food products themselves with regard to ingredients and overall hygiene

Each of these elements has a cost implication and there are also administrative, structural and management aspects related to them. Covering the entire spectrum is the question of governance which starts at the factory site with management of the company’s finances and accounts and reaches to, e.g., inspection of food products for export quality by independent surveyors. Cross-cutting issues such as infrastructure and the judicial system also affect the industry at every level.

The definitive value chain analysis for Pakistan has been undertaken by the World Bank in 2005 covering a range of products20. This lengthy and detailed study provides an in-depth discussion of the methodology of value chain analysis and one specific example related to the food industry – analysis of the apple industry. This Study does not seek to replicate this exercise. However, aspects of the work should be discussed.

In brief, the WB study found that for agriculture specifically the following issues impacted directly on competitiveness:

• Weak basic agronomic research into new varieties and crops

• A failure to consolidate land holdings in order to take advantage of scale economies and marketing strength

• Strong external competition from neighboring developing countries (especially China) that also sought to improve their competitiveness

20 Integrated Value Chain Analysis of Strategic Sectors in Pakistan, Global Development Solutions, unpublished August 2005



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• Lack of consumer awareness of the advantages of quality/healthy foods

• High post-harvest losses

• Inability to access export markets because of poor packaging, labeling

This Study supports all these findings. In general there are failings at every point in the food processing value chain that lead to very substantial opportunity cost losses. For example, the WB study estimates a loss of $500 million in the apple industry alone. In particular, we noted that the post harvest handling system (especially the mechanisms whereby small quantities of products are collected and transported) led to very considerable waste, probably as high (overall) as 30% of the harvested crop.

The other most notable area of loss is in process efficiency. As noted elsewhere in this report, most food processing factories are small-scale, lack a strong financial base and operate mainly in the “survival” mode; this means there is almost no re-investment in machinery and that maintenance levels are very poor. Poor maintenance in food processing means: (a) loss of raw material ingredients as they pass through the process, and (b) a poor quality product resulting from the process.

This Study has taken the approach that most readers will be familiar with the idea of value chain analysis (VCA) and that no methodological explanation is necessary. What is found to be useful is a rather more detailed explanation of the food processing chain as it is undertaken globally, and then to relate this to Pakistan (in other words to mirror the approach taken above in our description of how the industry is structured globally and in Pakistan). This is followed by examples of VCA to illustrate some of the points being made.

Figure 5 illustrates a standard food value chain and provides comments on the main issues of concern to those in the industry.

Although it seems a statement of the obvious, the primary value-added in the food processing chain is done by the farmer who adds a variety of inputs to land. These inputs (e.g., seed, fertilizer, water, labor) are of major importance for the success of the value-addition process because the ultimate quality of a food product depends on the quality of the primary ingredients. Agricultural costs of production are an essential factor in d determining the overall competitiveness of the final food product. For example, it may be cheaper in some countries for food manufacturers to import raw materials that are in fact grown locally simply because the product on the world market may be cheaper than the one available locally even allowing for transport costs. One such example was in the Philippines where in the 1990s it became cheaper to import Thai maize for processing in Manila from Bangkok in Thailand than to bring the same product from local farms in Mindanao (south Philippines)21. It is currently cheaper to import sugar from the world market to Pakistan than to process local sugarcane. Such examples abound.

The next important feature of the diagram is to note that agricultural raw materials (crops and animals) are of little worth in themselves. Wheat is a raw material that must pass through an intermediate stage (milling) to become an ingredient product (flour) that ends up as one of a number of ingredients mixed together and processed to make cookies, biscuits or bread. It is a major failing in almost every country that the elements in a value chain for food products are considered as if they were separate, distinct and individually valuable products in their own right. This point cannot be made too strongly. Agricultural crops and livestock are useless in themselves unless they pass into a value chain and are considered by all the stakeholders, but especially policy-makers and line agencies (e.g., departments of agriculture), as part of an integrated system. To make the point clearer: no one considering the automotive industry would think that tire manufacture was an end in and of itself; tires are obviously useless unless they are attached to wheels and to the car. No one would suggest that tire manufacture should be dealt with separately by a separate line agency and in isolation from the overall policy governing car manufacturing, But this is precisely the approach adopted in the food industry (in Pakistan as elsewhere), where crops come under one ministry but food industry comes under another. The result is almost always a complete disconnection between the largely technical agronomist responsible for crop and livestock production and those responsible for the development of the industries that use these raw materials. Oversupply or undersupply and misunderstandings about quality consequently plague the food industry in almost every country. However, in developed countries the integrated approach adopted by commercial food manufacturers usually overcomes the problem; not so in developing countries such as Pakistan.

The diagram shows raw materials pass through three main stages of raw material production, primary processing (divided into post-harvest storage, handling and transport and extraction of the valued ingredient) to the third stage of manufacturing of food items for sale to the public. Each stage has its individual concerns that are addressed both by government and by the private sector and these are shown in the diagram. The need for a productive and quality conscious agricultural sector has been discussed, however it is useless to produce high quality crops and then lose or damage a high proportion of these costly ingredients. Similarly, a well-managed intermediate product stage will be worthless if the tertiary manufacturing stage is mismanaged. To use the automotive analogy again: first class raw materials such as steel and hi-spec rubber can be turned into high quality functional components and indeed assembled correctly. However if the company fails to 21 The difference was about US$10/ton in freight costs, largely because of high port charges in Mindanao’ main port Cagayan d’Oro



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establish a correct marketing strategy, or fails to account for consumers’ preference fro safety features, then the entire value of the previous processes is lost. For this reason major global food processors (Procter & Gamble is an excellent example) have turned their focus principally to the management of their brands in the retail sector but with a strong backward chain that often out-sources individual manufacturing processes but imposes strong management and technical controls on suppliers.

As a result, the principle rules for maximizing value-added through the food chain are:

Agriculture – high productivity of desired raw materials must be determined by the needs of the food industry (i.e., demand driven), not by the fact that agronomic conditions may make it possible to grow the crop. Again it seems obvious but only when spelled out: if no one wants the product (perhaps because the costs are too high) then it would be a mistake for agronomists to grow it. As will be seen in the case of oil palm grown in Pakistan, this is precisely the case.

Intermediate processing – high standards of post harvest handling and storage is critical but not sufficient for good ingredients. If the market itself is free of distortions, then the technology for these elements will follow. What is essential is that the intermediate processors have close relationships and understanding with the farmers and excellent forward links to the final manufacturing. Assured availability of raw materials is the sine qua non of processing anything, but with food, which is required and consumed on a daily basis, interruptions in supply spell disaster. In order to ensure this at the intermediate stage and to reduce costs, locating the processing facility near the source of the raw material is critical.

Food manufacturing – at the tertiary or final stage of the value chain, the emphasis focuses on the presentation of the food product to the consumer on the supermarket shelf. There are a number of elements to this including (a) the form of the actual product – combined sugar, flour dough, additives can be presented as cookies, biscuits or cakes, (b) the package itself – the product can be presented in a simple paper container (e.g., loose in bag) or over-wrapped or in some more sophisticated form such as stacked potato chips in an aluminum canister, (c) the brand name of the product and its place in the consumer’s purchasing priorities. Branding is also closely related to advertising that establishes associations such as “healthiness” with a particular brand in the mind of the consumer. This end of the value chain is extremely complex, includes a wide variety of disciplines and relies as much on psychology perhaps as food science.

Turning now to the value chain structure in Pakistan. As might be expected it follows a very similar three-stage structure, but with some quite different issues that require analysis and discussion.

Figure 6: 4.2 Pakistan’s Value-Chain

Figure 6 identifies the two major sub-sectors of agriculture (crops and livestock – note that fisheries is not included in this study since it is the subject of a separate study by CSF22) groups the crop sector into three further categories, commodity crops (e.g., wheat, rice, maize), industrial crops (e.g., sugar, oilseeds) and horticulture crops (e.g., fruits, vegetables and fruit trees). These agricultural raw materials are discussed in greater detail in a separate section below.

The intermediate section shows how these crops and animal products are stored or processed at the primary stage and then pass into the manufacture of intermediate product such as flour, crude vegetable oil, fruit pulp, slaughtered animals and raw milk. As mentioned elsewhere in this document, many of these processes are quite primitive. Milk, for example may be taken in a bucket by bicycle in a small open container for quite some distance before being tipped into a churn. In any event, this intermediate processing stage is characterized by the myriad of micro rural enterprises found all over Pakistan. Handling agricultural raw materials in small, possibly uneconomic quantities is a characteristic of many developing countries including Pakistan where bulk handling is generally unknown. It is an important part of the value-chain where much loss and wastage can and does occur.

The tertiary stage of Pakistan’s food value-chain is characterized by a few larger and more professional companies, and by many smaller enterprises that struggle to survive. There are some big players amongst which one is Nestle. It would be wrong to give the impression that the tertiary stage of the food processing chain in Pakistan is wildly disorganized and inefficient. However, it is at a stage where individual smaller and medium-sized companies often exist in a vacuum of intense competition.

The main issues that affect competitiveness in Pakistan’s food value chain are as follows:

Agriculture – Agricultural output has performed well in Pakistan but much remains to be done especially in the area of variety improvement and the provision of seeds. Water is another issue. These are discussed in detail below. However, the issue for food manufacturers is the generally poor quality of crop and livestock produce at the farm gate. Reliability of supply is of major concern. A deep rooted issue is that of the system of land holding, a subject mentioned in virtually every document concerning agricultural development in Pakistan. Until land is held more equitably and until landowners have a genuine economic interest in improvement, productivity will languish.

The problems in agriculture are fundamental, long-term and are the subject of various development programs. There are no short-term or immediate solutions to agricultural improvement although initiatives such as the restructuring of the Pakistan Agricultural Research Council (PARC) are of significance.

Intermediate processing – many of these problems have been mentioned before. Wastage at the immediate post-harvest stage is a fundamental cost and competitive issue. Very often this is not because the technology is lacking (although e.g., lack of cooling systems for milk or fruit is a problem) but because the market structure from the farm gate to the intermediate processor is inefficient.

22 Action Plan for the Karachi Fish Harbour, CSF, February 2007



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It cannot be said too strongly that these issues are primarily social and economic (probably more social than economic) and not technical. Almost all primary and intermediate agricultural raw materials processing technology is very well-known and in concept dates back hundreds of years. True, there are many up-to-date techniques based on new machinery, but in its fundamentals any technology can be bought “off-the-shelf” for almost any possible use in post-harvest and primary processing. Much of this machinery (i.e., the “hardware”) can be bought very cheaply from China or manufactured locally under license. A good example would be seed cleaning machinery. Some proportion of the wheat crop must be cleaned and retained for re-planting; small-scale seed cleaners can be purchased for as little as $4,000 (perhaps by a community group). The question arises, therefore, why has this approach not been adopted? Is it a question of finance, a question of lack of knowledge, or a question that people simply cannot operate as communities in their own best interest? These questions are probably outside the scope of this Study and have no doubt been answered in more scholarly circles. However the fact is that (to take seed cleaning as an example) this part of the value chain (i.e., adding value to a crop) fails consistently. For wheat seed up to 30% of the seed provided to farmers for re-planting may be deficient in some respect and have to be rejected. This increases costs of production significantly and hence moves through the value-chain with a multiplier effect.

The solution to all these problems sometimes comes close to common-sense, but should not be dismissed as such. Locating a factory optimally near the raw material supply may not be possible when land may be an issue and where often the owner of the facility bases its location on his family home (perhaps for reasons of convenience or security). These factories at the intermediate stage can be very small family owned enterprises, so the considerations of a multi-national when it considers where to place a million dollar factory are simply irrelevant.

For post-harvest handling policy-makers should consider the possibility of small-grants aimed at e.g., supplying small scale milk cooling or fruit cooling facilities to community-based groups. Small wheat millers can also benefit from silo construction and grants to up-grade e.g., the rollers in their mills. As mentioned elsewhere, these small millers can also be helped to improve the standard of their products through the addition of fortifying vitamins.

For the intermediate ingredient manufacturers, probably the most critical requirement is to establish cluster groups and to establish formal linkages in both directions. Institutions like SMEDA could profitably take this approach up as a strategy in the food industry rather than devoting time to individual pro-forma feasibility studies. Access to R&D and innovative technology is desperately needed.

Food manufacturing – the food manufacturers have mentioned the following 5 issues that principally affect their competitiveness

• Inability to manage raw material supply – because many food manufacturers have been mis-located, or constructed in the expectation that there would be raw materials available (the “don’t worry farmers will grow it” syndrome), fluctuation in raw materials supply and a failure to establish strong backward linkages through



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the VC mean that many manufacturers report under capacity and a destructive competition for scarce supplies.

• Erratic inputs and poor labor skills – in particular supplies of potable water often present problems and add to costs because manufacturers have to deal with this problem directly themselves. Poor literacy levels and basic artisan skills also present management with problems e.g., relating to the operation of complex machinery such as packagers.

• Poor financial support – Companies report that commercial banks often fail to understand that their businesses depend on the natural environment, so that credit is extended or only short periods of time that does not fit with the agricultural crop supply calendar. Equally, because these businesses are often only marginally profitable, the lending institutions are reluctant to lend for re-investment in new technology or for R&D.

• Poor technical choices and a lack of innovation – a common feature of the food manufacturing facilities visited during the Study is the poor choice of machinery or processes. In many cases the owner, often from a family with a history in the business or perhaps someone with money from another source, has failed to consult a wide range of suppliers and to undertake a proper audit/feasibility study of the process requirement. The assumption is often made that “food processing is simple” and the investor has been sold a cheap process solution that will not do the job. Often he is left with machinery, but without technical support that, e.g., might help him with formulating a high quality product from the same ingredients that go into his current low quality product. In general there seems to be a lack of information exchange in the industry (perhaps because of the large number of small firms that have no surplus management time to spare) and the level of innovation is poor.

• Poor or non-existent standards of safety in the workplace and for the consumer – this is last but not least on the list of problems associated with the Pakistan food processing industry. Unfortunately it can be said to reflect a society wide challenge in the area of hygiene (e.g., the Karachi Fish Harbour, reported on by CSF in another study, is a classic case where lack of attention to basic hygiene has severely damaged the industry). The problem often starts with the buildings themselves, where instead of food standard factory construction (e.g., rounded corners to prevent waste biological material gathering, closed ceilings to prevent dust falling into open process lines) is almost totally absent except in the large companies. It extends to old machinery often operated without preventative dust masking or other safeguards for the workers (and to prevent biological waste from the workers entering the food product). Food products are often adulterated (e.g., milk is adulterated with formalin to extend its life) and packaging is provided that is aimed at short shelf lives and to be as cheap as possible (often allowing unwanted chemicals (e.g., from the low grade plastic material or print) to enter the product.



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4.3 Value-chain Case Studies

These examples of VCA provide some harder data related to the food sector and suggest some more general conclusions about the problems facing the overall food industry in Pakistan.

1. Fruit Juice The juice and beverage industry is one of the largest industrial sectors in Pakistan. Currently, of an estimated one million metric tons23 of cold beverages sold in Pakistan each year, 90% represent carbonated soft drinks (i.e., sodas, of which most of them are colas). The remaining 10% of cold beverages purchased and consumed (100,000 tons) are juices, nectars and still water. Of these, 10% (10,000 tons) represent the approximate sales of 100% pure juice. Most of the existing fruit juice factories operate in Lahore, Bahawalpur, Karachi, Hyderabad, Hattar (NWFP), Lorali, and Sargodha. As reported by SMEDA, 24 formal fruit juice and pulp processing facilities, plus a number of small informal factories are operating in Pakistan. Estimated installed capacity is approximately 400,000 metric tons per year with a growth rate of 20% to 25% based on a total fruit juice market of Rs2.5 – Rs2.6 billion. The beverage market in Pakistan is expected to grow at between 20% - 25% per annum. While demand may increase, what is not clear is which sector of the market, and product groups are likely to benefit from this growth. If the market continues to grow as it has in the past several years, the largest growth is likely to take place in the carbonated soft drink sector where investments in sales campaigns continue to overshadow the non-carbonated soft drink market because local juice manufacturers generally do not have the resources to compete e.g., with Coca-cola or Pepsico. Nevertheless, given a more reliable supply of raw material and sufficient investment in advertising and marketing, opportunities exist for the juice industry to influence consumption patterns and consumer preferences towards greater consumption of pure juice and high juice content drinks. The market for 100% pure juice (“nectar”) in Pakistan will grow only slowly over time. Not only does a 100% pure juice product cost more than the juice drink, soft drink and bottled water alternatives, but that the general populace has limited discretionary income (and juice definitely represents a discretionary purchase); has limited knowledge of the nutritional differences between fruit drink (10% - 15% pure juice) and 100% pure juice; and make cold beverage purchase decisions based on the following order: price; taste; and brand. Taking into account consumer and market conditions, Pakistan juice processors have chosen not to invest in equipment and processes that would convert fruits directly into 100% pure juice. For example, many apple juice manufacturers have chosen to import 100% juice concentrate (CAJ) from Iran; blend that concentrate and package it to sell as 250ml or one liter 100% pure juice consumer products in Pakistan. Making a 100% pure juice product in this way saves not only the additional capital required to purchase extra

23 Global Development Studies: Value Chain analysis for World Bank



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juicing equipment – and perhaps the building and land on which to operate it, but also the continual operating and maintenance costs associated with the extra juice-making machinery. The commercial success of a fruit juice processing facility is dependant on: • the continuous availability of raw material, • cost and quality of electricity, • an efficient distribution infrastructure, including a cold chain for fresh juices and juices in non-aseptic packaging. The example taken for value-chain analysis is that of apples24, however most of the larger manufacturers are able to use fruit juice concentrate from any fruit source, so the lessons learned are generally applicable to the fruit juice sector as a whole. Pakistan has a good potential supply of apples originating from temperate areas in some of the poorest parts of the country. However, on-farm, post-harvest and pre-processing losses of apples and other fruits continue to be substantial, often contributing to limited and inconsistent supply of raw material for juice manufacturers. A number of solutions are suggested25 including: • Improving the apple grading and sorting process at the farm • Forward-contracting: • Local processing facilities closer to the source of raw material: • Introduce the use of mobile semi-processing units: Once fruits are harvested, they are transferred by truck to a processing facility. While harvested most fruits should be processed within 48 hours of picking, given poor road conditions and limited logistical management capacity, apples are often not delivered to the processing facility until 5 to 7 days after they have been picked. This contributes to high pre-processing losses. After arrival at the processing facility, fruits may be temporarily stored before they are processed. Investment required to develop a reasonably high quality storage area can be as much as Rs. 10, 000,000, with a monthly operating expense of approximately Rs. 22, 000. After the fruits are washed, sorted, graded, cut and cored, they are made into a pulp which is either stored and sold to end users such as bakeries, confectioners, and other food processing companies, or are used to produce juice. Given the limited and inconsistent supply of fruit and the high cost of electricity, there is only limited bulk storage of juice concentrates. In fact, much of the juices are packaged immediately into 250ml Tetra Pak for the consumer market.

24 Data for this analysis are taken from the excellent work done by Global Development Services for the World Bank’s study on competitiveness, so far unpublished 25 For very detailed technical recommendations the reader is referred to the report (unpublished) by David Picha for the Horticulture SWOG



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After receiving fruits at the processing facility, the raw material is washed, cut and (in the case of apples) cored or de-stoned (mango). Then the fruit is cooked and mashed to produce pulp. Once the pulping process is completed, the pulp is transferred to a barrel for distribution. The stored pulp generally has three channels through which it is distributed: • Immediately transferred to end users such as bakeries, baby food manufacturers, and confectioners. • Distributed to a canning facility where jams and other preserves are produced. • Put into a cold storage for transfer to a juicing factory. During the pulping process, processors are generally able to yield 1.4% of the total weight of e.g. fresh apples in double strength, and 94.4% in single strength pulp. The remaining 4.1% of the weight is waste, which is sold to animal feed manufacturers and other secondary and tertiary by-product processors. Juice production consists of four major stages: preparation; processing and pasteurization; packaging; and packing. The three highest value adding activities are packaging (65.8%); processing (22.9%); and the raw material - apples (9.2%). This distribution of value-added would be representative across the board for all fruit juices. The greatest value added was the Tetra Pak packaging material at 98.7%, at US$179.40/1,000 liter of 250ml consumer packets, or US$0.042/250ml packet and US$0.0018/straw. The third largest cost was electricity at 0.9%, or approximately US$1.70/1,000 liters of 250ml packets. Inputs such as sugar, electricity and water will be discussed in detail in a later chapter since they directly affect competitiveness of the entire industry. However, note that for fruit juice sugar constituted 92%, approximately US$0.009/250ml packet. Cooking costs approximately US$65.17/1,000 liters of 250ml packets, of which US$64.33 (98%) constituted natural gas costs, and 2% value added came from electricity. The processing factories use natural gas to heat the boilers, which in turn provide the heat for cooking. Reducing the natural gas costs may require increasing boiler efficiency and/or redesigning the cooking and/or pulp-making process. TABLE 11: PRODUCTION COSTS AND MARGINS OF APPLE JUICE

10% drink 100% "Nectar"

Rupees per 250 ml

pack Paper 3.00 3.00 Sugar 0.75 nil Pulp or concentrate 0.25 4.00 Additives 0.10 nil OH 0.50 0.50 Other 0.20 0.20 Production Cost 4.80 7.70 Retail price 8.50 14.50 Margin 3.70 6.80 % Margin 77.10 88.30

Source: Global Development Solutions LLC/World Bank



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Given that packaging represents such an important element in fruit juice manufacture, it must be considered in greater detail. The most common form of packaging for local fruit juice is a 250ml carton. Tetra Pak dominates the formal sector in this market accounting for an estimated 61% of all costs associated with processing. Given the absence of a well established cold chain, Tetra Pak thoroughly researched the need for long shelf life, refrigerator-free packaging and designed both machines and its packaging material to offer an excellent end product; no other companies have seriously challenged Tetra Pak with another packaging or product that performs as well at the same or lower cost. There are three other packaging options available to juice manufacturers, none of which are economically viable for this particular product. The three packaging options include aluminum laminated pouch packs; tin packaging; and glass/plastic bottles. Transport packaging consists of the tray onto which the 250ml consumer packets are placed, and the shrink-wrap that secures the packets onto the tray. While the transport packaging cost per milliliter could be reduced by increasing the size of consumer packets to 500ml or one liter, the processor would have to consider the possibility of selling less drink overall, as many consumers on a limited budget might not buy larger packets. Also in a 250ml/packet size, some consumers may consider the juice drink an “impulse” purchase. Juices are consumed in rural and urban centers alike, but with the exception of large manufacturers like Shezan, which manages a national distribution system, the distribution reach of most juice manufacturers is confined to the city and surrounding areas in which the juice is produced. Where juice manufacturers distribute outside the immediate proximity, a wholesaler would be designated to a particular city or wholesale area, which generally covers department stores, supermarkets and bakeries. Secondary wholesalers are also used for distribution, particularly in rural areas, to distribute to convenience stores, town shops and local bakeries. The distribution agent, on the other hand, handles city markets and institutional sales such as hotels, hospitals and schools. There are several key distortions that impact the competitiveness of the juice sector. The four major distortions include: weak labeling standards; poor road conditions/pre-process losses; lack of continuous supply of fresh fruits. It is estimated (World Bank op.cit) that these distortions lead to an opportunity cost of as much as $69.8 million per annum for the apple juice industry alone.



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TABLE 12: OPPORTUNITY COST LOSSES FOR APPLE JUICE

Weak labeling standard $6,500,000 Increase in juice sales (tons) 10,000 Selling price ($/ton) $650 Poor road conditions/pre-processing loss 8,786,979 Production of apples 315,430 Transport losses 30% Apple-juice conversion ratio 7 Selling price ($/ton) $650 Lack of continuous supply of apples $39,000,000 Installed capacity of juice processing facilities (tons) 400,000 Capacity utilization 35% Current capacity utilization 20% Potential production volume (tons) 60,000 Selling price ($/ton) $650 Increased price of sugar $15,576,600 Selling price ($/ton) $650 Margin (%) 77% Estimated production cost 500.5 Reduction in sugar cost 22% Revised production cost ($) 390.9 Revised margin 259.61 Potential production volume (tons) 60,000 TOTAL OPPORTUNITY COST $69,863,579

Source: Global Development Solutions LLC/World Bank

2. Palm Oil

There has been considerable discussion relating to the feasibility of growing oil palm and producing palm oil in the coastal areas of Pakistan, especially Sindh. The National Oilseeds Development Board said that some 2,000 hectares of oil palm have been planted over the last 7-10 years, perhaps with the majority in the last 5 years. The rationale for growing oil palm is that whereas Pakistan does produce considerable supplies of cottonseed suitable for vegetable oil production, the supply is a by-product of the cotton industry and is unreliable. Equally, palm oil is imported at a high cost in foreign exchange. The commercial or plantation hybrid oil palm has been grown for specific conditions under which it produces a heavy weight of fruit that contains a high proportion of oil. The commercial oil palm requires year-round rainfall in humid tropical conditions with permeable (well drained) soil (i.e., not heavy clays). The agronomic conditions in the Sindh are sub-optimal for hybrid oil palm. Comparison of the probable yield curve for Sindh oil with that for optimal growing conditions shows that oil palm in Pakistan is far less productive over its life than, for example, in Malaysia (the world’s largest producer of oil palm). The data for yields and outputs are shown in Table 1.



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TABLE 13: PLANTATION OUTPUT VARIABLES FOR MALAYSIAN ESTATES AND ASSUMED FOR SINDH SMALLHOLDERS

PLANTATION Malaysia Pakistan Trees/ha 120 120FFB/tree 12 10Kg/bunch 30 25FFB Weight tons/ha. 43.2 30Hectares 2,000 2,000Total FFB tons/year 86,400 60,000Oil content 0.22 0.18

Source: FAO and ADB estimates Note: Sindh output reduced from (a) cold weather stress leading to lower fruit settings and fewer bunches and (b) from moisture depletion and poorer nutrients

Oil palm fruit bunches is the first step in an industrial process for extracting a number of products. The primary products are Crude Palm Oil (CPO) and Palm Kernels (PK). Both have an economic value as intermediate products in the extraction process. It must be understood that CPO and PK have no intrinsic value in their own right until they are (in the case of CPO) refined into Refined, Bleached and Deodorized (RBD) Palm Oil and (in the case of PK) crushed into Palm Kernel Oil (PKO) and Palm Kernel Meal (PKM – used as an animal feed). The management of this industrial process is subject to all the usual requirements of the chemical industry that responds to high technology and economies of scale and capacity use. For this reason, the main palm oil producers have historically been reluctant to export their crude oil in order to keep their own refineries at full capacity, as they would prefer to add value. In addition it is one of the main reasons why the scale of the industry in Malaysia and Indonesia has been so large. The scale of the Pakistan oil palm industry is currently very small. This level of FFB output requires only a small-scale extraction plant; in this respect comparison with Malaysia is probably not worthwhile because the scale would be so different (a conventional oil palm plantation in Malaysia could be 10,000 ha. perhaps rising to 20,000 ha. with extraction capacity of a comparable scale. Given the economies of scale, the costs of extracting Malaysian CPO will be considerable cheaper simply because the overhead costs will be spread over a vastly different volume of output. It is also likely that Malaysian extraction efficiencies will be greater than those in Pakistan since the Malaysian (or Indonesian) industry is mature, highly competitive from a commercial perspective and so lays a massive emphasis on optimizing the machinery. There are almost no circumstances in which one can imagine a small CPO extraction mill Pakistan being capable of matching the levels of efficiency found in the main producers.



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Table 14 models the processing of a hypothetical 2,000 ha. of FFB output in Malaysia and the 2,000 ha. in Sindh. The efficiency differences are taken care of simplistically be assuming that the Malaysian mill works 2 shifts and the Sindh one, while the extraction rates are different (favoring Malaysia). It will be seen that the Malaysia mill does not require as much capacity to mill a larger quantity of FFB as does Sindh. This will reflect in the cost data. TABLE 14: PROCESSING PARAMETERS FOR HYPOTHETICAL MILLS IN MALAYSIA AND IN SINDH

PROCESSING Malaysia Pakistan Processing days/year 300 250FFB tons/day 288 240Shift hours 16 8Mill size (FFB t/hr) 18 30Extraction rate 0.9 0.8Oil output (tons CPO) 17,107 8,640

Source: ADB and Barlow et.al. “The Indonesian Oil Palm Industry”, ANU 2003 Note: Reduced processing time in Pakistan reflects lower capacity use while the lower extraction rate reflects lower efficiency

These technical variables are combined in Table 15 which summarizes the cost comparisons. The costs for Malaysia are taken from industry reports while the costs for Sindh are “guesstimates” because no cost or input data have been provided on the local palm production and, of course, Sindh does not yet have installed capacity for milling which is another aspect of the problem of the local industry beyond the scope of this paper. In this respect the cost figures must be treated with some suspicion. Nevertheless they show enough reason to be skeptical of the economic value of growing oil palm in Sindh.



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TABLE 15: POSSIBLE COMPARATIVE COSTS OF PRODUCTION FOR CRUDE PALM OIL

Source: Barlow et al, op.cit and ADB

Note: Pakistan processing costs assumed to be 30% higher but no actual data exist since there is no mill. Transport costs are assumed based on international palm oil shipping rates and possible costs from Thatta to Karachi.

The data show that if the comparison is to be between RBD oil landed Karachi, and CPO refined Karachi, then (although no data is available) there is a strong likelihood that the locally refined oil would be much more expensive since quantities would be relatively small (and there are economies of scale in refining equal to those in extraction) and Malaysian efficiencies would be much greater.

3. Buffalo milk

With double the fat content relative to cow milk26, buffalo milk has a prominent place in the market benefiting from better quality perception from consumers27, fetching higher prices28 and representing higher potential for value-addition for processors (cream, butter). Buffalo milk is the raw material used for the production of ghee which is a cash product. Buffaloes are more efficient at converting highly fibrous low grade food (paddy straw, crop residues, wheat) than cows. Despite the fact that their daily milk yield is lower then cows and they have a shorter lactation period, they can still achieve yields of seven to fifteen liters of milk per day.

26 Buffalo milk contains 7% fat while cow milk generally has about 3-3.5% fat. 27 In Pakistan, buffalo milk is perceived as offering better health benefits than cow milk. 28 Buffalo milk constitutes over 80% of the milk sold in Karachi according to the Director of the Karachi Dairy Farm Association Mr. Baba Pilur and the price is 5 to 7 Pak.Rs higher then the price of cow milk.

COST ITEM Malaysia Pakistan

US$/ton CPO

US$/ton CPO

Upkeep 26 33.8Fertilizer 40 52Harvesting 34 44.2Transport 35 45.5Processing 36 46.8Overheads 38 49.4Depreciation 41 53.3TOTAL $ in tank 250 325 Transport to Karachi 30 5 CPO cif $Karachi 280 330 CPO $ Value Karachi 4,790,016 2,851,200



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The analysis was based on the position of the milk supply to the Karachi market from the Karachi buffalo colony. There are large numbers of buffalo that are kept in a peri-urban environment in Karachi in order to provide meat and milk to the population of the city29. Of the five thousand tons of milk consumed every day in Karachi, only 20% come from rural areas outside Karachi. The following explanations were provided to justify why no more entrepreneurs have established farms in rural areas:

i) the political pressures, the landlords with influence on the local government are more powerful in districts than in Karachi and thus are more likely to hinder the uprising of independent entrepreneurs;

ii) Karachi offers a hub for supply of a variety of fodder inputs brought in from different parts of the country (maize sub-products, wheat, cotton seed, corn, rice husk, rice sub-products, molasses, etc,.);

iii) the supporting systems and levels of coordination required to maintain efficient cold chains have yet to be put in place to allow proper distribution of milk.

The colony is under pressure to delocalize to more rural areas for several reasons:

i) effluent disposal in urban Karachi has become an environmental hazard whereas it would find immediate recycling value into fertilizer or fuel in rural areas;

ii) trucking of large quantities of forage into the city represents an additional cost to the consumer and a hazard to road traffic (road accidents are frequent)30;

iii) land, where existing lots are based, has become prohibitively expensive and access to additional land to support production growth is virtually impossible in the immediate periphery of urban areas

iv) costs of production (fodder, labor, possibly water) are cheaper in rural areas.

Karachi alone is estimated to consume every day more or less five thousand tons of milk31, four of which are mainly buffalo milk supplied from farms in Karachi and 1 thousand ton a combination of buffalo and cow milk from districts of Sindh. All the processed (UHT milk) is imported from Punjab. The Karachi market is continually growing with the size of the population. There are no processing facilities in Karachi in the proper sense of the word. It is unlikely that there be sudden change, positive or negative in the market as investors generally prefer to invest in capacity in Punjab where the environment is more favorable and the location is more central.

29 Numbers for the buffalo population of Karachi vary from 150,000 to “one million”. There appears to be no official data relating to this colony. For the purpose of this paper we assume it to be 250,000 as a purely arbitrary number. Buffalo manure is disposed of into the Korangi Creek. 30 The main road from Badin via Thatta to Karachi becomes congested with trucks carrying forage to the city and there are frequent accidents. 31 Source: Karachi Dairy Farmers’ Association which trades 120 tons of milk per day in its marketplace.



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TABLE 16: SUPPLY AND DEMAND OF MILK

SUPPLYUnits Values

Buffalo in Coastal Sindh Animals 1,500,000Female buffalo Animals 1,050,000

Average lactation period Days 200Females lactating % 0.55Milking animals Per day 575,342Average yield Liters/day/animal 6Herd output Raw Milk/day (liters) Liters 3,452,055Adulteration factor % 0.30Water added to raw milk Liters 1,035,616Output Retail Milk Liters/day 4,487,671TOTAL ANNUAL MILK SUPPLY Liters 1,638,000,000

Farm-gate Price/Liter US$ 0.26Annual $ Value of milk supply US$ 423,620,690

DEMAND

Human Population (Census 2004)Sindh 30,000,000Coastal Sindh

Karachi 13,853,000Thatta 1,301,000Badin 1,328,000TOTAL 16,482,000

Minimum daily human requirement Liters/person/day 0.5Volume of demand in Coastal Sindh Liters/day 8,241,000

SUPPLY-DEMAND BALANCE

Daily supply from Coastal Sindh Liters 4,487,671Volume of supply deficit Liters/day 3,753,329Per capita daily availabilityfor Coastal Sindh Liters/person/day 0.27Shortfall in per capita supply Liters/person/day 0.23Herd size required to supplyCoastal deficit Lactating Females 625,555

Animals are milked largely by hand into buckets and churns and the milk is transported by middlemen to the final end user. There are few if any facilities to cool the milk and no cold chain. Raw milk has a “shelf life” (it never actually reaches a shelf as such) of about 3-5 hours in a hot climate, so the industry is entirely dependent on the demand for the product on the day.



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The value chain from rural producers to Karachi markets is shown in Fig.7:

Fig. 7 Sample milk distribution chain sample prices32 Feb. 2007: There is almost no processing or batch sterilizing of raw milk. Raw milk enters human consumption unprocessed with the household responsible for boiling it prior to consumption. There is no secondary or tertiary industry on a scale justified by the size of the city of Karachi and by the export opportunities. The quality of the milk entering consumption is poor. There is no quality control on farm, although buyers will adjust the price if the milk is obviously poor quality. Once the milk passes into the supply chain, it gets diluted and adulterated. The milk supplied at the farm gate is often a mix of 90% buffalo and 10% cow milk. The milk is traded through a large succession of intermediaries and is often diluted with water several times before it reaches the market. Traders may add back oil or fats into the milk in order to recover fat content levels that will allow higher prices. The prices in the diagram give an idea of profit margins at different levels. The dilution of milk described above would raise the margin further and is not reflected in the quoted prices. Prices go up by as much as 4Rs/liter in the summer. Prices increase also during holidays. Milk prices have gone upwards by 25% in the last 5 years (Rs20/l to Rs25/l). The cost of transporting un-refrigerated milk is about 1Rs/liter. A preservative, hydrogen peroxide is commonly added to the milk that will be transported un-refrigerated, which has a negative impact on quality. It was impossible to obtain reliable information on cost of transportation in refrigerated units and the range of 1.5Rs/liter to 3Rs/liter should be used for the time being.

32 None of the prices above are official sources but based on verbal information collected from different sources.

28-35Rs/l

~25Rs/l

24Rs/l 13Rs/l

Base contracted volume sold at fixed price and surplus sold at market rate.

Semi daily auctions 15-37Rs/l

Community ‘Gawalla = milk collector’ often has exclusivity rights on local producers.

Producer: individual farmer in rural areas.

Wholesale buyer and transporter Agents: get the milk form the wholesale buyer to the market in Karachi.

Karachi Dairy Farmers’ Association (central milk market) (~+2Rs)

Retailer (+2Rs)

Producer: Karachi buffalo farm

Consumers

Consumers in rural center markets

15-18Rs/l



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The structure of production runs counter to the “first law of agribusiness” which says that productive units (in these case animals) should be near the source of their raw material (in this case forage). It is usually more efficient to transport high value-low volume output than it is to transport low value-high volume inputs. Assuming in the worst case scenario the only market is Karachi where most existing producers are currently located, a rough initial analysis leads to the following conclusion: the savings generated from not having to bring in the fodder from 100km away would more than compensate for the additional cost encountered from transporting the corresponding amount of milk in an un-refrigerated truck over the same distance and would at least break even with the same cost using a refrigerated truck33. This said, all other costs (labor, land) are generally lower in rural areas and would add up to defend the case of rural production. There is an unmet demand for milk throughout the country and not only in Karachi.

Comparative costs The retail price for milk in Karachi is high and has been increasing. At over 50 US cents/liter for UHT milk and around 30-40 cents for unprocessed milk (that may have been adulterated), milk in Karachi is more expensive to the price paid for milk in the UK (18-19 pence per liter – 32 US cents). In Thailand the farmers are guaranteed 31 US cents/liter (12.5 Thai baht) for raw milk however this is a subsidy for the industry paid by the consumer in a country where a dairy industry is problematical due to very hot temperatures; one might pay 50 cents for processed/packaged milk in retail shops. In India the retail price of milk is between 27 US cents/liter and 68 cents depending on type of container and location, the average price is 35 cents/liter. These prices are for processed UHT milk. As a point of general comparison, countries have been grouped in a 2003 study in the following classes34:

• EU/US level: The milk price in 2003 varied from 28 - 40 US Cents/liter in the EU with the lowest prices in UK and IE and the highest in Germany, the Scandinavian countries and Spain. In the USA the milk price varied from 26 - 30 cents. Besides the EU/US, this price level was also found in Hungary, Czech Republic, Israel, Bangladesh, Thailand and parts of China.

• World market price level: In 2003 a milk price level of 15 - 22 US Cents/Liter was received by farmers in Estonia, Poland, Chile, Brazil, India, Vietnam, and Oceania. This price range generally reflects the range of the ‘world market price for milk’ in recent years.

33 Assumptions: In a day, a buffalo consumes 40kg of fodder originating in Thatta and yields 8 liters of milk for 60% of the time (the remaining 40% accounting for the dry period). Not having to transport 10T of fodder transported over 100km at a total cost of 4000 PkRs would have to be evaluated against additional costs generated from transporting the corresponding amount of milk: 10000*8*60%/40=1200 liters at a transport cost of 1Rs/l un-chilled or 3Rs/l chilled. The 4000Rs cost savings on fodder transport is over 3 times as high as un-chilled transportation and 10% higher than un-chilled transportation of the equivalent in milk (1200PkRs and 3600PkRs respectively). 34 “Milk prices and costs of milk production in 2003 - A global comparison”, Torsten Hemme, Milkproduction.com November 2004



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• Below world market price: In Argentina and Pakistan farmers receive very low prices. This means the milk price there is not determined by the world market price for butter/skim milk powder minus average processing costs.

The same study undertook a survey of costs of production. Within Europe and also America the costs of milk production differ significantly. Significant cost advantages of larger dairy farms compared to smaller ones were found. The data are summarized in Table 17 as follows:

TABLE 17: COMPARATIVE PRODUCTION COSTS OF MILK Source: Hemme, op.cit., FAO and PPTA These data require some explanation. No information on what is meant by size of the farm is provided by the author except to say that “very large” farms in the USA typically have more than 2,400 animals. For Pakistan, the average size of a feedlot in Karachi would be 200-300 animals, 500 beasts would be on the large side. Similar figures apply to India. For both of these countries the data are for buffalo, while for the others they are for cows. Small farm sizes would probably average 20-30 animals in the developed countries and no more than 4 or 5 in the developing countries. Production costs are highly sensitive to yields. For example, the cost information found in the Karachi Colony was from a 500-head farm that obtained up to 10 liters per animal per day. The breakeven production level (i.e., to balance the cost of producing the milk with the farm-gate price received) was 9 liters. If the production rate had been as low as found upcountry, the same unit would have had a cost of 58 cents/liter. But of course in that case it would not have been treating the animals with hormones and feeding concentrate. In rural areas the production costs might be quite low, but then so are yields. It must also be understood that milk efficiency per animal is very different. The more progressive farms in Karachi may get 10 liters/day/animal, but the average production province wide is surely no more than 4 liters. By comparison, an efficient milk animal in

COUNTRY SIZE FARM COST/LITER

US Cents DEVELOPED USA Very large 28.00UK Large 28.00Germany Small 40.00Poland Average 17.00 Large 15.00DEVELOPING India Large 15.00 Small/rural 25.00Pakistan Karachi/large 26.00 Rural/small 30.00Thailand Average 31.00



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the USA or Europe or New Zealand may be producing over 20 liters. In this respect, the investment costs in the business (i.e., in the stock of animals) are quite different. One might think that this would mean that Pakistan owners would see the value in calves, but apparently they do not. In the light of these data, Pakistan’s milk production costs are high, but not outstandingly so. However, it must be remembered that input costs in Pakistan compared with the developed countries are very low, and so the valid comparison is with India. Larger farms in India are similar to those found in the Karachi Colony so with this perspective it can be seen that Pakistan has some catching up to do. Nevertheless, given the possibility for efficiency increases there appears no reason why ultimately Pakistan should not develop a highly competitive dairy industry targeted at exports. One final comment on prices: It will be seen from a comparison of the price survey data with those for production costs that superficially milk production is a business in which the margins are quite slim. However, it must be understood that in many countries milk is produced on the basis of farm subsidies. An analysis of the economics of this aspect of the international industry is beyond this paper. However, for example, the Thai price paid to farmer is a subsidy and is about 10 cents/liter above the retail price. The important point to be made is that as the dairy industry is rationalized under the WTO and other free trade arrangements, these subsidies will be removed giving the low cost, efficient producers an opportunity to expand their industries at the expense of those who cannot compete in an open market. Pakistan has the potential (though it is far from the reality) of becoming an efficient milk producer.



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CHAPTER 5

COMPETITIVENESS ISSUES IN FOOD PROCESSING

The previous chapters of this Study have captured the broad parameters of the food processing industry in Pakistan. These include a comparison with the global approach to the industry that emphasizes that successful multinational companies are driven by consumer demand for healthy, attractive branded products. By contrast Pakistan’s industries are mainly driven by the availability of primary raw materials. Raw material supply in Pakistan is problematic since agriculture has developed fundamentally along traditional lines and traditional cropping patterns. Intermediate processing industry usually has excess capacity. Finally, all sectors of the industry, including the manufacturing sector, are small-scale and under capitalized. Value chain analysis suggests that there are inefficiencies at every level, from the quality of raw materials, through the cost and supply to inputs to the final steps in packaging and marketing to consumers. That said, it is important to understand that this is by no means confined to the food sector. It is a description of almost all businesses in Pakistan and the reasons for this situation are social/cultural, historical and economic. An analysis of the structure of Pakistan industry is important, but it is beyond the scope of this report. 5.1 Comparative Production Costs For most processed foods the costs of necessary raw materials and factor inputs are higher in Pakistan than in either comparable neighboring countries or in the developed countries (e.g., USA). The differences between Pakistan and its neighbors are not great (see Table) and probably Pakistan’s food manufacturers are not hugely disadvantaged. The data shown in the table are aggregate and in many cases local food companies might claim to do better than their Asian counterparts depending on the specific arrangements they have with local suppliers. Pakistan certainly appears to have an advantage in the labor market regarding wages (of course there are other factors at work also – see below). What is rather counter-intuitive is that the data suggest that the developed countries (in this case the USA, but Europe would be little different) have an overall advantage in the costs of food production. First thoughts would be that countries that are primarily agricultural would automatically have a cost and physical advantage in the basic materials needed for food production. But of course this is not the case. Agricultural production regimes, including subsidies impact greatly on the actual supply of agricultural products in both Europe and the USA and one only has to mention the Common Agricultural Policy and the subsidies paid to US farmers to understand why that statement is true. This long-term institutional support for basic agriculture in the West has meant that the technology applied to agriculture is extremely sophisticated. Productivity in terms of yield per hectare is very high and results from the application of highly capital intensive means of production. Whereas the Pakistani farmer harvests wheat at best with a reaper drawn behind a small tractor and achieves perhaps 2-3 tons per hectare, the American farmer uses pin-point irrigation and fertilizer application, a computer-driven combine harvester and gains 10 tons



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on the same land area35. It is therefore the case that the developed countries are able to generate a far larger surplus of agricultural raw materials than are the developing countries including Pakistan. This raw material is more reliable in terms of its supply, more stable in terms of price (e.g. futures markets in the developed countries allow the risks of agricultural production to be minimized) and higher quality. TABLE 18: COMPARATIVE RAW MATERIAL AND INPUT COSTS

Source: Internet, various Note: Comparing costs between countries is a major and difficult task. Prices vary between Ports of origin and destinations. These data give only an approximate indication. Turning from basic raw materials to other necessary inputs, here too the developed countries have an advantage. Whereas it is true that the developing countries have much lower labor costs, it is the case that food manufacturing at all levels is open to the intensification of capital in the production process. For example, a typical small-scale wheat flour mill of, say, 100 tons per day capacity located in Asia might employ 15-20 persons per shift; in the USA a mill capable of processing 3,000 tons per day might use 3-4 persons per shift. All kinds of food manufacturing can be fully automated and this automation improves the efficient use of the raw materials, reduces losses during the process and improves the quality of the finished product. The technical choice for packaging, for example, is between a manual packaging line for biscuits or cookies that uses perhaps 50 persons and one machine, costing $200,000. The people are certainly cheaper, but losses at this stage can amount to 10% of the value added by the process. The machine on the other hand can cut losses to less than 1%. This is not to suggest that it is the right decision to opt for a capital intensive manufacturing process in a developing country with low labor costs, but it illustrates that food manufacturing has a range of technical choices for the same product that can in many

35 In fact average yields are much lower than 10 tons which is more commonly found in Europe. The reason is that most wheat in the USA is rain-fed, whereas most wheat in Pakistan and in Europe is irrigated, hence the use of the irrigated wheat figures in the text example.

Item Pakistan Thailand India USA Raw Materials Flour ($/ton) 265 250 300 170 Milk (cents/liter) 30 31 35 40 Edible Oil ($/ton) 380 250 280 200 Sugar (cents/lb) 18 13 17 23 Inputs Land ($/m2) 17 55 41 80 Capital (interest rates %) 10.65 7 7.5 5.25 Labor ($/month) 173 290 196 4,000 Power ($/kWh) 0.09 0.04 0.08 0.06 Freight (40ft container $ to Japan) 1,600 1,340 900 800



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instances favor the developed countries. Economies of scale, access to state-of-the-art machinery, access to capital to invest in that machinery all lead to lower unit costs of production and better quality products. The present Government’s focus on improved competitiveness has led to some improvement in the functioning of factor markets. These essential changes have impacted favorably on the food industry as indeed on others. The privatization of large parts of the financial sector has improved matters in capital markets. The remaining challenge in the financial sector is to consolidate the gains made especially in the area of enforcing financial contracts and in increasing the private sector’s role in insurance. Reforms to codify labor legislation are a good start and the Government is moving forwards to prepare a new Employment Services Act that will increase labor market flexibility through the use of temporary labor contracts. Additional reforms will be undertaken to reform laws governing labor welfare and to rationalize the labor levies system. Health and safety at work regulations also need to be tackled. Land reform has proven a difficult area. The challenge is to ensure clear title for new transactions while at the same time settling a host of property disputes. The Government needs to establish a consistent legal framework, registry and property-tax system to define land-use rights of owners and leaseholders and to provide tenants with some measure of security of tenure. Land must also be transferred in a timely manner with confidence in the outcome and at minimum costs. a. Raw Materials There are two principle features of raw material supply in Pakistan that place the food manufacturer at a disadvantage: First is access to a steady and consistent supply of the products required? There are several reasons for this. The factory may not be located in the right place, i.e., it may not follow the first rule of agribusiness, which is to locate near the raw materials supply. Instead, perhaps because of land ownership issues, the factory is located where the land is owned and then the search is one for raw material. Also the links between farm and processor are often tenuous with the raw material passing through a lengthy marketing chain from one middle-man to another. The result is that there is not one market for the raw material, but many with supply depending on favors and personal allegiances rather than a transparent understanding of the supply and the price. Second, the manufacturers receive poor quality raw materials. Post harvest handling is a major issue, from the wheat industry where procurement is done by government officials and the wheat is loaded into gunny sacks, to mango where the fruit remain un-cooled and deteriorate very rapidly. Each industry has its own unique problems (e.g., sugarcane is transported long distances and loses sucrose content, milk is adulterated with formalin to prevent I going off), but the overall result is that agricultural produce in Pakistan is not of the best quality and this loses value in the processing chain.



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b. Factor inputs Any food processor requires basic inputs to turn raw agricultural produce into a processed, packaged food product. The process is no different from that which occurs in the kitchen of a domestic household except that the scale is industrial. It involves the material to be cooked, clean water to wash the material, oil for cooking, equipment to prepare the food and vessels, in which it can be cooked, a suitable place for the cooking process to occur and finally suitable ways to present the process food to the consumer. The ideas are simple, but the execution is difficult (even at the household level preparing a meal that uses fresh produce, well-chosen additives and in a clean environment is a challenge).

i. Land, potable water and the treatment of effluent As in most developing countries, food processors in Pakistan have to provide their own sources of potable water, usually from boreholes dug on their own land. This seriously limits the possibilities of supply if, for example, the processing capacity is planned to increase. Equally the use of groundwater carries the risk that unwanted substances can permeate the local water supply (e.g., fertilizer or chemicals from agriculture). The enterprise can either ignore the risk (often the case in developing countries), or else invest in expensive reverse osmosis equipment for cleaning the water. Many food processing factories create effluent as a by-product of the process. For example, sugarcane milling produces cane waste (“bagasse”) as a by-product, rice milling produces bran and most processes that include cleaning raw materials produce waste water. Some of these by-products have value but require treating and managing. Often this process is mismanaged, losing value from the by-products. In the case where effluent is valueless, few controls exist and the material is usually dumped directly into the sewage system, so polluting the environment. The environmental costs of small food processors in Pakistan are probably high, though no data have been found that measure the impact.

Waste (and energy use - see below) can be decreased through process optimization, operating techniques, and scheduling. Wastewater can be processed and reused. Waste can be converted to byproducts and reused or sold. Changes made to improve quality or safety often results in energy savings. For example, improving an air filter, necessary to meet health regulations, also benefits the environment, although health regulations were the motivation behind air improvement. Many such opportunities exist in Pakistan but few have been adopted because there are no disincentives (i.e., controls or regulations that are enforced) and waste treatment requires money to be invested first before the benefits are recouped.

ii. Energy

The food processing industry depends on energy for the processes required for food freshness and safety. Thermal processing and dehydration are the most commonly used techniques for food preservation, and require significant amounts of energy. Process heating uses on average about 30% of total energy in the food industry (with significant



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variations between industries), while process cooling uses about 20%. Food preservation is dependent on strict temperature controls – cooling systems. Safe and convenient packaging is extremely important and is also energy intensive. The newest packaging techniques require aseptic techniques and electro-chemical changes. Proper storage is also energy dependent. Freezing and drying are used for food storage. Drying procedures usually depend on fossil fuels. Older dehydration systems such as those found in Pakistan were designed to operate with maximum throughput, disregarding energy efficiency. Newer systems are designed with re-circulating dampers and thermal energy recovery equipment to cut energy use 40%, but these are expensive and require capital to be invested.

Energy use in the food processing industry in Pakistan could be decreased significantly. Four processes that offer particularly good opportunities for improvement include:

• Pasteurization and sterilization by cold pasteurization and electron beam sterilization.

• Evaporation and concentration by supercritical extraction and protein separation.

• Drying by vapor recompression supercritical extraction extractive drying. Chilling, cooling and refrigeration by controlled atmosphere packaging.

Given that energy use is so critical to the food industry, it reliability and supply is of major importance to food processors. Almost all of those interviewed for this Study complained about the cost of electricity and diesel fuel and about the reliability of supply. It is important to understand why a reliable energy supply to power the production process is probably more important in the food industry than elsewhere: it may seem obvious, but is perhaps easily forgotten, that food processing utilizes biological materials. Once the process has started (for example, potatoes have been peeled, sliced and then pre-cooked as part of a chip manufacturing process) if it stops, then the entire batch is wasted since the cooking and processing process depends crucially on the time spent on the specific elements in the process line. Imagine that pre-cooked potato slices have been placed in a hot oil bath for frying and the power fails. The oil temperature drops and the slices are spoiled and must be thrown away. Costs are incurred from waste of raw material, loss of processing oil (which must be replaced) and from the lost value from lost sales of this batch. Equally the capacity use of the process line is reduced, so overhead costs become more difficult to bear on the basis of lower capacity utilization. Almost all food processors in Pakistan suffer from this problem. The larger companies install their own power generation sets or use waste material to fuel boilers, but many depend on external electricity supplies with no alternative for when the power fails. Many, reluctant to dispose of spoiled semi-processed product simply continue the process when the power returns and sell sub-standard products to a market that in any event is not quality conscious.



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iii. Capital - factory buildings and equipment Enterprises that process food products require specialized buildings. Again, reference to the domestic kitchen shows the reason. One does not prepare food in any part of the house but in a specialized kitchen that is designed for cleanliness (and ease of cleaning) and for the disposal of unwanted wastes and smells. A food factory has exactly the same requirements. International standards lay down strict requirements for any building in which food is handled or processed, from the kitchen of a hotel or restaurant to the largest scale food mill, cookie manufacturing line or market area. In developed countries these building standards are rigorously adhered to and enforced by both the enterprise themselves and the regulating authorities. The opposite is the case in developing countries and Pakistan is no exception. Because the regulations are unclear, and the level of technical know-how quite poor, even fairly large local investors in food processing have ignored this aspect of their business. A typical food factory in Pakistan is constructed to save money and built more for cheapness than as an integral part of the process itself. The technical aspects of this are many, but they include failure to isolate different parts of the process (e.g., raw material handling from cooking, and cooking from packaging), no provision for workers to change clothes or clean themselves, open: “warehouse-style” roofs, failure to restrict areas that are dusty, failure to drain excess water. The list is a lengthy one. Food processing equipment can be extremely expensive and highly sophisticated, driven by specialized computer software and using very high grade steel in its fabrication to prevent rust and contamination of the food products. Such sophistication is not the rule in Pakistan, where much food processing equipment is manufactured locally for least cost using sub-standard materials. Equally designs generally do not adhere to international standards which provide that machinery should minimize hazards (e.g., from hot or toxic or dusty materials) to workers and be easily cleaned. Take a rather specific example: welds should be rounded off so that small, inaccessible corners are avoided; screw heads should be sunk and plugged so that they do not attract dirt and bacteria. \this is almost never done with locally manufactured equipment. All enterprises wish to save money on capital invested. However, major food manufacturers understand that well-designed buildings and equipment are in the long-run cost efficient and pay back their investment easily in terms of saved down-time and increased value added. In the developed countries food companies are also highly sensitive to the civil or criminal claims made against them if their food products are contaminated. In countries like Pakistan, however, most investors in the food business do not understand the economic efficiencies and even if they do, their access to the extra capital needed is limited. Their problem is understandable: the customer does not insist on quality and there are few penalties involved if the occasional customer is sick as a result of eating the product. The competition from a large number of small-scale businesses is intense. Thus the enterprise that understands and takes food standards seriously is at an immediate disadvantage (at least in the short run) because it may have to price its products higher in the market to achieve a return on the extra capital employed. At the same time, because many enterprises are small, the amount of capital available is limited and expensive. Most



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investors in Pakistan cut corners, not perhaps because they want to as individuals, but because there is no industry consensus on standards and cutting corners turns into short-term profits, whereas the long-term is discounted.

iv. Labor Every report on every industry in Pakistan mentions labor as an issue for the manufacturing process. Pakistan has a surplus of youthful male laborers, but a distinct shortage of experienced skilled workers. Food processing requires several special skills, most of which are in short supply in Pakistan. These skills include food handling and treatment, food science and product formulation, food engineering, process line management, process line technology, waste management, laboratory management, quality control (especially quantitative methods), packaging and labeling, logistics, design, marketing of fast moving consumer goods (FMCG). At the unskilled level, because for the most part Pakistan has adopted a labor intensive approach to the industry (e.g. manual packing would be preferred to machine packing), what is required is manual dexterity and personal hygiene. These aspects are lacking in Pakistan because they are generally the attributes of females rather than males. In Thailand, for example, most food factories would prefer to employ female labor for unskilled tasks (good examples would include chicken slaughtering and tuna processing). In Pakistan the level of female employment is low, and this is as true of the food industry as it is of others.

5.2 Other Critical Competitive Elements a. Support for Agriculture (Research, Development and Extension)

i. Agricultural Research and Development

There is an enormous number of institutions that are involved in agricultural research in Pakistan that broadly come under the supervision of the Pakistan Agricultural Research Council (PARC). The National Agricultural Research Centre (NARC) is a major research-based institution amounting to an agricultural university with pure an applied research being undertaken at various institutes on the campus (e.g., Animal Sciences, Farm Machinery). There are R&D institutes and outreach stations all over Pakistan financed at either the federal or the provincial level. In general, it can be said that most of the agriculture (raw material) production aspects of the food industry are very well understood in Pakistan. That said, an often voiced criticism is that the research seldom makes its way to the field. But this is an easy criticism to make. Visits to some of the NARC institutes suggested that the reverse is true and that the researchers have very close connections to the farmers and that their work is very much demand driven.

The National Commission for Science and Technology has declared biotechnology as one of the high priority areas in research. IN 2005-06 pre-commercials planting of indigenously developed Bt cotton seed supplied by PAEC was carried out in Punjab and Sindh. Because of the encouraging outcomes the Prime Minister has stated that farmers should grow Bt



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cotton. Other programs to develop “bio-tech” (or genetically modified – GM) crops are in the pipeline. This is a critical element in Pakistan’s efforts to solve the crop productivity problem that has been mentioned earlier in this Study. Not only is a bio-tech approach important in itself, but Pakistan’s Asian neighbors are making great strides to develop agriculture on the basis of these crops. China has taken the lead in research on genetically modified plants. It has been investing $100 million per year in the discipline since the beginning of this century. Biotech National Research Laboratories in China employ hundreds of scientists. At present, more than 60 versions of GM plants have been approved for field trials. The leading GM plant in China is Bt cotton, covering 66 per cent of the area under cultivation. India too has embarked upon a very ambitious program in biotechnology, with a view to harnessing its available human and biodiversity resources. The biotechnology sector in India has in recent years witnessed accelerated growth. With approximately 200 industrial organizations producing biotech products, the sector is expanding rapidly. Many other Asian countries including Indonesia, Malaysia, Philippines, Thailand and Vietnam are giving high priority to plant biotechnology research in the hope of addressing the pressing challenges related to improving productivity, farmers livelihoods, driving rural development, and meeting food security demands. Pakistan until recently has been focusing on first generation applications in biotechnology, especially in agriculture and textile, leather and chemical industries, besides health, bioinformatics and environment. The government has invested about $17 million in research and development in various biotech projects, like vaccine production and insect-resistant crops. The Ministry of Science and technology has 29 projects and the Pakistan Agricultural Research Council has another 12. The Higher Education Commission and Pakistan Science Foundation sponsored 16 and 13 projects respectively. Many international institutions also provide financial assistance in various biotech projects. Such organizations include the Asian Development Bank, Islamic Development Bank, World Bank, USAID, Rockefeller Foundation and Australian Centre for International Agriculture Research. In all, more than 70 projects have been approved in various disciplines of biotechnology and genetic engineering at different institutes. The government has now set up a National Biotechnology Commission to evolve a national policy and action plan for the promotion of biotechnology in the country. The NBC intends to formulate a national policy and action plan to promote the uses and applications of new biotechnology both in agriculture and health sectors. Pakistan has more than 20 academic institutes dedicated to biotechnology and UNIDO has sponsored a Biotechnology Forum with the objectives that include:

• To take all necessary steps for the speedy induction and promotion of Biotechnology at all levels of the Federal, Provincial and local Governments.

• To prepare a draft National Biotechnology Policy and Action Plan. • To facilitate and arrange the creation of important databases of scientific

manpower, research institutes and projects in the country.



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• To recommend steps required for strengthening and expanding education, training and research facilities in the field of Biotechnology.

• To sponsor and encourage research in the agriculture, health and environment sectors.

• To advise the Government on specific measures for the development of Biotechnology related to the economic development of the country.

• To promote training and research in fields at the cutting edge of Biotechnology.

TABLE 19: CENTRES IN PAKISTAN WITH MAJOR BIO-TECH CAPABILITY

- Pakistan Atomic Energy Commission (PAEC); - National Institute for Biotechnology and Genetic Engineering (NIBGE), Faisalabad; - National Centre of Excellence in Molecular Biology (NCEMB), University of the Punjab, Lahore; - Nuclear Institute of Agriculture and Biology (NIAB), Faisalabad; - The Centre for Molecular Genetics (CMG), University of Karachi; - Biomedical and Genetic Engineering Division, Dr A.Q. Khan Research Laboratories, Islamabad; - Centre of Agriculture, Biochemistry and Biotechnology (CABB), University of Agriculture, Faisalabad; - Agriculture Biotechnology Institute, National Agriculture Research Centre (NARC), Islamabad; - University of Arid Agriculture, Rawalpindi, and - Institute of Biotechnology and Genetic Engineering, Peshawar .

Source: Ijaz Ahmad Rao, 2006 Among these institutions the National Centre of Excellence in Molecular Biology (NCEMB), University of the Punjab, is singled out for mention. The institution has to its credit a number of major achievements in modern biotechnology. It developed plant expression vectors for the introduction of foreign genes and synthesized four Bt pesticidal genes used in cotton and rice against American bollworm and rice leaf-folder. The genetically modified pest resistant varieties produced there include Bt rice Indica Basmati 370, while three novel Bt genes are being patented through a US company. Confined field trials of Bt basmati rice were successfully carried out last season. In addition, studies are being carried out to evaluate virus and insect resistance in genetically modified crops of mango, potato, tomato, chickpea, sugarcane, tobacco and cucurbits

ii. Field level extension

Even if individual researchers are open to real-world feedback, the weakest area for agriculture is almost certainly the mechanisms whereby R&D and other basic knowledge get transmitted to farmers. This is a truism about the agriculture of all developi9ng countries, so should not be taken to heart particularly in Pakistan Nevertheless, field visits to district extension offices suggest that almost none of the requirements for an efficient extension service are in place. This means that the average farmer is cut off almost entirely from information about his industry. Primary value-added in the food processing chain is done by the farmer who adds a variety of inputs to land. These inputs e.g., seed, fertilizer, water, labor are of major importance for the success of the value-addition process because the ultimate quality of a food product depends on the quality of the primary ingredients –



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for example, poor seeds mean low yields and often poor quality produce. All these inputs require improvement and the Government encourages public-private linkages between research institutions, extension agencies and agribusiness companies that will allow agricultural support enterprises to flourish. Agricultural (farm) costs of production are an essential factor in determining the overall competitiveness of the final food product and the Government’s target is to reduce these costs compared with Pakistan’s overseas competitors b. Essential additives Aside from the normal raw materials that form the basis of a given food item, say wheat flour or potato or fruit pulp, the manufacture of food requires certain key additives that require special mention since they impact directly on the competitiveness of the industry as a whole. Almost all cooking (for such is food processing) requires the addition of sugar, edible oil (as a frying or coating medium) and salt.

i. Sugar The addition of sugar is probably the single most important item in the processing of food. A variety of other additives are used (e.g., stabilizers, flavorings, enzymes etc.) but sugar is usually a prime ingredient. It is, of course, also a consumer item in itself, but it is not in this aspect that it is considered here. Most food processors can obtain the sugar they need. But it is almost all imported. The reasons for this are price (lower than local sugar) and quality (better than local sugar). Once again, reliability of supply is also critical. Sugar comprises a high proportion of the input costs of a given product (varying between items) but for the example used in this report it is 15%. Ensuring that the food processing sector receives sugar is an important aspect of competitiveness and the local sugar industry needs considering in the light of it being an important ingredient supplier as well as a direct supplier to the consumer.

ii. Edible oil The quality and reliability of supply of local cooking oil for industrial purposes is not good. Fortunately there is an alternative supply of palm oil from the world market and this can be refined directly here ion Pakistan. However, it must be seen that the high dependence on the world market for palm oil opens Pakistan to risks of price fluctuations over which it has no control (the same applies to sugar, of course). As argued elsewhere in this Study, growing oil palm in Pakistan does not appear to be commercially feasible. The growth of sunflowers should therefore be encouraged because they appear to provide the only feasible alternative source of vegetable oil. Rapeseed/canola is another source but may be less overall productive as a source of oil than sunflower seed.



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iii. Salt Pakistan is famous for its Salt Range of mountains between Islamabad and Lahore. Salt production has increased from 835,431 tonnes to 993,677 tonnes in 2007 under the auspices of the Pakistan Mineral Development Corporation (PMDC). Four salt mines - three in Khewra, Warcha and Kalabagh in Punjab and salt quarries at Jatta and Bahadurkhel in NWFP are being operated by the Corporation for salt production. Khewra is the site of the world's largest salt mines. In this respect the country is self-sufficient in this key ingredient. c. Packaging

Throughout the entire value chain the food business operates on extremely tight margins. Margins are particularly tight in Pakistan because of two pressures. A growing urban middle class wants convenience foods that demand sophisticated packaging solutions in order to retain their freshness, but they are not willing to pay for this level of technology. Given the large proportion of packaging costs in overall production costs, it is in this area that Pakistani food manufacturers often fail to beat overseas competition. Cutting corners on packaging can often affect both freshness and flavor, and consequently reduce market value.

It is important to understand that packaging technology is extremely sophisticated and embodies state-of-the-art food science combined with materials science. The larger food packaging companies have a presence in Pakistan, e.g., Dupont and TetraPak, but many of the smaller and medium scale manufacturing companies cannot afford the expensive products. Equally those in the juice industry point to the very high proportion of paper in the carton that accounts for around 70% of the entire cost of the product. It is sufficient to note that Pakistan imports most if not all of its complex packaging materials, whereas countries like Thailand are able to produce much of it domestically under license since they have highly developed petroleum oil refining industries that can produce base material for packaging such as polyethylene.

Many local products such as ghee and vanaspati are packaged in cans. The vegetable oil industry claims that only 5% of vegetable oil mills use old tin plates for packaging their produce. The use of old tin plate for packaging is harmful. However, taxes and monopoly control of the import of new tin plate is pushing this number up. The industry had tried introducing plastic bucket packs but had found the material lacking in quality and has since abandoned the practice. About 20% of ghee is sold in plastic pouches while the remaining 80% is sold in cans.

d. Support industries Food processing can be both labor and capital intensive. In its labor intensive form the industry requires little direct support beyond that provided by the suppliers of its raw materials and inputs. The basic processing line can be as simple as one machine served by workers who prepare the raw material (e.g., chop vegetables with hand knives) and with



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the entire packaging process done by hand. This is the model found everywhere in the developing world and one that Pakistan should wish to move away from. The capital-intensive model of food processing requires much more support. This falls into two areas: scientific (R&D) or technology support and light engineering. Food processing companies in Pakistan are very weak in the area of science and technology a fact that derives from the small-scale of the industry and the lack of resources to carry large R&D and product development capability. In comparison with, say, Procter & Gamble, which has an entire institute dedicated to pure research in food the average Pakistani company almost wholly lacks support. At the commercial end to the industry this amounts to a very limited capability to adjust formulations to specific markets. The situation for light engineering is better. Pakistan has good capability in this area, but in the case of food machinery it is generally not capable of meeting international standards. Food machinery requires specialist knowledge for its construction. If it not constructed correctly according to “food standards” then the product that the machine is used to manufacture will be compromised. Pakistan requires a “Food Machinery Engineering Institute” perhaps as the faculty of one of it major universities (Faisalabad?). This institute would provide both the food processing and the light engineering industry with the specialist knowledge required for reaching standards required by the market. e. Infrastructure Food processors depend on the timely supply of raw material and other necessary inputs together with basic utilities like water supply, sewage and electricity. Raw materials require storage (sometimes at cool temperatures or in clean environments) and products require transportation to ports for export and other market centers. In common with other businesses, food processors need access to communications. Because of the perishable nature of the products, speed to movement in the industry is critical. Key sub-sectors of the food industry in Pakistan lack adequate infrastructure. Two industries are mentioned in particular (horticulture and dairy) where cooling systems are required. The grains industry also lacks infrastructure. It is not less than astonishing that bulk commodities such as wheat are collected and moved in gunny sacks; shortage of these sacks is frequently mentioned as a constraint at harvest time. Failures of the electricity supply have been mentioned as contributing to lost productivity and the water supply and sewage systems are often inadequate even in the larger cities. In these cases the enterprise has to become self-sufficient, thus increasing costs. There may be some logic for developing special enterprise zones for the food industry. These zones would provide centralized food testing facilities, potable water, effluent treatment systems and perhaps light engineering services dedicated to the food industry (see above).



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f. Regional development The food processing industry in Pakistan is largely located in the Punjab (around the major population centers) and along the GT Road and in Karachi. NWFP has fruit pulp making industries and some other traditional industries (e.g., jam making) and Balochistan has fruit juice manufacture in Hub (on the coast) but nothing inland. One of the features of the industry is that often raw materials (such a sugar cane) have to be brought quite long distances to the processing facility. The key rule for food processors is to locate the factory near the source of the raw material (i.e., material that is bulky and difficult to transport) and to send the value-added product to market (i.e., transport the product with the highest value to weight ratio). This often does not occur in Pakistan because small-scale processors are tied to some family or community location and are either unwilling or unable to move to the optimum location. Once again, there could be incentives introduced to permit the necessary flexibility in the industry. g. Sanitary and phyto-sanitary (SPS) issues Pakistan faces significant non-tariff barriers to trade related to poor performance in the area of SPS compliance. The WTO Agreement on the application of SPSC measures specifies that countries should base their technical regulations on international standards. If they conform to these international SPS measures then there should not be barriers to trade. The way this procedure operates is that imported products require certificates issued by internationally accredited bodies or exporting authorities in the exporting country. Recent outbreaks of food born diseases such as BSE have emphasized the importance of these regulations. At the same time, if domestic industries comply with these requirements then the overall health of the population should improve. Pakistan has been subject to a number of bans, for example on meat to the Middle East, animal casing to Romania and potato to the Russian Federation. Most recently fish and seafood exports have been banned to the EU following a 2007 inspection of Karachi Fish Harbour that found unhygienic conditions. During 2004-05 the country was subject to 26 EU food alerts (see table).



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TABLE 20: FOOD ALERTS NOTIFIED TO THE EU Date Notifying

Country Product and Reason

26-01-04 Italy Chick peas – rodent faeces 06-04-04 Germany Spice mixes – unapproved color

additives 07-05-04 UK Chilli pickle – erucic acid 25-05-04 Greece Masala spice mixture – erucic acid 27-02-04 Norway Chilli powder - aflatoxin 21-02-05 Austria Bitter apricot kernels – Hydrocyanic

acid 01-03-05 Italy Sesame seeds - bacteria 13-03-05 UK Chilli powder - aflatoxin

Source: Pakistan’s Agro-based Exports & Sanitary and Phyto-sanitary (SPS) Compliance, Joint UNIDO and World Bank Study Two kinds of standards must be distinguished: these are:

a. Product standards which relate to the characteristics that the goods posses, including size, shape, appearance, chemical residues

b. Process standards that relate to the way and place in which the products are manufactured and packaged.

Pakistan’s food industry is generally deficient in both these areas for reasons that have been mentioned repeatedly in this Study. Product standards are usually deficient because consumers are often unwilling to pay for high quality products and don’t insist on adequate packaging and labeling. Equally there is a lack of enforcement (e.g., of laws dealing with adulteration) and a lack of knowledge by manufacturers of what is required. This is especially true when it comes to process standards. Poor understanding of technical processes and the need for “food standard” buildings and machinery is a major characteristic of the industry.



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There is a hierarchy of SPS issues and actions as follows:

TABLE 21: MAJOR SPS ISSUES FACING PAKISTAN Measure Issues and actions Awareness and recognition Consumers and other stakeholders must be aware

of the issues of hygiene and contents. The link between nutrition and health must be established

Application of good basic practices Such as EuroGAP and HACCP including traceability

Suitable and applied regulations Food laws and regulations must be relevant, in place and enforced

Clarity of institutional structures and roles

Functions of various institutions often overlap or are dysfunctional. Some necessary institutions may be lacking

Risk management National competent authorities have to be able to respond to the development of the more basic elements of the SPS measures

SPS diplomacy WTO members need to set agreed international standards

Source: UNIDO and the World Bank Study op.cit. i. SPS Issues in horticulture

TABLE 22: SPS ISSUES IN HORTICULTURE Key SPS Measures Issues and Actions Compliance In 2004 Pakistan ranked 32nd in the number of countries with

consignments rejected by the EU. The majority of notifications are for processed products.

Pesticide residues Maximum residue levels (MRLs) are exceeded. Studies suggest serious misuse of pesticides.

Traceability Farm and market records are non-existent. Such records are essential for exports to USA and Europe

Terrorism impact Need for detailed records of origin by exporters to the USA HACCP and GMP certifications

Some progress has been made with pack houses but it is limited. HACCP needs top be combined with Good Manufacturing Practices

EuroGAP E-GAP certification is a focus for development especially in the mango industry.

Post-harvest treatments Specific post-harvest treatments are prescribed for exports e.g., of mango and kinnow. The industry is making some progress but facilities are generally inadequate and knowledge is lacking

Irradiation There is some capacity in Pakistan. Irradiation is not always required

Pest risk assessment Pakistan must be able to provide evidence of pest free areas Source: UNIDO and the World Bank Study op.cit.



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ii. SPS issues in Meat

TABLE 23: SPS ISSUES IN MEAT Activity Issues Requirements Livestock production

Poor herd management Limited vaccination cover Lack of good breeding stock

Shift to feedlots or farmer cooperative groups Improved veterinary services and vaccinations

Slaughter Inoperative abattoirs Poorly regulated slaughtering

Privatize state-owned slaughterhouses Improved sanitation and HACCP for meat processing

Transport Lack of refrigerated transport Reefer vans, storage and chilling facilities

Marketing Complex and distorting marketing channels

Improved and integrated value chain

Retail Unhygienic retail facilities Lack of food hygiene controls

Regulated outlets Consumer awareness campaign

Export Almost wholly ineffective Provide all the above infrastructure and marketing channels

Source: UNIDO and the World Bank Study op.cit. h. Institutional aspects and regulatory bodies

i. Pakistan Standards and Quality Control Authority (PSQCA),

PSQCA, established under the Pakistan Standards and Quality Control Authority Act, 1996, is the apex body to formulate standards or adopt international standards. PSQCA merged three agencies, Pakistan Standards Institution, Central Testing Laboratories and Metal Industries Research and Development Centre. It is also responsible for enforcement of standards in the whole of Pakistan and has the mandate to inspect and test products and services for their quality, specification and characteristics during use, and for import and export purposes. However, the agency appears to be heavily oriented to industrial raw materials and products rather than those of the food industry, although it is empowered to intervene in this area. And indeed does so. For example, under Section-14 of PSQCA Act-VI of 1996 with effect from April 15, 2007, the manufacture, keeping in stock and the sale of polypropylene woven sacks for packing sugar was prohibited. The directive was to ensure the health and hygiene of the consumer, as the nature of the material may be carcinogenic. PSQCA also plans to launch a country wide the consumer awareness campaign. For this purpose the Consumer Liaison Office of PSQCA has drafted a public Notice regarding consumer awareness about certain consumable items like vanaspati/edible oils, biscuits and bottled drinking water/carbonated beverages. All these items have issues related to consumer confidence in their quality.

ii. Pakistan Council of Scientific and Industrial Research (PCSIR)

PCSIR is another apex-type agency founded in 1973 to promote scientific and technological research. The agency has 11 laboratories and five research centers located in



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major cities. Once again, the organization has a fundamentally industrial orientation. PCSIR undertakes the following activities:

• Evaluation of raw materials for industrial and food use; in this respect its facilities have the technical capacity to assist in raising the quality of agricultural raw materials

• Development of processes (e.g., livestock feed – see below). • Investigative analysis: in this area PCSIR says it can assist SMEs in reverse

engineering substances such as food additives, flavorings, surfactants in order to reduce the import costs of these expensive items

• Analytical and testing services: PCSIR can via its laboratories undertake a full range of analyses of any physical material

• Quality control for exporters: PCSIR provides the essential analysis of a variety of exports including food items (e.g. Nestle products) with the aim of assisting exporters to meet international standards

All this work is undertake without legal power to intervene. PCSIR must sell its services to users and provide value for money. In this respect no one should wish to change the system. That said PCSIR does not in any sense provide the powers of a Food and Drug Administration (FDA) such as is found in the USA and other countries (e.g., Thailand).

A review of the overall focus of PCSIR is that it is not a food oriented agency but has a very wide mandate to cover all areas of industry. That said, a new project has been approved for an investigation of the control of post-harvest fruit losses in the Northern areas, and this is a wholly worthwhile use of research funds since as indicated elsewhere in this report, such losses are critical for the horticulture industry. Otherwise in the food area, PCSIR has undertaken an assessment of food and beverage quality in educational institutions and the development of detoxification process for livestock feed.

iii. The Pakistan National Accreditation Council (PNAC) PNAC was established under the Ministry of Science and Technology as the national apex agency to accredit conformity assessment bodies such as laboratories and certification bodies. The accreditation services of PNAC were launched in 2001. The main activities of PNAC are:

• Accreditation of testing and calibration labs in accordance with ISO/IEC 17025, Quality and Environmental Management System Certifiers in accordance with ISO Guides 62 and 66, respectively.

• Formulation and Implementation of National Quality Policy and Plan • Crash program of awareness raising and training in the field of quality

Accreditation is the formal recognition of a body's competence to conduct a specific activity such as testing or certification. This recognition is based on a specific series of international standards. These standards address critical issues such as competence, impartiality and integrity. The extensive range of products and services available often



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make it difficult for the customer to decide which product or service best meets their quality and safety requirements. The supplier can therefore apply to have their product or service assessed objectively by an organization such as a certification body or test laboratory appropriate to the product or service. A certificate of conformance or test report is issued accordingly. An international network of national accreditation bodies of which PNAC is one ensures that the competence of all laboratories, certification bodies and environmental verifiers are assessed to the same principles. With competition across boundaries continuing to intensify over time, accreditation offers companies an advantage as it differentiates them from the competition, in addition to acting as a catalyst to raise standards and institute improved work practices. PNAC's activities ensure that accredited certificates and test results produced here are acceptable throughout the world. This eliminates the need for multiple assessments when goods cross frontiers.

To promote quality improvement practices in the country, PNAC launched the "Crash Awareness Raising and Training Program in the field of Quality" in the year 2001. The project aimed at mass awareness raising for all the stakeholders and general public through seminars/ courses and media campaign to improve the quality of goods and services. No objective information is available on the results of this program, but the impression is that while it did some things to raise concerns about quality, in general the results were mediocre.

iv. Pakistan National Bio-safety Committee (PNBC) One of the key concerns about “bio-tech” crops is that the research will not be controlled and that there could be disastrous environmental impacts if results “escape” into the general are of agriculture. PNBC is in charge of ensuring that risk assessment is carried out in accordance with bio-safety guidelines. Pakistani research institutes do follow international bio-safety regulations, such as those approved by the US National Institutes of Health, but bio-safety regulatory legislation for research and development is in its infancy in Pakistan. The government has ratified or signed many international agreements, like the Convention on Biological Diversity, Trade Related Aspects of Intellectual Property Rights, and Cartagena Protocol of Biosafety, to exhibit its growing interest in the genetically modified organisms’ trade under WTO rules and regulations. Regulations to govern and supervise DNA research and products (Bi-safety Guidelines 2005), involving genetically modified organisms, have been approved by the Ministry of Environment. i. Food safety laws

“Food safety” means that food that is ingested is safe for human health. In order to ensure that people get safe food, multidimensional approaches have to be taken at all levels of a food chain e.g. production, storage, supply, distribution, and consumption, etc. The government and citizens are two major stakeholders in any approach to food safety as are food producers and the food industry in general.



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The state provides a legal framework that lays down certain conditions for those involved in provision of food to the people. These conditions may include prohibition of the sale of adulterated goods, compliance with prescribed technical specifications, bio-safety guidelines. Most of the countries around the world have developed their own legal frameworks for ensuring food safety, notwithstanding the effectiveness of these frameworks. Pakistan does not have an integrated legal framework but has a set of laws, which deals with various aspects of food safety. These laws, despite the fact that they were enacted some time ago, have the capability to achieve at least minimum level of food safety. Unfortunately, these laws remain very poorly enforced.

The major reason for poor enforcement of food safety laws is the lack of demand from Pakistani citizens36. There is no public monitoring of the food safety legislation at all. It is for this reason that relevant government authorities have had shown little will in enforcing these laws.

There exist a large number of food laws in Pakistan. However, most of them deal with control of production, distribution and supply of food, in addition to dealing with profiteering and hoarding. There are four laws that specifically deal with food safety. Three of these laws directly focus issues related to food safety, while the fourth one namely the Pakistan Standards and Quality Control Authority Act, is indirectly relevant to food safety. A brief overview of these laws is given below:

The Pure Food Ordinance, 1960 consolidates and amends the law in relation to the preparation and the sale of foods. All provinces and some northern areas have adopted this law with certain amendments. Its aim is to ensure purity of food being supplied to people in the market and, therefore, provides for preventing adulteration. The law prohibits any person to mix, color, stain or powder any food, if the mixing involves violation of prescribed rules or is likely to make the food injurious for health. The prescribed rules set standards for coloring, preservatives, flavoring compounds, antioxidants, stabilizers, anti-caking agent, non-nutritive constituents, and metals. The law also prohibits sale, preparation, manufacture, import or export of such food for human consumption, which is unsound, unwholesome, or injurious to health, in addition to misbranded food items. Besides, the law sets rules for labeling of pre-packed food and precautionary measures to be taken during storage, stocking and packing. There are four criterion adopted by the law to ensure purity of food: a) it prohibits manufacturing/preparation or processing of such food, which is likely to be unsafe for human consumption, e.g. any food which can cause food poisoning; b) it prohibits import, export or sale of unsafe food; c) sets out certain hygiene standards; d) provides for inspection and laboratory analysis of food samples according to a set criterion. ‘Local authority’, which is designated by the government, is responsible for enforcing the Ordinance within its jurisdiction. The law is not uniform in all areas. Even penalties of the same offence vary in provinces. Furthermore, the law is silent about award of compensation or damages to consumers.

36 Food Safety Legislation in Pakistan: Identifying Entry Points for Public Intervention Mazhar Siraj, Research Fellow CRCP



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The Pure Food Ordinance 1960 does not apply to cantonment areas. There is separate law for cantonments called “The Cantonment Pure Food Act, 1966”. There is no substantial difference between the Pure Food Ordinance 1960 and The Cantonment Pure Food Act. Even the rules of operation are similar.

In August 2003, the Federal Government increased the punishment for adulterators to 25 years imprisonment. This increase is extremely higher than the punishment provided in the Pure Food Ordinance 1960, which ranges between imprisonment from 1 to 5 years and a fine ranging between Rs.100 to Rs.1 lakh. Consumer Rights Commission of Pakistan (CRCP), a national non-profit civil initiative working for articulation and protection of consumer rights, opposed the decision on the ground that ‘it is not the stringency or strictness of the punishment but its certainty, which ensures compliance. Authorities have not been able to obtain convictions even under the existing laws. Increase in punishment cannot be a substitute for an efficient and corruption-free administrative and a judicial system, which has the capacity as well as the will to enforce the punishment sanctioned under existing laws.”

The Pakistan Hotels and Restaurant Act, 1976 applies to all hotels and restaurants in and seeks to control and regulate the rates and standard of service(s) by hotels and restaurants. In addition to other provisions, under section 22(2), the sale of food or beverages that are contaminated, not prepared hygienically or served in utensils that are not hygienic or clean is an offense. This law does not specifically mention right to consumers to lodge a complaint. However, this does not prevent either any person to address a complaint to a Controller, which is appointed by the Federal Government for enforcement of the Act. Consideration of the complaint is a matter of jurisdiction of the Controller. Moreover, like other food laws, it does not provide for compensation to consumers in case of damages.

5.3 Summary of Competitiveness Indicators for the Food Industry The following table draws together a summary of the various aspects of competitiveness as they affect the food industry in Pakistan

TABLE 24: SUMMARY OF COMPETITIVENESS INDICATORS

Competition dimension


Economic

Incomes

Incomes in Pakistan are rising but so is inequality. Urban demand for semi-processed and processed food is increasing, mainly for high-energy and low-cost food items. Quality is not a prime consideration. Consumers have to be made aware of the benefits both for health and nutrition of good quality, safe food.



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Employment – providing jobs for a growing and youthful population is a principle challenge for economic policy Fixed capital formation Markets

The food industry has the capacity to provide jobs. However there is a lack of skilled labor in all parts of the industry, but especially in professional and technical areas such as laboratory workers, food technologists, food engineers. Performance in this area in the food sector is poor. Most manufacturers are small scale and cannot re-invest from tight profit margins. Maintenance of capital assets is poor and replacement periods are too long. Agriculture itself has been neglected and there is a general lack of investment in the supply chain. There needs be a stronger information base for farmers. Basic R&D conducted at universities and at NARC is good, but it fails to reach the producer. Primary marketing channels are complex and distorted. There is a general failure in the supply chain International market access is restricted by poor product quality and inadequate packaging. SPS issues are paramount for horticulture and for meat. Much is being done but there is a lack of a coordinated approach.

Social

Poverty – between 20 and 30% of persons are below the poverty line Health and education

Rural poverty and malnutrition still provide a challenge. Large numbers of persons do not have the financial resources to buy processed food. The effective domestic market for high-value foods is between 5-10 million persons. This is still a large market and can be serviced with high quality local foods rather than expensive imports. There needs to be a greater emphasis on nutritional information in schools and in the general public. Quality awareness is very low even among educated persons. Hygiene standards are poor in both processing facilities and in markets.

Environmental

Natural resource stocks

Pakistan has a wonderful agricultural



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Waste disposal

resource base in some areas (mainly Punjab). Water availability is of greatest importance to maximize output. Water management is the single most important aspect of food raw material production in Pakistan. The food processing industry is largely unconscious of its environmental impact. Biological waste from processing needs far better control and management.

Process


Many of the necessary institutional pieces are in place in Pakistan. However there is an overall lack of coordination between line agencies and between federal and provincial agencies. Institutional capacity is poor often because public servants are qualified administrators but lack any technical know-how.



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CHAPTER 6

SUGGESTIONS FOR INCREASED COMPETITIVENESS IN THE FOOD INDUSTRY By world standards the food industry in Pakistan is not competitive. That is not to say there is a food security crisis or that progress has not be made in agricultural productivity. In the circumstances of a developing country it has been a remarkable achievement that agricultural output has kept pace with population growth and indeed achieved a surplus that has enabled a more modern food industry to emerge. In this respect Pakistan is not far from a “tipping point” where with more effort and organization a food industry could emerge that would challenge if not American food companies, then provide a significant regional competitor capable of supplying neighboring markets such as the UAE, Africa, Central Asia and Africa with value-added products. This Study has identified a number of the critical issues that affect the food industry, and at the risk of repetition these are mainly:

• Erratic supply of raw materials via an often dysfunctional market supply chain • Lack of linkage between research in academia and the real world of agribusiness • Failure to encourage investment in modern agriculture and over-investment in other

areas of agribusiness (e.g., sugar mills) • Ineffective industry structures in major commodities and industrial crops, especially

cottonseed, wheat and sugarcane • Small-scale and inefficient food manufacturing units that are unable to innovate and

unable to focus on the consumer • Failure to enforce food laws and to develop an adequate SPS infrastructure • A huge domestic consumer market for low-quality, cheap products

Specific interventions can be recommended for each and every aspect of the food value chain from improvements in the on-farm management of water, improvements in seed and planting material through post-harvest handling, transport, storage and processing to packaging and labeling and the requirements of buyers in export destinations. A detailed list of specific recommendations would be almost endless and serve no useful purpose at this level of analysis. Every aspect of the food production function could be bettered in order to lower costs and raise efficiencies. In this case, where if only one sector was taken (say horticulture) the list of recommended improvements would exceed the length of this Study, what can be usefully said about the industry that might assist policy-makers and those formulating projects to consider the main areas of concern? Answering this question should rightly begin with consideration of the most important person in the market. One of the first features of the global industry pointed out in Chapter 2 of this Study is that large food enterprises are driven by the requirements of the



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consumer, the individual who sees the product on a supermarket shelf and decides on the basis of the appearance of the package and the label information that this particular food item will benefit his or hers health. These enterprises are fundamentally demand driven. It is with the demand for food that the interventions suggested by this Study commence. Demand for Food At the risk of being simplistic, this Study has indicated that there are fundamentally three markets for food in Pakistan: a large market of poor persons living in rural areas that consume the products of agriculture in a very simple form, either raw or semi-processed; a market of perhaps 50 million persons at most who rely on semi-processed and processed cheap, energy giving carbohydrates (consumed as forms of bread) and livestock products that have passed through a marketing chain generally in unprocessed form. This group consumes cheap snacks and sugary beverages. It is a market of enormous potential because only a very small shift in its requirements could translate into profitable business for food manufacturers. The third market is probably quite small, perhaps no greater than 10 million persons. These persons consume processed agricultural products to which considerable value has been added in the form of combining with other additives and then being packaged and marketed. A smaller proportion of this group might prefer foods that are imported and which embody the entire effort of some of the world’s largest companies that have created global food brands. There are two key aspects to policy intervention on the demand side of the food equation. First, Government must be concerned with the health of its population and must ensure that the food that is served is safe to eat. This is a simple requirement and one that at the most basic level is only capable of being tackled via programs that deal with poverty. If the only source of water that is available to cook rice is from a dirty canal that may contain excrement and chemical residues, no amount of food law promulgation or enforcement will serve to correct the matter. People may need to drink this water too, and simple means and instructions about how to boil water for human consumption form part of every basic poverty alleviation program. Suffice to say that an enormous amount of work needs to be done at this very basic level of human development.37 If a large proportion of the Pakistani population simply needs basic health and infrastructure services to provide potable water for cooking and drinking, and relatively clean conditions in which to prepare food, then another large part of the population needs to be educated about proper nutrition and hygiene in the market and in the products offered for sale. This may be the bulk of the population which has little if any idea about nutrition and matters such as a balanced diet. It is a fact of life in Pakistan that the normal diet consists of rough cuts of meat (very little fish is consumed) and flat bread of various kinds washed down with tea. Pakistanis consume 3 times more meat than Indians. Vegetables are those grown around the home on a seasonal basis. Lentils may be the most common kind of vegetable rather than green vegetables. This is a very basic approach to cooking and suggests that there is an enormous potential for consumers to be made aware of a more

37 For those who may think this point is over-stated, the author suggest they visit coastal areas of the southern Sindh around Thatta and Badin districts for insight into rural poverty that persists in much of Pakistan.



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sophisticated approach to food preparation together with better nutrition and quality. This implies that the domestic market for commercial crops (i.e., crops grown specifically for cash markets) could in fact be much larger than it is. In these circumstances efforts to make consumers aware of the possibilities of better nutrition and healthy eating would have an immediate and direct impact on the commercial viability of e.g. the horticulture industry. Trade and Marketing Pakistan’s trade in agricultural products is dominated by the export of raw materials. Cotton, rice and sometimes wheat are the main export crops and Pakistan fails to capture the value-added in each amount of raw materials exported. The key to export success is to add value and quality in the country and then to export finished products; better to export flour than wheat and even better to export cookies in an attractive package at 10 times the value of the ingredients. Pakistan must move away from a mindset of where the export of anything is better than nothing. One area in which Pakistan has done well is to establish a trade regime that is relatively free; certainly compared with many developed countries. However, it is essential that the international trade field be level and Pakistan must continue to take an aggressive approach in international trade diplomacy. Even if tariff barriers are negotiated away, Pakistan also faces significant non-tariff barriers related especially to the quality of its food exports. Chapter 5 has noted that various bans have been imposed (e.g., on meat and fish) related to a failure to establish an adequate SPS model. Certification under the various available schemes (perhaps starting at the farm level with EuroGAP) is an essential requirement and the Government must provide (a) a coherent institutional strategy for promoting SPS systems and (b) targeted incentives where all the agents in the food value chain are encouraged (or compelled) to participate in some form of certification or control. Another feature of the Pakistan food industry is the absence or dysfunction of supply chain linkages and essential infrastructure. In general, the food economy is so widely dispersed and there are so many participants that while it appears to be competitive (in the sense that there are many free agents in the market) information seems to fail to get transferred e.g., from exporters or processors back to the farms. Lack of knowledge at all stages of the supply chain seems to be a feature of the food industry in Pakistan. To suggest a policy to tackle this problem means that it must first be understood. Unfortunately there is no simple answer, and one consequence of that is that those charged with intervening focus on the technical deficiencies of the system. In horticulture, for example, the problem is seen as a lack of cool chains (milk has the same technical problem). But the fact is that technology, especially the simple technology that is used by most parts of the food supply chain, will be adopted when the economic conditions permit or encourage it. The answer is not “there is no cool chain”, but “there is no cool chain because…” It is discovering the “because” that is difficult and so answering the question has been generally ignored.



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Part of the answer is relates to the scale of the various enterprises involved in the supply chain; small enterprises have been unable to find money for investment (partly because margins are competed very low) and unwilling to take the risk of moving away from their family or ethnic areas. There is an absence of larger-scale enterprises including multi-national agribusiness. When larger scale businesses become involved the situation changes quite radically, for example in the distribution of agro-chemicals where the Engro company successfully supplies farmers with necessary fertilizer or in the milk industry where Nestle Pakistan both buys milk for processing and distributes bottled water, coffee and powdered milk. Whatever the cause of supply chain dysfunction, the solution is clearly to encourage investment in the supply chain. Entrepreneurs such as AgroMall (a consortium of agro-chemical, farm machinery and lubricant suppliers) can make an enormous difference in the basic supply chain of raw materials. Government programs must pick up on these initiatives and (a) remove barriers to them, and (b) if possible support them by active involvement with relevant agencies. Supply of Food The issues related to the supply of raw materials and intermediate products for food manufacturing are well documented by a host of government and donor-sponsored agencies. There is no shortage of knowledge among Pakistan’s policy-makers about the cause of many of the problems; the difficulty is with finding effective means to tackle the problems. Areas of concern fundamental to agriculture remain highly contentious, including the management of water and the structure of the basic supply industries. Simple matters such as poor basic rural infrastructure (e.g., farm to market access roads) still prevent the market operating effectively to deliver raw materials to factories in a timely and reliable way. These matters are not technically difficult either to identify or resolve; but there appears to be intractable institutional barriers to effective action. Pakistan’s officials and business folk almost invariably know what is wrong with any given situation; they just appear unable to do anything about it. This criticism applies as equally to the district extension office as to the official at federal or provincial level. The key to this is institutional reform and restructuring at every level of government. Hardware is not the answer; new software in the form of streamlined management and implementation approaches to basic issues is the answer. In general this can be done via the private sector that must be allowed freedom of action in every sub-sector of agriculture with government standing by to (a) facilitate and (b) to ensure that basic regulations are enforced (e.g., food laws).



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This Study has found that three areas are of outstanding concern:

• Research and development • Restructuring of basic industries • Investment in processing

Agriculture and the food industry in Pakistan is over-researched. There is a host of research institutes and university faculties and a large population of post-graduate qualified researchers. Some of this research (especially when supported by private industry) is excellent (for example, work on post-harvest handling of fruit at the University of Faisalabad) but much is simple re-invention of research done elsewhere in the name of adapting the research to local conditions but in fact aimed at ensuring research budgets are sustained. Almost none of this applied work (there are of course exceptions) can compare with work undertaken by the major multi-national companies which depend on fundamental research for product development. There needs to be a thorough and high level review of research projects being undertaken in the agriculture and food industry in Pakistan and a re-allocation of resources to those areas that are really necessary. At the same time, there is a failure to deliver R&D to the field (e.g., via the farm extension system) and to the industry. Once again this is an institutional failure and must be tackled at that level. Particular areas that should be mentioned are the provision of planting material (seeds and saplings) and the development of “biotech” or GM crops. Whatever the environmental concerns it is a fact that Pakistan’s neighbors are promoting GM crops. The basic agricultural and intermediate food product industries of Pakistan need to be restructured. Whatever gains are made by dedicated agriculturalists working on the farm are more often than not lost immediately after harvest. In the wheat industry wheat grain is left for collection in heaps in the field, open to insect infestation and other losses. Both the wheat and the sugar industries have excess capacity and much of it is inefficient. These industries need to be encouraged to restructure. Finally, the food manufacturing industry is under-invested; both in terms of recurrent invest in maintenance and worker health and safety, and in terms of investment in replacement machinery and in innovation (in both processes and products). As mentioned in this Study, the problem relates to the scale of most of these businesses which simply cannot afford the high-tech approach taken by their international competitors. Pakistan’s food manufacturing companies must be encouraged to develop linkages with each other and through the entire value chain from farmer to exporter. These efforts must be supported by government and by the financial sector. One valuable approach is to establish effective industry associations that can introduce common facilities for training and research.



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Summary and recommendations There is no “magic bullet” to increase competitiveness in the food industry in Pakistan. Rather there are multiple and highly complex issues that need to be tackled by the public and private sectors working towards a common aim. As far as specific recommendations for interventions that can be taken immediately by the Government, these cannot be micro-interventions (e.g., changing duty rates for palm oil imports or building cool stores). Such specific interventions are best recommended by individual projects (e.g., the ABDP is developing very specific policies and recommendations for certain horticulture crops). Rather the recommended interventions must deal with the bigger picture as described by this Study. Equally, the Study itself is not an Action Plan. Nevertheless two specific recommendations are made in outline with the details remaining to be discussed and prepared in another document:

1. Consumer Awareness Campaign - The Government should develop a consumer awareness campaign aimed at promoting better nutrition and health via better quality food. This campaign needs to include every aspect of the media from TV to posters, newspapers and workshops (e.g., with women’s groups). The objective of this campaign will be to energize individual consumers to demand better quality food and to change their diets to a more diverse and healthier mix of foods. Not only will the health of the population be improved (and thus the productivity of the workforce) but new market opportunities will be created for domestic food processors.

2. Task Force for the Food Industry - The Government should create a Task Force

headed by the Prime Minister that includes every agency involved with the food industry. The participants should be ministers from line agencies (or their permanent secretaries), heads of universities and CEOs of major companies. In some respects this task force would resemble a SWOG, but it would be focused on action and implementation rather than discussion. The aim of the Task Force would be to ensure that all the various efforts that are being made currently by a multiplicity of different agencies are coordinated and based on a sound understanding and overview of the food sector as an integrated industry in which linkages between sub-sectors are critically important. The objective of the proposed Task Force would be to take Pakistan’s food industry (including the entire value chain from farm to exporter) past the “tipping point” to become an internationally respected and competitive industry.



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Appendix 1: List of persons consulted during the study

1 Mr. Ishfaq Ahmed Afridi Manager Associate Small and Medium Enterprise Development Authority

Ministry of Industries Productions & Spicial Initiatives Government of Pakistan

State Life Building The Mall Peshawar Cantt Tel: 091-111-111-456-091-9213046-47 Fax: 091-5268908 E mail-: [email protected] 2 Mr. Ishfaq Ahmed Manager ( Business Development Service -Punjab Small and Medium Enterprise Development Authority


8th Floor LDA Plaza Egerton Road Lahore Pakistan Tel:042-111-111-456- Fax: 042-6304926-7- E mail-: [email protected] 3 Mr. Anjum Ahmed Director Special Projects Small and Medium Enterprise Development Authority


8th Floor LDA Plaza Egerton Road Lahore Pakistan Tel:042-111-111-456- Fax: 042-6304926-7- E mail-: [email protected] 4 Mr. Muhammad Tariq Provincial Chief( NWFP) Small and Medium Enterprise Development Authority


State Life Building The Mall Peshawar Cantt Tel: 091-111-111-456-091-9213046-47 Fax: 091-5268908 E mail-: [email protected] 5 Mr. Javed Iqbal Khattak Provincial Chief Small and Medium Enterprise Development Authority




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State Life Building The Mall Peshawar Cantt Tel: 091-111-111-456-091-9213046-47 Fax: 091-5268908 E mail-: [email protected] 6 Mr. Imran Chaudhry Manager Donor Coordination Small and Medium Enterprise Development Authority


8th Floor LDA Plaza Egerton Road Lahore Pakistan Tel:042-111-111-456- Fax: 042-6304926-7- E mail-: [email protected] 7 Mr. Shahb Khawaja CEO Small and Medium Enterprise Development Authority


6th Floor LDA Plaza Egerton Road Lahore Pakistan Tel:042-111-111-456- Fax: 042-6304926-7- E mail-: [email protected] 8 Mr. Muhammad Alamgir Chaudhry Provincial Chief (Punjab) Small and Medium Enterprise Development Authority


8th Floor LDA Plaza Egerton Road Lahore Pakistan Tel:042-111-111-456- Fax: 042-6304926-7- E mail-: [email protected] 9 Mr. Sultan Tiwana General Manager -B& SDS Small and Medium Enterprise Development Authority


8th Floor LDA Plaza Egerton Road Lahore Pakistan Tel:042-111-111-456- Cell: 0300-8596258 Fax: 042-6304926-7- E mail-: [email protected]

10 Mr. Ijaz Majeed



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Provincial Chief Sindh


5th Floor Bahria Complex -II Molvi Tameezudin Khan Road Pakistan

Tel:021-111-111-456- Fax:021-5610572 E mail-: [email protected]

11 Mr. Sarosh Yousufi General Manager ( Projects) Pakistan Industrial Development Corporation Ministry of Industires & Proudection Government of Pakistan

2nd Floor PIDC House Dr. Ziauddin Ahmed Road Karachi Pakistan

Tel 021-9202340-5685041-49Res- 021-5852166 Fax: 021-9204376 E mail: [email protected]

12 Mr. Muhammad Ali Gardezi Managing Director Punjab Small Industries Corporation 4th Floor LDA Plaza Egerton Road Lahore Pakistan Tel 042-9200453-9200463 Fax: 042-9200464 E mail :- [email protected]

13 Mr. Ali Sarfraz Chief Operating Officer SME Business Support Fund Office # 304 Siddiq trade Center main Boulevard Gulberg Lahore Pakistan Te:- 042-5782008 -042-5782013Cell: 0301-8420232 Fax :- 042-5781814 E mail :- [email protected]

14 Mr. Nasim Raiz Chief of Section ( ECA ) Planning & Development Department Lahore Pakistan Tel:-042-9210889



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15 Naheed S Durrani Additional Secretary ( Implementation ) Service General Administration & Coordination Department Government of Sindh Karachi Pakistan Tel: 021-9213326-7 E mail:[email protected]

16 Karim Bux Sirohi Managing Director Karachi Fisheries Harbour Authority Government of Sindh Fish Harbour West Wharf Karachi Tel 021-9214816

17 Mr. Muhammad Saleem Khan Joint Secreatary Development Planning & International Cooperation Ministry of Agriculture & Livestoke Gove of Pakistan Room # 403- Block B Pak Secreatariat Islamabad Pakistan Tel: 051-9202936 Fax: 051-9208707 E mail: [email protected]

18 Dr. Badaruddin Soomro Chairman Ministry of Food, Agriculture & Livestoke Gove of Pakistan Tel: 051-9203966-051-4445109 Fax: 051-9203312 E mail-; [email protected]

19 Syed Qamar Raza Commodore® Directir General maine Fisheries Department Government of Pakistan Fish Harbour West Whafrf Karachi Tel: 021-2312923-2316535-8 Fax; 021-9250289 E mail:[email protected]

20 Maher Sher Muhammad Dupety Secretary Ministry of Industries & Productions Government of Pakistan Islamabad Pakistan Tel: 051-9202746 Res 051-9267314



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21. Asad Ullah Khan Sumbal Project Coordinator Punjab Resource Management Program 142 Jail Road Shadman - Lahore Tele: (042) 9200832 Fax: (042) 9200532 Email: [email protected] Email: [email protected]

22. Hashim Raza Partner Development & Management Consultants 1st floor,82 DD Central Commercial Area Phase 4,DHA,Lahore Tele:(042) 573-4918/19 Fax:(042) 574-4624 Email:[email protected]

23. Syed Mohammad Ali Assistant Representative Food & Agriculture Organization Of The United Nations UN House, 5th Floor,Saudi Pak Tower 61-A,Jinnah Avenue,P.O. Box 1476,Islamabad Tele:051-2800086 Fax: 051 2800054

24. Ahmad N. Sukhera Additional Finance Secretary Government of the Punjab Government of the Punjab, Civil Secretariat, Lahore Tele:9211076 Fax:9211077 Cell:0300-8469840 E-mail:[email protected]

25. Yusaf Mahmood Officer-in-charge United Nations Saudi Pak Tower,11th Floor, Blue Area P.O. Box 1051,Islamabad,44000,Pakistan Tele:051-2800050 Fax:051-2800035 Email:[email protected]

26. Tahir Iqbal Federal Minister for Environment Government of Pakistan



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CDA Block -4,Civic Center G-6, Islamabad Pakistan Tele:051-9224578 Fax:051-9224890 E-mail:envir@@isb.compol.com

27. Sajid Naseer Khan General Manager Punjab Vocational Training Council 98-B/3,Gulberg III, Lahore Tele:5714428,5872044-48 Fax:5872040 E-mail:[email protected]

28. S. Momin Ali Shah Project Manager Ministry of Local Govt. & Rural Development 15 floor State Life Builiding,Blue Area,Islamabad Tele:051-9202112 Fax:051-9206979

29. Shafqat Ezdi Shah Secretary Government of Pakistan Ministry of Local Government & Rural Development, Government of Pakistan,Islamabad Tele:051-9202080 Fax:9203429

30. Usman Gul Chief of Section Foreign Aid Government of N.W.F.P. Planning & development Department, Civil Secretariat, Peshawar Tele:91-9210499 Fax:91-9210499

31. Malik Amin Minister of State Of Environment Ministry of State Of Environment CDA Block- IV,Near Lal Masjid,Islamabad Tele:9210880 Cell:0300-8550796 E-mail:[email protected]

32. Ajaz Rahim Executive Vice President Faysal Bank Faysal Bank Limited,Trade Center I.I. Chundrigar



114

Road P.O. Box 472 Karachi Tele:111-747-747 Fax:021-2211779 E-mail:[email protected]

33. Nawaz Ahmad Toor Secretary Sialkot Chamber of Commerce & Industry Shahra-e-Aiwan-e-Sanat-o-Tajarat P.O. Box 1870, Sialkot-51310 Pakistan Tele:0432-261881-3 Fax:0432-268835-267919

34. Chaudry Muhammad Shahbaz Director General Director General,Local Government Punjab, Lahore Tele:042-7249245-202 Fax:7249247

35. Khawar A. Khawaja Chief Executive SIAL 954 Muradia Road Model Town Sialkot Pakistan Tele:432-555333 Fax:432-257834 Email:[email protected]



115

36. Shafiq-ur-Rahman Export Executive New Mark Group of Companies Marala road,Murad pur,Sialkot- Pakistan Tele:432-273411 Fax:432-272223-24

37. Dr . Kausar Abdulla Malik Member(Biosciences & Administration) Pakistan Atomic Energy Commission PAEC Headquarters,P.O Box 1114 Islamabad,Pakistan Tele:9203149 Fax:9205385

38. Abdul Rauf Programme Office Manager House No. 7,Street 49, F-6/4 Islamabad,Pakistan Tele:594488 Fax:594500 E-mail:[email protected] [email protected]

39. Muhammad Alamgir Chaudhary Provincial Chief Small and Medium Enterprise Development Authority Ministry of Industries & Production Government of Pakistan 1st Floor,Waheed Trade Complex,36-XX,Khayban-e-Iqbal D.H.A Lahore 54792,Pakistan Tele:111-111-456 Fax:5896619 E-mail:[email protected]

40. Muhammad Rashid Ph.D, Soil Science Soil & Water Conservation Research Institute,Chakwal Tele:594500 Fax:594504 E-mail:[email protected]

41. Ahmad Raza Sarwar Deputy Secretary Tele:9211078



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Fax:9211079 E-mail:ds_rs.punjabnet.gov.pk

42. Sh. Muhammad Javed

Deputy Secretary Project & Coordinator PWD Secretariate,Old Anarkali,Lahore Tele:042-9210453 E-mail:[email protected]

43. Arif Nadeem Secretary Government of Punjab Tele:042-9210130 Fax:042-9211796 E-mail:[email protected]

44. Dr. Parvez Akhtar Director General Government of Pakistan No. 25,Sector H-9,Islamabad Tele:9258228 Fax:9258229 Email:[email protected]

45. Dr. Ronny Adhikarya Representative Food & Agriculture Organisation of the United Nations 5th Floor,Saudi Pak Tower,61-A,Jinnah Avenue P.O. Box 1476 Tele:2800032 Fax:2800054

46. Muhammad Umar Farooq Head,Operations Khush ali bank 94 West,Fourth Floor Jinnah Avenue,Blue Area P.O. Box 3111 Islamabad Pakistan Tele:111-092-092 Fax:920-6080 E-mail:[email protected]

47. Pieter Minderhoud



117

Team Leader Environmental Concerns of All The Four Provinces 211-B,Main Margalla Road,F-10/3,Islamabad Tele:2101153 Fax:2101167 E-mail:[email protected]

48. Khawar Anwar Khawaja Chief Executive Grays Small industries Estate,P.O Box 95,Sialkot,Pakistan Tele:563051/563052 Fax:551252/553809 E-mail:[email protected]

49. Ali Raza Head IUCN FT-4 10/11 Parin Lodge,Bath Island Road,Clifton Karachi 75530,Pakistan Tele:021-583-2913/5374072-75 Fax:021-5838106-5835760 E-mail:[email protected]

50. Dr. Inayat H. Thaver Health & Population Adviser British High Commission Diplomatic Enclave,Ramna 5,Islamabad Pakistan Tele:2081-2517 Cell:0300-8504916 Fax:282-3017 E-mail:[email protected]

51. Dr. Warren Weinstein Country Director J.E. Austin Associates House No. 3-H Gulberg II,Lahore- 56440 Pakistan Tele:042-5781906 Fax:042-5781909 Cell:0300-8690369 E-mail:[email protected]

52. Sajid Hassan Dairy Consultant to USAID Fund International Traders



118

13-F,First Floor,Gulberg Center,Main Boulevard,Gulberg-III, Lahore-Pakistan Tele:042-5761776 Fax:042-5764697 Cell:0300-8447667 E-mail:[email protected]

53. Adnan Kaisar A.A Rent A Car Cell:0300-9251665

54. Syed Shahid Husain

Advocate,High Court House # 241,Street # 11,E-7 Islamabad Tele:0333-5218506 E-Mail:[email protected]

55. Arthur Bayhan Senior Economist House No. 3-H Gulberg II,Lahore-56440 Tele:042-5781906-7 Fax:042-5781909 Cell:0300-4668319 E-mail:[email protected]

56. Roger S Jackson Team Leader Nippon Koei 3rd Floor,Doleman Estate 18-C Union Commercial Area Shaheed-e-Millat Road Karachi 75350 Tele:021-4541339 Cell:0301-2552446 E-mail:[email protected]

57. Anwer Chughtai Nature 3306 Garden Brook Dr. Dallas,Taxas 75234-2311 Tele:214-764-6875 Fax:214-764-6840 E-mail:[email protected]



119

58. K. Tamaki Project Formulation Advisor 2nd Floor,Block- B,Finance & Trade Center Shahrah-e-Faisal,Karachi Tele:021-5630690-2 Fax:021-563-0691 E-.mail:[email protected]

59. Shaukat Rehamn Janjua Amerivcan Express 1-E Ali plaza,Blue Area Islamabad Tele:051-2272425 Fax:051-2828783 E-mail:[email protected]

60. Gauhat Ali

Director Wever Association Tele:0921-294328 Cell:0320-5227563

61. Amber Mubarik Supervisor American Airlines Avari Lahore,87 Shahrah-e-Quaid-e-azam Lahore Tele:6279045 Fax:6313930 E-mail:[email protected]

62. Cadillac House # 12,Street 46,Sector F-7/1 Islamabad Tele:2654578-9 Fax:2651661 E-mail:[email protected]

63. Sardar Abdul Qayyum C.E.O Bar B.Q. Com. 51,Boating Basin, Clifton Block -5,Karachi Tele:111-227-111 Fax:5376963 Cell:0300-8235538 E-mail:[email protected]

64. Imdad Ali Nizamani



120

Member,Board of Directors Zarai Taraqiati Bank Tele:022-3889215 Cell:0300-8372394

65. Husan Subhani Group Manager Finance, Administration & Human Resource Management Sweet water 206-A Siddiq Trade Centre,72- Main Boulevard,Gulberg Lahore Tele:042-5782066 Fax:042-578-2067 Cell:0300-4000751

66. Ikramullah Khan Chairman Saeed Acres Fruit Farms Drub House,20,Chinar Road,University Town, Peshawar Tele:091-5850482 Cell:0345-9131802 E-mail:[email protected]

67. Syed Akhlaq Hussain Chairman Akhlaq Enterprises F-2 Karachi Fish Harbour,West Wharf, Karachi- Pakistan Tele:021-220-5477 Fax:021-220-0216 Cell:0300-8224300 E-mail:[email protected]

68. Sarfarz Bhatti Director Stony Brook Sugar & Distillery 4-A,S. Industrial Estate,Lahore Road Sargodha Tele:92-451-223556-7 Cell:0300-8600088

69. Muhammad Junaid Wattoo Communications Hub Manager STREAM Suit # 818,8th Floor,Shaheed-e-Millat Secretariat,Blue Area Islamabad Tele:051-9212630 Cell:0300-9896497



121

E-mail:[email protected]

70. Dr. Fayyaz Ahmad Chief Executive ECO Foods 14-km,Multan Road Lahore,Pakistan Tele:042-7511506 Fax:042-7511844 Cell:0300-8440216 E-mail:[email protected]

71. Tariq Gondal C.E.O Mineral Valley 410-4th Floor,Siddiq Trade Centre,Main Boulevard,Gulberg, Lahore Tele:042-5781991-92 Fax:042-5781990 Cell:0300-8477867 E-mail:[email protected]

72. Akhtar A. Hai Senior Research Economist AERC University of Karachi P.O. Box 8403 Karachi-75270 Pakistan Tele:021-9243204 Fax:021-4829730 E-mail:[email protected]

73. Yameen Memon Chief Executive D-112/B,Naseem Nagar Phase III,Qasimabad Hyderabad Cell:0300-937-6995 Tele:022-2654446 Fax:022-2655382 E-mail:[email protected]

74. Dr. Akash Ansari President Tele:92-227-61683 Cell:0300-303863



122

E-mail:[email protected]

75. Ali Mohammad Vice Chairman Fishermens Cooperative Society Fish Harbour,West Wharf Road,Karachi-74000,P.O. Box Tele:2311757 Fax:2311753

76. Qaisra Sheikh

Honorary Sheikh 3 Race Course Road,Shahrah-e-Aiwan-e-Tijarat Lahore Tele:042-7537211 Fax:042-7538246 Cell:0304-4023753 E-mail:[email protected]

77. Shoaib Hamid Khawaja Chief Executive Officer Rehman House,62 Mozang Road Lahore Tele:042-630-0845 Fax:042-630-0846 Email:[email protected]

78. Khalid Saeed Khan CEO KAM Engineering Behind Glaxo Lab.19 km off Ferozepur Road Lahore Tele:042-5820341 Fax:042-5820342 Email:[email protected]

79. Saeed Bhombal Bhombal & CO. Old Ralli Bros Building,Talpur Road, Karachi-74000 Pakistan Tele:2436394-98 Fax:021-2417004 Cell:0333-2298881 Email:[email protected]

80. Rehamatullah Javed Chairman 10-Nargis Block,Iqbal Town,Lahore-54570 Tele:7841300 Fax:042-7832456 Email:[email protected]



123

82. M. Ghalib Nishtar

President Khushalibank 94 West,Fourth Floor,Jinnah Avenue Blue Area,P.O.Box 3111 Islamabad Tele:111-092-092

83. Nasser Durrani Executive Vice President SME Bank Jang Building,40-E,Ak Fazal-ul-Haq Road Blue Area Islamabad Tele:921-7000-2 Email:[email protected]

84. Abid H K. Shirwani Executive Director University of Management & Technology 11-Aibak Block,Garden Town Lahore Tele:042-5869312-6 Fax:042-5835755 Eamail:[email protected]

85. Khalid Khan Chief Executive Agribusiness Support Fund 144-CCA,Phase IV,DHA,Lahore Tele:042-5749083 Cell:0300-8816100 Fax:042-5749084 Email:[email protected]

86. Dr. Rukhsana Hassan Assistant Professor Fatima Jinnah Women University The Mall-Rawalpindi

81. Dr. Junaid Ahmad

Chairman National Management Consultants 1st Floor,PIDC House,M.T Khan Road Karachi Tele:021-5662005 Fax:021-5217725 Email:[email protected]



124

Pakistan Tele:9270050-57 Fax:9271168 Cell:0333-5465537 Email:[email protected]

87. Prof. Dr. Najma Najam

Vice Chancellor Fatima Jinnah Women University The Mall-Rawalpindi Pakistan Tele:9270050-57 Fax:9271168 Email:[email protected]

88. Akhtar Riaz Assistant Director Sales Karachi Marriott 9,Abdullah Haroon Road G.P.O. Box 10444,Karachi Tele:021-111-223344 Fax:021-5680981 Email:[email protected]

89. Kamaran Masood Financial Analyst/Investment Advisor Agribusiness Support Fund 144-CCA,Phase IV,DHA,Lahore Tele:042-5749083 Fax:042-5749084 Email:[email protected]

90. Haider Ali Babarkhail Area Development Manager The Bank of Khyber Charsadda Branch,Mardan Road Charsadda Tele:021-511329 Cell:0320-5227417 Email:[email protected]

91. Syed Sarfraz National Sales Manager Faraz Foods



125

14 km,G.T Road More Eminabad,Gujranwala Pakistan Tele:92-55-3263827 Fax:92-55-3269091 Email:[email protected]

92. Javed Iqbal Chief Executive Faraz Foods 14 km,G.T Road More Eminabad,Gujranwala Pakistan Tele:92-55-3263827 Fax:92-55-3269091 Email:[email protected]

93. Abdul Manaf Administrative Assistant Asian Development Bank OPF Building,Shahrah-e-Jamhuriyat G-5/2,Islamabad,P.O. Box 1863 Islamabad Email:[email protected]

94. Manzoor Rehman Senior Project Implentation Specialist Asian Development Bank OPF Building,Shahrah-e-Jamhuriyat G-5/2,Islamabad,P.O. Box 1863 Islamabad Email:[email protected]

95. Peter Egens Pederson Manager Asian Development Bank 6 ADB Avenue,Mandluyong City 0401 Metro Manila,Phillippines,P.O. Box 789,0890 Manila,Phillippines Tele:632-632-6566 Fax:632-636-2471 Email:[email protected]

96. Sh. Arshad Aziz Administrative Assistant Asian Development Bank OPF Building,Shahrah-e-Jamhuriyat G-5/2,Islamabad,P.O. Box 1863



126

Islamabad Email:[email protected] Email:[email protected]

97. Emma Hooper

Poverty & Macroeconomic Specialist Asian Development Bank OPF Building,Shahrah-e-Jamhuriyat G-5/2,Islamabad,P.O. Box 1863 Islamabad Email:[email protected]

98. Naved Hamid Economic Advisor & Deputy Country Director Asian Development Bank OPF Building,Shahrah-e-Jamhuriyat G-5/2,Islamabad,P.O. Box 1863 Islamabad Email:[email protected]

99. Hashim Raza Partner Development & Mnagement Consultants 1st Floor,82 DD Central Commercial Area Phase IV,DHA Lahore Tele:042-573-4918/19 Fax:042-574-4624 Email:[email protected]

100. Salman Ahmad Senior Advisor PISDAC 49-J Model Town Lahore,Pakistan Tele:042-5847906 Fax:042-5847905 Email:[email protected]

101. Syed Sardar Ali Senior Partner Executive Business Center,Suite 10,Saudi Pak Towers,Islamabad Tele:051-280-397 Email:[email protected]



127

103. Dr. Junaid Ahmad Advisor Coorperate Affairs Competitiveness Support Fund 1st Floor,PIDC House,M.T Khan Road Karachi Tele;021-5662005 Fax:021-5217725 Email:[email protected]

104. Abdul Rasheed Secretary Lasbela Chamber of Commerce & Industry Ground Floor,Lieda Office Building,Hub Distt.Lasbela Tele:0853-303410 Fax:0853-302431 Email:[email protected]

105. Bashir Ahmed Nadim Managing Director Lasbela Industrial Estates Development Authority Tele:0853-33320 Fax:0853-32470

106. Ali Latif Financial Controller Business Support Fund Office # 304,Siddiq Trade Centre,Main Boulevard,Gulberg Lahore Tele:042-5782008 Fax:042-5781814 Email:[email protected]

107. Muhammad Ashraf Director General AHK National Centre for Rural Development & MA Ministry of Local Government & Rural Development Park Road,Chak Shahzad,Islamabad Tele:9255154 Fax:9255157 Email:[email protected]

108. Asif Ali Buledi Accountant Government of Sindh Tele:0297-744233 Fax:0297-862392



128

109. Ahmed Zamir Khan Director Fishermens Cooperative Society Tele:2313139 Cell:0333-2198723 Fax:2311753

110. Sajjad Ahmed Shaikh Deputy Secretary Government of Pakistan,Finance Division,Q-Block,Pak Secretariat Islamabad Tele:051-9204844 Fax:051-9205219 Email:[email protected]

111. Shafqat Ezdi Shah Secretary Ministry of Local Government & Rural Development Tele:051-9202080 Fax:051-9203429

112. Muhammad Siddique Memon

Secretary Livestock & Fisheries Department Government of Sindh 4-B,Sindh Secretariat,Block -90 Karachi Tele:9203291

113. Muhammad Kashif Monitoring & Evaluation Officer Government of Sindh Bungalow No. 06 Ali Town,Badin by Pass Road Badin Tele:0297-862392 Fax:0297-862392 Email:[email protected]

114. Fazal A. Nizamani Project Director Government of Sindh Barrack No. 87-88 Sindh Secretariat # 4-B,Opp.Sindh Assembly Building Karachi Tele:021-9206396 Fax:021-9206393 Email:[email protected]



129

115. Iihamddin Deputy Director Federal Seed Certification & Registration Department 608 Benevolent Fund Building,Peshawar Cantt,Peshawar,NWFP Pakistan Tele:091-9213010 Fax:091-9213010 Email:[email protected]

116. Dr. Kauser Abdulla Malik Member Planning Commission,Government of Pakistan,P- Block,Pak Secretariat Islamabad Tele:051-9201974 Email:[email protected]

117. Dr. Abdul Hayee Agricultural Marketing Specialist Social Sciences Division 20-G-5/1 P.O. Box 1031 Islamabad 44000 Pakistan Tele:051-9202548 Fax:0519202968 Email:[email protected]

118. Muhammad Akbar Khan Managing Director N.W.F.P Small Industries Development Board,Kohat Peshawar Tele:091-9212224 Cell:0300-9081261

119. Mansur Arifeen Chief Executive PAMCO 2nd floor,Building # 3,Associated House,7- Egerton Road Lahore Tele;042-9204421 Fax042--9204420 Email:[email protected]

120. Tajammal Hussain Nisar Provincial Coordinator Agribusiness Development & Diversification Project Tele:042-042-5899765 Fax:042-5749081



130

Email:[email protected]

121. Dr Tariq Ahmed Agribusiness Specialist Agribusiness Development & Diversification Project Government of Pakistan Ministry of Food,Agriculture & Livestock,144-CCA, Phase -IV,D.H.A Tele:042-042-5899765 Fax:042-5749081

122. Agha Muhammad Media Consultant PHEB Head Office,2nd floor,126 y Commercial Area Phase III Dha,Lahore Tele:111-111-742 Fax:042-5727160 Email:[email protected]

123. Afaq Tiwana Chairman Agrimall 1st floor,Mustafa center,45-F,Main Market Gulberg II,Lahore 54660 Tele:042-5788221-4 Fax:042-5788231 Email:[email protected]

124. Imtiaz Z. Nasir Business Development Officer PAMCO 2nd Floor,Building # 3,Associated House,7-Egerton Road,Lahore Tele:042-9204421 Fax:042-9204420 Email:[email protected]

125. Dr. Abdul Ghaffar Managing Director Livestock & Dairy Development Board 76 W,Umer Plaza,1st floor Blue Area Tele:051-2605711 Fax:051-2605713 Email:[email protected]



131

126. Dr. Faqir Muhammad Anjum Director University of Agriculture Tele:041-9201105 Email:[email protected]

127. Dr. Amanullah Malik Assistant Professor University of Agriculture,Faisalabad,38040 Tele:041-9200161 Fax:041-2602171 Email:[email protected]

128. Dr. M.A Pervez Professor/Diector Institute of Horticultural Sciences,University of Agriculture,Faislabad Tele:00092-41-9201086 Email:[email protected]



132

Appendix II: List of References and Publications Consulted

1. List of Text References and Data Sources in the Study

• Grant Thornton Food Industry Survey - Web

• Pakistan Labor Force Survey (2001-02)

• ADB Loan No. 2066, SME Development Program

• “Report of the APO Multi-Country Study Mission on Rural-Based Food Processing

Industry”, Abdul Hafeez Chaudhry, APO 2004

• Economic Survey of Pakistan 2005-06

• “Agriculture in Pakistan and the Doha Development Agenda: Challenges and

Opportunities”, EC Trade-Related Technical Assistance Programme (TRTA) for

Pakistan, September 2006

• Pakistan Agricultural Statistics 2004/05

• ADB PPTA 4525, SCICDP, 2006

• ‘Pakistan’s Dairy Industry: Issues and Policy Alternatives”, Muhammad S. Anjum,

Kamil Lodhi, Agha Abbas Raza, Forrest Walters, Stanley Krause, Special Report

Series No. 14, Pakistan Economic Analysis Network Project. Islamabad July 1989

• Federal Bureau of Statistics, Official Census 1998

• Pakistan Country Overview 2006, the World Bank

• “Sources of Income Inequality and Poverty in Rural Pakistan”, Research Report

102 by Richard H. Adams, Jr. and Jane J. 1995

• National Nutrition Survey 2001-2002 on behalf of the Planning Commission of

Pakistan.

• Action Plan for the Karachi Fish Harbour, CSF, February 2007

• Unpublished Report on Horticulture,

• Global Development Solutions LLC/World Bank

• “The Indonesian Oil Palm Industry”, Barlow et.al. ANU 2003

• “Milk prices and costs of milk production in 2003 - A global comparison”, Torsten

Hemme, Milkproduction.com November 2004



133

• “Food Safety Legislation in Pakistan: Identifying Entry Points for Public

Intervention”, Mazhar Siraj,Research Fellow CRCP

• “Pakistan’s Agro-based Exports & Sanitary and Phyto-sanitary (SPS) Compliance”,

Joint World Bank and UNIDO Report, 2006

2. Other Principle Publications Consulted Agriculture “National Agriculture Sector Strategy”, Asian Development Bank December 2005 PARC (Pakistan Agricultural Research Council). 1997. National Master Agricultural Research Plan 1996–2005. PARC, Islamabad. “The State of Food and Agriculture: Food Aid for Food Security”, FAO 2006 Competitiveness “The State of Pakistan’s Competitiveness 2007”, Competitiveness Support Fund/Ministry of Finance Islamabad “Competition Policy and Law in Pakistan”, The World Bank, December 2006 “Pakistan: Growth and Export Competitiveness”, Growth and Competitiveness Conference, Lahore December 2005, World Bank Dairy Industry Pakistan’s Dairy Industry: Issues and Policy Alternatives”, Muhammad S. Anjum, Kamil Lodhi, Agha Abbas Raza, Forrest Walters, Stanley Krause, Special Report Series No. 14, Pakistan Economic Analysis Network Project. Islamabad July 1989 “The White Revolution – ‘Dhood Darya’ – White Paper on Pakistan’s Dairy Sector”, Pakistan Dairy Development Company , June 2006 Economics “Building the Innovative Society: Knowledge, Technology and Competition”, Planning Commission of Pakistan, Vision 2030 Draft “Debt, Growth and Poverty: A Case of Pakistan”, Khan, Ashfaque. H. Paper presented at the ADB-IDRC Seminar on Poverty, Trade and Growth: Issues in Sustainable Development, ADB, Manila 2003



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“Drivers of Economic Growth, Unleashing the Potential of the Private Sector”, Pakistan Development Forum, 2006 Government of Pakistan. 1997. Economic Survey 1996–97. Finance Division, Economic Adviser’s Wing, Islamabad. “Inflation in Pakistan, Money or Wheat”, Mohsin S. Khan and Axel Schimmelpfrennig, IMF Working Paper No. 6, 2006 “Private Sector Development in the context of Poverty Reduction Strategy Papers”, Niklaus Eggenberger-Argote, Feb 2005 Environment Omar, K. 2005. Just How safe is Your Drinking Water? – IV. The News on Sunday. October 2, 2005. PARC (Pakistan Agricultural Research Council). 1980. Agro-ecological Regions of Pakistan. PARC, Islamabad Simeral, K. D. 2003. Using Constructed Wetlands for Removing Contaminants from Livestock Wastewater. Ohio State University. Web Paper .“Study on Water Escapages Downstream of the Kotri Barrage”, World Bank Draft Consultants Report, September 2005 “Sindh: State of the Environment and Development”, IUCN, 2004 Food “Food Safety and Agricultural Health Standards: Challenges and Opportunities for Developing Country Exports”, The World Bank, 2005 “A Case Study of Selected Fruit, Vegetables, Milk and Read Meat”, Fida Muhammad et al., ADB “Regulatory Affairs Local & International Food Regulations and It’s Update”, Dr Farhat Jameel, Regulatory Affairs Manager, Nestle Pakistan Ltd. 2005 “Meat Hygiene and its Importance in Public Health”, Progressive Farming, Vol 8/2 PARC Land Haris G et al. 2002. “Land Tenure, Rural Livelihoods and Institutional Innovation. A report prepared for DID”. LSE, London Law



135

“Food Laws Manual”, Ejaz Ahmed Awan, Nadeem Law Book House, 2nd Edition 2007 Livestock Adams, Richard, H. “Livestock Income, Male/Female Animals and Inequality in Rural Pakistan” International Food Policy Research Institute, November 1996 Akhtar A.S. 1986. Livestock Development: Issues and Policy Options. Pakistan Agricultural Research Council, Islamabad. Amir P., Akhtar A.S. and Dawson M.D. (eds). 1987. Livestock in Pakistan Farming Systems Research. Pakistan Agricultural Research Council, Islamabad. “Enhancing reproductive performance in dairy buffalo: major constraints and achievements”. Nanda AS, Brar PS, Prabhakar S. Department of Animal Reproduction, Gynaecology and Obstetrics, Punjab Agricultural University, Ludhiana 141004, India. FAO (Food and Agricultural Organization of the United Nations). 1987. Pakistan, Livestock Sector Study. Report of the FAO/ADB Cooperative Programme Investment Centre, vol. 1 & 2. FAO, Rome. Livestock Distribution in Pakistan. Ministry of Food, Agriculture and Livestock, Government of Pakistan, Islamabad. MINFAL (Ministry of Food, Agriculture and Livestock). 1995. “Nutritional and socio-economic implications of feeding cereal straws supplemented with higher dietary level of de-oiled cakes to lactating buffaloes (Bubalus bubalis): an on-farm study”, Sharma, N Dutta and U Naulia, Centre for Advanced Studies in Animal Nutrition, Indian Veterinary Research Institute, Izatnagar-243 122, India. “Planning Cattle Feedlots”, Joseph P. Harner III,Biological and Agricultural Engineering, James P. Murphy, State Leader, Biological and Agricultural Engineering. Kansas State University Agricultural Experiment Station and Cooperative Extension Service Industrial Crops Azma Khamis et al " Non-linear Growth Models for Modeling Oil Palm Yield Growth" J. Mathematics & Science, 1(3) 225-233, 2005 “Cultivation of Oil Palm and Coconut in Coastal Areas of Sindh Province”, Dr A. Rashid and M.M.I.Nizami, National Agricultural Research center, Pakistan Agricultural Research Council, August 1994 “Oil Palm, A Crop of the Future, A presentation before the 10th meeting of the Governing Body of the Coastal Development Authority” by Munawar Opel, Director general, 7th March 2005,



136

Modified PC-1 “Oil Palm Plantation on 1000 Acres……”, Planning & Development Department, Government of Sindh, February 2005 “Sugarcane Production Handbook – 2001”, By Benjamin L. Legendre, Ph.D., Specialist (Sugarcane), Louisiana State. Louisiana State University Agricultural Center, “The sugar industry plays a pivotal role in the national economy of our country” article by Dr. S.M. ALAM and M.A. KHAN, Nuclear Institute of Agriculture, Tandojam, Pakistan. “Pakistan Sugarcane Production”, Sugar Processing Research Institute, Inc., New Orleans, Louisiana, USA. “Sugar-cane production on decline” Dr Ali Muhammad Khushk, unpublished article “Pakistan... The bitter truth of sugarcane farming”, Gulf News - U.A.Emirates - 5 April 2006 Policy “Ensuring a Demographic Dividend – Unleashing Human Potential in a Globalized World”, Draft Summary of the Poverty Reduction Strategy Paper-II, 2007, Ministry of Finance Medium Term Development Framework 2005-2010, Planning Commission SMEs “SME Policy 2007: SME Led Economic Growth – Creating Jobs and Reducing Economic Poverty”, Ministry of Industries, Production & Special Initiatives Social “A Policy Study into the Economic Empowerment of Women in Pakistan and its Linkages with Competitiveness and Economic Growth”, Draft Report, Dr. Shane Tarr for the Competitiveness Support Fund, Islamabad, 2007 “Poverty Reduction Strategy Paper: Annual Progress Report 2005-06”, November 2006, PRSP Secretariat, Finance Division “Rapid Assessment of Coastal Fishing Communities in Coastal Badin, Sindh”, Ruqia Laghari NRSP, July 2005 Statistics



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Agricultural Statistics of Pakistan 1994–95. MINIFAL, Government of Pakistan, Islamabad. Development Statistics of Sindh 2004; Bureau of Statistics, Planning & Development Dept, GOS “Fruit, Vegetable and Condiment Statistics”, 2002, MINFAL “Production and Exports of Fruit” 2004, MINFAL FATA Statistics 2002; Bureau of Statistics; Planning and Development Department, Government of NWFP; Peshawar. Trade “Agriculture in Pakistan and the Doha Development Agenda: Challenges and Opportunities”, Sohail Jahangir Malik and Shoukat Ali Anwar Randhawa with Bruce Huff, International Trade Centre with EU, September 2006 “Food Safety Issues, Trade and WTO”, Authoukurala et al.,FAO 1999 “Trade Related Challenges Facing Exporters in Pakistan”. Pakistan Institute of Development Economics, Islamabad, and UNIDO, 2007 “Trade Policy 2006-07” Speech by Humayun Akhtar Khan, Minister for Commerce, July 2006 Wheat “Wheat Production in Pakistan: Saga of Policy Disincentives”, Naheed Zia Khan, Munir Ahmad and Asia Rasheed, Pakistan Institute of Development Economics, website



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Appendix III: LIST OF 101 MAJOR AGRO-PROCESSING COMPANIES REVIEWED BY THE STUDY (NB: This list can be sent in electronic form on request to CSF; each entry represents the web URL for the enterprise concerned and by clicking on it can provide detailed information on each company) Lahore (Punjab) Golden Confectionery Packing Machinery Hamd Food Products Rana Muhammad Ijaz Khan Rice Mills/Almaidah Traders Hush Rice K. K. Traders & Expoters Yousaf Food Industries(Pvt) Limited Metal Zone Zamzam Traders Indus Valley Rice Mills(Pvt. ) Ltd MEC Engineering Works (Pvt. ) Ltd. Chenab Rice Industries T&U Globex Wali Oil Mills Sanabel Trading & Marketing Co. Nizami Traders Rehman Corporation Prima Distributors Irfan Foods Pvt Ltd Multan (Punjab) Haider Sheep Casing Traders Bhutta Group Of Industry Bilal Brothers Enterprises Chiniot (Punjab) Hameed Son Rice Mill Sargodha(Punjab) Khan Citrous Paradise Faisalabad (Punjab) Dickens (pvt) Ltd Aromafood Help Foods & Chemicals



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Sialkot (Punjab) Style Pak Impex Foodsupplies Enterprises Mughalricemills

Islamabad (Punjab) Rainbow Farms Bruni International Integrated Technical Services

Kamonke (Punjab) Usmanricetraders

Wazirabad (Punjab) Aromabas Rice Mills (Pvt) Ltd

Rahim-Yar-Khan (Punjab) Taj Enterprises

Peshawar (NWFP) T. K. R Traders Masood And Company

Gujrat (Punjab) Alsultania Rice Mills

Gujranwala (Punjab) Ikram Rice Mills Rabia Enterprises Al-harm Rice Traders Irfan Brothers A~z. International Punjab Pearl Rice Mill Tajfood (Pvt) Ltd Super Rice Mills(Pvt)Ltd. Haroon Rice Processing Mills



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Quetta (Balochistan) Saddat Commission Shop

Sindh Bumbia Enterprises

Karachi (Sindh) King Rice Shaheen Enterprises Sayal Farming Co Chiltan Sea Food Paradise Food Industries (PVT ) Ltd Arbab Sons Hq Lala Enterprises Delta Export Centre Moon Rice Szt Corporation Imex Trading Company Ailya International Fisheries Pak Pvt Ltd Alaamir&Co Shazco Traders M/S. Malik Sons Importers & Exporters Raj Processing Mmcorpoation Trade Continental U. P. Foods Stuffs Co. Al-mashhud Intl Baari Falcon(Private) Limited Are Traders Buraaq International Foods Pak Food Ltd Bluechip Trading Co. Hamza International Pakistan SF Commodities Wasnan INC. N. A Foods Tajsons & Traders Makley Hills Food Industries Pvt Ltd Naurus (Pvt) Ltd. Young's Food Products Multi Food Products Sadiq Traders Sarah Group of Companies Sourcing Partners Inc. Tricone International TASTY FOODS GARIBSONS (PVT) LTD Haneefsfood

barq initiative pvt ltd Son Of The Sea Royal Rice Millers Limited M & A International General Traders Shan Food Industries Pak Food Chappal Traders Pearl Food Industries

Larkana (Sindh) Reliance International Commodities Exports

policy analysis on the competitive advantage of the food processing sector in pakistan

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