THE government`s investment support scheme for the textile industry is expected to leverage a capital spending of $250 million in modernisation of the textile machinery during next two years, but falls short of incentives required to encourage companies to put their money in greenfield projects.

The government`s Technology Up-gradation Fund Scheme (TUFS) is a modified form of the earlier unimplemented Technological Up-gradation Support Order of 2010 and has been relaunched to help the textile industry undertake stalled BMR (balancing, modernisation and rehabilitation) and capacity expansion.

The TUFS promises to reimburse the borrowers 50 per cent of normal interest charged by the lenders subject to a maximum of five percentage points a year or whichever is less on loans obtained between Sept 1, 2009 and June 30, 2014 for technological up-gradation. The maximum rate support to one company is capped at Rs50 million a year for each sub-sector of the textile industry.

Same incentives are available on investment through loans on plant and machinery imported for new projects.

The scheme provides for grant of up to 20 per cent of the capital cost to SMEs (small and medium enterprises) for import of new plant and machinery not exceeding Rs10 million through loans or their own sources.

The government will also provide five per cent investment or equity support to non-SMEs against imported new plant and machinery through their own sources. Maximum support to a single company will again be capped at Rs50 million for each sub sector.

The investment support will cover only technology and machinery at C&F value.

The scheme, envisaged in the five-year strategic textile policy in 2009, will not be extended to defaulters unless the same are rescheduled or restructured by the lenders. It will also make the borrowers ineligible for the support during the remaining period of the loan if any of their loans (long or shortterm) are declared non-performing after introduction of the scheme.

The borrowers who have availed of the SBP`s Long Term Financing Facilities or any other support or concession of the government against plants and machinery imports too have been excluded from TUFS.

The interest rate and investment support will be available for undertaking BMR and new projects in all the sub-sectors of the textile industry from cotton ginning to garment-making as well as for installing captive power generation and setting up common facilities for effluent treatment, captive power and weaving sheds.

While the modified TUFS was notified by the State Bank on Aug 30 after extensive lobbying by the All Pakistan Textile Mills Association (Aptma) with the government, many describe the incentives contained in it `too little, too late`.

`The scheme has fallen far short of our expectations,` says a leading Lahore-based textile exporter who requested anonymity for personal reasons. `It has many lacunae that will discourage greenfield investment. Still, I think, the companies are going to invest heavily in the long over-due BMR (balancing, modernisation and rehabilitation) to improve technology.

Mr Ahsan Bashir, who will take over Aptma as its new chairman from next month, largely agrees.

`While the scheme is not likely to attract significant greenfield investment, I expect the industry to spend something like $200-250 million on BMR,` he says.

The industry feels the TUFS should be extended to the users of longterm financing for BMR or new projects because their exclusion from the scheme has created an anomaly.

The industry also contends that the rate subsidy of five percentage points with maximum support capped at Rs50 million a year isn`t enough for stimulating investment at a time when energy shortages are rising and leading to industrial closures.

`When the scheme was envisaged back in 2009, the rate in the neighbouring India was eight per cent. Today it is five per cent. Thus, we are still more expensive than our Indian rivals. Hence, the rate support should be revised upwards to reduce the effective cost of borrowing for the industry and the cap on maximum annual reimbursement of interest rate support removed to make the loans for technological up-gradation as well as investment in new projects affordable and regionally competitive,` Ahsan insists.

What is most worrying for the industry is that the finance ministry has not committed funds forthe scheme. `The earlier version of TUFS could also not be implemented because the ministry did not allocate or release money to pay off the claims.

Nobody knows if the government has funds to reimburse the claims in future either. This creates an environment of uncertainty and discourages new investment,` he says.

He says the picture will become clear in the next couple of weeks as manufacturers file claims for reimbursement of support on loans for fresh investment and technological up-gradation obtained so far.

Mr Gohar Ejaz, top Aptma leader, says the textile industry`s appetite for new investment in technology and machinery up-gradation and capacity expansion is enormous.

`The industry hasn`t invested in technology upgradation or new projects in the last six years because of the formidably high cost of borrowing. I expect the industry to spend over $250 million on up-gradation of technology during the 22 months of TUFS`s remaining life.

Like others, he too wants the government to allocate a specific amount, say, Rs500 billion, for providing loans to the industry at a subsidised rate for large scale, long-term investment in new projects for new jobs and increased exports. But the question is: does the cashstrapped government have resources needed to spur private investment in the economy?