For a long time, the threat of on-money/ premium/ own has been a scourge on the local car sector as well as auto customers. Attempts by the government at various times to abolish the practice of bulk bookings and charging a higher fee to potential consumers for early car delivery have been ineffective. However, no meaningful measures have been taken, and the market continues to be dominated by a large number of investors/hoarders who prefer to seize a large portion of new automobiles before they reach deserving buyers.
According to a study conducted by the Pakistan Institute of Development Economics (PIDE), Pakistan's automobile industry has made undocumented transactions worth Rs 150 billion to Rs 170 billion in the last five years under the guise of additional charges, also known as own/ premium, paid to car dealers in order to receive immediate delivery. According to this study, up to 90% of passenger automobiles in Pakistan are sold for premium/on money.
Car firms that fail to deliver their autos within 60 days of accepting a booking order face a penalty of 3% plus Kibor, as well as a fine of up to Rs 200,000 WHT if they sell freshly purchased locally constructed vehicles within three months after delivery. These regulations, however, are ineffective since no investor registers a car and sells it within 90 days; rather, the game is played on the first booking of 'unregistered' automobiles, and it is generally the purchasers who have previously spent their own money to be the first to register a new vehicle.
The government's restriction on collecting a maximum of 20% on bookings, according to Ali Asghar Jamali, CEO of Indus Motor Company (IMC), offers a commercial case for investors. According to Jamali, investors may book five automobiles for the price of one, choking supply and lengthening delivery times, allowing investors to demand exorbitant own-money rates. Allowing automobile firms to require full payment at the time of booking would deter investors from entering the market. If assemblers do not provide a car within three months, the government might punish them, he added.
Another representative of the local automakers believes that current conditions, which include drastically shifting currency rates and worldwide commodity prices, will keep 'investors' relevant. According to the source, investors (read: hoarders) will continue to book automobiles at full price in anticipation of a price hike. He continued, saying:
"Investors will be gone if the government enables corporations to accept full payment with the extra caveat of charging higher prices if interest rates rise."
In actuality, however, the main cause of on-time payments is the delay in new automobile delivery. Remove the lag, and the on-time culture will go in an instant. Who will pay the extra money to investors whether the automobile is delivered immediately or in 10/15 days? Even before the epidemic, delivery delays for locally produced automobiles were several months, with the auto industry's overall production output hovering around 0.2 million units per year.
It is critical to maximizing the capability of local vehicle assemblers. Delays in delivery are unavoidable if the factories are not operating at full capacity. It makes no difference if some investor is booking 5 vehicles or not; if the investor is removed and there are 500 prospective purchasers in line, but the firm with a capacity of over 600 units is only manufacturing 300 units, the on-time culture will stay in place.
Furthermore, enabling assemblers to charge 100% of the booking amount will provide them with more opportunities to generate large profits in the form of interest on bank deposits, with deliveries preferably maintained at 3-months or longer, independent of their manufacturing capability. Assemblers demanding that the government allow them to have 100% payment in the name of booking while still needing several months to deliver the vehicle, and on top of that passing on the price increase impact (during the period) to the customers, will never end the presence of on-money culture; customers will continue to suffer from delivery delays, while assemblers will profit even more from substantial bank deposits.
There are several approaches to eliminate the threat of on-time payment, in addition to maintaining 100 percent capacity utilization. Where there is a will, there is a way, as the saying goes. Consider the following scenario:
Premium/on-money control is rather simple; all that is required are robust regulatory measures, which is exactly what governments are meant to accomplish. Allowing 100% of the booking amount to be charged, no matter how many taxes and penalties are enforced, would never put a stop to the on-time culture. Only on-time delivery, 100 percent capacity utilization, and strict regulatory controls will work. The dilemma is who will ring the bell for the cat?