KARACHI: In the absence of adequate regulations, a number of undocumented and under-taxed new entrants in the processed food industry have been producing cheaper products because of the low quality standard and the situation poses a major challenge to larger firms, said the State Bank of Pakistan (SBP). The SBP in its first quarterly report for Fiscal Year 2016-17 (FY17) said, “The processed food industry still holds significant potential for growth due to the country’s strong agriculture base. However, in order to harness this potential, the industry needs a level playing field where every entity is properly documented and taxed, adequate protection of innovations; minimum quality standards; and a setting that allow firms and growers to achieve benefits from economies of scale”. The SBP added a number of the new entrants in the processed food industry belong to the informal sector, which is largely undocumented and under-taxed. The food items produced by these firms are cheaper also because of the low quality standards. These manufacturers pose a major challenge to larger firms in the formal sector who invest heavily in innovation to make their product differ significantly from those currently in the market and on aggressive media campaigns to convince potential customers to buy their products. In simple terms, the entire process of product development and marketing is capital intensive. However, inadequate protection through patents and trademarks allows small manufacturers to easily copy the label and packaging of branded products. Such counterfeit products generally offer high margins to retailers especially in small karyana stores in villages. Thus, making R&D investment in the presence of free riders becomes quite challenging. ‘Quality standards are needed across the entire supply chain maintaining the quality of food products is one of the major challenges for the industry. The food quality depends on several factors, such as quality of the raw materials, state of logistic facilities (transport, storage), and conditions at the point of sale, etc. This means, ensuring quality would involve working with every player in the supply chains, such as farmers and wholesalers, transporters and retailers’. The implementation of globally recognized food safety and quality standards also opens up the export market in developed countries. Food processing can also add value to a country’s exports as currently, rice contributes around 50 percent of the country’s total food exports of $ 4.0-4.5 billion per annum. A focus on building up food processing capacity and smoothing out export logistics can greatly augment export earnings for the country. The SBP recommends that a close coordination with the processing industry allows farmers to earn a higher and stable income as the use of technology and acquired knowledge improves yields and lowers post harvest losses, the better use of soil and water resources and control of pests and diseases reduces output volatility both in terms of quality and quantity, farmers receive a premium for value added to their produce, the realized prices are higher as contract farming brings down the number of intermediaries. The strong competitive pressure compels processing firms to seek economies of scale by integrating farmers into the supply chain. As a result, a number of firms are going into corporate farming. However, the vast majority of farmers in Pakistan have land units that are fragmented and below 12.5 acres, which makes it difficult to generate economies of scale that would justify the use of mechanization and sophisticated cropping patterns. ‘One possible solution is to encourage cooperative farming which allows economy of scale by forming vibrant clusters of farmers’, SBP suggested. According to Household Income and Expenditure Survey data, the average monthly spending on readymade food – a subcategory of processed food – by the top quintile has risen from Rs 303 in 2004-05 to Rs 1,009 in 2013-14. Interestingly, the share of spending on all major food items by this quintile has fallen from 39.7 percent to 35.3 percent during this period. An increase in the internet usage, the growing confidence of customers in buying online, and the availability of more reliable delivery networks have encouraged customers to opt for web-based food ordering platforms.