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8 Weekly Roundup 12 Decoding PSL Economics
22 22 Pakistan’s next economic crisis 30 Pakwheels: The road to a $1 billion valuation
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34 SAPT: Opening new horizons for trade in Pakistan 40 Pakistan’s Debt – Steady As she goes! Dr. Kamal Monnoo
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44 44 Flour, sugar and everything nice 48 Location, Location, Location
CONTENTS
WELCOmE
WILL THE REAL ECONOMY PLEASE STAND UP? Is it the robust economy with one of the best performing stock markets in the world? Or is it the economy with ever dwindling exports? Is it the economy of strong consumer spending, or the economy of sluggish industrial strength? Or could it be the economy of a robust growth on the back of CPEC or the economy about to generate massive unemployment due to CPEC itself?
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The answer to these may depend upon who you have been reading lately. It is a strange coincidence that while almost all foreign publications including Bloomberg, WSJ, Forbes etc paint a very rosy picture of Pakistan’s economy, most of our local economists seem extremely apprehensive. Notwithstanding any conspiracy theory, a simple explanation may be that the analysis of international publications is flawed , looking at things from quite a distance, unfamiliar with the ground realities of Pakistan. But then it could also be argued that our own economists maybe too close to be able to see the big picture. In this issue’s cover story we analyse both sides of the argument and clear the mist surrounding our economic analysis.
Cricket too. But do we know how the PSL economics actually works? The sort of money and the thought process that goes behind running a successful sport franchise? In our story on page 12 we explore the business side of PSL, we find out how the team owners seem to be getting smart to know the pitfalls and how has their risky investment decision fared so far. Here we try to decode the PSL economics and see how the teams actually make their money and where do they really spend it. We also look at how the players are paid in the PSL. This story is must read for sports enthusiasts as not understanding how the economics impacts the sport being played in the ground means you are only have a cricket expert. In other stories we profile Pakwheels.com, Pakistan’s largest automotive portal that was one of the first tech-startups in Pakistan to raise VC funding back in 2014. We find out how well the investment of USD 3.5 million was used and what the founders plan to do with a possible second round of funding. This and much more in our 8th issue of Profit.
Pakistan Super League (PSL) is in full swing and like politics most of us consider ourselves experts on Babar Nizami
Managing Editor: Babar Nizami l Joint Editor: Yousaf Nizami l Contributing Editor: Farooq Tirmizi l Sub Editor: Fatima Farooq Editor Reporting: Farooq Baloch l Reporters Karachi: Aisha Arshad l Arshad Hussain & Usman Hanif Reporters Lahore: Syeda Masooma & Abbas Naqvi l Reporters Islamabad: Nida Jaffery l Ahmed Ahmedani & Amir Sial Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) l Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) Design & Layout: Rizwan Ahmad l Illustrator: ZEB Photographers: Zubair Mehfooz & Imran Gillani Publishing Editor: Arif Nizami Contact: profit@pakistantoday.com.pk
FROM THE MANAGING EDITOR
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“There is a need to engage developmentoriented parties to achieve progress in every sector”
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Rana Muhammad Afzal, Parliamentary Secretary for Finance
“Pakistan is facing water losses and no new storages have been built over the years” Abid Sher Ali, State Minister for Water and Power
Rs 79,900 crore was the budget deficit for the first half of the ongoing fiscal year. The budget deficit is now bound to miss the parliament-approved annual target by a wide margin. The deficit is now 2.4% of the GDP as reported by the Ministry of Finance. After the end of the IMF program last year the government had no obligation to follow prudent economic policies which is partly why the deficit is so large. The first-half budget deficit was 63% of the annual target of Rs1.276 trillion or 3.8% of GDP. In order to achieve the parliament-approved annual budget deficit target, the government was required to restrict the deficit to Rs600 billion or 1.8% of the GDP during the first half. The Finance Ministry missed the target by about Rs200 billion despite showing a huge statistical discrepancy of Rs57.2 billion in the first half. Interestingly, the Ministry does not know where it spent Rs57 billion. The fiscal operations summary of the Finance Ministry showed that the deficit ballooned primarily because of reduction in income, as there was no abnormal growth in expenditures. This was because the government did not fully book the power sector subsidies.
118 Megawatt is the capacity of Fauji Fertilizer Bin Qasim Limited (FFBL)’s new coal-fired power plant that came online. The plant will provide 52MW of electricity to K-Electric on a sustained basis. The plant will also meet steam requirements of FFBL’s fertiliser plant. FFBL Chief Executive and Managing Director Lieutenant General (Retired) Haroon Aslam said FFBL Power Company Limited had entered into a long-term agreement for 30 years. The plant is capable of producing energy using both imported and locally produced coal. The plant has become operational within two years of its inception.
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Rs 1,000 Crore was the profit-after-tax (PAT) posted by Pakistan State Oil (PSO). This represented a growth of 49pc over the PAT at Rs 6.7bn and eps at Rs24.8 in the same period last year. The company had not announced any interim cash dividend which dampened investor sentiments which is why this result was not unexpected. A cash crunch owing to circular debt is believed to be the reason behind there being no interim cash dividend. Higher oil volumes and oil prices mainly led sales growth. The company’s oil volumes grew 22pc to 3.7m tonnes in 2QFY17, up 22pc year-on-year.
BRIEFING
Rs 3,000 crore
will be borrowed by the government to pay off power sector liabilities. The amount will be borrowed from banks in order to partially pay off liabilities of the power sector in order to keep generation plants running in the coming summer season. With this decision, the amount of loans obtained from banks to retire circular debt and park in the government-owned Power Holding Limited would increase to a whopping Rs 3,650 crore. This is in addition to Rs 37, 000 crore circular debt that is affecting the balance sheets of the energy sector’s public and private companies.
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“ Fitch does not expect Pakistan to face external liquidity difficulties” IShaq Dar, Finance Minister
reduction in the price of LNG 30% to Rs900/cylinder has been implemented by the Oil and Gas Regulatory Authority (Ogra) on the directives of the Lahore High Court. Ogra directed all the 119 LPG marketing companies to strictly comply with the price determined by the Ministry of Petroleum and Natural Resources on June 8, 2016 at Rs900 per domestic cylinder of 11.8 kg (Rs76,500 per tonne) including general sales tax. The prevalent price in Lahore was Rs1,200/cylinder while it was up to Rs1,500/cylinder in hilly areas like Azad Kashmir, Chitral and Gilgit-Baltistan.The LPG pricing has been completely deregulated since Musharraf’s rule.On petroleum ministry’s request, the Council of Common Interests (CCI) approved the LPG Production and Distribution Policy 2016 in April last year. The policy required Ogra to regulate the LPG market and notify its prices. The LPG marketing companies would be in contempt of court if they failed to violate the price fixed by the regulator. <Insert 30% big font + OGRA logo>
30%
is the total amount of a loan given by Asian development Bank (ADB) to provide electricity to off-grid communities in Khyber-Pakhtunkhwa and Punjab. In November last year, the board of directors of the Manila-based lender approved the loan to enhance Pakistan’s energy security by helping install clean energy sources and improve people’s access to electricity in two of the country’s provinces. A handout issued by the Ministry of Finance stated that the programme was gender-sensitive as the design envisaged provision of 7% electricity from micro-hydroelectric power plants to women-headed households in K-P. The five year project will ensure 30% of solar facilities are installed in the girls-designated schools in each province.
$325 million
is the increase in cost of the Kachhi Canal project. This further increase, approved by the Central Development Working Party (CDWP) ,has added Rs 8,050 Crore to the total cost of the project. This would be the second such revision in the cost of the project that ignored for Chief Justice of Pakistan (CJP)’s inquiry findings that suggested massive corruption in the project. The CDWP also approved almost 25% increase in the cost of Chashma Nuclear Power Plants III and IV. The revised cost of the power plants is now Rs233.9 billion, up Rs44 billion. General Pervez Musharraf-led government had approved the project at a cost of Rs31.2 billion in 2003 for irrigating 713,000 acres of land in Balochistan. The plan envisaged provision of 6,000 cusecs of water to Balochistan districts through the construction of a 500km-long canal from the Taunsa Barrage, Punjab.
258%
$10.9 billion was the figure for workers’ remittances during the first seven months (July-Jan) of the fiscal year as reported by the State Bank of Pakistan (SBP). The figure shows a 1.87% fall from a year ago. Remittances from Saudi Arabia in the seven months slipped 5.6pc, which does not reflect the impact of the revenue loss to the kingdom following a 60pc decline in oil prices. The SBP report noted that remittances from all important and major sources recorded a decline during this period. The United States and the United Kingdom are the two main sources of inflows following Saudi Arabia, which is the single largest source of remittances for Pakistan. Both countries offered less remittances compared to a year ago.
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“ Growing cooperation between the two nations on economic and defence fronts is a good sign” Ali Alizada, Ambassador of Azerbaijan
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Rs 27,700 crore
is the total unpaid bill to Pakistan State Oil (PSO)’s. Most of the receivables are from the public sector. By the first week of this month power companies had to pay Rs 18,650 crore as well as a late payment surcharge of Rs 6,020 crore. Total payables stood at Rs24, 670 crore. Hubco owed the most with around Rs 7,100 crore pending payment to PSO. In a summary sent to the Cabinet Committee on Energy, the Ministry of Petroleum insisted that in an attempt to ensure uninterrupted power generation and minimise electricity load-shedding, PSO had been supplying fuel to the power sector on instructions of the government, but without consistent payments.
is the approved increase in both petrol and high speed diesel prices by the government which is half of what was recommended by Ogra (Oil and Gas Regulatory Authority). After the increase, the price of diesel is now pegged at Rs 80.48 per litre while the price of petrol is now Rs 71.29 per litre. The prices of kerosene oil and the LDO will remain Rs 43.25 and Rs 43.34 per litre, respectively. The government claims that in order to maintain stability, prices have been maintained since April 2016 despite an increase of around 43% in international oil prices during 2016. At present, the government is charging 31 per cent general sales tax (GST) on the HSD, 17 per cent on petrol, 17 per cent on kerosene oil and 17 per cent on the LDO. The government is collecting around Rs30b per month on account of GST and Rs12 billion per month as petroleum levy from oil consumers. The government has switched from monthly to fortnightly oil price review mechanism since January.
Rs1/litre
was the trade deficit in the first seven months of the current fiscal year, a rise of almost 29% due to falling exports and rising imports. The latest trade figures released by the Pakistan Bureau of Statistics revealed that the country has breached its trade deficit limits and booked a $17.42-billion deficit during the July-January period. Exports in the seven-month period were less than half of the annual target, while imports were about two-thirds of the annual projections. Exports fell by 3.2% while imports rose by 13.7%. The higher-than-projected trade deficit has increased the government’s reliance on foreign borrowings to meet its external account requirements. The country’s foreign financing requirements for this fiscal year are projected to be in the range of $12 billion to $15 billion, depending upon the projections of exports and imports. The government closed the last fiscal year 2015-16 at an eight-year low level of exports, which dropped to $20.8 billion despite preferential access to European markets.
$17.428 billion
duty has been placed on imports of galvanised steel coils and sheets by the National Tariff Commission (NTC). The duty on Chinese exporter Angang Steel Company is 40.47pc, followed by 31.31pc on Hebei Iron and Steel Co. Ltd., 9.13pc on Bengang Steel Plates Co. Ltd., 6.09pc on Maanshan Iron and Steel Co. Ltd. The rate on all other producers and exporters from China is also 40.47pc. duty would not be levied on imports from sources other than China, imports used as inputs in products destined solely for exports and on imports that are covered under any scheme exempting customs duty for exports under the Customs Act of 1969.
6-41%
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special economic zones (SEZs) are to be set up across four provinces and special areas under the China-Pakistan Economic Corridor (CPEC) to boost industrial production. The list of the proposed sites for establishing SEZs was shared with Chinese authorities in the last Joint Cooperation Committee (JCC) meeting held in Beijing recently. For attracting Chinese enterprises, the government is working on an investment package, which is expected to be finalised before the end of March. SEZs are believed to be critical for the industrial sector as they have played a key role in the industrial development in many Asian economies. Four SEZ sites were identified in Punjab, nine places in Balochistan, four sites were identified in Sindh while the Khyber Pakhtunkhwa government requested the establishment of SEZs in 17 places under the CPEC. Pakistan has agreed to provide gas, water, electricity and other facilities to factories in industrial parks. <Insert 37 big font>
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SPORTS
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Bilal Hussain and Farooq Baloch
“
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rom a corporate perspective, Pakistan Super League has all the ingredients to become the biggest brand in Pakistan, bigger than any other sports and entertainment brand currently on display,” Chief Operating Officer (COO) of Islamabad United, Shoaib Naveed told Profit days before the start of PSL 2. Little did he know, players from his own franchise would put the league’s very future at stake just when the second season kicked off. The match-fixing scandal, which rocked
the lucrative league on its second day became international news after the Pakistan Cricket Board (PCB) suspended United’s Sharjeel Khan, the star of PSL’s first season, along with teammate Khalid Latif for the duo’s alleged involvement in fixing. Few days later, former opener Nasir Jamshed was arrested along with a bookie from London in connection with the same case. As we write this report, Mohammad Irfan, also a United player, remains under investigation while Nasir Jamshed - not part of
INSIGHT
any PSL team - was identified as the link between the two suspended United players and the bookie. Both Nasir and Yousaf (bookie) were subsequently arrested in London and released on bail to appear in a UK court in April. It is still however too early to comment on how the whole scandal will affect the growing popularity of PSL, which experts say can become one of Pakistan’s largest brands in years to come. Amidst all the brouhaha, at least one thing is certain that the stakes are high and PSL means business to every stakeholder. The PCB’s swift response to the incident sends a clear message: there is zero tolerance for anything that can hold PSL back or stand in its way to success.
An emerging and strong contender for country’s top brands o understand what is at stake and what is driving all this optimism in the first place and criticism that follows, Profit takes a detailed look at the brand PSL, whose very launch -- let alone success -- was in doubt until it picked up momentum in the second half, courtesy some spectacular cricket, which pulled huge audience to the grounds and back home on TV. The defending champions, Islamabad United is a case in point when it comes to commercial success of a PSL franchise. Ali Naqvi and Amna Naqvi of Leonine Global Sports bought United for $15 million, the second lowest bid price for a PSL franchise, but the team went on to claim the title in the inaugural edition -- and this was not the only thing it won.
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“EXCLUDING THE TITLE SPONSOR (HBL) AND BROADCASTERS, PSL HAS MANAGED TO SELL SPONSORSHIP RIGHTS TO OTHER PLAYERS AT RATES AT LEAST THREE TIMES HIGHER THAN THAT OF LAST YEAR” Naila Bhatti, PSL Tournament Director
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In other words, this marriage of business with the country’s most sought-after sport opened up new opportunities for franchise owners, which range from building a valuable property to international fame and offers from big businesses lining up for sponsorship rights -- that seems to be the case with Naqvis, at least. Backed by powerful brands, the likes of Qmobile, Pakistan Telecommunication Company, JS Bank, and Igloo to name but a few, United now boosts a Facebook fan following of 2.8 million, highest for any PSL franchise -- the list doesn’t not include a host of secondary and tertiary sponsors. Given that it was bought for a lower price, United benefited the most in terms of appreciation in its brand value. According to PCB, each franchise saw its value more than double on the back of PSL’s growing popularity. According to a report by Dawn, the PSL chief Najam Sethi said they have received offers for a sixth franchise and the amount quoted was double the average price ($18.6 million) of the first five franchises who bought the rights for 10 years. A market survey by Profit, which includes background interviews of officials from franchises, PCB and advertising agencies, suggest that the value of United and Quetta Gladiators (the finalists of PSL1 ) has increased three-folds. “Excluding the title sponsor (HBL) and broadcasters, PSL has managed to sell sponsorship rights to other players at rates at least three times higher than that of last year,” PSL Tournament Director Naila Bhatti told Profit. Since all franchises have a share in PCB’s revenues, this increase directly translates to higher earnings for fran-
chises. The first edition of PSL received massive TV ratings last year and its viewership has increased by 27% to 374 (for first four match days of PSL2) compared with 294 (for the corresponding period of PSL1), according to Media Logic, a TV ratings provider, which collected data from Ten Sports, PTV Sports and Geo Super, the three channels that bought the broadcasting rights. The combined viewing of these three channels during peak slots (22:0022:30 hours) is 9 plus, which is higher than popular gaming shows like Jeeto Pakistan and top prime time dramas on Hum TV. The league’s growing popularity has resulted in higher rates for advertisement, that is more bargaining power for franchisees. For example, Peshawar Zalmi charged Rs2 crores from PepsiCo to place its logo on their official kit last year -- the same promotion is worth Rs5 crores this year, according to officials aware of the developments. It is perhaps these numbers, which have given so much confidence to United, the winner of PSL1, which even turned
down brands who placed low bids for sponsorship rights. This also explains why United is in good spirits and its management bullish this season. Unlike United and Gladiators, which spent the lowest amount but gained the most in terms of popularity, the other teams seem to be jittery. “Will be taking @thePSLt20 to new heights globally, the only way forward is UP IA #BringingBackSmiles,” Zeshan Afzal tweeted on October 10, 2016 following his appointment as Chief Executive Officer of Peshawar Zalmi, one of the hot favorites in PSL’s inaugural season, which failed to reach the final. With a proven track record in the financial sector, Afzal was the only CEO among all five franchises who could run his venture like a corporate firm. However, before he could bring those smiles back, Afzal left the franchise -- that, too, only a couple of weeks before the start of PSL 2. “I resigned myself,” Afzal told Profit on WhatsApp without giving further details. On the other hand, Javed Afridi, CEO Haier Pakistan, owner of Zalmi and a subsidiary of Chinese consumer electronics giant, Haier Group Corporation, had a different explanation to this: it was projectbased [assignment] and Afzal’s contract was not renewed, Afridi said in response to our queries on WhatsApp. We could not determine the actual reason behind Afzal’s departure from Zalmi because of the mismatch between the two explanations. However, what is certain is every news matters when brand reputation is at stake. Afterall, Afridi bought Zalmi for Rs 160 crores or $16 million. In fact, he has already invested at least Rs32 crore ($3.2 million) in terms of first installment of the franchise fee ($1.6 million) other expenses ($1.6 million), such as team ceiling (players fee), charges of match officials and logistics to name a few. The first season didn’t give franchise owners much time for planning, but this
year is different. Winning strategy and people who form those strategies, it turns out, is all that matters because margin for error is low and stakes are high. Even before these five teams took each other on for the second time, the owners knew that a professional management alone won’t bring results and leaders on ground will also matter. If we can be more specific, Javed
BACKED BY POWERFUL BRANDS, THE LIKES OF QMOBILE, PAKISTAN TELECOMMUNICATION COMPANY, JS BANK, AND IGLOO TO NAME BUT A FEW, UNITED NOW BOOSTS A FACEBOOK FAN FOLLOWING OF 2.8 MILLION, HIGHEST FOR ANY PSL FRANCHISE
Afridi’s Peshawar Zalmi replaced Shahid Afridi, the face of Pakistan’s T20 cricket and former captain with Darren Sammy, the talented West Indian who successfully led his team to two world titles (2012 and 2016) in the shortest format -- the 33-yearold is the only T20 captain to have won two world cups for his country. “I have complete confidence in Sammy as a leader and Afridi as an inspiration for the team,” Javed Afridi told Profit adding the change of leadership had no connection with Shahid Afridi’s performance. However, Zalmi is not the only team that entered the ground with a different captain this time around.
INSIGHT
Azhar Ali, despite a poor record as captain, was allowed to lead Pakistan’s one-day international team for quite a while, but Lahore Qalandars, that had the second worst winning record in the first season under Ali’s leadership, didn’t give him a second chance. The Qatar-based lubricants giant Qalco, which bought the franchise for $25 million, needs results on ground and for that they picked Brendon McCullum -- one of the world’s most aggressive cricketers who led his team to the finals of World Cup 2015 (50-over format), the only game they lost. Qalco’s Managing Director and owner of Qalandars Fawad Rana once said on a TV channel that his franchise embodies the characteristics of Qalandars (saints), but when it comes to performance, results matter more than characteristics -the change in Qalandars’ leadership indicates just that. In fact, none of the franchises who failed to reach finals in PSL inaugural season seems to be taking any chance, at least with their leadership. Karachi Kings, the most expensive franchise bought for a whopping $26 million by ARY Group, too, replaced Shoaib Malik with Kumar Sangakkara to lead the team in PSL 2 -- Sangakkara was man of the match in Sri Lanka’s only world T20 title that came in 2014.
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“FOR THE FIRST THREE YEARS, IT'S ALL ABOUT INVESTING AND MAKING THE BRAND BIGGER AND BETTER EACH YEAR, HAVING SAID THAT, WE WOULD LIKE ZALMI TO SUSTAIN ITSELF IN THE YEARS AHEAD, WE ARE IN FOR THE LONG HAUL THAT’S WHY WE HAVE MADE A 10-YEAR FRANCHISE AGREEMENT WITH PCB” Javed Afridi, CEO Haier Pakistan & owner Peshawar Zalmi
These changes certainly indicate that every franchise owner wants the best of the game to lead their teams on ground with one objective: winning the title. And, that certainly makes sense because PSL has become one of the hottest properties for these investors after the phenomenal success it had in the first season. PSL’s website says all franchisees have benefited from a significant rise in the value of their assets and are now able to cash in on the popularity of the first season by getting major brand name sponsors and media houses on board. In fact, it is already happening. For example, Islamabad United and Quetta Gladiators, the finalists of PSL1 have got new sponsors, such as JS Bank,
Jubilee Insurance, Master Oil to name but a few. While they will jack up their revenues, the new sponsors are only icing on the cake: both United and Gladiators, which received the lowest bids ($15 million and $11 million respectively) in the first season have benefitted the most in terms of increase in value. In fact, Nadeem Omar of Omar Associates, the owner of Gladiators even received an offer of Rs40 crores ($4 million) for his franchise, which he revealed to a small group of journalists during a PSL match last season -- current market estimates put gladiators value between Rs75 crores to Rs100 crores. The unexpected value gains and sponsors’ increasing attention to the finalists, perhaps, best explain why the other three franchisees have picked up the best names of world cricket to get the same recognition, the underdogs of PSL 1 have achieved. Following the success of PSL1, the league has become one of the most soughtafter marketing platforms for bigwigs of corporate Pakistan, the likes of Habib Bank Limited (largest bank), Jazz (largest telecom operator), Jubilee Insurance (private sector’s largest insurance firm) and Bahria Town Group (one of the largest real estate developers).
The league is now full of big names from corporate Pakistan, but HBL was quick to buy the title sponsorship at a time when the league’s launch was under doubt -- perhaps, its ability to foresee commercial gains paid off well. According to a market research by Profit, HBL invested Rs 30 crores ($3 million) for a three-year contract to become title sponsor of PSL. For a company that earns more than Rs34 billion in profits, this amount is peanuts for the brand recognition it will get from this sponsorship, say market analysts -- HBL has simply surprised the entire banking sector by taking the title sponsorship, they say. “If you look at the brand promotion HBL will gain from three-year contract with PSL, the amount they spent is peanuts,” said one analyst who requested not to be identified. PSL currently boosts a Facebook fan following of almost 3 million, secondly only to Indian Premier League (IPL), the undisputed king of all T20 leagues played around the world. Besides millions of fans who watched it on TV, the inaugural season was watched online by 90,000 people on the league’s Youtube channel. In short,
Zeshan Afzal, Ex-CEO Peshawar Zalmi
A MARKET SURVEY BY PROFIT, WHICH INCLUDES BACKGROUND INTERVIEWS OF OFFICIALS FROM FRANCHISES, PCB AND ADVERTISING AGENCIES, ESTIMATES THE VALUE OF UNITED AND QUETTA GLADIATORS (THE FINALISTS OF PSL1 ) HAS INCREASED THREE-FOLDS every brand wants to ride the PSL bandwagon. “PSL is a huge commercial opportunity,” says Numan Nabi Ahmed, Chief Executive of The Brand Partnership, which acted as technical consultant for Arif Habib Group in their bid for Karachi Kings that eventually went to ARY Group. The league, Ahmed says offers a double opportunity to brands for it has both qualitative and quantitative aspect. “This is a very exciting proposition for the franchisees and brands associated with it,” he said. Explaining the qualitative aspect, Ahmed said it provides franchisees with increased access to people who matter along with recognition locally and globally. “It helps create a strong consumer bonding for brands associated to a franchise. For example not many people recognised the otherwise successful businessmen who owned franchises but after owning one, they have become celebrities of sorts,” he said referring to Nadeem Omar of Omar Associates, which owns Gladiators. Sharing another example of global recognition, Ahmed said many Pakistanis learned about Shahid Khan, the Pakistani-American billionaire only after he bought a franchise in English Premier League, which has a huge fan following in the world including Pakistan. Talking about the quantitative aspect, he said these franchises in-
vested in a business that was bound to go up, and this is a global trend where property value of franchises in popular leagues goes up with time. Hence, brand equity is built and the investment grows, he says. The franchise owning businesses may benefit the most from PSL, but numerous other local and international brands operating in Pakistan, too, seem to be riding the PSL bandwagon to promote their own identities. “Quetta Gladiators was a young team
INSIGHT
“GLADIATORS ARE A YOUNG SIDE, WHICH IS AGGRESSIVE, DISPLAYS TEAMWORK, EXHIBITS FIGHTING SPIRIT AND YEARNS FOR VICTORY. THESE ARE THE ATTRIBUTES WE WANT TO PROMOTE IN OUR COMPANY WITH THIS COLLABORATION WITH QUETTA GLADIATORS” Javed Ahmed, Managing Director Jubilee Life Insurance.
just like Jubilee Insurance, the fact that relates the two entities,” says Javed Ahmed, Managing Director Jubilee Life Insurance, the country’s largest insurance company in the private sector and one of the sponsors of Quetta Gladiators in season two. “Gladiators are a young side, which is aggressive, displays teamwork, exhibits fighting spirit and yearns for victory. These are the attributes we want to promote in our company with this collaboration with Quetta Gladiators,” Ahmed said.
What future holds for PSL ith growing popularity of PSL, the league and brands associated with it, specially the franchise are hopeful it will become one of the biggest commercial entity going forward. “PSL is the biggest sporting event in the history of Pakistan. Subsequently, it has become the biggest platform for companies to place themselves or their products to familiarize themselves with masses,” Naveed, the COO of United said. “In years to come, PSL has the potential to provide recognition to bigger brands like Leonine Global Investments.” He goes on to say PSL is nowhere near reaching its full and if handled properly, it can become as big if not bigger than
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any reputable brands in the telecom and media space, two of the thriving industries in Pakistan. “But before PSL1 started, it had a negative value since it was postponed around four times. People were unsure whether the league would happen or not. So, it was a big thing that businessmen came forward and bought the franchises,” Naveed said adding they deserve to reap capital gains and much more. The PSL sold five franchises for $93 million for a period of 10 years to be paid every year in 10 equal installments. Moreover, it earned another $20 million from selling broadcast rights and title sponsorship for a three-year period and booked $2.6 million in profit from the first edition. This is certainly a good start for PCB, which lost $200 million in TV and ticketing revenue since international cricket was moved out of Pakistan in 2009, the year Sri Lankan cricket team came under attack enroute to Gaddafi Stadium Lahore.
Are franchises booking profits?
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he PCB has increased its rates to fully capitalized on the growing popularity of the league and even distributed over 80% its profit
among franchises. However, it will take a while before franchises start breaking even. According to stakeholders, Profit spoke to all franchises reported a net loss at the end of first season -- which is in line with a typical start by any new brand in the corporate world. Naila Bhatti, the PSL Director, says the first season was risky and PCB appreciated the main sponsors for taking that risk. “They took the right decision and it has paid them well for keeping faith in the league,” she added. “Our main sponsors were title sponsor HBL and broadcasters and we struck a three-year deal with them. So, a big jump in PSL profits is expected after 2018 PSL edition when we will auction the rights again for the fourth edition,” Bhatti said. It will also be the best time for valuation of PSL franchises because a sixth franchise will be added to the league. She further said that the viewership is increasing and the PSL management is satisfied with all the people involved with the league. “There is a big hype in the social media about PSL’s second edition and definitely it will be bigger than the last edition from several perspectives including the financial and viewership aspect,” she said. Ahmed of The Brand Partnership shares similar views. He says PSL will continue to become bigger next year and onwards “if we don’t have the beginning of events in the pattern of a league to it in football, hockey or squash, which may start growing gradually”. As Ahmed speaks, another league on PSL pattern is already in process and likely to be followed by other ventures. The inaugural season of Pakistan’s first Kabaddi league by the name of Super Kabaddi League (SKL) will start this march. The founder and CEO of Strawberry Sports
Management, the company organising the league, Haider Ali Daud Khan has been inspired by the success of PSL and believes his league could be the next big thing. He also plans to launch leagues for Wrestling and Volleyball in the future. Ahmed believes all franchises should be in profit this season, an estimate whose basis lies in the feasibility he conducted for Kings as part of the bidding process last season, other stakeholders Profit spoke to say they are likely to break even in or after third season -- it merits mentioning here that six out of eight IPL teams are still operating under heavy losses even after eight seasons. “For the first three years, it's all about investing and making the brand bigger and better each year,” Javed Afridi of Zalmi told Profit. “Having said that, we would like Zalmi to sustain itself in the years ahead, we are in for the long haul that’s why we have made a 10-year franchise agreement with PCB,” he said. Afridi, however, added he doesn’t have business objective as such. “We see the franchise as source of contribution from our end for the betterment of the game and cricketers in the country, especially the KPK region.” And United’s Naveed seems to agree. “It is too early to tell how impactful the league will be financially for all stakeholders, and it will take three to four years for it to mature and make that call,” he says. Regardless of timeline for booking first profits, franchises success will also depend on the success of PSL itself. But
“LAST YEAR WAS A BIT DIFFERENT STORY, BUT THIS YEAR EVERY TEAM HAS BEEN PLANNING AND PREPARING WELL FOR THE TOURNAMENT. THERE WILL BE MUCH MORE COMPETITIVE MATCHES TO BE SEEN THIS YEAR” Shoaib Naveed, COO Islamabad United
that won’t happen with sponsors alone, that is at least what Naveed thinks. “It’s not sponsors as much that nourish sports leagues, it’s actually broadcasters. On long term basis, if PSL has to survive then our sports broadcasting industry needs to evolve,” the COO said lamenting that sports broadcasting industry has not evolved in Pakistan over the time as it has evolved in other countries like America. He added if the broadcasting industry doesn’t evolve, it may prove dangerous for PSL over the years. However, that’s not the only obstacle to the event’s success. Numan Nabi Ahmed of The Brand Partnership says most people looking after PSL’s commercial aspect are not exposed to effectively exploit and monetize it. “There was a complete lull since February, 2016 (the time of inaugural edition) till December, 2016 when PSL 2 was back in the news. Both the franchisees and PCB did not pay attention to this aspect, Ahmed
says. “If they continued to do marketing and engage people, they could have recovered much of their investment and kept building the brand equity.” Giving an example, Ahmed says if a brand was willing to sponsor a franchise but could not meet demand during the season, the off season was the time to rope him in on a lower value. “They didn’t even gain 50% of the opportunity that was there.” Now that they know it, they can make more from it provided they have a game plan and strategy created for the purpose of monetizing from such platforms, Ahmed says. A solid strategy to monetize the brand’s popularity has its own importance, but gaining that popularity, that is winning the title, in the first place may take just more than that. “The most important ingredient for the recipe to win a tournament title is how you prepare yourself for the challenge,” says Naveed, the COO of United. Off the field planning and evaluation of playing conditions and opponents are as important as team’s eventual performance on the field, he says. At the end of the day, he adds it all depends on the strategy that has been devised and the preparation the players do accordingly. Strategy, it seems, is the most important aspect this season because no brand can afford to lose the commercial opportunities that come with recognition. The changes in the leadership of Zalmi, Qalandars and Kings seem to endorse at least one thing: franchise owners want their captains to turn things around for them. However, there will be no low hanging fruits because the finalists of season one don’t seem to be taking it lightly either.
INSIGHT
The parent company of United, the underdogs of last season and defending champions of PSL 2, have turned the franchise into a commercial entity, setting up a governing body and a professional management. And they seem to be well prepared with their strategy both on and off the field. “Last year was a bit different story, but this year every team has been planning and preparing well for the tournament. There will be much more competitive matches to be seen this year,” says Naveed of United. “Every team has learned from the first season, recognized where they lacked and I am expecting each of them will be coming in the league with full armament and ammunitions. So, there will be little margin for mistakes and there will be tough battles on the cards,” the COO said.
PSL and demons of fixing that continue to haunt Pakistan Cricket ressure is mounting on PSL officials as former cricketers and even politicians have turned vitriolic against the PSL officials following recent developments. Former chairman National Assembly Standing Committee on Sports Iqbal Muhammad Ali Khan has criticized PSL and said that the match-fixing issue has brought the country’s name into disrepute. Qamar Ahmed, considered an authority in cricket journalism, believes that apparently lack of transparency in the PSL and its franchises’ businesses through it could not be beneficial for the entity from a long-term perspective. I think PSL need to be more transparent along with all of its franchises so that PSL develops and grow,” he said. However, when there is so much money involved, chances of corruption and fixing are higher -- Indian Premier League is a case in point, which was also amid severe criticism after fixing scandals came into the limelight. Following the scandals, PEPSI withdrew its sponsorship deal with IPL. Similarly, one of India’s largest conglomerates JSW Group revealed that it had dropped its plan to purchase an IPL outfit after match-fixing controversies made the head-
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OMAR ASSOCIATES, THE OWNER OF GLADIATORS EVEN RECEIVED AN OFFER OF RS40 CRORES ($4 MILLION) FOR HIS FRANCHISE, WHICH HE REVEALED TO A SMALL GROUP OF JOURNALISTS DURING A PSL MATCH LAST SEASON — CURRENT MARKET ESTIMATES PUT GLADIATORS VALUE BETWEEN RS75 CRORES TO RS100 CRORES lines. Moreover, Chennai Super Kings and Rajasthan Royals were banned for two years following illegal betting and investigation into match-fixing. Gurunath Meiyappan, a former team official of Super Kings, and Raj Kundra, a former Royals co-owner, were banned for life from any involvement in cricket matches. Shanthakumaran Sreesanth, who took Misbah-ul-Haq’s catch in the inaugural World T20 Championship final, to take India to the victory stand, was arrested along with two other cricketers and several bookies in 2013. He served a year in jail before being bailed out. In 2012, five cricketers of low profile were found to be involved in the corrupt practice. Much older than PSL, IPL has been marred with several scandals as well but it still survived. In fact, shortly after Pepsi’ withdrawal, Chinese mobile phone company Vivo bought the title sponsorship. Former Pakistan captain and PSL brand ambassador Rameez Raja believes that the PSL brand wouldn’t be affected by this scandal. Yet it depends how PSL think tank unfolds its crisis management strategy. PCB’s response to the latest fixing scandal was prompt and may have restored fans’ trust in the league. However, it will need more than the right strategy post fixing crisis to help PSL grow. But than there is another challenge, which is bigger and holds more significance for Pakistan cricket in the long term, and that is bringing the league back to where it belongs. Most experts agree that the league’s full potential can be unleashed once it is brought home. In fact, the biggest challenge the PSL has been facing is organizing this tournament abroad, says Bhatti. “It has been a big challenge for us to organize the tournament abroad since all
our offices and support staff resides in Pakistan. So, definitely it has been the biggest challenge for us,” she said. The PCB is trying to bring, at least, the final of the second season back home, and they are hopeful about it. Market experts, too, believe the league’s full potential can be unleashed only after it is brought home. “PSL has to land in Pakistan to explore its actual potential as league from popularity to commercial viability,” says Naveed of United. Similarly, Ahmed of The Brand Partnership says the value of franchises can increase by up to 40% if the league comes to Pakistan. However, the hosting of final in Lahore once again hits snags after a deadly bomb blast rocked the provincial capital on Monday, February 13, sending alarm bells all the way to UAE. The friendly rivalry between cities that PSL is meant to cash in on, can only be fully unleashed when matches take place in these cities and fans turn to venue in large numbers to support their favorite local stars and cheer for international stars from all over the world - the main attraction for fans. However, if Lahore blast was not enough, the consecutive blasts that followed including one at a Sufi shrine in Sehwan, 200 kilometers north of Karachi, might have killed the slightest of hope. As we prepare this report Prime Minister Nawaz Sharif concludes a high-level meeting with heads of military, intelligence bureau, interior ministry, and finance ministry and backs hosting of PSL final in Lahore. However, it might need more than assurances to bring the league home. In a recent TV interview, Sethi admitted it would be difficult to bring foreign players to Pakistan after Lahore blast. n
INSIGHT
economy
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COVER STORY
Outsiders and the government are cheering strong economic data, but domestic economists remain highly skeptical. Who is right and who is wrong? More importantly is the next crisis around the corner? Farooq Tirmizi & Syeda Masooma
COVER STORY
uppose for a minute that you are a globally focused investment manager based in London or New York. If you have been paying attention to the signs, it is probably very hard for you not to get excited about
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Pakistan right now. You get up in the morning and read an article in The Wall Street Journal touting declining poverty and the rise of Pakistan’s middle class. You switch to Barron’s and there is another piece raving about the stellar performance of the Pakistan Stock Exchange. Opinion writers in Bloomberg are talking about Pakistan as a “pleasant surprise”. Forbes is favourably comparing Pakistan to India, which may cause some discomfort to you, since you probably have far more investments in India than Pakistan, if you have any in Pakistan at all. So you are intrigued but of course, you decide to do a little more research. After all, financial journalists are always looking for the next shiny object to draw the attention of their readers. You need to do your own diligence. That is why you make so much more money than they do. You log on to your Bloomberg terminal and the very first thing you check for is where the country’s sovereign credit rating
“PAKISTAN HAS REACHED WHAT I CALL THAT MOMENT OF OPPORTUNITY WHERE IT CAN EMBARK ON THE NEXT GENERATION OF REFORMS TO GENERATE HIGHER AND MORE INCLUSIVE GROWTH AND TAP INTO THE DYNAMISM OF EMERGING ECONOMIES” Christine Lagarde, MD IMF
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is at the moment. You see that both Standard & Poor’s and Fitch have rated the government of Pakistan’s international bonds at B with a stable outlook. Moody’s is one notch lower at B3, but also with a stable outlook. That is not great, but you have invested in worse and done just fine. So you look up the sovereign bond. The 10-year bond is trading at somewhat less than the issuing interest rate of 8.25%, but still much higher than what other bonds with similar maturities and credit ratings trade at. Could this be an undervalued market? Now you’re really interested, and without realizing it, your whole morning is going to be about Pakistan today. A look at the GDP numbers tells you that the country has been growing at more than 4% for the three years that the administration of Prime Minister Nawaz Sharif has been in office. This is not, surprising, of course. All oilimporting countries have seen a boost to economic activity coming from cheaper fuel prices. That is why you are also not surprised to see inflation in mid-single digits. But is it just all low oil prices, or is there more to the story? You check what the World Bank and the International Monetary Fund have been saying. The IMF, in particular, is seen as the “Good Housekeeping” seal of approval, since it employs some of the best macroeconomists in the world and tends to monitor economies quite closely.
You notice that IMF Managing Director Christine Lagarde was in Pakistan recently and she had some very interesting things to say while she was there. “Pakistan has reached what I call that moment of opportunity where it can embark on the next generation of reforms to generate higher and more inclusive growth and tap into the dynamism of emerging economies,” she said. The World Bank is similarly effusive. World Bank CEO Kristalina Georgieva, on a trip to the country, said: “Pakistan worked through three tough years that brought improvements in security and a more stable economy." It is not just these commentators and international bureaucrats, though. Businesses that actually risk their money are investing in Pakistan, including the most recent acquisition of Engro Foods by the Dutch dairy giant, FrieslandCampina At this juncture, we can step out of the perspective of this hypothetical investment manager and ask the question: is this all true? Is Pakistan’s economy truly taking off, or is this a momentary bit of prosperity that will all come crashing down the next time there is any kind of crisis in the world? No person living inside Pakistan is under any illusion that the country is doing
dramatically better in almost every material way under the Nawaz Administration than under the Zardari Administration. But the memory of the crash at the end of the Musharraf era is still fresh, and so many people are asking the question: is that about to happen again? And if so, how soon? How much longer will this honeymoon last? But before delving deeper into how the economic boom might come crashing down, let us first take a step back and examine exactly what has happened over the last three and a half years and place it both in the context of both Pakistani history as well as the contemporary experience of other economies in Pakistan’s geographic
“THE POINT IS SIMPLE: WE HAVEN’T MADE ANY REFORMS YET, IRRESPECTIVE OF WHAT THE GOVERNMENT SAYS, ONE LITTLE SHOCK TO OUR ECONOMY AND WE’LL GO BACK TO BORROWING. THE IMF IS THE EMERGENCY WARD OF THE WORLD AND WE WILL STAY IN THE FUND AWARD AS WE ALWAYS HAVE” Dr. Nadeem Ul Haque, Economist
and income peer group. The growth in Pakistan’s economy has been real enough for anyone paying attention to the rising skyscrapers in Pakistan’s large cities and townhouse and shopping mall construction in its small towns. The rise in construction is not only the perfect metaphor for an economy literally being built from the ground up, but also represents the single most visible sign of economic progress, and one that the Nawaz Administration in particular is most amenable to. On that front, here is one statistic that might place the current construction boom in some perspective: according to data from the All-Pakistan Cement Man-
THE RISE IN CONSTRUCTION IS NOT ONLY THE PERFECT METAPHOR FOR AN ECONOMY LITERALLY BEING BUILT FROM THE GROUND UP, BUT ALSO REPRESENTS THE SINGLE MOST VISIBLE SIGN OF ECONOMIC PROGRESS, AND ONE THAT THE NAWAZ ADMINISTRATION IN PARTICULAR IS MOST AMENABLE TO ufacturers Association (APCMA), in the 12 months ending January 2017, Pakistani cement manufacturers produced and shipped almost as much cement as during the first four years of the Musharraf Administration, long seen as a government in which Pakistan saw some of its strongest growth. Overall economic growth numbers are not quite as fast as those heady days yet. The Nawaz Administration is currently averaging a growth rate of just over 4.2% per year over the past three years or so, slower than the 5.1% per year that the Musharraf Administration averaged over its nine years in office, but certainly a welcome change from the 2.6% average seen during the Zardari years, the slowest economic growth rate on record for a Pakistan government. But overall, the signs of economic activity look robust. Car sales, for instance, crossed their pre-crisis peak this past year, with the industry selling nearly 180,000 locally assembled cars, according to data from the Pakistan Automotive Manufacturers Association (PAMA). That number represents a 49% increase over the 120,332 cars assembled in Pakistan in the fiscal year ending June 30, 2013, around the time Prime Minister Nawaz Sharif took office. And unlike the last boom in car sales, a much smaller proportion of the new cars being sold today are being financed by banks. More people are buying cars in cash
COVER STORY
than the height of the pre-crisis boom. Small wonder then than Volkswagon is finally willing to pull the trigger on its plan to invest in manufacturing facilities in Pakistan and Hyundai and Nissan are exploring joint ventures with local industrial conglomerates to set up car assembling plants in the country. Foreign investment on the whole is up as well. Net inflows from foreign investors over the past 12 months clocked in at $2 billion, a 48% increase over the previous year. However, this number should probably be placed in broader context: the number is still far lower than the $5.4 billion peak reach in the fiscal year ending June 30, 2008, just before the global financial crisis. And while the $2 billion number is
“PRICES HAVE ALREADY STARTED TO GO UP AGAIN IN THE LAST FEW MONTHS. BECAUSE OF IMF LOAN REPAYMENTS, PAKISTAN’S FOREIGN EXCHANGE RESERVES ARE ALSO GOING DOWN, SO IT WON’T BE MORE THAN LATE 2018 OR EARLY 2019 THAT WE WILL GO BACK TO THE IMF” Sakib Sherani, Economist
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the best foreign investment figure under the Nawaz Administration, it is not even as good as the $2.1 billion in net FDI that flowed in Pakistan in FY2010, the second year of then-President Zardari’s term in office. (Yes, really: Nawaz’s best year for FDI is worse than Zardari’s best year.) Nonetheless, at least some of the slack in foreign investment (though by no means all) is being made up for by local savers, both individuals as well as Pakistani companies. Deposits at banks in the country clocked in at Rs10.7 trillion ($102 billion) at the end of January 2017, up 54% since the 2013 election. That growth certainly caught the attention of foreign investors, since the government was able to sell its 40% stake in Habib Bank for over
WHILE THE $2 BILLION NUMBER IS THE BEST FOREIGN INVESTMENT FIGURE UNDER THE NAWAZ ADMINISTRATION, IT IS NOT EVEN AS GOOD AS THE $2.1 BILLION IN NET FDI THAT FLOWED IN PAKISTAN IN FY2010, THE SECOND YEAR OF THEN-PRESIDENT ZARDARI’S TERM IN OFFICE. (YES, REALLY: NAWAZ’S BEST YEAR FOR FDI IS WORSE THAN ZARDARI’S BEST YEAR.) $1 billion in 2014, in what was one of the largest listing transactions in the history of the Pakistan Stock Exchange. And this is before we even mention CPEC. Yes, CPEC, the China-Pakistan Economic Corridor, or the road that nobody in Pakistan can seem to stop talking about. By now, most people are well aware that CPEC is not a $46 billion gift from Beijing to the Pakistani economy, but rather a complicated set of infrastructure investments that will be paid for mostly by Pakistani investors, consumers, and taxpayers in the form of commercial loans from Chinese banks paid back by Pakistani power generation companies and the government, and electricity tariffs paid by ordinary Pakistani consumers. China is not losing money through CPEC, it is making money at every step of the way. But supporters of the government, and CPEC, argue that just because China is making money on CPEC does not mean that it is not good for the Pakistani economy, especially when one considers the fact that two-thirds of it consists of investments in Pakistan’s power generation capacity. Given the fact that the spotty supply of electricity is one of the biggest reasons for why the Pakistani economy has been held back, one could reasonably make the
case that Chinese financing for all of those power plants, which will collectively have the capacity to produce 10,400 megawatts (a 40% increase over Pakistan’s current capacity), is unmistakably a good thing. There is at least some truth to this argument. More reliable electricity supply would allow smaller businesses to produce at full capacity without having to run generators at extremely high costs, which in turn would boost both employment and economic output. Even a sceptic, then, would argue that while there are certainly some trouble spots (slowing exports and the rising current account deficit, to name two), the overall picture of the Pakistani economy looks rosy. Of course, nobody would argue that there will never be another recession in the country, but are the developments of the
“THE POWER PLANT PAYMENTS, TARIFF PAYMENTS, CAPACITY PAYMENTS AND LOAN REPAYMENTS WOULD EXERT A LOT OF PRESSURE AND OUR ECONOMY OR EXPORTS ARE NOT IN A POSITION TO BEAR THAT STRAIN. SO WE WILL HAVE TO GO TO IMF AGAIN” Dr. Salman Shah, Economist
last three years the build-up to an economic take-off, or are they simply a nice lull before the country gets hit by the economic equivalent of a hailstorm? Of course, Finance Minister Ishaq Dar, the man most directly charged with managing the economy, would have us believe that this miniature boom is the new state of affairs, that Pakistan is now on a permanently faster growth trajectory. “All major macroeconomic indicators are moving in the right direction,” said Dar, and that is mostly true. But it does not answer the question: for how much longer? On that front, a group of domestic economists and economic analysts who spoke to Profit were nearly unanimous: not much longer. The next global economic crisis, they say, will knock Pakistan back into a recession.
CHINA-PAKISTAN ECONOMIC CORRIDOR IS NOT A $46 BILLION GIFT FROM BEIJING TO THE PAKISTANI ECONOMY, BUT RATHER A COMPLICATED SET OF INFRASTRUCTURE INVESTMENTS THAT WILL BE PAID FOR MOSTLY BY PAKISTANI INVESTORS, CONSUMERS, AND TAXPAYERS IN THE FORM OF COMMERCIAL LOANS FROM CHINESE BANKS Perhaps the bluntest was Nadeem-ulHaq, a University of Chicago-trained economist who worked for several decades at the IMF before returning to Pakistan to serve as, among other positions, the deputy chairman of the Planning Commission under the Musharraf and Zardari administrations. “The point is simple: we haven’t made any reforms yet, irrespective of what the government says,” he said. “The cost of doing business is high and several other factors are included in problems and we haven’t done anything to tackle them. Some external factors, like low oil prices, are responsible for the improvements being seen in the economy but when they recover, one little shock to our economy and we’ll go back to borrowing. The IMF is the emergency ward of the world and we will stay in the Fund award as we always have.” That last point is particularly interesting because the IMF resident representative in Islamabad, Tokhir Mirzoev, told Profit: “If Pakistan manages to capitalize on its economic improvements, it may not need to come back to the IMF for assistance again.” Domestic economists, however, find the notion that Pakistan can somehow avoid returning to an IMF bailout program, laughable. For them, it is not a question of if but when Pakistan returns to the IMF
COVER STORY
seeking a bailout. “A lot of when we will go back to IMF depends on oil prices,” said Sakib Sherani, an economic analyst and founder of Macro Economic Insights, an Islamabad-based economics research firm. “Prices have already started to go up again in the last few months. Because of IMF loan repayments, Pakistan’s foreign exchange reserves are also going down, so it won’t be more than late 2018 or early 2019 that we will go back to the IMF.”
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Some went so far as to say that the IMF is well aware that Islamabad will be back seeking a loan from them in the next few years. “The IMF knows that we will be going back to them,” said Salman Shah, an Indiana University-trained economist who served as acting Finance Minister from 2007 to 2008. “Even in the last meeting with the IMF, the Fund stressed that we make reforms in the economy and businesses, which we aren’t doing. It’s not the objective of the government that we won’t have to go back to IMF. Their objective is to win the elections.” Another distinguished economist, Kaiser Bengali said “International agencies only praise the government if it opens the doors for them, it is only their vested interests in the economy that makes them praise the country’s state of economy. As of now Pakistan is selling bonds at 8% rate while Sri Lanka is selling at 5.5%. This shows how much progress we have actually achieved.” Nearly all economists and economic analysts who spoke to Profit brought up the 2018 elections as an inflection point, which may cause the economic tide to turn. Perhaps the reason for this is that the elections were one of the catalysts for the last economic crisis in the country, when Pakistan was caught in the perfect storm of rapidly rising oil prices coinciding with a populist government campaigning for re-election.
AND IF ONE WANTS TO DIG EVEN DEEPER, THE REASON THE GOVERNMENT HAD TO SEEK A BAILOUT FROM THE IMF IS BECAUSE THE GOVERNMENT OF PAKISTAN SPENDS FAR MORE THAN IT TAKES IN THROUGH TAX REVENUES, LARGELY BECAUSE OF A DECISION MADE AS FAR BACK AS 1947 TO NOT TAX THE WEALTHY ELITE OF THE COUNTRY In 2007, just as oil prices were beginning to hit their peak, the government at the time, in a bid to appease voters, decided that, instead of passing on that price increase to consumers, would absorb the shock on their behalf and dramatically increase fuel and electricity subsidies. That, in turn, caused the country’s financial situation to deteriorate sharply, increasing the deficit, slashing foreign exchange reserves, and forcing the government to seek a bailout from the IMF. And if one wants to dig even deeper, the reason the government had to seek a bailout from the IMF is because the government of Pakistan spends far more than it takes in through tax revenues, largely because of a decision made as far back as 1947 to not tax the wealthy elite of the country. Instead, the government enforces taxes based on what it has the ability to collect without much effort – likes sales taxes, or transaction taxes on highly documented sectors – but not what it should be taxing, such as the incomes of the country’s increasingly large moneyed elite. On this front, there is unanimous consensus amongst skeptical domestic economists and optimistic global economists alike: the government of Pakistan has done absolutely nothing to substantively solve its tax collection problem and is not even pretending to try.
Economists are right to expect that something similar is likely to happen again, in large part because most economic crises in developing countries occur due to balance of payments crises. Pakistan, for instance, does not have a large enough mortgage or consumer financing sector for a housing or consumer lending crisis to bring the economy crashing down, like it did in the US in 2008. But the more astute among economists are careful not to link the run-up to the 2018 election as the direct cause of the next economic crisis. Just because the last recession happened because the government made bad decisions in the run up to an election does not mean the next one will too. And indeed, on this score, there is some room for optimism: when oil prices started declining under his administration, Prime Minister Sharif took at least partial advantage of that decline by reducing electricity and fuel subsidies, rendering the country at least slightly less vulnerable to an oil price shock. No, the next economic crisis in Pakistan will be more similar to the Asian financial crisis of 1997, and it will happen purely because of a decision taken by Finance Minister Ishaq Dar. In 1997, many of the Asian Tiger economies had been growing rapidly for the last several decades, and their domestic companies were increasingly being courted by global banks keen to lend them money to finance their continued expansion. Many of the loans were denominated in US dollars or other foreign currencies. Loans are great when you are actually borrowing the money because they add to the country’s foreign exchange reserves in addition to providing financing for investments into future economic growth. The
FIRSTLY, HE HAS RENDERED THE RUPEE ARTIFICIALLY STRONG, WHICH MEANS THAT WHEN IT FALLS, IT WILL HAVE A MUCH SHARPER DROP THAN IT WOULD OTHERWISE HAVE HAD. AND SECONDLY, IN HIS VAIN DESIRE TO KEEP THE RUPEE AT AN ARTIFICIALLY HIGH VALUE, DAR HAS USED UP MORE FOREIGN EXCHANGE RESERVES AND BUILT UP EVEN MORE THROUGH BORROWING, MEANING THAT PAKISTAN’S CAPACITY TO DEAL WITH A CURRENCY CRISIS WILL BE EVEN LOWER THAN IT NORMALLY IS problem arises when you have to start paying the loans back. Simply put, you have to buy dollars and sell local currency in order to pay back the loan. But if enough loans are maturing at a similar time, there are more people buying dollars than there are people selling dollars, causing the price of the dollar to rise and the local currency to drop. That, in turn, makes the loans harder to pay off, because the more the currency depreciates, the higher the amount in local currency that needs to be used up in order to pay back the loan. The problem is particularly exacerbated in countries that run a current account deficit, because there will always be more people selling the local currency than buying it, causing it to continuously weaken. As you may have guessed, Pakistan falls into that category of countries. So the trigger for the next crisis will not be oil prices (though that is a possibility). The trigger will be when all of the loans Pakistani energy companies have borrowed from China come due. In some ways, that makes the crisis more pre-
dictable because that means that it will happen based not on a mercurial oil market, but rather based on the contracts that govern the loan contracts for CPEC projects. “The power plant payments, tariff payments, capacity payments and loan repayments would exert a lot of pressure and our economy or exports are not in a position to bear that strain. So we will have to go to IMF again,” Salman Shah said in an interview with Profit. However, here is where Finance Minister Ishaq Dar’s actions have made matters worse: by insisting on not allowing the rupee to continue depreciating naturally, Dar has done two things that have made the economy even more vulnerable to a crisis. Firstly, he has rendered the rupee artificially strong, which means that when it falls, it will have a much sharper drop than it would otherwise have had. And secondly, in his vain desire to keep the rupee at an artificially high value, Dar has used up more foreign exchange reserves and built up even more through borrowing, meaning that Pakistan’s capacity to deal with a currency crisis will be even lower than it normally is. Not only will Pakistan most certainly need an IMF bailout, it will need one bigger than one than Islamabad has ever asked for before. CPEC, in other words, is most certainly a cause of growth acceleration for the Pakistani economy. But it is also the keg of dynamite that will cause the Pakistani economy to blow up and eviscerate much of the gains CPEC was supposed to have created in the first place. Will the country be better off because of CPEC in the long run? We are about to find out. n
COVER STORY
EnTREPREnEURSHIP
What started as a car discussion forum for enthusiasts now has a 80% market share of the automobiles classified ads market. 14 years on Pakwheels has created new revenue streams and eventually hope to provide a one stop solution for complete automotive transactions By: Abbas Naqvi he automobiles market in Pakistan has grown exponentially over the last ten to fifteen years. Growing competition between the big three indigenous players (Suzuki, Toyota and Honda), a used imported car market with more variety than ever before and the introduction of German brands such as Audi means there is a car out there for everyone. That growth along with increasing internet penetration created a gap for an online automobile trading portal. Pakwheels.com sufficiently filled that gap and then some with
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other automotive related online services. And in the process Itâ&#x20AC;&#x2122;s gotten powerful too. Itâ&#x20AC;&#x2122;s more like a kingmaker in the automobile industry, with big car manufacturers like Honda and Toyota conceding to the power it holds over their customers. Why, one may ask? Because, it is the first and largest forum/blog (amongst other things) on automobiles in Pakistan and people naturally come to PakWheels to discuss matters related to automobiles. Recall the reviews that rolled out after Honda launched its much-awaited 10th Generation Honda Civic 2016. People complained about the interior of the car and welding marks on the front doors of the newly launched Civic.
And where was all this talk taking place? PakWheels! It generated loads of bad publicity for Honda. Some accused PakWheels of being biased towards Honda, others agreed and contributed to the assertions of low quality made therein. Whatever the case, Honda did subsequently accept the flaws and sought to remove them. It goes to show that PakWheels has an immense power to influence the perception of its users through its forums; evidenced by the fact that Toyota got its latest Fortuner 2017 reviewed by none other than the co-founder and Chairman of PakWheels, Suneel Sarfraz Munj. Unlike the Honda Civic review, Munj was all
praises for the new Fortuner which he feels addresses most if not all of the problems in the previous model. What initially began as a forum and a community centre for car enthusiasts back in 2003 is now the largest online classifieds portal for automobiles in Pakistan. Last year alone, the portal attracted over 25 million unique visitors to its platform which makes it one of the most visited online destination in Pakistan. “It wasn’t a commercial venture when we started PakWheels. It was just a place where likeminded people could get together,” says Suneel Sarfraz Munj, co-founder and Chairman of PakWheels.
At a time when social networking websites like (the now defunct) Orkut and Facebook had not taken root, PakWheels served as a platform for car enthusiasts who slowly started developing a level of trust among each other. That’s when the buying and selling at PakWheels started taking place. Sensing an opportunity, the founders officially launched it as an automobiles classifieds portal in 2005, while still retaining the forum separately. Up until 2012, the year in which Pak eVentures (the holding company of PakWheels) received a funding of $ 3.5 million by Frontier Digital Ventures (FDV), PakWheels
was funded by the very own pockets of its cofounders. Munj says that the sole reason for the forum-cum-portal’s survival and success was the lack of financial dependence the cofounders placed on the income generated from PakWheels prior to the funding. Munj did not share the valuation but according to some online sources, PakWheels was valued at over Rs100 crore post first round of investment. “It was the largest disclosed investment in any tech startup at that point and led to the opening of flood gate of investment for other local startups” says Munj. FDV is a venture capital firm based out
INSIGHT
of Kuala Lampur, Malaysia, and aims to become the world leader in online classifieds businesses in the frontier markets. PakWheels Private Limited was incorporated in Singapore in 2012. Citing the example of other tech startups which have received foreign funding, such as Zameen.com and Rozee.pk, Munj says that the foreign investors’ mindset about investing in Pakistan is changing. “Our kitchens weren’t dependent on this venture. I believe that we succeeded because it was not our primary business; a person is more likely to make hasty decisions under pressure in that case,” says Munj, while adding that a similar mistake was made by Carmudi when they entered the market. “The head of Carmudi is a class fellow of mine and he called me, saying that we should partner up otherwise the deep pockets of Rocket Internet (a German Internet company) would devour PakWheels,” says Munj. His reply had been swift, “Rocket Internet will not pay you if you don’t earn them something. We managed to do it for nine years and we’ll continue doing it; now one can see where Carmudi is vis-a-vis PakWheels” Munj and Raza Saeed (co-founder and CEO PakWheels) had other businesses that supported their families. Saeed owns one of the fastest growing software houses in the country, named: Confiz Solutions. It has offices in Pakistan, USA, Estonia. It was at Confiz Solutions that PakWheels was essentially born as a classifieds’ portal. Munj, on the other hand, has also had his
THE TERM AUTOMOTIVE ENCOMPASSES NOT JUST ALL THE CARS AND PASSENGER VEHICLES BUT ALSO THE SELLERS, MANUFACTURERS, MARKETERS, DESIGNERS, AND EVEN REPAIRING STATIONS. THAT’S WHAT PAKWHEELS WANT TO BRAND ITSELF AS: A ONE-STOP LOCATION FOR ALL YOUR AUTOMOTIVE WANTS AND WOES 32
100
%
increase in revenue annually for last three years
share of entrepreneurial experiences. He owned a retail gift shop off the MM Alam road by the name of 18 and a franchise of Illusions, another retail shop offering gaming consoles etc. He also has a family business. Munj prioritized PakWheels in 2012 after the company raised a funding from FDV. “I was more of an absentee landlord at PakWheels before 2012, frankly speaking; Raza was managing everything here,” says Munj, adding that he never visited the office more than once a month during those days. “Anybody who wanted my help used to come to me; I hardly ever visited the office.” However, there hasn’t been a single day when he wasn’t at the office at nine pm since 2012 when the realization struck that he could not handle so many businesses at one time. Now, the management likes to use the term automotives’ portal to identify itself with. It’s true that the terms automobiles and automotives are usually used interchangeably for cars and vehicles, but it’s important to understand the underlying difference to figure out how the company is positioning and branding itself. Automobiles is generally used for cars, bikes and scooters, but literally refers to anything that has an engine (auto) and can move itself (mobilis). Automotives is used for anything related to automobiles. Thus, a clutch is not an automobile but an automotive part. The term automotive encompasses not just all the cars and passenger vehicles but also the sellers, manufacturers, marketers, designers, and even repairing stations. That’s what PakWheels want to brand itself as: a one-stop location for all your automotive wants and woes. “It is the responsibility of every company which is funded by a foreign entity to show Pakistan differently from what is known as among the international investors, since we represent Pakistan,” says Munj. The question that arises then is what keeps the investor motivated and happy about a company operating in a troubled market like Pakistan. Even in this area the company seems
to have done well. Pakwheels has achieved the revenue targets set down by the investor by doubling its revenues every year during the past three years. So the investor is not only happy, but also willing to pour in more investment in the company. And that is what PakWheels is looking for – another round of funding in 2017. “Whether you’re selling meat, or veggies, or cars, KPIs (Key Performance Indicators) for any business primarily boil down to revenue growth and eventually profitability,” Munj says, referring to the growth rate target set by FDV.
Sustainable growth and the trick to achieving it ll the tech ventures are valued at their ability or potential to earn revenue, not the revenue that they earn currently,” says Munj. Trying to achieve a 100 per cent growth in revenue may seem an easy task when you’re being funded. But as time goes along, taking the revenue from 5 million dollars to 10 million dollars, and then doubling it to 20 million dollars the next year becomes an increasingly onerous task to execute. There’s only one way to do it, and that is by introducing, developing, and fostering new revenue streams which are sustainable in the long run. PakWheels has been achieving close to 100 per cent increase in revenue annually since the last three years. As for profitability, the other most important KPI besides revenue, PakWheels aims to book its first profit by 2020. “We’re hoping to break-even in 2018, but we will definitely do it by 2020,” says Munj. PakWheels has consistently added new products to its portfolio in a bid to create sustainable revenue streams which can help achieve the sales target, and eventually the profitability target in the future. To help buyers make informed decisions, PakWheels launched CarSure, Pakistan’s first used car inspection service. “CarSure is one such service which is growing very fast and is likely to take over the current highest revenue-generating stream Feature Ads, very soon,” Munj says refusing to disclose the exact percentage of feature ads in its overall revenue. CarSure team inspects a used car on a 200+ point checklist using latest tools and tech-
“A
nologies and provides an inspection report which is independent and free of bias. The team inspects key indicators of condition in a car, like the body paint, engine, suspension, transmission and interior etc. Majority of the ads listed on the portal are ordinary ads which are posted for free, while Feature ads are paid for. These ads are marked as ‘Featured’ and remain in the limelight for a longer duration (how much), thus generating more leads (phone calls by potential buyers) for the advertiser. When it comes to car selling, PakWheels.com generates majority of its revenue from classified advertising solutions offered to private sellers and used car dealers. Sellers can utilize different paid products like “Featured Ads” to highlight their vehicles throughout the platform and receive more inquiries resulting in faster sales cycle. “We believe that it is our responsibility to reduce the information asymmetry of a buyer in this industry and that is why we have introduced services like CarSure and Price Calculator,” says Munj. The used car Price Calculator tool is based on statistical modeling and machine learning technologies which provide the user with accurate information regarding the price of a car having a similar condition (mileage, colour etc) and model sold in the market and the highest, lowest and average price at which it has been traded in the market. Another newly launched revenue stream is the auto parts store, which promises to provide the car owners with reliable parts and ac-
“IT WASN’T A COMMERCIAL VENTURE WHEN WE STARTED PAKWHEELS. IT WAS JUST A PLACE WHERE LIKEMINDED PEOPLE COULD GET TOGETHER” Suneel Sarfraz Munj, co-founder and Chairman of PakWheels.
cessories for the car’s regular upkeep and maintenance.
Auto Shows ince 2011, PakWheels has conducted six Auto Shows in Lahore and other cities of Pakistan. These auto shows are meant to cater to an even greater target market than just car enthusiasts. It is a great marketing strategy for the company. Entire families, with little children who are amused by the roaring engines of exotic sports cars attend these shows. Over a 100,000 people attended the last auto show in Karachi at the end of 2016. (more information will be uploaded on this soon, with perhaps a few infographics of the number of auto shows and their details) PakWheels has conducted numerous awareness campaigns against one-wheeling in collaboration with the local traffic police authorities. It also has a partnership with Shaukat Khanum Memorial Cancer Hospital & Research Centre to create awareness about cancer at all its auto shows.
S
25 “T
Future plans
million unique visitors in
2016
here are still so many things that need to be addressed here in Pakistan that we cannot think of expanding abroad. We must solve all automotive industry related problems for customers here in Pakistan,” says Munj when asked if the company plans to extend operations to regional countries like India and Bangladesh. “Even today, very few people can buy a car on their own despite the existence of PakWheels classifieds, inspection and price calculator” says Munj while talking about future
plans. Globally, classified portals are moving from simple classified advertising to executing the full transaction, and in the process earning a commission which is significantly higher in value compared to the advertising fees charged in pure classifieds model. This makes online buying and selling more convenient for the users as it spares them the time and gives them peace of mind since the onus of ensuring a secure transaction lies with the portal. The most important thing to the users of this portal is trust, and that is what the company wishes to build and develop. PakWheels’ management claims to have 80 per cent share of the online automobiles classifieds market. “My aim is to make PakWheels a billion dollar company when valued, and the largest platform in Pakistan for anything and everything to do with automobiles,” says Munj. With players like OLX, Zameen, Rozee, and others in the market now, the classifieds industry is becoming increasingly competitive. Add to it to the boom in the number of internet users in Pakistan, especially through mobile phones and one comes to realize how rapidly the market dynamics are changing. It has given a huge boost to the online portals’ user-base. In hindsight, Munj believes that the television advertisement campaign ran by PakWheels in 2015 was something that the company could do without, reason being that the company does not want an advertisement war similar to what Pepsi and Coke indulge in. “OLX has tried to erect a barrier to entry by excessively advertising on the TV since 2012; and we are trying to outsmart them by not relying on such advertisement,” says Munj, adding that the demand for what PakWheels is offering is so overwhelmingly high that word of mouth is sufficient for raising awareness about the company. n
INSIGHT
TRADE
By: Arshad Hussain
34
f you take an aerial view of South Asian Port Terminal (SAPT), an under construction member port of Hutchison Ports Holding (HPH) being built in collaboration with the Karachi Port Trust (KPT), you instantly spot the best location for anchoring huge mother vessels in Pakistan. HPH is the world’s leading port investor, developer and operator, operating 319 berths at 52 ports in 26 countries. The management in Hong Kong is directly overlooking all aspects of the port, bringing in huge expertise and experience of port management from across the globe. SAPT serves as the most convenient port for trade resolve with the Central Asian and South Asian countries.It is being built with an investment of over $600 million on HPH’s part while the local government has spent approximately $800 million on its infrastructure that includes waves-breakers, dredging in deep water, roads and bridges etc. SAPT will open new horizons for trade in Pakistan. Presently a large percentage of Pakistan’s export and import cargo in containers is not routed through Karachi directly to final destinations, as large and very large mother ships cannot berth at existing container terminals. So these cargoes are taken to deep sea ports like Jebel Ali on smaller container vessels, and then unloaded and reloaded onto the mother ships there. All this means extra costs, time delays, higher risk, more documentations and overall inefficiencies. Often at short notice, exporters lose orders owing to the non-availability of space on smaller vessels when needed. This deficiency will be overcome with the mother ships of huge capacity calling at SAPT. The port will directly accommodate the mother ships, leading to greater exports and quicker receipt of import cargoes. In a nutshell, the main aim of SAPT,
“THE PROJECT HAS BEEN DELAYED FOR ALMOST 6 YEARS NOW BUT THERE NEVER BEEN A FEELING OF DISCOMFORT IN THIS REGARD FROM HPH, CONSIDERING THE HUGE AMOUNT OF INVESTMENT AND STILL NO RETURN ON IT” Capt. Syed Rashid Jamil, CEO SAPT Hutchison Port
spread over 85 hectares of land, is to become Pakistan's premier container terminal operator. Located within the Karachi Port, it is a natural deepwater harbor west of the Indus Delta on the Arabian Sea. It is going to play a pivotal role by complementing the rapid growth in Pakistan’s economy through trade. As a result of this terminal, Pakistan will be able to accommodate deep container ships which were not possible prior to the operation of this port. There will be significant economic benefits such as reduced costs to the country’s importers and exporters, improved transit time for shipments leading to efficiencies in supply chains, creation of direct and indirect job opportunities, and taxation benefits to the government and other stakeholders. SAPT has a lot of significance when it comes to meeting the growing shipping needs of Pakistan. This can be an early harvest project from China Pakistan Economic Corridor (CPEC)’s point of view because Gwadar Port, which lacks supporting infrastructure – power, storage, roads, railways etc – will take a while to fully develop. The taxation benefits to the local economy have already started to accrue and are envisioned to grow as the traffic for the terminal grows swiftly in the next couple of years, sources say. In an interview with the Profit maga-
HPH IS THE WORLD’S LEADING PORT INVESTOR, DEVELOPER AND OPERATOR, OPERATING 319 BERTHS AT 52 PORTS IN 26 COUNTRIES
zine Capt. Syed Rashid Jamil, CEO SAPT Hutchison Port says, “inauguration of this port will open new gateways for the international businesses from Pakistan through huge mother ships having containers’ capacity of 18,000-20,000 TEUs. Logistic cost on good transportation would be reduced with quick services and infrastructures.” The SAPT would further help to minimise cost of doing business in Pakistan similar to other neighbouring countries.He said,“ we have equipped it with state-of-the-art technology, which includes automated gates with identity cards checking system, RTGCs with position determination systems, remote controlled cranes (operated with CROS), control tower coordination, CCTV and trunk radio systems, mobile terminal messaging system, etc.” Furthermore, in order to facilitate operations, leading technology has been installed for navigation, berthing, loading / unloading, yard and storage, customs inspection and all other functions. “It would be operational by mid March this year as 16-meter dredging in open sea is almost going to be completed in next few days”, said Rashid. He further added,“KPT has chosen the right contractor Van Oord, a Belgian Company, for dredging in deep water and it has done a very satisfactory job so far.” “We expect that by the mid or end of this month, we will have enough depth to open our channels for the access for large vessels,” he claimed. He seemed satisfied with the ongoing work and the speed at which it (work) is being done. He further ex-
INFRASTRUCTURE
plained that as per the agreement, the required depth of the sea is around 16 meters, which can be extended to 18 or 20 meters if need be. Interestingly enough, SAPT’s expected annual capacity of 3.1 million TEUs is more than the combined existing capacity of three ports namely Karachi International Container Terminal, Qasim International Container Terminal and Pakistan International Container Terminal. They have a total annual capacity of 2.5 million TEUs. The Pakistani government is targeting another milestone achievement in collaboration with China through the development of Gwadar as a deepwater port (Free Port). It is expected to become fully operational by 2025-30 inline with the completion of China Pakistan Economic Corridor (CPEC) initiative and its related economic zones etc in
Gwadar city and neighboring areas. The SAPT port, as per the agreement with government of Pakistan, had to be completed in 2011 but was delayed owing to a lack of interest from concerned authorities, dredging issues and road infrastructure etc among the many. “The project has been delayed for almost 6 years now” Mr Rashid says. “Has there ever been a feeling of discomfort in this regard from HPH, considering the huge amount of investment and still no return on it?,” he questions. “Pakistan’s basic need was the deepwater port to reduce the cost of import or export which HPH accomplished, he claims. HPH came to Pakistan with the vision of developing the shipping and trade industry and the commitment of the company can be gauged by the fact that despite delays, HPH
PRESENTLY A LARGE PERCENTAGE OF PAKISTAN’S EXPORT AND IMPORT CARGO IN CONTAINERS IS NOT ROUTED THROUGH KARACHI DIRECTLY TO FINAL DESTINATIONS, AS LARGE AND VERY LARGE MOTHER SHIPS CANNOT BERTH AT EXISTING CONTAINER TERMINALS 36
remains fully committed to meeting deadlines for the existing project and to Pakistan. Back in 2011, he says, “the company had an option of pulling out of the project as per the agreement, but despite all the delays and challenges, it did not exercise that option because the company fully believed that the project would succeed. Its regional management in Hong Kong, in particular, had the confidence and belief that this project will be completed. They still maintain that they are committed to the vision of developing Pakistan as a successful deepwater terminal operating region. “I am very optimistic about Pakistan’s economy,” said Mr Rashid. Pakistan is a very resilient country despite problems in the past and he is sure there will be challenges in the future as well. He believes that the nation’s resilience and innovation are its biggest strengths. He seemed very hopeful thinking that if we can capitalize on our strengths, no one can stop Pakistan from reaching the sky limit. Mr Rashid also informed the profit team that KPT has sought time from Prime Minister for the inauguration of the SAPT port due to be inaugurated in March 2017. Van Oord is rapidly finalizing its dredging work and it is being hoped that the task will
be completed by 2nd week of the current month. “On December 19, 2016, the company has initiated its test operations at ‘One A port’, while One B, One C and One D ports are still under construction.Another port of ours ‘One B’ would be operational by April this year,” said the company official. Adding to it, he said, “so far we had handled more than 35000 TEUs from 19 vessels and we cleared big ships in very short time. Our test operations are free of cost and we are not charging for it. During test operations, we also set a national record with a ship called MSC Lucy, accomplishing almost 1700 container moves in just under 17 hours with a Vessel Operating Rate (VOR) of 129.” This is what makes SAPT so different from other terminals - its speed and efficiency is greater because of the latest stateof-the-art equipment that are in place.It is being operated by a very highly skilled workforce. SAPT’s biggest advantage is that it will be able to call large size ships that are being handled by large sized cranes. This means that the speed of clearing ships and moving containers would be much higher than the rest of the terminals.
“OUR PARENT COMPANY HPH MAKES A CONSCIOUS EFFORT IN SOURCING, DEVELOPING AND TRAINING LOCAL TALENT AND GIVING THEM THE SKILL SET THAT WILL HELP THEM BECOME INTEGRAL CONTRIBUTORS NOT JUST TO THE COMPANY BUT ALSO THE OVERALL ECONOMY OF PAKISTAN” “SAPT is the only private container terminal that has been designed and built as a specialized container terminal. Three other container terminals presently existing have been created on berth and yard areas, originally meant for bulk cargo,” Mr. Rashid said. In addition to this, the CEO said that the terminal will be one of the first ever to introduce an online payment system for customers, thus eliminating most of the tedious paperwork one needs to currently go through, to have a shipment processed and cleared. He said the company had so far handled 82.9 million TEU until 2014, playing a significant role in the development of economies and the expansion of international
trade of the countries. The CEO added, “our constant pursuit to ensure the level of standard and quality across all countries keeps growing consistently.” The logistics industry will be a major beneficiary of the project and the primary reason is the massive cost reductions it will bring because of speed and Just-In-Time. For example, for transporters the cost of moving trucks per mile will significantly go down because of the quick turnaround our company will provide. This will benefit both the end users as well as the shipping lines. In the long run, even the consumers will benefit as there will always be the possibility of reduced prices for the products they purchase. Responding to a question regarding
INFRASTRUCTURE
challenges, Mr Rashid said that challenges are a part of the business. “As a company, we are using our expertise, workforce and facilities to overcome those challenges and we have been successful in doing that so far.” Mr Rashid further said that challenges at ports are usually not just about manpower or equipment, in fact, they are mostly about regulatory matters. For example, lack of proper roads, infrastructure, delays in Customs clearance, changes in government policies etc. “If you assess this, the challenges that we are facing are not very different from what other industries and sectors face. This is all part and parcel of the business,” he commented. “Our biggest challenge remains infrastructure” he said adding, “Our business is to transport containers and for that we need good road access and this facility we are lacking right now in Pakistan. Currently all trucks from the Karachi Port pass through the Native Jetty Bridge, which is also used for other transportation by the general public. This causes a lot of traffic disturbances on the bridge. Ideally, there is a need to develop bypass over the bridge for heavy transport in order to run smoothly. This bridge will significantly help our overall operations, which has been committed by the government and KPT.” Regarding the CPEC, he said that Gwadar and SAPT are both deep water ports even though there is no direct relation between them. “There will be an impact towards the development of CPEC as the trade
in the country will be facilitated through bigger ships and frequency of trade will increase leading to an overall boost to the company.” Traders will have more choices and will not be restricted to just one port and this will attract more trade and competition. Also, Gwadar is going to take time to become fully functional because the city has to develop first, the industry and the skill have to develop as well. So at least till then, Pakistani businessmen can take advantage of the services being offered by SAPT due to its convenient location. He further commented that the competition is fierce which is always a good sign not only for the customers but also for the overall trade and economy of Pakistan. “With Gwadar in particular, competition will be there since both are deep sea ports operating within 200-300 nautical miles of each other. Both have their strengths and weaknesses. Other than trade, HPH’s major focus is to develop environment as this is an area the
“DURING TEST OPERATIONS, WE ALSO SET A NATIONAL RECORD WITH A SHIP CALLED MSC LUCY, ACCOMPLISHING ALMOST 1700 CONTAINER MOVES IN JUST UNDER 17 HOURS WITH A VESSEL OPERATING RATE (VOR) OF 129” 38
company has been looking to invest in. The company aims to become a major contributor towards the betterment of the environment and society. “What we are doing is implementing the best environmental practices from around the world. Practices that international environmental regulation does not allow, we are also making a conscious effort to follow the same route here in Pakistan,” he added. Another of HPH’s major areas of focus is human resource and the company is believed to be already contributing to direct and indirect employment in Pakistan. As other phases of the project will unfold, the company expects to open up more jobs for the people of the country. “Our parent company HPH makes a conscious effort in sourcing, developing and training local talent and giving them the skill set that will help them become integral contributors not just to the company but also the overall economy of Pakistan. And this is why majority of our staff is Pakistani. We do have Chinese staff too so our local teams are able to learn from their expertise, improving their overall skill. We believe there is talent in Pakistani people and as a company, we are fully committed to training and developing them with the required skill sets needed to succeed not only professionally but personally as well. Our idea is to develop future role models.” n
INFRASTRUCTURE
OpiniOn
Dr. Kamal Monnoo
and of which the domestic debt constitutes Rs14.4 trillion while external debt makes up Rs5.5 trillion. Meaning, this is excluding government’s contingent liabilities, which in their own right have swelled to nearly Rs1 trillion. What this latest debt number also means is that over the first quarter (July-September) of this fiscal year, the government added to the debt by some Rs 858 billion, n an article written a couple of weeks back, “paktaking the debt to GDp ratio to nearly 69.50%, which in istan’s debt: putting the record straight”, the FiJune 2016 stood at around 66.50%. nance Minister explained that why in his opinion The trend is rather alarming because despite governboth pakistan’s domestic debt and external debt ment’s claim of being at the peak of debt’s bell curve, are well under control and how the public debt which theoretically meant that the national debt should management under his government is progressing have started to come down, it instead is going in the requite well. Anyone claiming differently is either verse direction! This, notwithstanding, that when finishbiased or doing a disservice to the country – ing the last fiscal year, the government made a clever rather sweeping assumptions one must say! Anymove to by amending the ‘Fiscal Responsibility and Debt way, back to Mr. Dar’s piece, which in essence Limitation Act of 2005’, through a Finance Act that literclaims the following 3 things: a) the national domestic debt ally changed the debt goalposts. portfolio as part of the total public debt is much bigger than The Finance Ministry not only diluted the law but also the external one (net domestic debt constitutes 66% and exgot relaxed the statutory limit of restricting the public ternal debt 34% of the total net public debt), b) stating exterdebt at 60% of GDp. Both the previous ppp government nal debt at $73 billion is in-correct since one should not and the present pML-n governments have been in violalump together public & private external debts, and c) in the tion of this condition. With this act, the pML-n governtotal public debt the year-on-year growth of its short term ment has now set a new statutory deadline of June 2018 portfolio is 8.4%; for the medium term it is 13.7%; for the to bring the debt back to the 60% level of the GDp, as external debt it is 6.3%, and that these growth levels in each against the earlier deadline of June 2013. of the specified debt components cannot be termed as being Moreover, pakistan’s debt sustainability indicators have ‘exponential’. significantly worsened in recent years and especially in So what exactly is pakistan’s present debt profile? As per the the last three years due to a high increase in foreign exfigures released by the State Bank of pakistan (SBp) in nochange and refinancing risks, which appear to be the revember 2016, the total Central Government debt as on sult of reckless high cost borrowings. 30.09.2016, stood at Rs 19.9 trillion, ‘excluding liabilities’, The average time to maturity of public debt fell in fiscal year 2015-16, which in-turn has increased the refinancing risks and similarly, the short term foreign currency debt as a percentage of official liquid reserves and net inDr. Kamal Monnoo ternational reserves increased in fiscal year 2015-16, which in-turn increases the foreign currency risk. The SBp data further revealed structural changes that took place in the counThe writer is an entrepreneur and economic analyst. He try’s domestic debt profile during the last one year. it showed that the share of long-term can be contacted at permanent debt in the total domestic debt was significantly reduced, which has heightened kamal.monnoo@gmail.com risks attached with rollover of maturing loans. Still, to be fair to the government, in its defense it argues (and as Mr. Dar explains) that its debt management strategy clearly sets target ranges for currency, refinancing and interest rate risks, and though quite a few indicators are currently in red, they still fall within the
Pakistan’s Debt – Steady As she goes!
I
40
limits prescribed in its Medium Term Debt Management Strategy 2016-19. It further takes heart from the some global statistics by citing that amidst a high prevalent global debt phenomenon, Pakistanâ&#x20AC;&#x2122;s current debt at around $73 billion (over a population base of 200 million) is still quite manageable in comparison with say for example, Greece $367 billion, Ireland $865 billion, Spain $1 trillion and Italy $1 trillion. Fine, but the underlying flaws in such an argument is that not only are all these European failed economies, but also that they represent a single monetary block that gets balanced through a complex system of intra-regional monetary balancing mechanism overlooked by a rather thinly accountable European Central bank Pakistan on the other hand is neither an European economy nor does it have the luxury of printing at will to pay for its external liabilities. The real trouble however is that Pak-
istanâ&#x20AC;&#x2122;s debt profile presents an even bleaker picture when one starts to dissect the nature of its historical debt and the one that has been piled up in recent years. The historical debt profile (as we know) has little to show for itself: national infrastructure fails to match that of any developed economy; public support systems of health, housing, utilities, education and social benefits remain unsatisfactory; stubborn poverty level stuck at about 30% or more; extremely narrow and small industrial base; and a top heavy public administration system that despite being inefficient has become further entrenched over time. To make matters worse, during the past three years, government has been on a borrowing binge, acquiring expensive foreign and domestic debt at commercial rates. While it has repeatedly claimed that it is increasing its credit only to the extent of the budget deficit requirements, the reality is quite different. For example,
the increase in federal governmentâ&#x20AC;&#x2122;s debt from July-September 2016, adds up to Rs 858 billion, whereas, the budget deficit in the same period was only Rs 450 billion about half. So where is all this money going? And it is the answer to this question that forms the real worrying part. Borrowing in itself is not essentially a bad thing as long as it can be spent in a productive manner. Really if all these borrowing would have been put to productive use in self-sustaining projects or outlays, it would have been wonderful, because essentially the government could have claimed success in raising necessary investments and then putting them to use in a manner that not only generates growth, but also leaves the country richer in due course. Sadly, when we look at the spending priorities and at the element of self-sustainability in the various big projects currently underway, this has not been the case!
ECONOMY
journey
By: Aisha Arshad
44
From the humblest of beginnings back in 1950 to over 50 outlets nationwide, Rahat Bakers has truly come a long way. Now they have set their sights on Karachi as part of their ongoing product diversification and growth strategy
hen it comes to choices in foods and confectionaries, it turns out Karachiites are in luck -- courtesy of over 2 crore inhabitants that make it the country’s largest market for such businesses. With delights from dozens of home-grown and multinational brands already at its disposal, the city has recently welcomed another major player in the form of Rahat Bakers, the largest chain of bakeries based out of Lahore. After conquering Punjab and KP, the 66-yearold bakery opened its master franchise in Karachi as part of a plan to expand its footprint in the southern part of the country. The port city finally made it to Rahat’s radar, but the brand’s journey to become a nationwide bakery chain is a story not know to everyone thus worth documenting. It started in 1945 when two young brothers Rehmat Ullah Chaudhry and Ghulam Nabi Chaudhry left their home in Macori, India and came to Lahore to test their luck. For the next four years, the two worked with their uncle at a small bakery in Cantt Lahore and learnt confectionary skills – a skill that was going to become their identity in coming years. Their younger three brothers also joined them in 1947 and all five well-acquainted themselves with the bakery business. Five years later in 1950 the brothers were able to save enough to buy 50 kg flour, 50 kg sugar and 50 kg of clarified butter; along with a brick oven and a bicycle to open their own bakery in Cantt on a place
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rented by their uncle. They named their venture as Rahat Bakers and at the end of the business on first day the brothers had earned a sum of Rs 6. They had also earned some recognition among the customers that were going to become loyal over the years as Rahat became the largest bakery chain of the country. Today, with a network of more than 50 outlets, Rahat is the only nationwide bakery with its branches spread as far as Mardan. As many as 1400 employees are associated to the family business that once began as self employment and Rahat has now become the largest franchising network with more than 40 of its outlets working under various franchise owners. While talking to Profit, Imran Idrees – one of the second generation owners of the bakery that also owns two departmental stores with the same brand name in Lahore – said, ‘’We are in expansion mode for last 20 years. The first branch outside Lahore was opened in 1996 in Rawalpindi and since then our network is increasing.’’ It is also to be noted that Rahat had expanded in Lahore long before that and according to Idrees, it owned as many as 22 branches in Lahore in 1970s. Currently the number of branches in Lahore is 12 – after closing of some franchises. In continuation of the countrywide expansion trend that began around 46 years after the first outlet, the bakers have now stretched their network towards the South with the opening of Rahat’s first ever branch in Karachi. Currently functional in more than 20 cities of Punjab and Khyber Pakhtunkhwua,
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Rahat Bakers now aims to open five stores in the Southern zone of the metropolitan city by March 2017. The first branch of Rahat Bakers, in Karachi, is however a master franchise – owned and operated by the company itself. A Master franchise, as explained by Idrees, is the production outlet in every district – within approximately 5-10 km distance – which works as the factory for all the franchises in the district. The master outlet model was adopted about two years back when long distance logistics and transport of raw materials for the wide network of outlets became a hassle for the management, Idrees said while explaining the business structure. In order to further strengthen the market share in the highly competitive market, Rahat Bakers will soon open four more retail outlets within the whereabouts of District South Karachi to cover a customer base in DHA Clifton and Saddar area. ‘’We have many people in Defence and Clifton who visit Punjab regularly thus they are more familiar with our brand and mostly armed forces are in the area as well who are our loyal customers because of our presence in all cantonment areas,’’ Idrees confidently shared his strategy behind starting in the South District from where he received the highest franchisee requests of the bakery that requires Rs 30 million investment to set-up. After this establishment, Rahat Bakers plans to extend its wings in East District and the construction for Malir Cantt master franchise has already started. According to Idrees the backbone of this growth and customer loyalty is the production of fresh products with fresh ingredients. Till today, the basic raw material i.e.
’WE ARE IN EXPANSION MODE FOR LAST 20 YEARS. THE FIRST BRANCH OUTSIDE LAHORE WAS OPENED IN 1996 IN RAWALPINDI AND SINCE THEN OUR NETWORK IS INCREASING” Imran Idrees, owner Rahat Bakers
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flour, sugar, butter and milk are supplied by the head office and that has helped the brand maintain its quality across the board. Over the time, Rahat Bakers has also expanded its menu by offering various snack items on its shelves. According to the official website of the bakery, Rahat considers itself the pioneer in introducing bakery pizzas, croissants and cream puffs in the country which was once only accustomed to mithayi (a traditional sweet). Though the baker’s forte is in confectionary items and according to Idrees their lemon tarts and chocolate brownies are favourites; with the passage of time Rahat has gained popularity for its pizza. So much so that the bakers have been giving tough competition to international pizza chain Pizza Hut in Islamabad and Rawalpindi where Rahat Bakers is spread across a network of 11 and
9 outlets respectively. Not only that but the bakers were also able to make more sales than the international giant for four consecutive years from 2001-2005 onwards, say industry sources. Rahat is a force to be reckoned within Karachi’s market as well. It is not only an emerging competition for the bakeries in the city but also for international pizza and donut houses that are market leaders in Karachi. For people who have eaten its pizza anywhere in the country, ‘’it’s the most generous pizza of Pakistan.’’ ‘’So far Rahat’s Clifton outlet entertains around 110-115 customers a day but this is only until we do our massive campaigning and open other outlets in the city,’’ said Idrees who expects a greater footfall after establishment of multiple Rahat outlets in the economic hub of the country. This he thinks will help the brand develop and cater a large clientele in Karachi – the most populated city of Pakistan. When asked about international expansion on the back of growth in the country, Idrees said, “There are 381 districts in Pakistan alone, we would like to open a store in each district first and then we can think about going abroad.” The bakery’s doors opened in 1950 in Lahore that now hosts some 3,000 customers daily which is 10 percent of the 30,000 customers Rahat Bakery is serving throughout the country. The small bakery in St. John building that earned Rs 6 on its first day of business now generates over Rs 7 million in daily sales. n
STRATEGY
By: Abbas Naqvi
With experience in both printing and packaging for schools and MNC’s, HY printers have launched a sleek new stationery shop in the centre of Lahore by the name of Paper Clip that they plan to expand into a digital printing space as well 48
he choice of marketing is one of the most strategic decisions a business makes.Would you rather spend on conventional types of advertisement (billboards, TVCs etc.) which have a wide customer reach or would you improvise? At the end of the day, the decision primarily depends on the entrepreneur’s disposition and the sort of enterprise under consideration. Dr Badar Tauqeer is an Aitchisonian by schooling and a doctor by family tradition and education, but an entrepreneur by choice. He decided to deviate from the conventional and promote his concept in a differentiated way. Instead of spending an average of two lakh rupees on billboard advertisement monthly, Badar and the company’s co-founder Hasnain Ali decided to use their outlet’s prime location as the advertisement tool itself. “I believe that the right location, albeit expensive, compensates for not advertising since it’s located at such a place that the target market can see the store and visit it; no need to advertise,” says Badar, adding that he is paying a hefty amount in shop rentals. He goes on to add that if he had instead decided to settle for a place that was not so central, and thus less expensive, he would have had to bear recursive advertising and marketing expenses.
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“So why not invest the money wisely and choose a prime outlet location instead of a prime billboard location?” asks the thirty two year old Badar. Opened in January 2016, Paper Clip is a stationery-cum-school supplies store (uniform and textbooks) located off the Main Boulevard (opposite McDonalds’ franchise) in Lahore - offering two categories of products that are usually sold separately in Pakistan: school uniforms and an assortment of stationery. Unlike the majority of ‘somber-looking’ stationery shops one comes across in Pakistan, this one strikes an immediate spark of optical pleasure when looked upon from the outside. Designed with parametric wooden cubes cut in a symmetrical manner, the outlook is simple (Louvre style) but ensures that the entrants’ attention is drawn to the colourful array of products that adorn the wooden shelves instead of the shelves themselves.
“The design was carefully chosen to make sure that the right sort of ambience is created,” says Badar, adding that the lights play a pivotal role in making the shop’s atmosphere worth experiencing. The shop’s glass doors and glass windows allow the passersby to catch a glimpse of the entire ground floor of the shop. The first floor houses uniforms, books and bags for school-going children. Adjacent to the shop (Paper Clip), Badar is gearing up to launch the Ink Factory, which would offer the facility of digital printing on any medium of choice:acrylic, steel, wood, plastic, marble, merchandise, notebooks, stationery etc. The imported machine can handle all sorts of materials. “As of now, we are offering our own design templates which people can use for digital printing, but with the Ink Factory, our users can make their own designs,” explains Badar, adding that half a dozen local artists (mostly NCA graduates) have been taken on board to provide designs. In return, the artists will be paid a royalty fee every time their design is
ALL THE EXPANSION SO FAR HAS BEEN FUNDED BY THE CO-FOUNDERS, THEIR PARENTS, AND THE PROFITS EARNED BEING REINVESTED BACK INTO THE BUSINESS. THE DUO HAS THUS MANAGED TO AVOID EXTERNAL BORROWING SO FAR opted for by a customer. The move aims to engage the local art community and create a passive revenue stream for these artists. The Ink Factory will be accessed from within the adjacent shop (Paper Clip) and will also host a small coffee bar for customers on wait. “People will have the opportunity to see the printing live, and while they wait for their stuff to be readied, they can enjoy a cup of coffee here,” says Badar, highlighting that such a service and customer experience is not available elsewhere in the country but that the demand for it is huge. Paper Clip began back in 2007, when the two youngsters (Badar and Hasnain) de-
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cided to venture into a business of their own instead of working for others. They began with a printing press. “Being an active participant in the cocurricular activities at Aitchison, I already had some experience in printing since I had to get brochures and pamphlets printed for events,” recalls Badar. Badar spent an agonizing four months in the heart of the printing market of Lahore: Royal Park, to learn the tricks of the trade and to shortlist vendors suitable for his business needs. “Some had better paper quality while some excelled at binding; so I had to spend some time in the market to know who I could outsource my work to,” says Badar. It began with catering to the stationery needs of corporate clients such as banks and MNCs in 2008. Soon after, the co-founders realized that the gaps in the stationery market offered potential gains in the booming education (largely private schools) industry of the country. They put their plan in action by renting out rooms in leading private schools of Lahore such as Lahore Grammar School and Beaconhouse TNS and selling stationery at schools by the name of HY School Stores. Paper Clip also falls under the same brand name since it’s an extension of HY School Stores. The response it received was so phenomenal that the company decided to launch a flagship store in one of the most sought-after locations of Lahore: Main Boulevard, Gulberg. The flagship store caters to a large segment of customers that usually shop in the evening; since the schools close down the shop at 4 pm. All the expansion so far has been funded by the co-founders, their parents, and the profits earned being reinvested back into the business. The duo has thus managed to avoid external borrowing so far.
UNLIKE THE MAJORITY OF ‘SOMBER-LOOKING’ STATIONERY SHOPS ONE COMES ACROSS IN PAKISTAN, THIS ONE STRIKES AN IMMEDIATE SPARK OF OPTICAL PLEASURE WHEN LOOKED UPON FROM THE OUTSIDE. DESIGNED WITH PARAMETRIC WOODEN CUBES CUT IN A SYMMETRICAL MANNER, THE OUTLOOK IS SIMPLE (LOUVRE STYLE) BUT ENSURES THAT THE ENTRANTS’ ATTENTION IS DRAWN TO THE COLOURFUL ARRAY OF PRODUCTS THAT ADORN THE WOODEN SHELVES INSTEAD OF THE SHELVES THEMSELVES Similar to the many small businesses taking root in Pakistan through family funding, Paper Clip too began with being funded by the co-founders’ fathers. A meager amount of rupees one million was lent to them by their parents, and the reluctance of the investors in giving the money to the youngsters for their ‘career-derailing’ decision fueled their determination to succeed at it. “It was actually in 2010 that our fathers praised us for the progress that we had made and it motivated us a lot” says Badar. As of now, Paper Clip has an accomplished team of employees that look after the production of spiral notebooks, wrapping paper, gift boxes and cards. The shop offers over seventy brands, majority of which are international brands like Moleskine, Paperblanks, Paper-Oh, Muji, Deli (largest stationery brand in China), Mont Blanc etc. It considers every shop selling similar products as a competitor. That makes the entire Urdu Bazaar a competition for Paper Clip. Lowest margins in the list of products of-
“I BELIEVE THAT THE RIGHT LOCATION, ALBEIT EXPENSIVE, COMPENSATES FOR NOT ADVERTISING SINCE IT’S LOCATED AT SUCH A PLACE THAT THE TARGET MARKET CAN SEE THE STORE AND VISIT IT; NO NEED TO ADVERTISE” Badar Tauqeer, co-founder Paper Clip
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fered by Paper Clip are related to products like envelopes and writing pads among others that are sourced and manufactured locally. “Margins are low because the manufacturers are usually not tax compliant while we are,” says Badar, adding that the brunt of taxes is thus borne by Paper Clip instead of the end customer, reducing margins significantly. Even though the education industry cannot be strictly termed a seasonal industry per se, it does behave like one post the summer holidays. The months of August and September, the time when the new academic year commences after the summer break, back-toschool shopping spree at uniform and stationery shops is a sight to behold. Although a hectic and frustrating experience for the parents, it is the best time of the year for the stationery and uniform businesses.“The revenue generated during these two months is more than the money generated in the entire year,” says Badar. In terms of revenue contribution, corporate clients contribute an overwhelming proportion of the total, almost ninety per cent, while retail sales from the outlet accounts for the rest of the revenue. Paper Clip also has two ‘stationery vans’ that are on the move six days a week, from nine am to five pm and follow fixed routes, supplying customers with stationery and even day-to-day pantry items like tea during the day. (Attaching data which can be used to draw a map of their routes and destination as an info graph) The co-founders have one aim in mind for the future: make Paper Clip an outstanding example of best practices which embody the efficiencies of the developed world while remaining in sync with the local cultural norms. Seems like that would require a whole lot of effort, and a long way to go. n
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