Profit E-Magazine Issue 74

welcome

Time to deregulate oil prices If there is one habit we wish the government of Pakistan would try to kick, it is the insane attempts to assert political control over fundamental economic forces, specifically the need to control prices of essential commodities. Even as we write this sentence, we are well aware that to say that “the government of Pakistan should not seek to control the prices of essential commodities” is a heresy that would cause the heads of virtually all television opinion anchors to explode. But we mean it.

As our cover story this week demonstrates, the government’s attempts to control prices can have devastating consequences. Who can forget, for instance, the fact that Pakistan virtually ran out of petrol and diesel in January 2015 because the government refused to allow oil companies to be able to set their own prices? The problem then – and now – is that oil prices move on a day-to-day basis as does the price of the US dollar in which oil prices are denominated.

Yet the government does not allow oil companies to change their prices more than once a month, and even then, it does not allow them to factor in the changes that have taken place over the course of the entire preceding month. No, the government’s regulators at the Oil & Gas Regulatory Authority (OGRA) do a point-in-time analysis rather than averaging across the previous month and force oil companies to sell at the new prevailing prices. Every motorist in Pakistan has come across the absurdity of not being able to buy fuel on the last day of the month if fuel prices are set to go up the next month. Does anyone think this makes sense?

Why not let oil companies set their own prices and

move them on a daily basis as needed? This would smooth over their costs and profit margins while ensuring that the kind of choked supply situation the country ran into in early 2015 does not happen again.

And if the concern is price gouging, then the government can keep its regulations on gross margins for the oil companies, or perhaps a daily rolling average of ceilings and floors within which prices are allowed to fluctuate?

So much of what goes wrong in Pakistan is often attributed to corruption. But this is just gross incompetence. The monthly movements in oil prices benefit absolutely nobody and are a relic of a bygone era when the government controlled all oil companies and did not have the capacity to change prices more than once a month. It needs to be abandoned before the economy comes to a grinding halt again.

Farooq Tirmizi Managing Editor

Executive Editor: Babar Nizami l Managing Editor: Farooq Tirmizi l Joint Editor: Yousaf Nizami Reporters: Syeda Masooma l Muhammad Faran Bukhari l Taimoor Hassan l Abdullah Niazi l Ahmed Jamil Bilal Hussain l Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) l Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) l Layout: Rizwan Ahmad l Photographers: Zubair Mehfooz & Imran Gillani l Publishing Editor: Arif Nizami l Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk

FROM THE MANAGING EDITOR

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1991

1992

1993

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1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

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2010

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2018

Source: Pakistan Bureau of Statistics

2013

As this chart shows, Pakistan had been largely self-sufficient in terms of its coal needs until the fiscal year ending June 30, 2001. During that year, Pakistan’s demand for coal exceeded local supply levels and the country began to import coal from other parts of Asia. The spark for this increase in coal demand was largely the rise of the cement industry in Pakistan which saw significant increases in production in the late 1990s and well into the mid-to-late-2000s. The real spike, however, occurred post-2013, after the China-Pakistan Economic Corridor took off. Coal demand in Pakistan nearly tripled over the last five years. However, contrary to common perceptions, only about 40% of the increase in demand for coal since 2013 has been due to coal-fired power plants. The bulk of the remaining 60% of the increase came as the result of a dramatic increase in cement production, which itself was spurred by the rise in infrastructure spending and construction activity surrounding CPEC.

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2,000

4,000

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in '000s of tons

Coal production, consumptions, and imports in Pakistan

News IN NUMBERS

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2002

12.1% 2003

17.7%

2004

22.9%

2005

29.0%

2006

34.1%

2007

43.5%

2008

35.5%

2009

16.8%

2010

18.4%

2011

18.0%

2012

17.5%

2013

23.0%

2015

27.0%

2016

26.1%

2017

29.8%

2018

25.0%

2019

17.9%

Source: Pakistan Stock Exchange, Pakistan Bureau of Statistics

2014

27.9%

The above chart is an imperfect, but nonetheless illustrative, depiction of the level of depth in Pakistan’s equity capital markets, better known as the stock exchange. Developed countries and markets typically have stock market capitalisations (the total value of all shares listed on the stock exchange) that approach or even exceed 100% of their gross domestic product (GDP), or total size of the economy. As one can see, Pakistan has had some ups and downs in this regard, but has never seen market capitalisation cross 50% of GDP. Over time, as Pakistan’s economy grows and per-capita income increases, the market capitalisation-to-GDP ratio is likely to rise substantially.

This would reflect not just increasing wealth in the country’s population, but also an increasing ability of companies to access equity capital markets in the country which in turn would reduce the need for foreign investment.

0.0%

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Stock market capitalisation as a percentage of GDP

Depth of Pakistan's equity capital markets

News IN NUMBERS

10

W

By Farooq Tirmizi hen a financial institution in Pakistan thinks about its growth strategy, there is one play that every CEO ultimately reaches for: launching an Islamic finance business. And when it comes to Islamic finance in Pakistan, there is clearly one king: Meezan Bank, the undisputed market leader in the country and one that took the lead in 2003 – just one year after its launch in 2002 – and has never relinquished it since. To move into the Islamic banking arena, therefore, means going head to head with Meezan Bank. No matter how strong or well-capitalised your balance sheet, or how well-regarded your name in the conventional market, the Islamic finance market is another

“A significant portion of Islamic banking customers come from populations that were previously unbanked, thus creating a new revenue source for banks” Savina Joseph and Constantinos Kypreos, analysts at Moody’s Investor Services beast entirely, and in this corner of Pakistan’s financial system, Meezan is a tough act to beat.

Yet over the last few years, we suspect that Irfan Siddiqui, the founding CEO of Meezan Bank, has been resting a little less than easy.

Siddiqui is one of the savviest operators in the Pakistani banking market and he knows that – while most banks have struggled to compete with the franchise he has built – there are a few key competitors who are closing in. And if Meezan is not careful, it could lose its coveted slot as the leading Islamic bank in the country.

That is because Islamic finance is, quite simply, the hottest corner of the Pakistani financial markets. In 2002, the first full year of Meezan’s operations, there was only one other institution offering Islamic banking. In the 17 years since then, 20 more have joined the fray. At this point, there is only one bank left in Pakistan – JS Bank – that does not have an Islamic banking division and that is because it is a minority shareholder in BankIslami Pakistan.

The state of play in Islamic finance

T

he reason why every bank CEO wants to jump into Islamic finance is simple enough: it is the fastest growing part of the Pakistani financial system. In the 15 years between 2003 and 2018, deposits in the conventional Pakistani banking system have grown at average rate of 20.2% per year, according to data from the State Bank of Pakistan (SBP), from Rs1,8 trillion to Rs13.4 trillion.

That number is impressive, until you take a look at the growth rate of the Islamic banking sector: during that same period, deposits at Islamic banks and Islamic banking windows of conventional banks grew at an average of 65.1% per year, from Rs14.4 billion to Rs2.2 trillion, according to Profit’s analysis of bank financial statements and State Bank data. Inflation during this period averaged 8.8% per year.

To understand the magnitude of just how

much of a difference that divergence in growth rates can make, consider this fact: deposits in the conventional banking system are 6.3 times higher than they were 15 years ago. Islamic banking deposits in Pakistan are nearly 151 times higher over that same period.

In 2003, Islamic banking constituted just 0.8% of all banking deposits. At the end of 2018, that number stood at 16.2% of total deposits.

What makes this rise particularly attractive for the banks, however, is that it does not come at the expense of their conventional businesses. “A significant portion of Islamic banking customers come from populations that were previously unbanked, thus creating a new revenue source for banks,” wrote Savina Joseph and Constantinos Kypreos, two analysts at Moody’s Investor Services, the global ratings agency, in a note issued to clients on Thursday, September 19, 2019.

In short, no bank can afford to not be in the Islamic finance business in Pakistan. The World Bank’s Findex database estimates that, as of 2017, 79% of Pakistani adults did not have a bank account. And given the fact that Pakistan’s population is 97% Muslim, a substantial proportion of people prefer to use Islamic banking systems for their financial needs. While it is not possible to say with certainty what proportion of Pakistanis would prefer an Islamic bank over a conventional banking option, there are some revealed preferences of consumers visible in the data: for every new rupee that came into the banking system in Pakistan in 2018, about 30.3% went into the Islamic banking system and 69.7% went to the conventional system, according to Profit’s analysis of SBP and bank financial data.

How Meezan came to dominate the market

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o how did Meezan comes to become the single biggest player in this market?

Meezan’s single biggest advantage is being the first mover in the Islamic bank-

ing industry. In the late 1990s, there were two Islamic investment banks, both backed by Gulf Arab investors, operating in Pakistan: Meezan Investment Bank and Faysal Islamic Investment Bank. In 2002, both banks moved from being primarily corporate banks towards having a bigger retail presence, but only Meezan retained its Islamic identity. That decision appears to have been the difference that resulted in its significant outperformance.

Meezan Bank started its existence in 1997 as Al-Meezan Investment Bank, an institution with a limited licence to build up a corporate and investment banking franchise. At the time it started out, Al-Meezan Investment Bank was so small, and considered so insignificant, that it did not even have a full-time CEO. Irfan Siddiqui, the man who was given the job (and still has it) was serving as general manager (effectively COO) of Pak-Kuwait Investment Company (PKIC), a joint venture between the governments of Pakistan and Kuwait.

Siddiqui continued in both capacities until at least 2001, working with a 30-person team to build out what appears to have been at the time a vehicle for PKIC’s fixed income business. However, it appears that Siddiqui saw the potential in Al-Meezan when nobody else appears to have spotted at the time.

Siddiqui started off his career as a chartered accountant in 1979, but worked for a significant portion of his career either in the Middle East or for Middle Eastern entities. The list of his previous employers includes the Abu Dhabi Investment Authority, Abu Dhabi Investment Company, and the Kuwait Investment Authority.

That exposure to the Persian Gulf Arab states appears to have given him both an appreciation for Islamic banking (Islamic finance originated in the GCC region) as well as a network of contacts that would later help him build up the business.

Soon after it was launched, Siddiqui used his old contacts to bring in several other investors into the bank including the Islamic Development Bank, the Saudi-Pak Industrial

BANKING

and Agricultural Investment Company (a joint venture between the governments of Pakistan and Saudi Arabia), Shamil Bank, a Bahraini bank owned by Dar al-Maal al-Islami (DMI) Trust (the sponsors of Faysal Bank), and the Kuwait Awqaf, a Kuwaiti state-owned endowment.

Meezan Bank’s current shareholding is now dominated by Noor Financial Investments Company, a publicly listed company in Kuwait that manages the wealth of several of that country’s richest families. Noor Financial owns 49% of the bank.

The challenge in those early years was that Pakistan at the time had no regulatory infrastructure in place for Islamic banking. Siddiqui and his team worked with the SBP to try to develop that set of rules, and was finally able to become the first Islamic bank licensed by the State Bank on January 31, 2001. That same day, Meezan Bank announced that would be acquiring the Pakistani branch network of French banking giant Société Générale, lending the bank the credibility of having bought the operations of a Western financial institution.

In the first full year of operation (2003),

Meezan Bank had a hard time getting corporate clients to take it seriously as a bank. While it was able to get some of the larger, more reputable local corporates and a few of the multinationals to sign on to individual loans, it was not able to build a relationship with them in the way that conventional banks, with longer histories and easier to understand products, were able to get.

For its initial years, the bank relied on relationships with smaller and medium sized companies that had owners who were more religiously inclined. Many had never used a bank before because they believed that bank interest is prohibited under Islamic law, and so they did not mind not having the full suite of products available to them from the very beginning.

But even at the outset, Meezan Bank showed a desire to grow beyond just its core of Shariah-minded clients. To do that, it knew that it had to grow not just its own market share, but that of Islamic finance relative to conventional finance.

Its first mover advantage has meant that Meezan was always the largest player in the Islamic finance business, and so it – more than any

Market share

Profits

36.2%

Meezan Bank’s market share of the total amount of Islamic banking deposits in Pakistan for the calendar year 2018, according to Profit’s analysis of bank financial statements and SBP data

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49.8%

Meezan Bank’s market share of the total amount of the Islamic banking sector’s net income in Pakistan for the calendar year 2018, according to Profit’s analysis of bank financial statements and SBP data

other bank – could afford to invest in a full-time Islamic finance product development team that worked with religious scholars (including some who were on staff and others who were not) to build out the full set of products that would allow Islamic banks to compete for conventional business. To promote the industry as a whole, Meezan Bank has offered consulting services to other Islamic banks on how to create Shariah-compliant products.

The key, it turned out, was in the way the contracts were written. Meezan Bank, like every other Islamic financial institution, starts off with a conventional product and then looks for creative ways to rename, or in some cases, reconfigure, interest payments to make them smell Islamic. One of the favourite techniques used by such institutions is to give their products an Arabic name. So a car lease becomes Ijarah, a working capital loan for a manufacturing business becomes Murabaha, etc.

The Meezan juggernaut

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ver time, Meezan has been able to dominate the Islamic banking market in Pakistan and has never really let go of its status as the country’s leading Islamic bank, with a market share of just over 36.2% in 2018, a number that has remained largely steady over the past decade.

Over the past 10 years, Meezan’s deposits have grown at almost exactly the same rate as the Islamic banking market as a whole: an average growth rate of 27.3% per year for the past 10 years for Meezan versus an average of 27.6% for the Islamic banking market as a whole.

What is even more remarkable is the extent to which Meezan dominates profitability for the sector. According to Profit’s analysis

of bank financial statements and SBP data, Meezan accounts for just under 50% of all profits made by any Islamic banking institution – whether it be a standalone Islamic bank or the Islamic banking branches and windows of conventional banks.

That dominance of the profits generated by the industry are then reflected in other measures of the financial health of the Islamic banking industry. Meezan Bank, for instance, had a return on equity of 23.8% in 2018, a year when the overall banking sector in Pakistan was only able to generate a meagre 10.5% return on equity. The rest of the Islamic banking industry – excluding Meezan – did even worse, with a 9.9% return on equity.

In fact, excluding Meezan, the Islamic banking industry’s return on equity has exceeded 10% only once over the past decade. This then begs the question: if you are not Meezan Bank, why even bother competing for the Islamic banking market? After all, what good is growth if it comes with a decade of meager returns?

The answer to that is somewhat more complicated than a simple yes or no. For instance, the Islamic banking industry’s net interest margin (the difference between the interest rate at which a banks lends out money and the interest rate it pays out on deposits) is somewhat higher than the banking industry as a whole.

For the year 2018, the net interest margin for the entire banking industry was 2.8% while the Islamic banking industry had a net interest margin of 3.2%. However, while it is true that Islamic banking institutions have a lower cost of deposits – their average cost comes to approximately 3.1% compared to 3.7% for the banking industry as a whole – they also lend

at cheaper rates. In 2018, the average lending rate at Islamic banking institutions was 6.3% compared to 6.5% for all banks.

It is also often claimed that banks are chasing by diving head-first into the Islamic banking sector is the rapidly growing, cheap deposit base. They seem to be putting little thought into their ability to profitably lend out those deposits. Yet the reality is that Islamic banking institutions lend out 56.4% of their total assets as loans whereas Pakistan’s banks as a whole only lend out 43.4% of their assets as loans.

Part of this, of course, has to do with the fact that the government of Pakistan simply does not issue enough Islamic bonds, which limits the opportunities for Islamic banks to simply park their money in government bonds like the conventional banking industry is wont to do.

Nonetheless, being forced to lend out more of one’s balance sheet is not necessarily good for the banks, as reflected in their lower average lending rate.

The rising competitors in Islamic banking

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easured by return on equity – considered one of the most important measures of a bank’s profitability and broader financial health – the vast majority of Islamic banks and Islamic banking branches and windows of conventional banks pose very little threat to Meezan Bank.

Profit’s analysis of Pakistani banks’ financial statements reveals the following fact: over the past decade, only four banks – besides Meezan – have averaged returns on equity greater than 10%, and all four are the Islamic banking branches of conventional banks. The

four banks are, in order of profitability: Habib Bank, Standard Chartered Bank, Bank AL Habib, and Bank Alfalah.

These four, however, pose a potentially formidable threat to Meezan Bank’s lead in this lucrative sector. Profit examines the strengths and weaknesses of each of these in turn.

BANK ALFALAH: The weakest of the competitors is Bank Alfalah, whose Islamic banking division averages a return on equity of 12.6% per year for the past decade. By deposits, Alfalah is the fifth largest Islamic banking institution in the country. However, it grown relatively slowly compared to the industry average. Deposits have grown at an average of 14.1% per year for the past 10 years, compared to the industry’s 27.6% per year.

On the business front, while Bank Alfalah has among the cheapest costs of deposits, it has struggled to lend those deposits profitably and as a result has relatively middling net interest margin. Bank Alfalah’s Islamic banking branches have a net interest margin of 3.8%, according to Profit’s analysis of its financial statements.

After years of having invested in its Islamic banking franchise, it appears Bank Alfalah is willing to let its Shariah-compliant division flounder while it struggles to find the right strategy for growth for the bank as a whole.

BANK AL HABIB: One of Pakistan’s “Three Banks Named Habib”, Bank AL Habib has one of the strongest balance sheets in the country’s entire banking sector. A key characteristic is the fact that Bank AL Habib tends to lend to clients with whom it has very old established relationships. As a result, the bank has the lowest non-performing loan ratio in the country.

Bank AL Habib’s deposits have been growing at an impressive average of 39.7% over the past 10 years. That might be chalked up to a

BANKING

low-base effect, except for the fact that both the bank’s three-year growth rate (averaging 57.2% per year) and five-year growth rate (averaging 46.0% per year) exceed its 10-year growth rate, suggesting that – far from slowing down – the bank is actually accelerating its pace of growth in this sector.

The bank’s net interest margin – at 2.9% – is lower than the Islamic banking industry average of 3.2%, but as stated earlier, Bank AL Habib more than makes up for it by having lower provisioning requirements for bad loans.

As a result, the bank has been able to maintain an average return on equity of 15.9% for the past 10 years.

STANDARD CHARTERED BANK PAKISTAN: The very first bank in Pakistan to set up its Islamic banking branches and

Islamic banking windows without converting fully to becoming an Islamic bank was Standard Chartered Bank Pakistan, when it first started its Shariah-compliant operations in 2004. The bank’s Islamic deposits have grown at a respectable average of 25.2% per year over the past 10 years, although recent growth has stalled, with 4-5% growth being more common.

Yet despite the recent spate of sluggish growth, Standard Chartered Saadiq, as its Islamic banking division is know, has considerable advantages. For instance, it has the highest net interest margin in the industry at 5.3%, driven largely by the fact that it has the lowest cost of deposits in the industry at 1.5%.

How does Standard Chartered achieve this?

Largely by offering some of the best financial technology among banks operating in Pakistan,

which means that most of its clients use their StanChart accounts as their primary transaction accounts and hence maintain large balances in their zero-interest-paying current accounts.

That, combined with the fees StanChart is able to charge on ancillary services results in a much healthier revenue for the bank than any other bank might be able to achieve off a similar asset base. As a result, Standard Chartered Sadiq achieves returns on equity averaging 29.6% per year for the past 10 years.

HABIB BANK: The largest bank in Pakistan is also the second-largest Islamic bank in the country and unquestionably the most formidable competitor for Meezan Bank. All of Meezan’s competitors are much smaller than it, and Habib Bank’s Islamic banking division is certainly no exception. But Habib is deploying the lethal combination of fast growth, low capital intensity of its expansion, and massive reach.

As stated earlier, many of the new clients who open accounts at an Islamic bank are the previously unbanked. Habib Bank’s advantage is the fact that it has the biggest physical branch network in the entire country, meaning it is closest to the majority of unbanked people in the country. Habib Bank’s Islamic banking net interest margin is not very high at just 2.4%, but is generating solid returns with very little equity deployed since it can simply open Islamic banking windows at its otherwise conventional branches.

Deposits have grown at an astronomically high 153% per year for the past 10 years though admittedly that is off a very low base. Over the past five years, deposits have grown at an average of 30.9% per year.

The also-rans of Islamic banking

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t is a somewhat unusual fact that the four other dedicated Islamic banks in the country – BankIslami Pakistan, Dubai Islamic Bank, Albaraka Islamic Bank, and MCB Islamic Bank – barely merit a mention in an analysis of the country’s Islamic banking sector. That is because all four banks, while continuing to grow their deposit bases, have yet to manage their operations well.

All four have low net interest margins, high bad loan ratios, and as a result have low levels of profitability. And they continue to grow slower than both Meezan Bank as well as the Islamic banking branches of conventional banks, meaning they are actually losing market share.

The only want any of them would constitute a threat to Meezan is if all four merged to become one large Islamic bank. Perhaps then, the Meezan management will have to think of the other Islamic banks as their competitors. n

14

BANKING

By Taimoor Hassan

W

hen Sapphire moved into retail, the market noticed. The textile giant – one of the largest in the country and part of one of the largest industrial conglomerates in Pakistan – began its investments into the retail business in 2014, and aggressively poached talent from companies it saw as its competitors. But now, after five years of that relentless growth phase, the company has finally hit pause on its expansion plans and begun what appears to be a phase of consolidation, with a focus on margin improvement and increasing

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its own e-commerce sales.

The move comes after a period of strong growth that has flagged over the past 18 months as consumer spending power has struggled under the weight of an economic slowdown and rising inflation. Sapphire Retail, the wholly-owned subsidiary of the publicly listed Sapphire Textile Mills, is finally slowing down after five years of relentless growth.

For the 12 months ending March 31, 2019 (the latest for which financial statements are available), Sapphire’s processing, printing, home textile, and textile retail division – which houses Sapphire Retail – saw its revenues reach Rs13,417 million, up 20.2% from the same period in the previous year, but nonetheless representing a slower growth rate that

previous years. Between financial years 2014 and 2018, for instance, the company’s revenues grew at an average rate of 42.2% per year. Sapphire’s financial year ends June 30 every year.

Growing the retail business

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he story of how Sapphire has grown its retail business is quite a remarkable one. Sapphire is one of the largest industrial conglomerates in the country with consolidated revenues of greater than $800 million across businesses in textiles, power generation, retail clothing, and dairy products.

Sapphire Retail is the brainchild of

Nabeel Abdullah, a 33-year-old graduate of the London School of Economics, and a member of the family that owns a majority share in the Sapphire group. Nabeel is the CEO of Sapphire Retail and a member of the board of directors of Sapphire Textile Mills.

The company started off in 2014, with a Rs10 million investment in a single store in Dolmen Mall Karachi, which opened in December of that year.

Sapphire Retail is mainly a clothing brand, but also sells bedding, linens, and other home décor products. In fiscal year 2018, the processing, printing, home textile, and textile retail division of the publicly listed Sapphire Textile Mills Ltd – which houses Sapphire Retail – had revenues of Rs11,164 million. Of that, a little over Rs8,000 million was Sapphire Retail itself.

When it launched, Sapphire poached a significant number of employees from Pakistan’s largest clothing and home décor retailer Khaadi. The company remains significantly smaller than its rival, but Sapphire has been able to close some of the gap between itself and Khaadi in terms of revenue.

From that initial Rs10 million investment in a single store, Sapphire Retail has grown substantially over the past five years.

Sapphire has thus far pumped in Rs1 billion in total into the company and opened up 21 stores in eight cities across Pakistan: Karachi, Lahore and Islamabad, Faisalabad, Sialkot, Gujranwala, Multan, and Bahawalpur. In addition to those physical stores, the company also sells its products online on its own e-commerce store as well as through the DarazMall online marketplace operated by Daraz.pk, the Alibaba-owned e-commerce company.

Nabeel Abdullah says that capital injections from the parent company have financed the heavy expansion of the business as they have made heavy investments securing prime outlet locations in some of the newest high-end malls. In addition, the company has also invested in product expansions as well as securing some working capital requirements in the initial phase. Abdullah points out that, for each store, the company needs to begin incurring expenses at least nine months before it starts to realise revenues.

That expansion phase, however, has wound down as the company seeks to consolidate its business amidst an economic downturn.

“Going forward, given the economic conditions, our focus is less on growth. Our focus is on efficiency, consolidation and margin increase,” said Nabeel, in an interview with Profit. “At the moment, the challenge is that our expenses are all going up. We are focusing

CONSUMER GOODS

“Going forward, given the economic conditions, our focus is less on growth. Our focus is on efficiency, consolidation and margin increase.

At the moment, the challenge is that our expenses are all going up. We are focusing more on increasing our margins as much as possible without having to pass it on to the consumer” Nabeel Abdullah, CEO of Sapphire Retail more on increasing our margins as much as possible without having to pass it on to the consumer.”

Innovating their way through a recession

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he problem facing Sapphire at a time when it is seeking to protect and even expand its profit margins, is the fact that they are seeking to do so at a time when consumers increasingly have a smaller appetite for their products which, at least in the context of the Pakistani markets, are still seen as largely discretionary purchases.

As a result, the company faces an unappealing choice: either reduce its prices – which would impact its margins – or else be willing to live with slower growth and weaker cash flows.

“When we plan to sell, let’s say, 100 units on full price but we are not able to do so and only sell 50 units because the economy is in a slowdown, we have to put more [products on] discounts. As a result, the discount trend has increased a lot in Pakistan. Each month, there are clearances at each brand. But this is hitting all of us. Obviously, the consumer will wait for the discounts to make their purchases,” says Nabeel Abdullah.

It sort of becomes a marketing gimmick:

you put high prices on the products when you put them on display, and then put on sales each month and sell the product at what would be the actual ‘sale’ price of the product of the product to cover the margins.

“Putting on sale offers to an extent is a need of the business. You have to sell the products you have at the end of the season to manage cash flows. When you make it a business model that you’re going to sell only on sales, that is what we are trying to avoid,” says Nabeel.

Sapphire has a plan to stay competitive and profitable. That is by reengineering its products to keep costs stable despite increases and consolidating efficiency as a company. The edge Sapphire has is that its parent company, Sapphire Textile Mills, is a vertically integrated textile manufacturing unit that allows it to control all stages of the manufacturing process.

In vertically integrated textile mills, the production of each product is controlled in-house. Sapphire produces the yarn itself, followed by the production of cloth, all the way up to printing and stitching and controls everything that is involved in between. None of the production processes are outsourced. By virtue of being vertically integrated, for Sapphire, the scope of innovation and increasing efficiency exists at all the levels of the production process.

With the premier retail outlets being tapped out in its core markets for now, Sapphire has begun to turn to e-commerce as its strategy for the next phase of growth. As Nabeel puts it, the e-commerce has three key attractions: a lower cost basis, significant opportunities for brand-building and revenue generation, and the ability to be much more targeted in its advertising expenditures due to the ability to track efficacy of marketing initiatives 18

“Prices of almost everything has increased. Our cotton is linked to the US dollar, our yarn is linked to the US dollar. All the commodity prices increase with the US dollar.

As a result, our cost of fabric has gone up. And the taxation measures have also increased our manufacturing cost,” he says.

Nabeel is referring to the fact that cotton and yarn prices in Pakistan are benchmarked to the dollar. This is because when global cotton prices go up, cotton growers can simply export their product rather than selling to local ginning mills. The same goes with yarn, where local spinning mills can simply export their yarn if global prices rise. That means that local mills effectively have to follow – and pay – global prices, denominated in US dollars, even though all local transactions are taking place in Pakistani rupees.

“But since we are not able to increase our prices, the end result is the pressure on our margins because of which we have to work on our efficiency because we cannot pass it [price increases] on to our customers. We have to improve our product quality, but [we also have to] reduce the cost as well. We can bring efficiencies in the yarn, in the cloth, in the printing process,” says Nabeel.

Consequently, Sapphire invests an amount equal to 1% of its sales each year on research and development (R&D) to achieve those efficiencies. “We work on product development. Textiles are our strength. Our parent company has invested heavily in digital printing. The upside of digital printing is that you can print more designs. That means that in a single collection, we can offer a wide variety.

The colour restriction is nowhere close to our competitors, who utilise traditional printing methods.”

All that helps Sapphire achieve its philosophy of being able to sell high-quality products at a relatively affordable price for middle class consumers. That initial lower prices means that Sapphire is able to sell its products at regular prices rather than having to offer discounts.

And, as Nabeel tells Profit, as a brand, they try

not to put up more than three sales in a year by offering attractive initial prices to pull in customers.

Physical retail vs e-commerce

M

eanwhile, even as consumer spending is slowing down, the economics of setting up additional retail outlets in malls is becoming more challenging.

Several malls that were conceived of and planned during the long consumer boom between 2009 and 2018 are coming online and several companies that had launched their retail strategies before the recession hit are proceeding with their plans to open stores. As a result, rents at malls continue to remain high even as expected revenue per square foot has fallen significantly.

“There is always a teething phase. To increase foot traffic initially and increase conversion, it takes time. We cannot say that

Rs13,417 MILLION

if the sales are less in malls, it’s not only the malls [that are responsible]. It is the responsibility of both parties,” he says.

“When you get an anchor store in a mall, the thousands of people that come in, they see your brand, they see your stores,” says Nabeel, talking about how malls benefit retailers besides increasing sales.

“Today Packages [Mall in Lahore] is doing well, Emporium [Mall in Lahore] is doing well, Dolmen [Mall Clifton Karachi] has been around for a long time. I think malls are definitely making a lot of contributions to most of the retailers because the weather we have here, people want to take their kids to places where they can play in the play area, watch movies and shop as well,” he says, adding that the management of the mall plays a big role.

“If the management regularly organises events, for instance on special occasions, that increases the foot traffic in malls greatly,” he says. “So we as a strategy invested heavily in malls going for larger stores and get prime locations to tap market footfall.”

Revenue Sapphire’s revenues from its processing, printing, home textile, and textile retail division – which houses Sapphire Retail – for the 12 months ending March 31, 2019, the latest period for which financial data is available

With the premier retail outlets being tapped out in its core markets for now, Sapphire has begun to turn to e-commerce as its strategy for the next phase of growth.

As Nabeel puts it, the e-commerce has three key attractions: a lower cost basis, significant opportunities for brand-building and revenue generation, and the ability to be much more targeted in its advertising expenditures due to the ability to track efficacy of marketing initiatives.

Sapphire currently makes approximately 15% of its revenues from e-commerce, a number that it would like to take up to 30% of revenues within the next few years, says Nabeel.

At approximately Rs1.2 billion in online revenues, Sapphire is one of the mid-tier online retailers in the country. Taking on the e-commerce giant Daraz would require significant amounts of investment, somewhat comparable to the type of investment the company has thus far put into its physical retail operations.

But, from what Nabeel describes, it appears that the company’s strategy is not to compete with Daraz at all. Indeed, Sapphire products are available on DarazMall, the online marketplace operated by Daraz.pk.

Given the more targeted e-commerce strategy, Sapphire can afford to be more nimble in its approach, which in turn requires less investment on its part to grow its revenues.

“A store would cost you Rs200-250 per square foot. For e-commerce, you need a fulfilment center, which is actually a warehouse,

CONSUMER GOODS

and would cost Rs15 per square foot. And there are no rental increases either. In the long run, e-commerce becomes more lucrative,” says Nabeel.

“We are enhancing our branding and expertise in this line,” says Nabeel. “We are working a lot on digital marketing. We are using Google, Facebook, and Instagram. We are working with them and with some consultants, and we are looking to optimise our spending. The best thing about this [digital marketing] is that you can measure your returns. So, if we spend $10 on digital marketing to get a revenue of $100, we can monitor that,” he adds.

The second challenge, says Nabeel, in the online space comes on the fulfilment side.

“Our business is seasonal; there are peak seasons, there are highs and lows. When we put up sales, we might even sell 200,000 units in a single day, while on normal days, 20,00025,000 units might get sold. It really depends.

In rupee terms, Rs200 million to Rs250 million

Rs1

BILLION 20

Growth rate 42.2%

Sapphire Retail’s average revenue growth rate per year between financial years 2014 and 2018

is easily achieved on sales. But the challenge obviously comes when you have to fulfil that on time. Because obviously we have a certain dispatch capacity, so we are working on that.

We are trying to make sure that we are able to fulfill to the customer at the right time,” he says.

“Thirdly, returns and exchanges are very sensitive in e-commerce. You have ordered something, it wasn’t the right size, you want to change it. We are trying to make that as seamless as possible. Your product should get exchanged without any delays. It should

Investment The amount of money Sapphire Textile Mills – the publicly listed parent company – has thus far invested in Sapphire Retail

be flexible for the customer and they should get the similar sort of customer care that they would get in a store,” he adds.

To improve their e-commerce operations, Nabeel says they are working with their courier companies to shorten delivery times and making the process of returns and exchanges swifter and more seamless.

“We manage the fulfilment center on our own. We had previously outsourced customer care. We take care of that by ourselves now.

We are working on the service levels so that the customer does not face problems,” Nabeel tells Profit.

Though Sapphire Retail does not have any stores internationally, it has arrangements for international orders online, but that is a very small component of their total online sales.

“It is 2-2.5% of our total ecommerce sales but that is also not treated as export.

We show it as local sales because the government does not have a framework for export on e-commerce at the moment,” he says. n

CONSUMER GOODS

OPINION

Nadeemul Haque

Political will or bad policy and reform design?

ing. The example of the IPPs and NEPRA has been given above.

Consider, the donor led tax reform on which millions of dollars have been spent and numerous consultants have come to Pakistan to give us a tax policy that neither collects revenues nor lets business function. It has brought our growth rate down to recessionary levels. Another example is the high-profile education reform and advocacy program, funded by the United Kingdom’s Department for International Development (DFID), the efficacy of which is being questioned by many quarters.

Let us set the record straight: we have implemented a lot Reform remains an elusive and little understood concept in Pakistan. The of items that the donor wanted. We privatized, opened out the word is seldom used on TV. It is used even less in the cabinet and official economy, got rid of licensing, conducted tax reform, and have forums. Even academics shy away from the subject. Donors now and again numerous projects for building governance, access to justice, will talk of it but with the throwaway remark that “we do not have to education, and many other development goals. We have built reinvent the wheel”, “we know what is to be done”, and “all we have to do is regulatory agencies like NEPRA, the Securities and Exchanges import best practice”!

Commission of Pakistan (SECP), the Pakistan Electronic Media So, they set it up in an action matrix which is a template from some Regulatory Authority (PEMRA), the Competition Commisother country. They want all poor countries to mimic advanced countries sion of Pakistan (CCP), and many more. We have played with regardless of many local differences. autonomy of the State Bank of Pakistan (SBP). Yet development More often than not that such reform is never completely implementhas eluded us. ed, It kind of gets stuck in the gullet of the country, probably doing more On the other hand, it is fairly visible to any one visiting harm than good. As a case in point look at what happened to the electricity Pakistan that the people are turning away from modernity and sector when we were merely following best practice mindlessly. When the productivity. Society seems to be taking a turn towards fundonors designed independent power producers (IPPs) and the National damentalism and a cultural conservatism instead of modernity Electric Power Regulatory Authority (NEPRA) for us. Since then, for 25 and creativity. It is also very obvious that productivity has years we have been paying the price of a badly designed and an inconclusive seriously been on a declining trend for the last few decades. Dereform. This has cost us billions of dollars and no one has a solution. spite many pronouncements, education continues to decline in Yet no one really spends time trying to understand why Pakistan is quality and research, especially in government and industry, is such a laggard performer when it comes to reform. The donor contention is virtually non-existent. And academic research continues to be that we do not implement and that it is the lack of political will. Is that corirrelevant at best. Surely this should be raising all kinds of flags rect? Not if you examine what happened in many cases of donor policymakand we should all be coming together to improve our understanding of reform and why it is unsuccessful or halfhearted.

Donors and their consultants absolve themselves of responsibility by blaming poor policymaking and its shoddy results and the lack of reform of institutions Nadeemul Haque and regulations on lack of implementation. Many commentators also take the plea that the system does is an economist and the not work, and the country suffers poor outcomes because of the lack of political will. former Deputy Chairman of To my mind blaming unmeasurable political will for failure is simply intellectual laziness. Besides the Planning Commission of it is convenient those responsible forbad design of reform and policy. It is time we blamed bad policy Pakistan, and the former Vice making and design for the failures that we have faced.

Chancellor of the Pakistan It is also time to seek out good policy and reform ideas and mainstream them in our debate rather Institute of Development than focus on merely aping the West and following the advice of Western advisers.

Economics. He previously Good research on policy and reform ideas must be cherished by society and such thinkers given worked for decades at the respect and a seat at the policy table. That is the only path to progress.

International Monetary Fund.

Aping is only for monkeys.

COMMENT

21

22

ENERGY

The high-flying oil marketing company rose to become one of the largest in the country, but a fatal combination of bad government regulations and failure to plan for currency depreciation has resulted in massive losses

By Bilal Hussain

T

he 12 months ending June 2019 have wreaked havoc to a company that has been the bright star of the Pakistani energy business as recently as last year. From minnows in the oil sector, Hascol Petroleum had risen above just about every other company in the oil marketing space except the state-owned Pakistan State Oil (PSO) during the last decade. But now, it appears to have suffered a stunning set of reversals and has been hemorrhaging money.

It is a stunning reversal for a company that had become the darling of investors both within Pakistan as well as foreign investors who track Pakistani markets. Between 2010 and 2018, the company saw its revenues climb at an astonishing average of 52.7% per year, rising from Rs7.9 billion to Rs234.4 billion during that period. (Hascol Petroleum’s financial year ends December 31 of each year.)

The company publicly listed on the

Karachi Stock Exchange (now called the Pakistan Stock Exchange) in May 2014 at a share price that valued the company at Rs5.4 billion and the stock took off since then. It peaked on May 26, 2017, when it closed at Rs236.01 per share (adjusted for splits and stock dividends; the unadjusted price was Rs389.41 per share). Since then, as profits went from a peak of Rs1.3 billion in 2017 to a net loss of Rs12.0 billion in the 12 months ending June 2019, it has fallen by stunning 89.3% to Rs25.25 as of the close of trade on September 19, 2019.

So what went wrong? A combination of a particularly vulnerable business model and bad government regulations is largely responsible for the bulk of the company’s problems.

Hascol’s business model

H

ascol rose from being a relatively small player at the start of the decade to becoming one of the largest fuel oil retailers in the country, in addition to selling fuel to industrial and commercial consumers as well. It relies in large part on franchise owners who set up petrol pumps across the country with Hascol’s branding and the company in turn becomes their fuel supplier. Hascol also owns several of its own petrol pumps.

Hascol was incorporated as a private limited company in 2001. The company received its oil marketing license from the government in 2005, which allowed it to purchase, store and sell petroleum products like high speed diesel, gasoline, fuel oil and lubricants. In 2007, the company was converted into an unlisted public company. In 2014, it was finally listed on the Karachi Stock Exchange.

Hascol fortunes changed in 2009 when veteran energy executive Saleem Butt took over as the executive director and chief operating officer of the company. Under Butt’s leadership, the company was able to expand its access to debt, which had previously been somewhat less forthcoming. The COO established a relationship with Summit Bank, one of the smaller banks in the country, to begin extending the company the credit needed to expand.

The company aggressively expanded its retail petrol pump network across the country, focusing in particular on the relatively new highway network of the country and the suburbs that the highways lead, a market which is still relatively underserved. Mumtaz says that Hascol has opened almost 500 petrol stations 24

From then onwards, Hascol started to become bigger every year with Saleem Butt at the helm of affairs, first as COO, and then as CEO. Hascol rose to become the second largest oil marketing company in the country, overtaking Attock Petroleum in 2017, and behind only the government-owned PSO. (The company has since slipped into third place in the 12 months ending June 30, 2019). Its annual revenues increased approximately nine times from Rs25.9 billion in 2012 to Rs233.6 billion in 2018.

Among other things, the company’s rise relied on a very aggressive pricing strategy.

One source in the industry said that Hascol has enticed commercial customers by offering additional discounts, over and above what is customary in the market. One securities analyst also expressed the opinion that extending unrealistic discounts may have been one of the reasons for company’s recent below par performance.

“As far as I know, we were giving discounts just like others,” said Mumtaz Hasan Khan, chairman of the board at Hascol Petroleum. “The market share we captured was because we were developing our retail network. We were developing almost one hundred sites every year. It was increasing our volumes. Then, we increased our storage capacity. Your logistics improves due to your storage capacity. Plus, we increased our oil tank fleets.”

The part about increasing its retail footprint. The company aggressively expanded its retail petrol pump network across the country, focusing in particular on the relatively new highway network of the country and the suburbs that the highways lead, a market which is still relatively underserved. Mumtaz says that Hascol has opened almost 500 petrol stations.

“Our country is growing. Cars and motorcycles are increasing every year. Traffic is increasing and so does the movement of goods.

As soon as you start new petrol stations, every dealer brings business with them too. Plus, we give better service to customers. So, they give preference to your pump,” he said.

“But if you live in Nazimabad or PECHS [middle class neighbourhoods in Karachi], then you won’t go to Defense. And now new areas are being developed. In the beginning, we had a problem that in all these existing areas. There was no place for establishing fuel stations except those who have already established stations like Shell and PSO. There were no new commercial places. And if there were any, then people would develop shopping plazas, etc. and would not go for petrol pumps,” he added.

And the company also invested heavily in its storage capacity, partnering with Dutch energy giant Vitol in doing so. In collaboration with Vitol, earlier this year, Hascol added 232,000 cubic metres of oil storage capacity at Port Qasim, taking it to a storage capacity worth 26 days of fuel consumption, up from 16 days of storage just this year.

But perhaps the biggest rigidity in the company’s business model was the fact that it relies almost entirely on imported fuel and very little on local refineries for the products it sells with up to 95% of the fuel it sells being imported. That vulnerability was hidden while the Nawaz Administration, under Finance Minister Ishaq Dar, artificially kept the rupee stable at approximately Rs100 to the US dollar. But once that peg was removed and the rupee fell close to Rs160 to the dollar, Hascol felt the impact.

What went wrong with Hascol

“A

ll other companies have shares in local refineries. If you take PSO, about 60% of their procurement is from local refineries, while the remaining 40% they import.

We get very little from local refineries. Almost 90% to 95%, we have to import. So the rupee devaluation hit us the most,” said Mumtaz, in an interview with Profit.

The core problem for the company, of course, has been the fact that the government regulates prices of oil products sold in the country and does not adjust prices fast enough to keep pace with the extent to which prices change in international markets. As a result, companies are often stuck with inventory that they bought at much higher prices and are forced by the government to sell at much lower prices. This is especially a problem for Hascol, which has bigger inventories than any other oil marketing company.

“At any given time, we have about 20 days of storage. So, when the prices get adjusted and come down because internationally, crude prices come down. As a result of this, the value of our stock came down in dollar terms and all that. That was the reason we have to book big losses,” Mumtaz said.

Meanwhile, Hascol CFO Khurram Shahzad explained things in detail. “We purchased when oil was expensive at US$85.80 per barrel. The prices fell within one and a half and two months to US$58 per barrel. The difference of these prices, we have to endure that also as losses,” Khurram said.

“All industries are suffering but the oil industry is suffering the most because of regulated prices,” said Hascol director Liaquat Ali.

“All other companies have shares in local refineries. If you take PSO, about 60% of their procurement is from local refineries, while the remaining 40% they import. We get very little from local refineries. Almost 90% to 95%, we have to import.

So the rupee devaluation hit us the most” Mumtaz Hasan Khan, chairman of the board at Hascol Petroleum “Look at the auto industry. When the dollar appreciates, the next day they increase car prices by Rs25,000 to Rs30,000. We cannot increase prices like that.”

“Then we had some cases, which we had lost in London and we are still contesting the amount. But we had made those provisions.

Those amounts were in dollars. Meanwhile, the rupee devalued, and we booked that loss also in dollar terms. We had an arbitration case in London, which we have reported at stock exchange,” said Mumtaz. The expense of those cases have been recorded as liabilities on the company’s balance sheet.

It did not help, of course, that the company did not diversify its procurement of fuel. And it has not yet established a working relationship with the five existing oil refineries in the country, a point Mumtaz concedes, highlighting how his competitors do business.

“Total Parco buys its product from Parco [Pak-Arab Refining Company]. They don’t import diesel. They only deal in motor gasoline. Shell also has supply arrangement with PRL [Pakistan Refinery Ltd] and with Parco.

They also import very little. PSO also has a shareholding in PRL and Parco and also from Attock. They are a government entity and they receive facilities from the government. As a result of this, the proportion of their imported product, percentage wise, is a lot less than us.

Due to this, the devaluation has affected us more compared to other oil companies,” said Mumtaz.

But Mumtaz contends that the industry as a whole is suffering, and that his competi-

tors are simply able to hide their losses better, either by transferring those losses to the refineries (in which some of them are shareholders) or through accounting methodologies not available to ordinary companies, in the case of PSO. “Look at National Refinery’s financial report, take Pakistan Refinery’s report, Shell’s report. Every listed company’s report. Attock Refinery’s report. It is because the oil we purchase comes in dollars. The product is also purchased in dollars. When we booked purchases, the dollar rate was different. When we go to pay, we normally get 30 days credit.

Last year, the rupee was devalued by 40% to 50%. Due to this, the entire oil industry has suffered,” said Mumtaz.

And Khurram further elaborated on why some competitors looked better off than Hascol.

“If you look at PSO’s balance sheet, they tell you in ‘other receivables’ that on the product they imported, they have made losses of Rs24 billion on that account. But they are not charging in it the income statement. They said that since they have imported [that fuel] because of the government of Pakistan – and they give reference to a foreign exchange regulations manual – on the basis of that regulation, whatever loss they would incur, it will be recovered from the government of Pakistan and it is reimbursable,” Khurram said.

“They are showing it in the balance sheet. Otherwise, it should come in the profit and loss (P&L) account. Meanwhile, if you do an industry analysis, the Attock Group has Attock Refinery at its back and Nation-

ENERGY

al Refinery. And if you analyse only Attock Petroleum’s books and are not looking at the books of the other two refineries, it will not show you the true picture.”

“Attock refinery has had losses of Rs8 billion. National Refineries has recorded losses of Rs12 billion. That accumulates to Rs20 billion. They import crude and after refining it, they are giving it to Attock Petroleum. If Attock was importing the oil it sells, then Attock would also have made losses.”

“Shell is out from the commercial supply [business]. They are only working on the retail side. Despite this, their foreign exchange loss is greater than us while their imports are less than us. Shell had Rs5.9 billion in [currency depreciation] losses in December. We had a loss of Rs3.9 billion. Shell doesn’t show that

on their P&L.” “And if you put the Rs24 billion loss incurred by PSO onto their P&L, then you will see where it goes. They will be in losses too. If you take Attock and add their refineries number, then their profits would also fall,” Khurram pointed out.

When asked if Hascol would ever consider setting up a refinery of its own, since so many of its competitors own one, Mumtaz trashed the idea.

“Setting up a refinery is a very big investment. If today you are going to establish a 100,000-barrel refinery then you will have to spend $3 billion and it will take five years to start. You have to raise the financing, etc.,” Mumtaz said. “There is a Parco refinery in Karachi. For five years talks have been ongoing

Hascol fortunes changed in 2009 when veteran energy executive Saleem Butt took over as the executive director and chief operating officer of the company.

Under Butt’s leadership, the company was able to expand its access to debt, which had previously been somewhat less forthcoming. The COO established a relationship with Summit Bank, one of the smaller banks in the country, to begin extending the company the credit needed to expand 26

to establish the refinery at Khalifa Point.

They have yet to achieve financial close. After financial close, it will at least take three years before the refinery comes up.”

Meanwhile, Liaquat Ali said that the oil industry was one among many that was going through retrenchment owing to the wider economic slowdown. “The economy has slowed down. Car sales have declined 40%. Overall, the economy has slowed and infrastructure projects where diesel was used like [China-Pakistan Economic Corridor] CPEC projects has also slowed down. The government is not spending at the moment.”

Hascol’s declining market share

T

he last year has been particularly rough for Hascol and the company’s financial troubles – and relatively brittle business model – are starting to catch up to it. Even as industry-wide revenues have grown, Hascol’s revenue declined by 15.2% in the 12 months ending June 30, 2019 compared to the same period last year.

According to one analyst’s report, Hascol Petroleum’s volumes declined by 42% in the second quarter of the calendar year 2019.

The company’s management acknowledges the problems and admits that this is part of a deliberate strategy to conserve cash.

“We have curtailed some supplies,” said Mum-

taz. “Our less important dealers, the ones in remote locations, we have restricted supplies until we are done recapitalizing the company.”

The cash flow problem, in turn, is caused by the fact that while the company has to pay its import bills within 30 days, its dealers and pumps often have cash conversion cycles longer than that. “After we got hit by severe losses, we decided to stop our commercial sales. We had receivables from many power generation companies, so we stopped giving to them fuel to conserve cash and meet our obligations to the banks.”

“There goes a complete cycle. We get a 30-day credit on imports. We sell on cash in our retail business. But the bigger customers like power generation companies, etc., we give credit to them. They didn’t receive cash from the government [state-owned power transmission and distribution companies]. We therefore also got stuck in a sort of circular debt.

So, we reduced our supplies to them. Now we are only running the retail side,” explained Mumtaz.

That policy of moving away from supplying power generation companies is likely to be a smart move in the long run. “The government has changed its policy and stopped [allowing state-owned power generation companies from using] fuel oil [to generate electricity]. And now LNG [liquefied natural gas] has come. Similarly, power houses were run on diesel during winter and that too have

converted to LNG. Diesel demand has come down by 25%.”

Access to credit continues

W

ith the heavy losses that the company faced, Hascol became the target of rumours that banks had stopped lending to the company. Mumtaz categorically denied those allegations and stated that the banks continue to lend and support the company.

“The banks are still supporting us. None of them has withdrawn their credit line. Major banks like National Bank, Habib Bank, Bank Alfalah, Faisal Bank, Habib Metro, Bank of Punjab, Askari Bank. All the banks are still here with us. They understand the problem.

They know it [losses] didn’t happen due to negligence on our part. No fraud has happened in the company that one may think that the losses have happened because of that.”

However, Mumtaz did admit that the company has had some solvency issues in terms of repaying its lenders on time and was negotiating extensions. “Negotiations are ongoing with the banks. There are still some overdue payments to the banks. But all companies have taken a hit. We are not the only one.”

The company is seeking to shore up its balance sheet, however, and is considering raising equity through a follow-on offering on the Pakistan Stock Exchange (PSX). Yet after

“All industries are suffering but the oil industry is suffering the most because of regulated prices. Look at the auto industry.

When the dollar appreciates, the next day they increase car prices by Rs25,000 to Rs30,000. We cannot increase prices like that” Liaquat Ali, director at Hascol Petroleum seeing its share price plummet by nearly 90% over the past two years, the company has an uphill task ahead of it.

Mumtaz, however, said that the company continues to have value. “The company has assets. We have made a lot of storage facilities. If you now build the same assets now, it will cost you above 50% more. The cost of steel has gone up, the cost of cement has gone up, everything

ENERGY

has gone up.”

Liaquat Ali said that the final decision will be taken in the board meeting on September 23 and the company may seek to raise as much as Rs5 billion to Rs6 billion. “But as I said we cannot be sure today as our board meeting will be held on September 23. It will be decided then,” said Liaquat.

Meanwhile, the chairman said that he is a major shareholder and he would invest money and also expressed faith in all other major shareholders to invest in the company.

“If we have made losses and our share price has fallen, then we will have to work on it and undo the losses. I have made the biggest losses. Vitol incurred losses. I have personally made losses to the tune of $60 million,” Mumtaz said.

Liaquat said that he believes people will trust Hascol based on the past performance of the company. “A company’s share, which had a price of Rs 56, which even went up to Rs380.

We became the second largest [oil marketing] company in Pakistan. So, you don’t judge a company on only a year’s performance,” he said.

And the company’s board believe that the sellers who drove down the share price were never long term investors in the company’s stock anyway. Mumtaz says that it was a bandwagon effect following devaluation of the rupee.

“Nearly 10% of our shares were held by foreigners, by hedge funds in New York and all

28

that. As soon as the devaluation happened in Pakistan, foreigners started to offload Pakistani shares. They started to sell and there were no buyers, so prices started to fall and fall. But I haven’t sold any shares, Vitol didn’t sell any shares. No major shareholder has sold any shares.”

Is Vitol still backing Hascol?

I

n 2015, Dutch energy giant Vitol acquired a 15% stake in the company, and bought another 10% in 2016 to become the largest shareholder in the company. Meanwhile, Hascol and Vitol have also entered into a joint venture deal for marketing of LNG with a 3070 ratio respectively. The two have also signed a technical services agreement to enable Hascol to start fueling aircraft at Karachi, Lahore, and Islamabad airports.

According to Mumtaz, Vitol is going nowhere. In fact, he claims their foreign partner is quite bullish on Pakistan.

“Our foreign partners Vitol is willing to invest more in the company. They are willing to increase their shareholding. We have our annual general meeting on September 23, subject to the board approval. Only then we will know how much Vitol will increase its shareholding. They may go up to 50% or 51%. They are very bullish on Pakistan. Two weeks ago their delegation was here. We met Prime Min-

ister [Imran Khan], Finance Minister [Hafeez Sheikh], the petroleum minister, everybody.”

Meanwhile, if Mumtaz is to be believed, the management is also going nowhere despite the current travails of the company. “The same management was delivering excellent results.

Between 2011 and 2017, we were growing very rapidly. They are competent people and they are all professional people. There is no one from my family like a nephew or son or something. The company has been run professionally just like Shell or Total,” he said.

“It is a professionally run company.

That is why Vitol has taken shareholding. The management, they are good people, competent people, honest people. And they have been delivering good results often. Every company faces bad times. You can now see cars are not being sold. Who could blame the car industry?

You can’t blame the management of the car industry. The industry has seen 40% decline in sales. Similarly cement is not being sold. The whole country is going through this phase.”

“We are suffering with the country. We have only suffered more because other companies like Shell are also active in the lubricants, where prices are not regulated. The profit margin in lubricants is somewhere between 25% to 30%. Our lubricant business is not at that level that it could contribute to our bottom-line. But now we have built a new blending plant. We are hoping that in the next two to three years our lubricant volumes become significant and

become a big profit center for the company.”

“In the beginning we concentrated on our retail network and our storage capacity.

Now we are also concentrating on lubricants also. We have also started importing chemicals. We are now trying to diversify into other fields, so we could also have other income streams too. We concentrated on petroleum because we are basically an oil marketing company. Our first focus was building up our brand, retail network, and our storage capacity. First, we make money from there, then we said let us develop our other revenue streams.

For instance, lubricants, chemicals, LPG. So, we are going in all these too.”

Was there any wrongdoing in the company?

A

person formerly associated with Hascol denied Hascol has ever been involved in any wrongdoings directly, but there had been an internal scam uncovered late last year, which amounted to over Rs500 million.

“Some even put in to Rs780 million and some at Rs680 million. But I can safely say that the company has endured at least Rs500 million [in losses] due to the internal scam,” the

source said. The source added that the company terminated nearly ten employees from its finance department following an inquiry.

Hascol Chairman Mumtaz Hasan Khan accepted that the scam had happened. However, he contested its rumoured magnitude and said it was much lower than that. “Every company suffers from such small things. Some people do indulge in such things. But we terminated them from their jobs as soon as it came to our notice. We have zero tolerance for this.”

“The rumored amount is incorrect. It is nowhere near that. Much of it has been recovered. Some returned in cash, many have given their property documents. We were going to hand them to the police but they apologised and said that they would return everything.

That has nothing to do with the financial results. It was only a drop in the ocean. Very minuscule,” he said.

What now?

“O

il (is) suffering because it is a regulated industry. Our market is fixed. We cannot increase our profitability,” said Mumtaz. Hascol officials along with the management of other oil marketing companies have been meeting government officials including

the prime minister, the finance minister, the petroleum minister, and other senior government officials. As per reports, they want the government to let them increase their margin

by Rs 2 per litre.

“We conveyed our message to them. If the oil industry doesn’t make money, then how will investment happen in the country? We got a good feedback from the government. They appreciated our viewpoints and asked what steps should be taken. The petroleum minister and the finance minister listened to us very patiently and promised us that they would do things to make sure that the oil industry would come back.”

“They understand everything. They are all educated people. But they also have their constraints. People fear that prices are going up. The government has their constraints. Energy is a critical industry. If you don’t get oil for two days, then you know what would happen.

Oil is a very essential part of the economy. And if the oil industry doesn’t make money then who will invest in the country.”

But Mumtaz believes Hascol will be back on track in the next one year. “There is nothing to worry for the company. There come phases in life of individuals and companies. And with the grace of Almighty, we will overcome the crisis. We have a very good management team.” n

ENERGY

S

By Abdullah Niazi

omewhere in Istanbul, Javed Aslam must be reflecting on his four-year stint as President of the ECO Trade and Development Bank (ETDB). Not only has he been at the helm of a bank created and backed by the Economic Cooperation Organization (ECO), a 10-country Asian political and economic inter-governmental organization, he has done it all with little experience in banking.

For Javed Aslam is a bureaucrat, and the last position he held before becoming the President of the ETDB was Principal Secretary to the Prime Minister of Pakistan, a position that can be described as the head of the civil service of Pakistan. And the prime minister under whom he served is the now-jailed Nawaz Sharif.

A lot will be on Javed Aslam’s mind these days. His term ends in October this year, and it has been a tumultuous one. He might be thinking about his time as the boss of the ETDB, and how e-mails by bank employees questioning his competence had been leaked, or even the reportedly tense

32

“If there are any doubts about what I have achieved in these past four years, then all you need to have a look at are the profits. The finance ministry are the ones that make the appointment, currently they have set up a committee for this very purpose which must be on the hunt for the next appointment” Javed Aslam, outgoing President of the ETDB relationship between him and his Turkish and Iranian colleagues.

He may even be thinking about his imprisoned former boss, the man who gave him his current job. Given the state of the country, perhaps he is waking up in cold sweats these days, at the thought of the National Accountability Bureau (NAB) wanting to ask a question or two. They seem to have questions for everyone these days.

But whether Javed Aslam looks back wistfully or ahead with trepidation, what we know for sure is that his fellow bureaucrats are already putting on the moves to become his replacement as Pakistan’s man in the ETDB. The ETDB’s senior management is appointed on rotation every four years. Turkey, Iran and Pakistan take turns to appoint a President, and a Vice President each is appointed from the two other countries under each administration.

With Javed Aslam’s tenure at an end, there will be a new opening for a Pakistani Vice President for the bank. It sounds like an attractive offer for bureaucrats. A four-year, dollar-paid assignment in Turkey should have them licking their lips.

The machinations have already begun.

A committee of the finance ministry – which comprises Finance Advisor to the Prime Minister, Abdul Hafeez Sheikh, and two of the prime minister’s other advisors on economic matters, Ishrat Hussain and Abdul Razak Dawood – is on the hunt for a suitable candidate. But surprisingly enough, there seems to be little interest in the bureaucracy for the post – with very few applicants throwing their hat in the ring.

The ones that have made their interest known have failed to interest the committee, and they are ready to initiate a second, more public call for applications to find the right person for the job. But could looking outside the bureaucracy be the answer?

Javed Aslam’s reign has been meek but controversial, and far from an advertisement for the bureaucracy to be given another shot. But why was a bureaucrat that had little to do with banking sent as Pakistan’s man to head a bank

we run with some of our most important allies in the first place? Is this the general practice in Iran and Turkey as well, or is this a Pakistan specific issue? What were the outcomes of sending a non-banker to be President of a bank? And most importantly, where do we find the next person?

What is the ETDB?

T

here was a short period of time in which Pakistan, instead of sending a bureaucrat to such an important position, would instead look towards the private sector and send bankers to do what is clearly a banker’s job.

There is much to be said about whether a person from the private sector is the right person for the job. But Pakistan’s short tryst with sending private sector professionals on the ETDB assignment was, in fact, a lesson hard learned.

The ETDB is a multilateral development bank that provides risk capital for the mutual trade, transport, travel, and energy concerns of Pakistan, Turkey, Iran and the seven other members of the ECO, who have representatives on the bank’s board of directors.

But the ECO is not the first organisation of its kind. It is the successor to the Regional Cooperation for Development (RCD), the multi-country organisation between Turkey, Pakistan and Iran that had existed up until 1979.

And in turn, the ETDB is not the first bank of its kind.

Back in the 1970s, Turkey, Pakistan and Iran had all poured equity into a bank for the RCD. This bank suffered from the same fate as what seems to be happening to the ETDB – that Pakistan would send secretary-level civil servants with little banking know-how to run the RCD bank when their turn came to appoint officials. The results were catastrophic.

Reeling from the disaster of the bank and the eventual collapse of the RCD itself in 1979, it took the three countries another six years before they were able to band together under the banner of ECO. And then it was not until more than two decades later, around 2005, that the

ECO decided to set up the ETDB. Whether it was the zeal of his fresh premiership or his banker’s sensibilities, or perhaps both, then-Prime Minister Shaukat Aziz made sure that Pakistan would look for and appoint competent bankers from the private sector. While Iran and Turkey would not make their appointments from the private sector, they would still manage to send relevant people. The Iranians, for example, always send a person from the central bank. And the Turkish someone from the treasury.

From Pakistan, well-regarded bankers such as Nadeem Karamat and Saulat Ali Khan served as Vice Presidents for the ETDB one after the other, helping Pakistan’s credibility in ECO and allowing the ETDB to find a groove to move in. But when it came time for Pakistan to appoint its first President of the bank in 2015, Prime Minister Nawaz Sharif appointed Javed Aslam – once again establishing the precedent of career bureaucrats serving in international banking positions.

In both Shaukat Aziz and Nawaz Sharif’s case, there was one similarity which is that the prime minister would pick a person and have the finance ministry do the paperwork and send them off to Istanbul. This time around, while the private sector has still not been formally approached, there is at least this much consolation: the prime minister is not making the appointment.

The appointment kerfuffle

I

f you want nothing done; form a committee.

That is the popular wisdom at least. It is one of those quotes you will find on the internet sometimes attributed to Steve Jobs, and at others to Napoleon and even to Charles Kettering. Whoever said it, or if it was even ever said for that matter, the concept has pervaded the general consciousness of people.

What most do not realise is that while committees may be inefficient, this is one of their main functions. To curb individual impulses and work solely on the principle of

ECONOMIC POLICY

“We have already conducted our first round of interviews. But we have not found any suitable candidates within our shortlist so now we are expanding the search. For the first time, an appointment is being made on merit. No directions are coming from the prime minister’s office asking for this or that person to be appointed to the post.

Because of this, the committee plans to do its job seriously and with diligence” Ishrat Husain, Advisor to the Prime Minister for Institutional Reforms and Austerity due process. So, when a committee takes time, especially when it has credible names on it, one hopes they are taking their time towards making the right calls.

The Ministry of Finance has thus created a committee to choose who Pakistan will send as its Vice President for the ETDB. The committee includes Advisor to the Prime Minister on Finance, Abdul Hafeez Sheikh, Advisor for Investment, Abdul Razak Dawood, and Advisor for Institutional Reforms and Austerity, Ishrat Hussain.

“We have already conducted our first round of interviews,” Ishrat Hussain confirmed to Profit. “But we have not found any suitable candidates within our shortlist so now we are expanding the search.”

Initially, the committee had made invitations for members of the bureaucracy to apply for the job. Very few candidates showed up, and of the ones that did, the committee did not find who they were looking for.

There had been rumours that the frontrunner for the job was Kamran Afzal, who is currently posted in Istanbul as well and has experience with the ETDB since he serves on its Board of Directors as the Director for Pakistan.

However, it is something Ishrat Husain categorically denied.

“Not only is Kamran not in the running, he did not even apply,” he said. “For the first time, an appointment is being made on merit.

No directions are coming from the prime minister’s office asking for this or that person to be appointed to the post. Because of this, the committee plans to do its job seriously and with diligence.”

Up until now, the few interviews that have taken place have happened without looking towards private sector bankers, who have in the past worked successfully at the posts. But now it seems that the committee might go that direction.

“Our job is to pick the best candidate.

34

We want the best possible person who is the most qualified to go and represent Pakistan’s interests in the ETDB,” says Husain.

Why does it matter?

P

akistan has currently poured a significant $300 million in equity into the bank. And the reason the committee might be hesitant to appoint another bureaucrat is perhaps because of the term of the incumbent Javed Aslam.

Well-placed sources in ETDB have told Profit that Javed Aslam’s time as President has had the Turkish and Iranian governments in a tough spot. They have complained about his level of professionalism, and the fact that he is not well equipped to be at a high post in the world of banking.

For starters, he has apparently not dealt with Iran’s sanction woes well, using them almost as a crutch to explain away the bank’s inability to strike good deals internationally.

Pakistan’s trade ties with Iran, which were marred by the post-2010 sanctions, had been expected to see new life after the reestablishment of banking channels, and there were also talks of carving out a possible free trade agreement. But while things looked up for Tehran and Islamabad’s relationship, there was a general feeling that Turkey and Iran’s ties were a looming cloud over ECO and the ETDB. In such an environment, Pakistan had been expected to play mediator – something Javed Aslam is being accused of failing to have done.

With Turkey appointing the next President, and tensions in the region at an all-time high with Iran on the receiving end of the world’s scorn for alleged attacks on Saudi oil fields, it is yet to be seen whether the bank can recover from global politics.

There were also other low points in Javed Aslam’s time. At one point, he was in the middle of quite a scandal, after emails from high ranking officials of the bank were leaked in which his

competency had been questioned.

Speaking to Profit, he was dismissive of the accusations and concerns, but to an almost evasive extent. “If there are any doubts about what I have achieved in these past four years, then all you need to have a look at are the profits,” he said.

The problem is, other than pointing towards the bank’s financial statements, he cannot name any of the important decisions made by the bank to improve regional cooperation.

Moreover, as a multilateral development bank set up by the 10 country ECO, the ETDB’s stated mission is not to get profits. It is “not a profit maximizing organization but would rather focus on financing development programmes and projects at reasonable costs with a favourable repayment conditions as pursued by other [multilateral development banks] MDBs such as the World Bank, the Asian Development Bank, the Islamic Development Bank, the European Investment Bank, the Black Sea Trade and Development Bank, etc.”

On his own appointment and the appointment to come, Javed Aslam remained mum. He pointed towards having nothing to do with the selection process. Back when he was appointed, it was on the request of the prime minister himself, but generally, it is the finance ministry that makes the appointment. “The finance ministry are the ones that make the appointment, currently they have set up a committee for this very purpose which must be on the hunt for the next appointment,” he explained.

The committee is indeed on the hunt.

And within the ranks of Pakistan’s bureaucracy, perhaps not surprisingly, they do not seem to be putting much faith. But with another call for applications, perhaps more bureaucrats will step forward than the paltry few that did the first time. Whether a shining public servant will make themselves known or whether the committee will look towards its other options is yet to be seen. n

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36

By Abdullah Niazi

D

isaster has struck. Your boss is coming over, or maybe it is your in-laws, or even people from school you have not seen in years. You have been planning this for a while, even looking forward to it, but also worrying and making sure everything is perfect.

And that is when it happens. You get the fateful call that your maid is not coming. Something to do with her husband or a wedding or a funeral. And the house is a mess from last night.

There was an impromptu party at your apartment, or maybe your children had a sleepover at the house. Whatever it was, your place looks like a tornado ripped through it on the same night it was burgled.

You take a deep breath, tell yourself it is going to be fine, and get cracking on making the place at least a little presentable. That’s when disaster number two strikes. Your cook calls, she cannot make it today because the maid was supposed to give her a ride. And that’s when you panic. The game is up. Time to cancel your plans, slowly slump down, assume the fetal position and wallow in your shame.

Or at least that is how it would play out until a few years ago. Because if you are in Lahore or Islamabad, it is now possible to get on to a website or an app and place a booking for domestic help – ranging from cooking, cleaning, and handymen to child and elderly care.

In essence, it is much like Careem, except for domestic help.

Contrary to initial perceptions, however, the very similar services in Lahore and Islamabad are being run by two different companies. At the center of these two different companies are three MBAs from LUMS, and a rocket scientist.

The progenitors of the concept are the power couple of Muhammad Mustafa and his wife Suniya. Mustafa completed his undergraduate education from the GIKI, an MBA from LUMS, and a masters in management from Stanford GSB. Suniya is pursuing her doctorate in aerospace engineering after working for Formula One teams in Europe. The two have been running Mauqa Online in Islamabad and Rawalpindi for the past year and a half.

In the other corner are Zubair Naseem and Ali Tariq, two former LUMS MBA class fellow that have known each other for a lifetime. After decades spent banking all over the world from New York to Dubai, to two had been living quiet lives, when the entrepreneurial spirit struck. It led them to found Umbrellaonline.pk, a service similar to Mauqa Online, but one based out of Lahore that wants to take it up a notch. They have been at it only four months now.

The two parallel services based out of two

different cities provide a fascinating possibility.

Both in terms of the concept they are bringing to the table, and the possible territorial war that may be on the cards when one or the other decides to expand. For now, the two are operating on a relatively small scale, but the concept seems to be catching on, and demand currently exceeds their capability to supply for both. So, they have not quite drawn up battle plans yet, both wanting to get it right in their respective cities first, yet they recognise that it is an eventuality they will have to face.

What exactly are the services these two companies provide? How are they different, and what have they achieved? More importantly, being branded as social entrepreneurship ventures, what are these companies doing for their workers? And what is their future?

So what’s the deal?

I

t is simple enough. You go on to the platform for Mauqa or Umbrella, you either call them and ask for a booking, or apply through their website. The two are not at par technologically yet, with Umbrella not having an app.

Umbrella claims that they do not have an app yet because they do not want to get one of the dime-a-dozen app packages that you can modify for your own needs. They want their business to drive technology.

For now, the process is simple. You ask for a worker, the worker arrives, does the required work, gets paid and heads back. Both Umbrella and Mauqa have partnered with Careem to provide pick and drop services to their workers. It is as simple as ordering something online, except in this case it is services, and not commodities.

Moreover, emergencies are not the only situation in which you could make use of Umbrella. For bachelors living on their own, for a maid or a cook to come in a couple of times a week and make them a home cooked meal or clean up their house could contribute a lot towards their standard of living.

The only catch that there seems to be is the lag. Of course, if a service provider is free at the moment because of a cancellation, it will only take so long as the travelling time. But if they are completely booked, which they say they usually are, both services will take their time.

So, if you are in a rush, it may take some time, and you would be better off booking a day in advance.

This is one horizon on which Mauqa has Umbrella beat, at least for now, perhaps because they have been in business longer. Mauqa says that any time someone calls or applies asking for a booking, a worker is sent to them within 60-90 minutes. With Umbrella, the minimum regular waiting time is three hours before a worker can make it to your house.

“We have workers coming in that have worked as cooks and domestic help for decades, but they have to unlearn all of what they knew. We do not want these people to be servants, we want them to be professional service providers” Zubair Naseem, cofounder at Umbrella Online

Again, Mauqa has a much larger pool of workers. They have somewhere around a 100 on their force at all times. Umbrella in comparison had a much smaller number. While Ali and Zubair were reluctant to provide an exact number, the understanding was that it was somewhere between 15-20. As a result, the time of each individual worker may be stretched a little thin.

As far as the going rate is concerned, Umbrella is slightly pricier. They will send to your home within three hours a trained and uniformed person to come in and take over for you at Rs300 per hour. Mauqa charges Rs250 per hour, and also have a system by which you can hire a worker for the entire day for Rs1,750.

The going rate at first does not sound like much. But on a little introspection, you realise it is higher than what you would be paying your help on average. On principle, if you were to hire a worker from Umbrella every day for four hours a day, it would cost you Rs 37,200 per month. And if you were to get a worker for the entire day every day of the month, you would be spending Rs 54,250 per month.

Both sets of owners claim that this social entrepreneurial venture is designed not just to turn a profit, but also uplift the workers and eventually, perhaps in the long term, break the traditional mode of domestic help in Pakistan.

But one thing is clear from the numbers. Mauqa and Umbrella are never going to be a primary force. Their market is emergencies and substitutions. Perhaps bachelors that need someone to come in every now and then to clean-up behind them, or other professionals constantly on the go.

The team at Umbrella claims otherwise.

They are insistent that this is a disruption, which it might just be, but they say it will at

GIG ECONOMY

some point overtake the traditional structure of domestic help. They point to things such as the efficiency of their service, and the fact that you do not have additional costs such as marriages, births, and illnesses that one often has to bear – and concepts such as servants’ quarters.

Mustafa at Mauqa is more realistic, knowing that while it may be a disruption, it is not a revolution. The business has the potential to be big, but it cannot hope to be it.

The workers

T

hey key to the business, of course, is where these workers come from. And if Umbrella and Mauqa can find these untiring, unwavering, trained, and professional workers, why can the average household not get permanent help of this quality?

According to the companies, make a considerable effort to make sure they develop these workers. This is central to their vision of social entrepreneurship, which is based on a desire, they say, that gives back not just to them, but to the workers.

There is little doubt that Mauqa and Umbrella are similar. Mauqa launched early in 2018, and Umbrella only in March 2019. There is also little doubt about where the inspiration for Umbrella comes from. But its owners – Ali and Zubair – brush away the source of the idea as insignificant. What matters to them is how their service is different - and better. And the main difference they have in mind are their workers.

For starters, Umbrella has a robust system of recruitment. The first step in Umbrella’s process is actual field work, as Ali Tariq explains, they actually went out into lower income areas, especially where minorities live, to go and seek out workers. (No time to dwell on what a commentary it is on Pakistani society that they seek out religious minorities for domestic work.)

Once Umbrella has zeroed in on potential workers, they go out of their way to conduct what they claim are the most thorough screening in all of Lahore.

“We take copies of their ID cards and thumb impressions, of course, but we also go to their houses and geo-map their locations.

We talk to the locals, we talk to the police, and we make sure everyone is on board. So, if it is a woman we are hiring, we talk to her family and

Rs 300 38

The expensive option The hourly cost of hiring a domestic professional from Umbrella, the Lahore-based service connecting domestic staff to households needing help

whoever the head of the household is – whether that is her father or husband,” they tell Profit.

In addition to this screening, they also do thorough medical checkups of the people coming on board for things stretching from hepatitis to malaria and all kinds of other diseases.

“Our goal was to only have such people enter your home as we would like in our own and for our kids to be around. So, this is all very personal for us,” says Zubair.

But the process does not end there. For many people, the idea of Umbrella seems like Uber or Careem for domestic help. But their model is a little different, because they do not just connect clients to workers, the workers are employees of Umbrella. And once they have been selected, they take them to training.

The company has offices in Johar Town in Lahore, and on one of the top floors of the building, they conduct sessions for what is essentially a boot-camp-style finishing school for domestic help. In a few weeks, the people that come in are taught everything from presentation to talking skills to time management and conflict resolution. For this, the company has also developed a handbook – one tailored to make their workers the best in the business.

“We have workers coming in that have worked as cooks and domestic help for decades, but they have to unlearn all of what they knew.

We do not want these people to be servants, we want them to be professional service providers.”

Indeed, the proposition is attractive for the workers. Not only do they get trained, but Umbrella actually pays for them to be trained by the College of Tourism and Hospitality Management (CTHM), with whom they have partnered.

To their credit, Mauqa does all the same things. They were the ones that established the practices after all. They also conduct background checks and provide training. The only difference is that their outreach programme works a little differently. For one, most of their workers come to their offices instead of them going to the workers. While they do make a point to do basic background checks, they are not nearly as thorough as Umbrella – whose geo-marking, home visits, and medical screening sets them ahead of Mauqa in this regard.

But perhaps the more significant difference is that Mauqa’s training regimen is uninspiring.

Rs 250

The ‘cheaper’ option The hourly cost of hiring a domestic professional from Mauqa Online, the Islamabad-based service connecting domestic staff to households needing help

“We offer a base salary per day to their workers.

So theoretically, if there is not enough demand on a certain day and a worker does not get a job, he will get paid just for being on call.

This is a rare enough occurrence, since the demand is overwhelming and we are constantly looking for more people, but it is in place for the future so the workers remain secured” Muhammad Mustafa, cofounder and CEO at Mauqa Online

During the course of this profile, Profit interviewed Umbrella first, and took with a grain of salt their claim of providing ‘trained’ domestic help.

A two-week boot camp, even one managed by the CTHM, is hardly comprehensive. In comparison to Mauqa, however, it seems like a dream. Their approach is to give training on the spot – a one-day run down on soft skills and the most obvious dos and don’ts. After this rudimentary ‘training,’ the worker can be sent out on their first job as early as the next day.

But these are anxieties mostly related to the consumer end and affect the workers very little. In this, Mauqa seems to have a better deal for their workers than Umbrella does.

“We offer a base salary per day to their workers. So theoretically, if there is not enough demand on a certain day and a worker does not get a job, he will get paid just for being on call,” Mustafa explains. “This is a rare enough occurrence, since the demand is overwhelming and we are constantly looking for more people, but it is in place for the future so the workers remain secured.”

“Mauqa also provides a comprehensive health insurance plan to all of its workers and gives them a flexible work environment where they can choose when and how much to work on their own terms,” he adds.

The last part is true for Umbrella as well.

The workers are their employees, and not on contract, and can still design their own work patterns. And as they claim, they already have an insurance plan worked out for their workers and are simply waiting to have enough people on board to get it to kick into action. The distinction that remains, however, is that Umbrella’s workers are dependent completely on commission – unlike Mauqa, which provides a daily wage.

Expansionary ambition

T

here does appear to be a market for the services provided by these companies.

The problem, if you want to call it that, is that both Mauqa and Umbrella are currently working on a very small scale.

While they are covering entire cities and say that the demand is superseding their ability to supply, they have not yet made any big moves to try and jump right into it.

Caution seems to guide strategy for both Mauqa and Umbrella. For now, both of them want to get it just right. Currently, they have

undertaken more than 1,000 hours of training, and more than 35,000 hours served to 2,500 customers.

Umbrella is a smaller operation in comparison – but it is also newer, and burgeoning at that. With only a handful of managerial staff, they try and maintain a steady flow of workers for their recurring demand. In these four months, they have done over 1,100 hours of service, more than 350 households and between 350-400 jobs in a month thanks to the same customers coming back again and again.

The numbers are not huge, especially for Umbrella, but their dreams and hopes for the company are big. “I have no doubt in my mind that this is going to be a huge business, whether it is us or someone else. That is just what the market trends are showing,” says Zubair.

Ali and Zubair have plans to expand, in fact, they are looking at turning Umbrella into something much larger than what people might imagine. But for now, they are not really worried about the competition.

Mauqa has been around longer. They are more wellestablished, have their app up and running, and a larger workforce including a dedicated tech team. They have recently acquired investments, including from venture capital fund Invest2Innovate, a startup incubator based in Washington DC and Islamabad that seeks to help Pakistani startups achieve growth and scale

“In Lahore? No one.” That is the blunt answer Ali Tariq gives to us when we ask him whether Umbrella has any competition. But it is also a measured answer, because they are more than aware of Mauqa. And Mauqa has an eye out as well.

“We know Umbrella is out there. For now, we want to make sure we figure everything out in Islamabad. But we are going to have to move into other cities at some point, especially at the rate things are going. We want to go slow, but the demand is often overwhelming,” says Mustafa.

Mauqa has been around longer. They are more well-established, have their app up and running, and a larger workforce including a dedicated tech team. They have recently acquired investments, including from venture capital fund Invest2Innovate, a startup incubator based in Washington DC and Islamabad that seeks to help Pakistani startups achieve growth and scale.

Umbrella, to their credit again, seems bent on improving and perfecting their model before what they say will be a launch with a bang. They are still in their trial phase, and have a full launch with their state of the art app, and a fully trained, client ready workforce slate for a proper launch in a few months time.

As things stand, if anyone is going to expand, it will probably be Mauqa. But Umbrella is also watching closely, fine tuning their product and preparing themselves. And while none of this will be any time soon, it is exciting to see what happens next. n

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GROWTH AND INEQUALITY IN PAKISTAN: AGENDA FOR REFORMS

By Dr Hafiz Pasha

Friedrich-Ebert-Stiftung 2019, 550pp

40

eviewed by: R Prof Ehsan U. Choudhri, Carleton University Courtesy: Bloomsbury Pakistan

P

akistan has been held back by sluggish growth of per capita income since the 1990s. Slow growth has been accompanied by high income and wealth inequalities. This new book, by Dr. Hafiz Pasha, is a welcome contribution to the literature on growth and inequality in Pakistan. Dr. Pasha has had a distinguished academic and policymaking career, and he is well qualified to address these issues. The book is an ambitious undertaking. It is divided into 16 sections, including 48 chapters, covering a wide range of subjects. Most of the chapters are stand-alone pieces that are devoted to a specific topic and discuss developments from 2001 to 2018 using data and research findings from various sources. The 2001-2018 period is too short to identify long-term patterns, but it does allow comparisons between the governments of General Musharraf, PPP and PML(N). It is interesting to see how growth and inequality behaved during these regimes. The rate of growth in GDP was the highest under the Musharraf government (since 2001-2002), the lowest under the PPP and in the middle under the PML(N). Comparisons of inequality (as measured by the ratio of income shares of top and bottom quintiles) across these governments suggest a different pattern. Estimates by the Pakistan Bureau of Statistics indicate that inequality began to increase after 2001, and then turned around and decreased after the 2008 elections. World Bank estimates suggest, however, that the turn-around in inequality occurred earlier, in 2004, whilst the Musharraf government was still operating.

The book offers a rich array of facts about economic and social conditions in Pakistan and highlights the very serious problems the country faces. For example, the most recent population census, undertaken after an interval of 19 years, reveals that Pakistan’s population is considerably higher than previous estimates by national and international agencies, and implies a rate of population growth equal to 2.4% per year. Such a high rate would put enormous strain on Pakistan’s resources and make it very difficult to significantly improve the living standards of the growing population.

Pakistan does not fare well in health and education indicators. As compared to other South Asian countries, as well as other major Asian countries, life expectancy and mean years of schooling were the lowest in Pakistan in 2015.

Terrorism and power outages have plagued Pakistan’s economy. Dr. Pasha estimates direct and indirect costs of fighting terrorism and power outages and shows these to be a major burden on the economy (the cumulative costs of war on terrorism since 2012-3 are $250 billion, while costs of outages accounted for 2% of GDP in 2016-7). Are there any promising developments? Dr. Pasha notes that the China-Pakistan Economic Corridor (CPEC) will help finance important infrastructure projects and is seen as a potential “game changer”.

However, there are also risks associated with CPEC, especially rising costs and the unsustainability of external debt. Thus, it is too early to evaluate its contribution to economic growth in Pakistan.

Pakistan faces significant fiscal and trade imbalances, and there is a thorough discussion of the determinants of these imbalances in this book. On the fiscal side, a basic problem is that the present taxation system generates government revenues that are insufficient to meet government expenditure requirements, and this gap leads to budget deficits and growing public debt. Primary fiscal deficit (deficit excluding debt servicing) is especially of concern since it can increase government debt as a percentage of GDP. The government has been recently running a primary deficit every year. The deficit was brought down to nearly zero in 2015-6 (the last year of the previous IMF program) but it increased significantly in the next two years. Budget deficits have been accompanied by deficits in the balance of trade (exports minus imports). Pakistan’s international reserves fell to a low level in 2017-8, which was not enough even to cover two months of imports. Based on the situation at this time (which roughly corresponded to the completion date of the book), Dr. Pasha examined several scenarios for 2018-9, and correctly predicted that “business as usual” would not be feasible and that assistance via an IMF

program would be required, as there would be no good alternatives (such as borrowing from alternative sources or drastic restrictions on imports). He does not, however, sufficiently emphasise the policy blunder that led to this predicament. To avoid devaluation of the rupee, the government squandered large amount of international reserves (which were built up to a high level in 2014-5 partly via external borrowing) to support the value of the rupee.

This policy did not prevent a large devaluation, but it did lead to a huge loss of reserves and the need for seeking yet another IMF program.

How are major economic policy decisions taken in Pakistan? In a chapter in the section on governance, Dr. Pasha provides interesting insights about the institutional setup for the formulation of economic policy. The Ministry of Finance has emerged as the principal institution for making policy decisions. The Ministry has focused on short-term budget issues and has not given serious consideration to the long-term consequences of policy actions. The Planning Commission would be an appropriate institution to undertake long-term analysis of economic policy, but it has been reduced to essentially a project approving agency. The dominance of the Finance Ministry in policy making has also weakened the role of the State Bank of Pakistan in conducting monetary policy. The government’s need to borrow money to finance budget deficits, for example, puts pressure on the State Bank to lend to the government and thus expand money supply.

The book is a valuable resource for learning about Pakistan’s economy. Even those who are well informed about Pakistan will discover interesting facts and find the book rewarding.

However, readers looking for an explanation of the basic causes of low growth and high inequality in Pakistan, and/or for solutions to these problems are likely to be disappointed.

The first chapter in the section on growth summarises the record of GDP growth in Pakistan since the 1950s. It shows that except for the 1960s and 1980s, the average growth rate for every other decade has been below 5%. The low growth rate since the 1990s is especially disappointing in comparison with Pakistan’s South Asian neighbours, notably India, whose growth performance picked up during this period.

There is no new insight provided here about the causes of Pakistan’s poor growth performance after the 1980s. The first chapter in the section on investment does note that capital formation as a percentage of GDP in Pakistan is substantially below the levels in other South Asian countries. Low capital accumulation could partly account for Pakistan’s slow growth rate.

A fuller explanation of Pakistan’s growth performance, however, would also need to examine the role of productivity growth in Pakistan. The

behaviour of productivity growth in Pakistan and factors that might have slowed down productivity growth are not explored here.

In chapters on inequality, Dr. Pasha highlights the finding that inequality was higher under the military governments of General Musharraf and General Zia-ul-Haq than under the democratic governments following them.

One suggested explanation is that democratic governments have greater inducement to pursue policies that benefit the poor. As growth rates were also higher during the tenure of military governments, another possible explanation is that inequality is positively related to growth in Pakistan (statistical analysis in the book finds a positive association between the growth rate and the inequality measure from 1990 to 2014). This link can arise if the growth process is biased in a way that causes the incomes of skilled labor and the owners of capital and land (in the high-income group) to rise faster than those of unskilled workers (in the low-income group). Such a bias need not create a trade-off between growth and inequality.

Income distribution policies can be designed to alleviate the effect of growth on inequality.

What policy actions should be pursued to improve growth and reduce inequality? This question is addressed in the final chapter of the book titled “The Reform Agenda”. The agenda represents a long list of reforms in ten areas.

The proposed reforms are generally reasonable, but often present ad hoc solutions without full explanation of their underlying rationale.

For example, to revive agriculture, changes are proposed in the support price for certain products, without explaining the need and the effectiveness of these changes. Similarly, to revive manufacturing, it is argued, without explanation, that there is a strong case for raising tariffs. There are reforms proposed for promoting investment, generating employment, stabilising the balance of payments and managing public finances. Higher investment and greater macroeconomic stability would be helpful for growth, but it is not clear whether the proposed reforms in these areas would be adequate to significantly increase the growth rate in Pakistan. An important omission, moreover, is the lack of discussion of measures to improve productivity growth, which is an important determinant of overall growth. On inequality, Dr. Pasha discusses policies and institutions that provide favourable treatment to rich and powerful groups in Pakistan, but offers no specific policy actions to counteract this favourable treatment and bring about a more equitable income distribution. Nonetheless, stimulating equitable growth in Pakistan represents a major challenge, and Dr. Pasha’s timely book makes an important contribution in addressing this issue. n

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