Profit E-Magazine issue 60

welcome

THE CLEAR (LACK OF) STRATEGY By now, it is abundantly clear that the Imran Khan Administration has no clear strategy for reviving the economy, let along introducing the badly needed restructuring reforms. Yes, there was the move to increase prices of natural gas to be more in line with the actual cost of production and imports, but beyond that, there is nothing the current administration has done that can be described as “tough, but necessary”.

What is encouraging is that Finance Minister Asad Umar is beginning to notice that failure, or at least admit it to himself, even if he does not want to admit it to anyone else. How do we know? He began to lose his decorum in his speech to the National Assembly this past week, which suggests a deep-rooted frustration that is finally beginning to come to the surface.

While the manner and target of that ire – geared as it was towards the political opposition – was hardly necessary, it suggests that, at the very least, the minister does not believe the propaganda he has been spouting since coming into office. And in order to be successful in a policymaker, it is necessary not to believe one’s own propaganda as a politician.

Unfortunately, this still does not change the fact that the minister has been housebroken by the finance ministry, right down to absolutely every idea he has come up with, including ones he might think are his own. Take, for instance, the Sarmaya-

FROM THE MANAGING EDITOR

e-Pakistan Ltd idea. In theory, this was supposed to be a sovereign wealth fund run along the lines of the best-run sovereign wealth funds in the world, with a professional management and professional board of directors, and no particular allegiance to any individual investment, buying and selling companies on an asneeded basis.

Instead, what we have gotten is a professional board of directors that serves as window dressing for what is effectively a power grab by finance ministry bureaucrats. Instead of reporting to different ministries, all state-owned enterprises will now report to just the finance ministry. This may result in slightly more efficiency, since the finance ministry was de facto running them anyway. But it does not change the fundamental structural problem.

So you can keep showing your disdain for the opposition all you want, minister. We know the real person you are frustrated with is yourself.

Farooq Tirmizi Managing Editor

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The government is battling private shareholders, all shareholders are battling the CEO; the madness inside Pakistan Engineering Company and what it means for the future of the company

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By Syed Masooma and Ahmed Ahmedani

his is the story of a company you may never have heard of, but one that includes just about every ingredient of corporate drama that you can imagine. There are allegations of embezzlement, corruption, potential insider trading and what may well be a high-stakes battle for the control of a publicly listed company with a substantial shareholding of the government.

The entity at stake? Pakistan Engineering Company, Ltd, publicly listed on the Pakistan Stock Exchange under the ticket symbol PECO, which, incidentally, is also the abbreviated way to refer to the company.

If one is to believe the allegations in some rather insufficiently researched newspaper reports, the matter appears simple enough: a group of influential investment bankers and brokers gained insider information about a struggling state-owned company about to be revived and connived to buy shares from a state-controlled mutual fund that owned a substantial number of shares. The goal appears to have been to gain control over the valuable urban land owned by the company and sell it off for a massive profit in the tens of billions of rupees.

Of course, if the matter were quite so simple, this would not be nearly as interesting a story. Reality has a habit of being far more complex than fiction, this story has more twists and turns than a well-written mystery novel. To avoid getting lost in the complications, we shall start our story at the very beginning.

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How PECO got its start

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he company now known as PECO began life in February 1950 as the Batala Engineering Company (BECO) by a man named CM Latif, who set up a factory to manufacture light engineering products on a sprawling 34-acre plot in the Badami Bagh area of Lahore. Almost since the very beginning, BECO was a publicly listed company, listed on the Karachi Stock Exchange.

Over the next decade, as the young nation continued to expand its infrastructure, Batala Engineering did well, with business growing so fast that it soon needed

to expand its facilities.

So, in 1960, the company bought 247 acres of land in the Kot Lakhpat industrial area in Lahore with the aim of eventually expanding its manufacturing operations there. Alas, that vision was not to pass, because before the company could fully realise its ambition of expansion, along came the socialist government of Prime Minister Zulfikar Ali Bhutto, which nationalised the company in 1972 and renamed it the Pakistan Engineering Company (PECO).

At the time of nationalization, CM Latif owned 24.86% of the shares of PECO, and the rest of the shares were owned by the general public. Under the 1972 order, the shares held by CM Latif were taken over (or stolen, depending on one’s perspective) by the State Engineering Corporation (SEC), a wholly owned subsidiary of the Ministry of Industries. The government-operated mutual fund National Investment Trust (NIT) also purchased 21.24% of shares of PECO through the stock exchange effectively changing the shareholding pattern to this: 33.25% of the shares were held directly or indirectly by the federal government; 21.24% shares were held by the federally controlled NIT, and 45.51% shares were held by the general public.

It is important to understand the role of NIT in the shareholding. While the federal government owns the management company that runs NIT, and is among the largest shareholders in the mutual fund, the fund itself technically operates on behalf of all shareholders, which includes private individuals.

Hence, while NIT often acts as a quasi-government entity when it has a seat on the board of directors of companies it has substantial shares in, it is not directly obligated to do so under the fiduciary duties set forth for it by securities law.

The ambiguity of NIT’s role is where the problem starts in the battle for control over PECO, especially since the government’s ownership of NIT’s management company is what gave it management control over PECO in the first place.

The disaster of government ownership and attempted privatisation

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eedless to say, government ownership of PECO did not suit the company well, and in the 30 years that followed its nation-

“AS A STATE ENTERPRISE, IF PECO SHUTS DOWN, THE PRIVATE INVESTORS CAN PRESSURISE THE GOVERNMENT TO SELL THE 250 ACRES OF LAND WORTH APPROXIMATELY RS100 BILLION RUPEES, OR EVEN MORE” Mairaj Ariff, former CEO of PECO alisation, PECO kept on wracking up losses, accumulating a combined Rs2.12 billion in losses by 2002, consistently relying on government-guaranteed loans and bailouts to remain afloat. The company went from being a high-flying publicly listed company expanding rapidly to becoming a dysfunctional ward of the state, technically still listed on the exchange, but with no real trading in its shares and no interest from investors because it was an almost entirely hopeless cause.

Then along came the military coup of 1999, and with it the very pro-free markets former Citibanker Shaukat Aziz as finance minister. Aziz had no interest in continuing to spend government money bailing out a company that should never have been in government ownership to begin with (the government did not create it, after all). And so, in 2002, the company was placed on the “active list” of the Privatisation Commission, meaning the commission was authorized by the cabinet to sell the government’s shares in the company.

However, prior to that cabinet decision, the Privatisation Commission had sent a letter to NIT, ordering it not to sell its shares in PECO without prior approval from the commission. What is not entirely clear – and what has yet to be litigated in court – is whether the Privatisation Commission’s order was superseded by the order from the federal cabinet. It is also not entirely clear whether the Privatisation Commission was within its legal authority to give orders to NIT.

Nonetheless, what happened next would raise some eyebrows.

As part of the attempt to privatise the company, the government had decided to restructure the company’s balance sheet: it authorised PECO to sell some of its prime urban land in Lahore to pay back debts that had been guaranteed by the government, specifically about Rs1.8 billion in PECO liabilities that had been directly assumed by the government that it wanted paid back.

On August 9, 2003, the PECO board of directors was informed that they had obtained the final approvals needed – a no-objection certificate from the Punjab government – to sell the land and clear the way for privatisation.

The meeting was attended by, among others, Asif Jameel, who was a director serving as NIT’s representative on PECO’s board.

Within the next four days, NIT sold nearly all of its shares in PECO, all 1.2 million of them. The trading patterns in PECO’s shares went completely berserk.

In the year preceding the August 2003 board meeting, the average number of shares traded was 48,727 per day. In the month after the meeting, the average number of shares traded went up to 901,058 per day. More PECO shares were traded in the three weeks after that board meeting than in the previous full year.

In an investigative report compiled

by Javed Hasnain Rashid & Company, a chartered accounting firm retained by PECO management in 2018, it is alleged that the ultimate buyers of the shares from NIT were veteran investment banker Arif Habib, through Rotocast Engineering (Pvt) Ltd, and Masood Ahmad Khan Soodi, through Maha Securities.

The central allegation in the report is that NIT acted on behalf of Arif Habib

CORPORATE CONTROL

“EVER SINCE THE REFUSAL OF THE CFO TO ADHERE TO THE ILLEGAL DEMANDS OF MR. MAIRAJ A. ARIFF, HE HAS BEEN ON A VENDETTA AGAINST THE SENIOR MANAGEMENT OF THE COMPANY; HE HAD BEEN PREVENTING THEM FROM ATTENDING THEIR STATUTORY DUTIES AND HAS ALSO BEEN TRYING TO PREVENT MEETINGS OF THE BOARD OF DIRECTORS UNDER ONE PRETEXT OR THE OTHER” Arif Habib, Chairman, Arif Habib Corporation and his associates and improperly sold its shares, an action that, if true, would constitute not just insider trading, but several other counts of securities fraud.

For his part, Arif Habib claims that he did not act inappropriately and in fact, was not the buyer when NIT was selling in that frenzied month in August and September of 2003. “I had purchased shares of the company a year after NIT had sold in the market,” said Arif Habib, in a statement e-mailed to Profit.

Once NIT sold, however, the government was no longer the majority shareholder in PECO, retaining only a one-third share in the company. It managed to hold on to most of its board seats, however, until March 2006, when the private shareholders – led by Arif Habib – managed to flip the board of directors. The government had previously held six of the nine board seats prior to 2006. After that election, it only had three seats, and private shareholders then controlled six.

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The private control era, and the investigations

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hat followed was a period of extraordinary turnaround for PECO. In the six years ending June 30, 2004, PECO accumulated net losses of Rs858 million, even as its revenue grew from Rs244 million in 1999 to Rs457 million in 2004. In the six years after that, however, revenue nearly quadrupled, going from Rs457 million in 2004 to Rs1,677 million in 2010, an average growth rate of 24.2% a year. Profits soared as well, peaking in 2007 at Rs312 million.

And while the allegedly unauthorised sale of NIT shares had been reported to the government almost immediately, no real action was taken during the Musharraf Administration, perhaps in part because the result the government had been aiming to achieve – private management control of PECO and an end to government bailouts of the company – had effectively been

achieved, even if a full privatisation auction had not taken place.

That changed in 2008, when President Musharraf left office, and the newly elected government of President Asif Ali Zardari was sworn in.

With a newly reinvigorated Parliament after a decade of military rule, there was renewed interest in the legislature to examine the record of the military government. The Public Accounts Committee (PAC) of the National Assembly, led by Sardar Ayaz Sadiq, began looking into the matter of the allegedly unauthorised sale of NIT’s shares in PECO. The PAC formed an investigative committee comprised of senior civil servants who were tasked with looking into what happened and who was responsible. The committee ended up blaming officials at NIT for acting improperly and claimed that insider trading had, in fact, taken place. They recommended that the government make efforts to regain controlling shares in PECO at as

little a loss to state-owned entities as possible.

The report’s specific language, however, is highly debatable. It claims, for instance, that there was insider trading and that private shareholders were able to gain control of PECO as a result of that insider trading. Yet, it holds officials at NIT responsible, and urges the government to buy back shares rather than demanding they simply be confiscated.

The unwillingness of the PAC-appointed investigation committee to suggest any action against Arif Habib and his associates has been constituted by many including Habib to mean that the committee has exonerated his actions.

“The committee, the SECP [Securities and Exchanges Commission of Pakistan], as well the National Accountability Bureau have investigated and found no wrongdoing [on my part],” said Arif Habib, in his statement to Profit.

The government then entered into negotiations with Arif Habib to try to get him to sell his shares with at least some government officials believing they could compel him to do so.

However, Arif Habib decided to keep his shares and instead offered the government that he would abide by three conditions: 1. The government would be allowed to regain control over the PECO board of directors 2. Arif Habib would pool his shares with the government’s shares for sale when PECO’s formal privatisation process started 3. Arif Habib would offer the government the right of first refusal before selling any of his shares

THE GOVERNMENT MAY DISLIKE THE FACT THAT ARIF HABIB IS A SHAREHOLDER OF PECO, BUT THEY APPEAR TO HAVE ACTED IN A MANNER THAT SUGGESTS THAT THEY EITHER BELIEVE HIS VERSION OF THE STORY OR DO NOT HAVE ANY EVIDENCE TO PROVE OTHERWISE But while he was willing to make this offer, the government appears to feel this is not enough and is unwilling to settle for anything less than Arif Habib selling his PECO shares back to the government. As a result, while the chairman of the board and the CEO are still government appointees, the private shareholders, including Arif Habib, still control six of the nine board seats on the PECO board of directors.

The government was able to wrest at least enough control to be able to gain back partial management control, with the right to appoint the CEO. However, that appears to be where things went wrong.

The new CEO, and the battle for control

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n March 2016, the government appointed a civil servant – Mairaj Anees Ariff – as the CEO of PECO. And almost from the very beginning, the private sector shareholders were deeply unhappy with the situation, which has resulted in the company descending into chaos, accusations of embezzlement and corruption being traded between the CEO and the private sector shareholders, and the dredging up of the old issue of how the private shareholders managed to even

get control over the company in the first place.

In short, the situation is this: Mairaj Ariff wants to assert control as the CEO of PECO, and believes that the private shareholders, led by Arif Habib, are instigating a revolt under him, particularly through their influence with some of the senior finance and operations staff, including the CFO. The private shareholders, meanwhile, believe that the CEO is unqualified for the job and is not only running the company into the ground but also embezzling company funds while doing so.

Matters came to a head on October 3, 2018, when Mairaj Ariff wrote a letter to NAB alleging that three senior company officials – the CFO, the General Manager Audit, and General Manager Works – were acting as “front men” of the private sector shareholders. It is unclear what he means by “front men”.

If by that he means that they are acting on behalf of the shareholders, it is unclear why such a thing would be illegal, since company officials have a fiduciary responsibility to shareholders, and the private sector shareholders are in the majority. Nonetheless, Mairaj Ariff was in no mood to tolerate any dissent and went so far as to fire the three officials and have them physically barred from

CORPORATE CONTROL

entering PECO’s offices.

Arif Habib, however, has a completely different version of events. They agree that the CEO and CFO did not get along. They completely disagree on why. “Regrettably, the highhanded and inept manner, in which Mr. Mairaj A. Ariff had been running the day to day affairs of the company had been reported to different fora by the senior management of the company. So much so, that the Chief Financial Officer of PECO was constrained to file a complaint against the Mr. Mairaj A. Ariff after he was pressured by Mr. Mairaj A. Ariff to falsify the accounts of the company to hide the losses being incurred during his tenure. Ever since the refusal of the CFO to adhere to such illegal demands of Mr. Mairaj A. Ariff, he has been on a vendetta against the senior management of the company; he had been preventing them from attending their statutory duties and has also been trying to prevent meetings of the Board of Directors under one pretext or the other,” said Arif Habib, in his statement to Profit.

For their part, Arif Habib and the other shareholders allege that the CEO is trying embezzle funds, which they are trying to prevent him from doing.

They went so far as to try to block the company’s accounts at United Bank Ltd, a move that was resisted by the CEO, and for which Mairaj Ariff received support from officials at NAB. PECO’s accounts in United Bank were suspended after some company officials submitted documents to the bank requesting a suspension of these

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accounts.

The PECO accounts were restored on January 29, 2019, after NAB intervened, according to sources at Ministry of Industries. The president of United Bank was summoned at the offices of the Combined Investigation Team (CIT).

The responses submitted by the bank for the clarification of suspension of accounts were deemed “unsatisfactory” by the NAB and therefore PECO accounts were made operational again.

During the time that these accounts were suspended, salaries and payments for raw materials by PECO were delayed.

The justification from the PECO officials was that Mairaj Ariff had unilaterally appointed a new CFO after firing the old CFO, Mian Anwar Aziz. A civil court in Lahore has issued an injunction against Aziz’s termination. They alleged that Ariff unilaterally sought to change the authorized signatories of the bank account maintained with UBL without obtaining approval from the board of directors. By exerting pressure on UBL officials, Ariff got the signatories changed and also conducted certain transactions from the bank account, including a withdrawal of Rs5.6 million which amount is unaccounted for in PECO’s accounts.

Who is to blame for the losses?

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he ultimate dispute between the private shareholders and the government-appointed CEO is who is responsible for the

fact that PECO’s revenue have plummeted over the past three years and the company has swung from making a profit to a loss. Arif Habib and the other shareholders squarely place the blame on the CEO’s ineptitude, whereas the CEO blames what he calls meddling by officials whom he accuses of being loyal to the shareholders and not him.

Mairaj Ariff hints at what he believes to be a dark agenda that Arif Habib and the other shareholders have. “As a state enterprise, if PECO shuts down, the private investors can pressurise the government to sell the 250 acres of land worth approximately Rs100 billion rupees, or even more,” he said, in an interview with Profit.

And to further embellish his position that the private shareholders were acting in a nefarious manner, he commissioned that investigative report by Javed Hasnain Rashid & Company, a chartered accounting firm, laying out what he believes to be the illegitimate manner in which Arif Habib gained his shares in PECO. Ultimately, however, as much as the government may dislike the fact that Arif Habib is a shareholder of PECO, they appear to have acted in a manner that suggests that they either believe his version of the story or do not have any evidence to prove otherwise. Mairaj Ariff was removed from his position in February 2019 through a unanimous vote of the board of directors, bringing – for the moment – and end to the drama at PECO. n

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By Farooq Tirmizi

y first job out of college was at a brokerage firm in New York whose offices were just two blocks north of the Roosevelt Hotel in Midtown Manhattan, the luxury hotel owned by Pakistan International Airlines (PIA). As a young Pakistani entering the world of global finance, it was hard not to feel a sense of pride every time I passed by that hotel on my way to work every day. Here was a magnificent hotel in the heart of the largest financial center in the world, owned by my government.

In launching the Pakistan Banao Certificates, the government of Pakistan is appealing to the nostalgic patriotism of people like me: relatively high-earning professionals outside Pakistan who feel that sense of pride when we see our homeland well-represented in our countries of residence.

Essentially, the finance ministry’s argument is this: why invest in a US treasury bond when you could earn much more on a Government of Pakistan bond? Sure, the international ratings agencies rate Pakistan’s sovereign credit rating at B-minus, a junk-bond rating, but you know your government will not default on you. So why not invest with us instead?

GOVERNMENT BONDS

It is a good pitch, and I must confess, quite tempting on the surface. I am too young to be investing in bonds, but for people who are older, it appears to be an attractive investment option, with the added advantage of appearing to help the homeland.

But that is not how one should decide on where to invest one’s hardearned money. Investments should appeal to the head, not the heart. And no investment should ever be viewed in isolation: an investment is only a good one if it is better than the next best alternative. Apply both of these filters to the Pakistan Banao Certificates, and one gets a different picture from the one the finance ministry is trying to sell.

For this analysis, we first compare the Pakistan Banao Certificates to other bonds issued by similarly-rated governments, and even to other bonds issued by the government of Pakistan itself. Then, the analysis moves beyond the ratings to a more fundamentals-level analysis of why the government even needs the bonds, and whether it is a good idea for expatriate Pakistanis to be investing in the bond.

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Comparing Pakistan Banao Certificates to the alternatives

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he most intuitive question to ask when analyzing an investment is this: what else could I be doing with my money? The more sophisticated iteration of that question is: what else could I be doing with my money, given the level of risk I am willing to tolerate?

The premise of this portion of the analysis is that, as an investor whose currency of investment is the United States dollar, one has access to a wide variety of options from across the world. An investor should be indifferent as to where the particular investment comes from, so long as the risk level is the same, and the return is higher than an investment of comparable risk.

Our analysis of the peer group of Pakistan’s government bonds relied on sovereign credit ratings compiled by the three big ratings agencies in the world: Standard & Poor’s, Moody’s, and Fitch. We analysed ratings data as of March 5, 2019, and relied on countries that shared the same rating with

Pakistan in at least two of the three ratings issued by the three major issuers, or at least one, in cases where there were only two or fewer active ratings.

That results in a sample set of 22 countries with which Pakistan shares a rating. Standard & Poor’s and Fitch rate Pakistan at B-minus, and Moody’s rates Pakistan at the equivalent B3. All three ratings are well within junk bond territory.

Of those 22 countries, only 16 had US dollar-denominated sovereign bonds, a total of 198 bonds, to be precise. Yet not all of those bonds were directly comparable to Pakistan’s government bonds, which are all non-callable (meaning the government cannot do an early repayment), and repay the full principal amount at maturity. Excluding those callable bonds, we got a sample of 99 bonds that were most directly comparable to the government of Pakistan’s bonds.

That set of 99 bonds, including the 16 previously issued bonds (and their sub-issues) from the government of Pakistan, plus the two Pakistan Banao Certificates, were then plotted on a scatter plot, with the x-axis representing the maturity date, and the

y-axis representing the yield-to-maturity (a measure of a bond’s rate of return that factors in any changes in its price as well as the time left to maturity).

These 117 bonds, in other words, have the exact same issuer creditworthiness risk, no call risk, and the only variation is that of maturity risk (bonds maturing later are seen as riskier, and hence maturity risk is an important consideration), which is plotted on the chart. Using a simple, single-variable linear regression, we get a line that represents what might be seen as the yield curve for all B-minus-rated bonds.

The one thing that is immediately clear is that the Pakistan’s sovereign bonds yield systematically lower than the overall group of bonds with a similar risk profile. That lends at least some credence to the government’s hypothesis that perhaps Pakistan’s bond rating is lower than it can justifiably be. The market appears to value Pakistan’s bonds higher (and therefore they have lower yields-to-maturity) than just their credit rating would imply.

Having said that, the fact that all three of the ratings agencies have the exact same credit rating for Pakistan suggests that perhaps the market is more optimistic about Pakistan’s fiscal prospects than may be warranted by Pakistan’s own government’s performance. It is likely that the market is pricing in the fact that Pakistan has never defaulted on its foreign debt obligations, in large part because it has almost always had access to bailouts from the International Monetary Fund (IMF) owing to Islamabad’s close relationship with the United States.

Given the fact that Pakistan’s

relationship with the United States is now much more strained than it has ever been in its history, perhaps that optimism is unwarranted. Hence, it seems reasonable to assume that the B-minus rating is likely an accurate reflection of Pakistan’s fiscal risk profile.

Based on that assumption that Pakistan’s credit rating is accurate, it is clear that for just about any bond issued by the government of Pakistan, there is a bond with a similar credit risk and maturity, but higher yield-to-maturity. For instance, the 3-year Pakistan Banao Certificate yields 6.25% per year and matures in February 2022. However, there is a bond issued by the government of Ecuador that matures just one month later, but has a 7.89% yield-to-maturity. And there is a bond issued by the government of Lebanon maturing just three months later than the 3-year Pakistan Banao Certificate and has a 10.55% yield-to-maturity.

If I can invest in any US dollar-denominated bond, and I want to invest for three years, why would I pick the Pakistan Banao Certificate and not the bond issued by the government of Lebanon?

The 5-year Pakistan Banao Certificate fares even worse because its 6.75% yield is lower than another bond issued by the government of Pakistan that matures just 2 months later and has a 6.92% yield-to-maturity. That is before we even begin to compare it against bonds of other governments that mature around the same time, such as the one issued by the government of Zambia that currently yields 13.89% per year.

Simply put, the only attraction of the Pakistan Banao Certificate is that it is issued by one’s own government,

and has relatively lower minimum investment requirements: a minimum of $5,000 investment, with higher investments allowed in $1,000 increments. That lower investment threshold may be attractive to some investors, though bond mutual funds or real-estate investment trusts in both the United States and Europe can offer similarly lower minimum thresholds with comparable yields, and higher liquidity.

The (lack of) restructuring problem

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ut beyond this sheer numbers (our apologies to our readers who got an involuntary tour of bond mathematics in the previous section), there is a larger question that needs to be addressed: why is the government of Pakistan even raising this bond in the first place? Any good investor needs to know what their money will be used for, and hence it is important to understand both the stated and implied purpose of this bond issue.

The stated purpose is relatively straightforward. Pakistan faces a significant balance of payments crisis and urgently needs foreign exchange reserves to refinance our US dollar-denominated liabilities to external creditors, whether they be countries that have exported goods to Pakistan, or whether they be lenders and nations that have lent money to the government of Pakistan.

But that narrow, immediate goal comes against a larger backdrop of what appears on the surface to be a larger national plan: a permanent restructuring of the government of Pakistan to end the need for this kind

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of bailout in the future.

“This will be Pakistan’s last IMF programme,” said Finance Minister Asad Umar, at a press conference in Karachi in November 2018, reflecting a desire on the part of the Imran Khan Administration to “break the begging bowl”, in the words of the prime minister.

In other words, if Pakistan were a company, this would be a distressed debt investment for a company seeking to restructure its assets in order to avoid bankruptcy. (Not to gild a lily, but a distressed debt investment typically commands a significantly higher yield than what the government of Pakistan is offering.)

To assess this investment, therefore, one needs to look at the larger plan. What exactly does the government of Pakistan plan to do in order to put the country on a path out of the chronic cycle of fiscal crises that we have been in for the past seven decades of our existence. (Note to people who believe their parents and grandparents’ tales that Pakistan was ever a well-run government: those were lies.)

The problem, unfortunately, is that despite the very best of intentions, the Pakistan Tehrik-e-Insaf’s (PTI) plan for the Pakistani economy is no better than that of its predecessors because it does not address the structural problems plaguing the Pakistani economy: the fact that the government is over-involved in some segments of the economy (e.g. energy, transportation) which in turn hinder it from performing its core functions (e.g. education, health, infrastructure) well.

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The finance minister’s dilemma

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efore delving into what is wrong with the plan, it is important to understand why Finance Minister Asad Umar has settled on such a monumentally inadequate plan. The problem has a lot to do with the nature of Pakistani politics in general, and Imran Khan’s arrogant “savior complex” personality disorder in particular, as well as some mistakes Asad Umar made early in his political career.

The story starts in 2012. The fraternity of Pakistan’s financial journalists is a relatively small one, and Engro is an important enough company to Pakistan’s economy that most people who cover the country’s business and economy knew who Asad Umar was when he announced that he would be leaving his job as CEO of Engro Corporation to join the PTI. He was a widely admired CEO, which is why, at a time when many newspapers still considered the PTI to be the gadfly of Pakistani politics, Asad Umar’s announcement largely got favourable press coverage. (I am guilty of that favourable coverage myself, having written what can be described as a largely positive article about the announcement.)

A narrative soon started building: the PTI was bringing in highly intelligent people into its ranks, people who had previously been apolitical, but could potentially contribute a lot to the formulation of sound economic policy.

And Asad Umar was the posterchild for that narrative. Imran Khan would handle the political rhetoric that would galvanise the masses, but men like Asad Umar would be the cabinet ministers who

actually crafted economic policy that would turn the economy around, even if it meant occasionally upsetting voters.

And when Imran Khan was wooing these people to join the party, that is highly likely to have been the deal that was offered to them. Unfortunately for Umar, he seems to have taken that promise a little too seriously, at least at the beginning.

In the first few press conferences after he joined the party, particularly before and after the 2013 election, Umar was clearly operating on a different wavelength to Imran Khan. The future prime minister would go off on a populist tangent, and Umar would be visibly disinterested in the comments by his party’s leader. When asked questions directly, he would direct the financial journalists in the room to reach out to him directly.

In the cutthroat world of Pakistani politics, that mild dissent was enough to get Asad Umar exiled to the backrooms of PTI’s leadership. He was too prominent a figure to be completely sidelined, but think about how much you heard about him and his so-called policy unit in the Khyber-Pakhtunkhwa government between 2013 and 2018. Hardly anything at all.

Since then, Umar has learnt more about the harsh nature of Pakistani politics and has made it a point to never even mildly appear to contradict the populist narrative of Prime Minister Imran Khan publicly, or even in one-on-one interviews. That obsequiousness has earned him the coveted slot of finance minister in the cabinet, effectively the prime minister’s deputy, but it has come at the cost of him being able to express himself more openly, and thus made

the PTI more susceptible to the populist inclinations of the prime minister.

The structural problem

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he fundamental structural problem faced by the government of Pakistan is as follows:

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I t makes no effort to tax the wealthy, both the urban industrial elite and the rural agricultural elite.

2. I t buys the upper middle class’ silence by offering highly subsidized energy costs.

3. I t buys off the organized labour unions by maintaining large, inefficient state-owned enterprises to employ them.

4. I t ignores absolutely everyone else.

Virtually nobody in this chain is overtaxed, not even the salaried class, who love complaining about their taxes.

As a result, the government never has enough money to keep it going, turning itself from a functional entity into effectively a Ponzi scheme, where the hope is that the foreign-funded bailouts keep pace with the rising scale of the government’s operations.

The revenue problem is a hard one to solve, one that will take years, if not decades to solve. But the giveaways to the upper middle class and the labour unions can be solved more urgently, largely through privatization and elimination of energy subsidies.

On the matter of reducing energy subsidies, the government has made some incremental progress, but nothing that addresses the structural problem of theft, and the fact that the government effectively ends up paying for rampant theft in both the electricity and natural gas grids almost entirely through a backdoor bailout of the energy system by calling it “clearing circular debt”.

But on the question of ridding the government of the burden of the annual bailouts of the perennially dysfunctional state-owned enterprises, the government has made no progress, except for that window dressing maneuver that is Sarmaya-e-Pakistan Ltd. And the truth is that both privatisation and eliminating energy subsidies are related. The most critically dysfunctional companies owned by the government of Pakistan are energy companies, which is why it is not really possible for the government to crack down on theft of electricity and gas. Take a look at the chart that compares line losses at K-Electric, the only privately owned electricity utility in Pakistan, versus those of the state-owned companies.

Officially, the state-owned companies have lower losses, but those loss levels have remained stagnant over the past decade, whereas private ownership has caused losses at K-Electric to plummet.

State ownership in Pakistan is a failed experiment of the 1970s and needs to be gotten rid of. The sooner the government realizes that, the better off the entire country will be. Unfortunately, the PTI-led administration appears hell bent on trying yet another iteration of the same old idea: “Previous governments failed to fix the problem because they were corrupt. We will be able to fix it because we are better than they were.”

Why Sarmaya-e-Pakistan will fail

T

he government believes it can solve the problem of losses at state-owned enterprises by uniting them under a single holding company called Sarmaya-e-Pakistan Ltd and then running that similar to

the sovereign wealth funds of other governments.

Of course, because nobody in the PTI cabinet knows how the government functions, what they have actually agreed to is a massive power grab by the civil servants in the finance ministry. All of the state-owned enterprises are currently owned by different ministries, but under the new structure, they would all be owned by the finance ministry, with the finance secretary as the CEO of the holding company.

How on earth does that solve anything?

The employees of these companies would remain subject to government rules, including protections against being removed from their jobs for their incompetence. There will be no motivation by the civil servants running the holding company to behave any differently that the other civil servants who were previously running the stateowned companies individually.

And the board of directors of Sarmaya-e-Pakistan, while suitably filled with people with impressive private sector credentials, does not have the power to hire and fire the CEO, since the CEO is by default the finance secretary, who is always appointed by the finance minister, occasionally in consultation with the prime minister.

“The board of directors of any company has only one serious power: hiring and firing the CEO. Once they have done that, they can do nothing else. So, if a board does not have that power, it is useless. It does not matter who you appoint to that board. They will be able to change nothing,” said one CEO of a prominent publicly listed Pakistani company to me once.

You know who that CEO was?

Asad Umar.

GOVERNMENT BONDS

The league’s franchise owners have been losing money for the last three years, but the next three look to be a different story

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By Bilal Hussain

erhaps it was fitting, perhaps it was ironic. The most expensive team in the fourth edition of the Pakistan Super League (PSL) – the Multan Sultans – became the first team to be elbowed out of the title race. Ali Khan Tareen, son of billionaire businessman and politician Jahangir Khan Tareen, paid $6.35 million for the franchise fee for the Multan Sultans, more than twice that paid for what was previously the most expensive team in the league, the Karachi Kings franchise, leading many to ask the question: is the PSL a commercial venture or a vanity exercise for the country’s wealthy elite?

The Multan Sultan’s lack of success in the tournament was deemed by some cricket pundits to be an anomaly in an otherwise hotly contested tournament. Not that anyone could blame the new owners, who only bought the team in December 2018, giving them only a few months to prepare for the tournament.

People close to the PSL leadership, and who know about Ali Tareen’s aspirations, feel that the decision to buy the franchise at such a high price was not a bad one for him, if not a purely financial one on his part.

Ali Tareen has been positioning himself to become the face of South Punjab, no mean feat given the fact that it is a politically coveted part of the country that already

SPORTS

23

“THERE’S GREAT POTENTIAL FOR SPORTS LEAGUE INDUSTRY IN PAKISTAN AS THERE ARE ABOUT 70 MILLION PEOPLE WHO HAVE A ‘PROPENSITY TO SPEND’ ON SUCH LEAGUES. A SPORTS LEAGUE IN PAKISTAN DEMANDS VERY LOW INVESTMENT IN COMPARISON WITH WESTERN COUNTRIES AS HERE AN INVESTOR CAN BUY A WHOLE FRANCHISE IN LESS THAN THE AMOUNT A PLAYER IS TRADED FOR EXAMPLE IN A FOOTBALL LEAGUE. IT’S AN INDUSTRY RISING IN THE REGION. I SEE GREAT POTENTIAL BOTH IN THE GULF AS WELL IN PAKISTAN” Salman Sarwar Butt, former PSL official has several well-known figures prominent in national politics. And Ali’s first foray into that contested political arena did not fare quite as well as he might have liked: in 2018, he unsuccessfully ran as the candidate for the ruling Pakistan Tehreek-e-Insaf (PTI) in the by-election of NA-154, Lodhran.

He has already been working on different projects, in sports as well as education, in the region. The ownership of the PSL franchise has now brought the young Tareen into the limelight. It is likely that he and his father hope that the ownership of the franchise will give him political mileage in the years to come.

“It’s not bad to have political mileage by doing something good for society. He had been working on different projects even before Multan Sultans was up for sale. So, it’s not that he started to work after acquiring Multan Sultans,” said one former PSL official, speaking on condition of anonymity.

But while Ali Tareen may have bought the team for non-economic reasons, what about the other owners?

And what about the league itself? Just how commercially viable is this business?

How is the league doing financially?

T

he Pakistan Cricket Board (PCB) ran two press releases during the ongoing PSL 4 quoting former legends Wasim Akram and

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Shahid Afridi urging fans to turn out in big numbers at stadia across the country to make ‘Pakistan’s own event’ successful. That release, combined with other news coming out of the PSL and PCB more broadly, suggests that the league is not doing well financially, forcing the PCB and the league management to beg fans to come out in droves for matches.

Franchise owners acknowledge that they are currently losing money, but declined to provide details of their financial health when asked by Profit.

The PSL’s financial struggles stand in contrast to a booming global sports industry. Sports tourism and entertainment, according to the media and entertainment research firm Technavio, is already a $1.41 trillion industry worldwide. It is projected to achieve a projected $5.72 trillion level by 2021. Technavio’s market research analysts predict that this market will grow at a compound annualised

$36 million

growth rate (CAGR) of more than 41% by 2021.

At a PCB meeting earlier in February, a week prior to the beginning of the ongoing fourth edition of the PSL, it was disclosed that all participating PSL franchises were defaulting on their financial obligations to the PCB one way or another.

Profit has interviewed many top officials of the PSL and owners of some franchises in its previous coverage of the Pakistan Super League, in 2017 and 2018. Back then, the owners wanted to make it known that they were in the league for the betterment of cricket in the country.

A veteran sports journalist Anisuddin Khan rebuffs this notion. “What have they done for cricket before PSL? They are in the league to make money, and they are businessmen. If they make money, it is their right. But if they have been losing money, well then profit and loss are both part and parcel for any business. PCB is not obliged to pay anything for their losses, but they did after the first edition,” he said.

Despite the appeals for people to show up in stadia for matches, ticket sales are a relatively smaller portion

TELEVISION RIGHTS The amount of money paid by Blitz Advertising and Techfront, two advertising firms, for the broadcast rights for the Pakistan Super League for the next three years, a 358% increase over the last contract handed out by the PCB

of total revenue for PSL teams. The bulk of franchise revenues comes from sponsorships for the televised matches. The PCB signed a $14.3 million title sponsorship deal with Habib Bank Ltd (HBL), the country’s largest bank by assets, for the next three PSL editions, distributing half of it among six franchises.

According to ESPNcricinfo, PSL franchises incurred losses ranging from Rs200 million to Rs700 million each in the first two seasons of the league. The franchises have been seeking financial restructuring of the league as well as tax exemptions from the government to become profitable.

Since the franchises are deemed services businesses by the government, they are subject to provincial sales taxes. As part of its bid to help franchisees continue to make money, the PCB had sent a letter to the finance minister of Punjab, the province that is home to three of the six teams.

The letter included consolidated financial details of the five franchises from the 2016 and 2017 seasons.

According to the letter, the Lahore Qalandars – the least successful franchise on the field so far, having finished last each season – have incurred the largest losses: Rs312 million in 2016 and Rs421 million in 2017. The Qalandars are owned by Fawad Rana, owner of the Qatar Lubricants Company, a distributor of lubricants based in Doha.

Nadeem Omar’s Quetta Gladiators, the lowest-cost franchise in terms of its bid price, on the other hand, has accrued the smallest losses: Rs46.5 million and Rs63.5 million in 2016 and 2017 respectively. The Gladiators are one of the most successful franchises, led by Pakistan skipper Sarfaraz Ahmed and have finished runners-up twice in three editions.

Is a turnaround in the offing?

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art of the reason for the initial losses incurred by the league’s teams might simply be due to the fact that sponsors and advertisers had no idea what to expect when they first bid for television rights and advertising rates for the league, and may have bid too low. And the PCB, not having any benchmarks of its own, ended up accepting those benchmarks.

For instance, the $14.3 million title

sponsorship deal that the PCB struck with HBL is nearly three times the price of the $5.2 million title sponsorship contract awarded in 2016. The broadcast rights sold for even higher.

Blitz Advertising and Techfront paid $36 million in December 2018 for the rights for the next three seasons, up 358% from the last time the rights were sold. Those higher revenues are likely to affect the bottom lines of the franchises positively in the coming few seasons.

According to one source familiar with the matter, part of the reason for the willingness of sponsors to pay so much more is that they now see the media value of what they are paying for, given the high level of interest in the league from television viewers across Pakistan, particularly in the coveted upper middle class demographic.

The ratio of sponsorship deal value to media value received by the sponsor is measured at between 1:8 and 1:10, according to our source, who cited a study conducted by Nielsen Sports. Those are numbers that are significantly higher than is normal in other sporting leagues, where ratios of 1:3 are more typical. The PCB’s ability to negotiate higher values on its sponsorship deals is likely to erode that ratio, while still keeping it profitable for the companies making that investment.

In 2018, the third edition of the PSL was estimated to have had a combined media valuation of Rs3 billion (then $24 million) for all six teams, according to Najam Sethi, then-CEO of the PCB., who was citing a Nielsen Sports evaluation.

The higher revenues from advertising and title sponsorship rights means that some franchises are already starting to see healthier bottom lines. According to a source familiar with the matter, Peshawar Zalmi, Quet-

$14.3 million

“I HAVE A LOT OF DIFFERENCES WITH SETHI BUT THE ONGOING PSL EDITION IS NOT AT PAR WITH THE BAR SETHI HAS SET IN THE PREVIOUS THREE EDITIONS” Shoaib Ahmed, former PCB employee and current editor of Scoreline Asia ta Gladiators, and Islamabad United are likely to hit profitability this year, whereas the Karachi Kings and Lahore Qalandars are likely to hit breakeven.

This estimate is before taking into consideration any external sponsorship deals the franchises may have struck on their own.

Each of the teams has managed to find a corporate sponsor beyond just the title sponsor for the entire tournament.

The high cost problem

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art of the cost problem for the franchises has been the fact that they have to pay the franchise fees to the PCB in US dollars.

Last year, the Pakistani rupee devalued significantly against the US dollar, losing 32% of its value from December 2017 to November 2018. It has roughly remained stable since then.

The other big concern is the taxes paid on the franchise fee. According to the figures in the PCB’s letter to the Punjab finance ministry, franchise fees made up anywhere from 30% to 91% of a franchise’s total costs in 2016 and 2017.

TITLE SPONSORSHIP The amount of money paid by Habib Bank Ltd, the country’s largest bank, for the title sponsorship rights for the Pakistan Super League for the next three years, nearly three times the $5.2 million they paid for the first three years

SPORTS

According to the franchises, the franchise fee, taxes, players’ match fees, logistics in UAE, dubbed as a home away from home for Pakistan while it continues its exile from international cricket following the 2009 Taliban attack on the Sri Lankan cricket team, adds up to make them to incur heavy losses.

Despite all these reports, the newbie in the PSL – Ali Tareen, leading a consortium – has paid a franchise fee of $6.35 million when the PCB’s base price was set at $5.21 million.

The young Tareen is the son of one of the richest men in Pakistan, Jahangir Tareen, who owns a controlling stake in JDW Sugar, the largest sugar manufacturer in the country, and a company listed on the Pakistan Stock Exchange.

Tareen bought the franchise despite the fact that it made a loss of approximately Rs400 million in the one season they played in 2018. PCB terminated the contract with Schon Group, the previous owner of the franchise, after the latter ‘failed to meet financial obligations’. Given the high franchise fee, the Multan Sultans of Ali Tareen will take more time to hit profitability.

The league coming into its own

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he main reason for us to launch the PSL was simply patriotism. The IPL (Indian Premier League) wasn’t allowing our players to play in their league so there was a dire need for our own league. But we made sure that it was not just a ‘me-too’ replica of IPL and it should have a quintessence of Pakistan in its nature,” said one PCB source.

“We now have our own PSL ‘characters’ like Fawad Rana (owner of the Lahore Qalandars) and Viv Richards (legendary West Indian batsman and Quetta Gladiators mentor) where fans have developing association with.”

However, there is some concern about the departure of Najam Sethi from the helm of the PCB. The PSL was Sethi’s brainchild, but resigned from the PCB after the PTI-led Imran Khan Administration came into office in 2018.

“I have a lot of differences with Sethi but the ongoing PSL edition is not at par with the bar Sethi has set in the previous three editions,” Shoaib Ahmed, a former PCB employee told

26

Profit. He said that Sethi was able to create hype for the league in media.

Ahmed now runs a cricket magazine called Scoreline Asia.

Our anonymous PCB source has also been full of praise for Sethi and said that it was only he who was able to push the rigid PCB bureaucracy to the wall to kick off the league. The source was critical of current PCB CEO Subhan Ahmed. “The man simply doesn’t have the capacity and vision to take the PSL ahead,” he said.

Shoaib Ahmed concurred with our source’s opinion.

“He is good at knowing the ICC [International Cricket Council] rules and regulations and he has his strengths but he doesn’t has the capacity to lead PSL. However, I believe franchise owners wouldn’t let anyone deplete the brand value the league has already garnered. So I feel and hope PSL’s brand will not go down,” said the source.

Is PSL financially viable?

S

alman Sarwar Butt, who was one of the main officials of the Pakistan Super League (PSL) during its pre-launch phase, believes cricket leagues have great economic potential apart from sporting spectacle.

The second most followed sport after football, cricket’s most successful league – India Premier League’s each match now worth $9 million – four times more than highly followed NBA basketball games in the United States.

The overall value of the IPL ecosystem has increased from $5.3 billion last year to $6.3 billion this year. The renewed broadcast rights deal was the major contributor to this increase.

Among franchises, the Mumbai Indians are estimated to have a brand value of $113 million, continuing to top the charts for the third season in a row. Right behind them are the Kolkata

$6.35 million

Knight Riders (KKR), with a brand value of $104 million.

Meanwhile, the combined media exposure brand value worth for Pakistan Super League season three has been calculated at $230 million, according to a press release issued by the Pakistan Cricket Board (PCB). According to Nielsen Sports, who conducted extensive research on the league, the PSL and its official sponsors generated 38% higher value than the previous season, showing a rapid growth in the league in PSL’s third edition.

“Cricket leagues need to be built over a period of time. Any investor coming into a compelling product in the Gulf and UAE could see returns starting from 10% to 12% and building up further into very good returns over a period of time. The potential for products like these, especially in the open economies like the UAE, is huge,” he said.

Butt further said that there’s great potential for sports league industry in Pakistan as there are about 70 million people who have a ‘propensity to spend’ on such leagues. He was referring to country’s middle-class population, which exceeds total population of many European countries, where sports industry has highly been matured and lucrative.

He said that the sports league in Pakistan demands very low investment in comparison with western countries as here an investor can buy a whole franchise in less than the amount a player is traded for example in a football league. “It’s an industry rising in the region. I see great potential both in the Gulf as well in Pakistan,” Butt said.

However, Butt was interviewed ahead of the launch of the UAE T20x, which was scheduled to begin in December last year. Butt was the CEO of the league, which unfortunately, was called off at the eleventh hour. n

HIGH PRICE The franchise fee paid by Ali Khan Tareen for the rights to own the Multan Sultans, an amount that was more than twice the amount paid by the next most expensive franchise, the Karachi Kings

SPORTS

OPINION

Ayesha Aziz

mile in providing a space for gender issues and equality to be discussed without judgment. Acknowledging gender issues within a company can propel awareness, improve the working environment and boost employee confidence.

Providing speakers and the skill-sharing aspect of groups has helped to bring women a route to confidence – something that is the biggest benefit of women’s networking groups. When these groups host speakers, the topics relate to strengthening themselves intellectually, physically, emotionally, deally, we’re all part of the human race. We all have equal possibiliand spiritually with ideas that make them more ties in the world based on our abilities and desire. We all have an confident and balanced. equal playing field. But realistically, this isn’t a perfect world, and Its tools like these which women in the industry there is a need to ultimately strengthen individual potential and should all be able to access. Beyond enriching create more successful, confident business people. Even with a women’s careers, just being part of the network conscious inclusion of diversity and gender into a company’s dybrings a sense of belonging. You can forge lasting namic – there's still a great need for supportive networking groups. friendships and interact with people who have Especially in industries where the male to female ratio is often unballike-minded challenges and ambitions. anced, women continue to walk into rooms dominated by men, so for Even though studies show that women in general them to be able to discuss certain issues in the space of a women’s nethave sharper problem-solving and multi-tasking work is very important. It doesn’t matter how much education you have, capabilities, the high occurrence of poor self-eswhat race you are, or your marital status — relationships are the gateway teem in women keeps them from reaching their to realizing what is possible in our own lives when we see people just like potential at every level from asking for the dollar us tackling similar hurdles. amount they are worth to seeking out advanceSocietal issues continue to restrict the potential for many women. They ment. Some women are too intimidated by male must put the needs of their children ahead of professional advancement dominated networking environments to partici— they often choose quality of life and a less-demanding career in expate. Making some friends in the security of change for less income and reduced job satisfaction. When adverse conwomen’s networking groups gives them the ditions, financial hardship, and oppression are a part of a woman’s world, courage and helps to build confidence in others. she can draw hope from other women who encourage her and share Women more readily share and celebrate small their stories. Women’s groups provide the opportunity for women to victories in both personal and professional areas in gather and create a safe place so that she might share her story to those female-only environments. In a world where there who will be blessed by hearing it. are too few support systems, small victories Networking groups can be an efficient way to meet valuable contacts shared in an intimate gathering of women are the and gain ideas, but some female-only networking groups go the extra spark that ignites hope in their hearts. The little victories are the chances to celebrate someone’s success — even yours!

Women’s networking groups have faced criticism for allegedly segregating women and offering Ayesha Aziz praise based on gender, but praise is, and should, focus on achievements. I don’t think we need to praise women just for existing in a historically male dominated industry. While is a mother, mechanical women breaking barriers should be celebrated, anyone should be appraised first and engineer, teacher, foremost for their capability. I think when that is complemented by the fact that a trailaspiring master chef, blazer is a woman, you are putting out a much more holistic view of successful women photographer, wanderer and you encourage women to reach new heights in their careers. It’s those moments and a lot more! where you can turn being a minority into a positive statement.

Balance for be‫מּ‬er: Are women’s networks really needed?

i

EquAlity of opportunity

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You can’t be what you can’t see! The lack of female role models is a key challenge to tackle – something that is an indicator of where we are in the cycle of change in regards to gender in the workplace. Right now, the spread of female talent isn’t wide enough. Women look ahead and don’t see a path to higher leadership or any drivers to get them excited about their career prospects. There remain few mentorship opportunities.

How a woman can feel inspired to attain a role that has never had an established female role model – it also begs the question of whether a woman gaining a job in the c-suite is even that pioneering in the 21st century?

Statistics show that the minute you get to director-level and above you see a drop off of women in those roles. Female networking groups support women who are potentially falling off before reaching the c-suite and this dialogue is essential to any shape and size of business. It’s not enough to get there alone, you’ve got to bring the next generation with you and pull other women who are starting their careers and bring them up. Men do a lot of networking with men but women need to help each other as well.

We need that camaraderie to support each other, which is provided by a networking group.

One of the things I’m really passionate about is how we look at our policies and make sure they support and meet the needs that affect a woman, at any stage of her career. I think the role that women have as they continue to expand in leadership roles is to really review and reflect on business policies that might discourage women from continuing up to clevel positions or have a bias against women.

The criticism of female networking groups is an opportunity to increase dialogue and awareness around gender issues. It has been questioned that the exclusion of men from networking groups prevents awareness of gender issues in the workplace. Men don’t always have to be excluded, you can have a women’s network that welcomes the contribution of men and their voice in the conversation. Anything that drives dialogue around diversity in the work place is a positive thing. Women don’t get recognized enough sometimes, we need to support each other and I’d rather have dialogue than no dialogue.

When 90% of people on an executive board are male, who are you going to talk to, how do you build confidantes

30

and support when you have no one around you? Networking groups are not about rewarding and patting each other on the back, this is a necessity – we can’t do it on our own.

All professional networks celebrating diversity are developing, but there is still a long way to go. The great change is these groups raising issues and making a real difference in gaining awareness.

However, when it comes to reaping the benefits of the group’s connections, you get back what you put in. If you actively participate and come into the group with a proactive mindset, you will get enriching relationships and experiences out of it. If you shy away from engaging, you will ultimately have a less rewarding experience. Networking takes two not one: if you really want to participate and build a network, it takes work and it takes development and the nurturing of those relationships, be it friends, careerlength contacts or even new clients.

Tailoring a network to a group with shared experiences is the best way to allow members to discuss and gain advice without judgment. Women who do enter the industry are highly likely to work with mostly male colleagues and a male boss, so as a network we can share our best practices, support each other and share stories. When people get an opportunity to know others better, they find peer mentors, role models, and friends. Women’s groups create a place that is comforting and helpful to women while they expand their circle of friends and influence to all people. At the end of the day – especially when you work in an organization – it’s all about connecting with each other and sharing best practices; it’s just a natural concept.

Women’s networking groups are relevant to every business – whether you experience issues surrounding gender or not. When you examine the benefits, it’s easy to understand that women’s groups cultivate stubborn determination and hope. When you combine those two components, you have potential — amazing potential. Women’s groups are about giving their members a reason to believe when they run out of reasons.

These gatherings feed their attendees’ minds and souls and rekindle the fire in their hearts when the challenges and struggles of daily life threaten to dim the embers.

The primary challenge women’s networks face is positive - “to encourage women to remain in the industry.”

Yes, there's a challenge on gender parity

in the corporate sector. Yes, we need to redress the balance. But I can see change is slowly but surely coming, which is an encouraging sign that future generations will have more female role models in senior leadership to aspire to.

It’s about dialogue and it’s about increasing the diversity in our workplace because by increasing diversity we increase a better outcome for our businesses.

Life is a team sport. When you strengthen one member of the team, the entire team wins.

Some tips for building an effective Women’s Network: • Aim for a women’s group that is smaller in scale, has a targeted set of objective and provides real substance to the audience it supports.

• Decide what the role of men in your group or with your group is.

• Half of it is showing up and having a leadership role and deciding you’re passionate around that – if you have that people will come. Find core group members who are passionate, driven and prepared to put the time and effort in.

• Meet frequently until you establish what your plan and objectives are – after this you’ll be able to maintain a more remote network – monthly and quarterly groups can work quite well.

• You need to have a vision – establish why you’re bringing people together.

Understand what your goals for the group are and invite the right people accordingly – there’s no point focusing on mentorship and inviting those interested in profitability. Don’t silo women’s groups that aim to offer mentorship – being too specific will deter the next generation.

• Don't use the group as an opportunity to advertise – no one looks forward to a monthly sales pitch.

• You could focus on bringing in celebrity speakers or simply just aiming to swap best practices and meeting new people.

• Embrace modern technologies (e.g have a WhatsApp group where they ask and answer questions on, which can become a valuable resource to everyone).

• Be ready for the network to pose some issues in the wider organization, don’t wait for an issue to arise before setting up a women’s network.

• Don’t make monetary barriers – people should be able to take advantage of benefits with ease. n

EQUALITY OF OPPORTUNITY

As rates rise, borrowers are slowing their expansion plans for the Careem and Uber businesses, likely hitting the banks’ bottom line

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By Arshad Hussain

uhammad Irfan started his rental car business in 2015 with just one used car. Then came Careem and Uber and the boom in both ride-sharing and auto-lending, and soon Irfan was a busy man, growing his business rapidly to eight cars, of which five are on ride-hailing services, operated by drivers he has hired for minimal salaries of Rs20,000 to Rs25,000 a month for 10-12 hours of work a day.

Now, just as his business is really taking off, comes the 425 basis points rise in interest rates, instituted by the State Bank of Pakistan in anticipation of a sharp

32

rise in inflation. All of a sudden, Irfan’s ability to grow his business is highly constrained.

“Running a business is getting harder in Karachi and other parts of the country as the banks hiked their interest rate from this month,” said Mohammad Irfan.

The impact on Irfan’s business is a microcosm of the trade-offs faced by central banks when they set monetary policy: increasing interest rates may curb inflation, but it comes at the expense of reducing the economic growth rate, which would have been spurred by entrepreneurs like Irfan continuing to invest in their businesses.

The rapid rise in auto lending

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rior to the launch of Uber and Careem in Pakistan, auto lending was primarily a consumer lending affair. Banks would lend only to the most reliable of borrowers who were buying cars for their personal use. After the advent of 3G and 4G cellphone service in Pakistan, however, the country witnessed the launch of a wave of mobile internet-enabled businesses, including ride-sharing apps like Uber and Careem. And all of a sudden, from the banks’ perspective, auto lending went from being consumer finance to being small business lending: still risky, but a little less so.

In Karachi, many people who might otherwise not have bought cars for anything other than personal use are now running Careem and Uber businesses: leasing cars from banks and then hiring drivers to operate them on ride-hailing services. The cost of setting up the business is relatively low using an auto loan, since one can start with as little 20% of the value of the care as a down payment and then make monthly installments. The banks, meanwhile, love this business because it is effectively a small business loan secured against a physical asset.

“All the banks easily give finance for vehicles on installments as they keep the vehicle’s documents against the security of their loans,” said Irfan.

The companies or drivers have to make monthly installments for up to five years. “Owing to the low-cost interest, it was easy to pay back their installments on time, but now it is almost double in the present circumstances,” claimed Irfan.

The SBP’s decision to hike interest rates, combined with the devaluation of the Pakistani rupee, therefore, will likely also hit the banks’ bottom lines as they are forced to scale back what has until recently been a rapidly growing and highly profitable business line for the banks.

Banks typically charge anywhere between 300 and 400 basis points above the Karachi Interbank Offered Rate (Kibor), which in turn is closely linked to the State Bank’s discount rate.

When the discount rate was as low as 5.75%, even a 400 basis point premium above that amount meant that loans would be priced at less than 10% for the end-consumer. Now, however, with the discount rate itself at 10.25%, interest rates for auto loans have soared.

The effect of the rise in interest rates is an expected slowdown in the economic growth rate of the country to as low as 3% for the fiscal year ending June 30, 2019, compared to 5.8% for fiscal year 2018.

And despite the 425 basis point hike in interest rates over the course of little over a year, there are signs that the central bank may still not be done yet with raising rates. “The SBP may also increase 50-100 basis points discount rate for the next monetary policy to overcome the rising inflation,” said an analyst at Topline Securities, a brokerage firm.

According to SBP data, the consumer financing of the commercial banks increased by 12.4% to Rs57.2 billion in July-Mar 2018 compared to Rs51.1 billion in the same period last year.

Similarly, the auto financing of the banks also increased by 24.3% in July-Mar period to Rs 36.6 billion.

Islamic banks dominate auto loan market

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or a variety of factors, most notably the religious sensitivities of many Pakistanis, the Islamic banks tend to dominate nearly all forms of consumer financing, including auto loans, This is despite the fact that, on average, Islamic banks in Pakistan charge higher interest rates on virtually all of their consumer borrowing products relative to conventional banks.

A survey conducted by Profit of the interest rates charged by the banks on their auto loans reveals that the Islamic banks have significantly higher rates. Meezan Bank, Bank Alfalah (Islamic banking division) and Bank-

Islami are the most expensive lenders in Pakistan’s auto financing sector.

However, the interest rates of Dubai Islamic Banks are little lower compared to other Islamic banks or banks’ Islamic branches.

Ahmed Ali Siddiqui, Head of Product Development and Shariah Compliance at Meezan Bank, said, “We are charging ‘rent’ from our customers as they don’t want to pay ‘interest’.” According to him, this is not a big amount on a five-year investment, as the conventional banks are also charging 15-16% on auto financing.

He also said that Meezan Bank never has any hidden charges and the monthly payment amounts included insurance cover, registration charges and other taxes etc, which the bank charges from the customers. Banks that do not include those in their upfront monthly payment amounts tend to be those who have some hidden charges, he stated.

A research analyst at AKD Securities, an investment bank, had a somewhat more cynical view of the matter: “Islamic banks are also charging a ‘religious tax’, which makes their loans more expensive,” said Hamza Kamal, an analyst who covers the banking sector at AKD Securities.

Bank Alfalah (Islamic banking division) is charging close to 16% interest rates for its auto loans, followed by 15.35% per year by Bank Al Habib Limited, Bank Islami (15.56%) and Dubai Islamic Bank (14.5%).

Among the public sector banks, the First Women Bank is the most expensive lender with interest rate of 20.44%, followed by the Zarai Taraqiati Bank Limited with 16%. (Both banks are not financing for auto loans, but giving loans for other products) Habib Bank Ltd, the country’s largest bank, is charging a 15% interest rate on auto finance from individuals. “HBL charges the lowest return on financing, as it is the biggest bank of Pakistan,” said Rehan Ahmed, a branch manager at HBL in North Karachi.

MCB Bank is giving out loans at around a 16% interest rate. The big advantage of a loan from MCB, however, is that it is a fixed rate loan: meaning rates are guaranteed not to go up during the entire five-year duration of the loan. Most other banks have variable rate loans, which, in an environment with rising interest rates, is a somewhat unattractive option.

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Interestingly, the country’s largest bank owned by the government — the National Bank of Pakistan — also charges 15% interest from individuals, compared to 15% by the military-owned Askari Bank.

Profit before tax of Islamic banking industry increased to Rs23 billion by the end of September 2018 compared to Rs 18 billion in the same quarter last year, according to SBP data.

Profitability ratios like return on assets and return on equity (before tax) stood at 1.3% and 20.2% respectively by end of September 2018. During the period under review, operating expense to gross income ratio was registered at 65.1%.

PM’s youth loans

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S Bank is the only bank in Pakistan which is lending directly to the drivers of Careem at 6% under the Prime Minister Youth Business Loan (PMYBL). “We are empowering Careem drivers and present them an opportunity to own a vehicle of their dreams in the pursuit of establishing a source of stable income,” said Zaid Haroon, Head of Corporate Communication of the JS Bank.

“The bank is receiving overwhelming response as we are the only lender in Pakistan who is providing loans under PMYBL scheme at 6% to the Careem’s drivers only to create jobs,” said Zaid Haroon. The bank had so far provided 3,500 cars to the drivers in last 18 months, he added.

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The filer / non-file question

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s if rising rates were not difficult enough, under new laws, the banks are now required to ask borrowers and depositors the question as to whether they are tax filers or not. A tax filer must have an income of over Rs90,000 to be approved for an auto loan, said sources in the industry.

In May 2018, the outgoing Nawaz Administration had imposed a ban on non-filers, preventing them from buying new vehicles. Similarly, non-filers were also banned from purchasing property valued at more than Rs 4 million. The purpose of the ban was to force these people into the tax net.

The decision of the government severely hit the banking sectors and the auto industry. The banks were the biggest customers of the new brand cars of the locally manufactured cars in Pakistan. Pak Suzuki Company was the biggest beneficiary of the past trend.

“Annually, the banks book approximately 60-70% of locally produced cars for their customers and the bookings of new cars have decline by 30-35% from July last year,” auto industry source claimed. Now the banks are providing loans only to the filers, he claimed.

The new Cabinet of Prime Minister Imran Khan on September 18, 2018 allowed the non-filers to purchase properties and new cars, but later it reversed its directives owing to the pressure of

opposition and the economists.

Overseas Pakistanis will be allowed to buy new cars and new property. In case of inherited property, the beneficiary, a widow for example, is also exempt from the condition of filing tax returns. This means the property can be transferred to the beneficiary regardless of its value even if he or she is not a filer. The third change allows non-filers to purchase automobiles below 200 cc (engine), such as auto rickshaws and motorcycles.

However, the latest amendments once again bar non-filers from buying new automobiles and property. “Previously there was no limit on the type of automobiles non-filers can’t buy, we have changed that,” Finance Minister Asad Umar said on a TV interview, explaining one can’t expect a rickshaw driver or bike riders to be a tax filer. Similarly, those (housewives) who inherit property from their husbands or fathers should not be burdened with this condition, he said.

Since December 2018, Irfan had sold three cars to pay-off bank loans as there is no other option for him to pay higher returns in future. He was paying Rs 300,000 to Rs 350,000 in the head of loan-interest per month. He has started winding up his business because of the rising inflations, non-availability and higher cost of CNG. He said, “if we do not pay the installment on timely, I have to sell other vehicles because the banks will pressurize me to pay the loan or they (banks) will seized my vehicles.”

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KARANDAAZ:

THE GATES-FUNDED NONPROFIT SEEKING TO BANK THE PAKISTANI UNBANKED By digitizing the government’s payments, the NGO believes it can reach up to 84% of the unbanked

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arandaaz: the Gates-funded nonprofit seeking bank the Pakistani unbanked By digitizing the government’s payments, the NGO believes it can reach up to 84% of the unbanked According to the World Bank, approximately two billion people do not use formal financial services and more than 50 per cent of adults in the poorest households are unbanked.

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Financial inclusion is a key enabler to reducing poverty and boosting prosperity. Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs–transactions, payments, savings, credit and insurance–delivered in a responsible and sustainable way.

To promote digitalization and increase its GDP by a cumulative 7 percentage points (roughly US$ 36

billion) by 2025, as envisaged by State Bank of Pakistan, the first step needed to be taken by government is to digitize its payments and bring 14 million unbanked customers into the formal financial fold.

With the visible growth in usage of digital technology and its penetration in financial services worldwide, digital technologies are also fast being deployed in Pakistan for new mobile accounts, carrying out funds

solutions for social impact. Karandaaz collaborates across the financial services ecosystem to maximize impact through improved access to digital finance for low income, rural, and otherwise excluded population segments, especially women. With $32 million in funding from the Bill & Melinda Gates Foundation, Karandaaz Digital aims to work with all stakeholders to facilitate digitization of government and other payment streams and provide support to innovative digital financial service startups. The focus areas of the unit are divided into four work streams.

Rehan Akhtar, Chief Digital Officer, Karandaaz Pakistan shared the details of Karandaaz Digital unit and its activities. A major task of the organization is to ensure government’s payments of over Rs5 trillion to be through digital channels.

Under the digital unit, one of the major programs of this organization was to collaborate with State Bank of Pakistan for establishing micropayment gateways which will substantially reduce the cost barriers to reaching the poor with financial services through interoperability between accounts, including branchless banking. According to Rehan, it is expected that through this initiative, 84% of the unbanked population can be served and approximately Rs5 trillion worth of government payments can be digitized. Karandaaz Pakistan, in partnership with SBP, sees this initiative as a significant effort in helping the poor to access financial services and thereby improving their lives.

Ensuring transparency in government projects

transfers, introducing electronic payment systems, etc.

Confronting the huge challenge of digitizing Pakistan, with no major competitors in the country, a non-profit organization Karandaaz Pakistan has taken number of steps for digitalization of Pakistan especially in the financial sector.

Karandaaz Digital aims to catalyse the financial services industry towards greater financial inclusion by employing cutting-edge innovations and digital

The major contribution of digitalizing payments is to ensure transparency in the execution of government projects.

Rehan believes there is substantial evidence to show the benefits of digitizing government payments in improving transparency and efficiency and advancing financial inclusion. Karandaaz Pakistan is working jointly with major government stakeholders to digitize Person to Government (P2G) and Government to Person (G2P) payments through the following initiatives: Micropayment gateway: In the move to make the government’s payment digitalized, Karandaaz Pakistan has been engaged with the State Bank of Pakistan (SBP) to establish a micro-payments gateway. This will

substantially reduce the cost barriers to reaching the poor with financial services through interoperability between accounts, including branchless banking.

It is expected that through this initiative, 84% of the unbanked population can be served and approximately Rs5 trillion worth of government payments can be digitized. Karandaaz Pakistan, in partnership with SBP, sees this initiative as a significant effort in helping the poor to access financial services and thereby improving their lives.

Digitization of National Bank of Pakistan: Apart from collaboration with SBP, Karandaaz is also engaged with National Bank of Pakistan which collects and disburses around Rs8 trillion per year, primarily through manual processes. Karandaaz supported NBP to develop a strategy to digitize these payments and develop a platform based on an open API approach. The partnership is an opportunity to digitize government payments and bring 14 million unbanked customers into the formal financial fold.

Digitization of National Savings: Rehan says another major contributor in digitalizing the payments is Central Directorate of National Savings (CDNS) which has also been engaged by Karandaaz in digitizing its banking systems and data and enabling alternate delivery channels to better the capacity of CDNS to extend financial services to low-income and excluded segments.

Kissan E-Credit Scheme: Apart from the banking system, Rehan says Karandaaz is providing technical assistance to the Punjab agriculture department to support the five-year Kissan (Farmer) Package Program aimed at digital and financial inclusion of farmers. The intervention aims to reach 500,000 smallholder farmers who will be provided interest free loans.

He said Karandaaz provided assistance to the Agricultural Department in designing the overall farmer’s registration and payments process flow and on technical integrations with different banks to provide loans. Karandaaz also provided technical assistance to develop the digital apps for the farmers on their smartphones.

Money order digitization: Besides, Karandaaz provided technical assistance to Pakistan Post for digitizing its money order service to build new business opportunities, improving service penetration and providing efficient, transparent and convenient

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services to its customers.

Innovation and incubation: According to Rehan, Karandaaz Digital partners not only with government channels but also with commercial service providers, private firms, and FinTechs to develop and test digital payment solutions with the prospect of reaching millions of new customers who are otherwise financially excluded or have limited access to financial products and services.

Improved digital connectivity is reshaping consumer behavior, which is increasingly tilted in favor of convenience, cost savings, and customized retail experiences. Businesses are also capitalizing on opportunities emerging from digitization, such as supply chain efficiency, lower transaction costs, and enhanced flexibility in addressing consumer needs.

Value chain payments: Karandaaz partnered with one of the leading private banks in Pakistan to conduct a pilot for digitizing payments to 6,500 last-mile retailers and 10 distributors to understand merchant motivations for adopting digital payments as well as technology requirements.

User Interface and experience: Karandaaz conducted a user interface and experience (UI/UX) study based on human centered design (HCD) principle with one of the leading mobile network operators. The operator redesigned its mobile money app using an HCD approach to increase access to financial services through a well-designed smart phone interface.

FinTech disrupt challenge: Karandaaz conducts a FinTech Disrupt Challenge in Pakistan to identify and support innovative solutions in the FinTech space. Till date, Karandaaz has provided grant funding to 10FinTechs including Ricult Pakistan, Publishex Solutions, Paysys Labs, Credit Fix,Unikrew Solution, Agri-Gate, Invoice Waqalah, Matilda Solutions, Love for Data, and AgriMart.

Research and data analytics: Talking about another task of his company, Rehan says Karandaaz Digital also conducts research, assessment, and digital experimentation to assess the pricing and product adaptation possibilities for digital financial services among low income segments. This project includes: Customer segmentation study: Karandaaz partnered with Dalberg and

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TO PROMOTE DIGITALIZATION AND INCREASE ITS GDP BY A CUMULATIVE 7 PERCENTAGE POINTS (ROUGHLY US$ 36 BILLION) BY 2025, AS ENVISAGED BY STATE BANK OF PAKISTAN, THE FIRST STEP NEEDED TO BE TAKEN BY GOVERNMENT IS TO DIGITIZE ITS PAYMENTS AND BRING 14 MILLION UNBANKED CUSTOMERS INTO THE FORMAL FINANCIAL FOLD Rockefeller Philanthropic Advisors to develop a nuanced framework for analysis and action in designing and delivering digital financial products based on people’s attitudes, behaviors, experiences, and preferences for money and technology. The study also focuses on understanding the reasons for the gender gap in financial inclusion.

Human-centered design study on Benazir Income Support Programme (BISP) beneficiaries: This study evaluates the biometric verification system (BVS)-based cash withdrawal process for BISP beneficiaries. Insights and recommendations from this study are expected to assist in redesigning the withdrawal process and for scaling across the country.

Fintech Center, Information Technology University (ITU): Karandaaz has partnered with ITU to conduct actionable research by the FinTech Center at ITU to understand the digital financial services needs of female micro-entrepreneurs, develop a women-focused mobile solution for a Digital ROSCA (Rotating Saving and Credit Association), and find solutions for safeguarding women against fraudulent SMS. Retail payments study: Karandaaz has conducted a research study to understand the factors hindering the uptake of digital solutions for retail payments in Pakistan. This study also undertook a detailed segmentation exercise to understand the pain points and requirements of each merchant segment.

FINCA roaming SIMSIM facilitators experiment: Karandaaz is conducting a pilot in partnership with FINCA Microfinance Bank for mobilizing economically active women in peri urban/rural areas in the use of digital financial services through Roaming Female SIMSIM. Policy and regulation: The important part of digitalization in Paki-

stan, according to Rehan, will remain incomplete until the issues related to regulation are resolved with the help of government. Karandaaz Digital envisages an enabling environment for the promotion of digital financial services in Pakistan. Karandaaz identifies critical regulatory gaps, challenges and barriers restricting digital financial inclusion and conducts research to inform deliberations on addressing those barriers.

In order to engage with regulators, policy makers and relevant stakeholders, Karandaaz also develops policy briefs to identify regulatory barriers and highlight opportunities to advocate for policy reform to drive the adoption and usage of digital financial services in Pakistan.

Digital banking regulations: Karandaaz has signed an agreement with State Bank of Pakistan under which it is providing technical assistance to the bank for formulating legal and regulatory framework including licensing criteria for digital banks. This will help create an enabling environment for digital banks and streamline the regulatory and supervisory framework.

Karandaaz Pakistan

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arandaaz was established in 2014 and registered with the Securities and Exchange Commission of Pakistan as a nonprofit organization. Basically, it is aimed at promoting access to finance for small businesses through commercially directed investments and financial inclusion for individuals. In regard to the projects of the organization it is funded

by United Kingdom’s Department for International Development (DFID) and the Bill & Melinda Gates Foundation (BMGF). Karandaaz operates through four programme vehicles: Karandaaz Capital, Karandaaz Digital, Karandaaz Innovation and Knowledge Management & Communication. n

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