Profit E-Magazine issue 67 by Profit (by PT)

From mattresses to cars, the heir to the Master Molty Foam fortune is trying to shake up Pakistan’s car market with Chinese cars. But how do the machines match up, and even if they do, will they ever be accepted? By Bilal Hussain

“T

he automobile is an expensive commodity - a consumer durable you don’t forget buying for the rest of your life. You have your house then you have your car. And just like a house, you have a lot of expectation from your car. It is your status symbol. You drive it everyday. It has hundreds and thousands of moving parts all working in tandem such that it can either be a delight or a nightmare” says Danial Malik. Danial is a man that understands the importance of a car. He knows how integral it is, just how pervasive its presence can be in a person’s life, and just how much people care. He is by no means a raving petrolhead, but he has an appreciation for the more romantic aspects of automobiles. This connection and understanding to cars will help him in what he is setting out to achieve, for Danial is the CEO of Master Motor Limited, a joint venture between Master Motor Corporation and Changan International Corporation with a 70:30 equity partnership. And with this, he wants to bring Chinese cars into Pakistan to compete with the existing, established Japanese brands.

Masters of industry

aster Motor Limited, of course, is part of the Master group, best known for their Molty Foam mattresses which were put into the market by Danial’s grandfather, Malik Riaz, back in 1963. One is naturally taken aback of course, few people know just how extensive the Master group is beyond their mattress business. Master Enterprises, under the banner of which Danial’s grandfather sold Molty Foam mattresses, was a joint venture with Bayer A.G. of Germany to manufacture foam mattresses in Pakistan. The term ‘Molty Foam’ soon enough became the household shorthand for mattress. But the group’s exploits were far from over, and it went to new heights after when Riaz Malik’s three sons Naveed Malik, Najeeb Malik and Danial’s father Nadeem Malik took the company’s reins in their hands. Over time, the group further diversified into textile, chemical, engineering, power, retail and furniture sectors successfully. Now, with the third generation of the family involved in the business, the group has 16 manufacturing facilities all over Pakistan with distribution and supply chain network throughout the country. According to Danial, the Master group directly employs 20,000 people.

But their involvement in the automobile industry is one that can be traced right back to their initial beginnings as a mattress company. The group entered the industry in the most innocent of ways - making car seats. Four years later, they had made inroads into the textile industry and has furnished most of its need for seat covers from there. During a visit to the Master group’s autopart facility, Procon Engineering, one can see seats being made for Toyota’s Fortuner to Suzuki’s Mehran. The same is true for Honda at its Lahore’s facility. Our guide at the Procon Engineering, Amanullah, explained that the group has integrated over decades from making foams to sit and sleep on, and then entered the auto industry. At Procon Engineering, other metal based auto-parts are also made. Today, the group has two automotive plants located in Karachi with an annual production capacity of 740 buses, 9000 trucks and 30,000 passenger vehicles.

China throws its hat in the ring

hen you think China, you think communism, and dragons and Kung Fu and maybe Pandas. You don’t think cars when you

“So, if you ask me whether it will be difficult for us to bring out a Chinese vehicle to compete with Japanese brands, then I can only show you that we’ve done it already in the bus segment thanks to our superior quality and bus service. We have been producing at our full capacity for two years and yet we are unable to meet demand” Danial Malik, CEO Master Motors

think China. Cars are supposed to be made in Japan or Germany, not China. Or so you’d think. China is in fact the biggest automotive market in the world, producing a whopping 30 million units per annum. Within China, Changan is the largest automotive brand - producing 2.8 million vehicles a year, more than ten times Pakistan’s total car production. The reason more Japanese and South Korean brands are seen globally is that the market dynamics of these countries are vastly different to China. They have small domestic demand because of population so they had to look outwards in order to grow. China didn’t need a global stage because they had enough of a market at home. But then why the sudden interest in Pakistan? As Danial explains, the automotive industry has seen a global recession of sorts in the past year or so. “The Chinese automotive market cooled with the rest of the world. And since then, for the past couple of years, Chinese companies have been aggressively looking outwards to grow.” There is also a deeper, more global reason for China to want to target Pakistan. Chinese cars are all Left Hand Drive, and the Right Hand Drive vehicles designed for Pakistan are being made especially keeping in mind the country is a RHD nation.

By collaborating with Master Motor, the Chinese company is not only looking to tap into the Pakistani market, but also the global righthand drive market through their Pakistan based facility. “You can see all other companies have provided technical license and support to their partners in Pakistan but we are the first joint venture in Pakistan with a global brand Changan to manufacture cars in Pakistan,” said Danial. The Changan’s right-hand drive (RHD) vehicles produced in Pakistan will be sold to Changan’s distributors in South Africa, Malaysia, Indonesia and other RHD countries. If it happens, this will be the first time in the history of Pakistan that locally made vehicles will be exported out of the country on a large scale.

What’s in it for Master?

learly Changan has a reason to be interested in Pakistan, but why is the Master group joining hand with them to bring Chinese cars to Pakistan? It is a risky venture, Pakistan is a naturally suspicious market, and people have not yet completely warmed to Japanese import cars, even as their end is being spelled by the government, let alone be comfortable with buying Chinese cars. The impression is that “made in China” means made cheap, and the fixation with Japanese cars is will not be easy to shatter. But Danial has no qualms about the quality of his product, claiming the “made in China” label is little more than perception. “Chinese companies like Tencent, Alibaba and WeChat are leading the world. They are bigger than their American counterparts, even though they only operate in China while the Americans operate all over the world,” he says in the defence of China. “The final frontier for Chinese brands really is the automotive sector. And this is the most exciting and challenging frontier because the automobile is the most expensive commodity - a consumer durable that one purchases as a long term investment.” The idea is to bring Changan passenger cars to Pakistan. According to Changan’s Director Marketing and Sales, Shabbiruddin, Changan’s goal is to bring Chinese SUVs to Pakistan that will be available in the price of a high end sedan. While the company has been hush hush with exactly what models they are going to launch, or even what they are trying to compete with, Profit’s impression was that the group is trying to bring SUVs to compete with the Honda Civic and the Toyota Corolla Grande - cars that float around in the Rs 3.2 - 3.8 million mark. A risky proposition, to say the least, especially if it is entering the market with a virtually unknown, Chinese sounding name. For now, the company is still just working

on its load carrying vehicles. It launched three 1000 cc vehicle, the carriers M-8 and M-9 as well as the seven-seater van ‘Karawan’ in April this year. Danial said that the company has built a plant in Karachi with a production capacity of 30,000 vehicles per annum within 13 months’ record time. “There is a textile part, there is a plastic part, it has got an engine, it has got metal, glass, paint - it has something or the other from so many different industries. That is why automotive is called the mother of all industries. It’s complicated, and changing the myth about Chinese products through this industry is going to be a very exciting challenge for China” says Danial.

Smoke and mirrors:

n Pakistan, that challenge is for the Master group alone. While Danial may have no worries about the product he is putting out in the market, perception does matter. And it is going to take a lot to change it. Changan has an uphill task ahead of it. All other cars have a past in Pakistan. Either the companies have operated here or their cars were imported. Even now, one can sometimes still see passenger cars like the Nissan Day, Nissan Juke, Kia Sportage, or the Hyundai Santro out on the road, but Changan passenger cars have never made it to Pakistani roads. Which is why they will have to do something extra to stay in the game. To tout their fated success, Changan likes to point out how well Chinese buses have done in Pakistan. Danial says that Master Motor, which has in the past produced Chinese vehicles such as Foton buses, quickly understood that it has to bring the best product from China. In the three-ton segment, Master Motor are market leader in Pakistan. It has also been selling Yutong buses in the country. “Yutong are the most sold buses in the country and it happens to be Chinese. We have partnered with Yutong to bring inter-city buses to Pakistan. We are doing its CKD production for the last four years,” he said. For the past few decades, Korean company Daewoo and Japanese company Hino had dominated the inter-city bus market in Pakistan. Master Motor is now dominating the market with 70% market share and selling its buses at roughly 30% higher price. “So, if you ask me whether it will be difficult for us to bring out a Chinese vehicle to compete with Japanese brands, then I can only show you that we’ve done it already in the bus segment thanks to our superior quality and bus service. We have been producing at our full capacity for two years and yet we are unable to meet demand,” Danial said. Still, one wonders whether Master would not be better off expanding their bus business rather than trying to get into the household vehicle market. After all, buses are not family

AUTOMOBILE

cars, and family’s don’t really want rough, bulky, Chinese, practicality. The car market has generally not looked fondly upon Chinese cars. Syed Anjum, a car dealer at a showroom at Khalid bin Walid Road, says that people were not happy with Chinese car performance. Anjum had facilitated the sale of a FAW pickup, not even a passenger car such as the FAW V2, to a close acquaintance and had received negative feedback. While Changan is not FAW, there is a generally low opinion of Chinese products, and people aren’t quite ready to risk it with a purchase as major as a car. “Even as a dealer with a commission to make, I would not want to risk my reputation over this car. It just isn’t trustworthy.” Others that Profit contacted were also unwilling to let go off their Sedans for a Chinese brand SUV. A major reason for such harsh opinions, again, is the comparatively low performance of FAW vehicles compared established brands like Honda and Toyota. One car enthusiast, Shakaeb Khan, said that the Changan CX70T - the car Changan is likely to try and launch in Pakistan - looks like a crossover, with its front inspired by range rover models, an overdone interior, and loaded with unnecessary minute technological trinkets that have no bang for the buck. “Both have a 1.5 turbo charged engine with 6speed auto and manual gearboxes. None of them is a four wheel drive. Hence no offroad, which the Pakistan market expects from an SUV,” said Shakaeb, who had the chance to check out Changan vehicles during the Pakistan Auto Show held here at Karachi Expo Center in April. He thinks that the Changan SUV, simply on its merits, might be able to compete with the Honda BRV, front wheel drive. What it can’t compete with is the much lower cost of the BRV, which is a Rs2.5 million machine for a new car with and established and well respected brand name. The Cx70T is the premium among Changan models. And while it might have better fuel economy given its 1.5 turbo engine, if it is indeed in the Rs 3.2- 3.8 million range, it will be blown away in the market by the BRV for those that

want to upgrade to a cheaper SUV from their sedans. Master and Changan are no oblivious. Changan’s Director Marketing and Sales Shabbiruddin also confessed that established brand names have been embossed on the minds of people aged roughly 50 years plus and minus five years. “But the new generation is not like that” he argued. “They see what they are paying for and analyse whether or not they are getting value for money, and with our product, they definitely are.” At the same time, Changan is only so flexible. They know that the demand is Pakistan is directed more towards affordable hatchbacks and Kei cars, but they will not be launching such models any time soon. Meanwhile, Danial also admitted that there may be demand for hatchbacks or kei cars in the country, but they were helpless in the face of their parent company Changan to launch models as per Pakistan’s market requirements since the demand here was only a small fraction of what they produce in China. So in effect, the

“The existing players should prepare to receive another blow from the new entrants onto the market. One thing that has been made abundantly clear by macro-economic indicators is that demand will not be increasing until at least next year. The worst years are yet to come for the auto industry” Ahmed Lakhani, Senior Analyst JS Global Capital

Changan-Master alliance is less about providing cars to a Pakistani audience, and more a side venture for the Gargantuan Changan.

The state of the industry:

hat will become of Changan in Pakistan is yet to be seen. The Master group is confident in their investment and Changan sees enough potential in the market to take the gamble and throw some SUVs Pakistan’s way. But what kind of industry is Changan and master entering into? For Changan, Pakistan is new territory, and even for the Master group, trying to sell household cars is going to be uncharted waters. The immediate concern is of course the original concern. Japanese companies such as Toyota, Suzuki and Honda have been in the Pakistani market for a long time. But that doesn’t mean Changan is swooping in to break the big three. Other companies including Japanese Nissan and Korean brands Kia and Hyundai have previously been to Pakistan as well, and Nissan and Hyundai will be making their second entry

“The established brand names have been embossed on the minds of people aged roughly 50 years. But the new generation is not like that, they see what they are paying for and analyse whether or not they are getting value for money, and with our product, they definitely are.” Shabbirudin, Director Sales and Marketing Changan while Kia will be doing it for the third time, fighting for scraps and a seat at the table. Danial is not worried though, and his easy candour is almost infectious. He certainly knows the importance of a car, and his belief cultivates confidence in the venture. “We have a clean slate and we can be whoever we want to be. And with our beautifully designed cars with the latest technology at an accessible price, why in the world would it not work?” he asks. The joint venture between Master Motors Changan is worth $100 million at a ratio of 70:30. The top brass prides itself of managing to form a joint venture for the first time in the country’s auto sector. In all other collaborations, the foreign partner has always been there just for Technical License Agreement. It has been alleged in the industry that under Technical License Agreements, the foreign partners generally limit the domestic partner to the task of procuring parts from them - so that they can achieve their own export growth goals, creating a clear conflict of interest. Considerable localization by such collaborations is difficult to achieve and thus not very beneficial to the host

“The Changan SUV, simply on its merits, might be able to compete with the Honda BRV, front wheel drive. What it can’t compete with is the much lower cost of the BRV, which is a Rs2.5 million machine for a new car with and established and well respected brand name” Shakaeb Khan, Auto Analyst

country. And as Danial pointed out, the drastic devaluation of the rupee and high import duties has made it very important for companies to localize to remain profitable. “They (Changan) have invested in the venture so if the joint venture remains profitable, so will they. So it is also in their interest for us to localise as soon as possible.” This would also be good for the economy at large, because more localisation would mean fewer dollars moving out of the country, giving Pakistan the precious foreign exchange that it so badly needs right now. With all this in mind, the Master-Changan alliance has vowed to achieve localisation upto 50% by 2021. For sure a bold claim, but that seems to be the flavour of the entire venture. According to one study, production capacity of the auto industry may double to 600,000 units with new entrants entering the auto fray and further investment by existing assemblers. Approximately $1.3 billion will be invested by new and existing players. The auto industry in Pakistan has huge potential due to low motorization, which is only 18 vehicles per thousand people. The government has already removed auto sector anomalies by restricting used car imports, removing regulatory duties and allowing non-filers to purchase vehicles. The next challenge is ensuring GDP growth and a stable policy environment leading

to increase in vehicle demand. However, the recent rounds of rupee devaluation, and subsequent price increase has reduced sales of established players Honda, Toyota and Suzuki. “Apart from Toyota’s Corolla car, sales decline of the whole industry has been quite evident. Suzuki has been incurring losses in the last two consecutive quarters,” JS Global Capital Senior Analyst Ahmed Lakhani told Profit. He said that the existing players should prepare to receive another blow from the new entrants onto the market. One thing that has been made abundantly clear by macro-economic indicators, and does not bode well for the new entrants either, is that demand will not be increasing until at least next year. “The worst years are yet to come for the auto industry.” The good news for the auto car manufacturers, however, is the government’s restrictions on imported cars. The import of used cars has declined by 60%, according to reports. Commercial imports of used cars has never been legal, but it has been imported under different pretence - through manipulation of gift, baggage and transfer of residence (TR) schemes, which was supposed to facilitate overseas Pakistanis. This means that there is now a new market for local car manufacturers to target. During the calendar year 2018, 278,000 passenger cars and LCVs were sold while another 54,000 used cars were imported - giving Pakistan a market size of 331,000 cars. Since January 15 this year, there has been a complete halt in imports of used cars due to government restrictions. Not only will the new entrants be looking to scoop up major chunks of this 54,000 car pie, they will at the same time be making an effort to cut into those that would buy from the big three otherwise. This would make sense because even though they may not be as recognisable brands, especially Changan, many of the apprehensions involved with imported cars such as them being refurbished will not exist. n

AUTOMOBILE

By Syeda Masooma

22As. But where’s the beef?

ow many of you have heard of Ali Moeen Nawazish? Chances are, most of you have. In 2009, this large but unassuming A level student was making rounds on television shows after securing 22 As in his A levels – a world record at the time. Oohs were Aahed for this beacon of scholarly pursuit, parents gave their relatively underachieving children biting side glances, and said students made jokes at the expense of their rotund overachieving contemporary. And the world went on. Ali Moeen Nawazish made a world record academic achievement, and our ‘A-grade’ obsessed nation turned him into a celebrity. After his exploits at the intermediate level, he went on to get his Bachelor's degree in Politics and International Relations from Trinity Hall, Cambridge, and then completed a master's degree in journalism from the Columbia University Graduate School of Journalism. Since then, his success has been middling at best. Currently, he is a youth ambassador and columnist at Jang Media Group. He also runs blue-ticked Facebook and twitter accounts with 1.2m and 33.7K followers respectively. But nobody really cares about his Columbia journalism education, which must have helped him develop the Jang Real-AR news app. He is and will forever be the kid who got 22As in his A-levels, and now posts shaky, winding, brow-beaten political opinions on his Facebook, which get a decent amount of shares because, well, he must be smart if he got those grades. No? But let’s forget about Ali Moeen Nawazish and his pointless number of A-grades for second. How many of you have heard of Ahmed Rauf Essa, S Zayd Enam, or Bilal Ather? Chances are, very few of you. Essa and Enam are among the Pakistanis included in Forbes 30 Under 30 list. Essa is a graduate of the Institute of Business Administration in Karachi and is an entrepreneur, best known for co-founding Telemart. He has about eighteen different accolades and honors to his name which include him being a nominee as well as the judge for Forbes 30 Under 30. He has received the prestigious CEO World Award, ACQ Global Award, Golden Bridge Award and International Business Award among others. Enam is Pakistan’s drop-out success story, having left Stanford to focus on the company he founded - Cresta.ai. Enrolled in the PhD program at Stanford, after completing his Bachelor of Arts/Science from University of California, Berkeley, the entrepreneurial spirit has always been alive in Enam, who dropped out once before (in high school) to work on his first startup

MediConnect - a healthcare provider platform. Ather is also an entrepreneur. He founded the multimillion dollar company Wifigen. He also struggled academically, his ACCA giving him nightmares as he flirted with the idea of becoming a career rock guitarist, and tried his luck at singing. It was only after giving his musical abilities a run that he decided to explore another of his interests - computers. With two CCIE certifications, and only six months job experience in Beaconhouse, he would jump ship from the job market to join the start-up scene and find his own company - Ikhtira Systems only for it to capsize a short while after. It was only after this tumultuous road that he found himself helping Arfa Karim’s parents in setting up their institution in Plan9, in exchange for permission to utilise the space for his own work - which by now had started to include Wifegen. All of the names mentioned above are success stories of Pakistan’s youth, and only one of them has made it into mainstream consciousness. The reason I am bringing them up is to make a simple point - Pakistan’s socio-cultural mindset, and in turn educational institutions, are more concerned with higher academic achievements that can be shown off to neighbours and printed on pamphlets, than they are concerned with arming graduates with the appropriate knowledge, attitude and skills required by the Pakistani employment industry. Of the four success stories, only Nawazish has anything spectacular to show for academically. Some of the others have even struggled in their academic careers. They do, however, have entrepreneurial abilities to take financial and career risks, defiance in the face of failures, an ambition to give back to society without monetary gains, technical knowledge, adaptability, and perhaps realistic expectations from the world they operate in. By no means do I mean to trivialize the great feat achieved by Nawazish, but considering he is the only one that has basked in some of the limelight, I merely mean to ask, to what end are such achievements? And what does the market want beyond grades? And why are we so grade obsessed in the first place? One entity to blame can be the government school and job system that relies heavily, if not solely, on marks obtained. The prime example of this can be found from the combined competitive and central superior services exams that lead to coveted bureaucracy posts. Furthermore, the ‘respected’ professions of doctor and engineer also require little more than the ability to remember and reproduce bookish knowledge in exams to top the board and enter into a government college or university. Over the years, matriculation and intermediate marks have sky-rocketed, with toppers achieving once unthinkable marks. Another side of the story is the social per-

ception that equates intelligence with academic performance. Parents want something to brag about, and it's much easier to brag with numbers than without. That is why parents would rather rave about their child being a ‘topper’ rather than any extra-curricular achievements. So ingrained is this bizarre idée fixe that it has become a standard comedy trope, from stand-up to whatsapp joke forwards. But the roots of this obsession can still be traced back to a single idea: better grades mean better job prospects. While it may still stand true for the bureaucracy, things have changed a great deal in the corporate and private sector.

Times are a changin

he job market is changing because jobs are changing. And with them the requirements of employers, society, and the economy. The value of a good education can never be underestimated, but the pendulum of benefit and returns has started swinging towards non-academic, co-curricular and soft skills. Automation and Artificial Intelligence (AI) have already made a myriad of jobs doable without human workforce in the Westren hemisphere of the world. This is an unavoidable development even for Pakistan. As employers look to innovate, prospective employees are going to have to get creative as well. In a recent study by Naqeebz Consulting titled “Graduate Employability: Employers’ Perception Survey Report,” it was revealed that the top job openings of 2018-2022 in Pakistan will be Business Development, Digital Marketing, Human Resource Management, Marketing, Business Analysis, Project Management, Brand Management, Software Development, Social Media Marketing, and Client Services. This is a long road from the time when construction workers, manufacturing factory workers, and agriculturists topped the list of jobs driving the economy. There are of course certain jobs that will always exist - lawyers and doctors for example - that require rigorous academic training, although even these are undergoing a process of methodological change. But if you are to join corporate industry, the ability to cram and repeat phrases from a textbook alone isn’t going to get you anywhere in the new market landscape. The same survey also identified that 78 percent of employers in Pakistan are dissatisfied with the quality of graduates. The 212 organizations from 25 different industries spread across Pakistan that took part in the survey were asked what qualities they consider important while hiring fresh graduates. Only 18 percent of them considered high grades to be a factor for evaluating the applicants - and even then it was one among many factors. However, to avoid the impression that no education is important, a

EDUCATION

notable 79 percent of organizations considered professional knowledge skills and technical skills to be an important condition for them to hire a fresh graduate. But what this essentially means is that unlike your parents, neighbors, or relatives, 82 percent of employers out there are not concerned with your marksheets. An equally important factor to note here is the focus on 70 percent employers on soft skills - a concept unheard of in most educational institutions in Pakistan. Even globally acclaimed institutions like the ACCA did not bother to include a soft skills course in their curriculum for Pakistan, even though back home in the UK, soft skills has become an invaluable part of the ACCA degree. These ‘soft skills’ include verbal communication, time management, presentation skills, and critical thinking. In addition to these, the survey also identified positive attitude, self-confidence, team work, passion, enthusiasm, integrity, and planning and organization among the soft skills that employers today look for in their prospective employees. In addition to these vital skills that need to be added to modern graduates’ repertoire, another striking expectation from employers was their focus on what the motivations of the applicants crossing them were. Unsurprisingly, high salary expectations ranked high on the list of reasons for employers’ dissatisfaction. Poor written communication, lack of initiative taking abilities, refusal to learn new skills, inability to work in teams or comprehend work instructions were also among the primary reasons most of these employers’ expressed discontent with the quality of Pakistani graduates. The demands of these employers may seem subjective, but if you pause here for a moment and reflect, what comes to mind? Aren’t these the same qualities that we saw in Ahmed Rauf Essa, S Zayd Enam, and Bilal Ather, the three success stories mentioned at the start of this article? They share many, if not all, attributes that these employers are looking for. Entrepreneurship, initiative taking ability, positive attitude, self-confidence, passion and enthusiasm are ingredients that each of them put into their work to get where they are today. At the same time they did not have unrealistic expectations which allowed them to deal with their initial failures. They were willing to change career paths, not just their ways of operating, which is high on the list of demands everywhere. There are innumerable success stories from within and outside Pakistan that highlight the importance of the qualities and skills brought out by this survey, but the problem lies not in their identification but in their amalgamation into the educational systems, curriculum, and mental and social fabric of Pakistan’s education system.

“As employers look to innovate, prospective employees are going to have to get creative as well. The top job openings of 2018-2022 in Pakistan will be Business Development, Digital Marketing, Human Resource Management, Marketing, Business Analysis, Project Management, Brand Management, Software Development, Social Media Marketing, and Client Services. This is a long road from the time when construction workers, manufacturing factory workers, and agriculturists topped the list of jobs driving the economy.” So what next?

t may seem easy enough. The problem has been identified, and now that we know what employers want, it’s a simple case of moving towards resolving the problem. Diagnosis means we’re halfway there, and might finally be able to start moving towards resolving the problem. The reality is much bleaker. This is not the first time such a survey has been conducted in Pakistan, or even the first time that these very problems have been identified within the system of education, training and employment. In fact, in 2016 the Higher Education Commission conducted a survey that highlighted most of the problems identified by Naqeebz Consulting in 2018. This survey, conducted jointly by the HEC and the World Bank as part of the Tertiary Education Support Program (TESP) implemented by the HEC for 2011-2015, included 375 employers who nominated practical knowledge, prior work experience, and the ability to think analytically as the top qualities of employability. Ability to take responsibility and initiative, self-motivation, and capability of oral communication and interpersonal skills were also identified as necessary elements of success. Needless to say, two years ago the requirements of analytical skills, creativity, team work, numerical knowledge, writing and computer skills, flexibility and willingness to learn and change were as important as they are today. It is not difficult to see how many of the employability factors identified by HEC in 2016 still remain uncatered to by educational institutions. If two years is not enough time to bring about any change, then there is another governmental institution - Pakistan Bureau of Statistics (formerly Federal Bureau of Statistics) - that has been conducting annual Labor Force Surveys since as far back as 1963. Their 2018 report titled “Pakistan Employment Trends” identified areas of education

and employment that are increasingly becoming redundant. Agricultural employment, wholesale, trade, hospitality industry, transport, communication, and real estate as well as manufacturing were all identified as the areas where there is “vulnerable employment”. In addition to these former mainstays of the job market, “Health and social work” were also highlighted as areas where employment opportunities are weakening. Despite the long annexure of “Sustainable Development Goals” attached to this report, little has been done to resolve the issue of these sectors where employment has become “endangered”. And as the world changes, there is little that can perhaps be done. But even the bare minimum would at least result in some hope. Unfortunately, the academia-industry linkage in Pakistan is pitiable. According to the survey by Naqeebz Consulting, a whopping 80 percent of the organizations surveyed have never been approached by HEC or by any higher education institution to get an idea of what they look for in employees - the very employees they are supposed to be training. While almost all universities tout their MBA degrees are the straight road to financial strength, there is no evidence of any cohesion between the universities offering degrees and the places they are supposedly training them for. The industry players need to be taken on board by the HEC and the academia in general to give their input on curriculum development, designing modules for technical and professional skills, and for opening up the opportunities for internships during education. As far as the industry side is concerned, the Naqbeez survey showed that we have at the very least 150 prominent employers from 25 industries willing to work with the educational authorities to formulate better courses and curriculum. But it all depends on how quick the academia is to take into consideration the obvious, and by now unavoidable, changes in the country’s employment dynamics. n

EDUCATION

ACCOUNTING

By Farooq Tirmizi and Bilal Hussain

rnst & Young, the global accounting and professional services firm that goes by its brand name EY, is re-evaluating its relationship with its Pakistani partner Ford Rhodes Sidat Hyder, which includes the possibility that EY will sever its ties with its local partner. Rumours of this potential change have been swirling in the accounting industry in Pakistan since at least January of this year, Profit has learned through sources familiar with the matter, and have cause alarm among Pakistan’s leading accountants and partners at the local affiliates of the global Big Four accounting firms. According to sources familiar with the matter, the cause of the re-evaluation appears to have been the results of an internal compliance audit of Ford Rhodes Sidat Hyder by Ernst & Young’s global offices, a routine practice designed to ensure that the firm offers consistent standards of work to its clients worldwide. That compliance audit found significant deficiencies within the practices of Ford Rhodes Sidat Hyder, and caused the re-evaluation to begin. Conversations between Ford Rhodes Sidat Hyder and Ernst & Young are ongoing and have not yet reached a definitive agreement or settlement on the matter. Profit reached out to both entities for comment on the matter, but did not receive responses. It is also unclear as to what precisely what found to be deficient in the practices of Ford Rhodes Sidat Hyder. Insiders at the firm are either unwilling or unable to comment, and partners and other accountants at rival firms also appear in the dark as to what precisely was the problem, except that it appears to have been significant enough for at least one, and possibly more, partners to have been fired from their jobs, an almost unprecedented action in the history Pakistan’s Big Four accounting firms. The unwillingness of anyone to state specifically what the problem was is unsurprising: the Big Four accounting and audit firms rely on their reputation for integrity above all else for business. A loss in confidence would be a devastating blow to the firms. Whatever the issue, it appears the problem had been festering for some time, and had remained obscured from view from the global partnership in large part owing to Pakistan – and specifically Karachi’s – poor security situation, which had meant that the annual compliance audits were typically conducted not by a randomly assigned set of

“Auditing by firms like EY give credibility to almost all companies in different industries. It helps investors take decisions more easily if they consider the financial reports credible. If EY leaves country, then there is one firm lesser [in Pakistan], who give credibility to financial reports of different companies in Pakistan. Credible reports lessen friction for investors to take decision. If there is one less big name like EY in the country, then it might even mean decline in investments” Arsalan Ahmed, accountant at JS Global

partners from the global firm, but specifically by Pakistani accountants working out of the EY offices in the United Arab Emirates. Sources familiar with the matter say that many of these accountants had previously worked at the Pakistan offices of EY and would tip off their former colleagues on the scope of the coming compliance audit, which would allow Ford Rhodes Sidat Hyder to be able to paper over their deficiencies in time. In 2018, however, with the security situation significantly improved, EY felt comfortable sending non-Pakistani partners to conduct the compliance audit, which meant that Ford Rhodes Sidat Hyder was not given advance warning of the scope of the audit. As a result, significant deficiencies were found in the practices of the local firm by their global partners, resulting in the difficult conversations that have been taking place since then. The senior management at EY Pakistan have been left scrambling, trying to fix those deficiencies – which resulting in at least one partner being fired – and have tried to contain the flow of information, going so far as to keep even senior employees in the dark as to what is happening with respect to the conversations with EY Global. “Yes, the rumours are rife that EY might be pulling out from Pakistan,” said one source in EY Pakistan who wished to remain anonymous. “We have confronted the top management, but the top management has told us that the two partners – foreign and local – have only been discussing different matters, including a possible merger of EY Pakistan (EY Ford Rhodes Sidat Haider) with EY Global. The top management has assured us that nothing of the sort is happening right away and routine work need not to be disturbed.” Few in the industry believe a complete

pullout of EY from Pakistan is on the cards. Many believe the global firm is likely to wish to retain its presence in Pakistan, but with tighter global control – and far less autonomy for local partners. The worst case scenario being envisioned by these partners is for EY to sever its ties with Ford Rhodes Sidat Hyder and opening up a separate EY Pakistan office, as the local subsidiary of one of its other global offices, either in the Middle East or elsewhere around the world.

Causes of friction

ources in the industry say that part of the reason for the friction between the global partnership of the Big Four firms and their local partners in Pakistan can come from standard operating procedures and policies set by the global firms that are not always easily application within the Pakistani context. An example cited by those sources was the following: private companies doing business in Pakistan who hire the Big Four accounting firms for an assessment or evaluation may have fewer requirements for the standards that need to be followed, but the global standards that the firm’s local affiliate would need to adhere to in order to retain their global affiliation would force them to perform services that the client neither wants nor needs, and is most certainly not inclined to pay for. “The international audit industry has evolved but Pakistan’s industry has yet to evolve,” said one partner at a Big Four firm in Pakistan. “It is difficult to follow benchmarks of the Big Four. Sometimes it is not even required in our local environment, but the foreign partners want us to follow their guidelines.”

Reverberations across the industry

egardless of the outcome of the conversations between EY and Ford Rhodes Sidat Hyder, it is becoming clear that the industry as a whole is feeling significant reverberations already. According to a source at a rival Big Four firm, there are now reports that PricewaterhouseCoopers (PwC) is beginning a similar, deeper compliance audit by a non-Pakistani global partner of its affiliate in Pakistan, AF Ferguson & Company, a process that sources say began earlier this month. Partners at all the major accounting firms are now worried about what is likely to happen to their global affiliations. “I am disappointed as, ultimately, this will affect all Big Four firms which is not good for the country,” said one partner at a Big Four firm in Pakistan. “This will give ideas to the other Big Four who may follow suit. Risk management is a very big issue for them.” Others have tried to downplay the significance of what is likely to happen. “The pioneers of the Pakistan’s auditing industry A. F. Ferguson is better known than its foreign partners PwC. The ‘Big Four’ are not too big in Pakistan,” said another industry insider, a partner at another Big Four accounting firm. “Therefore, if Ernst and Young pulls out of Pakistan, it won’t be making much damage to the industry.” “Pakistan is inherently a low-fees market for assurance. Local fees here are less than what auditing firms charges in other markets as assurance fees,” the source said. “It is expensive to maintain Big Four standards – even as compared to other international auditing firms, and when the returns are low then pulling out may be more prudent decision than staying. There’s reputation at stake.” Others, however, consider the notion that a Big Four accounting firm leaving Pakistan will have no impact on the industry as delusional thinking. “The local partners of the Big Four are also the biggest accounting firms in Pakistan. There used to be some big names in Pakistan’s

It appears the problem had been festering for some time, and had remained obscured from view from the global partnership in large part owing to Pakistan – and specifically Karachi’s – poor security situation, which had meant that the annual compliance audits were typically conducted not by a randomly assigned set of partners from the global firm, but specifically by Pakistani accountants working out of the EY offices in the United Arab Emirates audit industry some forty odd years back, who didn’t partner with the big global names. Where are they now? Either they do not exist anymore or are too small to be observed,” said another partner at a Big Four firm in Pakistan.

Why the Big Four matter to Corporate Pakistan

ultinational firms tend to prefer having a single audit firm that can audit their operations around the world, which is why accounting firms tend to be the most global organisations of professional services providers. For instance, if Siemens uses Ernst & Young as its auditors in Germany, they will want to use EY Pakistan to audit Siemens Pakistan. Among the biggest impacts of EY leaving Pakistan would be the gap left in terms of technical knowledge and information technology, which the Big Four provide to their local affiliates. A pull-out would need a loss of access to that knowledge base and technology. Then, of course, there is a loss of access to the credibility that comes from having financial statements audited by a reputable global accounting firm. “If a financial statement is audited by a well reputed firm or especially from one of the Big Four of the audit firms, it certainly gives credibility to the statement to the sigh of relief of the inves-

According to a source at a rival Big Four firm, there are now reports that PricewaterhouseCoopers (PwC) is beginning a similar, deeper compliance audit by a non-Pakistani global partner of its affiliate in Pakistan, AF Ferguson & Company, a process that sources say began earlier this month

tors,” said Arsalan Ahmed, an accountant at JS Global. Arsalan has also heard the rumours that EY has been leaving Pakistan and thinks it is not good for the country. “Auditing by firms like EY give credibility to almost all companies in different industries. It helps investors take decisions more easily if they consider the financial reports credible. If EY leaves country, then there is one firm lesser [in Pakistan], who give credibility to financial reports of different companies in Pakistan. Credible reports lessen friction for investors to take decision. If there is one less big name like EY in the country, then it might even mean decline in investments,” he said. The industry source added that the Pakistan audit industry is staff intensive, with each of the Big Four firms having 1,500 to 2,000 well-paid white-collar employees. Should even one of them pull out, it would have a significant impact in terms of job losses and the closing of opportunities for Pakistani accountants and aspiring accounts. And the blow to Pakistan would be devastating reputationally: all other countries that Pakistan competes against – in either the region or globally – have local partners and offices of all of the Big Four accounting firms. Pakistan already lags India in terms of other types of professional services providers: there are few – if any – global law firms, banks, investment banks, and management consulting firms with operations in Pakistan. The fact that all Big Four operate in Pakistan is a rare bright spot in Pakistan’s connections to the global economy. Should that change, it would have a major impact on the economy, and the willingness of investors to consider Pakistan as a destination. More importantly, if one firm leaves, it could start an exodus that results in all Big Four firms leaving, which would be a devastating body blow to Pakistan as an investment destination. n

ACCOUNTING

By Muhammad Faran Bukhari

t’s the first thing they teach you in economics class, demand and supply. The higher the demand for a product and the lower its supply, the higher its price and vice versa. Ask anything of the market and you shall receive, or to put it in more economic jargon, demand and you shall be supplied. The agricultural sector is no exception. But what do you do about the little problem of there being a demand for seasonal produce in the wrong season? Sure, you can preserve, dry or can, but people want fresh summer fruit on their tables in the winter. Since the early 1960s, greenhouse structures have been evolving to meet this demand. One of the more recent innovations in this field have been tunnel greenhouses. These humble looking arches are a far-cry from the large, sci-fi transparent structures that one imagines when thinking of a greenhouse. Using simple sheets of polyethylene and hoop houses constructed of aluminium, steel tubing, or even the significantly cheaper lengths of PVC water pipes, farmers have managed to regulate climatic conditions and produce off-season vegetables that are high in demand, and which they can then sell at high prices in the market.

How is it done?

ultivation in tunnel farms usually begins in autumn. A normal tunnel farm ranges from 10 to 20 acres with most farms needing a covered area of at least 3 acres to be economically feasible. Steel pipes, aluminium pipes or bamboos are used to create D shaped rows of support structures around the plantation that are usually 3 to 12 feet in height and about 5 feet wide. The structures are covered with polythene sheets to create either low tunnels, walk-in tunnels or high tunnels depending on the farmer’s needs. The polythene sheets traps heat inside and keep rain and frost outside, simulating summer and enabling the plants to be able to bear produce that would not be able to grow if exposed to the natural climate. In Pakistan, especially in the fertile plains of Punjab, farmers are fast switching away from conventional farming and adopting tunnel farming tech-

niques, which reportedly give a higher per acre yield and higher profits compared to conventional farming. But how much does the yield and profits increase exactly and how feasible is tunnel farming in the country compared to other conventional farming methods? Profit went to the farmers taking this leap, to find out.

The farmers perspective and feasibility

“I

n Pakistan vegetables and fruits including cucumber, tomatoes, green chili and watermelons are increasingly being produced in tunnel farms,” says Qazi Naeem, a tunnel farmer based in Daska. “So what happens is that with tunnel farming you come into the market earlier than the rest, and you get an edge over conventional farmers and make good money. With time more farmers are switching towards tunnel farming in the country.” According to Qazi Naeem, tunnel farming should only be done on at least an area of more than 3 acres for it to make economic sense. “On an area lower than 3 acres, costs are usually high, and this adversely impacts profitability.” Tunnels however, vary by cost and size ranging from low tunnels, walk-in tunnels to high tunnels. “On an area of 1 acre, high tunnel costs from Rs2,000,000 to Rs3,000,000, walk-in tunnels costs Rs350,000 to Rs450,000 and low tunnel costs around Rs150,000. But when it comes to per acre yield, tunnel farms offer much higher productivity

compared to conventional farming. And Qazi Naeem is glowing with praise for the yield that tunnels provide. “With a high tunnel, we can get anywhere between 100,000 to 150,000 kgs of tomatoes per acre. In a walk-in tunnel the yield is around 40,000 to 60,000 kgs, and in a low tunnel the per acre yield is around 30,000 kgs,” he says. According to Qazi, compared to this per acre yields of tomatoes in conventional farming are around 15,000 kgs to 18,000 kgs. Before tunnel farming gained popularity in Punjab, Sindh, having the advantage of being able to produce off season vegetables due to its favourable climate, was the primary supplier of off-season vegetables to Punjab. However, the large distance between the provinces meant high transportation costs that cut down on the margins. A single truck of vegetables and fruits that comes from Sindh costs more than Rs100,000 in transportation costs alone. By producing off-season vegetables in Punjab, farmers have been able to get higher margins and avoid the extra storage and transportation logistics that come with moving produce along long distances. But tunnel farming isn’t quite so simple as putting up a tunnel and reaping the benefits. Inputs like water, fertiliser and sprays needed for tunnel farming are more in quantity compared to those needed for conventional farmings. “In tunnel farming hybrid seeds are used which need high fertilisation and high water management in order to get to their maximum yield,” Qazi Naeem explains. “Special sprays whose residual effect van-

AGRICULTURE

“With a high tunnel, we can get anywhere between 100,000 to 150,000 kgs of tomatoes per acre. In a walk-in tunnel the yield is around 40,000 to 60,000 kgs, and in a low tunnel the per acre yield is around 30,000 kgs,” he says. According to Qazi, compared to this per acre yields of tomatoes in conventional farming are around 15,000 kgs to 18,000 kgs” Qazi Naeem, Tunnel Farmer

ishes after 24 hours are used in place of normal hard sprays to save the seed from getting burnt. Hence, the larger inputs needed for tunnel farming increase cost. Despite this, the increase in per acre yield still results in more profitability compared to conventional farms.” For profits own assessment, we analysed the returns for planting gourd on a 1 acre tunnel farm using low tunnels. Compared to open plantation, the returns from tunnel farming came out to be significantly more. In a one acre low tunnel, the cost of installing the structure stands around Rs23,000 with transparent polythene and black mulch, which costs an additional Rs15,000 and Rs5,000 respectively. In per acre terms, the cost of seeds is around Rs5,000 and fertilizers, pesticides and labour cost Rs20,000 each. Hence, the total cost for planting gourd in low tunnels on a one acre

farm comes down to Rs108,000. On the other hand, with a minimum production of Rs30,000kgs per acre, the minimum total revenue is approximately Rs250,000 due to the off-season quality of the gourd means that it can fetch an above market price, meaning a profit of around Rs140,000 and a Return on Investment (RoI) of around 129 per cent in the first year. Compared to low tunnels, planting gourd in the open costs around 50,000 in total and gives a production of around 15,000 kgs to 18,000 kgs per acre. Since off season vegetables cannot be produced in the open, gourd produced in the open has a lower price compared to that produced in tunnels during off season. Hence the total revenue generated through traditional cultivation comes down to about Rs100,000 giving profit of around

Rs50,000 and an RoI of around 100 percent in the first year, much lower than the profit and RoI from low tunnels. While tunnel farming may offer increased return to farmers, Qazi Naeem believes that the high initial cost of setting up tunnel farms is a major deterrent for farmers, who might otherwise be willing to switch to tunnel farming. “The small landlord is hand to mouth. The cost difference between conventional farming and tunnel farming is huge. Only people who can afford to invest and bear the cost can switch to tunnel farming. For example, if you plant vegetables in the open and your expense is Rs50,000 per acre, that expense will increase to Rs150,000 if you install a low tunnel,” he says. Muhammad Din is a farmer based in Rahim Yar Khan. Like Qazi Naeem, he also tried his hand at tunnel farming cultivating cucumbers, green chillies, and capsicum in low tunnels. However, he switched back to conventional farming due to higher cost of setting up tunnels and since the returns from growing sugarcane were similar to what he was getting through tunnel farming. “Almost 100 pipes are needed to create tunnels on an area of one acre which is a costly affair and the amount of labour needed for tunnel farming is also higher,” he says in an interview with Profit. “At that time the return we got from tunnel farming was equal to what we could get by cultivating sugarcane. Why would I install tunnels if I can get the same amount of money from sugarcane.” However discounting the returns provided by sugarcane at the time, Muhammd Din concedes that returns from tunnel farming were greater than other crops cultivated through conventional methods. “Through tunnel farming I used to get a profit of around Rs100,000 per acre. On the other hand if I cultivate cotton or wheat through conventional means that gives a profit of around Rs50,000 per acre,” he says. n

AGRICULTURE

OPINION

Sayem Z. Ali

Budget - Not all is doom and gloom

are kicking up a storm on the impending doom and gloom of the economy. All governments in the last decade have gone down the same route. Every election cycle has been followed by a balance of payments crisis whether it be 2008, 2013 or 2018. Each time we have had to reach out for a bailout from the lender of the last resort, the IMF. The prescriptions are always the same: more taxes, higher interest rates, depreciation of the rupee and reduction in subsidies. Inevitably all these corrective measures lead to lower growth and higher inflation. The bigger The government has brought forward the crisis, the bigger the adjustment needed to stabilize the economy, and hence, the bigger the impact on growth & inflation. a balanced budget Given the size of the crisis the economy is facing today, the FY2020 Budget was expected to unveil significantly tougher measures such as increase in rime Minister Imran Khan’s PTI led government GST on goods & services (from 17% to 18%), increase in corporate tax and super has announced a tough budget to arrest the alarmtax, roll back of subsidies, and a significant reduction in the size of the Public ing build up in public debt over the last decade. Dr Sector Development Program (PSDP). However, quite surprisingly and to the Hafiz Shaikh in his press conference at the launch relief of many, none of these measures were presented in the Budget. of the Economic Survey FY19 lamented that the Hence, it will be a big challenge for the government to achieve the targets size of the public debt has reached unsustainable levels. Public debt laid out in the FY2020 Budget to achieve primary deficit of 0.6% of GDP in increased from Rs 7.7 trillion in FY2009 to over Rs 28.6 trillion in FY2020 – compared to 2% in FY2019 and 2.2% in FY2018. Achieving these FY2019, meaning that debt has nearly quadrupled in a decade. targets is not only paramount to reduce the build up in public debt, it is also In the upcoming year FY2020, just the size of interest paycritical towards securing external financing of US$ 6bn from the IMF and ments on the debt accumulated over the last 10 years will reach Rs around US$ 8bn from World Bank and ADB over the next three years. Without 2.9 trillion, which is a whopping 83% of the total budgeted federal the financial support of the International financial institutions the economy will revenue collection targeted in FY2020 Budget (net of provincial continue to face significant risks of a default on external debt obligations. transfers and inclusive of all tax and non-tax revenue). This leaves However, despite these challenges the Budget FY2020 brings forward hardly any resources for the federal government to run the civil welcome steps to divert more resources towards the poorest and the most marand military administration, fund the growing pensions bill, and ginalized segments of the society. Keeping true to its core principles of welfare make critical investments in public infrastructure. Faced with this society, the PTI government has increased spending under the Prime Minister alarming situation, the only option on the table for any government Ehsas program by 52% in FY2020 to Rs 193bn (from Rs 127bn in FY2019). Simwould be to take sharp austerity measures, including reducing ilarly, the newly merged districts of KPK (formerly FATA) have been allocated spending and raising government revenues. These are deeply Rs 152bn funds in the FY2020 Budget, against earlier commitment of Rs 100bn. unpopular moves for any government. Opposition parties are proThese are massive steps and will directly support over 10 million of the poorest testing against the measures and citizens are bracing themselves for and marginalized households. a tsunami of inflation on essential good & services. Media analysts The other positive in the FY2020 Budget is the move away from the regressive taxes imposed under the Dar regime. These regressive measures have choked up the transactions taking place in the economy and increased the cost of doing business. The most important steps include abolition of the regressive presumptive tax regime and the ‘non-filer’ Sayem Z. Ali regime. These are important steps towards ease of doing business in Pakistan, with Pakistan currently ranked in the 10 is a senior banker and worst regimes globally. Overall, given the tough economic circumstances, the government has brought forward a bala visiting faculty memanced budget. It will take Pakistan towards a more sustainable debt path and create space for the government to spend ber at IBA Karachi on the welfare of citizens. There are risks that the targets will not be achieved and that could put the IMF program in sayemali@iba.edu.pk peril. However, it’s not all doom and gloom as the media analyst are predicting. Government has diverted a significantly higher budget for the poorest and most marginalized households. At the same time steps have been taken to reduce the cost of doing business and facilitate economic activity and job creation. Despite all the hue and cry over on media on rising prices and cost of living, Inflation remains within single digits, averaging 7.3% in FY2019. This is lower than the first year of the PPP government in 2008 (CPI averaged 19.6%) and lower than the first year of the PMLN government in 2013 (CPI averaged 8.6%). Inflation will likely go up in the aftermath of the FY2020 Budget but it is hardly the doom and gloom picture being painted on the media. n

COMMENT

By Bilal Hussain

ilal Asif, founder of a blockchain-based software-as-aservice (SaaS) company Block360, says all of his companyâ&#x20AC;&#x2122;s clients are outside Pakistan â&#x20AC;&#x201C; mostly from Europe. Block360 is yet to have a local client and Bilal believes it is only due to lack of awareness about the technology. Block360 currently has four foreign clients â&#x20AC;&#x201C; two from Germany and one each from UK and Denmark. Bilal believes his startup has great potential to scale and has already started generating over Rs1 million per month in revenues, which his company is receiving in euros. The company provides infrastructure for the cryptocurrency and machines economy. It develops and delivers cutting-edge software solutions necessary for businesses, governments, organizations and individuals to securely move assets across the blockchain. Since its inception in 2017, it has provided blockchain technology support to over 15 startups and established companies mainly in Europe but also in the United States.

“We meet many startups that pitch their business to investors across Pakistan, but countless times we see business plans that are not thoroughly worked upon. We meet startups that know how much they want to raise now but not a clue about how much more they need to scale. We meet founders that are fixated on valuations and are targeting an exit before they have even built a business. This does not unlock funding. A word of caution for founders: raise funds to build a business, not to sell a facade you build around it” Ali Samir Oosman, CEO of TPL e-Venture Capital Small businesses are becoming ‘micro-multinationals’ across the globe by using digital platforms such as eBay, Amazon, Facebook, and Alibaba to connect with customers and suppliers in other countries. Even the smallest enterprises can be born global. According to a McKinsey survey – which was cited in its report Digital Globalization: The New Era of Global Flows – 86% percent of tech-based startups reported some type of cross-border activity. Small businesses have the ability to reach out to new markets. Such businesses support economic growth everywhere. But Pakistan is not faring well in the segment. The startup culture is struggling. Entrepreneurs have reported several reasons. There is still a cultural lack of support for entrepreneurship and the physical and technology infrastructure of the country leaves much to be desired. But a big complaint from startups is that there are still not enough venture capitalists willing to fund and scale their businesses. “The startup culture is very bad in Pakistan. Nobody is working to address it, and those who are supposed to be doing this, are serving their own personal interests,” said one entrepreneur who wished to remain anonymous so as to speak more candidly. This entrepreneur successfully completed an incubation round at a renowned incubation center with their team, but was not happy with the experience at the incubator. In this person’s view, the only good thing they got from the incubation was a place to sit, which served as a temporary office when the team was unable to afford renting an office of their own. “There was a clause in the contract, which

made it binding for the aspiring entrepreneurs to sit in all workshops when they are asked to, whether it is related to them or not.” According to the entrepreneur of the tech-enabled startup, investors in Pakistan are not very much fond of tech-based business idea. And those who are interested ask for majority stakes in the company. “We come up with an idea, spent time developing it, and when we contact a potential investor, they ask us for majority shares. That’s the biggest catch of our startup culture,” the entrepreneur said. Most analysts agree that Pakistan has great potential for venture capital investment. It is the sixth most populous country in the world with a population of over 200 million. It has the fourth largest middle-class in developing Asia and 65% are under the age of 30 with a median age 22. It has one of the fastest growing retail markets with an average annual growth rate of 8.2% for the period 2016-21 – ahead of India’s 5.3% and Vietnam’s 4.8%. The size of Pakistan’s retail market is $210 billion. The online retail sales in Pakistan have surpassed $1 billion in 2018 with a compound annualised growth rate (CAGR) of 140% over the past four years. However, online sales are still only 0.34% of total global e-commerce as compared to India’s 5% and Indonesia’s 4%. But Pakistan’s e-commerce sales are projected at $4-5 billion by 2021.

The difference between venture capitalists and vulture capitalists

oya Imam, head of investments at TPL e-Ventures – a venture capital fund backed by TPL, the security technology and financial services company –

says that venture capitalists who look for majority stakes in startups are mockingly referred to in the industry as ‘vulture’ capitalists. Such investors are considered detrimental for the startup culture as it demotivates entrepreneurs seeking to build out their businesses. It is considered bad for industries that might flourish as a result of a thriving startup culture. However, Ali Samir Oosman, CEO of TPL e-Venture Capital, believes that these ‘vultures’ – typically old family businesses rather than institutionalised venture capital firms – were nonetheless important initially as there was no one else in the beginning to finance Pakistani startups. It was those early vulture capitalists that drew the attention of more professional and institutionalised investors, inducing in them a serious case of FOMO (fear of missing out) about the Pakistani startup ecosystem. “And finally, companies like TPL are here, who want to take things professionally ahead, keeping the interest of the entrepreneur intact in the startup.” “We aspire to be one of the first strategic investors a startup would come to. We have a small yet engaging team that plays an active role at every stage of a company’s development; your coach, your sounding board, your door-opener or just a second pair of eyes to confirm whether you’re on the right track. “TPL e-Ventures offer its portfolio companies not only financing, but also strategic and operational support as well as access to a national and international network. We aim to help the daring and passionate build meaningful, outstanding businesses. We are not passive financiers. We provide mentorship and strategic advice to startups in a number of fields, helping startups scale their business and help them raise their next round of financing. “In fact, we actively mentor and advised

VENTURE CAPITAL

startups on their business plans and strategy eventually connecting them with other investors even when we are not investing. A big part of our mission is to grow the industry and make Pakistani startups attractive investment opportunities,” Ali said.

Entrepreneurs: know the game you are playing

efore approaching a venture capitalist, an entrepreneur or a startup must know their business. They must know and be able to articulate what they want and achieve. One piece of advice from venture capitalists to entrepreneurs: research the venture capital firm you are pitching to ahead of meeting them and understand whether their objectives align with your startup. Venture capital funds manage the money of investors who seek equity stakes in startups. Such funds invest in early stage companies with a primary focus on technology, generally investing for a minority stake taking a long-term view somewhere between five and 10 years. The investments are generally high-risk for high-reward opportunities. However, these characteristics may vary from venture capital to venture across different markets and sectors. One thing remains constant that remains similar across the globe is the focus on finding innovative businesses that have the potential to disrupt, and helping them grow. “Good startups have no shortage of investment opportunities. It’s more about finding the right partner that shares and complements the founder’s view and wants to see the startup succeed,” Ali said. However, he strongly believes that although capital is also not unlimited in Pakistan, most Pakistani startups lack the aptitude to unlock even the available capital. “I have seen startups even coming up with

an exit plan. Just imagine entrepreneurs starting an idea that they are supposed to believe in to eventually sell it off. To an investor, it shows that even the entrepreneur doesn’t completely believe in his or her idea. If an investor comes with an exit plan, it’s fine but it’s not fine for an entrepreneur.” He said that people, who are looking for capital investment, do not properly do their homework and do not know what would be their revenue stream and what they are looking to achieve through their enterprise. “But an important thing that startups must ask themselves before anything else is: what am I doing wrong that I can do better?” “We meet many startups that pitch their business to investors across Pakistan, but countless times we see business plans that are not thoroughly worked upon. We meet startups that know how much they want to raise now but not a clue about how much more they need to scale. We meet founders that are fixated on valuations and are targeting an exit before they have even built a business. This does not unlock funding. A word of caution for founders: raise funds to build a business, not to sell a facade you build around it.” The founders of all the unicorns (private startups valued at over $1 billion) in the world do not worry about exit opportunities – that is the job of the investors as they are time-bound sometimes. The founders worry about building the biggest and best business they can.

The venture capitalists’ lament

“T

here are always anomalies and lucky stories but in my opinion, on the supply side of startups, to be honest and straightforward, most of the founders sitting at [government-funded] National Incubation Centers (NICs) across the country and out in the market are not experienced enough to solve the problems a startup throws at them. Many are fresh out of college. I believe it would be best for young entrepreneurs to build at least two to three years of job experience. Take on new projects for your employer as an “intrapreneur”, learn budgeting, costing, team management, timeline manage-

“Venture capitalists who look for majority stakes in startups are mockingly referred to in the industry as ‘vulture’ capitalists.” Zoya Imam, head of investments at TPL e-Ventures

ment, customer services, and then take on the challenges of entrepreneurship. They will be more confident and better equipped to handle what comes their way.” Accelerators in Pakistan can be a key learning and growth platform for startups. The ecosystem is at a very early stage as everyone is still trying to figure out what works and what does not. Accelerators, although not perfect, offer a great environment for innovators and thinkers to mingle and learn through each other’s experiences. With good training programs and opportunities to interact with notable industry veterans, they enable young founders to learn and mature – and more importantly, determine a product-market fit. Most founders in Pakistan, at one point or another experience ‘imposter syndrome’. They put themselves in a position as founders of the business and sometimes feel alienated from what they feel they should be doing. In this regard, accelerators allow for them to connect with mentors, experts and coaches to be able to reorient themselves. Accelerators are very important for venture capital and investors as well. A wellrun accelerator takes an early stage concept or Minimum Viable Product (MVP) and supports them to gain enough traction, learn valuable skills for better management and aggressively test their solutions with access to end users in order to determine the viability of the product and its revenue potential and capabilities. This process helps de-risk a potential investment for the investor while ensuring that the founders are well prepared to face the challenges that await them.

What startups can do for the economy

akistan can be a nurturing ground for technological startups to help address economic and employment challenges in the country and venture capitalists have a major role to play in bringing about a digital revolution.

Ali, who is also a member of SECP’s Committee on Fintech, said that the future of venture capital in Pakistan is very bright and we are already seeing deals where both local and foreign investors have deployed capital in Pakistani startups. “A number of startups are making their mark locally and globally on the technology landscape which is a good omen not only for venture capitalists but for the government as well.” Internet penetration in Pakistan has grown from 2.6% to 27.5% in under five years with 40,000 new subscribers per day. In addition to this, Pakistan has over 100 million phone subscribers, 60 million 3G/4G subscribers, and 35 million social media users. Venture capitalists typically focus their investment efforts using one or more criteria such as the industry segment that startup is operating in (mobile, biotech, Software as a Service (SaaS), fintech, etc,), the stage of the company (early-stage, seed, or Series A rounds, or later stage growth rounds with companies that have achieved meaningful revenues and traction); and geography (e.g. Pakistan, Emerging Markets, Silicon Valley, New York, etc.). “Some of the segments that we are most excited about are Fintech, Healthtech, Agritech and customer-centric solutions that aim to solve everyday problems for the people of Pakistan. Solutions in these spaces are at the center for improving the lives of people and we are extremely excited at some of the solutions that are coming up over time.”

What venture capitalists owe entrepreneurs

good venture capitalist knows what is happening at the startups they invest in, how it is happening, where it is going and who is doing it, and what does the law say. They should be empathetic and should have an understanding of problems and solutions regarding a startups’ target market. They must have the ability to identify great talent – talented founders. Venture capitalists should also have a good network and they must

be the No. 1 fan of the startup they partner with. If they do not believe in the ability of their startups to do great things, then why should anybody else? A good venture capital is not just a source of funding. The intent is to act as a long-term business partner. As opposed to an idea generating partner, a venture capital acts as a growth and strategy partner aside from the financing role. This is particularly important for early-stage businesses where the right partner could help multiply growth, unlock funding and generate leads, whereas the wrong one could drive the business to the ground. What is common in both situations is that both types of venture capital could fund the startup. “In our case, we have a long-standing history of building and growing diverse businesses and making strategic partnerships that has positioned TPL as one of the most unique investors in the country. We have presence and knowledge across tracking, digital mapping, location-based services, insurance, payments, properties and logistics,” Ali said. “Fintech and the use of digital payment is a key to unlocking the true potential of digital commerce in Pakistan. With a number of players looking to solve the payments problem, I believe the future is very bright,” Ali said. However, the time it takes to unlock this potential will be determined by a number of key factors, which are improved regulation around transaction services and data manage-

Most observers agree that Pakistan has significant amounts of capital, but a lot must change before it can be unlocked. There is capital easily available for early stage and seed rounds but not enough for multiple follow-on rounds and growth investment. This is primarily because growth capital requires significant amounts of funding and for this new industry, investors are just finding their feet

ment; incentives from government to support the growth of digital payments; easy access to financial services for all; availability to make digital payments via an integrated merchant network nationwide. “As much as I believe fintechs will help provide access to financial services, the viability of the business model is still a big question. With huge costs associated with building out a financial services network, both consumer and merchant, and the ever decreasing MDR (Merchant Discount Rate), profitability for these startups without traditional banking products will be extremely difficult to achieve. In my opinion, the winner amongst fintech startups will be the one with the most active users and the largest merchant network thus becoming a high-value acquisition target. For now, all the power still lies with the big banks.”

The evolutionary phase of Pakistani venture capital

ost observers agree that Pakistan has significant amounts of capital, but a lot must change before it can be unlocked. There is capital easily available for early stage and seed rounds but not enough for multiple follow-on rounds and growth investment. This is primarily because growth capital requires significant amounts of funding and for this new industry, investors are just finding their feet. As a result, there is a lack of confidence in potential returns, disinterest in the long investment horizons, and a cautious approach overall. Good startups have no shortage of investment opportunities. However, it is a young ecosystem and it is expected that as the industry matures, more and more great startups would come from Pakistan. “We have just started unlocking the potential for venture capital funding in Pakistan where local corporations and family investors are deploying capital. We have seen a number of deals announced already.” “To unlock more and more capital growth,

VENTURE CAPITAL

eventually from international investors, the pace of growth for the industry at large has to increase. We need new policies and regulation. We need open APIs (application program interface), we need corporations using tools, we need more data on everything, we need everyone using a smart-phone, and we need digital banking and digital payments to spread far and wide. When that happens, then trust me: floodgates of funding will rain down on Pakistan’s amazing talent,” Ali said enthusiastically. An API is a set of routines, protocols, and tools for building software applications. Basically, an API specifies how software components should interact. Additionally, APIs are used when programming graphical user interface (GUI) components.

TPL’s portfolio

o a query about competitors, Ali said that the market is too small to have competitors and it is the time to welcome as more competitors as there

can be. “We do not view the market from a competition perspective. We believe that at this stage in Pakistan’s nascent startup ecosystem, everyone must work together and create an enabling environment for growth. The core intent of all venture capitals should be to focus on building and supporting the startup ecosystem by working together and ensuring that good startups are able to access everything they need to grow and scale whether that be mentorship, financing, operational support or access to other investors etc.” “But what sets us apart are three key factors – firstly, we are a large group of companies operating at a national and regional level across multiple sectors. This gives us great visibility of

$1 billion

140%

ACQUIRING SCALE The estimated total size of Pakistan’s e-commerce industry in 2018

RAPID GROWTH The average annual growth rate of the e-commerce industry in Pakistan over the past four years

the market and customer pain-points via a number of industries. Secondly, startups are able to grow with our businesses leveraging everything from technology to customers and our shared services. Lastly, we spend time with the founders and help them with their business strategy and projections, even if we do not invest in them. We do this because we genuinely want them to succeed. A successful startup coming out of Pakistan is positive for all of us.” “It’s like if our profits are 1% of a $50-million industry, it’s nothing. But if the industry develops and become $500-million only then 1% would be a handsome amount.” Venture capital investments have so far been private transactions so it is difficult to assess an accurate figure that has been invested in Pakistan and comes under the category of venture capital. However, according to one estimate, venture capital investment was something around $25-28 million in 2018. Talking about TPL’s portfolio company

KarloCompare, he said that it is a financial services aggregator and travel platform in which they have invested. The startup has shown impressive results post investment and is looking to solve for the lack of financial inclusion in the country. The platform works with corporations and direct consumers for travel packages and offers a power comparison engine which allows customers to apply for auto-loans, credit cards, personal loans and insurance. As with all startups, KarloCompare faced a number of challenges from industry partners due to lack of API connectivity and a deteriorating macro situation in the country. But it has all been a learning experience. All Pakistani startups that are direct to consumer platforms, due to non-availability of any localized scaled platform, must rely on Google, Facebook and Instagram for lead generation. As the rupee depreciates against the US dollar, the cost of marketing and customer acquisition goes higher with revenues in rupee remaining the same. This is a problem that directly affects the company but at the same time makes Pakistan a market for cheap customer acquisition cost in the eyes of global tech companies looking to enter Pakistan market. “Despite these factors that are out of one’s control, the team rallied well and responded to the challenge. I am glad to say that they are still growing and looking to raise funds. We are excited about where they are going,” he said. TelloTalk is another TPL’s portfolio company. It is Pakistan’s first home grown hyper-localized messaging platform that allows people to communicate, share content, transfer payments and transact with businesses. The over-the-top (OTT) instant messaging app TelloTalk in the past has even been defined as a potential answer to successful China’s WeChat and India’s Hike in Pakistan, with its indigineous characteristics. Ali said that they were also working on three more ventures and one is in its final stages. n

VENTURE CAPITAL

OPINION

Asif Saad

Disrupt or Be Disrupted Tech disruption about to hit Pakistanâ&#x20AC;&#x2122;s five major industries and more

he human mind is trained to visualise linear developments and finds it difficult to estimate exponential possibilities which emanate from technology. Such disruptions are always resisted by humans at first, but once accepted and fully deployed, they are capable of changing the way we live. Think about fire, the wheel and breaking the horse in ancient times to the aeroplane and the automobile in the early 20th century followed by the internet and smartphones in recent times. In particular these days, information technology is moving faster than ever, driven by developments in 3 basic areas; processing power, communication speed and storage capacity. IT is combining with improvements in specific industry technology in almost every sector to bring disruptive changes to the market. With technology growing exponentially and businesses developing linearly, a big gap opens up between current organisations and the capability which technology can offer. This gap is usually filled by innovative startups that disrupt the existing business

models by offering value in terms of both enhanced usage of a product or service and/or reduced cost. I have been observing the technology trends closer to home and would like to share some thoughts around anticipated disruptions in many sectors in Pakistan. Although, as a country, we have been slow in adapting to new technologies, but once started, the momentum creates its own pace and can impact our lives sooner than we imagine. I will discuss five of the most interesting trends, although there are many more on the horizon. Solar and renewable energy In the next 10-15 years, the electricity grid as we know will be almost extinct or at least much less pertinent to our lives. As a result of investments in solar and renewable technologies coupled with the global focus on improving battery life and user-friendliness, we will see the need for grid-connected power reduce substantially. Already if you are fortunate enough to have a solar system installed at your rooftop, your reliance on the grid is probably less than 50% of your energy demand. The next 50% will come much faster thanks to the expected technology improvements. This will require a major change in business models of large scale power producers and utilities. Some naysayers make the case of the western world where grids are still alive and note that Pakistan only has a small fraction of consumer load on solar. That may be true at present, but remember that technology will grow exponentially once it passes through its initial phase. The other great thing about technology is that it does not differentiate between the developed and developing world. How many of us still have landline telephone? It is the consumers who act fast to ensure they benefit from technology when it becomes affordable.

Education

Asif Saad is a strategy consultant who has previously worked at various C-level positions for national and multinational corporations

The trends in online education should be drawing fear in the hearts of the thousands of bricks and mortar education institutions in Pakistan. Underpinned by higher broadband speeds and WiFi capabilities, we are already witnessing tremendous growth in digital classrooms, online learning material, Ebooks and video content. Online education has not only replaced the physical classroom in some cases, but it is also challenging the entire education system as it exists today. Imagine that your childâ&#x20AC;&#x2122;s math or physics lecture is available anytime that she needs to access it from anywhere. What sort of learning is then required from schools and how will the current schools change their business model? This also has huge implications for governments and may offer a way out of the difficulties provincial governments face in managing public schools.

Retail

It is amazing to see the retail space being built these days. It is all the more puzzling since the trends are quite clear if you follow the evolution of the retail sector in the developed world. The retail space is losing ground to online shopping in a big way with large malls and stores being consistently forced to reduce the number of locations. In Pakistan, the trend of online shopping is visible in every household with trips to the malls often serving more as entertainment than for shopping. We have heard stories about stores at a certain mall in Lahore protesting successfully against high rents! In my opinion, this trend will pick up and will hurt the retail business model of malls and retail stores making it a challenge for them to remain relevant. The upside for the country as a whole is that we may see some downward adjustment to retail space valuations and rentals which have been out of line with Pakistani purchasing power for a while.

Electronic media

Since I am one of those old fashioned people who think the idiot box has done us much harm, this one is going to be a huge plus for our society as a whole. The growth of paid streaming services such as Netflix will take away the consumer from the advertising-based business model of our normal cable tv channels. I doubt if the low-quality content, of Pakistani news channels, in particular, will be missed once the consumer is able to control what she wishes to watch without being exposed to the bombardment of even poorer quality advertisements currently on display. I recall when a few years back, the previous government tried to introduce digital transmission in Pakistan, the cable TV operators made a big hue and cry against this.

But the entry of Netflix which can potentially eliminate cable tv altogether has hardly been noticed by these operators. In addition to the cable channel business, this change will disrupt the advertising industry as they will have to switch to other vehicles, with social media potentially replacing mainstream advertising.

Banking

It is already clear that the traditional retail banking business model is on its way out. Pakistan already has a Fintech industry which is beginning to have a say. What is surprising though is the retail branch operation still being expanded by a number of banks. This does not make sense

since the technology is already there to eliminate physical banking completely. Why would you invest in more branches when you know they will be redundant soon? Bank managements surely know this but perhaps there is a trick here which I am missing. In any case, Fintech and virtual banking are the future with physical banks playing a much-reduced role in our daily lives. The above 5 are just a few of the technology disruptions which are well on their way in Pakistan. I have picked only a handful because of limited space but the story is the same in many other sectors. Healthcare, transport, courier services, publishing, restaurants and delivery and numerous others are on their way to being disrupted. What is required is an understanding by governments and companies who need to play their role as enablers and promoters of disruption in the interest of the consumer. Traditionally it is the concerned industry which has been more resistant to change and does not wish to move into unknown territory. It is only natural that your core reason for success also becomes your core reason for rigidity. In addition, our companies remain in survival and fire fighting mode most of the time and management does not have the vision to create self disrupting business models. Be that as it may, all of the above and many other similar disruptions will bring improved service and/or cost reductions for the consumer. This is good news for the Pakistani consumer and should help in improving the quality of life for average citizens. n

COMMENT

The new NSW system may be all the rage, but with Pakistanâ&#x20AC;&#x2122;s epidemic export system rot, do we have the cart before the horse? By Syeda Masooma

n December 2018, erstwhile finance minister Asad Umar, while chairing the first meeting of the steering committee, approved the implementation of the National Single Window (NSW) system in Pakistan by the Federal Board of Revenue (FBR) Customs’ Wing. On May 28 2019, FBR Chairman Shabbar Zaidi revealed to a group of journalists and development partners that the NSW will become operational by 2021. The announcements were met with great enthusiasm at a gathering of officials and stakeholders including Member Customs Operations Dr Jawwad Uwais Agha, World Bank Country Director Patchamuthu Illangovan, Project Director Imran Mohmand, and economists and resident officials from the Asian Development Bank. Everyone present touted the idea that the NSW will be helpful in improving trade and “provide a comprehensive solution for imports, exports, transit trade, trade through border customs stations and air cargo.” But what actually is the NSW? How it is expected to work? What is the likelihood of it working in Pakistan? And can it be expected to impact Pakistan’s export sector woes in any positive way? The project is to be completed at an approximate cost of $163 million (around Rs 25 billion or 25,000 million Pak Rupees). This is clearly a major undertaking. For context, the amount is equivalent to the money allocated for the Green Line Bus project (Rs 24.6 billion),

approximately 5 times the funds given for the Karachi water supply scheme (Rs 9.6 billion), and almost three times the Prime Minister’s National Health Programme (Rs 8.179 billion). But where these projects, with their significantly lower funding, have clear goals for the public, the NSW still wades murky waters regarding exactly what it is supposed to do. It is pertinent to mention here that the establishment of NSW system by 2022 is a basic requirement under the World Trade Organisation (WTO) Trade Facilitation Agreement to which Pakistan is a signatory. The question, therefore, is not whether to establish such a system or not, but what are the prerequisites that need to be included in the business plan before its formal approval to avoid it becoming another PSM or PIA, and what will its impacts be once it is in place.

Operational and Business model of NSW

he business model for execution and operations as well as alignment of participating departments had been approved by the Steering Committee back in April, 2019. The draft legislation for NSW has been prepared while the functional, revenue and technical models are expected to be finalized by June, 2019. Though the government has allocated funds in the upcoming PSDP, however, customs is currently providing funds

from its GD (goods declaration) service fee to fast track the NSW implementation. The operational model of NSW is such that 48 trade regulators have been, or are being, taken on board whereby all their operations will be conducted through the NSW. Under the new system, all 48 regulatory bodies are to retain their respective powers while their functions will be carried out through electronic access to the NSW. What will happen to the payments being made by the traders, whether they will go to the respective bodies, stay with NSW, or be divided in some specific proportion, is yet to be determined. Whether there will be a registration cost payable by the traders wishing to join NSW, and if so how much, is also to be decided. The details shared by those spearheading the project about how NSW is expected to earn were also hazy at best. To understand how the business model of NSW might work - if decided and established properly - we can take the example of a similar single window operation from Singapore, which has proven to be a success story. Singapore’s one window model is known as TradeNet and has been operational since January 1989. Back in 1987, it cost north of 20 million Singapore Dollars in direct capital costs for TradeNet (USD 10 million as per the exchange rate back in the day); [For NSW these are estimated to be $163 million today]. The business model then dictated that any company wanting to join TradeNet had to pay a monthly

ECONOMY

fee of S$20 (approximately USD 14) and per transaction cost of S$2.88 (approximately USD 1.99). (This has been a transition of a one-time connection fee of S$750 and a monthly charge of S$30 around the turn of the decade). Assuming ceteris paribus for factors above and beyond the subscription fee, in Pakistani currency, this would amount to approximately Rs 2,000 monthly subscription fee and about Rs 300 per transaction, such as permit applications, origins applications and so on. NOCs (No objection certificates), licenses and other statutory requirements are a different game altogether, but they will certainly cost more than this. In a bird eye’s view, therefore, NSW does seem to have the potential to bring cost advantages for traders in Pakistan, since Rs 2,000 is surely far less than the logistical costs it takes for importers and exporters to travel to Karachi, Islamabad, and provincial capitals for clearances and permit applications. However, as of now the financial model of National Single Window is unclear - perhaps even to the organizers and managers themselves. During the event where the FBR chairman updated concerned parties with the progress of the project, Customs member Agha claimed that this one window operation will reduce the costs for every department involved, and will also bring about reduction in the costs paid by the traders. But his presentation only mentioned “cutting costs through reducing delays and informal payments”. At the same time, Project Director Imran was of the opinion that the fees charged to those facilitating from the NSW will make this model a self-sufficient one. The running cost estimates as given by the

FBR are $22.5 million per annum, amounting to approximately Rs 3.3 billion. It is interesting to note here, that WB Country Director Patchamuthu Illangovan did not shy away from raising his concerns over another public sector entity being formed in Pakistan despite so many examples available of public sector projects bleeding money. He suggested that the FBR outsource NSW to a third party to prevent yet another organization dependent on state cash. Needless to say, the suggestion was not taken kindly by the Customs member or the FBR officials present at the time, but that does not discount the very real risks attached to the implementation of this new system. It is also notable that the Singaporean example is also a public-private partnership. In 2007, the Singapore customs adopted a public-private partnership model for the revamping

of TradeNet. NSW can learn from its own mistakes from other projects, or learn from other countries for exact same projects and avoid all the financial ditches. However, if precedent is an indicator, it is likely to do neither.

The malady of exports

hat’s about it for the future of NSW as an entity itself, but what is important to look at is the impact i will have on the public as well as the economic dynamics of the country. NSW from the very beginning has been dubbed a breakthrough in improving the trade climate of Pakistan. And that climate hasn’t always been very productive. For starters, Pakistan’s imports are relatively inelastic. According to trade data report released by the Pakistan Business Council, one-fourth of our imports constitute petroleum products, (23.18% in FY2018 and 26.17% in FY2019), followed by machinery, chemicals, and food. Together, these categories constitute about 70% of our imports. Unfortunately, our exports also seem to have an inelastic demand with textiles making up approximately 60% of total exports. Why? Because for decades the overvaluation of Pakistan Rupee has been blamed as the cause of lack of competitiveness of Pakistan’s products in the international market. However, despite the devaluation of PKR, and even with incentives being offered by the government, the export figures showed an 11.13 percent decline in March 2019, as shown by Pakistan Bureau of Statistics. From a value of $2.227 billion in March 2018, exports fell to $1.979 billion in march 2019. This happened despite Pakistani currency

losing almost one-third of its value against the dollar since December 2017, when our exports seemed to have hit the hardest blow. The problems are much rooted much deeper than just the currency value and the delays in the clearances - important as these factors may be. Pakistan is lagging behind its neighbors and trading partners in economic growth. South Asia continues to be the fastest growing region with 7 percent growth projected for 2019, according to the World Bank’s economic update. However, Pakistan’s economic growth is expected to decelerate to 3.4 percent in the same time period, and even more so, by 2.7 percent, in the fiscal year 2020. The trade deficit is also projected to remain elevated during 2019. Pakistan’s export products are highly concentrated into very few products - cotton, leather, and rice make up for approximately 70 percent of exported goods - and even most of these are intermediary goods instead of value added finished goods that fetch good money. This is perhaps the biggest deterrent to any improvements in our trade balance. Poor quality of infrastructure, outdated technology, energy shortages, and lack of incentives to gain competitiveness as opposed to dependency on tariffs are the root causes of low exports. At the same time, there has not been any concentrated effort to diversify the export market. The same six countries - United States, China, Afghanistan, United Arab Emirates, Britain and Germany - are being relied on for Pakistani products for decades. The idea of global value chains and regional integration either does not make sense to the Pakistani lawmakers and traders or they are simply not interested. Even our current export markets are contracting. Our all-weather, higher than the Himalayas, deeper than the ocean, sweeter than honey, and stronger than steel friend China has also

continued to reduce its demand for Pakistani yarn and fabric, since 2017 when competing countries began significantly undercutting their prices. China is also more inclined towards high-tech products now instead of low-tech products like textiles and footwear. Saudi Arabia and the UAE have also shifted away from Pakistan in exports of rice, according to statements released by the Ministry of Commerce. The shifts in export volumes and values of these products are not inconspicuous in our trade data, yet there seems to be no “investment” being made into targeting newer markets or focusing on improving product quality. This is where the question of NSW comes in again. When asked how the NSW would deal with this crumbling in Pakistan’s export sector, Customs Member Agha no longer had the former glowing praise for the NSW and simply said none of this was his department’s job. “You should ask commerce ministry these questions. We are only here to enforce what regulators decide”. An economist with Asian Development Bank’s Pakistan resident mission, Farzana Noshab, however had something of an answer.

“It is interesting to note here, that WB Country Director Patchamuthu Illangovan did not shy away from raising his concerns over another public sector entity being formed in Pakistan despite so many examples available of public sector projects bleeding money. He suggested that the FBR outsource NSW to a third party to prevent yet another organization dependent on state cash. Needless to say, the suggestion was not taken kindly by the Customs member or the FBR officials”

“The time lags in clearance of consignments in Pakistan and the delays in communication elsewhere in the world is harming the reputation of Pakistani exporters so NSW will benefit exporters in that sense,” she said.

E-payments challenge

hen there is the obvious challenge of shifting from cash, cheques, and pay orders to online payments. NSW will also require a legal framework that enables and defines the conditions of electronic submission of documents, user authentication, data sharing and data archiving. Talking to Profit, after the presentation, Customs member Agha said that the 48 regulatory bodies brought on board will have to get rid of the hard cash and cash equivalent instruments. “We are in talks with all of them, on a daily basis. We also have 62 branches of National Bank of Pakistan on board with us and we are working every day to ensure that cash is done away with.” There is no denying that unifying trade regulators and making the process of importing and clearance easier is something that is necessary in modern economies. However, if the ailments of Pakistan and its economy are concerned, NSW is just a posh decorative addition to a dilapidated house. The tangible impact of NSW will be to make the process of importing easier while adding more burden on the national exchequer to support yet another public entity - without making necessary reforms that can ensure income and revenues to support the very system as well as the larger economy. Even on its own, the business model of the National Single Window seems flimsy for now and unless proper management is put in place, there is little to be hoped from a model that can otherwise bring a great deal of transparency for the government and facilities for the traders.

ECONOMY