Profit E-Magazine Issue 63

welcome

No, Prime Minister, the problem is you The premiership of Imran Khan is what happens when the collective wisdom of upper middle class drawing rooms in Pakistan comes to life and assumes the office of Prime Minister.

The result is predictable catastrophe. And Asad Umar’s departure – which, if we are honest with ourselves, we should all have seen coming – is the epitome of what is wrong with the current administration’s approach to governance.

It was not the inane ideas about treating the federal government of Pakistan like a charitable hospital for which fundraising and philanthropy could raise the funds to do bug and important things. It was not firing one of the best Pakistani macroeconomists in the world from the Prime Minister’s economic advisory council just because of his religion. It was not even the insistence that the government seek assistance from so-called “friendly” countries rather than the International Monetary Fund.

No, it was something the prime minister said almost as a passing reference that at the time sounded benign and true: that the PM was disappointed in the quality of economic expertise in the country. Strictly speaking, of course, this is true. Seventy years of the nation as a whole underinvesting in education has its consequences and poor ability to govern ourselves is one of them.

But in hindsight, perhaps it reflected a deeper malaise. The Prime Minister may have genuinely thought – like all uncles in every drawing room in every city and village across all of Pakistan – that “the solutions to all of Pakistan’s problems exist, all that we need is to kick out the corrupt leaders and put in honest people in charge.” It is entirely possible that the Prime Minister thought to himself: “well, here I am! An honest man as prime minister. Where are these magical solutions that everyone I have ever talked to convinced me exist? Please tell me so that I can implement them!”

And he expected his finance minister – Asad

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Umar – to be the man who brought forth those magical solutions for all of Pakistan’s economic problems. The solutions that would somehow cause rivers of money to flood the country and pay for fixing everything, all while requiring the Prime Minister to ask absolutely nothing difficult of any of his voters.

Needless to say, those solutions do not exist.

For some time, it has been conjectured that Asad Umar simply did not have the heart – or the spine – to tell the prime minister that these solutions do not exist and that managing the economy of Pakistan involves making some very difficult choices for which he needs to prepare the voters early while his political good will was still riding high.

It now appears that the minister was indeed a man of integrity, and that while he may have paid lip service to the prime minister’s populist (and rabidly nonsensical) agenda in public, that in private he continued to be the intelligent man those of us who knew him before his political career know him to be. That he kept advocating for sanity on macroeconomic policy, and that the prime minister – and allegedly his support base in the military establishment – simply did not care to listen to reason.

What is perplexing is how sudden this departure was, and how the prime minister tried to frame it as simply a cabinet reshuffle. It indicates that the minister knows the meaning of events in politics perhaps a little better than

the prime minister. The Finance Minister is not an ordinary cabinet position. The holder of that office is the de facto, and sometimes even de jure, deputy prime minister.

To “reshuffle” a minister out of the finance ministry is to tell them in no uncertain terms that they are being demoted. And no minister would take that demotion publicly unless they were a complete sycophant who had nowhere else to go.

In resigning, Asad Umar has reminded us of his fundamental integrity, that he is a good man who tried to do the right thing, but ultimately was not able to muster enough support to get the job done.

This is not to exonerate him completely. After all, it was his job as finance minister to build the kind of coalition of support he needed for the policy ideas that he felt were important and needed to be implemented. That he did not succeed reflect at least partially on his lack of preparedness for the job, which is disappointing to say the least. But it is important to remember that he did the job with integrity, and though he may not feel it right now, the person least worst off in all of this is Asad Umar himself.

He was a successful executive of one of Pakistan’s most admired companies, and he can no doubt return home to Karachi and will likely be welcomed on the boards of many more companies. And his personal wealth – which he earned on his way to the top of Corporate Pakistan rather than, like the Prime Minister, simply inherited – means that he does not need a job to feed his family.

No, the real worry is what will become of us. Take a look at the cast of characters who are up for the job, including some who have already ruled themselves out.

The one this newspaper would have most enthusiastically in favour of is Shaukat Tarin, the former Citibanker who currently heads the board of directors of Silkbank, and who has previously served as Finance Minister under the Zardari Administration.

Tarin has precisely the right combination of technical skills, a no-nonsense attitude, and the ability to cut through bureaucratic messes to get the job done.

Unfortunately, he has ruled himself out by stating that he cannot accept the position while he remains under investigation from the National Accountability Bureau (NAB). One wonders if this might persuade the prime minister to reign in the excesses of NAB (as we describe in one of our stories this week) when it may cause him to lose his most promising candidate for Finance Minister.

Dr Ishrat Husain is the next candidate, and certainly has admirable credentials, including presiding over what appeared to be a period of remarkable macroeconomic stability at the State Bank of Pakistan during the Musharraf Administration. The problem, of course, is that we are conflating the stability of the macroeconomy, which was caused largely by exogenous factors, with competence in running monetary policy, though there are certainly no complaints on Dr Ishrat’s abilities on that front.

More importantly, however, the ability to run monetary policy under a benign prime minister is very different from running fiscal policy under a populist one. We wish Dr Ishrat good luck, but we are worried he may not be able to cope with the pressures of the job.

Dr Hafeez Sheikh and Dr Salman Shah have both held the position previously and both are trained economists. However, the job requires an ironfisted heavyweight who can effortlessly move between strong-arming people in some situations and diplomatically persuading them of his agenda in others. Neither man, competent and respected though they are in their fields, demonstrated that capacity when they were in office.

In short, firing Asad Umar solves absolutely nothing, and the choices for his replacements – barring one – are not any more appealing. The Prime Minister could make the best of the situation and call off the NAB dogs from Shaukat Tarin. But if he had that kind of wisdom, we would not be in this mess in the first place.

Farooq Tirmizi Managing Editor

Executive Editor: Babar Nizami l Managing Editor: Farooq Tirmizi l Joint Editor: Yousaf Nizami Reporters: Arshad Hussain l Muhammad Faran Bukhari l Taimoor Hassan l Ghulam Abbass l Ahmad Ahmadani Shehzad Paracha l Haniya Javed l Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) l Zulfiqar Butt (Lhr) l Mudassir Iqbal (Isl) l Layout: Rizwan Ahmad l Illustrator: ZEB l Photographers: Zubair Mehfooz & Imran Gillani l Publishing Editor: Arif Nizami l Business, Economic & Financial news by 'Pakistan Today' Contact: profit@pakistantoday.com.pk

FROM THE MANAGING EDITOR

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The Pakistan Bureau of Statistics (PBS) does not make inflation data available since independence, but since January 1958, the country’s inflation rate has averaged at around 7.56% per year. However, that average hides significant variation, though one lesson is clear: he longer the government uses artificial means to keep inflation below 5%, the worse the subsequent increase in inflation. Reversion to the mean, in the case of the Pakistani economy, is a mean, chaotic, highly disruptive process. Generally speaking, dictators tend to try to hold down inflation as long as possible, and it usually escapes out of control just as they are being forced out of office, leaving democratic governments to clean up the mess.

News IN NUMBERS

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The total amount of money owed by the government of Pakistan has largely continued to rise for much of its history. Data from 1995 shows that Pakistan’s external debt, while rising slightly, remained largely stable in the 1990s before beginning to rise sharply in the Musharraf era. The stability in the 1990s, however, was not for positive reasons. The government of Pakistan was not able to raise money from global markets and international lenders at the levels it would have liked because the country’s macroeconomic indicators were in shambles. While the Musharraf Administration was able to improve those numbers considerably, it then made the mistake of dramatically increasing the government’s long-term foreign debt burden to finance short-term consumer spending. Oddly enough, the only administration that managed to make a significant dent in the total amount of foreign debt owed by the government of Pakistan was the Zardari Administration.

News IN NUMBERS

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Since August 1947, the Pakistani rupee has depreciated at an average rate of 5.38% per year, according to data from the State Bank of Pakistan (SBP). And do not be fooled by what looks like long periods of stability of the exchange rate prior to the 1980s. Those were artificially maintained, both through the Bretton-Woods system of international exchange rates, and then by successive government who never fully caught on to the idea that they needed to let the currency truly float. Note, in particular, that periods of supposedly stable exchange rates are followed by sharp declines. If the currency is held to an artificially strong level, it ultimately finds its way to the level that it would naturally fall to, and the consequences then can be quite severe.

News IN NUMBERS

Does the Tableeghi Jamaat’s annual ijtemah have the potential to become Pakistan’s largest religious tourism generator?

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Make shift camps are set up each year in Raiwind for the annual gathering

By Muhammad Faran Bukhari

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aiwind – a small city at the outskirts of Lahore – is home to one of the largest religious movements in South: the Tableeghi Jamaat. Every year, tens of thousands of devotees descend on the Jamaat’s headquarters for its annual gathering (ijtemah). This influx of people brings with itself enormous economic activity.

“My family has been in the business of supplying essential supplies for people gathering here ever since the Jamaat established its headquarters here in Raiwind,” said a shop owner Abdul Rahim, while talking to Profit. “On a normal day, I sell products worth Rs10,000 to 15,000.

However, during the days of the annual ijtema, sales can reach up to Rs45,000 to Rs50,000 per day.”

Like most shopkeepers in the market, Abdul Rahim sells sleeping bags, backpacks, camping tents and other related products that are in high demand with the people visiting the Raiwind Markaz, a spacious facility built on more than 400,000 square feet of land. The Markaz serves as a mosque, a madrassah, a residential area, and the headquarters for the movement and is considered by Tableeghi Jamaat followers all over the world as a hub of spiritual and missionary activities.

All year around, followers visit the Raiwind Markaz, where they receive religious training and are then sent out in groups to various places within Pakistan and abroad for missionary activities. But every year, in the month of November, an annual gathering is

held in the city.

Typically, the annual gathering lasts for three days, starting on a Thursday afternoon and ending on a Sunday, with an especially long prayer. The attendance at the annual ijtemah has been reported at more than two million, bringing together devotees from around the globe. In particular, the last day of the gathering may attract several more millions of people, from all walks of life, including devoted celebrities and politicians. The late singer Junaid Jamshed was associated with the Jamaat as are venerated cricketers Saeed Anwar and former Punjab Chief Minister Pervaiz Elahi.

In addition to the November gathering is a smaller event in March for existing members.

In March 2019, almost 300,000 people attended the gathering, of whom 5,324 people from 93 countries other than Pakistan were present.

In the nearby bazar, sleeping bags sell in the range of Rs1,500 to Rs4,500, portable mattresses for Rs750 to Rs900, camping tents for Rs900 to Rs1,000 and ittar (a type of natural perfume popular with the Jamaat’s members and Muslims around the world) starts from Rs75 and can go all the way up to Rs40,000 for a bottle.

“A large proportion of the customers who buy from my shop are the devotees. However, sometimes people from Lahore also come to buy camping products from me, as they are cheaper here compared to the prices at which they are sold in Lahore,” said Abdul Rahim.

Many other local entrepreneurs have also been quick to spot economic opportunities presented by the large number of devotees visiting Raiwind. As more and more people gather, and the use of electronic devices becomes more commonplace over the years, finding electrical outlets to charge mobile phones and other

devices has become increasingly difficult in the crowded facility. So small shop owners in the bazar have begun to provide charging facilities to the visitors for the minimal price of Rs.20 per charge. According to prudent estimates, each shop serves about 150 to 250 customers per day.

But while such small-scale entrepreneurs have benefited, Pakistan as a whole has yet to capitalise on the economic opportunity presented by these gatherings – a phenomenon beginning to be described as religious, or faith, tourism that can have important implications on the world’s economy, climate, and even state of tolerance. The World Tourism Organization (UNWTO), the United Nations’ specialized agency responsible for the promotion of responsible, sustainable and universally accessible tourism, has organized several conferences since 2014 dedicated to exploring the potential of this type of tourism.

Hajj vs. Tableeghi Jamaat ijtemah

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mong the countries that have truly benefited from religious tourism is Saudi Arabia, which has been able to transform pilgrims who come to visit the holy cities of Makkah and Madinah into a billion-dollar market.

Last year, almost 2.4 million Muslims traveled to Makkah for Hajj, through which Saudi Arabia is estimated to have earned around eight billion U.S. dollars. With the right infrastructure and positioning, Pakistan can make great gains through religious tourism.

One opportunity is special packages offered by private tour operators for people traveling to Makkah from foreign countries.

In Pakistan, for example, the most high-end of

THE BUSINESS OF RELIGION

TJ devotees on preaching missions are often seen roaming the streets with large backpacks carrying camping equipment

such packages, which include a return ticket, visa, hotel stay and food, can cost more than one million rupees per person. Currently, no such facility exists for devotees travelling from other countries to the Tableeghi Jamaat’s headquarters in Raiwind.

In the case of Saudi Arabia, the number of people travelling to Hajj using Saudi Arabian Airlines (Saudia), the country’s national carrier, experienced a growth of 40 per cent in 2017.

Meanwhile, Pakistan International Airlines (PIA) only operates international flights to 26 international destinations in 19 countries, which means that people traveling from other countries often opt for other airlines, even if they make more stopovers on the way increasing total travel time and cost compared to direct travel.

Jamaat’s structure and economic activity

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hile events related to the Tableeghi Jamaat may have created economic opportunities for small entrepreneurs like Abdul Rahim, the Jamaat’s focus on austerity means that the scope of related economic activity is limited.

Groups of members are sent to foreign countries and to different parts of Pakistan on missionary activities that can last from a day to a year. But, for these, the members pool a specific amount of money from which they are supposed to spend during their travels.

Compared to the luxurious hotels available to pilgrims in Saudi Arabia, Jamaat

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members use mosques to stay in the different cities or towns that they travel to. And instead of eating out or catering, food is often prepared inside the mosque or supplied free of cost from nearby neighbourhood homes. Members say that spending too much time in the bazaar is also discouraged by the Jamaat.

Tableegh and national productivity

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t may not be immediately clear, but members’ involvement in Tableeghi Jamaat’s activities has another economic impact in the form of labour productivity.

“When a person goes away for months at a time for tableegh, they are not working for that time which is unproductive for the economy,” a business owner based in Lahore told Profit on condition of anonymity. “An employee working in my company who earned around Rs50,000 a month decided to go for a fourmonth tableegh mission and applied for paid leave. The company rejected the application, but he decided to go anyway,” he said.

When the employee returned, he had not been paid for four months and was having trouble managing his household expenses and had to take a loan from the company. “The same person after returning back from tableegh started to take longer prayer breaks during work hours, hence his productivity suffered even more.”

Many other people visiting the Raiwind Markaz often have similar stories, where religious devotion often outweighs the burden of financial responsibilities unless the company is proactive in its policies.

Shops in the Raiwind Bazaar offering mobile charging facility can often serve hundreds of customers at once “One of our founders is a senior leader of the Tableeghi Jamaat, but we have a policy that we don’t allow preaching or discrimination based on religion or sects. Corporations are supposed to be secular. I am not asking people to leave their religion. What I am saying is that the company has no religion,” said Musaddiq Zulqarnain, chairperson of Interloop Limited, a hosiery manufacturing company based in Faisalabad. “Employees at Interloop know they have a specific number of holidays and that they can avail and spend them however they want.” n

THE BUSINESS OF RELIGION

Pakistan’s leading logistics company has tried to innovate in the face of stiff competition but has floundered. What went wrong, and how can it be fixed?

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T

By Bilal Hussain

he pace of change can sometimes overtake even the best companies, including those that have achieved the coveted “verb status”.

In most of urban Pakistan, when people want to say “send it by courier” they often say “just TCS it”, even if they are using a different courier service. A company with that kind of stature in the eyes of its customer base can usually count on a safe, reliable future flow of business.

But all is not well with TCS, with tumultuous management changes, stiff competition, and even allegations of suffering customer service quality and financial performance. What has gone wrong with this storied Pakistani brand? And will it rise again or is this the final blow for the company?

There is certainly a lot going for TCS. The company has been in business for 36 years, and is by far the biggest brand in the retail logistics business. TCS handles almost 130 million shipments a year, courtesy its vast network: more than 10,000 professionals (including over 4,000 couriers), and 740 retail outlets, dedicated chartered Boeing 737 aircraft, and a fleet of 375 satellite-tracked delivery vehicles.

This is the largest such network in the country, larger than the multinational giants that operate in Pakistan, the likes of DHL and FedEx. TCS has a total of 14 businesses including Express and Logistics, Mail Management Solutions, Air Freight Solutions, and Visa Delivery, to name a few; it covers 3,500 international destinations through partners. The company’s state-of-the-art facilities make it capable of printing up to 2 million impressions and 600,000 stuffed envelopes in less than a day.

When it comes to courier services in Pakistan, TCS is still very much the Goliath. And it got there by being an early pioneer in its field.

As we tell you the story of TCS, you will notice a few consistent themes: innovation in its field, aspiration towards global quality, and an owner who is remarkably open to giving outside managers control over the company’s day-to-day affairs.

The company’s owners, however, have always struggled with succession planning, though not for lack of trying. And for all the founders’ efforts to run the business like a professional organisation, family issues can sometimes get in the way of business decision-making.

What is also a consistent theme from the past, however, is that TCS always bounces back from its rough patches, usually stronger than ever. While it is too early to say just yet, it may well happen this time as well.

This story is based on extensive interviews with at least three people familiar with the company’s operations, who wished to remain anonymous in order to speak candidly, and one on-the-record interview with Saira Awan, the current vice chairperson of the board of directors. Much of the background information about the company’s history comes from a 2002 Harvard Business School case study on TCS.

Khalid Awan and the rise of private couriers

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he company’s founder, Khalid Awan, started his career as a flight engineer at Pakistan International Airlines (PIA). In 1983, at age 35, he left the airline and decided to get into the logistics business with his elder brother Sadiq, who was 23 years older than him. The two brothers started a joint venture with DHL, the international courier service owned by the German post office.

It was a struggle in the early years to even get regulatory approval for the service. Under the Post Office Act of 1898, it was illegal for any entity other than the post office to deliver “letters” though the term “letters” was not clearly defined in the law.

TCS was able to argue that it should be allowed to deliver “business-related documents” and that its partner DHL should be allowed to deliver packages and mail from Pakistan to other countries.

The arrangement that the Awan brothers struck with DHL was that their international package delivery would be a joint venture, with DHL owning 51% and TCS owning 49%, and the local delivery business would be a 100% TCS-owned entity. Management control would reside entirely with the Awan brothers, with Khalid serving as the CEO and Sadiq serving at the company’s chairman of the board.

DHL agreed to this arrangement – particularly the management control – but only if Khalid would agree to be trained in DHL’s way of doing business, which the brothers immediately agreed to.

The arrangement benefited DHL because it allowed them to grow much faster than their global rivals in the Pakistani market. And it benefited TCS because it allowed them access to the technical and managerial support of a well-run global enterprise like DHL. The government, meanwhile, had not fully resolved the question of whether what TCS was delivering constituted “letters”, which meant that the Post Office would frequently dispute TCS’ right to carry and deliver certain packages. That legal limbo, however, did not stop the government from levying a 10% excise duty on TCS’ operations, which ultimately transitioned to becoming a general sales tax.

Yes, you read that correctly: the government was not willing to give TCS a guarantee that its services would be regarded as authorised under the law, but it had absolutely no problem telling TCS that it owed taxes on providing those same services.

TCS’ early break came in 1985, when it won a contract from the Pakistan Banking Council to connect 4,000 bank branches across the country via overnight delivery services. And from that point on, the business continued to thrive.

The first succession problem

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halid and Sadiq continued to work well together, but as the business flourished, it soon became clear that they had to plan for succession, particularly since Sadiq was significantly older than his younger brother and would therefore be much more likely to want to retire soon and pass on his wealth to his only son, Salim. However, Salim was not actively involved in the family business and Khalid worried that forcing him to take on his father’s role

LOGISTICS

“Yes, we know Daraz is starting their own service... we do not see this as a threat to us. As I said, we want to go with them. We would like to see efficient and tech-enabled players in the market.

It is also giving us the impetus to further improve ourselves. So, all these are positive moves, and all of these are positive for the Pakistani customers who we serve as well. So, we have to take a holistic view in this” Saira Awan Malik, Vice Chairperson of TCS Holdings might endanger the business.

Khalid, however, was astute and saw the conflict coming long before it even arose.

In 1991, he proposed to his brother that they divide up the business, with Sadiq taking full ownership of the more profitable international business and Khalid taking control of the local courier business. Salim was not entirely happy about the split in the family business, but at least Khalid had managed to avoid any unpleasantness.

More importantly, he had shown the kind of dispassionate decision-making skills that many often lack in family businesses: Khalid succeeded in separating family concerns from those of the business, ensuring a smooth harmony between both of them.

That dispassion came to the fore again in 2000. The 1990s were a somewhat difficult time for TCS, with many of its managers leaving the company to form a rival, Leopard, and Khalid got worried that he might once again find himself in a succession crisis, particularly after his handpicked protégé and chief operating officer, Jamil Janjua left in 1996 to work at the British Council.

So in 1997, Khalid decided to bring on Naveed, the son of an elder brother who had passed away, to come in and join the business as a potential designated successor. The goal was to train Naveed while Khalid was still on the job and eventually pass on the management of the company to him. To incentivise Naveed to think like a manager, he was given a 10% stake in the company.

However, by the year 2000, it became apparent that Naveed was not going to be the successor that Khalid hoped he would be, and so Naveed departed from the company. It is not clear if he still owns the 10% of the company that he was given when he was brought on, though he did own it for at least some time after leaving.

By that time, Jamil Janjua had decided to

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return to TCS, and Khalid Awan was so happy to see him back that he made him the CEO of the company and moved himself up to the role of chairman of the board. Janjua remained as CEO for the next eight years.

The coming of Mannan

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y 2014, as Khalid Awan grew closer to his 70th birthday, his mind was on succession once again. And once again, the family option was not ideal.

Khalid’s son, the younger of his two children, is a reasonably able young man. A graduate of York University in Toronto, he completed a graduate degree in management from the Cass Business School at the City University of London before working at an accounting firm in Dubai for a few years, following which he returned to Karachi and joined the family business, largely on the board of directors.

In any ordinary Pakistani family business, he would have been the automatic designated successor. But Khalid Awan is not an ordinary Pakistani businessman. His male heir is not his only option.

Khalid’s daughter Saira Awan appears to be considerably more talented than her younger brother. She graduated from Yale University in 1999 before going on to getting a law degree at the University of Cambridge and then working as a corporate lawyer at the London offices of Cleary Gottlieb Steen & Hamilton, one of the largest and most respected law firms in the world.

Surely, she must be Khalid Awan’s designated successor? She certainly seems to think so.

“I am my father’s designated successor, yes,” she said in an interview with Profit, though she added that both her brother and she would be taking over the reigns of their business as successors to their father on the board of directors.

But sources within the firm indicate that

while Saira is regarded as highly talented, she is not viewed as being ready to run a business as large as TCS, at least not without a little more experience under her belt.

There is something truly admirable about Khalid Awan holding his children to high standards and still not letting them think that the job of CEO of TCS Holdings is theirs for the taking. And it is even more admirable that he views the success of the company as being a concern separate from that of his own personal and family’s financial fortune.

And so in order to secure the future of the company, Khalid began looking for an outside CEO to take over the reigns of the company.

And that is when he met M. A. Mannan.

Mannan is a charismatic banker who had a high-flying career. He graduated with an MBA from IBA in Karachi in 1991 and joined Citibank as a trainee in that legendary team led by Shaukat Tarin that revolutionised Pakistani banking.

After a successful career across several financial institutions, both in Pakistan and abroad, Mannan met with Khalid Awan in 2014 and pitched him on the idea of immortalising his legacy and making a considerable amount of money in the process.

Mannan’s pitch was to rapidly grow the company’s topline by launching a series of new service lines that would also serve to diversify TCS’ revenue base. Following a phase of rapid growth, Awan would then be able to either sell off the company completely, or sell at least a partial stake to cash out at a much higher price than he might otherwise get for his business.

Perhaps most crucially, Mannan promised to help Khalid remove the personal guarantees that he had been signing onto every time he got a loan from a bank for TCS, which meant that his personal wealth was at risk with the business.

Awan appeared to be fascinated by the possibility, especially since Mannan was offering not just to increase the potential for upside growth, but also – through the removal of those personal guarantees – limiting the downside

“It takes $20-30 million to set up a proper e-commerce business in Pakistan, and nobody aside from Daraz has been willing to do that.

If you’re not willing to do that, then you’re wasting time and resources” Hamaad Ravda, former chief marketing officer at Daraz.pk

risk. After a seven-hour conversation with Mannan, Awan decided to offer him not just the job of CEO but also a 20% stake in the company.

It was a decision highly uncharacteristic of Awan: ever so careful about preserving his legacy, and ever so careful about ensuring a smooth succession plan, here he was committing so much of his company’s fortune into the hands of a man whom he hardly knew at the time.

But, for a time at least, it seemed to work very well.

The ‘turnaround’ effort

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n the first three years of Mannan’s tenure as CEO, matters appeared to work really well.

Mannan brought in several staff members whom he knew from his banking days, luring them to the company through high salaries. To motivate some of the key staff members already at TCS, he raised salaries as much as 300% for some people.

And he innovated as well, starting two completely new lines of business: TCS Hazir and Yayvo. The former is a one-hour delivery service that would offer on-demand delivery for people who want to order something from a nearby retailer. And the latter is an e-commerce business that sought to create a competitor to then Rocket Internet’s (and now Alibaba’s) Daraz.pk.

As promised, Mannan delivered on his pledge to get TCS’ lenders to remove the requirement for the company’s owners to add their personal guarantees to the loans for the company’s operations. And he took advantage of the fact that TCS was a relatively unlevered company (i.e. it had a relatively low debt load) and used debt financing to raise the capital needed for many of the new projects as well as the increased operational expenses.

The new projects did not come cheap.

According to sources familiar with the company’s finances, TCS spent approximately Rs800 million in capital expenditures over the four years between 2014 and 2018.

For the first two years, it seemed to go well. Yayvo grew to become the second-largest e-commerce platform in Pakistan and TCS

Hazir showed some early promise.

But then, things began to falter.

Things fall apart…

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ccounts of what happened next differ sharply. Where possible, we at Profit have tried to piece together as cogent a picture as possible, and tried to do so without taking sides in what eventually became a battle between two completely different visions of Saira and Mannan for the company.

Among the biggest criticisms of Mannan’s approach is the fact that he brought in a lot of former bankers who had never run a logistics company before and had no idea about the idiosyncrasies of the business. And Mannan’s tendency to offer high salaries to people he liked resulted in a culture of sycophancy around the CEO, something that had previously never existed in TCS, a company that had prided itself in having an open and honest culture.

Mannan was apparently a great orator and motivator, using gimmicks to make his point, but his ideas often lacked depth and understanding of the business. Take, for instance, his decision to start TCS Hazir, the one-hour delivery service.

“One day, Mannan called a meeting and asked the staff to make two queues, and then threw a tennis ball in the middle,” said one source who wished to remain anonymous. He said that nobody picked the ball in between.

This ball is our parcel delivery rider, he said.

When he is out to deliver parcels then he can drop anything like food etc to people on his way.”

Perhaps that made more sense in person, but nonetheless, the manner in which the product TCS Hazir was launched was a disaster.

The company’s plan was to use idle time for riders to deliver items to people who wanted to buy things from local retailers without having to leave their homes and offices. It was an attempt to bridge the gap between the convenience of e-commerce with the immediacy of physical retail. In theory, it was a sound idea.

In practice, however, the company horribly underestimated the amount of time its riders would have available to make these kinds

of deliveries, resulting in the core business of delivering regular packages suffering from serious delays and cost overruns.

“Imagine that a serious courier service, where parcels, which also consist of important documents has riders who are out buying cigarettes and nihari in between deliveries of those important parcels. It delayed TCS deliveries, which in return hurt company’s image and business,” said the source.

“It [TCS Hazir] was an instant flop, but Mannan’s ego did not let him abandon the idea,” added the source.

It was a similar story with Yayvo, which started off as a competitor to Daraz.pk. On this, there appears to be considerable disagreement as to what exactly happened. People in the pro-Mannan camp argue that the board of directors did not allow the CEO to adequately fund that venture, as a result of which it never stood a chance of succeeding. They also claim that Yayvo was the brainchild of Khalid Awan himself and Mannan was only asked to implement his idea.

Observers outside the company agree that an inadequately funded venture would be tantamount to burning cash. “It takes $20-30 million to set up a proper e-commerce business in Pakistan, and nobody aside from Daraz has been willing to do that,” said Hamaad Ravda, former chief marketing officer at Daraz.pk. “If you’re not willing to do that, then you’re wasting time and resources.”

And employees certainly agree that Yayvo is a distant second to the power of Daraz.

“Yayvo has never been a real threat to Daraz. pk. If Yayvo has 500 vendors, then Daraz.pk has 5,000 vendors. Related products are expensive on Yayvo. And promotional discounts are better on Daraz.pk,” said one former employee.

But there are others who argue that TCS should never have entered the e-commerce market in the first place, especially since e-commerce delivery was rapidly becoming a large part of its business. Sources familiar with the matter tell Profit that even though TCS only accounts for about one-third of Daraz.pk’s

LOGISTICS

deliveries, the business from Daraz accounts for around 8-9% of TCS’ revenue. This, by the way, is up from close to zero just five years ago, suggesting that e-commerce delivery is the wave of the future for logistics businesses in Pakistan.

One former employee, who wished to remain anonymous, said that launching Yayvo created natural conflicts of interest that resulted in a reduction in service quality just as a new competitive business was ramping up and competitors were beginning to improve their offerings.

“Launching Yayvo has pissed off TCS vendors,” said the source. “First you are a partner in an enterprise where your part is to provide logistics to vendors. But after learning your partner’s business model, you start encroaching in their area of specialization. It had been a simple case of conflict of interest.”

That conflict of interest began showing itself in particularly ugly ways when TCS began to have cash flow issues as a result of delayed deliveries and its high debt load that Mannan had taken on as CEO. TCS began using the cash it collected on behalf of e-commerce vendors for cash-on-delivery orders and using it to fund its own working capital requirement, delaying payments by up to several months to vendors who were owed payments.

According to one source familiar with the matter, TCS currently owes as much as Rs100 million to e-commerce vendors on account of cash-on-delivery payments. Needless to say, neither the vendors, nor the platforms like Daraz, are pleased at the situation. The vendors and platforms have increasingly started using other courier services like Leopard, M&P Couriers, Blue Ex Logistics and E2E Logistics to name a few, which have smaller operations bases than TCS but also fewer of the capital constraints.

(Editor’s Note: To be fair to TCS some of the e-commerce vendors have been seen complaining on social media of delayed payments from other courier services as well.)

And Daraz.pk, which is still TCS’ main customer, now has its own courier service, Daraz Express. “I believe TCS’ Yavyo misadventure has been one of the reasons for Daraz to launch its own courier service,” said one former employee.

And now that Daraz is backed by the deep pockets of Alibaba, the threat to TCS’ core business is even bigger, as the biggest e-commerce company in Pakistan, the fastest growing segment of the logistics business, seeks to build out a competitor to TCS. “Yes, we know Daraz is starting their own service,” said Saira. “We have been working closely with them and we had this conversation and we have known that. This again (is) a pattern that a lot of e-commerce companies have followed internationally as well. Amazon

22

M A Mannan ex-CEO TCS addressing the staff in 2017 did the same thing in US etc. Again, we do not see this as a threat to us. As I said, we want to go with them. We would like to see efficient and tech-enabled players in the market. It is also giving us the impetus to further improve ourselves. So, all these are positive moves, and all of these are positive for the Pakistani customers who we serve as well. So, we have to take a holistic view in this.”

She doth protest too much, methinks.

The deal to sell, and Mannan’s departure

B

y this point – 2017 to be precise – Mannan and Khalid Awan were operating on completely different wavelengths.

Awan was horrified at what Mannan was doing to his company, while Mannan thought he was successfully building up a company and getting it ready for an exit.

Khalid Awan started to reassert his influence back in the company at the same time that Saira had moved back to Pakistan and joined the company and began asserting her influence. The family’s renewed managerial interest might have irked Mannan, but he kept his focus on finding strategic investors who would be willing to buy all or part of the company.

The company’s revenues continued to grow, albeit at the expense of the rest of its financial health. For the latest financial year, TCS’ revenues hit Rs14.5 billion, but that growth came at a cost. The company’s receivables from Yayvo reached a staggering Rs1.8 billion, or nearly 12.4% of its total revenues.

Nonetheless, by mid 2018, Mannan had succeeded in finding a buyer. The Dubai-based Ijarah Capital, the multi-private equity firm owned by several wealthy Emirati families, had expressed an interest in purchasing the company – all of it – at a valuation close to $200 million.

Over a weekend in August last year, Mannan and Khalid Awan hashed out the details of the transaction, and it looked as though they were ready to announce it at their management committee meeting the following Monday.

However, that is when things took an unexpected turn.

At that management committee meeting, everyone was expecting both Mannan and Khalid to show up and announce the details of the transaction. However, Mannan did not show up and only Khalid attended the meeting, announcing something completely different.

“He said ‘the company is going through a tough time from a financial and working capital perspective. So we have decided to part ways with the President and CEO [Mannan]’. It came as a shock to all of us,” said one source familiar with the matter.

Sources familiar with the matter say that it was Khalid Awan’s children – especially Saira – who were opposed to the transaction and persuaded their father to not go through with it.

And since Mannan had staked virtually the entirety of his strategy for TCS on a successful sale of the company, his position at the company was untenable after that. Whether he was fired or resigned is unclear, and probably irrelevant.

For their part, the board downplayed the idea that Mannan was fired. “After a certain passage of time, there is always a need to look at things with a fresh pair of eyes. And we felt, as Mannan sb left in September 2018 and by the time he left it was more a case of strategic realignment at the board level rather than any disagreement. TCS had an amicable departure with him. The board had a very good working relationship with him, the management had a very good relationship with him and as such he had not left due to disagreement,” said Saira.

“We, as a family are very very committed, as a second generation we want to take the business forward. And we felt that there was

a need for focusing on our core. Our priority is and we think our core strength is our logistics.

We wanted to renew that focus. And so, it was more a case of strategic realignment at the board level. And to get our vision, where this company needs to go, we felt that it was important to different – I would not say different leadership as I would like to clarify that our current CEO [Salman Akram] is the one who has moved up through the ranks [in TCS] – So again, we believe very firmly in our management. A lot of people who are here in TCS have been working from 10 and 15 years so there is a lot of institutional knowledge, not just of the sector but also of the company. So, we felt that we need to change direction and bit of focus.”

The bloodbath and aftermath

F

ollowing that fateful Monday, everything Mannan and his team started was halted, according to one source familiar with the matter. All of those who were a part of Mannan’s team were also quietly made to part ways with TCS. Everyone close to Mannan either resigned or was asked to leave. The head of TCS E-Commerce, which has two entities under its umbrella – Yayvo and Sentiments – Salman Hasan resigned. The head of human resources Asma Sheikh, the Director of Innovation and Customer Service Sohail Shaikh, and the Head of Marketing Naiyer Saifi all left in quick succession.

“But Mannan and Company had little to bother as they received their full money of the contract,” a source said. “However, the most important asset of the company – the human resource had to pay the price. After Mannan’s exit, the people who took to the helm of affairs started terminating employees when they could have reduced the financial stress by pay-cuts.”

“People associated with the company for 35 years were shown the door. Those who were about to retire in three years were also terminated,” said the source.

According to our source, who wants to remain anonymous to avoid retribution from the current management, said that Chairman Khalid Awan had been a great employer in the past but in Mannan’s case and even later on he has given unbridled authority to the management and has himself turned a blind eye.

There has been reports that management even bypassed Awan’s own instructions not to terminate employees. One source even claimed that Awan, a very healthy and physically fit man for his age, had a heart attack recently, which many speculate may have been caused by the stress related to the turmoil at the company that has been his life’s work.

“The company is struggling as there’s unpredictability among the employees. Nobody knows who’s next to be shown the door. Everyone is throwing their CVs to friends and family and nobody now has interest in their daily work. The company’s operations are struggling due to this,” said the source.

Saira, however, had a different view of why the layoffs were occurring. “Times of economic stress and financial stress are also times of great opportunities,” she said. “I think sometimes you are forced to make certain decisions, which you do not take when everything is going right. You are forced to revisit and reflect that it should have been done this way. That either it is the efficient use of capital? That these people are working at their optimal capacity?

I feel the time that has passed, although it has been challenging financially, but it helped create a transformation plan, which has been a very beneficial thing for us.”

She may well be right. In the late 1990s and early 2000s, the company routinely had operating profit margins exceeding 15% and net profit margins exceeding 10%. These days, however, according to sources familiar with the company’s finances, TCS has an operating profit margin of approximately 6.5%, and a net profit margin of approximately 2.0%.

Meanwhile, the company still has the massive debt load – approximately Rs4.7 billion – that it has incurred, much of it under Mannan’s tenure, and that now constitutes 75% of the company’s capital structure. With liquidity problems at TCS mounting, the banks are starting to get very nervous, and do not have confidence in the post-Mannan management team.

Of particular concern is the fact that Amir Iqbal has been brought in as the chief financial officer. Amir Iqbal’s track record is not particularly liked by the banks. He was the controller at the Gulistan Group between 1998 and 2002, a period during which that group defaulted on its debt obligations to its lenders.

DEBT BURDEN

RS5 BILLION

The total amount of money owed by TCS to banks and other lenders, an amount that constitutes 75% of the company’s capital structure

Iqbal was brought onto the company’s management by Saira while Mannan was still the CEO, even though Mannan already had a CFO named Raziuddin Ahmad, a chartered accountant who had previously spent 10 years working as the CFO of Coca Cola Pakistan.

Iqbal is said to be a good friend of Saira’s husband, Mudassar Malik, the investment banker who co-founded BMA Capital. The two men worked together while Iqbal served as CFO of one of BMA’s subsidiaries.

Will they sell, or will they hold?

I

t is increasingly looking likely that TCS will have to raise capital from somewhere.

The management appears to think that selling Yayvo might fetch as much as $100 million, a number that most independent market observers believe is fanciful at best and outright delusional at worst. Most observers believe – based on Daraz’s acquisition price of $150 million – that Yayvo is unlikely to sell for much higher than $20-30 million.

After denying that Yayvo was for sale for months on end, the TCS management has finally acknowledged, on the record, that the option is at least being considered. “Our current plan for Yayvo is to raise growth capital and to create some strategic partnership so that growth of Yayvo can be boosted in that way,” said Saira Awan.

An outright sale of Yayvo might make enough of a dent in TCS’ debt load to stem the bleeding. But many of its lenders appear convinced that the company may still need to raise money by selling shares. And with management turmoil hitting the company in as public a manner as it has – it is hard to hide the sudden ouster of a CEO, even for a privately owned company – any investors who might be looking at the company are likely to smell blood.

Then there is what Saira made abundantly clear: she clearly does not want to sell the company. She wants to inherit and ultimately run TCS. It is certainly possible that Khalid Awan was wrong and that Saira is in fact ready to lead TCS. If she is able to successfully sell Yayvo for a reasonable price – and she is expected to hit the road this week to find buyers in China and the United Arab Emirates – and pay off the debts and keep the company afloat, she may well prove her doubters wrong.

Khalid Awan worked tirelessly his whole life to set up a business that separated family concerns from those of business, and where merit was rewarded above and beyond all else.

His daughter got off to a rocky start. Here is hoping for Khalid’s – and for TCS’ – sake that she is able to right the ship. n

LOGISTICS

...and should the government try to forcefully document the informal economy?

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O

By Taimoor Hassan

n March 15, former intelligence officer and defence analyst Asad Munir, a retired brigadier in the Pakistan Army, committed suicide by hanging himself from a ceiling fan. Munir’s suicide unveiled a gutting reality about a system infested with incompetent [government] officials who play with the life and honor of citizens in the name of accountability. In his suicide note, Munir revealed that he was committing suicide “to avoid humiliation, being handcuffed and paraded in front of the media,” and made an impassioned appeal to the Chief Justice of Pakistan to take notice of the conduct of the officials at the National Accountability Bureau (NAB).

While Munir’s is not the first instance to display the consequences of NAB’s virtually unbridled powers to ruin people’s lives and dignity, what is more worrying is that NAB and other law enforcement agencies intimidate businessmen, who are the life and blood of the economy, and their image as respectable members of the society is shredded on mere ‘allegations’ of corruption.

The sentiment among the businessmen community as conveyed to Profit is that in an atmosphere of intimidation like this, no entrepreneur or businessman is likely to invest in Pakistan, and the existing ones will also eventually lose their morale.

Names of prominent businessmen make newspaper headlines frequently as NAB officials leak to the press the names of people they are investigating. One of the latest victims was Mian Muhammad Mansha, one of the richest man in Pakistan and the largest shareholder of MCB Bank among other businesses, who was summoned

by NAB over ‘allegations’ of money laundering, which he denies.

The businessman appeared before NAB to record his statement, but, unsurprisingly, refused to appear again for fear of being detained as NAB has been detaining people for the purpose of investigation. It was not until the Lahore High Court (LHC) ordered NAB to refrain from coercing Mian Mansha that he agreed to appear.

While the case against Mian Mansha is likely to linger on for a while, and he might as well be exonerated, but the ordeal still may cause harm to his reputation. However, more importantly such in-

“Simply put, if a person puts a small shop and it grows on to become a large departmental store, it will automatically become formal because large businesses cannot go unnoticed. You have to let them grow. If you allow growth, they will not be able to hide. It is going to evolve naturally.

Informal will automatically become formal.

Meanwhile, fix the system!”

Nadeemul Haque, economist and former head of the Planning Commission stances may cause irreversible damage to Pakistan’s image as an investment friendly country.

(Disclosure: Mian Masha was one of the early financiers in the parent company of Profit.)

The ability to detain arbitrarily, without charges indefinitely during an investigation, without any evidence or recourse to judicial remand, coupled with the fact that NAB inquiries require the accused to prove their innocence, rather than assuming innocence and requiring prosecutors to prove guilt, goes against the very foundation of the rule of law, the bedrock of a civilised society and a thriving economy.

The rule of law requires accountability of those who are in power – both political and economic. But when those charged with enforcing the rule of law adopt such tactics, it does not serve the purpose of cleaning up corruption, and only serves to disincentivise investment and entrepreneurial activity. More

importantly, it does nothing to fundamentally reform the sclerotic system that brought about the alleged corruption in the first place.

More complicated than simply tax evasion

M

ore often than not, businessmen in Pakistan are perceived to be vile and corrupt. The general assumption is that if someone makes money in this country, there must have been some foul play involved.

It is true that businesses sometimes do employ illicit means to achieve their ends, but at least in some cases, they do it out of necessity rather than choice because in a business environment where government agencies such as NAB or the Federal Board of Revenue (FBR) adopt a rigidly bureaucratic and hostile attitude towards commercial enterprises, it is not

always possible to play by the rules because the rules themselves appear to be designed to strangle a business rather than nurture it.

For instance, while tax evasion is a legitimate problem in Pakistan, it is at least partially caused by the propensity of the FBR to harass businesses and individuals who pay their taxes rather than those who do not. Far from rewarding tax-payers, the government appears to actively punish them, encouraging businesses to go against the rules to if they want to do business.

A Lahore-based businessman explains that if you conform to the system, meaning that you pay taxes diligently, revenue authorities will raid your facility and harass you more than they will do non-taxpayers. “They are asking for more tax money from the same businesses that have been paying taxes actively,” he said while talking to Profit.

Ehsan Malik, former managing director of Unilever Pakistan and current CEO of the Pakistan Business Council (PBC), a business lobbying group, told Profit that the revenue authorities such as the FBR also ask for advance taxes to meet their targets. “When there are targets, authorities start harassing existing taxpayers by sending them notices.

Some taxpayers get scared of the investigations and pay taxes in advance, meaning to pay taxes of the upcoming quarter in the present quarter [so that the targets of the authorities can be met]. That’s the sort of harassment that is meted out.”

Going after the same people is an easy fix for tax collectors, explains Malik, as the authorities have to meet their targets and show performance. The FBR is assisted in doing so by the structural flaws in the system because policy making and tax collection lie with a single entity, making a tax official a prosecutor as well as a judge. If for instance tax revenues are shy of the required targets, since the power of policy making also lies with the tax collectors, they will just levy another tax on existing taxpayers to meet those target, he says.

Sending notices hasn’t been the only tool

MACROECONOMIC POLICY

“There are at least 47 different types of taxes in Pakistan as assessed by the World Bank. When you have so many taxes, their compliance and returns and dealing with multiple taxing authorities creates a lot of hassle. Moreover, there is always a tussle going on between the federation and the provinces over the jurisdiction of collecting taxes.

This also gives rise to interprovincial rivalry. In all this, only the taxpayer suffers” Ehsan Malik, CEO Pakistan Business Council to pressurise businessmen. Newspapers are abuzz with instances of raids and arrests of businessmen and it has only picked up pace after the Imran Khan Administration took office.

Names of influential figures in the business community have been put on the Exit Control List (ECL) by the government, allegedly for failure to comply with tax laws, though the punitive measures appear to have been undertaken without convictions of crimes in courts, or even indictments.

That is besides the unchecked powers of NAB to go after businessmen on mere allegations. The phenomenon has become so prevalent that courts have intervened on more than one occasion ordering the state authorities to stop harassing business owners.

A businessman explained that this has created an atmosphere of fear in the business community which has really slowed things down because it is holding them from making new investments because of the fear that the officials will come after them if they get to know they have money. Jobs are created by businessmen who are willing to take risks with their money in the form of investments.

Higher employment eventually leads to higher

consumption which drives economic growth.

If businessmen are scared, they will not invest and that is eventually going to lead to further slowdown in the economy, he says.

Moreover, for those who pay taxes voluntarily, Ehsan Malik claims that the system is overly complex and it has been kept as such deliberately so that when someone makes a mistake, he can be left at the mercy of officials.

Dr Kaiser Bengali, an economist who has previously advised the provincial governments of Sindh and Balochistan, claims that FBR officials use their powers to extort bribes.

“If the government really wants to increase revenues, there are electronic means of doing so. There are so many ways through which you can identify a person’s eligibility to pay taxes.

But the government does not want to do that.

They want to have a personalised approach to concoct avenues for corruption and that is deliberate,” he says.

“There are at least 47 different types of taxes in Pakistan as assessed by the World Bank. When you have so many taxes, their compliance and returns and dealing with multiple taxing authorities creates a lot of hassle.

Moreover, there is always a tussle going on

“If the government really wants to increase revenues, there are electronic means of doing so. There are so many ways through which you can identify a person’s eligibility to pay taxes. But the government does not want to do that. They want to have a personalised approach to concoct avenues for corruption and that is deliberate.”

Kaiser Bengali, economist and former advisor to the governments of Sindh and Balochistan

28

between the federation and the provinces over the jurisdiction of collecting taxes. This also gives rise to interprovincial rivalry. In all this, only the taxpayer suffers,” Ehsan Malik says.

Whether a consequence of the flaws in the system or simply incompetence of successive governments to keep things on track from the very beginning, or both, there is a large undocumented sector that operates in the overall economy, which eases the burdens associated with operating in the formal economy, away from the eyes of the officials.

Economists call this ‘informal economy’ or the ‘informal sector’ that is made up of small and medium scale enterprises and individuals which are not documented and therefore are not liable to pay taxes or conform to regulations imposed by the government, unlike the formal sector. In Pakistan, the informal sector is estimated to be around 60-70% of the overall economy.

The undocumented/ informal sector

T

he informal sector is not limited to undocumented businesses only. Even formal businesses maintain parallel books and accounts to save them-

“As companies and individuals grow and become richer, that is when they should come into the tax net. It is more like natural evolution coupled with technology induction, besides improving and simplifying the system. If the system is simplified, meaning that tax administration is easy, exemptions are not there and tax rates are low, a majority of the people would be in the tax net and voluntary compliance will improve a lot” Salman Shah, former federal finance minister

selves from paying taxes and additional costs associated with maintaining standards. They are able to do it because the shadow economy, another connotation for the undocumented sector, enables the formal businesses to do so because due to its large size, informal sector forms an integral part of the overall operations of the formal businesses.

For instance, a large documented retail business might use a small distributor’s service in his supply chain, who is most likely to be undocumented. Since the transactions between the two would not be recorded at both ends, it will be easy to hide such transactions completely in the official books. Formal businesses are also at times compelled to maintain parallel books because those who are undocumented are not liable to pay taxes and therefore do not allow formal businesses to deduct taxes during a transaction with them.

For the state, a large informal economy means a significant loss in tax revenues besides lack of power to effectively regulate undocumented businesses. But experts estimate the cost for citizens to be even higher as informal firms, because they are not regulated, can underpay workers, employ children, make them work long hours, may not maintain health and safety standards and may produce goods of substandard quality. Unregulated enterprises can contribute significantly towards deteriorating overall wellbeing of a society.

Despite all the ills, businesses still want to stay associated with the undocumented or unregulated economy for three main reasons: firstly, taxes lack legitimacy in Pakistan: there are virtually no incentives from the government for being a taxpaying business; secondly, no one comes after you; and third, it yields more profits, at least in the short run, which is the ultimate purpose of doing a business.

The present situation is that those operating in the formal sector have become informal

after staying in the formal sector for a long time due to the disincentives associated with it.

“For instance, in the manufacturing sector, there is a textile mill that has done that.

They registered different units as different companies. If a mill has 1,000 workers, all the labour laws apply on it. If you break it down into smaller units, labour laws don’t apply. So there is a trend towards informalisation. Formal companies have become informal because it saves them from payments of maintaining standards imposed by regulatory bodies,” Dr Kaiser Bengali says.

What should the government do?

T

o understand what the government should do, it is important to look at what the government is trying to do at the moment and what is wrong

with it.

The government is trying to formalise a sector that employs 60-70% of the labour force, using the same old coercive and rent-seeking authorities, by the use of stick instead of encouraging voluntary compliance by providing incentives. It is inarguably true that taxes remain the single best source of increasing government’s revenue and increasing the number of taxpayers is the best way to achieve that.

But should it be done in haste, like the government is trying to do in a complex economy already in a slowdown, where authorities act with impunity and where there is a punitive tax regime that discourages wealth creation?

Nadeemul Haque, an economist and former deputy chairman of the Planning Commission, believes that the informal sector is very large and the present strategy to formalise it will hamper economic growth as the government is shutting down businesses in the name

of documenting them.

According to him, the majority of the people will stay informal because people are not that rich and there is not much that can be taken out of them anyway. The informal sector will eventually come into the formal stream if businesses are allowed to grow and that requires policies that enable smooth working of the economy.

“Simply put, if a person puts a small shop and it grows on to become a large departmental store, it will automatically become formal because large businesses cannot go unnoticed. You have to let them grow. If you allow growth, they will not be able to hide,” he said.

“It is going to evolve naturally. Informal will automatically become formal. Meanwhile, fix the system,” he says. “Also stop this differentiation between filers and non-filers. Most of the people in our country are non-filers and it is going to be like that because most of the people here are not that rich. You have to let it evolve naturally. The purpose of economic policy is to enable smooth working of the economy.

Everyone cannot be included in the formal economy. For example these Uber and Careem drivers, they cannot be formalised. They will stay informal. Let them work that way,” says Dr Haque.

Former finance minister Dr Salman Shah says that informal sector employs a lot of people and any hard action is going to bring an economic standstill and increase poverty. “As companies and individuals grow and become richer, that is when they should come into the tax net. It is more like natural evolution coupled with technology induction, besides improving and simplifying the system. If the system is simplified, meaning that tax administration is easy, exemptions are not there and tax rates are low, a majority of the people would be in the tax net and voluntary compliance will improve a lot,” he says. n

MACROECONOMIC POLICY

OPINION

Asif Saad

The utilities must transform

a number of factors such as the cost of the import of liquefied natural gas (LNG) and subsidies thrown into the equation, the basic issues faced by gas companies are common to all utilities and simple to understand.

Utilities are expected to provide one or more of the basic needs for life – water, electricity, gas – without which one cannot imagine living. In trying to fulfil their mission, most have to operate in all kinds of physical areas: densely populated cities, planned Raising prices and privatising ownership is suburbs, unplanned outskirts, urban slums and vast tracts of rural not enough to create a more efficient energy and agricultural lands. supply chain; the utilities have to rethink Their operations face two basic threats to cash flows. First, the rampant theft in certain areas and/or by consumer categories how they approach their way of doing which means the utility is unable to bill for the complete supply. business entirely And second, their inability to collect billed amounts due from consumers.

Both of these added up leave a large gap in cash requiref you live in Pakistan and have recently received your ments for the utility which the central regulator (separate from gas bill, I bet you are fuming (pun intended). Gas conthe government in Pakistan) accommodates in the tariff charged sumers have received their latest bill with increases of by the utility to paying consumers. The regulator provides this reup to 5 times from last month’s bill – that is 5 times in lief under the premise that the utility will reduce its losses by imone month! proving its operations in the future. Many developing economies Call it crazy, madness and quite unbelievable if in South Asia, Latin America and Africa follow similar models. you are an ordinary bill-paying consumer. But it is not So far so good. an unlikely outcome if you have followed the working of However, in reality, most utilities are unable to improve governments, policymakers and gas companies in Pakistan, or for beyond a certain point and lost revenues remain at the same levels that matter in many countries in the developing world. for long periods of time. There are two main reasons for this to While the current gas situation in Pakistan is complex with happen.

Firstly, the writ of the state is ineffective in rural areas as well as city outskirts and slums. Theft remains rampant despite there being laws against it since law enforcement is a challenge and this coupled with weak governance structures leave utilities Asif Saad exposed to potential avenues for corruption.

The is a strategy consultant who Secondly, and more importantly since this is under management control, most utilihas previously worked at various ties suffer from a lack of capacity to modernize. They continue to utilize archaic methods to C-level positions for national and operate with a business model based on large manpower pools, extensive operations driven by multinational corporations reactive maintenance requirements, reliance on mostly manual labour and usage of inferior and outdated technologies.

It is evident that the old business model based on manual/physical solutions is incapable of handling the needs of large and diverse consumer segments which continue to grow and all have their own peculiar requirements.

To take one example, measuring the loss of the energy unit (water, electricity, gas) in today’s world should not be much of a challenge if proper energy accounting processes are used and unit losses are measured at various levels between the source and the end usage.

I 32

However, most utilities in Pakistan at best have a single estimated number for energy loss and are unable to provide accurate data at the consumer/area level which could be used to design interventions. They are also unable to respond swiftly to consumer cries for help when their services breakdown. Whereas, simple organisational efficiencies using basic management tools would allow predictive maintenance which follows a disciplined maintenance regime to ensure minimum service downtime.

We see success stories in India and Latin America where some utilities have not only shown significant improvement in their financial performance but also created strong relationships with their customers through improved service levels. This has been achieved mostly via modernization driven by a strong desire of management to change the culture and is supported by the effective use of new technologies.

Management teams have followed the path to digital transformation and changed the traditional utility business model with the

use of data analytics, mobility, smart grids, the internet of things (IOT), etc. Even the biggest issue of revenue leakage due to theft has been tackled with some success using data and machine learning software.

Similarly, the use of mobile devices and software by maintenance crews can result in a significant improvement in service levels.

Many industry experts make this success a case for privatization since privatized entities have shown stronger improvements driven by greater incentives.

But they are not the only ones to have initiated organisational and digital transformation. There are many examples of state-owned organizations throughout the world which have taken this path and it would be too simplistic to assume ownership change from state to private is essential to transform. This is a complex issue and merits discussion at another time.

Returning to the current problem in Pakistan, the government and policymakers are at fault and so were those before the current regime since they all followed the same path.

Their hands may be tied as far as trying to keep the utilities afloat, but their inability to realize that raising prices without undertaking meaningful reform to modernize is not going to be enough.

They are only kicking the can down the road until a few years later when they will have to burden the consumer again. They must first understand what is required for utilities to become sustainable, find ways to modernize, and embark on the journey of business model change via digital transformation.

It is possible to significantly improve upon the ancient work practices of utilities and only through this change will we be able to transform these organizations making them efficient and consumer-oriented. The key is the management’s willingness to undertake change with the objective of improving consumer service levels and to be able to stick to this formula over the medium to long term.

I am not sure if any of this will translate into lower gas bills for us but at least we will know there is some method to the madness!

COMMENT

With a little bit of patience, some market research, and an entrepreneurial spirit, individual investors can reap many benefits of participating in the stock market

By Syeda Masooma

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will start this piece by quoting two people who are considered authorities on investments. The first is a respected economist and Nobel laureate Paul Samuelson: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” The second is Warren Buffet, one of the most successful investors in the world with a net worth north of 86.3 billion US dollars who has said, “The most important quality for an investor is temperament, not intellect.”

Put together, what these gentlemen are essentially saying is that investment is not how well you can predict the market or how smart you are in evaluating which way investment winds will blow, rather it is about being patient, tranquil, and careful, and giving your investments time.

For the purpose of this article, we will discuss investments in the context of our local stock market – the Pakistan Stock Exchange (PSX).

The Pakistan Tehreek-e-Insaf is attempting to improve Pakistan’s local investment culture and is trying to bring people into the fold of savings and investments. Finance Minister Asad Umar was correct in his statement at the launch of the Medium Term Economic Framework (MTEF) that the savings rate in Pakistan is lower than most similar economies. In 201718, private sector saving amounted to about 12.2% of GDP of which 1.4% was preempted by the government to finance its consumption, said the MTEF document.

An overall savings rate of 10.8% of GDP (in 2017-18) is still only half the savings rate achieved by Pakistan in 2002-03, and about one-third of the savings ratio in neighboring India, where it is 34% of GDP). The MTEF plan itself includes the promise that PSX will offer new products such as voluntary pension funds and explore distribution channels to bring in

“The younger lot often comes in with the idea of doubling or tripling their principal investment overnight. Therefore, many choose to go for speculative trading. This is why overly passionate investors enter the stock market, suffer losses, and then bid farewell to stocks forever losing out on many potential opportunities” Muhammad Irfan, CEO of Askari Securities Ltd retail investors to at least one million. In the proposed amendment bill announced by Umar in January, carry-over of capital loss in stock trading was also allowed for three years.

At the same time, there is a shocking dearth of any awareness-raising campaigns by the government, or any entity including the PSX itself, to educate potential investors on various avenues of investment. The only such example that can be found are sessions held by the PSX at chambers of commerce and industry in various cities.

Profit spoke to about three dozen business students at the Institute of Business Administration in Karachi (IBA) and the Lahore School of Economics (LSE) in Lahore, as well as some investors, to learn about their views on why the general public does not invest in the Pakistani stock market. The most common replies can be classified into three categories: 1. A lack of awareness about how to invest in the PSX and low levels of trust in stock traders 2. The stock market is not considered “safe” to put one’s money in so they’d rather invest in real estate or gold, and 3. There is no place for small investors in the stock market as it is manipulated at the highest level and is a playground only for the rich.

This article will attempt to address all three concerns, in addition to providing some guidance for younger and/or newer investors on how to avail this investment opportunity while avoiding the most common pitfalls. Some knowledge of terms like deposits, dividends, risk appetite, margins etc. is expected but if you’d like to look up these definitions, Investopedia

is a great place to start.

Lack of awareness and trust in stock brokers

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here is no denying the fact that Pakistan does not have many free or formal channels where interested individuals can study and explore the stock market as an investment option, and the ones that exist need to be marketed aggressively and covered properly in the media.

“The maximum investment news is a one-liner about the direction that the stock market took for the day,” says Syed Zafar Abbas, general manager at Zahid Latif Khan Securities (Pvt.) Ltd. “How, then, can we hope that the public will develop any interest [in investing]?”

A perfect example of the situation is the rare website “JamaPunji”. Launched and managed by the Securities and Exchange Commission of Pakistan (SECP), the website includes a stock trading simulator and explains different types of investments that can be made in the stock market. When asked if they were aware of this platform’s existence, surprisingly – or perhaps not – none of the students or the investors who spoke to Profit said yes. The only group that knew of the platform were people who are already traders.

So how do people who invest do it? Let’s take inspiration from two people who have invested in the PSX. Mansoor Ahmed, a graduate of LSE, said that although his motivation to invest in the stock market came from his business education, his first helper was the website investorguide360, where financial analysts write blogs on investments and provide guidance on the stock market. “I started to read different articles and if I found several people talking about the same stock, I would go online and check that stock myself before investing in it,” he said.

His infatuation with the PSX began in 2014 and since then, discounting the dividends that he has earned, he has made an unrealized loss of about 30%; unrealized because he has

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not sold his investments at a price lower than at which he bought them. Rather, he is holding on to them and waiting for their recovery. However, since he did not opt for margin financing, he has the ability to hold on to his investment while it recovers. (More on margin financing later).

Another investor Jahanzeb Tahir, a Masters degree student at IBA, became interested in the stock market because his sports mates are investors who introduced him to this channel as a means of additional earnings. “My first experience and learning came from my friends with whom I play tennis. They have been dabbling with stocks for a while now and they taught me the basics but choosing stocks is something I learned on my own,” he explained. “There are some companies that you can simply tell are doing well by their financial statements; others you see through the news and analyst reports.”

He has also undergone the same experience with his stocks as Ahmed but is happier with his dividends. “I made an unrealized gain of approximately 12% on my capital investments when the market was up, and now I am down by 15%. But I have not sold my stocks so I can say that so far I have earned well in dividends.”

Both these investors said that they did not feel the need to go to a stock brokers to start trading. There are some legal requirements involved, such as opening an account with a securities company that is registered as a brokerage house with the stock exchange. A certain %age, also known as a “commission”, goes to these individual brokers with every sale and purchase of a stock. But beyond that neither of these two investors said they needed day-to-day guidance on which stock to sell or buy.

The bottomline is that it is not necessary for an investor to trust a certain broker. There is a plethora of information available in the form of trader reports, analyst reports, and there is also the stock exchange website which shows real time movement of stocks. As far as a lack of

LOW SAVINGS

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“The maximum investment news is a one-liner about the direction that the stock market took for the day. How, then, can we hope that the public will develop any interest [in investing]?”

Syed Zafar Abbas, general manager at Zahid Latif Khan Securities (Pvt.) Ltd awareness is concerned, for now it is up to the interested investors to look for information on their own until the authorities and regulators realize their responsibility to provide easy access to such information on a much wider scale than is being currently done.

Real estate or gold is a safer investment

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akistan’s economy is volatile. That much is a given. But Pakistan’s stock market is even more volatile. That also is a given. But that in itself does not make this type of investment “unsafe”.

As was mentioned in the very beginning, it is the investor’s temperament that makes stock investments safe or unsafe.

“The younger lot often comes in with the idea, or at least the initial goal, of doubling or tripling their principle investment overnight.

Therefore, many choose to go for speculative trading or leverage products,” said Muhammad Irfan, CEO of Askari Securities Ltd. “This is the primary reason why smaller investors quickly get squeezed out during market troughs. This is also why overly passionate investors enter the stock market, suffer losses, and then bid farewell to stocks forever losing out on so many potential opportunities.”

Let’s discuss speculative trading first.

Speculative trading, also called margin financing or speculative stocks, is defined by Investopedia as “stocks with a high degree of risk.

STARTER ACCOUNT

10.8%

Rs50,000

of GDP was Pakistan’s savingsto-GDP ratio in 2017-18, while India’s was 34%.

is the minimum investment amount at most brokerage firms in Pakistan

Many traders are drawn to speculative stocks due to their higher volatility … which creates an opportunity to generate greater returns (albeit at a greater risk). Most long-term investors and institutional investors stay away from speculative stocks…”.

Speculation itself in the stock market is defined as “the act of conducting a financial transaction that has substantial risk of losing value but also holds the expectation of a significant gain or other major value.” In other words, you either lose big or win big. Coming back to the PSX, this is where many new or tentative investors lose their money and then walk away from trading on the stock market altogether.

Irfan defines another practice that falls within the ambit of margin financing: where an investor can trade on more than their invested capital. Consider this example: you have already invested Rs.100,000 but, through margin financing, you take on three or four times the liability of the invested amount – say Rs.400,000 – and trade on that. You will pay interest on this additional amount at KIBOR + 8%, compounded daily. This means that if your “speculation” is correct, the returns you will make on this investment will far exceed the commission and interest paid on the extra amount. But at the same time, if your expectation of the market goes wrong, the loss is equally massive. (KIBOR stands for Karachi Inter Bank Offer Rate) “If you are trading at just as much as you have invested, then even if the market goes down, you have the chance to wait for the market to recover. However, if you have chosen margin financing, then you don’t have that cushion,” explained Irfan. “The losses made per day as a result of such speculation are deducted every day from the investor’s account with the stock exchange, until her or his actual invested amount is reduced to thirty% of the original amount.”

Another reason why the stock market is seen as “unsafe” is the mistaken belief that one needs to continuously keep trading to make money. “If we advise investors to hold on to their investments, they push back saying that the market is showing an upward movement and we are not capitalising on that,” said a stock broker on condition of anonymity as he was not authorized to speak to the media.

“They accuse us of being lazy for not indulging in trading every day. But, if we do trade their stocks as they ask, then more often than not they end up losing some money and again blame us.”

The third piece is the perceived insecurity of stocks compared to returns through investing in gold or real estate. Investors who choose to buy gold or plots of land do not intend to sell their investments the next day or even the next week of the purchase. Why, then, is the stock market considered any different? If investments in the stock market are also treated as long term affairs, rather than indulging in speculative investing, the risk associated with it can be mitigated.

PSX is not for small investors and manipulation at the higher level

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he first part of this argument is incorrect, but there is some merit to the second. Let’s begin with the first half.

At Zahid Latif Khan Securities, the minimum investment amount is Rs.50,000 and this amount is fairly standard at most other companies; it may vary but only slightly. If a share’s price is less than Rs.100 per share, then an investor needs to buy at least one hundred units in order to make their investment worthwhile i.e. a maximum of Rs.10,000. With Rs.50,000, they can buy as many as 500 shares!

For shares priced at higher than Rs.100, bundles vary and investors can buy more or less than 100 shares.

Now compare this with gold. As of April 12, 2019, the price for one tola of gold – the minimum amount at which investing in gold would make sense – is Rs.70,700. Seeing these numbers, you can easily conclude that the stock market very much has space for smaller investors and is definitely an avenue that they should

consider.

The second half of this argument, however, is a very contentious issues – insider trading and stock price manipulation, a problem that is not exclusive to the Pakistani stock market but is a part and parcel of investing in any stock market in the world. One way to avoid getting mired in a sticky situation like this is to steer clear of investments offered by securities companies themselves which may create a conflict of interest for brokers.

One of the most common methods of price manipulation is to artificially increase the price of a stock if it is in the interest of an investor to sell it. One way to do it is to create a hype in favor of the stock (thereby increasing its demand) and then simply letting the market forces of demand and supply take effect. The conflict of interest arises when stock brokers have a stake in the stock themselves and are also responsible to advise individual investors on their choice of stocks for trading on any particular day. This not only perpetuates a lack of trust in brokers but can also lead to massive losses for naïve investors who succumb to such hype.

Even if stock brokerage houses do not invest themselves, artificial hype can still be created by investors who hold massive amounts of stocks of any kind, value, and denomination.

This is where market risk and uncertainty become an unavoidable part of trading in stocks.

However, with a little bit of patience, some market research, and an entrepreneurial spirit, individual investors can reap the benefits of participating in the stock market.

The beginner’s guide to investing

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o where should novices begin? They should seek out asset management companies (AMCs). Investopedia defines these companies as “a firm that invests pooled funds from clients, putting the capital

to work different investments including stocks, bonds, real estate, master limited partnerships, and more. Along with high-net-worth individual portfolios, AMCs manage hedge funds and pension plans, and – to better serve smaller investors – create pooled structures such as mutual funds, index funds, or exchange-traded funds (ETFs), which they can manage in a single centralized portfolio.”

The basic factor at play here is that because AMCs bring together several investors, leading to a higher sum total of investment, they can provide smaller investors an opportunity to work with bigger, better, and more expensive stocks. They utilize economies of scale on their end and individual investors get higher returns proportionally through AMC-offered funds when compared to wholly as individual investors. Through this medium, the minimum capital requirement (of Rs.50,000) can also be avoided and the risk can also be mitigated because investments are made into diversified stocks instead of one or two companies. The companies are also responsible for choosing, buying, and selling stocks so a new investor also has more cushion to learn about trading before going solo into the world of the stock market.

Final word

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n conclusion, those who have less familiarity and knowledge of the stock market should go with asset management companies. However, those who do have basic financial knowledge may choose to invest directly but it is highly recommended that you choose long-term investments. Those who are confident that they are very proficient in how stocks work may choose margin trading and if you are one of those who consider themselves to be ahead of the curve in PSX knowledge, you could even delve into derivatives!

Novices, hold on. This is not the time for you to know what “derivatives” are. That is for another time and another article. Good luck! n

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The German engineering giant has launched a healthcare focused subsidiary in the country to focus on providing hospital and laboratory equipment to the market

By Taimoor Hassan and Farooq Tirmizi

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alk into upscale restaurants in Pakistan and you will find menus that advertise offerings that conform to the “keto” diet. At some exclusive gyms, membership fees now runs in excess of Rs10,000 per month. And Siemens is expanding its footprint in the country’s healthcare sector.

What do all three of these developments have in common?

They seek to capitalise on the growing propensity among Paki-

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Our largest customer by volume, for the last three to four years, has been the Pakistan Army. They have had a long-term business with us. It includes the Armed Forces Institute of Cardiology (AFIC) and the Central Military Hospitals (CMHs). AFIC is their top-class cardiology institute and they have to buy high-end equipment. Then the major players in the private sector like Shaukat Khanam, Shifa International [are also our clients]. They have a certain status level as they have a reputation to uphold. They tend to buy from organisations like us. And their mindset also matches with us” Khurram Jamil, managing director of Siemens Healthcare Pakistan stanis – particularly the upper middle class – to spend on their health, and a growing awareness of what it takes to become and remain healthy.

And Siemens, the German industrial and engineering giant, wants to make sure that it remains at the forefront of all of the capital expenditures that will eventually go into expanding the country’s healthcare infrastructure.

Like its American rival General Electric (GE), Siemens is a diversified industrial conglomerate with a long history, but is largely known in Pakistan for the equipment it manufactures for electricity generation, transmission, and distribution infrastructure. This is, of course, for good reason: the bulk of Siemens’ business in Pakistan is in the energy sector.

But globally, healthcare is an increasingly important part of the Siemens franchise, and the company has reorganised itself accordingly, spinning off its healthcare business into a separate company publicly listed on the Frankfurt Stock Exchange. That restructuring had an impact on its Pakistan business as well, with Siemens Pakistan – a publicly listed company on the Pakistan Stock Exchange – spinning off its healthcare business into a separate, private company called Siemens Healthcare (Pvt) Ltd in 2016.

Siemens Healthcare, in turn, would like to become the leading provider of healthcare equipment in Pakistan, an effort that may be helped along by the fact that there is now a dedicated healthcare-focused Siemens subsidiary in the country.

How successful it might be remains to be seen, though if the company’s history and dedication to the Pakistani market are concerned, it may well be off to a good start.

Siemens in Pakistan, and healthcare

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iemens has a very old history in South Asia, dating back to 1867, when Telegraphen-Bauanstalt Siemens und Halske (S&H), one of its predecessor companies, built the Indo-European telegraph line linking London to Calcutta via Karachi. Its operations in what is now Pakistan began in 1922 in Lahore, though it was not until the 1950s that the company began to have a major impact on the economy of the territories that now form the country.

In 1952, Siemens helped the government of Pakistan set up a telephone equipment manufacturing company called the Telephone Industries of Pakistan (TIP). If you grew up any time in the 1990s or earlier, chances are your family had a rotary telephone with the letters TIP written on the dial. Those phones were manufactured at the TIP plant in Haripur, which Siemens helped set up. The next year, in 1953, Siemens formally incorporated its subsidiary in Pakistan. And Siemens Pakistan became publicly listed on the Karachi Stock Exchange in July 1978.

The history of Siemens medical technology starts in Berlin in the mid-19th century. In 1844, Werner Siemens put one of his inventions to use for medical purposes for the first time, using electricity to treat his brother for tooth pain. Three years later, Siemens teamed up with Johann Georg Halske to create a company called Telegraphen-Bauanstalt Siemens und Halske (S&H), in Berlin. The new company’s products included electromedical equipment.

In Erlangen, Erwin Moritz Reiniger laid the cornerstone for Reiniger, Gebbert & Schall

(RGS), a company specializing in medical technology.

In 1895, Wilhelm Conrad Röntgen discovered X-rays, touching off a revolution in medicine: In Aschaffenburg, X-ray pioneer Friedrich Dessauer founded his own company, which later came to prominence under the name Veifa-Werke. Not long afterward, in 1916, Frankfurt-based Veifa-Werke was acquired by RGS. The company ceased operations for cost reasons in 1927, with production shifting to Erlangen.

S&H began acquiring shares in RGS in 1907 and acquired a majority stake in the company in 1925. Permission to maintain the Erlangen site went along with this. In 1932 and 1933, the electromedical production activities of S&H in Berlin were also shifted to Erlangen to coincide with the establishment of a new company called Siemens-Reiniger-Werke (SRW).

The company soon came to be viewed as the world’s largest specialized electromedical company. SRW became part of Siemens AG in 1966 and did business as the company’s Medical Technology Division starting in 1969.

The division became an independent legal entity called Siemens Healthcare GmbH in 2015, and in May 2016 launched the brand name Siemens Healthineers to express the company’s pioneering spirit and innovative engineering.

The Healthineers come to Pakistan

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iemens Healthcare in Pakistan is primarily a supplier of the kind of large radiology and diagnostic imaging equipment that is the mainstay of

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most hospitals in the developed world. “[Our product line in Pakistan] is imaging machinery primarily. It includes x-ray, ultrasound, computed tomography (CT), magnetic resonance imaging (MRI), and angiography machines.

On the in-vitro side, there are lab diagnostics like blood and urine testing, so machines for those,” said Khurram Jamil, managing director of Siemens Healthcare Pakistan, in an interview with Profit.

Needless to say, this equipment does not come cheap, which means that Siemens’ clientele for this kind of equipment tend to be the larger, well-funded public and private hospitals. “When you are a BMW seller, you don’t talk to a Mehran buyer. So you focus on those people [as a business] who can understand that,” said Jamil.

The company is reluctant to identify its customers by name, though it gave a few specifics that indicated just who it is able to sell its equipment to.

“Our largest customer by volume, for the last three to four years, has been the Pakistan Army,” said Jamil. “They have had a long-term business with us. It includes the Armed Forces Institute of Cardiology (AFIC) and the Central Military Hospitals (CMHs). AFIC is their top-class cardiology institute and they have

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to buy high-end equipment. Then the major players in the private sector like Shaukat Khanam, Shifa International [are also our clients].

They have a certain status level as they have a reputation to uphold. They tend to buy from organisations like us. And their mindset also matches with us.”

“Then there is the Ministry of Health (MoH). We had signed a major ultrasound deal with the previous government. Then there is this institute in interior Sindh, a good 7 hours’ drive from Karachi: Gambat Institute.

Almost everything for that institute is being supplied by us.”

That large institutional clientele means that the impact of Siemens’ technology on Pakistan’s healthcare remains largely confined to the tertiary level of healthcare, and not the primary level, which is where the bulk of the healthcare crises in Pakistan usually arise.

Siemens management appear to be aware of this, but point out the fact that their role is simply to provide the enabling technology, not necessarily create the entire infrastructure that would allow for the improvement of population health outcomes at the fundamental level.

“We cannot be involved in basic healthcare,” said Jamil. “For example, Pakistan has

a very high infant mortality rate. But those providing imaging equipment cannot fix it.

We are not in therapy, we are not pharmaceuticals. We are in diagnostics.”

The ups and downs of Siemens Health… and Pakistani healthcare

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iven the fact that Siemens relies largely on selling capital equipment to large hospital systems across the country, its revenues and profits have varied wildly over the past decade. Siemens Healthcare is no longer part of the publicly listed Siemens Pakistan holding company, and has not been since 2016. The company declined to disclose its financials to us, hence the only financial information we have about the company is from 2008 through 2015, when it was a segment of the publicly listed company.

Nonetheless, that period does reveal an interesting picture. Revenue over that period as a whole grew by a paltry average of 0.5% per year, from Rs597 million in 2008 to Rs618 million. Pre-tax profits grew by a somewhat more respectable average rate of 7.2% per year, from

Rs33 million in 2008 to Rs53 million in 2015.

However, those aggregate numbers hide considerable variation. For instance, in 2009, revenue shot up 64.7% to Rs984 million. This was a period when many hospitals across the country were expanding, and therefore needed capital equipment, for which Siemens is among the suppliers. The following year, however, revenue fell by 41.3% to Rs577 million.

The worst year for revenue was 2011, when the Siemens healthcare business in Pakistan had just Rs291 million in revenue.

The dip in 2011 matches data on overall healthcare spending in Pakistan. According to Profit’s analysis of data from the Pakistan Bureau of Statistics (PBS) and the Ministry of Finance, the year 2011 saw the country’s total spending on healthcare as a percentage of the total size of the economy reach a low point of just 1.2%. It has since bounced back to approximately 2.5% of gross domestic product (GDP), of which 1.1% is government spending – both federal and provincial – and 1.4% is private household spending.

On per citizen per month basis, however, healthcare spending in Pakistan has continued to rise rapidly over the past decade and half.

According to PBS data analysed by Profit, average Pakistani spending on healthcare has gone from Rs56 per person per month in 2002 to Rs335 per person per month in 2018, an increase that clocks in at an average of 11.8% per year.

The bulk of that increase is driven by government spending, which grew by an average of 15.7% per year during that period, from Rs15 per person per month to Rs151 per person per month. And the increase was most dramatic since 2011: government spending has grown at an astonishing average rate of 33.9% per year since then. In the eight years prior to 2011, the average annual growth in government spending on healthcare was 12.5% per year on a per person, per month basis.

Why did government spending on healthcare increase so dramatically after 2011?

11.9 %

33.9 %

That was the first year when the federal and provincial budgets felt the full impact of the 18th Amendment to the Constitution and the 7th National Finance Commission Award, two developments that together both transferred responsibility of education and healthcare away from Islamabad and towards the provincial governments, and gave them the financial resources to manage these priorities.

The inventory problem

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he biggest problem for Siemens Healthcare in Pakistan seems to be caused by two competing forces.

Siemens wants to keep an asset-light business model in the country, meaning it does not have large inventories of equipment and spare parts within the country. Its clientele, however, are used to other companies working through distributors and other means to deliver spare parts quickly, and cheaply, if not always through above-board means.

“Siemens, we are not here as dealers.

Naturally, our way of doing business in this country is going to be different. Toshiba or General Electric (GE), our competition, you’ll find that they have local dealers. They spend there and have dealership with them. That is the difference you see here,” said Jamil.

PRIVATE HEALTHCARE SPENDING Average annual growth rate in private household spending on healthcare, on a per person per month basis, between 2011 and 2018

GOVERNMENT HEALTHCARE SPENDING Average annual growth rate in government spending on healthcare, on a per person per month basis, between 2011 and 2018, a dramatic increase that was a direct result of the 18th Amendment to the Constitution and the devolution of power to the provinces

That often means dealing in a market environment where clients expect faster results than a multinational company is able to offer, largely since the company has to follow a set of protocols to import a part directly from its manufacturing hub in Germany rather than being able to source it locally.

Of course, the solution to that would be to simply keep enough of the most commonly requested spare parts in inventory within Pakistan so that it would limit the amount of time it takes to procure the part from abroad, but Siemens management appears unwilling to do that.

A second solution might be to speed up its procurement process so that it is able to deliver equipment relatively faster to its clientele, but that may also require more investment than Siemens is willing to put into the company’s Pakistan operations at the moment.

Potential investment?

“R

ecently, I have been working very aggressively and I am trying to get some investment from Germany,” said Jamil. “Two to three months back, an honorary consulate from Germany, we have reached an understanding with him that we will invest in Pakistan to upgrade public and private hospitals. And if this materialises, and it is very early to say yet that it will materialise, but I can tell you that it will be a significantly large amount.”

“It is a big amount. Right now, I am not at liberty to tell you the amount, but you’ll get to know. It will be announced and we’ll have a signing ceremony as well. You can mention that a large amount is coming to Pakistan and we have signed a letter of intention for that. The main purpose of the investment is to upgrade hospitals in Pakistan. And also invest in greenfield and brownfield projects in Pakistan in the healthcare sector. The equipment involved will be of Siemens completely. It’s all across Pakistan.” n

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