Profit E-Magazine issue 73

welcome

Dear CEOs, please stop whining One of the professional hazards of being a financial journalist in Pakistan is that when you get to meet and talk to CEOs, you spend anywhere between half and two thirds of the time listening to them complaining about how the government of Pakistan is not giving them free stuff and how the government should ban their competition, particularly the ones who are located outside Pakistan. Mixed in those generic complaints – which, in the case of some industries like textiles, have not been updated since about the early 1990s – must be some truly legitimate complaints from the government, but by the time the CEO gets to those, our reporters have usually passed out in a comatose haze of boredom.

So this is an open letter to the CEOs of Pakistan from the admittedly handful of financial journalists in the country. We would like you to be aware of the following: we are not your therapists. We are not your mommy. You are not a petulant four-year-old child. Stop whining about how the government is not giving you candy, and do your job. You are the public face of your companies. Act like it.

It is not your job to comment on how the country is going to hell in a handbasket or how everything is somehow the government’s fault. It is your job to take responsibility for the fate of your companies and their stakeholders – your shareholders, employees, customers, suppliers, and the wider communities you share space with – and continue to build thriving businesses despite all the obstacles. That is why you make the big bucks.

At Profit, we have a policy of simply cutting out the entirety of the portions of the interviews of CEOs where they start complaining. Our readers already know Pakistan is a difficult country to do business in. Unless you

have something unique and substantive to say, do not expect us to serve as an extension of your public relations agency.

In developed economies, particularly the United States, CEOs have a tendency of never showing any weakness and always being upbeat and talking up their companies. Perhaps that goes too far in one direction, but Pakistani CEOs have a habit of going too far in the other.

And to the CEOs of publicly listed companies who complain about how things are going to hell: you know we can see your financial statements, right?

We will end with this plea: Let us try to be adults and take responsibility for our actions. Let us try not to blame others (the government, imports, etc) for our problems. Maybe we will get better at finding solutions if we do.

Farooq Tirmizi Managing Editor

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

FROM THE MANAGING EDITOR

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In arresting the former CEO of Engro Elengy, the government is proving itself an untrustworthy counterparty in public-private partnerships – and driving away talented professionals from ever working for state-owned companies 10

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By Farooq Tirmizi and Syeda Masooma

heikh Imranul Haque has been in jail for approximately one month and nobody in the government – not even the serious looking men charged with prosecuting him, nor the slightly more ridiculous men charged with selling the case to the public on television – can tell you why.

Oh, sure, they will use sums that sound large (if you do not think about them for too long or do not know the context) and say that he bilked the government out of money. But pay closer attention and you notice something: no actual allegations of wrongdoing. Just insinuations and a nasty tone used to heavily imply that he must have done something wrong, and perhaps the (correct) hope that energy sector contract law is not something most people know anything about.

Here is how we know this: even the references filed against him by the National Accountability Bureau (NAB), a copy of which has been seen by Profit, do not cite any specific laws he violated. There are allegations – with little evidence – that former Prime Minister Shahid Khaqan Abbasi violated specific laws, such as the 2010 Anti-Money Laundering Act and the 2004 Public Procurement Rules. But what law or regulation did Imranul Haque violate? The allegations are completely silent on the matter.

Using a combination of NAB documents and public reporting on the matter, Profit has tried to put a picture together of what exactly happened. What emerges from our

analysis of the matter suggests that, while government officials may have made some errors in the processes used to award contracts for the liquefied natural gas (LNG) terminals in 2015, the government has yet to present any evidence of malfeasance or malintent. Indeed, the government is not even alleging that a quid pro quo took place, which is typically the legal standard for corruption and abuse of power cases.

In other words, for the government to prove that Sheikh Imranul Haque did something wrong, it is not enough to say that he got a favourable contract from the government (we discuss below that it was not as favourable as it has been reported). They also have to prove that he gave the government officials who granted him that contract something of value: cash, a gift, or some other thing that can reasonably be construed as a pay-off.

It does not bode well for the government’s case that, while they continue to shout from the rooftops that Engro Elengy was granted an overly favourable contract – without providing much evidence to back up that assertion – they do not even allege that the former Prime Minister (who was arrested in connection with this case) received anything in return. They actually make the opposite allegation: that after conferring this big favour on the company Imranul Haque worked for, Abbasi decided to do a more personal favour and appointed Haque to the position of managing director of the government-owned Pakistan State Oil. So what on earth is happening? Let us start at the beginning.

The LNG transaction

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he story starts with the pursuit of a liquefied natural gas terminal in Pakistan.

Let us recap why this terminal was needed in the first place, and why Engro, of all companies chose to pursue this project.

It was 2006 when the government of Pakistan decided that it wanted to incentivize companies to engage in the domestic production of fertilizer. As a sweetener to that fertilizer policy, the government of Pakistan promised to provide 100 million cubic feet per day (mmcfd) of natural gas, the raw material needed to produce urea, the most common fertilizer used in Pakistan.

The bidding process for that permit saw two companies win: Engro, and the Fatima Group which would go on to set up Fatima Fertilizers in Pakistan. Engro, being the highly ambitious company that it is, decided to make their plant the biggest investment in a single project in Pakistan by a private sector company: they invested $1.1 billion in capital to set up the largest single-train urea manufacturing facility in the world.

The plant was ready to begin testing by early 2010. Unfortunately, that was precisely the

Imranul Haque, in the slammer for being good at his job? time when Pakistan began to reach the limits of its production of natural gas, and the country faced something it had never before seen in its history: natural gas load shedding, which hit the northern parts of the country particularly hard since they tend to rely on natural gas to fuel heaters in the winter.

Needless to say, the government of Pakistan reneged on its sovereign guarantee to Engro to provide that 100 mmcfd of natural gas for the fertilizer plant that they had just spent $1.1 billion – most of it borrowed – in building.

This caused revenue and profitability at Engro to be hit badly as the company struggled to pay off the debts for a project that was not earning it anywhere close to the kind of profits that were needed to pay down the loans that it had taken on for the project.

It was around that time – 2011 or so – that Engro started contemplating the idea of setting up an LNG import terminal. The logic behind that move was simple: if the government of Pakistan was not going to supply the gas that it had promised, Engro would simply import it. All it needed was permission from the government of Pakistan to do so, and permits from the stateowned natural gas pipeline companies – Sui Southern Gas Company (SSGC), Sui Northern Gas Pipelines (SNGP) and Interstate Gas – to allow Engro to use their pipelines to pump the imported gas from Port Qasim or Karachi Port to the Engro Fertilizer plant in Dharki, Sindh.

Under the Zardari Administration, the company struggled to get the government to even grant it permission to build the plant, let alone actually start construction and use the plant. So when the Nawaz Administration took office in 2013 and signaled that it was willing to help Engro solve the problem created by the government reneging on its own promises, there was some cause for hope.

It helped that the Nawaz Administration appointed Shahid Khaqan Abbasi, himself a

University of California Los Angeles-trained electrical engineer, to the position of Minister of Petroleum and Natural Resources. Abbasi was not familiar with the energy or petrochemical business, but as an engineer, he likely understood the challenge facing the industrial and mechanical engineers at Engro who were trying to solve for the problem of having a massive fertilizer plant that needed to import its fuel after the government’s promises turned out to be hollow.

After a two-year negotiation process, the government finally initiated the process of opening up bids to allow companies to set up LNG import terminals. Engro was among the very first companies to apply and won the bid. NAB alleges that the process was rigged to ensure that Engro won the bid. However, it does not outline what illicit measures that Engro must allegedly have used to secure the government contract.

The government’s allegations

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here are three central allegations that the National Accountability Bureau has made against Engro and Sheikh Imranul Haque personally about the LNG project. The first is the issue of capacity charges and why the government ever agreed to pay those (more below on what are capacity charges and why they make business sense for both the company and for the government.)

The second is the allegation that the awarding of the contract to Engro was the result of favouritism on the part of the government.

And the third allegation is that Sheikh Imranul Haque was the recipient of further favouritism when he was asked – and accepted – the position of managing director of Pakistan State Oil. NAB alleges – without specifying how – that Abbasi and other former government officials broke government rules in awarding those contracts. What it does not specify, however, is exactly how Engro Elengy, or Sheikh Imranul Haque personally, violated the law. Did they bribe somebody? Did they threaten somebody?

Did they use their influence to improperly influence government procurement processes? At no point does the government specify how Imranul Haque or Engro broke the law.

The problem with capacity charges is particularly egregious. NAB is claiming that the contract is unduly lucrative but provides no benchmark to prove its point that it is an unusually lucrative contract. In particular, NAB officials appear to have a problem with the very idea of capacity charges, which are a commonly used tool by governments and even private businesses to encourage investment in energy infrastructure projects.

In a nutshell, the logic behind capacity charges is this: they generally take place in

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situations where there is a single monopsony buyer who controls the entirety of the market for your product or service and needs you or another entity to build out essential infrastructure for its business.

Essentially, the only three companies in the country that control the transmission or distribution of natural gas are all majority-owned by the government of Pakistan. So when the government asks companies to set up infrastructure projects – like, say, an LNG import terminal where the company’s only possible buyer is the government – it has to give them some assurances that it will continue to buy the product.

Engro’s agreement with the government is this: either you buy the gas that we import – which we do based on demand projections we receive from you – or you at least pay us some sort of charge that helps cover the costs of setting up this plant. It is fundamentally similar to the contracts the government signs with electricity generating companies: either the government buys their production or at least pays for the cost of them setting up the infrastructure.

This capacity charge, which ended up being utilized for approximately six weeks at the beginning of the project – and which is recoverable by Engro itself buying the gas it imported using the terminal – is being presented by NAB as a scandal, without any acknowledgement of the fact that this kind of arrangement is relatively standard. Nor is there any specific allegation as to which law or regulation prevents Engro Elengy from entering into such contracts, or what law makes them and their executives criminally liable.

In short, here is what happened: Engro believed the government when it said it would provide them with the amount of gas they would need to justify a massive $1.1 billion investment in urea production. Once it became clear that the government itself was not interested in fulfilling its promises, Engro tried to set up its own infrastructure to import natural gas. For that it needed permissions, which it received after years of waiting for the government.

Then, once it had secured those agreements and raised the money to make its infrastructure

investment, Engro and its executives were faced with potential criminal charges for having the audacity to have a normal energy sector contract with the government of Pakistan as their counterparty. And, for the first time, a private sector executive was arrested without any allegations of criminal wrongdoing.

Not only did the government renege on its initial promises, but it actually jailed the head of the Engro team that decided to solve that problem without the government’s help.

The Engro project

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he bidding process used to grant Engro Elengy the terminal license was the same process as the one used to grant contracts for Dasu Dam, which is to say that it was a single-stage, two-envelope process.

Both Engro and Pakistan Gas Port Ltd (PGPL) submitted final bids. PGPL’s bid was declared technically non-compliant by an independent, USAID-appointed consultant (the UK-based firm, QED).

Unsolicited Twitter feedback by PGPL subsequently confirmed that the bidding process was transparent. The LNG terminal project has returns in line with other contracts the government has entered into and is similar to indepen-

Then, once it had secured those agreements and raised the money to make its infrastructure investment, Engro and its executives were faced with potential criminal charges for having the audacity to have a normal energy sector contract with the government of Pakistan as their counterparty. And, for the first time, a private sector executive was arrested without any allegations of criminal wrongdoing 12

dent power producer (IPP) projects in Pakistan.

The project was price competitive. Engro’s terminal tariff is $0.44 per mmbtu, which is comparable to international and regional projects.

The USAID-appointed consultant (UKbased, QED) conducted bottom up costing and determined that a competitive tariff would be between $0.57–$0.78 per million British thermal units (mmbtu). By comparison, the rates in Indonesia are $1.50–2.0 per mmbtu, Japan $0.66 per mmbtu, 4GasAsia $0.84 per mmbtu for retrofit at SSGC LPG, and India at $0.80–1.10 per mmbtu.

And while it is true that capacity payments – which are the norm for such projects – are due to Engro; $272,000 per day in year 1 and $228,000 per day in years 2-15, no capacity payments have been made to Engro whatsoever to date (given the fact that the project is running at over capacity i.e. there is no idle time.

Figures being reported in the media are misquoted as representing profit. Per attached article, overall revenue for Engro from this project has been estimated at $1.5 billion. The company argues it will pay back around one-third ($0.45 billion) of the revenue to the government – state-owned Port Qasim Authority (PQA) and the federal government – in the form of taxes and port and shipping royalties.

The lease of floating storage and re-gasification unit (FSRU) is about $750 million and the shore side facility costs $130 million over the 15-year period. A second terminal has since been awarded to PGPL on the same basis with equivalent payments of $240,000 per day.

The LNG terminal was set up in record time of 330 days, 5 days before deadline. The past five attempts have failed during three governments at implementing LNG projects since 2006.

The LNG terminal has thus far saved Pakistan $1.2 billion per year due to reduced import of furnace oil. In addition, there have been savings of $600 million by negotiating the best deal for

the country for LNG procurement, according to Bloomberg News. (Source: Bloomberg article).

How the Sheikh is holding up Let us not forget that in the middle of all of this, Imranul Haque is still in jail. As sources close to him confirmed to Profit, it has been 30 days since his arrest and a reference has yet to be filed against him. NAB’s investigative team only visited the Engro elengy port last Monday for the first time, having already arrested Imranul Haque and Shahid Khaqan Abbasi.

The Investigating Officer (IO) in the case in the last hearing informed the court that he would finish his inquiries in 14 days. The question remains to be asked, what will they manage to do in 14 days that they have not in the past 30? NAB’s answer has been that they are going to interview board members in their hunt for irregularities or corruption. Needless to say, the reader should not be surprised if 14 days from now when Imranul Haque applies for bail and asks that his remand be ended, he is given another promise that the IO will have the case wrapped up with a pretty pink bow in another two weeks. “NAB has said that they will be done in 14 days, and we hope that this will be it. There is no logical reason for him to be under lock and key” Salmanul Haque tells Profit. He is Imranul Haque’s son.

“They’ve been very good to my father while he has been in their custody, this much I would like to say. He gets time outside every day and we are allowed to see him a few times a week. He also gets food from home thrice a day. But he is still in a cell, and he has been in there for a month and might be for longer - and that too just for doing his job well.”

He has a point. As previously discussed, the accusations against Imranul Haque have essentially centered around him striking a good deal with the government. And while it is up for debate whether Shahid Khaqan Abbasi or Imranul Haque had the better end of the bargain, he is currently being punished for doing a good job as a CEO. And while he may be getting good treatment from NAB, he is still their prisoner.

According to sources close to Imranul Haque, he does not get questioned a whole lot for someone under investigation. An interrogator might come in for 20 to 30 minutes every few days and chat with him about this and that. The entire process has an air of stalling about it.

In this case, one might just have a pinch of sympathy for the interrogators. They have a job to do, which is interrogate. And one would imagine a lot of interrogating - hours on end of it daily - especially if someone has been in custody for a month.

But the interrogators have little to ask him.

His actions as CEO were legal, and again, he has not been charged with anything illegal either,

$1.1 BILLION $1.5 BILLION $450 MILLION just a lot of conjecture. His appointment as MD of PSO was perfectly legal, and perhaps testament to the job well done that was his deal with the government.

“NAB has been good to my father yes, but again, they have said they need only 14 more days.

When nothing comes up again, as it inevitably will, I hope they will remember their own words and not ask for another extension in remand” Salmanul Haque ended. The consequences of the government’s decisions Here is why all of this matters: the government of Pakistan has basically proven itself an untrustworthy counterparty in any negotiations on matters of public-private partnerships. Which company in their right mind would ever want to trust the government when it next calls for investment in a particular sector that the government deems necessary for the country’s economic progress? And which CEO will want to engage in those negotiations know what Sheikh Imranul Haque has gone through.

Imranul Haque has the kind of credentials the government would dream of to have as the leaders of state-owned companies. Well-educated, decades of experience working as an engineer and manager at energy and petrochemical companies and willing to work in a state-owned company.

Who does the government think will answer their ads for managers and CEOs of large, troubled state-owned companies knowing the

Massive Investment The amount Engro invested in Enven, the fertiliser manufacturing plant in Dharki, Sindh, which is the largest single train urea plant in the world

Revenue Total revenue Engro can expect from its LNG project over the next 30 years

Payback The amount of money Engro is likely to pay back to the government in the form of royalties, fees, and taxes from its revenues kind of trouble it can bring? Will it be well-credentialed people, or will it be charlatans who know they cannot get a well-paying job in the private sector?

This is fundamentally the government scoring an own goal and limiting its own capacity to implement a reform agenda when it comes to the economy?

The consequences for professionals

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astly, it is important to address what the arrest and NAB allegations against Sheikh Imranul Haq mean for professionals in the country who have ever considered working for the government and are anxiously waiting for the government’s civil service reforms to open up recruitment for government jobs that can allow them to have an impact on the country’s governance.

Does this process give anyone more confidence that the government – in particular the Imran Khan Administration – have the best interests of the country at heart and will not subject them to politically motivated persecution when it suits their convenience?

The answer to those questions are uncomfortable for anyone in the government or private sector to contemplate. n (With additional reporting by Abdullah Niazi)

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The hue and cry over the government’s secretive ordinance to relieve titan industrialists and the withdrawal of said ordinance in response to public backlash has been the talk of the town in the past week. But what is the GIDC, and what exactly went down last week?

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By Eleazar Bhatti and Ahmad Ahmadani

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he Pakistan Tehreek-e-Insaf government has recently waived off approximately 208 billion rupees in Gas Infrastructure Development Cess, more famously known as GIDC, to ‘influential’ industrialists through a presidential ordinance. Account for the accumulated interest, and this amount goes up by another 92 billion rupees to a whopping 300 billion.

The GIDC scandal has been the talk of the town. In essence, the Prime Minister and his cabinet approved an ordinance and sent it to the President for signature. After the hue and cry over the GIDC ripping off taxpayers and giving breaks to large industrialists, the PM

In the process of this media outcry reflecting the public outrage, however, many of the nuances surrounding the ordinance and the GIDC have been lost. Have taxpayers actually been robbed off Rs 300 billion? Many might not even have known what in the world the GIDC is until the news of the ordinance and its eventual withdrawal broke.

And before we jump to conclusions, the bigger question here is, did we, the general public of Pakistan, really pay a cess? And if so, are these big firms not paying up because they just don’t feel like it, or is there another side to the story that we don’t yet?

Profit, explains.

The cess business

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decided to ‘withdraw’ the ordinance and asked the Attorney General to take the matter off the government’s hands and into the lap of the Supreme Court.

The ‘details’ and ‘theories’ surrounding the matter have made the rounds on whatsapp, been hotly debated on television and labelled a great betrayal of the Pakistani people. TV personality and journalist Rauf Klasra went so far as to say that Prime Minister Imran Khan has ‘robbed’ the nation of almost 300 billion rupees.

The accusation is eerily similar in its wording to the Prime Minister’s own complaints against his opponents whom he wants to so badly hold accountable. What makes the matter so serious, however, is that for once, everyone seems to be agreeing with Rauf Klasra.

efore we go any further into this debate, what even is a cess? There may be a general understanding that it is a kind of tax, but what is the difference between a cess and any regular tax? And what exactly is the GIDC anyways?

A cess is a tax on top of a tax, levied by the government for a specific purpose. For example, GIDC, which stands for Gas Infrastructure Development Cess, is a tax specific for gas related development work throughout Pakistan. In simpler words, the government collects money on top of the tax you already pay to raise funds for specific projects etc.

The Gas Infrastructure Development Cess (GIDC) was introduced by the Pakistan Peoples’ Party government under the leadership of former president Asif Ali Zardari back in November 2011 after the agreement with Iran for the Iran Pakistan gas pipeline.

This cess was initially introduced on 25th November 2011 as a Money Bill. A money bill, or supply bill as it is also known, is a bill that solely concerns taxation or government spending, as opposed to changes in public law.

The main objective of levy of GIDC was to raise funds for undertaking development of infrastructure related to transnational gas pipelines. This would include pipelines extending or operating across national boundaries such as the Iran Pakistan Gas Pipeline and TAPI project - the Turkmenistan–Afghanistan–Pakistan–India Gas Pipeline, and Liquefied Natural Gas (LNG) projects such as the terminals operated by Engro Elengy Terminal Private Limited and Pakistan Gas Port Corporation at Port Qasim in Karachi.

Who’s footing the bill?

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his cess was imposed on all industries, which includes the fertilizer sector, CNG sector, IPPs, Captive Power Plants and basically everyone

that has an industrial gas connection. Hence it was in no way imposed on the general public or directly collected from the people.

But then how did the general public end up paying this cess? Well, the government imposed this cess on industrial gas connections and this amount was to be collected from these industries in terms of increased gas bills. And as any business would do, these businesses adjusted their prices according to the increase in cost of production. If they had to pay Rs13 per unit of gas before, and now had to pay Rs100 to Rs300, then they would just adjust their prices accordingly.

But contrary to popular belief, these businesses did not increase their selling prices in relation to the increase in gas prices, just because of basic economics. Principles of economics state that an increase in price directly correlates with a fall in demand. In short, if these businesses passed on the impact of the cess on to the consumer then they would lose customers resulting in lower sales and naturally lesser profits.

And so these businesses declared this cess unconstitutional because it was introduced via a money bill and unreasonable because the cess was simply too much.

Nonetheless, this money bill was challenged in various courts including the Sindh High Court and Peshawar High Court for being unconstitutional, only later to be challenged in the Supreme Court of Pakistan.

These very courts issued stay orders in favour of the companies that were supposed to collect funds on behalf of the government from consumers and deposit them into the national exchequer.

Now these companies lost a case in the Sindh High Court over the increase in the rate of GIDC from Rs13 per MMBTU to Rs100 per MMBTU and subsequently also filed appeals obtain stay orders against this increase. Then the government once again enhanced the cess to Rs200 per MMBTU for captive power plants with effect from July 1, 2014.

Fast forward a few years, and the Supreme Court upheld the judgment of the Peshawar High Court, and in its judgment dated 22nd June 2014, maintained that the GIDC is a fee and it could not have been introduced through a money bill and hence it was not validly levied in accordance with the Constitution of Pakistan. In short, it was rendered unconstitutional.

Subsequently, three months later, on 24 October 2014 the government promulgated the GIDC Ordinance, 2014. However, it was once again challenged in various courts of law.

Upon this, the government, with the approval of parliament in May 2015, promulgated the GIDC Act, 2015.

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The government played seesaw with their position on the GIDC ordinance in the course of the last week.

But that did not stop the law from being challenged again. The consumers once again challenged the GIDC Act, 2015 and the courts once again granted stay orders against billing as well as collection of this controversial cess from consumers. As a result of all this legal back and forth, the government was not able to retrieve the funds and the arrears amounts of GIDC have since been accruing from the inception of GIDC which was back in January 2012 till December, 2018.

Now, there is one judgement that is in favour of the government and one judgement against the government, with some 200 plus

cases on which various companies have obtained stay orders.

For the judgment that was passed in the industries’ favour, Sui Southern Gas Company Limited (SGCL) and Oil and Gas Regulatory Authority (OGRA) had filed an appeal against Century Papers Ltd and got the judgment suspended. And according to the legal counsel of these firms, subsequently fresh notices have been issued to more parties but those parties were successful in obtaining favourable interim orders in these subsequent proceedings, hence the 200 plus cases.

But contrary to popular belief, these businesses did not increase their selling prices in relation to the increase in gas prices, just because of basic economics. Principles of economics state that an increase in price directly correlates with a fall in demand. In short, if these businesses passed on the impact of the cess on to the consumer then they would lose customers resulting in lower sales and naturally lesser profits.

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So, what’s happening now and why are we talking about it?

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he PTI government through a Presidential Ordinance dated August 28, 2019 waived 50 per cent of the GIDC, 100 per cent of the accumulated interest and offered payment of arrears in two trenches along with the facility for big corporations to adjust the amounts against sales tax refunds. Sounds fairly simple and straightforward.

According to this Presidential Ordinance, the CNG sector, the fertilizer sector (including feed and fuel), captive power industry, Karachi Electricity Supply Company (KESC), generation companies (GENCO) and Independent Power Producers (IPPs), after entering into an agreement with Sui Northern Gas Pipeline Limited and Sui Southern Gas Company Limited within 90 days of the commencement of the Gas Infrastructure Development Cess (Amendment) Ordinance, 2019, shall be able to pay half of the outstanding cess levied or charged from the May, 22, 2015 to December, 31, 2018.

And, the payment of outstanding cess shall be made in two tranches, first within thirty days and second within three months of the signing of the agreement. Also, the reduction in the rate of cess shall be applicable from the date of payment of arrears and withdrawal of litigation.

Now, the fertilizer sector divides it’s gas usage in to feed and fuel at an 80/20 ratio. The fertilizer sectors uses 80 percent of gas feed, which basically means the feed produced by the sector and 20 percent of the gas is used as fuel to run the production plants.

The Presidential Ordinance also declared that the rate of cess for new fertilizer plants, namely Engro and Fatima fertilisers which were built after the cess had been imposed and through billions in direct investment into the country, shall be reduced to zero and for old fertilizer plants, CNG sector, IPPs and K-Electric and other GENCOs shall be reduced to half. Moreover, the rate of cess for zero rated

industry (export) and its captive power shall be reduced to zero.

Pay up?

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y now you know what the GIDC is and where it all started. But exactly how much did everyone have to pay and why aren’t they paying up?

The total outstanding GIDC amount before the GIDC Act 2015 was introduced with various companies and sectors stood at a whopping Rs147.2 billion. But keep in mind that this was before the Money Bill became an Act of the constitution. Now, after the GIDC Act 2015, outstanding payments under GIDC till December 2018 stand at a ‘modest’ Rs269.1 billion, bringing the grand total to Rs416.3 billion in unpaid dues.

Before the GIDC Act 2015 came into being, the total outstanding amount with fertilizer companies for fuel was Rs0.9billion, Rs15.1 billion for old fertilizer plants and Rs8.5 billion for new fertilizer plants.

The PTI government through a Presidential Ordinance dated August 28, 2019 waived 50 per cent of the GIDC, 100 per cent of the accumulated interest and offered payment of arrears in two trenches along with the facility for big corporations to adjust the amounts against sales tax refunds. Sounds fairly simple and straightforward

Meanwhile, Pakistan’s industry owed Rs20.7 billion, Independent Power Producers or IPPs owed Rs9.6billion, Karachi Electric Supply Company, now known as K-Electric owed Rs25.3 billion, while captive power plants owed Rs28 billion, CNG stations in Region-1 owed Rs21.2, and CNG stations in Region-2 owed Rs18 billion.

However, outstanding amounts postGIDC Act 2015 up till December 2018 with fertilizer companies under fuel stand at Rs1.5 billion, old fertilizer plants at Rs57.5 billion, new fertilizer plants at Rs54.5 billion, Pakistani industry at Rs21.8 billion, IPPs at Rs2.5billion, K-Electric at Rs32.1 billion, captive power plants at Rs63.4 billion, CNG Region-1 at Rs22.6 billion and CNG Region-2 at Rs18.3 billion.

Once again bringing the pre-GIDC Act 2015 total to Rs147.2 billion and post-GIDC Act 2015 total to 269.1 billion, with a grand total of Rs416.3 billion.

As per the official documents, from January 2012 up till December 2018, some Rs701 billion was to be collected from the masses yet, only Rs285 billion was deposited to the national exchequer.

This is despite the fact that the government had imposed a surcharge worth Rs300 per Metric Million British Thermal Unit or in short MMBTu on the gas used in fertilizer plants as feed while Rs150 per MMBTu on the gas used as fuel in fertilizer plants. Likewise, the government had imposed a surcharge of

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Rs200 per MMBTu on Captive Power Plants and Rs100 per MMBTU on other industries.

These companies eventually ended up collecting cess from the general public under GIDC and at rates up to Rs400 per bag of fertilizer from farmers, or so we have been told so far. Yet only a small chunk of this money was being deposited to the national exchequer, because let’s face it, these big sharks didn’t want to give up the money. Hence the plethora of court cases and stay orders that they are more than happy to slug it out in.

Right?

Well, not exactly. As mentioned earlier, the industry of Pakistan declared this cess unconstitutional, unreasonable and discriminatory. And more importantly, this cess was never imposed on the general public to begin with, unlike what we have been told.

For one, the fertilizer sector states that the government jacked up the cost of production considerably, as fertilizer sector was levied GIDC at much higher rates of Rs300 per MMBTU - triple that of the power sector at Rs100 per MMBTU, and double the rest of the industrial sector at Rs150 per MMBTU. In spite of this clear discrimination, the fertilizer sector has probably been the only sector that paid a significant amount of Rs129 billion as GIDC to the national exchequer.

The sector further argues that urea was selling at Rs1580 per bag before the GIDC was imposed initially in January 2012. Thereafter, gas prices increased twice and led to an impact of Rs168 and another Rs210 on July, 1, 2019, which would sum up to price of Rs1958 per bag. Now, if the GIDC impact of Rs405 per bag was fully passed on, urea should have been selling at around Rs2363 per bag, the impact of change in sales tax and inflation notwithstanding. So, the mere fact that urea is presently selling at Rs1840 per bag is reflective of the inability of the fertilizer industry to pass through the full impact of GIDC. Once again, basic principles of economics hold that increase in price leads to lost demand and less sales.

Moreover, back in PML N’s government, former prime minister Shahid Khaqan Abbasi gave concessions to the CNG sector on GIDC and recovered some funds. And following this very precedent PTI’s government announced the GIDC (Amendment) Ordinance 2019 or in short, an amnesty scheme for industrialists, to recover ‘stuck’ government funds.

The basic argument for this was that if the government tries to recover funds by litigation, the decision can go either way, in favour or against the government hence recovering even 50 per cent of the money is good enough. Because there are judgements in favour of and against the government.

But wait a minute, if you thought waiving off 50 per cent or Rs208 billion was bad enough, industrial tycoons wrote letters to the Ministry of Finance, asking for further relief of Rs100 billion.

Mind blown? – Well ours too. But after what you have just learned, doesn’t this cess seems a bit unfair to begin with? Thankfully, the public and the opposition parties didn’t buy the ordinance introduced by the PTI government.

What now?

O

ver the last one week since the presidential ordinance was announced, Imran Khan and his government has faced some intense criticism, some even going to lengths of declaring this move as a robbery by Imran Khan and his government.

Others have highlighted it as a policy to favour the blue-eyed boys of this government and praised the former PML-N and PPP governments for not giving in on the demands of these industries and businessmen.

But wait a minute, didn’t former PML-N prime minister Shahid Khaqan Abbasi give the same concession to the CNG sector? And was it not the PPP government that introduced the cess without proper consultation and legislation?

The PTI has made several efforts to somehow undo the damage, and over the last

Over the last one week since the presidential ordinance was announced, Imran Khan and his government has faced some intense criticism, some even going to lengths of declaring this move as a robbery by Imran Khan and his government. Others have highlighted it as a policy to favour the blue-eyed boys of this government and praised the former PML-N and PPP governments for not giving in on the demands of these industries and businessmen 18

few days, has held various press briefings, meetings, issued clarifications and what nots to change the public’s perception about the bill. Even more, Imran Khan himself has categorically denied that this ordinance was not to favour any ‘individuals.’ The latest explanation was that the government exempted the taxes only in a bid to recover 50 per cent of the “stuck revenue by way of an out of court settlement after consultation with the industry”.

Nonetheless, after great criticism and in yet another historic u-turn, Prime Minister Imran Khan has decided to retract the ordinance. Other than the pesky issue of the Prime Minister being constitutionally unable to withdraw an order of the President, the retraction has been a move towards undoing some of the damage.

According to a statement issued by the Prime Minister’s Office, Imran Khan decided to withdraw the presidential ordinance regarding the GIDC and since has directed the Attorney General of Pakistan to “approach the Supreme Court for urgent hearing of the matter”.

The government says that the decision to go to the apex court has been taken so that the matter can be decided at the earliest, strictly in accordance with the law and the constitution, because Pakistan needs the money.

Yet, the government is concerned over going to the Supreme Court, saying that the decision could go either way and then the government would even lose the rest of the money under the GIDC head.

According to the statement, “Going to court carries a risk because the decision could go either way. This means that the government could get the whole amount or could lose it all and possibly forgo any prospect of future revenue collection under the head.”

“Also, on top of this, the government could be saddled with the burden of administering refunds of approximately Rs295 billion of the principal amount,” the statement added.

Nonetheless, according to the opposition parties, the problem doesn’t lie in the waiver of GIDC primarily but the fact that the PTI government treated this ordinance as an inside job and was kept super hush hush, and finally imposed by a presidential ordinance, essentially bypassing the parliament, and the very essence of democracy.

The truth is that even from the billions collected by the government under the GIDC, none of them have been used for any gas infrastructure development up till now, and it is highly unlikely that the funds from the GIDC will ever be used for that. The LNG terminals at Port Qasim we see today have been set up using private investment, and hence the GIDC becomes useless in retrospect. n

ENERGY

OPINION

Asif Saad

Our manufacturing opportunity

which would be within my limited budget. In this piece, I want to explain how the domestic market for these products is an opportunity for local entrepreneurs and how they could generate value for themselves by creating new demand in many similar sectors.

Let’s begin with my findings. I started the search with floor tiles and compared locally produced tiles with imported ones as well as marble. While the marble was locally made, it was expensive and time-consuming to install. I therefore decided to procure How Pakistani producers floor tiles and evaluated available options. But apart from a few must redefine opportunity and low-quality local tiles, there was nothing available and the concreate new markets tractors and tilers recommended that I go for imported tiles. From expensive top-end Spanish or Italian tiles to the lower end Chinese one, everything was readily available. I could easily find a product or the last 5 months, I have undertaken the arduto match my quality and price requirements. Next up, I wanted ous task of renovating my home. Much to the diswood for my doors and windows. I didn’t have to bother much here comfort of family members, I have rather foolishly because I learned that there is limited availability of local wood. persisted with the endeavour. Although it is difBut much to my surprise, along with the wood, we are also importficult to foresee success in this adventure, at least ing locks, handles, door hinges and stoppers- basically everything not to the satisfaction of my wife and my mother, else required for a door or a window!

I have managed to gain some knowledge about the building Onto electric lights-from small basic LEDs to slightly nicer sector in Pakistan. The main insights have sadly been about bedroom lights are all imported, mostly from China. Even comthe complete absence from the market of locally manufactured panies which used to produce lights and bulbs in Pakistan have products used in the finishing of homes and buildings. Other switched to importing from China! I then looked for fabric for curthan basic commodities like cement, steel bars and paint, I have tains and sofas assuming this would definitely be locally made since not found anything locally produced which I could use. Mind Pakistan exports these products. But the retailers told me another you, I wasn’t looking for anything fancy- only normal products story- no one wants to buy Pakistani fabric because it cannot match the quality of imports from countries like China and Turkey. Does that mean we do not export home textiles anymore? I found out later that we do, but we have been operating at the lower end of the market and have been unable to add value to our product line, thus losing market share in the domestic as well as export markets.

Naturally, from the consumers’ perspective, it is okay to buy imported products as long as their Asif Saad needs are being met. It makes perfect sense to be able to procure whatever meets your price and qualis a strategy consultant ity requirements. Any preference for local products would be based upon the capacity of the local who has previously worked producers to meet consumer needs. The contractors, craftsmen, traders and retailers all smiled when at various C-level positions I persisted to ask about local products. At the end of my queries, they would just shrug and say they for national and don’t use or stock local products and don’t know where I would find them. multinational This brings me to the bigger question: why are we not producing locally? There must be valid corporations reasons for the local entrepreneur to stay away from the domestic markets for all these products. And this is not only restricted to the building industry; the same phenomena cuts across most industries in Pakistan. In my work across different sectors, I have often found management teams talk about per capita consumption of their product or service and how further investment cannot be made unless

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the market is large enough. This is a simple number which is derived by dividing the total sales of a product by the population. So if we are looking at the market for automobiles, for example, we would take the total sales of all local car producers plus imports and divide this by the population. You would then compare this number with the per capita car ownership in other countries. You could do the same with air conditioners, refrigerators or anything . But there is a fundamental problem with this simplistic analysis. It takes the historic number but ignores the market development opportunity that the low per capita actually represents. Let me illustrate with the example of the Tata Nano in India.

When Tata motors decided to engineer a car for the low-income Indian consumer they did so by flipping the logic of the per capita numbers. They challenged themselves to develop a car at a price point which will attract the lower-income groups who perhaps wanted to

trade up from motorcycles. They did not see the lower market level as an impediment and instead took it as an opportunity to create an entirely new market of previous non-consumers. I have not followed Nano’s success but I looked at the price point today on their website; it sells for approximately USD 4000 compared to the Suzuki alto (same engine size) in Pakistan which sells for almost double that amount!

Pakistani entrepreneurs need to flip the logic of the numbers and create new markets which match local capacities with affordable price points for the domestic consumer.

Granted that public transport should be the first choice for the ordinary citizen, but if there is to be automobile production in Pakistan, it must not be restricted to low volume high-end cars. Producers in high growth economies with sizable populations have first established themselves in the local markets with affordable products. Japan did

“One wonders, once more, why the pharma industry would want their prices to go down. Even if they are no colluding to drive them up, what would they get by suggesting deregulation if it will indeed drive the prices down? And if they are fine with prices going down, then what is the problem with the government fast tracking the process a little through regulation?”

this in the ’60s, followed by South Korea a couple of decades later and now we have seen China on the same path for the last 30 years. In fact, China still carries the label of inferior quality and cheap prices although it has now started offering high price variants in many industries. But whatever the volume/ price equation is, it is made to work for the domestic market first. This allows producers to establish a large volume base from which it can upscale quality to address export market requirements. This is not rocket science and Pakistani manufacturers need to learn and adapt accordingly.

Understandably, entrepreneurs and investors feel nervous when considering entry into sectors which are difficult to quantify as consumers purchasing power remains a mystery. But while these opportunities come with their unique set of challenges, entrepreneurs who take the plunge stand to create new growth engines and reap considerable returns while solving problems for the community.

This is what the larger groups in Pakistan who have the capital and management depth ought to be planning as they develop their future strategies. On the policy side, the recent direction of reducing imports cannot be sustainable unless consumers are offered viable local alternatives. Governments need to encourage local production not by restricting imports but by enabling entrepreneurs to take advantage of the opportunities presented by the domestic market. n

COMMENT

22

The legendary corporate titan has consolidated all of his financial holdings into a single holding company, a move that practically screams the desire to acquire something. So what could be on IGI’s shopping list?

I

By Farooq Tirmizi

t is practically an axiom in the world of corporate strategy: if you consolidate several separate businesses under a single holding company, you are in the market to buy something, usually something big.

In Pakistan, given the dearth of formal businesses, the menu of options is slimmer and hence the pace of mergers and acquisitions is slower, but the rule still holds: if you combine a set of assets into a single entity, you are suddenly every investment banker’s best friend.

They all know you are in the market to either sell something or buy something – often both – and they want to make a fat advisory fee helping you conduct those transactions.

So, in late 2016, when IGI Insurance announced that it would be renaming itself IGI Holdings and consolidating the IGI Group’s insurance and financial services companies under a single umbrella, speculation started in the country’s miniscule community of investment bankers: what does IGI want to buy? And what would they be willing to sell?

Profit does not have a definitive answer, but through an analysis of the company’s financial statements, as well as information we have gleaned from sources familiar with the IGI’s deliberations, we have been able to piece together

FINANCIAL SERVICES

a picture of what was considered, and what could still be on the horizon.

In order to understand what could be possible – and what is advisable – it would be helpful to first explore the nature of the institution, and its history.

Babar Ali’s forgotten child

I

f you asked Pakistan’s economic cognoscenti to name the top corporate titans in the country’s history, we suspect Syed Babar Ali would be in nearly every person’s top three, and quite possibly the favourite to be number one.

The man has managed to build an industrial and financial conglomerate that tends to be known for all the right things: innovative prod-

ucts and services, engaged employees working under an ownership structure that gave its managers true autonomy, and the uncanny ability to attract some of the biggest and best names in global business to invest in Pakistan, an ability driven by the fact that companies around the world know they can trust him.

“There are two people with whom you can co-invest with complete trust: the Aga Khan, and Syed Babar Ali,” said one investor based in New York who wished to remain anonymous.

While Profit has previously covered Babar Ali’s family background and business success in considerable detail, it is worth recapping what he has been able to build. He created and grew Packages Ltd, Milkpak Ltd, Tri-pack Films, and the IGI Group. He brought several foreign companies to Pakistan, including Nestle (Swit-

zerland), Tetrapak (Sweden) and serves on the board of Coca Cola Pakistan, Siemens Pakistan, and Sanofi-Aventis. Oh, and did we mention he is the founder of the Lahore University of Management Sciences (LUMS), Pakistan’s finest institution of higher learning?

Buried among his bigger and better known achievements involving Packages, Nestle, and LUMS, the IGI Group is a relatively lesser known venture by Syed Babar Ali. It is also the business venture where he faced major setbacks, including being forced by the Securities and Exchanges Commission of Pakistan (SECP) to wind down the operations of IGI Investment Bank and merge its remaining assets into IGI Insurance in late 2016.

Less well-known than some of the other names in capital markets (think JS, AKD, KASB, et al) and the smallest among the major insurance groups, IGI is easy to forget. But given the consolidation of its assets – and the rumours that the company explored the option of buying a bank – perhaps the country’s economy would do well to pay attention.

If you went up to Mian Mansha and asked to buy MCB Bank, you would either be told to leave, or else given a price so astronomically high that you would walk away. However, if you go to the Abu Dhabi Group and suggest an interest in buying Bank Alfalah, they Tracing the story of IGI he story of IGI starts very early on in would at least take the meeting and discuss a the history of Syed Babar Ali and his family’s business ventures. In fact, it reasonable price, as well as your ability to close on predates Packages Ltd by three years. the transaction; that is to say, can you actually The first company in the IGI Group IGI Insurance, the property and casualty pay what you say you can pay? was insurance company, which was founded in 1953

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and is currently the fourth-largest property and casualty insurance company in the country. And for decades, it remained the only company in the financial services sector owned by Babar Ali and his family.

IGI Investment Bank was the next entity created by the group, founded in 1990 as the group’s first financial services foray outside insurance. Investment banks – at least ones registered as such – are typically licensed to provide underwriting services for both debt and equity securities, though in Pakistan that usually means mostly debt.

Unlike their counterparts in the United States and Britain, however, Pakistan’s investment banks are allowed to raise deposits from high net-worth individuals in addition to institutions. (The bulge bracket investment banks in the United States and Europe offer deposit products to their high net-worth individual clients, but they typically do so through a bank subsidiary, not directly.) This is a detail that will become particularly relevant in our more detailed discussion of the investment bank, below.

Shortly after creating the investment bank, IGI bought themselves a seat on the Karachi Stock Exchange and set up IGI Securities (now called IGI Finex Securities) in 1994. IGI Securities is by no means one of the largest brokerage firms in the country, but it does a respectable amount of business in the country’s equity markets.

IGI Investment Bank did own a securities brokerage licence as well, but in 2007, IGI Securities became a subsidiary of IGI Investment Bank and the two securities licenses were merged into IGI Securities.

Also in 2007, the group further deepened its foray into the capital markets and created IGI Funds, an investment management company that offered mutual funds to retail and institutional investors. IGI Funds was a subsidiary of IGI Investment Bank.

IGI Funds was a major success for the group: it attracted some of the most talented people in Pakistani capital markets – including star fund manager Maheen Rahman – to work for the company. However, in 2013, IGI agreed to sell its asset management business to Bank Alfalah’s subsidiary, Alfalah GHP Investment Management Ltd, for Rs200 million. The reason: a need to raise cash for the struggling parent company, IGI Investment Bank.

In April 2014, IGI closed on the transaction to buy MetLife Alico, the life insurance company owned by New York-based insurance giant MetLife, which itself had acquired Alico through an acquisition of the troubled US-based insurance giant AIG’s life insurance business in 2010.

At the time of the transaction, IGI claimed it had re-entered the life insurance business, but did not specify when it had previously owned a life insurance business. All life insurance companies in Pakistan were nationalised in 1972

to and merged to become State Life Insurance Corporation, but it is unclear whether an IGI life insurance subsidiary was among those that was expropriated by the government during its nationalisation drive.

The consolidation and the rumours

I

n late 2016, IGI announced that it was renaming IGI Insurance to be called IGI Holdings and converting it into the holding company for all of its financial services companies. And that is when the rumours started, perhaps for good reason.

Here is why: the new entity is a behemoth. At the end of its first full year of operations in 2017, IGI Holdings had a consolidated balance sheet with assets worth Rs103 billion.

The book value of the company (assets minus liabilities) was Rs73.5 billion. While that value has since declined to Rs45.6 billion as of June 30, 2019 (more on why later), the fact remains that IGI remains a formidable company with the ability to buy a substantial asset.

And the rumours that it was on the market were given further life by the reports that the company was working with Atif Bajwa, the former CEO of MCB Bank and Bank Alfalah.

Those rumours were lent some credence when Bajwa formally joined the board of directors of Packages Ltd, the flagship company of Syed Babar Ali’s business empire.

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Sources familiar with the deliberations tell Profit that the group was working with Bajwa to explore the possibility of buying a bank.

That collaboration happened even before Bajwa joined the Packages board. As the former CEO of two of the largest banks in the country, the Aitchison and Columbia-educated banker was a natural choice to help spearhead any efforts by IGI to enter the banking space.

IGI Holdings has yet to formally initiate even a tentative purchase process. We know this because the State Bank of Pakistan requires any entity seeking to buy a bank in Pakistan to notify them – a notification that is then made public – of their intention to even begin the due diligence process that serves as a precursor to an acquisition.

But all major banks in Pakistan are publicly listed, so it is possible to do a significant bit of initial analysis and valuation on a bank

before even making a formal request for initial due diligence.

However, it is unclear if IGI remains interested in buying a bank. It is more likely that the group’s interest is opportunistic, rather than active.

Nonetheless, with that formidable a balance sheet, and a convenient holding structure that lends itself very well to becoming a financial powerhouse in Pakistan, IGI Holdings is all dressed up for an acquisition. The only two questions that remain are the following: how much can it afford to spend on an acquisition, and what could it buy within that budget?

Profit’s efforts to secure an interview with the senior leadership of IGI Holdings were unsuccessful, but we have analysed the company’s financial statements to paint a picture of what is possible, though we cannot be certain of the company’s intentions.

IGI Holdings is currently one of the largest non-banking financial conglomerates in the country, with two well-regarded insurance companies and a brokerage firm. Were it to buy any of these three banks, however, it would become just another bank holding company with a slightly larger insurance arm.

In other words, if you buy a bank, it cannot simply be part of your portfolio of assets. It becomes the core business and everything else becomes expendable 26

How big is IGI’s budget?

A

s of the end of the second quarter of 2019, IGI Holdings had a balance sheet of Rs73 billion in assets. How much of that can actually be used for an acquisition?

Let us start with the simpler bits: the company has about Rs1.8 billion in government bonds and mutual funds that are easily disposable within a matter of days if it needs to convert them into cash. The bulk of its assets are a significant investment portfolio of publicly listed equities worth Rs45.5 billion as of June 30, 2019. How much of that could the company actually use to fund an acquisition? The answer to that question is somewhat complicated.

Nearly all of that Rs45 billion is in a portfolio of publicly listed stocks which means that the company should be able to sell them off over the course of a few months to convert that amount of money into cash. In theory, they could all be sold on one trading day, but trading volumes on the Pakistan Stock Exchange are so low that if they – or any investor – do not want to adversely move the market price of the stocks they are selling, they would break up the sale over the course of several weeks, if not months.

Here is where this gets complicated, however: more than 90% of IGI Holdings’ investment portfolio is the shares it owns in Nestle Pakistan. IGI Holdings owns just under 10% of Nestle Pakistan, a legacy asset that the broader group has had since Nestle first entered the

Pakistani market in 1988. How realistic is it that IGI would sell those shares to buy something?

In the latest annual financial statements, dated December 31, 2018, the company classified its investment in Nestle as “available for sale”, which suggests that IGI is at least open to the possibility of selling that stake to fund an acquisition. Indeed, selling off non-core assets is the very point of creating a holding company structure in the first place.

That gets us to a number just north of Rs47 billion that is currently at the disposal of IGI Holdings to make an acquisition. What could they buy for that much? In the world of Pakistani finance, just about everything that is up for sale.

WAR CHEST

RS47

BILLION

What IGI can buy

P

rofit has previously reported that at least three banks in Pakistan are up opportunistically up for sale: Bank Alfalah, Meezan Bank, and Faysal Bank. By opportunistically, we mean that while the current controlling shareholders of these banks are not actively looking for buyers, they would be willing to sell to right buyer at the right price.

So, for instance, if you went up to Mian Mansha and asked to buy MCB Bank, you would either be told to leave, or else given a price so astronomically high that you would walk away. However, if you go to the Abu Dhabi Group and suggest an interest in buying Bank Alfalah, they would at least take the meeting and discuss a reasonable price, as well as your ability to close on the transaction; that is to say, can you actually pay what you say you can pay?

We will not speculate on which bank IGI Holdings might be most interested in. However, it is important to examine just how advisable it is to sell shares in Nestle Pakistan to buy a bank. Because, while it has recently seen a slowdown in revenue growth and seen its share price slump, Nestle Pakistan is one of those rare assets that is both high-prestige and highgrowth. It is the kind of thing you proudly pass on to the next generation.

Our course, under certain circumstances, it would make sense to sell off shares in Nestle Pakistan, particularly if the asset one was buying in its place offered better value and faster growth. Those two attributes do not describe the Pakistani banking sector as a whole, though a case could be made for the Islamic banking sector, particularly if the asset in question is Meezan Bank.

But that brings us to a more fundamental question: should IGI buy a bank? After all, the experience with IGI Investment Bank, the closest thing to a bank the company has ever owned, ended in disaster. Indeed, IGI Investment Bank would have gone bankrupt had Syed

The amount of money IGI Holdings has in assets that are currently either held as available for sale or could be sold should the company decide to re-allocate capital towards an acquisition

BAILOUT

RS285 MILLION

The amount of money Syed Babar Ali personally lent to IGI Investment Bank in an interest-free loan to help the company return money to its depositors

Babar Ali not personally stepped in during 2014 with a Rs285 million interest-free loan to help shore up the company’s balance sheet.

The management all but admitted that the company was about to go bankrupt. The only reason why we cannot technically say that it actually went bankrupt is because they paid back all of their depositors and creditors and folded the remaining assets of the investment bank into IGI Holdings. Functionally, however, it was the same end. Were it not for Syed Babar Ali’s desire to preserve his good name and reputation in the market, people would have lost money on IGI Investment Bank. Instead, the person who lost the most money on IGI Investment Bank was Babar Ali himself.

The problem with Pakistani banking

W

ere it any other set of banks up for sale, we would have offered our unsolicited advice to the IGI Holdings board to not buy any of them. But all three are good banks with solid balance sheets and worth considering. The problem is the absolute dominance of the bank-

ing sector in Pakistan’s financial system.

IGI Holdings is currently one of the largest non-banking financial conglomerates in the country, with two well-regarded insurance companies and a brokerage firm. Were it to buy any of these three banks, however, it would become just another bank holding company with a slightly larger insurance arm. In other words, if you buy a bank, it cannot simply be part of your portfolio of assets. It becomes the core business and everything else becomes expendable.

So the choice facing the 92-year-old Syed Babar Ali is the following. He knows whatever he does next is likely to be one of the last big acts of his life. Does he really want his biggest asset to become a bank that somebody else built, while the insurance companies and other capital markets companies he built from the ground up become non-core appendages to his empire?

In business, decisions are not always based on cold, rational numbers. Human emotion can play a big role. Buying a bank may make all the financial sense in the world. But does it make sense on an emotional level to the buyers who have to decide to deploy their capital to do so? We suspect the answer is no. n

FINANCIAL SERVICES

HIGHEST PRICE, DOMINANT MARKET SHARE:

THE CURIOUS CASE OF

ATLAS HONDA

The motorcycle manufacturer sells more vehicles than the rest of the industry combined, despite having a more expensive product.

How does it do that?

By Bilal Hussain

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he company has mostly lower-middle and working class customers. It has the most expensive product on the market, and one that is generally worth at least two months’ income for most people who buy their product. Yet, its market share is dominant, selling more than the rest of the market combined, including significantly cheaper products from China. How has Atlas Honda managed to completely dominate the Pakistani market for motorcycles?

In the fiscal year ending June 30, 2019, Atlas Honda – a joint venture between Pakistan’s Atlas Group and Japan’s Honda Motor Company – sold 1.11 million motorcycles, which represents a 62.6% market share among all domestically assembled motorcycles, according to data from the Pakistan Automotive Manufacturers Association. It is approximately 50% of all motorcycles sold in the country, once one combines the sales of imported Chinese motorcycles.

Here is what is even more impressive: it has done so while continuing to have a premium-priced product. Atlas Honda’s best-selling motorcycle is the Honda CD-70, a motorcycle with a 70-cubic centimeter (cc) engine, a size that is the most popular in Pakistan. The Honda CD-70 is priced at Rs74,000 while its imported Chinese competitors sell for Rs50,000 or even less. In other words, despite knowing the fact that they can save 32% by buying an imported Chinese motorcycle, the average Pakistani motorcycle buyer still wants a Honda.

In other words, the company’s advertising tag line ‘Mein te Honda hi lesaan’ (I’m definitely buying a Honda) is more that just a good ad: it is actually true.

“Times are challenging and we are not getting the policy of our choice, but we are getting access to discuss manufacturing policy. We still have hope. Pakistan’s economy has always shown remarkable resilience” Saquib H. Shirazi, CEO of Atlas Honda

So how did this happen? More importantly, at a time when Pakistani manufacturers continue to struggle against cheaper imports from China, what is Atlas Honda doing right?

In short, the answer is quality and brand awareness.

Honda’s motorcycles tend to last much longer than its Chinese competitors. Most motorcycle buyers that Profit interviewed stated that, in general, the average Honda motorcycle lasts anywhere between seven and 10 years of smooth rides and good performance before finally needing to be replaced. Compared to that, an

imported Chinese motorcycle typically needs to be replaced within three years.

There is also the question of resale value.

A Chinese motorcycle bought for Rs50,000 will need to be sold off within three years for Rs15,000-20,000, an almost two-thirds drop in value. Compared to that, a new Honda that can be bought for Rs74,000 can be sold after three years for an average of Rs50,000, a drop of around 33% in a comparable period of time, according to data from Pakwheels.com.

In short, Chinese motorcycles last for one third of the time, and depreciate in value twice

as fast. The cheaper upfront cost is simply not worth the trade-off, which is why the overwhelming majority of Pakistani motorcycle riders prefer Honda.

In terms of fuel consumption, Chinese motorcycles are comparable to Honda. The 70-cc version of Honda motorcycles typically average between 50 and 70 kilometers per litre. The 125cc version of Honda motorcycles average between 40 and 45 kilometers per litre. According to experts in the industry, the 70-cc and the 125-cc motorcycles account for about 95% of all motorcycles sold in Pakistan, with the 70-cc accounting for approximately 70% of sales, and the 125-cc accounting for approximately 25% of sales.

There are roughly around 50 companies which are selling Chinese bikes under different names. United, Unique, Super Star, Eagle, Super Power, Hi-Speed and Road Prince are marketing Chinese imports. However, all Chinese bike sellers combined do not come close to Atlas Honda’s sales numbers.

The product line of Atlas Honda is more extensive than that, however, and includes a wide range of motorcycles. In the 70-cc category, there is the Honda CD70 and the CD70 Dream. In the mid-range, there is the Prider (100cc), the CG125, the CG125Self, the CB125F, and the CB150F. The biggest motorcycle the company sells is the CB250F. Prices range from Rs73,900 for the CD70 to Rs640,000 for the CB250F. “Atlas Honda excels in assembling, chrome plating, and producing a higher quality of nuts and bolts, and has a better paint shop,” said Sabir Sheikh, the chairman of the Association of Pakistan Motorcycle Assembler (APMA). That is reflected in the price of the spare parts used for the company’s products. Sheikh says. “Honda spare parts cost five times more than those used in Chinese bikes.”

It is also important to note that customers with lower incomes tend to be more brand conscious than wealthier consumers. As many marketing experts have noted, the reason is that lower income consumers have far less financial capacity to experiment with products they buy,

AUTOMOBILES

particularly high-ticket items like motorcycles.

They would much rather buy a tried and true brand name like Honda than experiment with an unknown brand that may or may not work.

It also helps that Honda has been exceptionally good at marketing to its target audience, producing advertising that is focused on the rural and suburban customer, and creating compelling advertising and storylines in vernacular languages that appeal to their customer base.

Hit by the slowdown

N

onetheless, while Atlas Honda is one of the dominant market place in the Pakistani motorcycle market, it is not immune to the pressures faced by the industry. The company saw the volume of motorcycles it sold in fiscal year 2019 decline by 3.1% compared to the previous year. However, Atlas Honda is still doing better than the industry as a whole, which saw its volumetric sales decline by 7.7% during the same period.

As a result, revenue growth for Atlas Honda stalled, growing at just 6.2% in the financial year ending March 31, 2019 compared to the same period last year, from Rs77.5 billion to Rs82.4 billion. Profits actually declined somewhat, as the company was not able to pass on its rising costs entirely to its customers. Net income fell by 31.2% in fiscal 2019, from Rs4.7 billion to Rs3.2 billion.

And that decline has resulted in further pain at the company. According to one source familiar with the matter, Atlas Honda has laid off as many 150 employees, which represents about 9% of the company’s total workforce in Pakistan. The company declined to comment on the reported layoffs when contacted by Profit.

The causes for the decline has nothing to

do with the Atlas Honda or even the motorcycle industry as a whole. As Pakistan seeks to correct its macroeconomic imbalances, the currency has depreciated sharply, causing the prices of imported inputs and costs to rise, and resulted in inflation, rising interest rates, and thus lower appetite among both banks and borrowers to buy automobiles of any kind on credit. It has also forced companies to raise prices at a time when consumers are already stretched.

But Atlas Honda CEO Saquib H. Shirazi appears largely unfazed, unlike many other CEOs. “Times are challenging and we are not getting the policy of our choice, but we are getting access to discuss manufacturing policy.

We still have hope,” he said.

He believes policymakers at the highest level are serious about trying to solve the

country’s major economic problems, which in turn makes them open to seeking input and advice from key industry players, like Atlas Honda. He added that Prime Minister Imran Khan is apparently trying hard to figure out what the right thing to do is, and he summons the five key economy-related members of his cabinet every Monday for a two-hour meeting to discuss the economic crisis.

That apparent seriousness of purpose, along with the general pattern of Pakistan’s economic history, is what makes Shirazi optimistic about its prospects.

“Pakistan’s economy has always shown remarkable resilience,” he said.

But Shirazi was critical of how the government’s major economic decisions have apparently always been taken on a short-term basis. Economic policy has been made subservient to fiscal crises and need when, in his view, there should have been a national economic strategy in place for with plans looking ahead for the next several decades.

“But every time we have a fiscal [crisis],” Shirazi lamented.

He tried to strike an optimistic note, and said that the right narrative has finally started to take hold again, noting that “every general now also says that economic sovereignty is of utmost importance,” a reference to the fact that Pakistan’s military has always had an outsize role in decision-making in the country, a factor that is particularly ascendant in the current administration.

The Atlas growth story

N

onetheless, Atlas Honda has been a juggernaut of growth over the time it has been in operation. The number of units sold has risen by an average of 15.6% per year for the past two decades, and

30

12.3% per year for the past decade. Meanwhile, revenues over the past decade have grown at an average of 13.9% per year.

Atlas Honda is the second largest automobile company in Pakistan after Indus Motor Company, the local subsidiary of Toyota. The Pakistani market for automobiles is dominated by the three major car companies from Japan: Toyota, Honda, and Suzuki. Of these two, Honda and Suzuki manufacture both motorcycles and cars.

However, Suzuki is the only company that manufactures all types of vehicles out of the same company. Honda has two separate joint venture entities in Pakistan, both with the Atlas Group. Honda Atlas Cars manufactures sedans while Atlas Honda manufactures motorcycles.

The year 2018 was the first one that Atlas Honda sold more than 1 million motorcycles and the company has already increased its capacity to build as many as 1.5 million motorcycles per year. It is also one of the few companies that – in addition to not fearing competition from India – is also welcoming of the prospect of free trade with India, since they believe their 70-cc product would be especially popular in the Indian rural customer, who currently faces the choice of either a 125-cc bike, which is more expensive, or a scooter, which is more suited for urban roads than rural ones.

Honda’s history in Pakistan is very old, and Atlas Honda has been doing business in Pakistan since 1962. That date of entry into the Pakistani market is made more extraordinary by the fact that Honda itself was founded in Japan in 1948. That means that Honda was less than 15 years old when it first entered the Pakistani market.

Honda came to India in 1995 and brought motorcycles there in 1999. In Pakistan, Honda

Blockbuster sales

Dominant market share

The number of motorcycles sold

by Atlas Honda in the fiscal year ending June 30, 2019, a 3.1% decline over the previous year

The total market share of Atlas Honda among locally assembled motorcycles in Pakistan; that market share remains above 50% even when accounting for imported motorcycles from China

1.1 million

brought motorcycles in 1962 and cars in 1992.

The Honda Motor Company owns 35% of Atlas Honda, and three of the eight members of the company’s board of directors are nominated by the Japanese company. The remainder are owned by the Shirazi family, one of the richest

62.6%

families in Pakistan, as well as local shareholders. The company is also publicly listed on the Pakistan Stock Exchange.

The looming competition?

B

ut while Atlas Honda has thus far been able to beat back the competition, it still has a long way to go and its competitors are getting stronger and making more inroads into the market. The Chinese bikes, for instance also market themselves as 70-cc bikes, just like Honda’s CD70, but the former’s engine size is bigger. Their engines are typically 78cc, which means that they run faster than their Honda counterparts and are popular among younger, lower income consumers.

According to a motorcycle mechanic Ahmed Ali, Atlas Honda was losing its share now at least in Karachi as Chinese bikes have better acceleration due to their bigger engine size.

“What I think is that now the youth only wants pickup. And they can also afford easily cheaper Chinese bikes. I have seen that Chinese bikes are now in more demand because they run faster and are cheaper,” he said. n

AUTOMOBILES

34

I

By Abdullah Niazi

t all started with a visit, as all good bureaucratic wormholes do. On the outskirts of Faisalabad, within what is part of the Faisalabad Municipal Corporation (FMC), but doesn’t quite feel like it, a team from the commissioner’s office arrived in the lazy days before Eid. Hanif watches as the team from the commissioner’s office hoops and hurdles its way over open sewage lines and unpaved roads, holding their forearms to their noses in meek attempts to block out the overpowering stench of animal waste.

Eid is a busy time for municipality employees. With animal markets setting stage and small scale vendors roaming all over the city trying to make a buck, there’s all kinds of smells and mess making the city a nightmare. And that’s where the municipality workers come in, strutting around demanding permits and often also just out there trying to make a buck.

Which is what makes this visit so strange.

Living in one of the most dilapidated areas of Faisalabad, Hanif is also an animal farmer by profession. And while this means he is regularly hounded by the municipality, his product is milk, not meat. So at least for the time that the cattle markets are still alive, he expects the FMC to be too busy dealing with the Eid influx to care about the handful of cows he has tied up in the confines of his shabby home.

As the inspectors arrive, you can smell trouble in the air better than you can smell the animals. Usually when the inspectors come knocking, they expect bribes. A few thousand here, a few thousand there, there’s usually a strict per cow number that both parties are aware off. The municipality people huff and puff and the farmers grumble and complain but the transaction is completed and life goes on as it always does.

But the game is different today, and the people making their way through the neighbourhood aren’t here for petty bribes of fines.

On the peripheries of Faisalabad where this show down is taking place, there live around 500 dairy farming families. Each family has between 5-10 buffaloes to their name, and all of them live off the meagre fare selling this milk gets them. It is, essentially, a milk cottage industry. A cottage industry that, by the way, produces 20% of Pakistan’s annual milk production, and 70% of the country’s saleable milk production as per Pakistan’s 2016 livestock census.

And the commissioner’s people are there to shut the whole operation down. You are within the limits of the municipality, and you can’t keep cattle on your residences they say.

The team was there to evict the cattle, but in effect they were evicting the people as well.

Because without their animals, they have no livelihood.

What followed was a fascinating few days that displayed how politics, bureaucracy, local government, and classist hysteria come together to try and oust from Faisalabad a community vital to local economies all across the country.

There were delays as Eid did in fact give the dairy cottage farmers some respite. And then a push to have them out again. The farmers followed up this latest deadline by going to the Lahore High Court (LHC), and the court gave them a stay.

For now, the eviction stands still, awaiting a response from the commissioner to explain his decision to have the farmers moved out. But how long will the farmers will be able to hold their ground assisted by the law? What if any effect will there be on Faisalabad’s milk market?

And how in the world are we supposed to accommodate dairy cottage farms within cities, without risking health hazards?

Pardon the pun, but where’s the beef?

M

ilk men are evil. In Pakistan they don’t come strolling to your doorbell with a six pack of milk bottles, bow tie slightly crooked, and humming a tune. In Pakistan, they arrive on a broken down Sohrab motorcycle, struggling to carry the weight of the huge copper drums slung carelessly on either side. The fumes from their ancient two-stroke bike producing and evil black hue that undoubtedly affects the milk in some way or the other.

They also aspire to make sure your kids don’t grow tall. Which is why they all conive to mix water in your milk and inject their animals with the worst kind of steroids that will speed up your journey to the afterlife. That, at least, is the perception countless television exposes have fed to us.

Perhaps no one symbolised this milk hysteria more than former Chief Justice of Pakistan (CJP) Justice Mian Saqib Nisar. While his lordship had taken to heart many issues and liberally used his suo motu powers, his fear of the country’s dairy situation was enough to grab international attention. When the economist profiled his honour, they captioned a full length picture of him beautifully - “judge, benefactor, milkman.”

But looking at Hanif and hearing him talk, he doesn’t seem like the monster that every gawala has been made out to be. He’s just trying to get by. And for all we know, he is among the many gawalas that mix milk in their water and charge high prices and juice up their buffaloes.

“What is significant; all of these anti-poor operations were conceived and led by unelected officials and same is the case in Faisalabad in present instance. The Administrator of Faisalabad is an unelected bureaucrat” Usama Khawar, Advocate

This might make you think, why care about 500 small scale dairy farmers. Maybe it’s sad that they’re being evicted, but what’s the big deal if they have to move a few blocks over?

What you’re not realising then is that people like Hanif are actually significant contributors to the economy. And the problems they face are not peculiar to Faisalabad.

Pakistan is among the leading raw milk producing countries in the world. Unlike production systems in developed countries such as the US, however, milk production systems in Pakistan are typical of developing South Asian countries. This production system characteristically is a mix of traditional and commercial methods, although the traditional beats out the commercial in volume due to the sheer number of small scale dairy farmers.

According to the Livestock census of 2016, a whopping 70% of the milk producers in Pakistan are subsistence based, compared to a miniscule 0.5% of large peri-urban commercial milk producers.

The 500 small scale dairy farmers that Hanif lives with at the edges of Faisalabad milk their animals and end up selling at least 70% of the produce, using the rest for themselves. They sell to local shops and on fixed routes. Going by the census, these 500 would be categorised as market oriented small scale holders.

This is because while living on the edges of Faisalabad and selling to the city’s population makes them peri-urban, since they have smaller herds ranging from 5-15 animals at most, they also have certain characteristics of rural commercial farmers. This is even truer since a number of these 500 settled families came from nearby rural areas such as Jhang, where they had been practicing rural commercial dairy farming, due to repeated floods.

Small scale holders that are market-ori-

FARMING

ented thus end up producing a vast 70% of saleable milk from the various milk production systems operating in Pakistan.

With 10 animals per household producing up to 8 liters a day, the 500 dairy farming households facing eviction in Faisalabad can produce up to 40,000 liters of milk on a good day. According to a study in the Pakistan Journal of Agriculture, 50% of the milk produced in Faisalabad district is consumed by the city itself. Of this 50%, the larger scale commercial farmers sell to other cities and bottle their milk.

The 500 dairy farmers facing eviction have a key role to play in this 50% consumption within Faisalabad.

What they’re up against

W

hen the commissioner had made his desire known to have Faisalabad cleaned up in one fell swoop, Hanif and his fellow farmers were indignant, not bewildered.

They knew they were within the FMC jurisdiction, but while they claim they had no knowledge of the legality of keeping cattle within the municipality, what they do know is that they are part of the municipality in name only.

The commissioner of Faisalabad, Mohammad Javaid Bhatti, has seen himself become the man in charge of Faisalabad in wake of the recent dissolution of local governments by the PTI. When contacted, he was unavailable to speak at length, having gone to Islamabad for training. But his office did inform us that the decision to evict the farmers was taken after multiple health and cleanliness concerns were raised.

True enough, the conditions in which this milk is produced are filthy. Animal waste and animals not only make it an ugly sight to behold, but also a haven for disease. “The commissioner took the initiative on his own after a number of complaints. He gave time to the people and gave multiple warnings before taking action” his office explained.

What they couldn’t explain, however, was the lack of municipal facilities in the area.

While the commissioner says it is part of his jurisdiction, there is no sewage or waste disposal mechanism in place in this area - where experts say there should be extra care because of the animals.

An eyesore it may be, but as far as the farmers are concerned, that is the municipali-

Annual milk production from various milk production systems in Pakistan ty’s mistake, not theirs.

The question is one of sustainable living.

This cottage industry for dairy provides Faisalabad with a significant portion of its milk. But the facilities they recieve are next to nothing, which ends up promoting unhygienic and putrid conditions for milk farming. And this is not peculiar to Faisalabad. While the eviction may be their headache for now, all over the country, peri-urban and small scale market-oriented farmers face similar conditions in which to farm their product - and often similar hurdles.

They have bigger problems to deal with than possible evictions. For example, as the earlier mentioned paper in the Pakistan Journal of Agriculture points out: In Pakistan, peri-urban dairy farmers are usually poorly connected to financial institutions and livestock services, and get negligible returns from their dairy enterprise. Other existential problems include high calf mortalities, unsystematic breeding, imbalanced feeding, high loans and a hostile marketing system dominated by middlemen.

Of course, moves such as this eviction attempt are nothing new for Hanif and his fellows. Ambitious, but unelected functionaries often victimize marginalised and lower income communities in their clean up drives. Ask the

As important contributors and providers of the local economy, they should ideally receive not just municipal facilities but additional support to ensure that they can work and produce hygienically and in peace 36

farmers, and they will tell you how such moves are made every few years. While they say these attempts are usually stalled by bribes, this time around the municipality is serious.

“This operation against the small dairy producers is part of broader anti-poor bias of our bureaucratic elites” argues Usama Khawar, the lawyer that has taken the FMC to court on behalf of Hanif and the other dairy farmers.

“We have seen dispossession of poor in the form anti-encroachment drives in Islamabad first against katchi abadis and more recently against kiosks; in Karachi against small shop-keepers and informal settlements; and now in Faisalabad” he says.

“What is significant; all of these anti-poor operations were conceived and led by unelected officials and same is the case in Faisalabad in present instance. The Administrator of Faisalabad is an unelected bureaucrat.” he added.

But in addition to these biases and structural difficulties they face, there also seems to be a political challenge. The farmers have alleged that there is more than just cleanliness behind their eviction. They allege that the operation is taking place at the behest of Khurram Shehzad, the incumbent MNA for NA 107 (Faisalabad VII). Khurram’s interest in having the farmers evicted is that they would no longer be in his constituency, and be the one polling station in NA 107 that defected for the League.

While Khurram Shehzad has not responded to Profit’s attempts to contact him, one can never put too much stock into such claims. The numbers of the farmers are paltry enough that Shehzad wouldn’t go out of his

way to get them chucked out. But at the same time, the farmers are insistent, and have made it part of the case they are pursuing against the FMC in the LHC.

The court case

T

he legal system, for now, has at least backed the farmers. The LHC has restrained the Faisalabad Municipal Corporation from displacing the dairy farmers and directed the commissioner to decide their application within two weeks strictly in accordance with law.

Usama Khawar argued on behalf of the petitioners that the authorities were determined to uproot the dairy producers, destroy the livelihood of thousands of citizens and push them into poverty by displacing them through illegal, mala fides, and politically motivated coercive action.

Ironically enough, counsel told the court that the municipal corporation invoked Punjab Local Government Act, 2013 against the petitioners which was a repealed law. The repeal of the PLGA 2013 in the wake of the PLGA 2019 is what had elevated the commissioner to the position of de facto mayor, yet it was the PLGA 2013 he used to have the farmers evicted.

Profit’s detailed dive into the PLGA 2019 compared to the PLGA 2013 in a previous issue had discussed in passing that issues such as dairy farming should be dealt with by the local government, and in the absence of these elected representatives, unelected state function-

Annual saleable milk production from various milk production systems in Pakistan aries such as the commissioner are given free reign to do as they will.

Such functionaries cannot very well understand the importance of such communities to local markets and economies. They often brush aside the fact that many of these people have been doing this work for decades, inheriting their small properties from their fa-

thers. And in their zeal to clean up, they often bulldoze instead of fixing important structures such as this particular cottage industry.

For now the court has simply given a stay, a win for the farmers, but an unstable one and easily set aside. What they will have to argue in front of the judge is not just their right to their livelihood, but also their right to facilities that the municipality should be providing them.

As important contributors and providers of the local economy, they should ideally receive not just municipal facilities but additional support to ensure that they can work and produce hygienically and in peace.

The point to be made here is a legal one, relating to arbitrary removal and right to property, and on some level even a constitutional one, relating to the overreach of unelected functionaries such as the commissioner of Faisalabad.

But it also presents the opportunity to set a precedent that could boost the peri-urban farming industry and increase the standard of milk being produced. Simple sewage facilities and stricter regulation could mean these small scale farmers could have proper sheds within their homes to sequester their animals in.

A cleaner area with paved roads could also encourage the setting up of milk shops by these farmers, and cut out the middle men that often leave the farmers themselves with little to take home from their produce.

This might even help tone down some of the more hysterical anti milk-mafia elements in media and whatsapp circles. n

FARMING

A

By Taimoor Hassan

report published by Small Arms Survey, a research project at the Geneva-based Graduate Institute of International and Development Studies, in June 2018 estimated that civilians in 230 countries till year end 2017 owned 857 million firearms. What makes this number appalling is that it is 84.6% of the total number of guns in the world. Yes, militaries and law enforcement agencies do not own majority of the firearms, according to the survey.

Out of the over one billion firearms in the world, militaries hold 13.1% of the guns, which comes to 133 million, while law enforcement agencies hold a paltry 22.7 million guns, only 2.2%. The case of Pakistan is no different. The survey estimated that there were an estimated 43.9 million civilian-owned guns in Pakistan by

WEAPONS TRADE

39

the year end 2017, up from 18 million in 2007, much more than the estimates are for military-owned guns (2.3 million) and guns owned by law enforcement agencies (944,000), putting Pakistan at 4th spot for the highest civilian firearms holding, behind only the United States, India and China.

Forty-four million guns looks like a big business. A 9mm caliber pistol, which is the lowest caliber and the most demanded in Pakistan costs approximately Rs25,000 on the lower end of the price range. Of course, there are other, more expensive ones as well, depending on the manufacturer.

But given the fact that Rs25,000 is the cheapest a gun can get, that would mean that the total value of the 43.9 million guns in circulation in Pakistan is at least Rs1,098 billion, a highly conservative estimate.

And the market has been growing at about 9.3% per year for the past decade, according to data from the Small Arms Survey.

Extrapolating from that growth rate, the country will have 52.5 million guns by the end of this calendar year. And next year, another 4.9 million guns will enter the Pakistan market, meaning annual small arms sales in Pakistan are worth at least Rs122 billion ($764 million) and may well be worth more than $1 billion a year.

To put that in context, that is more than the value of all motorcycles and rickshaws sold in Pakistan in a year.

But walk into the shops of firearms retailers in Lahore and you would find no customers and empty inventory. Dealers say that it has been six years of misery in their business. The downfall of their business began when the Pakistan Muslim League Nawaz (PML-N), led

by Prime Minister Nawaz Sharif took office in 2013. The anti-gun policies of the Nawaz Administration at the federal level, and the Shahbaz Administration in Punjab, curtailed arms imports, and banned licenses, all in a bid to regulate the industry in a country with several armed insurgencies and a high violent crime rate.

That, however, meant hard times for legal arms dealers.

“Our business is down since Mian [Nawaz Sharif] sahib’s government. He had an anti-gun policy. We expected that this government would do something about it, but I don’t blame them because they have bigger problems to look after. The items we deal in are not their priority. It is not a necessity of life,” says owner of Bukhsh Elahi and Co, a Lahore-based arms dealership.

The legal guns business has degenerated completely. On the supply side, imports have been disallowed, on the demand side, licenses are not being issued: there has been a blanket ban on issuance of arms licenses in Punjab. The

40

“The sales receipt has the customer’s information like his name, phone number, CNIC all there, and our [dealer’s] information, like our license number, sales tax number. More importantly, it has the serial number [of the weapon] that we have sold to that customer. A copy goes to the police from our side, another one goes to the [provincial] home office. The customer goes to the home office for the endorsement of the weapon purchased” Syed Yasir Hassan, owner of Arsenal, a Lahore-based arms dealership

District Commissioner’s Office in Lahore told Profit that the ban has been in effect since 2015.

Dealers claim that the ban is not in effect in other provinces.

“There was a lot of demand earlier. From November till the end of February or March is hunting season and we had good sales in that period. People ask for cartridges, shotguns, rifles. Other customers would need it for self-defense or sporting, for competitions. Right now, we might get 15 customers in a day. Out of them only eight would have a license, and seven would not because licenses are banned.

And of the eight that would have a license, only two would be potential buyers but then we have no weapons or ammunition because imports are banned,” says Syed Yasir Hassan, a Lahore-based importer of arms and ammunition and owner of Arsenal, an arms dealership.

Meanwhile, arms dealers argue that the regulations have done nothing to curb the widespread of use and ownership of guns, just made it more difficult to do so legally. They point out that the number of guns in Pakistan continues to rise rapidly, and of the 44 million guns estimated to be in the country in 2017, only 6 million were legally registered, with the rest in the black market.

Legal imports of arms and ammunition were only $8.24 million in 2007, according to data from the Pakistan Bureau of Statistics, and peaked to $36.63 million in 2009 when Pakistan People’s Party (PPP), led by President Asif Ali Zardari, was in office. That was the heyday of the business, dealers say.

When the Nawaz Administration took office in 2013, imports were at $16 million and had decreased to $6 million by 2018, when the PML-N government, during its last days in office, lifted the ban on imports of arms and ammunition. Importers, however, say that though the ban has been lifted, the Ministry of Commerce is not issuing licenses, which is a prerequisite for imports.

“Only an SRO [Statutory Regulatory Order] was issued allowing imports but actual licenses were not issued. Old licenses expired when the old policy was changed. We are registered as importers but our actual document, which used to get renewed each year, we don’t have that. It’s like all other licenses that get renewed. We don’t have the required documents so we can’t show anything to the manufacturers about the imports permission,” says Yasir.

On the other hand, commerce ministry officials insist that the imports have been al-

lowed after the SRO was issued by the previous administration at the end of its tenure.

Gun dealers argue that the process of doing a legal trade in guns is being made too onerous, which does not serve the government’s policy objectives of greater transparency into the gun market.

“Overall in Pakistan, laws related to guns are so strict, it is not even possible to do the trade otherwise. No arms importer in Pakistan is allowed to import automatic guns in the country. If somebody has been able to bring them in the country, he might have used forged documents or misdeclared the weapons, which is a criminal offence. All the Klashinkovs and automatic weapons can only be smuggled into Pakistan. Legal trade is not involved in that.

That is all illegal trade. If you want to stem that, secure the border,” says Yasir.

“The procedure is that whenever a consignment comes to Pakistan legally, it will have a packing list with a record of all the weapons with their serial numbers, make, model, country of origin and all other details written on it,” he adds.

The data is entered into the database of customs authorities that a certain importer imported specific guns, from a specific manufacturer based in a specific country, with all the serial numbers.

“We get possession of the consignment only when we clear all the taxes,” Yasir says.

“For as long as the consignment is there and not cleared, you have to pay demurrage on it,” he adds.

Demurrage is the tax/fine an importer pays to the customs authorities if his consignment is not cleared on time. It is charged on a daily basis and is higher for arms and ammunition because gunpowder is flammable and carries a high risk if kept with other items.

As per the old policy, importers were authorised value-based licenses. They could only import a certain number of weapons based on the monetary value of their license, which differed for each importer. For instance, an importer might be allowed a quota of Rs2 million im-

Empty inventory at Arsenal ports for a year, while another importer might have a license of Rs4 million worth of imports.

An importer could import a certain number of weapons equivalent to the value of their license.

That flooded the markets with Chinese and Turkish made guns and ammunition because they were less expensive and would allow more units against the more expensive ones such as the US, European or Brazilian made weapons, which are more expensive and hence a smaller number of units could be imported.

The value-based licenses gave rise to a

legitimate problem of under-invoicing. Where a gun would cost $200, importer would declare its price to the customs authorities to be $80, which would be a loss to the government revenue, even though customs authorities would clear the consignment at a higher price than declared, according to their own estimates of the prices of weapons.

At times, these consignments would be confiscated and would stay with the customs authorities, and importers would be required to pay demurrages for each day it would stay with the authorities, which would become losses for importers. And the best the government could come up with was to abolish the import regime.

Here is what it takes when somebody wants to purchase a weapon. First, they will have to apply for a legal demand license with provincial home department or the federal Killingrmsthe dealers point out that encouraging the legal trade will help the interior ministry, depending on where they live. The government more effectively regulate licence takes anywhere been six weeks and gun ownership in the country.

Here is what it takes when somebody two months to get. The licences are all linked to a to purchase a weapon. First, they will government database that monitors legal weapons wants have to apply for a license with provincial home or the federal interior ministry, ownership. Only once licenced can a person buy a gun. department depending on where they live. The licence takes But the process does not end there anywhere been six weeks and two months to

A

WEAPONS TRADE

Massive market

Rs122 billion

Estimated value of guns sold in Pakistan every year, according to an analysis conducted by Profit using data from the Small Arms Survey, more than the value of all motorcycles and rickshaws sold in the country

Brisk business

4.9

million

The estimated number of guns that will be sold in Pakistan in 2019, according to Profit’s analysis of data from the Small Arms Survey

Collapsing imports Empty inventory get. The licences are all linked to a government database that monitors legal weapons ownership.

Only once licenced can a person buy a gun. But the process does not end there.

“The sales receipt has the customer’s information like his name, phone number, CNIC all there, and our [dealer’s] information, like our license number, sales tax number. More importantly, it has the serial number [of the weapon] that we have sold to that customer. A copy goes to the police from our side, another one goes to the [provincial] home office. The customer goes to the home office for the endorsement of the weapon purchased,” Yasir says.

“If the police or any other department wants to check, they will have the complete list of all the weapons imported by us and will be able to tally it with our receipts that which weapons have been sold. If they check our stock, they will be able to verify so there cannot be anything fishy in all this. Only if a weapon is missing, they will know that there is something wrong,” he says.

But the legal trade is struggling with regulations and formal licenses are banned, all while reports continue to surface of government officials illegally issuing backdated or otherwise unauthorised licenses in exchange for hefty bribes. The home department recently unearthed a scandal of officials in the Lahore District Commissioner’s Office hundreds of

42

$6

million

The total value of legal arms imports in Pakistan in 2018, according to data from the Pakistan Bureau of Statistics

Peak of the market

$36.6 million

The total value of legal guns imported into Pakistan in 2009, under the Zardari Administration, according to data from the Pakistan Bureau of Statistics

fake, forged and illegal arms licences, involving millions of rupees in bribes. Other district offices were also found involved in the scam and the probe has only been widened.

“When you stop something legal, the illegal will start. They don’t give licenses anymore, which can still be received through DC Office illegally. There are lots of scandals involving that.

You have to start giving licenses legally. Nobody in this space wants to keep illegal weapons but people have no other way other than obtaining it illegally. So, because of that, those outlets which are taxpayers and want to do this legally, they are suffering, but the illegal ones are thriving,” say Bukhsh Elahi and Co. All this comes at a time of macroeconomic slowdown in the country. “The demand for weapons has decreased in the last 5 years, especially since the devaluation of the rupee against

the dollar,” says Muhammad Salahuddin, a Lahore-based importer of arms and ammunition What makes the process of obtaining guns more cumbersome, says Yasir, is that even if somebody has a license, they will need another letter from Home Office giving them permission to purchase the weapon.

“The policy can be a lot better. They could have had computerised booklets just like passports. Whenever you have to change your weapon now, get a new or a used one, you have to get a new license which takes 1.5-2 months.

And then you need permission again to buy it,” he says.

Profit has learnt that the Punjab Home Department is mulling lifting the license ban for those individuals who are tax-filers. When contacted, the Home Department refused to comment on the development. n

WEAPONS TRADE