welcome
WHY DATA JOURNALISM IS STRUGGLING IN PAKISTAN This week, Profit will include two, seemingly contradictory ideas. We are replacing our “News Briefings” section with a “News in Numbers” section, where we will seek to tell stories through data visualisations. And we are also publishing an editorial outlining why we believe data journalism in Pakistan will likely continue to falter for the foreseeable future. Our aim in starting the “News in Numbers” section is to acknowledge that there are often stories hidden in numbers and sometimes the best way to tell that story is to simply show what the numbers look like, with ideally meaningful visualisations to illustrate the point. We will seek to tell stories that highlight facts not often known by the public at large. This week, for instance, we highlight the rise of Multan as a hub of international aviation in Pakistan, with over 1 million passengers flying out of the City of Saints in 2018. But on the larger point of the ability of Pakistan’s media to tell stories through numbers, we remain largely pessimistic. There has been considerable effort made by many professionals at many media organisations to integrate data journalism into their storytelling practices, and a valiant effort by some of the newer journalism schools to improve the quality of data journalism in Pakistan. But, we believe, these efforts are largely doomed to failure in the short to medium term. The real problem with telling stories with numbers in an increasingly quantifiable world is that Pakistan’s journalists, by and large, are badly educated in mathematics. It is, of course, no fault of their own. Education quality in Pakistan in
FROM THE MANAGING EDITOR
general is poor, and particularly poor when it comes to teaching people how to apply abstract principles to practical life. The data journalism needs to have a comfort level with mathematical concepts to be able to do their job properly. They need to be comfortable with logarithms to be able to calculate rates of increase and decrease over multiple periods of time. Understanding at least basic calculus would help them be able to tell stories of numbers that change over time, with the second differential being a particularly useful concept in understanding if and when an inflection point is achieved. And the need to understand the mathematical logic of probability is obvious. Too few people practicing journalism in Pakistan today are familiar with any of these concepts, including some people who might – on paper – possess relevant degrees. And as a result, very few people are capable of performing the kind of sophisticated analysis and storytelling that is increasingly needed to hold the powerful – both governments and businesses – to account. We would end this editorial on a positive note, but we do not really have one, so instead we will leave it on this dark note. Enjoy your week!
Farooq Tirmizi Managing Editor
9
News IN NUMBERS
People from Multan and the surrounding areas of South Punjab have increasingly had better air connectivity as both local and foreign airlines have started offering direct flights from Multan to destinations in the Middle East, particularly the major aviation hubs of the United Arab Emirates. The trend started I 2011 with Pakistan International Airlines offering direct flights from Multan to Saudi Arabia, followed by Air Arabia and Shaheen Air connecting Multan to the UAE in 2013 and 2014. The massive increase in the fiscal year ending June 30, 2016 is the result of a single event: Emirates Airlines starting direct flights between Dubai and Multan, which caused international air travel to and from Multan to skyrocket through 2018. Unfortunately, Emirates decided to end those flights in October 2018, and hence the numbers for FY2019 are likely to be significantly lower. But for the moment, Multan is the fifth airport in Pakistan to hit the 1 million passengers a year mark.
10
News IN NUMBERS
Sialkot is a unique airport in Pakistan: the only one not owned or built by the Civil Aviation Authority but instead by private investors who are members of the Sialkot Chamber of Commerce. The airport serves the needs of the industrial cities of Gujrat, Gujranwala, and Sialkot. It also serves as the hub of a new, private sector airline to be called Air Sial, which claims it will begin operations this year. The airport offers a surprisingly robust number of connections, not just to the aviation hubs of the Middle East, but also direct weekly flights to Paris and Barcelona. Operations at the airport commenced in FY2008 and have been growing rapidly ever since. Sialkot is the fastest growing airport in Pakistan, with passenger traffic increasing at an average of 51.8% per year since 2008, with the bulk of that being international air traffic, which has been growing at an average of 81.2% per year during that same period.
11
By Taimoor Hassan
14
I
f there is one thing that will make or break the current breakneck growth trajectory of e-commerce in Pakistan, it is the extent to which financial technology is able to keep pace with the growth of the broader market. In a cash dependent economy, it is very difficult to get people to transact over the internet if they are not also willing to make payments over the internet. There are several companies trying to bridge the divide: JazzCash and EasyPaisa, both owned by telecommunications companies, are trying to change the market by introducing mobile wallets that rely on mobile cash. Then there are Finja’s SIM SIM mobile app and the FonePay App, two notable brands that have raised investments from international venture capitals and have also gotten some local investors excited. Besides those two, Keenu, a notable brand of POS [point of sale] machines has also been successful in making a name in the market and is gaining traction. But all of these companies are trying to make it easier to transact locally using credit cards. One company – E-Processing Systems (Pvt) Ltd, a subsidiary of the publicly listed Systems Ltd – however, is seeking to make the existing cash touchpoints of most consumers the gateway to their access to the global financial system: the retailers where
they top up their mobile balances on their prepaid cellular connection plans. OneLoad’s core product is a simple phone and web application that is being used by your local small shop owners, convenience stores and pharmacies to serve walk-in customers, providing them with on-demand mobile airtime, and processes a whopping one million digital commerce transactions a week at these micro retailers across the country. What’s more fascinating is that the company reached this level of adoption without any advertising, marketing or brand awareness campaigns.
Empowering the retailer
D
igital commerce is burgeoning in Pakistan as mobile networks expand and the internet becomes accessible to a greater proportion of the population. Better connectivity has allowed people to access and use products and services conveniently, quickly and effectively. In Pakistan – with over 157 million verified cell-phone connections, according to the Pakistan Telecommunications Authority – where cellular density stands at 75%, growing from 54.6% in 2008, the market for digital services is still in nascent stages allowing more opportunities for disruptive technologies to bridge the gap for service delivery.
With an increase in the usage of digital services, whether it is a Netflix account or internet data package to watch YouTube or use WhatsApp, in Pakistan and around the world, there is a need to pay for such services without hassle. In Pakistan, however, since credit and debit cards are not used frequently, a largely non-digitized and unbanked market heads over to the nearest retailer to top-up these services with cash. According to OneLoad, an estimated 20 million people do that in Pakistan each day, making digital service top-ups a must-have for retailers. Originally started, like other fintech companies, to digitize payments and provide an e-wallet to people, OneLoad soon came to a realization that the need was not on the consumer side because many other players were there to cater to those needs like Easy Paisa, SIM SIM, Jazz Cash and even banks to a certain extent. Entering the market with a consumer-orientation was going to be an expensive investment because the competitors were pumping in a lot of money but OneLoad’s funds had to be used optimally. In order to get into the space without having to outspend its well-financed rivals, OneLoad decided to shift its focus to the retailer/ merchant side as the company had identified a need: keeping inventory of scratch cards was a pain for the merchants. They were unable to hold
FINANCIAL TECHNOLOGY
“WE FUNDAMENTALLY BELIEVE THAT UNLESS A DIGITAL SERVICE ADDRESSES A REAL LIFE NEED IN A MORE CONVENIENT MANNER THAN THE INCUMBENT BEHAVIOR, ITS CHANCES OF SUCCESS ARE LIMITED. ONELOAD WAS DESIGNED AS A SERVICE WHICH ADDRESSED SEVERAL PAIN POINTS OF RETAILERS AND SMALL STORES IN PAKISTAN” Muhammad Yar Hiraj, OneLoad founder and CEO
big inventories, lost count of scratch cards sold of a specific telecommunication company, coupled with a fear of theft. Moreover, getting top-ups from different companies was expensive and cumbersome as it required paying several service providers upfront and tying up money in physical cards or buying credits which were only usable for one particular service. Unused credit was also lost money for retailers. That was an opportunity there. OneLoad moved quickly and successfully digitized the retailer to make it easy for them to serve walk-in customers as retailers could now work with less upfront investment, did not have to tie up capital in multiple dedicated services and did not have to deal with numerous vendors visiting their shops demanding them to purchase more than they needed for
16
the day. OneLoad provided retailers with an online solution where they would have all the scratch cards on one digital platform, and they would load money on this platform and sell it from there. A merchant did not have the restriction or worry of running out of a specific company’s scratch cards because he would have access to load money and using that ‘universal balance’ that he put into the system, he would be able to sell airtime of any of the telecommunication company. It also empowered retailers to create a distribution hierarchy of the airtime inventory, allowing the business owners to keep a tab on what was being sold down a retailer chain. For instance, if scratch cards were being sold at a pharmacy and there were five branches of that pharma-
cy, the owner would simply buy the cash-in for airtime themselves using the online platform based on their estimated sales, and then distribute to respective branches of the pharmacy chain based on the sales volume of individual branch. Every component of the supply chain makes money as the commission is distributed down the chain. OneLoad deducts its percentage at the source and passes the rest on to the retailer. According to OneLoad, their uptake increased phenomenally after they finished integrating with all four of Pakistan’s mobile telecommunications companies, which was done almost a year ago. Building on this, the fintech has also now introduced the facility of paying utility bills and buying international gift cards like the Google Play store and Apple’s iTunes cards. The integration with
“AS AN INVESTOR AND SUPPORTER OF A DIGITAL COMMERCE AND FINTECH STARTUP, IT IS IMPORTANT TO BE COMFORTABLE IN A ROLE OF BEING A MENTOR AND A COACH, PROVIDING THE STARTUP WITH THE REQUIRED RESOURCES TO GROW. WE DID ALL THIS WITH ONELOAD AND THE RESULT IS APPARENT” Aezaz Hussain, chairman and founder of Systems Limited
the Google Play story and the Apple app store would allow consumers to buy and pay for apps and services that are offered through those two platforms, including services such as Netflix and paid apps. Besides that, its platform also allows to send and received money to other OneLoad users and even bank accounts. To access the services requires going through a simple registration process after which a user can load money onto OneLoad account through any of the leading banks’ over the counter services. Presently, OneLoad claims that more than 25,000 retailers actively use its platform and earn commission on a transactional basis. It has served over 100 million consumers -- meaning that 100 million people have bought airtime from OneLoad -- since its full-service launch in late 2016, with over 20 million retailer views of the application each month. It also claims of being the largest fin-
tech in Pakistan in terms of transactions performed and has entrenched itself for mass market, bottom of the pyramid commerce. And that business is beginning to bring in significant revenues for its parent company. In calendar year 2017, the latest for which financial information is available, OneLoad achieved revenue growth of 828% from Rs8.2 million in 2016 to Rs76.5 million in 2017. That growth was largely driven by the increase in the number of transactions by 886% compared to 2016, from 2.4 million in 2016 to 24 million in 2017. The total value of the transactions processed through OneLoad in 2017 was Rs2.2 billion. OneLoad founder and CEO Muhammad Yar Hiraj commented on the factors contributing towards OneLoad’s success and said, “We fundamentally believe that unless a digital service addresses a real life need in a more convenient manner than the
incumbent behavior, its chances of success are limited. OneLoad was designed as a service which addressed several pain points of retailers and small stores in Pakistan and piloted it with a single large use case i.e. telecom airtime vending and have seen tremendous growth in numbers. Based on our learning from the initial use case, we are gearing ourselves to introduce a number of new functionalities for our customers in 2019 and are hopeful of doubling our numbers this year as well.” “Our focus, resilience and support of our investors is what led to OneLoad’s growth over the years. Support from our investors and advisors who are veterans in the industry and funded the growth of the company has been invaluable and enabled us to reach this level,” he says. Talking to Profit, Aezaz Hussain, chairman and founder of Systems Limited, said: “As an investor and
FINANCIAL TECHNOLOGY
supporter of a digital commerce and fintech startup, it is important to be comfortable in a role of being a mentor and a coach, providing the startup with the required resources to grow. We did all this with OneLoad and the result is apparent. Systems Limited in its role of supporting OneLoad and taking it to new heights has been successful. In 2019, we envision a more active brand where we would be looking to enhance its product and service offerings through its continued access to technology assets of Systems Limited.”
Strengthening interoperability
O
neLoad’s key focus is on digitizing more pain points of retailers, whether it is providing financial services to walk-in customers and earning commissions or procuring merchandise from corporations. Additionally, they are interested in extending their merchant network to service providers, financial institutions and e-commerce players allowing them to offer their products and services, through OneLoad, thereby creating a truly interoperable merchant network. In its pursuit of interoperability, they are also open to integrating other fintech companies, like in the branchless banking services such as EasyPaisa and JazzCash, to use OneLoad’s platform to offer their services through a retailer. It also falls in line with the operating ideology of OneLoad i.e. giving the retailers as many options as possible to sell and earn commission. Another example of such services would be empowering the non-traditional retailers to offer assisted e-commerce service, where they can assist a customer in buying, for instance a cell phone from a website for the customer in exchange for a commission. OneLoad says that it is also open to suggestions by banks and even other digital service providers to innovatively use OneLoad’s platform to tailor a solution for others. For instance, if a banks want to do cash-out or cash-in transactions through OneLoad, it would be
18
USER BASE
TRANSACTION VALUE
The number of users in Pakistan who have thus far utilised OneLoad’s platform to top up their mobile balances
The value of transactions processed by OneLoad in 2017, the latest year for which figures are available
100 million
open to facilitate these through its platform as being an aggregation company at its core, such services are a natural fit for it. A lot of banks are also approaching OneLoad and it is in the process of integrating with three of the big ones where they will provide the top-up facility to the bank’s customers on internet banking through OneLoad. One of the remarkable feature of OneLoad’s successful journey so far, which speaks of the substance the business is built upon, is that there were virtually no direct marketing efforts to scale the business to where it is. It was the company’s retailers who made tutorial videos themselves showing how someone can make money through OneLoad, automatically generating marketing content for the company. Onwards, the company has started advertising its brand on the social media because, according to them, their retailer is very active on social media. The company does not ignore
Rs2.2 billion
consumers altogether either. All the services that are available to the retailer are available to the consumer as well and the firm is probing ways to allow more payments options for consumers. OneLoad also wants to venture into is e-money and is in talks with the State Bank of Pakistan (SBP) over e-money regulations. Once it receives the e-money license, it will come under regulation and that would allow them to transact with the formal economy. A disruption of sorts, OneLoad believes that it is going to be an enabler for the traditional payments industry because OneLoad is expanding the whole chain down to the roots of the markets with its non-traditional retailer base and digitizing their transactions. Therefore, it considers itself adding to the formal economy as an enabler instead of being a competition as it wants to supplement the banks and other fintechs to enable their services through its platform. n
FINANCIAL TECHNOLOGY
20
By Syeda Masooma
BUSINESS EDUCATION
I
t is one of the strangest facts about Corporate Pakistan: there is, and has been for decades, a massive shortage of accountants in the country. This shortage has been acknowledged publicly by the guardians of the accounting profession in Pakistan – the Institute of Chartered Accountants of Pakistan – for almost as long as the problem has existed. And yet, it has continued to persist, despite ICAP insisting that “ICAP does not support the artificial shortage of accountants in Pakistan.” To put the problem in some context, here are the numbers: as of 2018, there are a grand total of 6,118 chartered accountants in Pakistan who have qualified the Chartered Accountancy (CA) qualification examinations administered by ICAP. Approximately another 6,000 accountants in Pakistan have qualifications issued by the London-based Association of Chartered Certified Accountants (ACCA). It is unclear how many accountants in Pakistan have both qualifications, though there is certainly some overlap in the membership of the population of the two governing bodies. There are a handful of other accountants in Pakistan who have qualifications from other accounting bodies, but broadly, that means that there are approximately 12,000 qualified accountants in the country. How many should there be? To give some
22
context for that, India has 282,193 members of the Institute of Chartered Accountants of India (ICAI). If Pakistan had as many accountants as a percentage of its population as India, there were would be nearly 44,000 accountants in Pakistan, suggesting a shortage of 32,000 accountants. There are some who estimate this shortage even higher. “Pakistan has a shortage of 50,000 or more chartered accountants,” said Sajjeed Aslam, the head of ACCA Pakistan. As Pakistan seeks to document its economy while also trying to create well-paying white collar jobs for its growing population, having more people enter the accounting profession seems like a good thing. But for decades, ICAP has held a tight grip on who gets to call themselves an accountant in Pakistan: while tens of thousands of students attempt the CA examinations every year, only a few hundred pass the full set of exams to become chartered accountants each year. But ICAP’s grip on the Pakistani accounting industry is slipping and is about to cross an important inflection point. The year 2019 will be the first in Pakistani history when the number of CA-qualified chartered accountants within the country will become a minority, exceeded in number by ACCA-qualified chartered accountants. This is somewhat remarkable consid-
ering the fact that ICAP has existed since 1961 and ACCA did not enter the Pakistani market until the mid-1990s. Outside Pakistan, ACCA is already the dominant qualification even among Pakistani accountants. Of the nearly 8,000 Pakistanis who work as chartered accountants outside the country, approximately three-quarters have an ACCA qualification, compared to just one-quarter who have a CA. This makes the age-old debate between students in Pakistan an even more interesting one: which option is better for a student seeking to enter the profession in 2019? ICAP or ACCA? ACCA and ICAP remain the two primary avenues in Pakistan for students wishing to pursue accountancy as a profession. Although many universities, as well as other bodies like the Institute of Cost and Management Accountants of Pakistan (ICMAP), also offer courses in accountancy, taxation and other related disciplines, the title and benefits of being a chartered accountant rest solely with ACCA and ICAP. In order to understand what benefits each of these two paths may confer, we compared the structure of their coursework, their fees and costs, and the potential career trajectories of the members of both organisations. But first, a history lesson.
“WE’VE DONE A BIG PIECE OF RESEARCH LOOKING INTO WHAT ARE THE CAPABILITIES REQUIRED OF PROFESSIONAL ACCOUNTANTS IN THE FUTURE. AND WE’VE DEVELOPED WHAT WE CALL THE SEVEN QUOTIENTS FOR SUCCESS. SO AT THE MIDDLE YOU’VE GOT WHAT YOU’D EXPECT ETHICAL AND TECHNICAL COMPETENCE. BUT AROUND THE SIDE OF THE OTHER QUOTIENT SUCH AS, CREATIVITY, VISION, EMOTIONAL INTELLIGENCE, WHICH IS SORT OF WHAT YOU ARE TALKING ABOUT, EXPERIENCE – THE DIGITAL QUOTIENT” Helen Brown, CEO of ACCA Global
Global giant vs local powerhouse
A
CCA is a global body operating in 108 countries around the world. Its origins can be traced as far back as 1904 where it began as London Association of Accountants, with the prime motive of allowing more access to the accounting professionals. By 1905, the association had introduced its first examination. By 1910 it had a thousand member accountants and in the next three years, London’s association began its global expansion with establishing its first branch outside the UK, in South Africa. The actual arrival of ACCA in Pakistan is difficult to ascertain. However, it can be estimated to be around 1995, when the ACCA global online platform was launched, offering courses and e-business services online. ACCA had already built a stronghold in Asia, Russia and the rest of the former Soviet Union by the late 1980s, so there were probably already a few ACCA members in Pakistan when the institution finally moved to operate from within the country. Today ACCA has offices in 108 countries in the world and boasts of 280,000 members and 503,000 students. Of those, approximately 12,000 are Pakistanis, with a nearly even split of 6,000 each between those working inside Pakistan and those working outside Pakistan. ICAP on the other hand has a much clearer history with its roots in the government of Pakistan adopting the Auditors’ Certificate Rules, 1932, and the Companies Act of 1913 for regulating the profession of accountancy in the country. The reframing of the Au-
ditors’ Certificate Rules in 1950 allowed both practicing and non-practicing accountants to be registered as such, who eventually formed Pakistan Institute of Accountants (PIA) to safeguard their rights and provide a platform to the accounting professionals. In June 1959, the then government established a Department of Accountancy and set an advisory body called the ‘Council of Accountancy’ under the Auditor’s Certificates Rules, 1950. This advisory body recommended the establishment of the Institute of Chartered Accountants in Pakistan which was accepted, resulting in the official establishment of ICAP on July 1, 1961. Over the next six decades, ICAP has become the premier regulatory body for regulation of accounting in Pakistan and has north of 8,000 members of whom just over 6,100 practice within Pakistan.
The Accounting Cold War
N
eedless to say, after more than three decades of being the dominant accounting association in Pakistan, ICAP had grown used to its premier status. With the advent of the ACCA, and the growing competition for both students and members, however, ICAP has had to grow accustomed to losing its monopoly status, a situation that, many allege, it has not taken to kindly. In September 2012, the Competition Commission of Pakistan (CCP) brought charges against ICAP for a directive that the latter had issued in July that same year. ICAP’s notice issued to its members and chartered accountants had asked them to refrain
from hiring and engaging accounting trainees from any non-ICAP institution, ‘particularly trainees from foreign institutes or any other accounting body of a similar nature’. This was seen as a clear attempt to stymie the careers of accountants who had other qualifications because in most accounting bodies, training and articleships are a necessary component of completing one’s certification. If Pakistan’s major accounting firms stopped hiring trainees and interns from non-ICAP bodies, it would destroy the careers of anyone who was not in the CA program. In addition to the London-based ACCA, this notification also came as a hurdle for members of the Institute of Chartered Accountants of England and Wales (ICAEW) and the Chartered Institute of Management Accountants (CIMA) from being hired by an ICAP-member institutions, which include all of the Big Four accounting firms in Pakistan. The CCP’s notice to ICAP said that this could also lead to barriers for professionals from foreign countries who wish to offer accountancy services to Pakistan any time in the future, thereby it was in violation of the Competition Act, 2010. On January 10, 2013, the CCP imposed a Rs25 million penalty and a daily fine of Rs1 million on ICAP for every day that it refused to withdraw its instructions barring members from hiring accountants from other institutions. The CCP also appraised the stakeholders in the case of the ICAP’s circular stating that since the directive has been declared illegal, rescinding or withdrawal of the same is unimportant. However, the accountancy firms
BUSINESS EDUCATION
“IN THE PAST SEVEN OR EIGHT MONTHS, THE STIPEND RATES HAVE BEEN IMPROVED FOR ACCA MEMBERS. THE THREE YEARS’ CONTRACT PREVIOUSLY PAID RS6,500 IN THE FIRST YEAR, AND ONE THOUSAND RUPEES WERE ADDED AS INCREMENTS EVERY YEAR THEREAFTER. NOW THEY HAVE MADE RS10,000 FOR FIRST YEAR, RS12,000 FOR THE SECOND YEAR, AND RS15,000 FOR THIRD YEAR. SO, BY THIRD YEAR YOU CAN SAY THAT ACCA MEMBERS FINALLY START TO GET THE MINIMUM WAGE IN PAKISTAN AND BY THEN THEY ALSO GET COMPETITIVE TO CA FELLOWS” Umar Ali Lodhi, advisory associate at KPMG Pakistan and ACCA member reportedly still refused to hire nonICAP trainees. Eventually, in March 2016, the Lahore High Court offered ICAP to withdraw its circular and gave a deadline of April 7, 2016. No further information is available on the matter as yet. Profit repeatedly reached out to ICAP for comment, but there was no response. Every single time, after hearing the query, the call was transferred by the operator to some number that was never answered. However, the relationship between ICAP and the ACCA is not as simple as a hostile competition. For instance, ICAP is offering exemption to students who have cleared ACCA examinations in several subjects if they wish to obtain a CA qualification as well. And ACCA accountants are still able to get articleships and internships in at least some accounting firms, even if they are less preferred than CA students.
Key differences in education and training
T
he choice for students, however, goes way beyond the organizational war between ICAP and ACCA. For most people aiming to build a career in the world of accounting, the factors that matter are the potential growth and the likely remuneration packages they will receive once they come out the other end of their education, be it from ICAP or ACCA. Let’s look at the differences in the educational details of both these organizations before moving on to the cost structure and the potential career trajectories of both CA and ACCA
24
members. In 2017, an eighteen-year-old girl from Sakrand, Sindh became one of the youngest achievers of ACCA qualification in the world. After doing her matriculation, instead of pursuing intermediate, which is normally the next step, Aqsa Majeed Memon, chose to enroll in ACCA at the age of sixteen and cleared her exams in the next two years. As great an achievement as it may be, what it highlights for ACCA as an educational and professional body is that there are no specific criteria or prerequisite educational requirement to get enrolled in this chartered accountancy course. However, this might just be the problem for Pakistan. KPMG Advisory Associate Umar Ali Lodhi drew comparison with Pakistan’s ACCA and UK’s ACCA. “In the UK, when students have completed their Bachelors’ degree and enter the workforce, if their job requirement demands it and only if their employer sponsors it, then they get into ACCA.” In Pakistan, however, admissions are open ended and the only factor that does count is sixteen years of age. As opposed to this, ICAP, which is also the de facto guardian of accounting standards in Pakistan, requires a Higher Secondary School Certificate, an A-Levels degree with at least two passes or some equivalent qualification as an admission requirement. This is only one of the several differences in the two courses, which while basically both preparing chartered accountants, can lead to completely different career and growth trajectories for their members. The ACCA, however, is not simply a certification. If students complete the thesis requirement in addition to clear-
ing their examinations for the ACCA, they are eligible to receive a Bachelor of Science (BSc) Honours degree in Applied Accounting from Oxford Brookes University in the United Kingdom. (Despite the fake-sounding name, Oxford Brookes is actually a respectable British public institution that can trace its origins back to 1865. It is not one of those visa-fraud mills.) Chartered accountants from both these institutions provide the same, or similar, services in the fields of taxation, audit and assurance, budgeting, and accounting and finance. The biggest difference between these two qualifications is that while ICAP’s syllabus focuses primarily on Pakistan’s laws and regulations, ACCA offers more insight and training into UK’s laws and international regulations. The subject matter covered in the courses in ACCA and CA examinations is organized a little differently, but is otherwise largely the same: managerial and financial accounting, corporate law, taxation, audit, and basic financial analysis. In addition to the differences in courses there are several other differences in the qualifications offered by the two organizations, namely: ACCA, whose qualification is also known by the same abbreviation, leaves the choice to students on how many subjects they wish to attempt in one sitting, and are allowed to take exams over a period of ten years at most. ICAP on the other hand, offering the course CA, has a fixed number of exams per attempt and students have to clear all at once or they are considered to have failed the attempt altogether. The order of the modules for examinations is fixed for CA while for ACCA
that also remains the choice of students. The number of attempts is also limited in ICAP exams with six being the most and that too for some of the subjects, while for other, less accounting-intensive subjects, just three attempts are allowed. For ACCA however, there is no limit to the number of attempts and a student can continue to appear in exams until he or she has cleared all courses sufficient to become a member. There are also differences in the professional requirements between ACCA and CA. First of all, an ACCA member needs not to have completed all courses to become part of the workforce, albeit it is almost always as an intern that they enter the workforce. For CA-qualified accountants however, there is a specified criterion and a set number of exams that students need to have cleared to become eligible for employment or even training. This also at times becomes a hurdle for ACCA members to land the same level of training or employment opportunities as a CA accountant in Pakistan. The CEO of an accounting firm based out of Islamabad, speaking on the condition of anonymity, shed more light on the matter. “There are two things to note here. First, ACCA members are obviously not as well versed with Pakistan’s accounting and finance laws as CA qualified accountants, although they do come in handy when we have an international project. Secondly, ACCA members are up for training at any stage in their education. Unlike CA there is no minimum limit of exams to have been cleared to join the professional market as an intern or trainee. So for us as an audit firm, people with CA or enrolled in CA are almost always a better choice of resources,” he said. We should note that this particular CEO is a member of ICAP who has previously worked with PricewaterhouseCoopers Pakistan. Nauman Khan, an ACCA member who interned at Ernst & Young Pakistan and is currently working in a small auditing firm in Lahore, was of the opinion that it is not just the ICAP’s circular that might have caused problems for ACCA members but rather that accounting firms have always been less favourably inclined towards ACCA as opposed to CA-qualified individuals. “They give us training contracts but rarely ever an ACCA member gets an employment contract from the Big Four accounting firms. So even when we are doing the same job, we are being paid less.”
Accounts payables and accounts receivables
DIRECT COSTS
Rs
227,941 Minimum amount of fees due to ACCA Global for the fastest path to completing the ACCA qualification, at current exchange rates, assuming a student passes all exams in one sitting
Rs
51,400 Minimum amount of fees due to ICAP for the fastest path to completing the CA qualification, assuming a student passes all exams in one sitting
INDIRECT COSTS
Rs
Rs
172,500
148,000
Typical cost of in institution fees for academies that offering tutoring for ACCA examinations
Typical cost of in institution fees for academies that offering tutoring for CA examinations
TOTAL COSTS
Rs
Rs
400,441
199,400
The minimum costs for ACCA, assuming current exchange rates and no failed exams for a student paying tuition fees at a typical institution
The minimum costs for CA, assuming no failed exams for a student paying tuition fees at a typical institution
The cost structure of ACCA and CA as of 2018-19 is as follows:
ACCA:
These amounts are payable to ACCA in the UK, though local banks such as United Bank Ltd have
BUSINESS EDUCATION
created special products that allow students to deposit the fees in Pakistani rupees for them to be received by the ACCA in British pounds. Besides these fees the enrolled students have to pay tuition fees and registration fees to the institution or academies they choose for their preparations and those amounts vary depending on the respective organizations.
CA:
These amounts are payable to ICAP. Besides these fees the enrolled students have to pay tuition fees and registration fees to the institution or academies they choose for their preparations and those amounts vary depending on the respective organizations. For an estimate of what these registration and tuition fees might amount to, we have taken the fee structure of a popular college in Karachi, known for its ACCA and CA preparation. Here are the amounts due to the said college, in addition to the costs mentioned above. What that means is that, at current exchange rates, and if a student does not fail a single exam, the minimum cost of the ACCA is Rs227,941 in ACCA fees and Rs172,500 in institution fees for a total cost of Rs400,441 for the qualification as a whole. For the CA, those numbers come out to Rs51,400 for the ICAP fees and Rs148,000 for the institution fees for
26
“PAKISTAN HAS A SHORTAGE OF 50,000 OR MORE CHARTERED ACCOUNTANTS” Sajjeed Aslam, head of ACCA Pakistan
a total of Rs199,400 for the entirety of the CA qualification. In short, the ACCA costs at least twice as much as the CA, though the costs for individual students may be different depending on how many exams they have to retake, and what the costs of their fees for their institutions might be. Passing exams, however, is not the end of an accounting education. Students typically need to complete three years of training in the audit function of an accounting firm before they can be allowed to call themselves chartered accountants. And during that time, firms do not pay them much, and this is where the discriminatory attitude towards the ACCA really starts to bite. Profit spoke to three ACCA members who entered the job market after clearing all fourteen exams since June 2018, and their starting training remunerations were Rs6,500, Rs8,000, and Rs10,000 respectively. All three of them expressed their dismay, as they
requested for anonymity, over the fact that even the minimum wage rate was not being followed by the auditing companies in case of ACCA members, despite the fact that their colleagues from CA were earning the legally fixed remunerations.” A little silver lining for ACCA members came from one person, Umar Ali Lodhi, an ACCA member currently working with KPMG as an advisory associate who said that the practices are now showing improvement for ACCA members as well, at least in KPMG. “In the past seven or eight months, the stipend rates have been improved for ACCA members. The three years’ contract previously paid Rs6,500 in
the first year, and one thousand rupees were added as increments every year thereafter. Now they have made Rs10,000 for first year, Rs12,000 for the second year, and Rs15,000 for third year. So, by third year you can say that ACCA members finally start to get the minimum wage in Pakistan and by then they also get competitive to CA fellows.” Head of ACCA Pakistan Sajjeed Aslam also believes that since ACCA members are well versed in international laws and regulations, they have a better chance at finding freelance work on platforms like Upwork and compliment their income further. For CA passed candidates, following are the legally set rates of stipend for 2018-19 as per their specific stage of study:
Divided on strengths, united in weakness
A
s a final note, while ACCA and CA differ substantially in their courses and training requirements, they both share a stark similarity. Neither of these courses offer the soft skills, de facto the most important part, of university level education. Since the institutions that are responsible for preparing students for these exams are like academies holding periodic classes, and not proper universities exposing students to co-curricular activities, the focus on communication skills, presentation skills, or social skills are almost absent. This will become especially more important in the era of augmented and artificial intelligence as more and more of the technical functions of accountants and auditors get automated. The corporate world will still need accountants and auditors, but their jobs will increasingly require more of these
“soft” interpersonal skills and less of the technical skills that they consist of now. “Since there is no background study requirement for ACCA either, students from all areas and backgrounds join ACCA. And no matter how exceptional they are in accounting, many of us enter the job market with zero interpersonal skills. This only adds more difficulties for us in succeeding amidst accounting and finance graduates from LUMS and IBA,” said Nouman Khan, the Lahore-based ACCA-qualified accountant. The ICAP curriculum is equally deficient in such interpersonal skills training, meaning that while CA might be defeating ACCA in Pakistan over its local legal proximity, it is disappointing its fellows on the same level. In response to the question about lack of social training, ACCA Chief Executive Helen Brown said, “We’ve done a big piece of research looking into what are the capabilities required of professional accountants in the future. And we’ve developed what we call the seven quotients for success. So at the middle you’ve got what you’d expect ethical and technical competence. But around the side of the other quotient such as, creativity, vision, emotional intelligence, which is sort of what you are talking about, experience – the digital quotient.” She said that ACCA is building these factors into the qualification and they are also working with their partners who provide the training for the qualification these quotients. “One part of the revamped qualification is what we call the ethics and professional skills module and that’s a digital interactive module that helps people to work through what it is they’re going to need to do in the work environment and very much with the intention that they hit the ground running when they go into
BUT ICAP’S GRIP ON THE PAKISTANI ACCOUNTING INDUSTRY IS SLIPPING AND IS ABOUT TO CROSS AN IMPORTANT INFLECTION POINT. THE YEAR 2019 WILL BE THE FIRST IN PAKISTANI HISTORY WHEN THE NUMBER OF CA-QUALIFIED CHARTERED ACCOUNTANTS WITHIN THE COUNTRY WILL BECOME A MINORITY, EXCEEDED IN NUMBER BY ACCA-QUALIFIED CHARTERED ACCOUNTANTS. THIS IS SOMEWHAT REMARKABLE CONSIDERING THE FACT THAT ICAP HAS EXISTED SINCE 1961 AND ACCA DID NOT ENTER THE PAKISTANI MARKET UNTIL THE MID-1990S
the workplace.” Helen was correct in her statement, but partly. The ACCA global website does feature communication skills as an important factor in training and also has study resources for students who wish to adopt the course online, of their own will. However, it has not been inculcated as an essential course that students need to take as part of their training. Course outline and timetables of SKANS, SBM and several other preparatory institutions’ were obtained by Profit, and so far none of them has separate courses or training sessions for students for presentation skills, debating, or other related activities, at least not directly under the ACCA requirements or options. So, while the global body might have begun to realize the drawbacks of not including these skills in the curriculum, they have yet to provide the same for their Pakistani students and members. There was, however, a professional grooming workshop held by ACCA in Lahore in March 2016. ICAP, on the other hand, has a comparatively better track record with regular ‘Interpersonal Skills for Finance Professionals’ seminars being held for their members. Again, this is not something that is compulsory for ICAP members but there is at least a regular availability of training in this regard and unlike ACCA’s communication course, these seminars are also free for members.
What is right for students?
A
fter all is said and done, students wishing to stay and pursue accountancy in Pakistan might be better off with CA, considering its lower costs and wide acceptance within the country’s accounting fraternity. However, those wishing to have a global work experience or wish to work with global companies in particular will likely be benefited more by attaining ACCA qualification. Irrespective of which accountancy professional course a student may choose, they will have to be proactive and self-reliant to gain experience with interpersonal skills and communication abilities on their own because, at least for now, they will not be provided to them as part of the curriculum. n
BUSINESS EDUCATION
OPINION
Nadeemul Haque
Kill transactions, kill economic growth
n A tax system must be simple and clear. n It should not seek to tax different goods and
services differently to allow all consumer and investment decisions to be based on market realities. n Tax rates and policies should be stable and not changing in mini-budgets every few months forcing all to speculate on tax policy. Transactions form the backbone of Tax administration is a collection agency, not an economic growth, and it is a fallacy intrusive and oppressive bully using the power of colthat the government knows which lection to ruin your life as well as extract rents from you. Systems are used to stop anyone from cheating transactions are better than others the government including the tax man. The tax man is not allowed to treat the citizens as thieves and bully hopping malls are empty, consumer busithem into submission or bribery. nesses are reporting losses in double digits, In the last 40 years, the Ministry of Finance and people are losing jobs while new ones are Federal Board of Revenue (FBR) have spurned these not available, and new investment is not principles and have sought taxation like the medieval happening. This is not a downturn in the tax farmers that kept their populations in perpetual economy. It is merely the culmination of amdeprivation. They tax whatever they can see arbiateur hour in policymaking that international donors trarily. They call indirect taxes withheld income taxes and the bureaucracy have combined to develop for with the full intention of never returning the withheld decades. tax. They nurture the narrative of tax thieves for their The thirst for taxation has driven the economy to countrymen to cover up their incompetence and vethe ground. Economic activity is now gasping for air. nality. The FBR collects little tax itself, having farmed Decades of research has clarified the principles out tax collection to withholding agents, banks, of taxation, which are: utilities, schools, telecom companies, etc. Yet it has wide-ranging powers with no accountability. As in medieval times, in modern Pakistan, those engaged in trade, entrepreneurship and economic activity spent real time, resources and effort to hide Nadeemul Haque from this predatory and thoughtless government. In Pakistan, the informal market grew similarly, not as thieves’ or smugglers but as people looking to is a University of Chicago-trained make a life for themselves beyond intrusive tax faming. economist who served as the Thanks to large-scale migration of people from rural areas to urban former deputy chairman of the centers, the middle classes grew in every corner of Pakistan over the last 40 Planning Commission of Pakistan, years. Government policy impeded that growth, but the enterprise of the mithe former vice chancellor of the grants and their families generated wealth and commerce everywhere. Land Pakistan Institute of Developvalues went up as the dispossessed now found wealth to buy a house and ment Economics, after having perhaps set up a shop. had a decades-long career as an This informal economy grew to provide the “tax hunters” — international economist at the International donors, the finance ministry, the FBR, and their followers— with more excusMonetary Fund. es for predatory taxation. They raised the specter of documentation and an
S
COMMENT
31
apartheid between the filers and the non-filers. The poor migrants, building a life from a high propensity to save, are considered thieves and precluded from accumulating wealth by an uninformed and thoughtless policy. The finance ministry and the FBR have virtually waged war against the small saver who is saving in real estate and the small trader who is making a living by setting up a small business for the last decade or so. Their allies in this fight are the big industrialists who were raised under licenses and subsidies, then thrived on state protection and bureaucratic favors such as tax exemptions and favorable input prices and sovereign guarantees. The upshot of all these policies is that the state is now taxing all manner of transactions arbitrarily while also imposing huge documentation costs. Real estate has been particularly singled out to virtually stop all transactions. Migrants and small savers have for decades bought plots in housing schemes that the state promoted over the last five decades. Development was delayed by decades as collusion between regulator and developer defrauded investors on many levels. Thirty to forty years later, some of these schemes are maturing, not because of any effort by either the regulator or developer. The natural urbanization process made these properties valuable. The government is now busy maligning this investment as thieving
32
and informal. Without evidence, all the government wants to do it tap into the capital gains of small savers that have taken decades to mature. No apologies for the failure of regulation, for the failure of courts to guard contracts, and no punishment for malfeasant developers. Instead, the government is busy abusing savers and cheating them out of gains that they waited decades for. Similarly, people who have attempted to set up a small business are forced out of business by government policy or asked to contribute way more than they earn. Any entrepreneur rising out of poverty has to face the calumny of the state be being called ‘informal’, another word for thief. For example, Hafeez Center, a shopping plaza in Lahore, is full of clever entrepreneurs who adapt to market needs by providing software, computers, mobile phones, etc. Most of them are small shopkeepers with shops with a floor area of less than 100 square feet. Their business has dried up with the recent push against the import of mobile phones into the country as well as more harsh checks on the informal economy. There are many such centers for small entrepreneurs in every city. I recently checked some of them in Lahore and they are hurting for business. The prime minister is now saying that making money is a good thing and the rich should get richer. Why then are those who are lifting their heads
out of poverty being called names and targeted? The government and its advisers need to change their analysis and make it more evidence based. Here are three things that they need to: First, they must understand that an economy is a set of transactions and more transactions means higher economic growth. Second, it is a fallacy to think that the government knows which transactions are better. Third, taxing transactions beyond a simple general sales tax (GST) or value-added tax (VAT) is inefficient and counterproductive. It will kill transactions and slow down growth. It is time that the government stopped making policy on rhetoric alone. There are no good and bad transactions. Nor is documentation a tax on transactions. The primary reason for much of the legal framework and government machinery is to facilitate transactions. There is a clear need for the government of Pakistan to be a transaction-facilitating government rather than a transaction-blocking government. The economy is shrinking because of this policy of suspicion on all transactions. If the government wants to revive the economy, they should carefully review all policies to weed out those that are impeding transactions. Policymakers should remember: kill transactions, kill economic growth.
COMMENT
IS ANOTHER
TAX AMNESTY SCHEME IN THE MAKING?
Experts say a scheme without tax reform will do little to widen the tax net and replenish foreign reserves
T
By Syeda Masooma
he Pakistan Tehreek-e-Insaf (PTI) government is not gathering many successes on the economic front. In February, the inflation rate reached its four-year high at 8.2 percent as the impact of constant Rupee devaluation finally hit Pakistan’s import-dependent economy. According to data from the Pakistan Bureau of Statistics, the Consumer Price Index (CPI) showed a 7.19 percent year-on-year increase and the last time inflation reached 8.2 percent was in June 2014. So, what is it about then and now that is similar? It seems that we are seeing the making of another tax amnesty scheme. Prime Minister Imran
34
Khan met members of the traders’ community on March 4 and sought suggestions regarding a potential scheme. Before delving into the merits and demerits of having another “financial NRO” and what to expect if it comes forth, let’s take a look at some of the previous amnesty schemes and the impact that they had on tax collection and the overall economic situation of Pakistan. Let us begin by admitting that such schemes invariably end up discouraging and hurting actual taxpayers in favor of tax evaders. They also hurt the national exchequer when seen in comparison to tax collection during the absence of such amnesty schemes. “[Another amnesty scheme] is absolutely unnecessary and useless,” says Nadeem ul Haque, former deputy chair-
person of the Planning Commission Pakistan. “It should be a thing of the past. Government needs a good tax policy. Tax amnesty schemes only show that you have no ability to make a policy or carry out its administration.”
History of amnesty schemes and their failures
A
tax amnesty scheme, in its most basic sense, is a voluntary compliance strategy that allows individuals or organizations who have not paid their taxes previously to pay a certain amount during the scheme to avoid criminal prosecution. It is meant to help state treasury departments raise tax revenues and widen the tax net, but in effect it mostly ends up benefiting tax evaders at the
expense of taxpayers. Pakistan offered its first tax amnesty scheme in 1958 and since then, there have been more than a dozen amnesty schemes with successive governments promising almost each of them to be the last. Details of some of these schemes are hard to find and probably lost in a plethora of documents that may or may not exist. For instance, the schemes of 1985, 1991, 1998, and 2012 are remembered only in name with no details on tax rates, declarations filed, or revenue generated. No data is available with the State Bank of Pakistan, the Federal Bureau of Revenue, or the Ministry of Finance for these schemes. For those schemes that have data available, we have compiled it below: The first tax amnesty scheme was introduced during the regime of Ayub Khan towards the end of 1958. It brought approximately 71,000 declarations and as many as 266,183 taxpayers entered the fold contributing a total of Rs1.12 billion. Despite this, tax collection remained at less than 10 percent of the total GDP in 1958-59. “Black economy” and untaxed economy has always been part of Pakistan’s economic problems, but the intensity of the issue has been constantly deepening with every passing regime. According to research conducted by the Pakistan Institute of Development Economics (PIDE) in the late nineties, the underground economy was approximately 4% of the formal economy in 1983 and had worsened to approximately 40% by 1997. In monetary terms, the report valued “black economy” to be $15 billion and $1,215 billion in 1983 and 1997 respectively. Considering this figure, the Rs141 million collected through the 1997 tax amnesty scheme shows inconsequential impact of the scheme. The 2000 amnesty scheme, perhaps, holds more importance for the current regime than any other because
the current prime minister was himself one of the beneficiaries of the tax amnesty scheme introduced under the Musharraf regime. Khan declared his London flat that he had bought some eighteen years ago in 1983. Along with him, approximately 79,000 other declarations also came forth in that year’s tax amnesty scheme contributing a total of Rs10 billion in tax collection. It is even more interesting to note that later, in 2013, Imran Khan became one of the fiercest opponents of tax amnesty schemes. And now, as the prime minister, he is considering another scheme. We will discuss Khan and his party’s inconsistency in policy making later. Then, in 2013, the Pakistan Muslim League-Nawaz (PML-N) announced another scheme. Dealing only with assets held within the country, like the 1997 scheme, this too was focused on appeasing a select voter base. This scheme was primarily for owners of imported cars who had brought them into the country without paying due taxes. The estimations of the loss from this “black market” activity was Rs35 billion. The calculated tax as a result of the amnesty scheme, however, was less than 1% of this value. The 2016 scheme was also directed at the same economic strata of society, aimed at pleasing small traders by offering tax exemptions as well as immunity for the financial crimes committed previously as long as they were prepared to bring their domestic assets into the legal fold. The targeted community was not very willing to avail the scheme and only a mere 10,000 declarations were made, contributing Rs0.85 billion.
2018’s exception and external factors
T
o date, the most successful tax amnesty scheme, if measured purely in terms of revenue collection, is the 2018 scheme that was
introduced by the PML-N government. This was the first scheme by PML-N that dealt with not just local but also foreign assets. The only other relatively successful amnesty scheme was the one announced by Pervez Musharraf which also allowed for declaration of assets abroad as well as domestic holdings. This might be indicative of the fact that those who do not pay taxes on their international properties are more willing to be included into the tax fold, as compared to those who have found loopholes in the taxation system in Pakistan which allow them to maintain properties in the country without becoming filers. On April 8, 2018, then-president Mamnoon Hussain promulgated four ordinances to affect a one-time amnesty scheme for “legalizing” undeclared assets at home and abroad, a reduction in income tax rates, issuance of dollar-denominated bonds and restricting cash transactions in non-filer accounts. The tax rate offered for foreign currency accounts within Pakistan was 2% while for other assets a 5% tax rate was offered. For foreign assets, the non-repatriated liquid assets tax rate was 5%, for immovable property outside Pakistan it was 3%, and for repatriated liquid assets the tax rate was 2%. The tax rate for liquid assets repatriated and invested in government securities – up to five years in US Dollar-denominated bonds with six-monthly profit payment in equivalent Rupees (rate of return 3%) and payable on maturity in equivalent rupees – was also 2%. This scheme resulted in an unprecedented repatriation of money and declaration of assets, amounting, to approximately Rs120 billion, according to initial estimate by the Federal Board of Revenue (FBR). However, there is one more factor to be considered that might as well have been the factor for success of this amnesty scheme: by the time this scheme was announced, the maintenance and security of unde-
FISCAL POLICY
clared wealth abroad had become a lot more dangerous than ever before and governments globally had been collaborating to bring undocumented wealth into the legal fold. Pakistan has become a signatory to the OECD Multilateral Convention which had been open to providing access to information about offshore financial accounts of Pakistani residents from September 2018. A direct impact of this is towards enhancing the capacity of the FBR which can now gain access to offshore financial accounts of Pakistani residents held in signatory countries. Furthermore, amendments were also made to the Protection of Economic Reform Act of 1992 to regulate foreign exchange movements and bring them in line with the Income Tax Ordinance of 2001. By way of these amendments, the FBR may inquire about the source of foreign remittance above Rs10 million and a limitation of five years to probe foreign assets and income has been removed.
What can be expected from the PTI government?
C
urrently, Pakistan faces the daunting task of cracking down against tax evaders. Only 1.3 million people file their annual income tax returns and even fewer pay the due amount of taxes. According to FBR reports, the direct tax collection is less than 40% of the total tax collection and most of it comes from over 75 types of withholding taxes. The International Monetary Fund (IMF) has also assessed Pakistan’s gross external financing needs at its highest, at $27 billion, for the current fiscal year. It is notable that the risks associated with the country’s debt sustainability are creating an obvious and conspicuous pressure on arranging that financing at favorable rates. Therefore, it seems logical, however practically inefficient it may be, that the current government is trying its hands at every way to bring money into the economy, even if it means pardoning tax evaders and punishing tax payers in the process. Last year, when the PTI was in the opposition and the Nawaz Sharif administration announced an amnesty scheme, now-Finance Minister Asad Umar called tax amnesty schemes “a slap on taxpayers’ face.” Now times
36
have changed and there are rumors that the prime minister is contemplating a tax amnesty scheme to overcome the shortcomings of FBR’s tax collection and bring more money into the country. Researchers and economists are divided on the potential benefits that another amnesty scheme may have. “At the time of the 2018 scheme, global conditions were favorable in the sense that it was becoming less and less secure to maintain assets abroad with impunity,” Sohaib Jamali, columnist and researcher at Business Recorder, told Profit. “In fact, I believe that this particular amnesty scheme could have fetched even more in declarations and tax collections had Imran Khan not been so loud and clear in his aims to bring the beneficiaries of such schemes to task.” Speaking about the potential upcoming amnesty scheme, Jamali said that it will be of little to no benefit without addressing three concerns: an assurance against harassment of business community members, especially those who have already taken advantage of previous amnesty schemes; understanding that not all undeclared assets are a product of ill-gotten money; and a follow-up of the scheme with strict action against those who do not avail it. In his article published recently, he wrote: “Once that ball is set in motion, and the people are convinced that there is no way you can cheat the system anymore, that’s when the government should offer a new amnesty scheme as a one-time escape route. At present, the people know that the government doesn’t have the ability to bite; not even the teeth to show for.” There are two things to note here. Firstly, in 2018, the Lahore High Court declared the 2013 amnesty scheme illegal, which cause severe damage to trust among the business community. The aftereffects of that scare can still be seen in the unwillingness of Pakistani citizens to declare their assets despite promises by the government that no legal action will be taken against those who avail such schemes. Secondly, there are no noticeable results of the hype around the empowerment of the National Accountability Bureau (NAB) after the 2016 and 2018 schemes to act against those who did not avail these amnesty schemes and were on NAB’s radar for possessing undocumented assets gotten through
criminal activities. Put together, this means that so far these amnesty schemes have created terror in the hearts of those who wish to declare their assets but have done nothing to terrorize those who continue to operate outside the legal boundaries of maintaining wealth within Pakistan and abroad. Economist and former caretaker finance minister Salman Shah agrees with the assertion that the current international environment could be one of the factors that works in favor of the latest amnesty scheme. But unlike other experts who spoke to Profit, he is rather hopeful that a well-crafted scheme might be exactly what Pakistan needs at this dire hour of enormous external debt and depleting national reserves. “However, we cannot continue to have amnesty schemes and then also maintain a draconian taxation system that is likely to keep discouraging people from entering into the legal tax fold or paying taxes,” he says. Shah also said that despite being one of the signatories of The Stolen Asset Recovery Initiative (StAR) by the World Bank, Pakistan has not yet followed up on its international cooperation agreements to bring back stolen wealth and act against money launderers. “But there is a crackdown happening on accounted wealth all over the world and moving money and assets to Pakistan will be a better option under such circumstances,” he said. Looking at the history of Pakistan’s amnesty schemes and the current prevalent international environment, it is safe to conclude that the government needs to at least conduct tax reforms and implement amnesty schemes together if not introduce reforms first and offer amnesty later. The beneficiaries of these schemes need to be given proper and reliable assurances that they will not be harassed and hunted after for availing the new scheme, and at the same time NAB and law enforcement agencies need to go with full force after those who do not avail the amnesty scheme. Without these measures taken simultaneously, there is little hope that a future amnesty scheme will help replenish Pakistan’s foreign reserves, improve the tax net, or create any positive change in FBR’s performance with respect to tax collection. n
FISCAL POLICY
By Bilal Hussain
38
P
akistan’s auto industry does look like a cartel of Japanese auto manufacturers – Suzuki, Toyota and Honda – with Suzuki catering to the smaller hatchback car market; Toyota manufacturing mid-size sedans; and Honda producing larger sedans. The three companies essentially do not compete against each other and largely stay within their lanes in one of the clearest examples of oligopolistic collusion possible. Ali Asghar Jamali, the CEO of Indus Motor Company (PSX: INDU), the Pakistani subsidiary of Toyota, however, would like to dispute that notion. Jamali says when Toyota along with other original equipment manufacturers (OEMs) entered the Pakistan auto fray a few decades ago when the government’s policies for the industry were focused on import substitution. Islamabad wanted the auto companies to be more localized, which he said made the auto companies to endeavor to localize more of their production. “It made us strive towards more localization and we did that, and we
are now more localized and therefore more cost effective than before,” he said. He also bragged about the fact that Toyota cars especially its flagship Corolla has what he termed a relatively high level of indigenous components. “With every model change in Corolla, Toyota Pakistan has successfully localized more and more, despite significant advancements in parts sophistication and resultantly achieve reduced dollarized cost of Corolla,” he said. “The first Corolla car costed more in US dollar terms with a lower level of localization as compared to contemporary Corolla, which is 64% localized. There are numerous advancements comparatively such as dual air bags, power steering, ABS brakes, immobilizer etc.,” he said. Toyota has recently increased its production capacity in Pakistan by 20% and has invested around $126 million to allow it to both increase production of existing models as well as introduce new ones into the Pakistani market. The company’s capacity has increased from 54,800 to 66,000 vehicles, and with overtime Toyota can
produce 80,000 vehicles in Pakistan. The increase in production capacity comes at a time when Toyota is the largest car company in Pakistan by revenue and operates in a market where it is heavily protected by government tariffs on imported cars, both new and used. And yet, that level of government protection is not enough for Toyota and the other Japanese car makers, who still want more protection. And the incumbent players are particularly peeved about the fact that the government of Pakistan has offered additional incentives to newer entrants into the Pakistani market, incentives that are not available to the incumbent players. Jamali admits that the government had to offer incentives to new entrants to lure them into the country but added that the government should also increase the opportunity cost for them to import so that they opt for cheaper parts produced by local vendors. Under the new policy, the new entrants – Volkswagon, Nissan, Renault, Hyundai, Kia, and others – can import completely knocked down (CKD) units at a 10% customs duty
AUTOMOBILE MANUFACTURING
“THE CONCESSION IS BEING GIVEN THROUGH A CUSTOM NOTIFICATION TO ALLOW CLEARANCE OF OLD AND USED AUTO PARTS THROUGH THE PAYMENT OF A 20% PENALTY. WE HAVE URGED THE GOVERNMENT TO LOOK INTO THESE DISCREPANCIES WHICH ARE NOT ONLY HURTING THE LOCAL AUTO INDUSTRY BUT ALSO THE GOVERNMENT DUE TO LOWER COLLECTIONS OF CUSTOMS DUTIES AND TAXES” Aamir Allawala, CEO of Tecno Auto Glass Ltd
while local part makers import components at 10% and sub-assemblies at 20% customs duties – which makes, in Jamali’s view, local vendors uncompetitive. “Local auto part makers will further have to compete with high economies of scale of global OEMs as well. Therefore, the government must remove this tariff anomaly by reducing the customs duty on components to 5% and sub-assemblies duty to15% to 10% – which would reduce cost of locally produced parts and will enable part makers to produce parts for new entrants as well.” According to Jamali, around 30% of the auto parts purchase by the recent and upcoming local assemblers will be on the borderline – means that they may opt for local parts’ purchase if it is a bit cheaper than their imported substitutes. For instance, if a part is selling at Rs125 while it would cost Rs130 if they import, then they would opt for the latter. But if duties are reduced and Pakistani auto part makers can sell their parts for Rs110, then sales for local vendors will certainly increase. “Toyota has always encouraged the local engineering base and has arranged 35 technical assistance and technology transfer agreements between local vendors and foreign counterparts for various technologies and parts and has localized more than 170 parts since 2004 and procuring local parts worth over Rs200 million every working day, which shows our commitment to the localization,” he said. Pakistan’s car-ownership rate is relatively low at only 18 per one thou-
40
sand people. The low car-ownership rate in a country of 200 million-plus people, along with a growing economy and the government’s incentives for the entry of new companies under greenfield and brownfield status, has combined to make the auto industry quite lucrative for the newcomers. “The goals of the auto industry for the year 2021 include annual car production of more than 415,000 units, with contribution to GDP increasing up to 3% and generate employment of four million people in auto and allied industries,” said Munir Karim Bana, the CEO of Loads Ltd, an auto parts manufacturing company. He added that investments were now coming from China, Saudi Arabia, the United States, the United Arab Emirates, and a bailout package from IMF. Under these circumstances, the Pakistani auto market was likely to get a boost in car sales and it may cross 500,000 units mark before expected. “But for that the government must continue to ensure consistent and long-term policies. However, the recent decision of imposing a 10% federal excise duty (FED) creates uncertainty in the minds of investors as it disturbs their feasibility and affect planned volumes,” he added. Bana, the former chairman of Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM), added that incentives for local auto parts makers along with consistency in policies can help the auto manufacturers and vendor to significantly enhance their contribution to the national economy and employment creation.
Aamir Allawala, the CEO of Tecno Auto Glass Ltd, which will be the first company in Pakistan to make windscreens, said that there is another problem auto part manufacturers were facing – malpractice in parts imports. He said that it has been creating issues for the industry as the government is losing an estimated Rs19 billion in customs duties and taxes annually on account of low valuation by Pakistan Customs for auto parts imports. “The discrepancy in Custom Valuation Ruling 661 has become an opportunity for duty and tax evasion to unscrupulous importers that puts local auto industry at a disadvantaged position,” he added. He pointed that commercial importers evade sizable taxes due to Customs Ruling 661 (formerly 329) by under valuation of parts, especially high technology parts, whose assessed value is far less than OEM imports as well as local manufacturing cost. He added that import of old and used auto parts is not allowed under Import Policy as defined by SRO 345(I)/2016, Paragraph 5(A)(VIII) Appendix-C Serial No. 11. “However, the concession is being given through a Custom notification to allow clearance of old and used auto parts through the payment of a 20% penalty,” Allawala said. Allawala is also a former PAAPAM Chairman. “We have urged the government to look into these discrepancies which are not only hurting the local auto industry but also the government due to lower collections of customs duties and taxes,” he added.
“LOCAL AUTO PART MAKERS WILL FURTHER HAVE TO COMPETE WITH HIGH ECONOMIES OF SCALE OF GLOBAL OEMS AS WELL. THEREFORE, THE GOVERNMENT MUST REMOVE THIS TARIFF ANOMALY BY REDUCING THE CUSTOMS DUTY ON COMPONENTS TO 5% AND SUB-ASSEMBLIES DUTY TO15% TO 10% – WHICH WOULD REDUCE COST OF LOCALLY PRODUCED PARTS AND WILL ENABLE PART MAKERS TO PRODUCE PARTS FOR NEW ENTRANTS AS WELL” Ali Asghar Jamali, CEO of Toyota Pakistan
Last year Profit interviewed senior vice-president of Nissan Motor Corporation, Peyman Kargar, who came to Pakistan to sign MoU with local partners Ghandhara Nissan. He said that Nissan would initially be starting with 20% indigenous parts and would gradually move towards greater indigenisation of its cars provided that production increases. The Nissan SVP added that the process of localisation depends on the number of cars produced. The cost-benefit ratio is higher when importing parts compared to producing them in host countries with low demand levels. He added the volatile exchange rate in Pakistan makes localisation process more feasible and it would be necessary in order to become cost competitive. But an industry official has claimed that there’s a conflict of interest for new entrants’ foreign partners, who may want to increase their home country’s exports rather than letting or facilitating their peripheral partners localize more. An official of one of the new entrants, which will soon be making passengers cars, said that if vendors receive duty rebates when they sell their products to new entrants, then the new entrants will likely try to localize more and as soon as possible. But the government has to make sure that the vendors receive duty rebates only when they sell it to new entrants in order to sustain advantage given to new entrants, which has at first place has enticed them to start their operations in Pakistan.
“For example, the government may collect 5% less tax from vendors when they sell auto parts to newcomers. It will translate into less expensive auto parts for new entrants therefore it would lure them towards localization as incentive would be bigger. The cost of production would be a bit lower, making them competitive,” the source said. The source rebuffed the notion that the new entrants may have conflicts of interests of seeking more localization as it would decrease sales of their parent company back home. “Even Chinese companies have now been trying to start production elsewhere like Pakistan where labor is cheaper in order to remain cost competitive internationally. Chinese labor is expensive when compared to Pakistan. And auto companies in Pakistan have to localize sooner or later to remain competitive,” it added. “The only thing lower duties for vendors would do is to help new entrants localize quicker than under present duty structure as they will ask vendors to pass on the impact on the reduced duty, therefore making local procurement a bit less expensive therefore attractive.” However, a well-informed industry source said that becoming a vendor for a new company is not an easy task. Most of the present vendors supplying technical parts to present Japanese companies have technical collaboration with those OEMs. “From a layman perspective, it may sound very good that duties are reduced for local vendors so that they are able to
supply cheaper parts and it will attract new entrants to localize more. But it’s not that simple as it looks,” the source said. “New players will certainly be hesitant to share CAD [computer-aided design] drawings of technical parts with vendors, who are already in collaboration with their already established competitors. So, they may opt for local auto parts like tyres, audio system, glasses and batteries etc. but they won’t be buying technical parts unique to their respective brands,” the source explained. A CAD drawing is a detailed 2D or 3D illustration displaying the components of an engineering or architectural project. Computer-aided design utilizes software to create drawings to be used throughout the entire process of a design project, from conceptual design to construction or assembly. The source added that if incentive is given to local vendors in terms of reduction in duties then it would only translate into increase in profitability of local vendors and OEMs knowing this would certainly ask for discounts so it will further eventually make present auto car makers a bit more cost effective. The source said that the government has been mulling that it should attract new vendors as well to start their operations in Pakistan giving them incentives just as they did for OEMs under its ADP 2016-21 policy. “That will be the only proper way for the government to help, facilitate and make lucrative for new players to localize more by paving the way for
AUTOMOBILE MANUFACTURING
“THE GOALS OF THE AUTO INDUSTRY FOR THE YEAR 2021 INCLUDE ANNUAL CAR PRODUCTION OF MORE THAN 415,000 UNITS, WITH CONTRIBUTION TO GDP INCREASING UP TO 3% AND GENERATE EMPLOYMENT OF FOUR MILLION PEOPLE IN AUTO AND ALLIED INDUSTRIES” Munir Karim Bana, CEO of Loads Ltd
new vendors,” the source added. The source added that under present circumstances, new auto players will only be able to localize in terms of non-technical parts and peripherals like tyres, audio system, glasses and batteries etc whether local vendors receive duty incentives or not.
Revisiting the Automotive Development Policy (ADP) 2016-21
A
ccording to Board of Investment (BOI), a new manufacturer under ADP 2016-21) establishing maiden assembly facility will invariably need separate treatment and greater incentives in the early years to enable it to introduce its brand, develop a market niche and share, create
42
a distribution and after-sales service networks, and develop a part-manufacturer base. For this purpose, BOI created two different categories to attract new investment with different incentives. The first category, has been named Greenfield Investment, which is defined as the installation of new and independent automotive assembly and manufacturing facilities by an investor for the production of vehicles not already being assembled or manufactured in Pakistan. The second category enacted is Brownfield Investment, which has been defined as the revival of an existing assembly and or manufacturing facilities that were non-operational or closed on or before July 01, 2013 and the vehicle has not been in production in Pakistan since that date.
The revival is undertaken either independently by original owners or new investors or under joint venture agreement with foreign principal. Foreign principal can also independently through purchase of plant utilize it. These new ventures under the Greenfield Investment have been given duty-free import of plant and machinery for setting up the assembly or manufacturing facility or both on a one-time basis. They are also allowed import of 100 vehicle of the same variant in completely built unit (CBU) form at 50% of the prevailing duty for test marketing after ground breaking of the project. Meanwhile, concessional rate of customs duty at 10% on non-localized parts and 25% on localized parts for a period of five years for the manufacturing of cars and light commercial vehicles. Import of all parts (both localised and non-localised) at prevailing customs duty applicable to non-localised parts for manufacturing of trucks, buses and prime-movers for a period of three years. For the Brownfield Investment, investors are entitled to import of non-localised parts at 10% rate of customs duty and localised parts at 25% duty for a period of three years for the manufacturing of cars and LCVs. Import of all parts, both localized and non-localized, at prevailing customs duty applicable to non-localised parts for manufacturing of trucks, buses and prime-movers for a period of three years. n
AUTOMOBILE MANUFACTURING