Profit E-Magazine Issue 37 by Profit (by PT)

12 Weekly Roundup 14 Why Ishaq Dar deserves bouquets and not brickbats

20 22 Three major banks are up for sale. Who will buy them? 30 What makes Pakistan plump for IMF time and time again? Waqar Masood Khan

34 Pakistan’s aviation sector: in ‘rapid descent’ 40 Pakistan’s promising auto market lures Nissan back

Managing Editor: Babar Nizami l Joint Editor: Yousaf Nizami l Contributing Editor: Farooq Tirmizi l Business Editor: Agha Akbar Reporters: Farooq Baloch l Kazim Alam l Aisha Arshad l Arshad Hussain l Bilal Hussain l Eleazar Bhatti l Syeda Masooma l Ghulam Abbass l Ahmad Ahmadani l Shehzad Paracha l Director Marketing: Zahid Ali l Regional Heads of Marketing: Muddasir Alam (Khi) l Zulﬁqar Butt (Lhr) l Mudassir Iqbal (Isl) l Layout: Rizwan Ahmad l Illustrator: ZEB l Photographers: Zubair Mehfooz & Imran Gillani lPublishing Editor: Arif Nizami l Business, Economic & Financial news by 'Pakistan Today' Contact: proﬁt@pakistantoday.com.pk

CONTENTS

WeLcoMe

SBP’S HOTEL CALIFORNIA You can bring in money any time you like, but you can never leave It doesn’t make sense. Just doesn’t. Here are three banks that are clearly up for sale. Three solid banks, with great fundamentals, not some haemorrhaging sarkari bank filled with bad loans and worse people. Not some failing private bank acquired by a non-banker who had bitten off more than he could chew. No, three profitable, well-run banks. Yet no one is buying them. Meezan, Al Falah and Faisal have got spreadsheets that other banks would salivate at. So why is it so difficult to sell them? Luckily, as opposed to political, crime and social issues reporters, we financial journalists have an invariably accurate rule of thumb: any anomaly that the market cannot explain can be attributed to the government and regulators. And that is exactly what is happening here. The State Bank is rumoured to be the spanner in the works for the sales. There are several reasons for this. These three banks do have one thing in common: the owners are Gulf-based. A sale to someone within the country - and there are interested local buyers - is going to lead to money going outside the country, which our regulators don’t want, given our precarious situation on the foreign exchange front. Will the regulators say it in these many words? No. But as regulators go, the SBP is an extremely powerful one. Its leverage will do the talking. The State Bank doesn’t have this problem with foreign buyers, though. Shares will change hands

FROM THE MANAGING EDITOR

outside the country, letting our foreign exchange reserves be. Foreign buyers, though, do have a problem with this situation, notwithstanding the good fundamentals of these banks. After assessing the problems of the current owners of the banks, they know that investing in Pakistan is a one-way street; you can put in money, but you can’t take it out. That doesn’t seem fair to international players who transfer huge amounts across borders as if it were wiring money to the bank across the street. The SBP’s nervousness as far as foreign exchange goes, is not unwarranted. With an import-based an economy as ours, there is lots that could go wrong in the face of such turbulence. But what about the principle involved? We keep talking about ease of the doing business and keep reiterating our resolve to improve our dismal scores on the indices designed to measure such ease. Yet, we don’t walk the talk. Tear down this wall, Mr Governor. It just might inspire enough confidence for foreign buyers to jump in, not causing the much feared flight of foreign exchange.

Babar Nizami

Readers Say Well, WhatsApp has always been on loss and Facebook admitted in a court ruling that they would not be able to monetise WhatsApp to its bought price. I wont say WhatsApp is a winner. So is OLX. These businesses run on hope, that some fine day they would start earning good. Till then they are just doing social work for us. Be it WhatsApp or OLX or Zameen. Yes they have our data. But sometimes I wonder, how well can they monetise our data?Conclusion: Just like hope, many such businesses fade away with time. Apropos: “Is OLX feeling hot under the collar?” Moazzam Aslam, Assistant Manager (Roaming Projects) at Jazz Seems the agency, the media planners really took the poor OLX people for a ride. $21.6 million is a lot of money. I think OLX needs to rethink its internal strategy and also seek clarifications from it's marketing consultants. Apropos: “Is OLX feeling hot under the collar?” Umer Ashraf Sheikh The unicorn finally makes an appearance. Apropos: “Pakistan’s mystery billionaire” Faisal Naeem, cofounder Rent My Car Banking sector is very unfair when it comes to salary package. This is detrimental to banking Industry. Apropos: “How bank CEOs rake in the big dough” Kan Haris

How to ContaCt

facebook.com/Profitpk twitter.com/Profitpk linkedin.com/showcase/13251020 profit.com.pk profit@pakistantoday.com

Fantastic read! After a very long time I have read a Pakistani article that is so well written and the story that it covers is absolutely inspirational. Glad to see a man who has vision and is thinking outside the prescribed box. Reading about Mr Khan is no different to reading about a businessmen from here in UK based on the ideas that he is planning to implement i.e. smart metering, solar panels, renewable energy etc. Apropos: “Pakistan’s mystery billionaire” Shahzaib The mystery Pakistani Billionaire who bought Haleeb Foods. Just one of the many companies. I left Haleeb to join Shell many

months before we ever heard of him buying a minority stake in Haleeb. This is impressive. Apropos: “Pakistan’s mystery billionaire” Rehan Haque, Marketing and Brand Strategist I think most online shopping ventures underestimate the overheads and infrastructural costs associated with building a presence in the market. They first need to lobby for stronger cyber crime laws and accountability which itself could cost millions of dollars. The only reason Daraz is doing relatively well compared to others is the refund policy. Our market isn't ready for an online store yet. Apropos: “Is OLX feeling hot under the collar?” Shahbaz Khuwaja Why, and how was he able to maintain this kind of a low profile and why is he opening up. However, considering the state of economic and business reporting in general the low profile does not come as much of a surprise. Apropos: “Pakistan’s mystery billionaire” Abid Hussain, Journalist It happens everywhere! The top brass is never affected! They make the rules! Apropos: “How bank CEOs rake in the big dough” Faiza Ahmed, Teacher Great to see a Berkeley Alumnus making strides in the Pakistani business world, Habibullah Khan wants to be the Dhirubhai Ambani or Ratan Tata of Pakistan. An ambitious businessman with a growing appetite to invest. Apropos: “Pakistan’s mystery billionaire” Umar A Chaudhary Writer, Editor, Freelancer OLX is a gold mine. From ad opportunities to sponsored classifieds, it has 100 ways to generate revenue. With the kind of data OLX has, it is unfathomable that it won't be able to recover its investment from Pakistan. Apropos: “Is OLX feeling hot under the collar?” Syed Jawwad Ali Jafri, Country Representative at InMobi

COMMENTS

“As risk of default on foreign debt increases, the cost of insuring against default has surged to its highest level” PTI MNA Asad Umar

QUOTE

BRIEFING

“Pakistan has become the largest recipient of Chinese concessional financing that includes grants and cheap loans” Planning Secretary, Shoaib Siddiqui

year-on-year rise in exports was recorded to touch $2.23 billion by end of March 2018. On the other hand, imports growth remained subdued at only 5 per cent as compared to March 2017, which has also been one of the lowest growth in imports in the past many months The initiatives by the government to provide duty drawback as well as the exchange range adjustments have contributed positively to the growth. Improved market access especially in the European market owing to the successful review of GSP Plus facility also played an important role Imports on the other hand are now finding their real value by improved exchange rate regime and regulatory duties on non-essential and luxury goods. However, imports remained under pressure due to continuation of oil prices on higher side. The increase in fuels imports (Oil, Coal and LNG) both in the terms of price as well as quantities keep the balance of trade around $3 billion for the month of March 2018, which is however 5.7 percent lower than March 2017 due to robust exports growth.

24pc

was Pakistan’s per capita income for the financial year 2017-18 compared against Rs162,1230 reached for FY 2016-18 which was reached from provisional data during population census carried out in March 2017. Pakistan’s economy is said to have achieved its highest economic growth rate at 5.79 percent, the highest in eleven years, proclaimed the government. The agriculture sector is said to have posted growth of 3.81 percent, surpassing the projected figure of 3.5 percent set by the government for FY 2017-18. Also, major crops registered a growth of 3.57 percent compared to the projection of 2 percent. Cotton production during this period was projected to have risen 11.8 percent, rice 8.7 percent and sugarcane 7.4 percent. And livestock posted a growth rate of 3.76 percent against the projected target of 3.8 percent, the following was the fishery sector which registered growth of 1.6 percent this financial year compared to 1.7 percent in previous year. Forestry posted 7.17 percent growth during this year against forecast target of 10 percent.

Rs180,204

BRIEFING

$100m loan is set to be approved by World Bank for Sindh in enabling generation from solar energy. he Sindh government has formulated a framework to tackle the environmental, social and resettlement impact which could come due to its major push courtesy the Sindh Solar Energy Program (SEEP). The SSEP scheme of the provincial government is focused on aiding solar deployment across the province which includes residential, utility-scale and distributed generation reforms. As per this scheme, a 400-megawatt solar park is set to be established which will be initiated with a 50MW and witness the first tariffbased competitive auctions across the country, which were announced in December 2017. This initiative of the solar park is intended to decrease the risk of privatesector developers which will protect permits are obtained, the land is secured, and power off-take is also pre-arranged. The site for the first 50MW situated near Manjhand, Jamshoro district has been found with land secured for it. The target is to conclude this pilot solar suction by end of this year and let the project get working by 2020. Also, under this scheme, it is targeted to set-up 15MW of distributed PV on rooftops of public sector buildings in the metropolis of Karachi and Hyderabad.

BRIEFING

“CPEC has helped the country come out of an energy crisis and industrial production has significantly increased” Minister for Interior, Ahsan Iqbal

QUOTE

$3.285b

loan will be granted to Pakistan by International Islamic Trade Finance Corp (ITFC). “We will supply Pakistan with $3bn to finance trade activities for a period of three years,” Hani Salam Sonbol said, adding that the remaining $285 million would be to finance gasoline purchases. Jeddah-based ITFC is the financing arm of the Islamic Development Bank for trade activities. It gave Islamic countries trade financing worth $40 billion in the past 10 years. “We will increase our funds to support trade activities and create job opportunities in the next 10 years”, Sonbol told on the sidelines of a conference in Tunis, without elaborating.

have been borrowed by the government in the last five years from foreign countries to sustain the economy. Information compiled shows that the incumbent government took $6.6 billion in the first year 2013-14, $5.6 billion in 2014-15, $7.3 billion in 2015-16, $10.5 billion in 2016-17, and $7.6 billion from multilateral and bilateral institutions in the first 56 months. Moreover, the government has taken $7.9 billion from the consortium of commercial banks. The data indicate that the government has taken $4.3 billion in the last fiscal year 2017-18, whereas $322 million, $50 million, $1.3 billion were received during 2013 to 2016. The government took $1.7 billion from commercial banks in the first eight months of the current fiscal year. Meanwhile, Pakistan has taken $6.9 billion from raising bonds in the international market. The present government received $1.9 billion in 2013-14, $1 billion in 201415, $500 million in 2015-16, $1 billion in 2016-17, and $2.5 billion in the current fiscal year.

$37b

rise in inflation was recorded for the week ended April 4th. According to Pakistan Bureau of Statistics data released on Friday, the Sensitive Price Index (SPI) increased during the week after slowing down during three consecutive weeks previously. The index, based on a survey of 17 cities and 53 markets, monitors prices of 53 items. During the period under review, prices of 26 items increased, while prices of 12 items decreased 15 items stayed constant. For the income group earning up to Rs8,000 a month and also the income group earning more than Rs35,000 a month, the SPI increased by 0.6 per cent over the previous week. For the period under review, SPI for the combined group on an Year on Year (YoY) basis experienced a decline of 0.89 per cent.

0.4pc

27.81pc

subsidy package has been proposed for the holy month Ramazan by the Ministry of Industries and Production (MIP) for nineteen essential commodities. An official disclosed the items suggested for concession in this subsidy package include dates, wheat flour, ghee, cooking oil, gram flour, gram pulse and sugar. Also, the Economic Coordination Committee (ECC) of the cabinet will take up this proposal for go-ahead. Aside this subsidy, it has been learnt the Utility Stores Corporation (USC) would be offering 5 to 10 percent discount on more than 1,500 items of daily use, by decreasing its margins to provide relief for poor sectors of the society. Also, the authorities may offer a subsidy of Rs4 per kilogram on flour sales totalling Rs200 million for the holy month of Ramazan. MIP has projected the supply of flour for the month of Ramazan to be around 50,000 tons. And it is expected prices for ghee may be decreased by Rs15 per kilogram, gram pulse and gram flour by Rs20 per kg and dates by Rs30 per kg, the official shared.

increase in gold imports was recorded in the country during the first seven months of financial year 2017-18. During the period under review, 326 kilograms of the yellow metal valuing $13.18 million was imported against an import of 278 kg gold worth $10.31 million last year. However, on yearly and monthly basis, the import of yellow metal in February 2018 plunged by 67.2 per cent and 72.2 percent when compared to imports during February 2017 and January 2018 respectively, according to the latest data from the Pakistan Bureau of Statistics. Imports during February 2018 declined to $335,000 from $1.021 million in February 2017, and $1.2 million in January 2018. Similarly, the overall metal group import also increased by 27.43 per cent in July-February (2017-18) to $3.45 billion from $2.7 billion in the same period of previous year.

Rs1.73b

BRIEFING

INTERVIEW

WHY ISHAQ DAR DESERVES BOUQUETS AND NOT BRICKBATS

By Agha Akbar

Having served two back-to-back terms as SBP governor in Pervez Musharraf’s dispensation, Dr Ishrat Hussain has had a long and distinguished stint in various high-profile leadership roles here and abroad – including with multilateral donor agencies. His absolute sweep of the economy, especially Pakistan’s, makes him the person to talk to when the country is purportedly going through difficult times – an attribute that given the prevailing economic crisis makes him a frontrunner for the interim prime minister’s position. As the curtain inexorably comes down on the latest term of the PML-N dispensation, with 2018

Dr Ishrat Husain gives a thumbs-up to the finance minister reviled by most experts not belonging to the PML-N ‘for opting for stability over growth’

national elections looming, the [previous] federal finance minister Ishaq Dar is being painted in colours not so flattering by many a top economist, with the charge sheet against him lengthy and damning. In this milieu, Dr Ishrat Husain gives a thumbs-up to the finance minister reviled by an overwhelming majority of experts not belonging to the PML-N. The Oxford University Press recently published Dr Husain’s latest book, the result of yearlong research at Woodrow Wilson in Washington, ‘Governing the Ungovernable: Institutional Reforms for Democratic Governance’ suggests across-theboard reform in a whole raft of sectors. The one good thing about Ishrat Hussain is that he does not shy away from offering an opinion, hence, Profit spoke to him at length on the factors holding back

Pakistan’s economic growth, foreign exchange reserves taking a plunge, devaluation and devolution, the CPEC, diminishing exports and surging imports etc. Asked as to how he would compare the post-Musharraf 10 years to the 1990s, called ‘the Lost Decade’, he said, it ought to be divided into two parts. “Between 2008-13, the economic management was not given due importance, evident from five finance ministers and as many state bank governors. Without firm hands on the wheel, you cannot carry the economy forward. From 2014-17, the economy was in firm hands.” Dr Husain bucks the trend, backing Dar to the hilt. “He managed the economy quite well until 2017. Under him, the upward trajectory was resumed. The criticism here is always lopsided. When are not having any growth, [experts complain] stabilisation is stifling growth. When now there’s growth, everybody is still critical of our current account deficit.” To Dr Husain, the drop in exports from $25 billion to $21billion – which exacerbated the current account imbalance – was owing to energy shortages from 2010 to 2014, less so in 2015-16. “Had the growth rate stayed as in the past, by end 2018 fiscal, the exports would have been $36 billion – and trade deficit lower by $15 billion and [as a consequence] less borrowing. The culprit in this whole equation is the decline in exports, caused by energy shortages. “For the last eight months exports though have increased by 11% cumulatively and in February they increased by 15%. It shows that the moment energy shortages were taken care of, the exports

started picking up.”

Opt for growth

ncrease in investment too has precipitated the current account deficit. “Higher investment will take you to higher growth, but with a time lag. Meanwhile, to maintain a certain level of reserves, the difference between inflows and outflows needs to be borrowed. That is why $2.5 billion was borrowed, and another $2-3 billion would be needed to maintain reserves at

‘GROWTH SHOULD NOT BE SACRIFICED, FOR AFTER A LONG TIME WE HAVE A 5-6% GROWTH TRAJECTORY. IF I HAVE TO MAINTAIN THE TRADEOFF BETWEEN THE CURRENT ACCOUNT IMBALANCE AND THE GROWTH OF 6%, I WOULD OPT FOR THE LATTER’

$12.5 billion – equivalent to three months of imports. This is manageable. Growth should not be sacrificed, for after a long time we have a 5-6% growth trajectory. If I have to maintain the tradeoff between the current account imbalance and the growth of 6%, I would opt for the latter. That is my philosophy.” “Growth is essential for the businesses and ordinary citizens, and for the absorption of 1-1.5 million of youth entering the labour force. Growth is good for taxation too, as the GDP increases and you retain the tax rate ratio, your taxes still go up. So, for all these reasons, if I have to maintain the tradeoff between the current account imbalance and the growth of 6%, I would opt for the latter. That is my philosophy.” But will the government be able to tide over this current account gap? To him, it is a question of managing the economy.

ECONOMY

“We’re currently in turbulent waters and a good helmsman is needed. I don’t know, for how many months you didn’t have a finance minister in this country. There was a gap, and, hence, the uncertainty. International investors actually want to see who is running the show. The advisor [Miftah Ismail] is very competent but he is only there for 2-3 months. It’s a self-inflicted wound on economic management.” Talking of self-inflicted wounds, in the late 1990s, the foreign currency accounts of resident and non-resident Pakistanis worth $11.2 billion were frozen, seriously denting the confidence of depositors. Is a repeat nigh? Dr Husain does not think so. “These accounts only hold $6 billion and the SBP is using that for forward swaps anyway. It would largely shake the confidence in the economy and doesn’t make any economic sense either.” From the early to mid-2000s, how did he manage the SBP to have a decent stable exchange rate and good reserves? “We created an environment where FDI reached $5 billion, exports doubled during the 5-year period, remittances rose from below $1 billion to $6-7 billion. With such inflows, my problem was how to sterilise the excess dollars so that the rupee doesn’t get undervalued and hurt the economy – a very different problem than being faced today.” What is the downside today? “Well, you have to protect your exports, you have to increase your remittances and you have to bring in more FDI. These are three no debt creating inflows. In my six years [as SBP governor], I only concentrated on that. My door was open for every exporter. Importers were not allowed to come but exporters were always welcome. I used to ask them what their issues were? And there are so many issues within the government, I honestly don’t know how people who do business in Pakistan continue to run them… Now, as the provincial government is doing its own thing, and no one bothers to ask the federal ministries of commerce or finance,

‘THE CULPRIT IN THIS WHOLE EQUATION IS THE DECLINING EXPORTS, CAUSED DUE TO THE ELECTRICITY AND GAS SHORTAGES.’ Dr Ishrat Husain there is more confusion. The FBR is at its strongest right now. And the day the FBR becomes strong, your industry and exports vanish. We are an over-regulated and overtaxed economy. That is the downside.” The rupee has devalued sharply in recent weeks. Is it the right time for it? Dr Husain say, it is. “Also the fiscal deficit, $85 billion foreign debt means that your rupee liability goes up by Rs85 billion for one rupee devaluation. And that puts pressure on his fiscal deficit. Ishaq Dar calculated this much better but all the economists were against him. Now they are against the devaluation.” Was he in favour of devaluation? Now? “The bottomline is only the central bank knows... where the inflows are coming from and when the outflows are going out and when there is going to be a gap. Even the finance minister should not talk about devaluation. Ishaq Dar used to have strong opinions about exchange rate. But the only entity that should speak about it is the SBP.”

IMF, no panacea

s far as meeting the external commitments with current account deficit putting the reserves under pressure is concerned, Dr Husain believes that finance ministry would be able to manage that. “In the short-term it is going to be difficult but it can surely be managed. At the end, it would play out better for the country. It is a matter of

‘FOR THE LAST EIGHT MONTHS EXPORTS THOUGH HAVE INCREASED BY 11% CUMULATIVELY AND IN FEBRUARY THEY INCREASED BY 15%. IT SHOWS THAT THE MOMENT ENERGY SHORTAGES WERE TAKEN CARE OF, THE EXPORTS STARTED GOING UP’ 16

making choices and these are tough choices. If you are asking my opinion, then my priority would be 6% growth upgrade – for me poverty and unemployment reduction are two important goals – over and above everything else. There are others who are concerned with the short-term stabilization measures, for them current account deficit management is difficult because you should not borrow. I would borrow, I have no problems with that.” That said, going to the IMF is still a no-go area for Dr Husain. “We don’t have to go to the IMF. We raised $2.5 billion from the market. Why do we have to go to the IMF?” Perhaps it is because the IMF is cheaper? “It’s not about cheaper; their conditionalities are too stringent for the economy to grow. The preference is stabilisation and when you stabilise, the economy stops to grow. My preference is very clear.”

Governance reforms

f he is handed the reins of the country today, what three initiatives would he take to lead us to a better, brighter tomorrow? “First of all, I’d embark on governance reforms. Secondly, I would have a strong finance team – very competent, people of integrity, give complete freedom to reform the system as far as our economic management is concerned. And, thirdly, set up local governments. The devolution is very good, but it is incomplete. The provincial governments have too many powers and too many resources but a common man

interacts with the patwari, with the thanedar, with the irrigation SDO, with the head teacher, with the health practitioner at the local level – it doesn’t come to the provinces. No powers or resources have been given to the local governments. Punjab is 110 million people, yet [just] 35 districts. How can you govern Punjab, sitting from Lahore? It is a mess.”

CPEC, Business as usual won’t work

here is such hype about the CPEC, with high expectations attached to it, yet concerns have also been expressed – especially by the industrialists and mercantile community. Dr Husain believes two points are very important. “One, the policy imperatives, and, second, it being a golden opportunity, in that there are institutional changes that ought to be brought in. If we do not change our institutional policies and management, the benefits will not be of the same magnitude which are being promised – because business as usual won’t work. Due importance must be given to the Western corridor and also to the additional funding for health, education, drinking water, jobs, agriculture and vocational trainings for the local people – in its absence there would be disaffection in Balochistan and southern KP. “There should be a $100 million grant to Gwadar, Khuzdar and all these districts including Qilla Saifullah, Zhob and Dera Ismail Khan, so that their people get clean drinking water and jobs, which will not be a part of CPEC but part of the policy anyway. Otherwise there will be a sense of deprivation among people despite the corridor being established. And what about the local industry, which is afraid of Chinese dominance? Dr Husain is of the view that there is no reason for the local industry to have apprehen-

‘THE BOTTOMLINE IS ONLY THE CENTRAL BANK KNOWS... WHERE THE INFLOWS ARE COMING FROM AND WHEN THE OUTFLOWS ARE GOING OUT AND WHEN THERE IS GOING TO BE A GAP. EVEN THE FINANCE MINISTER SHOULD NOT TALK ABOUT DEVALUATION’ sions. “They are simply jumping the gun. Out of the $50 billion the Chinese have committed, $35 billion are for energy. That is our need not of the Chinese people, and 10,000 MWs have already been added. Out of the remaining $15 billion, around $3 to 4 billion are for Gwadar and its airport. The remainder, $10-12 billion, are for the roads. So, the industry is still to come. Whatever everyone is saying right now is all speculative. Every minister has made it clear that the industrial zones under the CPEC will be open for all business to provide a level playing field, including the foreign non-Chinese investors. That should bring the discussion to an end. “Since the Chinese marketing is excellent, if a Pakistani enterprise creates a joint venture which would reduce the former’s fabrication cost and the latter could latch onto their brand, ultimately both the parties benefit. But our businessmen want to remain protected, they don’t know how to compete. Just imagine for yourself that in a country where private equity funds come to see me because they can’t find investment avenues where there is complete and clean disclosure. In comparison, India has every international private equity firm, you name it, they are all there. Around $15 to $16 billion [in FDI] are being invested in India every year, and who are the beneficiaries – the Indians, government and businesses alike. Their profit margins have skyrocketed. This

‘WHATEVER EVERYONE IS SAYING RIGHT NOW IS ALL SPECULATIVE. EVERY MINISTER HAS MADE IT CLEAR THAT THE INDUSTRIAL ZONES UNDER THE CPEC WILL BE OPEN FOR ALL BUSINESS TO PROVIDE A LEVEL PLAYING FIELD, INCLUDING THE FOREIGN NON-CHINESE INVESTORS. THAT SHOULD BRING THE DISCUSSION TO AN END’

is what I keep telling the Pakistanis.”

Profit, not a dirty word

he ‘two books’ issue to evade taxes is common in the sub-continent. Dr Husain though says that the Indian business house have reformed themselves. “The ones that wanted to grow, they learnt their lesson. Azim Premji told me that till his dad’s time, there were two books and the balance sheet was weak. When he came back after studying abroad, he pitched for foreign equity. Now, their balance sheet has swollen and though they have become a minority shareholder but their profits and returns have multiplied by 1000%. What is advisable, that you keep two books or where your investment remains low but your returns are way higher.” Would there ever be a similar change in the mindset of our businessman too? “It will happen gradually. You should always look at both sides. Till you have the monopoly of Pakistan Steel Mills (PSM), all the steel manufacturing industries were private holdings or in informal sector. In the last year or so, seven of them have floated IPOs and all of them are expanding. This has happened because you have competition and the capacity to build. They could not have expanded with their own money, so they had to go to the IPOs and in the process their books were cleaned. In Pakistan, we are followers, if you went for an IPO and I am your competitor, I will also go for an IPO. The cement sector went public quite a while back and now steel is following. So this is how transformation takes place, over time and not overnight. But we should encourage this transformation and not criticise them on their growth or on their profits. Now they would also pay the taxes as well. So, what is wrong with making profits? Our mindset is that whoever makes a profit is a dirty man, that he must be a thief.” n

ECONOMY

THREE MAJOR BANKS ARE UP FOR SALE

WHO WILL BUY THEM? Their eventual buyers could alter the face of the Pakistani banking system. Who has the cash, knowledge, and desire to pull this off?

By Farooq Tirmizi

or the first time in Pakistani history, three perfectly healthy and viable banks are simultaneously up for sale. None of them is a distressed asset being sold by sponsors who had hastily gotten into the banking business and made too many bad loans that they did not have the capital nor the stomach to be able to cover. And none of them is a bloated, nationalized bank filled with a balance sheet of politically motivated bad loans and an employee roster of people who want a paycheck for doing very little. No, these are all banks in rude health, and worthy targets of any financial institution that wants a strong beachhead on their way to conquering the Pakistani financial market. The problem? Nobody who knows banking wants to buy them, and (most of) the people who want to buy them have little to no experience in banking. The three banks up for sale are Bank Alfalah (BAFL), Meezan Bank (MEBL), and Faysal Bank (FABL), which are the sixth, eighth and thirteenth largest banks in the country respectively, as measured by total assets. All three are up for sale for more or less the same reasons: the Gulf Arab investors who initially put up the capital to create these banks have held their positions profitably for decades and are now looking for a suitable exit opportunity. This is a unique moment in the financial history of the country. Ordinarily, when a bank in Pakistan goes up for sale, there is usually something terrible going on with it. Typically, banks in Pakistan get sold

for three reasons: 1. The first reason is when the government is about to sell off a nationalised bank, with a bloated workforce and a balance sheet with more holes in it than a block of Swiss cheese. These tend to be large institutions with a wide branch network and recognisable brand names. Think Habib Bank, United Bank, etc. 2. The second reason is when a distressed local bank is put up for sale. Banks are not meant to be created like sausages, and unlike a cow, when you put together the worst bits of a country’s financial system, you do not suddenly get a high-flying financial institution, no matter how much you spend on branding and marketing it. (Yes, NIB Bank, we are talking about you.) It is not always the result of a bad series of mergers, for example. Sometimes, the banks should never have existed and the sponsors should just have stuck with equities and never gotten involved with fixed income in the first place. (Yes, that would be you, KASB Bank.) 3. The third reason is when some foreign banks inevitably fail to implement their lack of a growth strategy for Pakistan and sell off their branch network to the institutions who are not in it for the quick buck. Some of these banks just get their timing wrong, like Barclays. Some suffer in other parts of the world and decide to

‘AND GIVEN THE FACT THAT THIS IS FAR FROM A DISTRESSED SALE, THE ABU DHABI GROUP IS LIKELY TO TAKE THEIR TIME AND WAIT FOR THE RIGHT OFFER FROM THE RIGHT BUYER BEFORE CLOSING A TRANSACTION, A PROCESS THAT COULD DRAG ON FOR SEVERAL YEARS IF NEED BE. WHOEVER WANTS TO BUY BANK ALFALAH HAD BETTER WANT IT BADLY ENOUGH TO MAKE A HIGHLY COMPELLING OFFER’ scale back everywhere, including Pakistan, like Citibank. And some just professionally suck at life, like HSBC. (More on the general mass of incompetence that is HSBC later.) None of these three situations apply to any of these banks. Meezan Bank is the fastest growing bank in Pakistan and has never had a single year of losses in its entire history. Bank Alfalah grew from almost nothing to become the sixth largest bank in the country and remains an exceptional bank when it comes to its focus on consumer lending. And Faysal Bank has relationships with most major corporations in Pakistan and has been a solid middle-market player. So why are these institutions up for sale? Each has its own story, though those

stories have a few elements in common. How closely those past trajectories will be a consideration for their prospective buyers is not yet known, though if they are prudent, the potential investors would do well to understand just how these banks got to be where they are today.

Bank Alfalah: the disruptor

f the three, the biggest prize is Bank Alfalah, which in itself is a remarkable fact. The list of the top five banks in Pakistan has consisted of the same names since 1959, with minimal movement in the rankings, until 2005, when Bank Alfalah, a bank that had at that point existed for only seven years in its current form, overtook Allied Bank to become the fifth largest in the country. While it has since then slipped back into sixth place, Bank Alfalah is the one bank that was not content to leave the Big Five in peace and has consistently had the ambition to grow into their ranks, possibly even break into the top three. It is a bank that has ambition baked into its DNA, and its past CEOs, despite their very different management styles, have strived to somehow preserve that culture. The story of Bank Alfalah starts with the Bank of Credit and Commerce International (BCCI) and its operations in Pakistan. The Bank of Credit and Commerce International was one of the most notoriously corrupt banks in the recent past of the global banking system and it started in Pakistan, founded by Agha Hasan Abedi, a man who got his start at Habib Bank in 1946, but then went on to create United

Bank Ltd (UBL) in 1959, and the BCCI in 1972 after UBL got nationalised. The BCCI started off from an office building on Karachi’s McLeod Road (in what is now Bank Alfalah headquarters), but quickly grew to become the seventh largest private bank in the world, along with it introducing an entire generation of Pakistanis to the world of international banking. The fraud that caused British regulators to shut down the bank in 1991 is, of course, now a well-documented part of banking history, but it did have a significant legitimate business that left orphaned assets in its wake after the bank was disbanded worldwide. In Pakistan, its assets consisted of three branches in Karachi and Lahore. The State Bank of Pakistan took over those assets in 1992 and renamed them Habib Credit and Exchange. The move to seize BCCI’s Pakistan assets coincided with the deregulation and privatization of the Pakistani banking sector. In 1997, Habib Credit and Exchange was bought out by a new banking entity backed by Middle Eastern investors: Bank Alfalah. Bank Alfalah’s majority shareholder is Sheikh Nahyan bin Mubarak Al Nahyan, a member of the royal family of Abu Dhabi. His brother, Sheikh Hamdan, has been the chairman of BAFL’s board since 2002. Both brothers are minor members of the UAE federal cabinet. Incidentally, a different branch of the Nahyan family were the original investors in UBL, so Nahyan involvement in Pakistani banking goes back almost as far as there has been such a thing as Pakistani banking. How Bank Alfalah grew from almost nothing to being one of the largest banks in Pakistan is a story in its own right, but suffice it to say that the bank is a powerhouse when it comes to consumer lending, in large part because its sponsors have always wanted it to focus on financing the

growing middle class of Pakistan. Sheikh Nahyan’s investments in Pakistan are housed under the Abu Dhabi Group – which has nothing to do with the sovereign wealth fund of the government of the UAE. Among the other assets they own in Pakistan are Wateen Telecom, an internet and communications infrastructure company, and Taavun, a real estate developer. The group sold its struggling mobile operator Warid to Jazz (then called Mobilink) in November 2015. Given the struggles of its telecom businesses, it has long been rumoured that the Abu Dhabi Group may decide to close ship in Pakistan altogether and even sell off Bank Alfalah. In years past, however, the group’s majority shareholders have vociferously denied such rumours. Now, however, we at Profit can confirm from at least three sources in Pakistan’s financial services sector that the very earliest stages of a conversation about a sale of the Abu Dhabi Group’s shares in Bank Alfalah have begun. It is this interest in selling off Bank Alfalah which is said to be behind Atif Bajwa’s departure as CEO of the bank in June 2017. Sources inside the bank say that he had been under tremendous pressure to

IN BRINGING IN ANSARI, THE SPONSORS SENT A CLEAR SIGNAL – WHICH THE MARKET COGNOSCENTI RECEIVED LOUD AND CLEAR – THAT THE BANK’S OPERATIONS WERE BEING MADE MORE EFFICIENT AND PROFITABLE IN PREPARATION FOR A SALE

reduce operating costs and had been unable to do so, in part due to his desire to protect the exceptionally strong benefits that the bank offers to its employees, matched in their generosity only by the state-owned National Bank of Pakistan. It is not a coincidence that the man brought in to replace Bajwa was Nauman Ansari, the man who was responsible for unsentimentally removing an estimated Rs1.5 billion a year in excess operating costs from Faysal Bank’s income statement. Ansari served as CEO of Faysal Bank from 2014 through 2017. In bringing in Ansari, the sponsors sent a clear signal – which the market cognoscenti received loud and clear – that the bank’s operations were being made more efficient and profitable in preparation for a sale. Higher profits are likely to result in a higher sale price for the Abu Dhabi Group’s shares in the bank. However, it is likely to take Ansari at least two years to fully improve the economic efficiency of the bank’s operations, and it remains to be seen whether he will do so at the expense of alienating a highly talented workforce who were attracted to the bank for its generous benefits (Alfalah pays for the full medical costs of an employee’s parents, a benefit that can be crucial for many families). And given the fact that this is far from a distressed sale, the Abu Dhabi Group is likely to take their time and wait for the right offer from the right buyer before closing a transaction, a process that could drag on for several years if need be. Whoever wants to buy Bank Alfalah

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had better want it badly enough to make a highly compelling offer.

Meezan Bank: the Islamic juggernaut

ank Alfalah may be the largest bank up for sale, but Meezan Bank is the most valuable, as measured by its market capitalization, which is higher than that of Bank Alfalah. Indeed, Meezan Bank’s market capitalization (stock price multiplied by the total number of shares outstanding, or the total value of the company) is higher than all but six banks, the six being the Big Five banks and Standard Chartered Bank Pakistan. How is Meezan Bank valued higher than the larger Bank Alfalah? Because it has consistently grown faster than any other bank in Pakistan for the last thirteen years in a row. Simply put, Meezan Bank is a deposit gathering juggernaut. It has the unquestionable first-mover advantage in the Islamic banking market, which is an important segment in a country where many people have religious objections to conventional banking. Given its strong brand name in the Islamic banking sector, Meezan Bank’s management are probably the only ones in all of Pakistani finance who absolutely do not worry about where they will be able to raise deposits from. If anything, Meezan Bank has the opposite problem: a deposit base that is growing too fast for its management to be able to profitably deploy in loans. That task is made much harder by the fact that – unlike other banks – it cannot buy long-term government bonds. The longest tenure on a Shariah-compliant government bond in Pakistan is three years, and its yields are typically lower than a conventional three-year bond. Conventional banks have responded to the historically low interest rates in Pakistan by shoveling money into long-term government bonds, where they can earn a nice spread of several basis points above the one-year bond. Islamic banks, unfortunate-

ly, do not have that option, though Meezan has been working with the government to introduce a Shariah-compliant version of the 10-year bond. In the meantime, however, Meezan is desperate to deploy its capital into corporate and commercial loans, and its existing and prospective client base know that, which is why they are able to bargain down for lower rates than they would pay on conventional loans. It cannot rely on the religiosity of CFOs and corporate treasurers for higher rates, because Meezan Bank appears to have already run through the list of companies that bank only with Islamic banks and now has to compete for the Shariah-agnostic business alongside conventional banks. BankIslami or Dubai Islamic do not keep Meezan CEO Irfan Siddiqui awake at night. Standard Chartered, Habib Metropolitan and Faysal Bank do. Meezan Bank started its existence in 1997 as Al-Meezan Investment Bank, an institution with a limited licence to build up a corporate and investment banking franchise. At the time it started out, AlMeezan Investment Bank was so small, and considered so insignificant, that it did not even have a full-time CEO. Irfan Siddiqui, the man who was given the job (and still has it) was serving as general manager (effectively COO) of Pak-Kuwait Invest-

BANKISLAMI OR DUBAI ISLAMIC DO NOT KEEP MEEZAN CEO IRFAN SIDDIQUI AWAKE AT NIGHT. STANDARD CHARTERED, HABIB METROPOLITAN AND FAYSAL BANK DO 24

ment Company (PKIC), a joint venture between the governments of Pakistan and Kuwait. Siddiqui continued in both capacities until at least 2001, working with a 30-person team to build out what appears to have been at the time a vehicle for PKIC’s fixed income business. However, it appears that Siddiqui saw the potential in Al-Meezan when nobody else appears to have spotted at the time. Siddiqui started off his career as a chartered accountant in 1979, but worked for a significant portion of his career either in the Middle East or for Middle Eastern entities. The list of his previous employers includes the Abu Dhabi Investment Authority, Abu Dhabi Investment Company, and the Kuwait Investment Authority. That exposure to the Persian Gulf Arab states appears to have given him both an appreciation for Islamic banking (Islamic finance originated in the GCC region) as well as a network of contacts that would later help him build up the business. Soon after it was launched, Siddiqui used his old contacts to bring in several other investors into the bank including the Islamic Development Bank, the Saudi-Pak Industrial and Agricultural Investment Company (a joint venture between the governments of Pakistan and Saudi Arabia), Shamil Bank, a Bahraini bank owned by Dar al-Maal al-Islami (DMI) Trust (the sponsors of Faysal Bank), and the Kuwait Awqaf, a Kuwaiti state-owned endowment. Meezan Bank’s current shareholding is now dominated by Noor Financial In-

vestments Company, a publicly listed company in Kuwait that manages the wealth of several of that country’s richest families. Noor Financial owns 49% of the bank and has publicly made it known that its shares are up for sale. Most notably, in 2013, they tried to sell the bank to Habibullah Khan, the Karachi-based billionaire who owns Mega Conglomerate, a shipping and logistics conglomerate that has since branched out into real estate development and other industries as well. That transaction, however, was blocked by the State Bank of Pakistan, in part because Habibullah Khan was using an offshore company to conduct the transaction. Meezan Bank’s rapid growth makes it an attractive acquisition target, though the one risk it has is the fact that the founder CEO Irfan Siddiqui is unlikely to remain in the job for much longer, having served in it for what is effectively 21 years. That key man risk aside, however, Meezan Bank is unquestionably a strong beachhead for any institution looking to establish a foothold in Pakistan’s financial services sector.

Faysal Bank: the hidden Islamic play

ong known as one of the “also-rans” of the Pakistani middle market, Faysal Bank has finally begun to capitalize on the synergies from its initially botched 2010 acquisition of RBS Pakistan and will likely further enhance its growth prospects by converting from a conventional bank to an Islamic one. Faysal Bank started off its existence in Pakistan in 1987 as the tiny branch operations of Faysal Islamic Bank, a Bahraini bank owned by Prince Mohammad bin Faisal al Saud, the son of the late King Faisal of Saudi Arabia. Mohammad was the eldest son of the late king, born in 1937. Like his younger brothers, he finished high school at the

‘HOW IS MEEZAN BANK VALUED HIGHER THAN THE LARGER BANK ALFALAH? BECAUSE IT HAS CONSISTENTLY GROWN FASTER THAN ANY OTHER BANK IN PAKISTAN FOR THE LAST THIRTEEN YEARS IN A ROW’ prestigious Lawrenceville School in New Jersey. He then went to Swarthmore College in Pennsylvania but then transferred to Menlo College in Silicon Valley from where he graduated. He appears to have always had a keen interest in finance because he started his career in 1959 at the Saudi Arabian Monetary Agency. In 1977, Mohammad bin Faisal left the government and began investing some of his own capital into a new bank being formed in Egypt: Faisal Islamic Bank. In 1981, he created the Dar al-Maal al-Islami Trust (The House of Islamic Finance) in Geneva. DMI began investing in setting up Islamic banks throughout the Muslim world, setting banks up in Egypt, Bahrain, Niger, and Pakistan. DMI originally created two banks in Pakistan. The first was the branch operations of Faisal Islamic Bank (set up in 1987), and the second was the Faisal Islamic Investment Bank (set up in 1996). In 1995, the branches of Faysal Islamic Bank were incorporated locally in Pakistan as a conventional bank. In 2002, the Islamic investment bank was merged into the conventional bank and the whole entity lost all of its Shariah-compliant credentials. The decision to move to a purely conventional model seems to have been prompted by the management, rather than the shareholders. Mohammad sees himself as a global advocate of Islamic finance, so he was probably not happy with the decision, but he let it slide, at least for some time. This shift also did not go over well with many of the bank’s depositors, and many voted with their feet. In 2001, the

‘FAYSAL BANK IS THE SMALLEST OF THE THREE BANKS CURRENTLY UP FOR SALE, BUT MAY WELL BE A HIGHLY ATTRACTIVE OPTION FOR A SMALLER, NIMBLER ACQUIRER LOOKING FOR THE RIGHT COMBINATION OF ASSETS AND TALENT TO GROW THEIR PRESENCE IN PAKISTAN’

bank’s total deposits were Rs31.9 billion ($509 million). By the end of 2002, the year of the shift, they had dropped to Rs24 billion ($393 million), a decline of nearly 23% in just one year. Nevertheless, the bank soldiered on and was able to recover the lost deposits within the next year (2003) and had more than doubled its initial deposit base within the next two years, by the end of 2005. The bank did this by relying on the deposits of several Arab-owned businesses in Pakistan. Its single biggest client was the Attock Group which – through its ownership of Pakistan Oilfields, Attock Refinery and Attock Petroleum – is the only non-state-owned conglomerate to operate in every segment of the oil supply chain in Pakistan. At one point, the Attock Group accounted for nearly a quarter of all deposits at Faysal Bank. The mid-2000s were a turbulent time for the bank, in part because of its strategy to rely on an outsize presence in the capital markets of Pakistan by effectively using its deposit base as one large proprietary trading book. It also did not help that the bank’s head of investment banking was indicted in a court in New York on charges of insider trading. All that changed after Naved A Khan, a former ABN Amro banker, was brought in by the board in March 2008 to clean house. Naved Khan made significant changes to management, effectively firing most people and bringing over a large team from ABN Amro. And in 2010, he completed the acquisition of RBS Pakistan, which had acquired his old employer’s Pakistan operations. Naved Khan was good in cleaning up management and restoring some of Faysal Bank’s credibility in the market with the RBS acquisition, but it was his successor Nauman Ansari who finally put the pieces together and made the acquisition work, in addition to cutting away much of the bank’s bloated workforce.

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More critically, the bank appears to be investing in its growth strategy by converting more of its branches to Islamic banking (which typically has faster deposit growth) and increasing the size of its branch network (currently at 405 branches) by another 100 branches over the next five years. Faysal Bank is the smallest of the three banks currently up for sale, but may well be a highly attractive option for a smaller, more nimble buyer looking for the right combination of assets and talent to grow their presence in Pakistan. One source familiar with the matter, however, claimed that sponsors of Faysal Bank, like those of Bank Alfalah, are asking for an exorbitant price, suggesting that they might not be as committed to the sale process.

And now, a word about the acquirers…

o who exactly is in a position to buy these assets? And who would want to buy them? The list includes both foreign and domestic players. The potential foreign acquirers would be the most interesting ones, since they are likely to be large foreign financial institutions, extending their presence into the Pakistani market. The most interested potential acquirers, however, are the domestic players, only some of whom have a history of previously owning and operating financial institutions.

Engro Corporation

The wealthiest contender by far has to be the Engro Corporation. Having recently divested itself of stakes in several key subsidiaries – including the flagship Engro Fertilizers and the former rising star Engro Foods – Pakistan’s largest private sector conglomerate now has $700 million in cash on its balance sheet. The delay in deploying that cash towards profitable investments is rapidly becoming a $700 million itch, and the company’s chairman, billionaire Hussain Dawood, is reported to be quite eager to remedy the situation as quickly as possible. The problem with Engro owning a bank is that the group has never really operated a non-industrial business before. Hussain Dawood’s other conglomerate – the Dawood Corporation – has in the past owned a securities brokerage firm that dabbled in investment banking (Elixir Securities), and currently owns an alternative asset management company (Cyan Ltd), but retail and commercial banking is another beast entirely. Add to that Dawood’s reported aversion to “political exposure” in his future businesses, and a bank may not directly be a good fit for neither Engro nor the Dawood Corporation.

Nonetheless, there are only so many places one can deploy $700 million in Pakistan profitably. Engro could either find several investments and deploy the cash piecemeal, or it could buy a bank in one fell swoop. The temptation to do the latter is likely to be strong, even if the analysis suggests it may not be the most prudent move.

Mega Conglomerate

The shipping conglomerate owned by Habibullah Khan has by now quite publicly declared its intentions to buy a bank. In 2013, Habibullah Khan tried to buy Meezan Bank, a transaction that was ultimately blocked by the State Bank of Pakistan (more on State Bank’s lopsided policies below). And in an interview with Profit, he has admitted to wanting to buy a bank with a large branch network, specifically mentioning 600 branches as his benchmark. In effect, he all but said openly that he wants to buy Bank Alfalah. Should the Mega Conglomerate eventually be able to secure State Bank approval , the transaction would make a certain amount of sense from both Habibullah Khan’s perspective, as well as the broader economy. For one thing, Habibullah Khan is currently the largest shareholder in Pioneer Cement and has made a bid for Dewan Cement. Should that transaction become successful, he will own companies with a cement producing capacity unrivalled in Pakistan. He has also had a recent spate of highly successful commercial real estate developments, and is on the verge of branching off towards luxury residential real estate as well as hotel management. Should the Mega Group decide to advance further into real estate, owning a cement company as a supplier, and a bank that could lend a hand with financing (there are legal limits on self-dealing with banks, but owning one never hurts in raising capital) could potentially create synergies.

Yunus Brothers Group

Better known as the conglomerate that

owns Lucky Cement, the Yunus Brothers Group and its majority shareholder Muhammad Ali Tabba have also reportedly expressed an interest in buying a bank, specifically Faysal Bank. Like Engro, however, Tabba has never owned a major non-industrial business before, and it is not immediately clear what advantage the group would gain from buying a bank. In addition to Lucky Cement, the group owns ICI Pakistan, the chemical manufacturer, as well as Lucky Electric Power Company, an electricity generation company, as well as investments in cement manufacturing companies outside Pakistan. The group is a voracious user of growth capital, though that is not always a good enough reason to buy a bank. At least one source familiar with the matter states that the Yunus Brothers Group may not be interested in directly acquiring a bank, but instead may provide capital to another investor interested in owning one. The other investor most likely to be backed by the Yunus Brothers Group is Adira Capital.

Adira Capital

The new kid on the block, Adira Capital is a company founded in 2017 but run by some very well-known names in Corporate Pakistan. It is primarily the brainchild of two seasoned executives: Waqar Malik, former CEO of ICI Pakistan, and Atif Bokhari, former CEO of United Bank Ltd. The company bills itself as a financial sponsor that is akin to a private equity firm, but instead of several funds with limited life spans, it has a pool of permanent capital that it deploys on behalf of some of the wealthiest Pakistani families. It made a splash in late 2017 by announcing its success in acquiring a controlling stake in Linde Pakistan, a provider of industrial gases. While Adira is not yet an established player in the country’s corporate landscape, a bank acquisition by the group may make sense. After all, Atif Bokhari successfully ran the third largest bank in

‘THE PROBLEM? NOBODY WHO KNOWS BANKING WANTS TO BUY THEM, AND (MOST OF) THE PEOPLE WHO WANT TO BUY THEM HAVE LITTLE TO NO EXPERIENCE IN BANKING’

the country for 10 years, and is highly respected in Pakistan’s financial services sector as an able bank CEO. And despite its relatively recent provenance, Adira has shown itself capable of raising large enough sums of capital to outbid some of the most well-known names in Pakistan, as it did when it bought Linde Pakistan (now called Pakistan Oxygen). In short, Adira Capital is a name to watch and potentially a serious contender in the game of bank acquisitions.

IGI Holdings

Syed Babar Ali is best known as the founder of the Lahore University of Management Sciences and Packages Ltd, but one of his other successful businesses is a series of financial institutions that operate under the brand name IGI. These include a general insurance company, a life insurance company, an asset management company, and an investment bank. So, despite his fame as an industrialist, Babar Ali actually has significant experience in financial services, albeit on the non-banking side of the capital market. Several sources have repeatedly indicated that Babar Ali and his family are interested in buying a retail bank, and perhaps the most serious and credible evidence for that desire came last month, when they consolidated both insurance companies, the asset management firm, and the investment bank under a single holding company named IGI Holdings Ltd was Consolidating all financial entities under one roof looks a lot like the precursor to making a bid for a commercial bank to become a universal financial services institution. A source confirmed to Profit that ex-CEO Bank Alfalah, Atif Bajwa, was in the market on behalf of Babar Ali to gather investors and buy one of the banks up for sale.

The State Bank problem

ll of these local bidders, however, have one big problem in common: the State Bank of Pakistan, which must approve any transaction involving large controlling shareholdings in any bank in the country. And on that front, aside from the idiosyncrasies of any individual acquirer, the one problem all of them will face is the fact that all

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three banks are currently owned by foreign entities, and thus any payment made to them will likely involve the Pakistani acquirer drawing down the country’s dollar reserves by selling rupees and buying US dollars in the currency market and then sending that cash abroad to the sellers’ home country (in this case, UAE, Kuwait, and Saudi Arabia respectively). And that, apparently, is something that the State Bank of Pakistan is opposed to. In the federal government’s asinine bid to control the exchange rate, and the constant fear of low foreign currency reserves, some potential acquirers say that the government may give them hard time when they seek to close the transaction, and may find excuses to delay or even block any transaction that would have a significant impact on the country’s foreign exchange reserves. Sources familiar with the matter say that the State Bank is likely to ask any acquirer of these banks to either raise the money to pay the sellers from outside Pakistan, and then make the payment without any money ever traversing through the Pakistani banking system at all (and thus not impacting the country’s foreign exchange reserves), or if the money must leave Pakistan, that it do so in small installments paid out over an extended period of time. Both of those conditions are unlikely to work, the first being difficult if not outright impossible for the buyers, and the second being unacceptable to the sellers. Such concerns on the part of the State Bank are tantamount to introducing currency controls and effectively rescinding the right of foreign investors to repatriate their profits outside Pakistan. When asked to comment on the matter, a spokesperson for the central bank declined to comment on the matter, saying, they would only do so when they have official confirmation that a bank is being sold. “The SBP does not

comment on hypothesis and assumption,” he said. That non-denial denial aside, however, buying a foreign owned bank for a domestic investor is likely to be made difficult by the State Bank. That might leave the potential foreign investors as somewhat stronger contenders, should they choose to exhibit a greater interest in Pakistani banking.

THE FOREIGN CONTENDERS

The Big Four American banks

one of these is ever likely to be interested in acquiring a Pakistani bank. Citibank already has a presence in Pakistan and has never shown any interest in pulling a Standard Chartered and acquiring a local bank to enhance its footprint. JPMorgan Chase for a long time owned a seat on the Karachi Stock Exchange, which was eventually sold in 2012, and has a miniscule presence in Karachi to serve its international treasury clients’ need for Pakistani rupee transactions, but has otherwise indicated no interest in Pakistan whatsoever. Bank of America, or at least some of its predecessor entities, has historically had branches in Pakistan, but has not had a presence in the country in decades, and judging by its current trajectory, is not interested in a global expansion spree, least of all in Pakistan. And Wells Fargo is unaware that a world exists outside the border of the United States.

The big European banks

Among the largest European banks, most have either already tried and failed at having a presence in Pakistan, or else have indicated no interest in the country whatsoever.Among the British banks, Barclays

‘MEEZAN BANK’S RAPID GROWTH MAKES IT AN ATTRACTIVE ACQUISITION TARGET, THOUGH THE ONE RISK IT HAS IS THE FACT THAT THE FOUNDER CEO IRFAN SIDDIQUI IS UNLIKELY TO REMAIN IN THE JOB FOR MUCH LONGER, HAVING SERVED IN IT FOR WHAT IS EFFECTIVELY 21 YEARS’ 28

and HSBC have already tried and failed at having a presence in Pakistan (HSBC multiple times; more on them below) Lloyds Bank has shown no recent interest in Pakistan, which is a shame, since one of the most iconic buildings on McLeod Road in Karachi is the old Lloyds Bank building, which until very recently served as the headquarter of Silkbank. Of the largest banks in France, both Credit Agricole and Societe Generale have had branches in Pakistan that were sold off in the early years of the Musharraf Administration, with Credit Agricole Indosuez Pakistan being bought by the institution that eventually became NIB Bank, and Societe Generale selling its Pakistan branches to Meezan Bank in 2003. The only German bank to have shown an interest in Pakistan is Deutsche Bank and they seem perfectly comfortable having their three tiny branches in Karachi, Lahore, and Islamabad to serve their global German clients. And judging by how much trouble the German banks are in currently, none of them are likely to want to start expanding abroad.

EFG Hermes

Widely known as the Goldman Sachs of the Middle East and North Africa, EFG Hermes is a quintessentially capital markets institution. It has in the past, however, shown an interest in acquiring a commercial bank in Pakistan, and was one of the final two bidders for RBS Pakistan. However, it is unlikely that EFG Hermes will actually end up bidding for any of the banks up for sale, in part because EFG Hermes now already has a presence in Pakistan’s capital markets after having acquired Invest and Finance Securities in 2017. EFG’s experience with commercial banking has not been a happy one historically. The bank had acquired a stake in Lebanon’s Banque Audi in January 2006, but then sold it in January 2010 after it became evident that the bank’s majority shareholders would never sell additional shares or allow EFG to gain management control. Nonetheless, that transaction did signal a willingness on the part of an otherwise high flying capital markets institution to consider the more humble world of

commercial banking as part of its growth strategy. It may well be possible that the attractiveness of the assets on sale in Pakistan right now may tempted EFG Hermes to try its luck in commercial banking once again. HSBC: If HSBC ever applies to come back to the Pakistani banking market, it should be laughed out of the offices of the State Bank of Pakistan. We include HSBC on this list not because we think it has a serious chance or intention of buying any of the three banks, but to tell you just how bad a failure HSBC has been in Pakistan and why it does not deserve to ever come back to the country. HSBC has by far the worst track record in Pakistan of any foreign bank, which is saying something considering the fact that the list includes Barclays’ decision to enter Pakistan in late 2008, and ABN Amro’s decision to buy Prime Bank in 2007. No, when it comes to bad timing and a spectacular inconsistency of strategy, HSBC are a class on their own. The bank has entered the Pakistan market three times, and left in disgrace all three times. It first came in 1982, and had left by 1986. It returned again for a time in the early 1990s and again in the late 1990s, finally putting up its business for sale in 2012, a transaction that ultimately closed with Meezan Bank putting the old British bank out of its misery in Pakistan. The transaction closed in 2013 and HSBC left Pakistan for the third, and quite possible the last, time. To that, we say good riddance.

ICBC and Bank of China

Both the Industrial and Commercial Bank of China and the Bank of China – the largest and second largest banks in China respectively – have been consistently rumoured as possibly being interested

‘IT WOULD BE HISTORY COMING FULL CIRCLE IF IŞBANK ENDED UP ACQUIRING ONE OF THESE BANKS, AND THE MONEY THAT LEFT THIS PART OF THE WORLD ALMOST A CENTURY AGO FINALLY CAME HOME’ in buying a bank in Pakistan. ICBC may have lent slightly more credibility to those rumours by actually opening up branches in Pakistan and plastering its name on top of the tallest building in Karachi. However, sources familiar with the matter say that the rumours are more often than not wishful thinking on the part of Pakistani investment bankers hoping to sell assets to cash-rich buyers from China. There has been little indication on the part of either bank that it wants to expand its business in Pakistan and neither of them has even so much as put in a request for an initial due diligence in any of the many auctions of Pakistani banks that have taken place over the last decade. Given the increased economic cooperation between Pakistan and China, and given other Chinese financial institutions’ interest in Pakistan (think the Shanghai Stock Exchange buying the Karachi Stock Exchange), one might expect it to be a natural fit for Chinese banks to acquire Pakistani banks. Alas, like most things CPEC, we fear this is likely to be a mirage as well.

Işbank

The sentimental favourite among the foreign banks absolutely has to be Turkey’s Işbank. Işbank is the largest bank in Turkey and currently has absolutely no presence in Pakistan. But its history ties the bank back to this part of the world, and its existence is one of the reasons why the people of Turkey have a soft spot for the

SOME POTENTIAL ACQUIRERS SAY THAT THE GOVERNMENT MAY GIVE THEM HARD TIME WHEN THEY SEEK TO CLOSE THE TRANSACTION, AND MAY FIND EXCUSES TO DELAY OR EVEN BLOCK ANY TRANSACTION THAT WOULD HAVE A SIGNIFICANT IMPACT ON THE COUNTRY’S FOREIGN EXCHANGE RESERVES

people of Pakistan. In 1919, shortly after the end of the First World War, Maulana Mohammad Ali Jauhar and Maulana Shaukat Ali Jauhar started a movement to save the Ottoman caliphate in Turkey from being dismembered by the victorious European powers following the Treaty of Versailles and the Treaty of Sevres. Most Pakistani high school students know this story: Indian Muslim volunteers from what is now Pakistan, as well as other parts of India, went to fight in Turkey against invading European armies in a war that defined the very existence of modern Turkey. And several families donated heavily, with some women giving away the entirety of their jewelry, to help finance the Turkish war effort. The Turks have never forgotten that help and that is why Turkey has a historically strong diplomatic bond with Pakistan. The part of the story that is less well known is what happened with the money that was left over from the donations of South Asian Muslims after Turkey won the war. That money was used by the government of modern Turkey’s founder, Mustafa Kemal, to fund a national bank, which was named Işbank. The bank has been an integral part of Turkey’s economic growth story since the very beginning of its republic. Işbank has been looking for a way to enter the Pakistani market for some time now. In 2012, it considered a bid for HSBC Bank’s Pakistan operations. However, according to sources familiar with the bank’s thinking at the time, the bank withdrew its bid because it wanted to acquire a bigger bank in Pakistan to establish a real presence throughout the country, not just a small foothold. It would be history coming full circle if Işbank ended up acquiring one of these banks, and the money that left this part of the world almost a century ago finally came home. n

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OPINION

Waqar Masood Khan

What makes Pakistan plump for IMF time and time again? Are there policy prescriptions that would rid the country from the need to approach the Fund on a permanent basis?

‘THE LEADERSHIP HAS TO UNDERSTAND THAT THEY DON’T HAVE UNLIMITED RESOURCES TO SPEND, EVEN IF IN THE DOMESTIC CURRENCY, BECAUSE THAT ALSO INEVITABLY LEADS TO EXTERNAL ACCOUNT IMBALANCE’

How it started

oward the close of the military government (1977-1988), the end of Afghan War was nigh akistan has been approaching International Monitoring and the US and western financial support to Fund (IMF), intermittently, since 1988. The last proPakistan was waning. Indeed, a new world gramme was successfully completed during the period order was unfolding, characterized by globalization – 2013-16. However, within a short period of time we are with its primary manifestation in the form of free back to a situation where without seeking Fund’s support movement of private capital and end of official flows – the country may be facing a risk of default. free trade and loosening of government controls on inGiven this almost predictable cycle of seeking IMF support, it is frastructure investments, opening them for private innatural to inquire what ails the economy of Pakistan that routinely revestment. quires outside help on regular intervals. Why so many of the Fund proThe inexorable wave would affect Pakistan in grammes were aborted midway or, when significantly implemented, three important ways: (i) seeking capital from multilathave failed to achieve the desired results. Are there policy prescriptions eral institutions to sustain future growth; (ii) movewhich, if adopted, would rid the country from the need to approach the away from industrial development under the high-walls Fund on a permanent basis. of tariffs and rationalise the taxation system with eqIn this piece, we attempt to give an answer to this fundamental uity between local production and imports; and (iii) question. allow private investment in sectors that were hitherto the preserve of the public sector. These three aspects represent the main directions in which the economy of Pakistan has evolved in the last three decades. Clearly, our journey has been moving in fits and starts and it has yet to attain a steady state where growth would Waqar Masood Khan occur without disruption. We first give an informal account of each of the nodal The writer is former federal points when it was decided to go to a Fund programme. finance secretary

IMF Program: SAF 1988-91 he 1988 programme, known as Structural Adjustment Facility (SAF), was signed in October by the interim government of Ghulam Ishaq Khan, after the demise of General Ziaul Haq, and when the reserves were down to a precarious level of less than two weeks of imports. The

T 30

first Benazir Bhutto government, formed in December, readily owned the programme and worked diligently for its success. However, she was out of office within 20 months. The first Nawaz Sharif Government (November 1991- July ‘93) had its own ideas about liberalisation of economy but was not concerned too much about the programme type of discipline. Consequently, it abandoned the programme discipline, and the programme was terminated without completion. The liberal policies continued through the term of the government but they caused serious imbalances in fiscal and external accounts. Consequently, in early April 1993, the finance minister Mr Sartaj Aziz, invited a Fund mission for a new programme as reserves were hovering around a dangerous level. On April 18, the government was sacked by the president and an Interim one was formed under Mr Balakh Sher Mazari. Mr Farooq Leghari, as the finance minister, continued to hold the negotiations with the Fund. On May 27, the Nawaz government was restored by the Supreme Court, without stemming the political instability. It finally culminated in the resignation of both the president and the prime minister.

IMF Program: ESAF 1993-96 and SBA 1995 he resignations led to the formation of yet another interim government led by Mr Mueen Qureshi. This interim government finalised a highly ambitious three-year extended structural adjustment facility (ESAF) program with the Fund. Curiously, the second Benazir Government again owned the ESAF and worked for its success. However, in June 1995, it abandoned the programme as it found structural conditions (relating to expansion of GST) too difficult to follow. Soon, thereafter, the imbalances again started emerging and rose to a point that in November 1995, the government had to rush to the Fund for a stand-by programme (SBA). On its conclusion in October 1996, a Fund mission negotiated another ESAF. Mr Naveed Qamar, who was appointed finance minister replacing Mr Vaseem Jafry who was advisor to the

‘ACCELERATING GROWTH, PRICE STABILITY, RISING INVESTMENTS AND HISTORIC INCREASE IN RESERVES WERE THE CHARACTERISTICS OF THE ECONOMY. THINGS WERE MOVING IN THIS DIRECTION FOR A FEW YEARS AND PAKISTAN EVEN STARTED MAKING PREPAYMENT OF EXPENSIVE LOANS’ PM on Finance, announced the agreement with the head of the mission on October 28. However, the die was cast against the government, as it was sacked by the president on the night of 4-5 November 4-5 , 1996. Incidentally, Mr. Abbas Mirakhor, Pakistan’s executive director in the IMF was sitting with the prime minister when she was informed that her government had been sacked.

just like many western capitals, were not supportive of the military government and for nearly one year no meaningful assistance for stabilisation was provided by them. In November 2000, the IMF agreed to provide a 10-month SBA. This was essentially a programme where a significant amount of conditionality was met upfront and the remaining conditions were also fulfilled.

IMF Program: ESAF 1996-99

IMF Program: PRFG 2001-04

nlike in his first term, the second Nawaz government took a more serious view of the Fund programme and adopted the ESAF negotiated by the outgoing government. However, it was abandoned soon thereafter. In 1998 Pakistan conducted nuclear tests which led to economic sanctions. The economic situation then became very precarious. The government decided to follow a course of economic self-reliance and not seek any further assistance from the development partners. But then in August 1998, the US fired cruise missiles into Afghanistan passing through Pakistan. This led to the revival of Pak-US friendship and the process to restart the Fund programme was initiated. Senator Ishaq Dar was appointed finance minister, and he succeeded in getting the revival of the stalled ESAF. The Paris Club rescheduling was also allowed alongside the private creditors of London Club. However, before the work would start on implementation of the programme and funds would be disbursed, another change took place.

IMF Program: SBA 2000

here was yet another change in the government with the military takeover of the country in October 1999. Initially, the multilaterals,

fter 9/11, things eased up greatly as considerable foreign resources started flowing into the country. In November 2001, the Fund approved a three-year poverty reduction growth facility (PRGF), which put the country on the path of stability and growth. Support from the World Bank, Asian Development Bank and other multilaterals such as USAID and DFID also started flowing. The programme turned out to be the longest running, as Pakistan succeeded in completing 10 reviews under it. With rising foreign exchange reserves, the country was in great shape and the Fund was also keen to use its PRGF resources elsewhere. Accordingly, the last two reviews were cancelled with mutual understanding and disbursement were also not made. The PRGF was considered the success of sustainable economic management, freeing the country from the future needs for the IMF programmes. Accelerating growth, price stability, rising investments and historic increase in reserves were the characteristics of the economy. Things were moving in this direction for a few years and Pakistan even started making prepayment of expensive loans. But this process was interrupted when the then president deposed the chief

ECONOMY

justice and the process disturbed the serenity of the military rule. Around the same time, the global financial crisis also erupted leading to oil prices jumping up to $150/barrel. The political compulsions prevented the government from passing on the increased prices to consumers, consequently fiscal deficit went out of hand and pressures started building on foreign reserves. Elections were held in 2008 and a new government came to office, which removed the president, electing a new new one in his place.

IMF Program: 2008-2010 he ensuing political instability and continuing effects of financial crisis affected the economy comprehensively. Inflation touched 25%, exchange rate was depreciated by 25% and stock market crashed to a point that it was shut-down. Under the circumstances, the country was again pushed to seek a fresh IMF programme, and 23-month SBA was signed in November 2008. The programme started well for two reviews and then it went off track. Two things led to its eventual failure. First, in June 2010 the major reform of the programme, namely consolidation of sales tax into an integrated general sales tax in VAT mode, was due. However, an important coalition partner of the government, MQM, left the government, leaving it in minority. The government failed to elicit necessary parliamentary support for the passage of the GST law. Second, the country was hit by unprecedented floods that led to significant displacement of populations and imposed major relief and rehabilitation costs. After the failure of SBA 2008, there was no further program during the tenure of the PPP government. However, SBA 2008 was a very generous programme as it disbursed heavily at the time of signing. At the end of June 2011, the country had reserves of more than $18 billion, highest ever until then. Yet for the next two years, these were brought down to

‘IT IS ONLY A MATTER OF TIME BEFORE THE COUNTRY WOULD BE RUSHING TO THE FUND FOR A NEW PROGRAMME AS RESERVES ARE IN A FREE FALL AND EXCHANGE RATE HAS LOST ITS SYNTHETIC STABILITY’ barely $6 billion (SBP).

IMF Program: 2013-16 ost 2013 elections, for the new government in office by PML-N under Mr Nawaz Sharif, post 2013 elections, there was no escaping for a new IMF programme, which was quickly negotiated. It was a threeyear extended fund facility (EFF) with disbursements distributed equally across the period. The programme was successfully concluded with all 12 reviews completed. But unfortunately, the economic management again slipped into indiscipline and inaction. It is only a matter of time before the country would be rushing to the Fund for a new programme as reserves are in a free fall and exchange rate has lost its synthetic stability. The curious thing this time would be a relatively buoyant economy growing at a rising growth rate, price stability, high investments and strong consumers’ spending. Yet, policy failures are threatening to undermine this scenario.

Conclusion conomic instability that leads to seeking IMF programme emanates from fiscal deficit that leads to current account deficit that in turn poses the need for foreign resources beyond what is available through foreign investment and loans from other sources. Financing the current account deficit from reserves is a clear signal that economy is heading for a situation of default. The rising fiscal deficit is the symptom of both the failure of taxation system to generate the required funds as well as government’s inability to reign in its ex-

‘CLEARLY, OUR JOURNEY HAS BEEN MOVING IN FITS AND STARTS AND IT HAS YET TO ATTAIN A STEADY STATE WHERE GROWTH WOULD OCCUR WITHOUT DISRUPTION’ 32

penditures within the available resources. The difficulties in implementing structural benchmarks agreed in the programme were not fully assessed with the result that these were aborted after failure to implement them. This is responsible for not building an economy that has sufficient leverage to ward-off crisis. It is not infrequent that the Fund imposes unrealistic conditionality and shows inflexibility in modifying it based on mutual consultation. Often the mission would tend to discount the difficulties inherent in implementing structural policies. In this sense, the Fund has to share jointly the responsibility of programme’s failure. It has also been the case that the programmes were sought at a time when major events were affecting the country and economy. At least, one sees a pattern that the change of government is a point when a programme becomes inevitable. However, there have been occasions, especially in the 1990s when a programme spilled over into the tenure of another government, which did not own it. Disruptive world events, such as the global financial crisis, were also responsible for approaching the Fund. But such occasions are faced by other countries as well and as such contingencies of this type do not affect a country’s reputation. The ownership of the programme has been lacking as economic managers were not sufficiently concerned with the need for developing a sustainable economy. When facing dire needs, managers are ready to accept all conditions and even implement if disbursements are withheld but as soon as such exigencies are eased, they return to their familiar ways of managing the economy. The leadership has to understand that they don’t have unlimited resources to spend, even if in the domestic currency, because that also inevitably leads to external account imbalance. Unless this tendency is curbed, our drift towards the IMF yatra at regular intervals would continue like a business cycle. n

ECONOMY

PAKISTAN’S AVIATION SECTOR:

IN ‘RAPID DESCENT’

From commanding 60% share of international traffic in 2015, the indigenous airlines are down to 38% – a drop of more than one third

An international forecast projects Pakistan’s domestic air travel to grow at twice the pace of global traffic over the next 20 years, enough to lure nearly half a dozen new airlines to apply for an operator’s license. But a deeper look into the market reveals that local carriers are bleeding money hands over fist, resulting in the largest private sector airline to freeze new investment and hold expansion plan

By Farooq Baloch

n 2016, International Air Transport Association (IATA), a trade body that represents 280 airlines or 83% of the world’s air traffic, projected intra-Pakistan air traffic would grow at almost 10% per annum over the next 20 years. If this projection turns out to be accurate, the local traffic will outpace the global annual growth rate projection by more than 100% during the same period. Like every other positive news, the IATA’s forecast, which is subject to the country’s economic and demographic growth over the same period, made headlines, often linking it to the much-touted China Pakistan Economic Corridor that is likely to act as a catalyst for the growth of domestic air traffic. Since the report was out, Serene Air and Air Sial have already launched their operations in the country while four new airlines are said to be in the process of acquiring a Regular Public Transport (RPT) license from Civil Aviation Authority to jump on the aviation bandwagon. “This supports the prospects of growing revenues for airliners,” financial research and ratings firm JCR-VIS said in a 2016 report, citing IATA’s forecast. However, a deeper look into the market reveals the optimism about growth prospects of Pakistan’s aviation sector is in stark contrast with ground realities facing the indus-

AVIATION

try. Far from growing business, the local airlines are losing money on account of an intense price war within the industry, regressive taxation policy and predatory pricing by Gulf carriers, the likes of Emirates, Etihad, and Qatar who have been allowed to expand operations into the country under National Aviation Policy (NAP) 2015. “It looks good from an outsider’s perspective, but when you are in the business, you have to see if you can sustain,” said chairman Shaheen Airlines International (SAI), Kashif Sehbai talking to Profit. “We have the highest tax rate in the world, 44% is what we pay in different taxes,” said the SAI chairman of the current taxation structure, which is crippling the industry. “Nobody is making money on the domestic sectors, everyone is in loss – Shaheen, PIA, Air Blue, Serene, everyone,” said he, adding the environment is not conducive for growth anymore. The largest private airline in Pakistan, SAI is known for its bullish stance on the country’s aviation sector. The company had added in its fleet last year seven new A319s, a member of Airbus A320 family mainly used in domestic operations. But, it has put a freeze on new investment and held its expansion plan for now. This 180 degree shift in its otherwise aggressive expansion policy doesn’t come without a reason: the airline has lost close to $100 million in two years at $4 million per month and was the worst hit carrier in fiscal year (FY) 2017, witnessing a 30% drop in its domestic passenger traffic compared to the preceding year. SAI’s market share has now dropped to 23% from a high of 26% two years ago. However, it is not the only local carrier that is bleeding financially. “In the last two months, our operations cost has gone up by 15%,” says Raheel Ahmed, Deputy Managing Director,

‘IF I DON’T HAVE REGULATORY REQUIREMENTS TO UPHOLD, I WILL NOT RUN A SINGLE FLIGHT DOMESTICALLY. I WILL NOT ADD ONE NEW FLIGHT TO THE EXISTING OPERATIONS IN THE PREVAILING CONDITIONS’ Kashif Sehbai, Chairman, Shaheen Airlines International (SAI) Commercial, Air Blue. Their revenue, he says is the same as it was five years ago. Air Blue saw its passenger traffic drop 18% in FY17 over the previous year, according to CAA data. Are these new airlines jumping in a ditch, we ask Ahmed. “Absolutely! All of us are losing money.” Explaining, Ahmed said in the last four months dollar went up 10%, fuel prices also increased, which raised the cost because they have to pay dollars to leasing companies, fuel suppliers and aviation regulators (in case of international flights) under different charges. Jet fuel price has more than doubled to $80 per barrel, up from $40 a barrel on January 2016, but the industry was not able to pass on this significant increase to the consumers because of an intense competition in the domestic sector. The aviation sector is a volumes business and runs on low margins – about 5% internationally and less than 3% in Pakistan. But high taxes result in higher fares, making air travel more expensive, which in

‘THE AVIATION SECTOR IS A VOLUMES BUSINESS AND RUNS ON LOW MARGINS – ABOUT 5% INTERNATIONALLY AND LESS THAN 3% IN PAKISTAN. BUT HIGH TAXES RESULT IN HIGHER FARES, MAKING AIR TRAVEL MORE EXPENSIVE, WHICH IN TURN HAMPERS THE SECTOR’S GROWTH. THIS WAS ALSO EVIDENT IN THE LAST YEARS’ AVIATION DATA’ 36

turn hampers the sector’s growth. This was also evident in the last years’ aviation data. Pakistan’s domestic air traffic increased by 3% in fiscal year ending June 30, 2017, according to statistics published by CAA, a distant south from IATA’s projection, which estimated intra– Pakistan air traffic to grow at 9.9% per year over several years. “We are overtaxed,” says Nehal Akbar, Regional Director South, Serene Air adding high tax rate and a price war were hurting the industry. Though he acknowledged Serene was barely breaking even, he disagreed that the market wasn’t growing. “It’s not that we are not getting business; business is there and the industry will grow at 10 to 11% every year, but our margins have squeezed.” Because of a high-tax-low-volumes scenario, local carriers are unable to pass on any increase in operational costs to the consumers. And operating below full occupancy, local carriers have engaged in a price war to get any extra passenger they can. For example, almost all the domestic operators charge between Rs10,000 and Rs11,000 (this can go up as occupancy rate increases) on a one-way ticket from Karachi to Lahore, but Serene increased that price earlier this year after two of Air Blue’s planes were grounded for maintenance. The first recommendation in National Aviation Policy 2015 was to reduce taxes, but the government increased it threefold, Sehbai said. “Seems like intentional strangling of the industry.” In 2015, the government changed the

tax policy by moving away from percentage of ticket price to a flat rate. That is passengers have to pay a flat tax of Rs2,500 (Rs3,500 when other CAA charges are added) on one-way ticket compared to 16% of the ticket price under the previous policy. The change in policy discourages people from air travel and makes it difficult for local airlines to compete with international carriers accused of using predatory pricing or dumping seats in Pakistan on very low fares. Air Blue pulled out of Dubai a year-and-a-half ago because it could not compete with Emirates, which operates six daily flights on that route. Shaheen Air also suspended its Manchester flight, which was operating on full capacity, after Pakistan International Airlines (PIA) in 2016 reduced its fare beyond a sustainable level – the state-owned aviation giant is costing Rs40 billion to the exchequer in annual losses but continues to be bailed out by the government. The local carriers are now more focussed on domestic market since their international operations have been reduced significantly over the last couple of years. “In 2015, domestic airlines had 60% share of international traffic, now we have 38% of that market, a decline of 22%,” Sehbai, the SAI Chairman, says. “We call it rapid descent.” In National Aviation Policy of 2015, the incumbent opened Pakistan’s skies – thus the name Open Sky Policy – to international carriers in an attempt to liberalise

‘IN THE LAST TWO MONTHS, OUR OPERATIONS COST HAS GONE UP BY 15%. Raheel Ahmed, Deputy Managing Director, Commercial, Air Blue the country’s aviation sector. “The policy must ensure a competitive playing field for all national airlines, an open sky that increases travel and market access, and a fair and just system for all stakeholders,” reads the policy document adding, “The transition to more liberal Air Services Agreements shall accord greater business freedom, higher levels of customer satisfaction and greater micro and macro-economic growth of the aviation domain.” It further says, “Pakistan shall pursue bilateral open skies policy towards other countries based on the principle of reciprocity.” However, local carriers believe that the Open Sky Policy wasn’t implemented using a level-playing field. In theory open sky is not a bad policy, Sehbai says but the government should also take into account that Shaheen can’t compete with Emirates. “No airline in Pakistan can compete with the Gulf carriers because the latter are state-run and have better tax policies. This part was neglected in our aviation policy when it was implemented.”

‘SAI’S MARKET SHARE HAS NOW DROPPED TO 23% FROM A HIGH OF 26% TWO YEARS AGO. HOWEVER, IT IS NOT THE ONLY LOCAL CARRIER THAT IS BLEEDING FINANCIALLY’ Raheel Ahmed of Air Blue echoes similar views. Giving an example of Karachi-Dubai-Karachi route, Ahmed said their return fare is Rs18,000, which includes Rs11,000 tax. So it comes down to a margin of Rs7,000 for a two-way ticket or Rs3,500 on a one-way fare. “But they are backed by their governments, we can’t compete on this margin.” Giving another example, Ahmed said, “Pick any two-hour [flight] segment in India. The aircrafts are the same, the amount of fuel burned is the same, but their tax is Rs1,500 while ours is Rs3,500.” Ahmed’s point is further elaborated by Kiran Stacey in her recent opinion piece for Financial Times. “Indians have better access to air travel in part because they are richer, but also because, for them, air travel is much cheaper,” writes Stacey, who recently experienced domestic travel in both India and Pakistan. “A highly competitive domestic aviation market means that a passenger

AVIATION

looking to fly from Delhi to Mumbai on July 1 this year, for example, can pay as little as $35. In Pakistan, someone wanting to do the roughly equivalent trip from Islamabad to Karachi will probably have to fly with the government-controlled Pakistan International Airlines and pay at least $100 to do so.” Because of lower taxes, Indian airlines are better positioned to compete with Gulf carriers compared to their Pakistani counterparts. The Gulf carriers, like Emirates, Etihad, and Qatar Airways are accused of predatory pricing even in the United States where major airlines have taken up this matter with their regulator. According to the competition, Gulf carriers receive subsidy from their respective governments, which sees aviation sector as an opportunity for increasing tourism to the Gulf states – an allegation, the latter denies. After denting their share on the international front, the UAE-based airlines have started expanding their footprint in Pakistan’s domestic market by offering more direct flights to tier two cities, which is diverting business away from Pakistani carriers. The government put a noose around our neck by giving them [Gulf carriers] permission to eat our market, Sehbai says. “Our skies were sold [for a song], but what good did it bring for Pakistan?” Others are of the view that the policy was not implemented on the basis of the reciprocity as promised. For example, Dubai-based Gerry’s Dnata was given airport handling services, but that wasn’t reciprocated in Dubai by giving the same rights to, say its Pakistani counterpart Shaheen Air Services, says Akbar of Serene Air. “It is not a fair policy,” said he. “The government should provide some support, maybe lower taxes before expecting us to compete. If they lower taxes, air travel

‘IT’S NOT THAT WE ARE NOT GETTING BUSINESS; BUSINESS IS THERE AND THE INDUSTRY WILL GROW AT 10 TO 11% EVERY YEAR, BUT OUR MARGINS HAVE SQUEEZED’ Nehal Akbar, Regional Director South, Serene Air will increase and more people will benefit through job creation,” he added. The local industry is apprehensive because first Gulf carriers were allowed to go to Peshawar, Faisalabad, Sialkot and Multan and now they fear they will be allowed to operate direct flights to even Sukkur and Nawab Shah. All this money is going out of the country, Akbar said referring to a report that says foreign airlines have remitted $1.5 billion in two years (FY2016 and FY2017). But more competition is healthy for the market and brings more choices to passengers, and, needless to say, keeps prices under check. Are local carriers afraid of competition then? “I have got zero concern about competition,” said Sehbai in a matter of fact tone. “I want to turn Shaheen into Pakistan’s Emirates and revive the past glory of our aviation sector. But that’s not possible without a fair operating environment.” If the government wants to improve Pakistan’s aviation sector, it has to provide level-playing field, the SAI Chairman says. “For the industry to grow, we need tax reform. We need a national aviation vision. People who understand commercial aviation need to run CAA and make policy.”

‘BECAUSE OF A HIGH-TAX-LOW-VOLUMES SCENARIO, LOCAL CARRIERS ARE UNABLE TO PASS ON ANY INCREASE IN OPERATIONAL COSTS TO THE CONSUMERS. AND OPERATING BELOW FULL OCCUPANCY, LOCAL CARRIERS HAVE ENGAGED IN A PRICE WAR TO GET ANY EXTRA PASSENGER THEY CAN’ 38

Our queries to CAA were not responded till the filing of this report. However, CAA is said to be revising the aviation policy, which is likely to be out in the middle of 2018. “I am not hoping for much improvement,” says a visibly upset Sehbai – and he certainly has reasons for that. The fastest growing local carrier, which increased its revenues by more than 300% in the last five years, SAI made huge investment by adding seven new A319s to its fleet in 2017 as part of an aggressive country-wide expansion plan – only to hold back later because of what it considers a “hostile business environment”. “We are just abiding by minimum flight schedule requirements and not expanding, why do I invest, what am I getting in return. The yields have not gone up,” Sehbai says. “If I don’t have regulatory requirements to uphold, I will not run a single flight domestically. I will not add one new flight to the existing operations in the prevailing conditions.” The SAI Chairman says Pakistan’s local aviation sector will not grow under current policies. “Theoretically, there is room for more airlines in Pakistan. There are 200 million plus people, but only 70 planes are catering to them; the potential is very big.” Sehbai believes financially, it is not a viable to operate an airline under the current policy. And what about those new airlines, we ask him. “Mark my words. In this environment and with the current policies, they would fail.” n

AVIATION

PAKISTAN’S PROMISING AUTO MARKET LURES NISSAN BACK Ghandhara Nissan and Nissan Motor Company plan to invest $41 million to assemble Datsun models

By Bilal Hussain

s the CPEC gains momentum, enhancing the feelgood factor and stirring an economic boom across the country, one of the topnotch Japanese automakers Nissan has decided to make a comeback to Pakistan – with its Datsun models. To many a Pakistani, Nissan was synonymous with its now-defunct ‘Sunny’ since the late 1960s. But, having stopped its production for nearly a dozen years, it no longer features as a part of the company’s plans for the Pakistani market. Perhaps buoyed by the promise of Auto Development Policy 2016-21, Ghandhara Nissan partnering with Nissan Motor Company is planning to invest Rs4.5 billion, approximately $41 million, over the next four years, creating 1,800 new job. The first Pakistan-assembled Datsun cars would be plying the roads as early as next year.

Pakistani auto market dubbed lucrative

t only 17 per one thousand people (translation: only 17 people out of every 1,000 possess a car; Japan in contrast has a motorisation rate of 600), the low motorisation rate in a country of 200 million-plus people, along with the growing economy and the government’s incentivisation for the entry of new companies under greenfield and brownfield status, has combined to make the auto industry quite lucrative. Exclusively talking to Profit, the senior vice-president of Nissan Motor Corporation, Peyman Kargar, said, “Pakistan has great potential in the auto industry as the economy is growing while the motorisation rate is quite low.” Nissan is a global full-line vehicle manufacturer that showcases as many as 60 models under the Nissan, Infiniti and Datsun brands. In fiscal year 2016, the company sold 5.63 million vehicles globally, generating

revenue of Japanese yen 11.72 trillion. In fiscal 2017, the company embarked on its ‘Nissan M.O.V.E. to 2022’, a mid-term sixyear plan targeting 30% increase in annual revenue to 16.5 trillion yen by the end of fiscal 2022. Nissan has a global workforce of 247,500 and since 1999 a partnered with French manufacturer Renault. In 2016, Nissan acquired a 34% stake in Mitsubishi Motors. Renault-Nissan-Mitsubishi is at the moment, the world’s largest automotive partnership, with combined sales of more than 10.6 million vehicles in calendar year 2017. Meanwhile, established in 1981, Ghandhara Nissan is a part of the Bibojee Group of companies. The group is an industrial conglomerate with a diverse portfolio comprising Pakistan’s largest tyre manufacturing unit, automobile assembling plants, cotton spinning mills, a woolen mill and companies dealing in general insurance, and construction. Having two independent assembling facilities each for commercial and passenger vehicles, the company prides

itself to be Pakistan’s only automobile company with the capability of assembling a complete and diverse range of products. According to auto analyst Shakaib Khan, Nissan’s Sunny model was a great success and was well received but its distribution and its spare parts were difficult to find. Nissan previously operated in Pakistan from 2004 before wrapping it up in 2008. However, Peyman Kargar, who is also the regional chairman overseeing Nissan’s operations in Africa, the Middle East, and South Asia, said that Nissan would be coming this time with a proper plan – its after sales service geared towards long-term customer satisfaction. Answering a query on Pakistan has huge demand for low engine size cars, Kargar said that it might be true at the moment but Nissan expects Pakistan’s auto industry to evolve.

Small is beautiful

hough the company’s top officials have largely kept mum when questioned about which Datsun car/cars will be launched, Ghandhara Nissan CEO, Ahmed Kuli Khan Khattak hinted that they will be starting with small cars. If the market grapevine is to be believed, Nissan would be starting its operation with 1.2 liter Datsun Go, a popular car in neighboring India, which is considered to have similar market characteristics as in Pakistan. When buying a car, price and family size are major concerns for a customer in both India and Pakistan. Post the upgradation of Ghandhara Nissan’s production facility at the Port Qasim under this new partnership, the capacity would be raised to 32,000 units. Apart from Nissan, Kia and Hyundai have also announced plans to reenter the Pakistan market in association with Lucky Cement and Nishat Group respectively. According to Ahmed Kuli Khan Khattak, if required the capacity would be increased with another phase of investment of Rs1.5 to 2 billion. Khattak said this on the occasion of officially announcing Ghandhara Nissan and Nissan Motors Company partnership recently. Peyman Kargar believes that Pakistan has a good balance of imported used and locally manufactured cars at the moment because customers were given limited

‘PAKISTAN HAS GREAT POTENTIAL IN THE AUTO INDUSTRY AS THE ECONOMY IS GROWING WHILE THE MOTORISATION RATE IS QUITE LOW’ Peyman Kargar, senior vice-president, Nissan Motor Corporation choice by the existing auto makers. “Consumers must have choice, when the manufacturers are fewer. Moreover, each of them is manufacturing just one or two products [in a given engine size],” said Kargar. Meanwhile, Kargar added that the restriction on imported used cars of under three years is a good regulation to restrict flooding the market at the expense of local industry. “As far as local industry is not ready to provide cars to customers at par to the demand and to their satisfaction, authorised import of used cars up to a level is fine. It is a sensitive balance,” he said. The countries where import of used cars was not allowed, Kargar informed, the local industry was in a mess.

The vexing issue of delivery period

argar further said, Pakistan’s automotive industry is growing and there’s even greater potential in the industry. The market size is expected to grow by about 50 percent in the next four years – to 300,000 new units from the present 200,000. The Pakistan customers deserve the same cars as other parts of the world get, said Kargar, adding, “the customers would move to another brand as soon as they have a choice.” “Nissan would not be compromising on quality and if the current supplier of parts in Pakistan fails to deliver then they wouldn’t be buying parts from them anymore and would nurture new quality suppliers”, said Kargar. Kargar further said that Nissan would be making differentiation for itself in Paki-

stan market with quality product, competitive price and negligible delivery period. He added that by providing cars in time, it will prompt other industry players to do the same. But according to Ahmed Kuli Khan, who mentioned the local assemblers supporting their endeavor to launch Nissan, the high delivery period of the local assemblers was due to capacity constraints. “With new players coming, this [extended] delivery period would hopefully be reduced,” Khattak said. Local assemblers generally take from three to eight months to deliver cars to customers. Kargar said, Nissan’s wouldn’t be doing that and would be using the money of the customers only for what they have paid for and nothing else. Kargar, who hails from France, also said that Nissan believes in localisation and 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 said, 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. Moreover, he said that the volatile exchange rate in Pakistan makes localisation process more feasible and it would be necessary in order to become cost competitive. Ahmed Kuli Khan also talked of preferring CKDs (Completely Knocked Down) over CBUs (Completely Built Units), though initially production would be on both prongs. n

AUTO