Profit E-Magazine Issue 48 by Profit (by PT)

10 Weekly Roundup 14 How Pakistan dealt with the 2008 financial crisis 18 What is the PTI’s energy game plan?

26 26 Govt’s tax collection can go through the roof 30 On the budget, Asad Umar capitulates to the Q-Block babus

33 A Chinese Company Reshaping the World Leaves a Troubled Trail 38 Hi-tech lubricants aim to make a splash in the OMC market

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

CONTENTS

welcome

‘HE’S A PLEASURE TO WORK WITH’ In our edition dated June 10, 2018, Profit did an evaluation of the respective economic agendas of the Pakistan Tehrik-e-Insaf (PTI) and the Pakistan Muslim League Nawaz (PMLN) for which our reporters interviewed leading policy minds inside the PTI, including the two men who are now the finance ministers for the federal government and KhyberPakhtunkhwa, Asad Umar and Taimur Khan Jhagra respectively. While we found both men erudite and intelligent on most matters, it was exceedingly clear that, when it came to matters relating to fiscal policy, neither had absolutely any idea what they were about to step into. We are now two months past the election and several weeks into the government’s new term, and it is increasingly clear that the federal finance minister has yet to learn enough about the government’s fiscal affairs to be able to have a substantive impact on fiscal policy and has instead abdicated that role to the highly unimaginative and status quoupholding minds among the civil servants in the Finance Ministry. There is virtually nothing in the current budget that speaks to any policy priorities that the PTI outlined prior to the election and nothing that has not already been witnessed by any-

one who has observed Pakistan’s economic policymaking over the past two decades. The same tired old ideas about how to balance the budget – raise taxes on the already taxed, bring back tariffs to curb imports, etc. – are seen time and again in this mini-budget, which the finance minister announced earlier this month. We understand that the minister likely has not had the time to craft a full budget for this year, given the timing of the election, and that the next budget is the one he should really be judged by. That is entirely reasonable, even though his lack of preparation prior to the election is inexcusable. But given the fact that he took six weeks of near-silence and dedication and this is the best he could come up with is somewhat disconcerting. We hope the minister finds his sea legs soon enough. Otherwise, Naya Pakistan will look shockingly like Purana Pakistan .

Farooq Tirmizi Managing Editor

FROM THE MANAGING EDITOR

Federal Minister for Railways, Sheikh Rashid Ahmad

QUOTE

“Wi-Fi and passenger tracking systems are going to be introduced in trains for public convenience and safety”

“No discriminatory statutory regulatory order will now be issued to benefit specific businessman” National Accountability Bureau Chairman Justice (Retired) Javed Iqbal

46pc

year-on-year fall was registered in Pakistan’s oil sales, touching a seven-year low to 1.35 million tonnes in August. Similarly, during the first two months of this fiscal year, the sales also fell by 38pc to 2.988m tonnes. The volume declined due to a steep fall of 79pc in furnace oil (FO) sales to 191,000 tonnes mainly due to reduced usage in the power sector after the availability of RLNG. Excluding FO, volumes saw a decline of 27pc on account of lesser working days in the outgoing month amid Eid holidays as well as double-digit growth in petroleum prices. However, FO sales suffered a 70pc dip in 2MFY19 to 541,000 tonnes, reports a national daily. Meanwhile, high-speed diesel (HSD) sales hit a nearly four-year low at 493,000 tonnes, down 38pc, on increase in diesel prices by 46pc to Rs113 per litre. The 2MFY18 sales decreased by 30pc to 1.1m tonnes. Among companies, Attock Petroleum Ltd (APL) outperformed its peers by posting a meagre 5pc decline in its volume to 181,000 tonnes. Product-wise, petrol and diesel sales of APL went up by 5pc and 25pc respectively. FO sales, on the other hand, fell by 33pc. Pakistan State Oil remained the most affected during August as its FO sales plunged 97pc, taking the overall decline to 66pc.

13.73pc

decline in domestic cement despatches was recorded in August 2018, which in fact was the first such decline in consumption in the last three years. Domestic cement despatches in Pakistan was 2.895 million tons out of which 2.326 million tons was despatched by mills located in the northern parts of the country and 0.569 million tons by the south based mills. During the corresponding month of last year, the north zone despatched 2.730 million tons of cement and south based mills despatched 0.625 million tonnes. Cement exports, on the other hand, increased by 35.82 per cent as 0.557 million tons of cement was exported against 0.409 million tons exported in August 2017. Domestic cement despatches in the first two months of current fiscal declined by 5.31 per cent. In the north zone, cement despatches declined by 8.80 per cent while in the south zone it declined by 10.91 per cent. However, exports despatches in the north zone declined by 29.66 per cent while in the south zone it grew by 158.40 per cent.

Rs88.54b

revenue was generated by the tobacco industry during financial year 2017-18. On a report of the Public Accounts Committee (PAC) submitted on May 23, the National Accountability Bureau (NAB) has initiated an investigation against the cigarette manufacturing companies regarding rising tax benefits. The cigarettes manufacturing companies in Pakistan have started taking tax benefits after the introduction of a third tier in the tax structure in May 2017, and major industry players shifted their famous brands to the lowest tax slab and sold cigarettes with a 50 per cent reduction in the federal excise duty, which enhanced their sales, but government revenues plunged, according to the audit report. The report also alleges that two main multinational cigarette manufacturing companies obtained benefits of over Rs33 billion through the change in the tax slab structure. However, industry sources claimed that the tax revenue received by the government from cigarettes manufacturers enhanced to Rs88.54 billion in the fiscal year 2017-18 compared to Rs74.10 billion in the same period last year. The government revenue has enhanced during last one year instead of declining as claimed by the PAC.

“It is the mission of my life to provide jobs for the unemployed youth of the country” National Assembly Speaker Asad Qaiser

QUOTE

$37b

could be the trade volume between Pakistan and India, if both countries do away with artificial trade barriers, a World Bank report said. India’s informal trade with Pakistan makes 91 percent of for-mal trade, the World Bank said in its report ‘A Glass Half Full: The Promise of Regional Trade in South Asia’. Many of these items are exported from India to Pakistan through third countries, usually the United Arab Emirates. Port restrictions offset the advantage of geographical proximity, which should lead to low transit costs and times between the states or provinces in northern India and Pakistan and thus boost trade. Pakistan allows only 138 items to be imported from India over the Attari–Wagah land route.

Rs50b

of investment has been attracted by Sindh’s Special Economic Zones (SEZs) with roughly Rs34 billion of it solely in the 930-acre Bin Qasim Industrial Park (BQIP). And the remainder of the Rs16 billion of the investment went to SEZs in Khairpur Special Economic Zone (KSEC) and Korangi Creek Industrial Park (KCIP). Also, Rs15 billion of investment in BQIP has been made by Kia-Lucky Motors which already has commenced operations with completely built units (CBU) and will start manufacturing Kia cars soon. Sindh Board of Investment Director Projects Abdul Azeem Uqaili said in the SEZs, entities received three things which include a ten-year income tax holiday, second, they don’t require to pay duty on plant and machinery imported to establish a manufacturing unit. And lastly, infrastructure and utilities are at their doorsteps, said Mr Uqaili. Furthermore, two more SEZs have been recommended to be established, one is the Dhabeji SEZ which comes under China-Pakistan Economic Corridor (CPEC) and will be setup over 1,500 acres land and the other is a 300-acre Marble City.

$1b

will be invested by Facebook in its first Asian data center in Singapore, slated to open in 2022. Facebook’s facility will be located in the west of the island, near where Google is expanding its Singapore data centres in an $850 million investment as mobile growth, e-commerce and cloud computing demand rise across the region. “This will be our first data centre in Asia,” Facebook’s vice president of infrastructure data centres, Thomas Furlong said at a press conference with local authorities in Singapore. He said the facility was expected to open in 2022 depending on the speed of construction. Facebook said in a statement the 170,000 square meter facility represented an investment of more than S$1.4 billion ($1 billion) and would support hundreds of jobs.

454pc

surge has been recorded in circular debt during the last ten years from Rs105 billion to Rs582 billion in 2018 which has been parked in a holding company. Around Rs480 billion of circular debt was cleared by the previous PML-N government and during its tenure commercial borrowings from banks rose Rs477 billion. This was revealed by officials who shared circular debt by end of July 2018 touched Rs1.18 trillion, which includes Rs596 billion of debt and Rs582 billion in Power Holding Private Limited (PHPL). A decade ago, the amount of circular debt parked in PHPL amounted to Rs105 billion. Also, the previous PML-N government levied surcharges totalling Rs2.3 per unit to clear the debt of power distribution companies (Discos). And power generation companies owe Rs8 billion to gas suppliers and Rs107 billion to oil suppliers. Also, the Central Power Purchasing Agency-Guarantee (CPPA-G) owes Rs375 billion to independent power producers (IPPs) and Rs20 billion to nuclear power plants.

Rs5.15t

worth of market treasury bills (MTBs) and Pakistan Investment Bonds (PIBs) will be sold by the State Bank of Pakistan (SBP) between Sep-Nov 2018 to assist the government in financing the budget deficit. According to the central bank, it will auction Rs4.850 trillion of three, six and twelve months debt via T-bills and intends to float Rs150 billion of three, five, ten and twenty-year bonds as per tenor-wise targets of PIBs. Also, the central bank published the PIB floating rate auction calendar and revealed it would sell Rs150 billion of 10-year floating rate PIB on October 17th. And the latest targets show the government would continue to depend on bank borrowing to manage its spending requirement. The budget deficit clocked at 6.6 percent of gross domestic product in FY18 against 5.8 percent in FY17, touching a five-year high.

BRIEFING

“CPEC has eased Pakistan’s energy bottleneck, improved road connectivity and enhanced foreign investment” Chinese Ambassador to Pakistan Yao Jing

QUOTE

22.54pc

surge in exports was recorded during the August of current financial year 2018-19, to touch $3.663 billion up by 5.05 percent compared to the same period last year, while it enhanced by 22.54 percent compared to July 2018 while 8.8 percent compared to August 2017, the data of Pakistan Bureau of Statistic (PBS). According to the data, the trade deficit of the country slightly decreased by 1.25 percent to $6.167 billion in July-August 2018 compared to $6.245 billion in July-August 2016-17. However, it decreased by 6.80 percent compared to July 2018 and 2.87 percent compared to August 2017.

$489m

of loans and grants were received by Pakistan during the first month (July) of current financial year 2018-19. Pakistan received $289 in financial assistance from China out of a total of $489 million in loans and grants obtained in July this year from several bilateral and multilateral creditors, according to official data. China remained the largest lender to Pakistan and during July it obtained $70 billion of financing from foreign commercial banks, Asian Development Bank $27.4 million, International Development Association $23.14 million, Saudi Arabia $16.5 million. And Germany lent $15.8 million, followed by the USA $14.2 million, France $10.9 million, UK $9.19 million, Kuwait $3.07 million. Furthermore, the International Fund for Agriculture Development (IFAD) lent $1.88 million, OPEC $0.41 million, as per the data released. $29.14 million were obtained as grants and $439 million were loans during July from the total monthly disbursements, the data revealed. The government had projected overall foreign assistance for FY19 to be around $9.6 billion compared to $11.486 billion in FY18.

Rs270m

will be spent for upgradation of testing labs of the Hydrocarbon Development Institute of Pakistan (HDIP) in different cities. “An amount of Rs.220 million has been allocated for strengthening and up-gradation of Karachi Laboratories Complex (KLC) under the Public Sector Development Program 2018-19, while Rs.50 million to upgrade HDIP’s POL testing facilities at Islamabad, Lahore, Multan, Peshawar, Quetta and ISO Certification of Petroleum Testing Laboratory at Islamabad,” official sources said. The sources said the KLC would be transformed into a state-of-theart base by equipping it with a complete range of POL products’ testing facilities at par with the international standard for maintaining the supply of quality fuel.

$23m

investment will be made by Engro Polymer and Chemicals to enter hydrogen peroxide business. In a notification sent to the Pakistan Stock Exchange (PSX), Engro Polymer and Chemicals said its board of directors announced to enter Hydrogen Peroxide business through a greenfield manufacturing facility with a CAPEX of $23 million. The project will be funded through internal cash generation.” Furthermore, it said “Engro Polymer & Chemicals Limited derives hydrogen as part of its caustic manufacturing process. Currently, hydrogen is largely being used as fuel which is not the best value creation for hydrogen. Also, the company said the board of directors also directed the management to evaluate further capacity expansion in this space and/or other avenues of diversification. At end of last month, Engro Polymer had announced it signed a contract with Tianchen Corp China (TCC) for an integrated manufacturing facility with an annual capacity of 100,000 MT per annum for capacity expansion of PVC plant.

20pc

increase in gas prices has been approved by the government Petroleum Minister Chaudhry Mo-hammad Sarwar said, in effect slashing consumer subsidies that were a fiscal drag on the govern-ment’s budget. Sarwar said the move would help ease part of the 152 billion-rupee ($1.24 billion) defi-cit for state-owned Sui Northern and Sui Southern, the two main suppliers of natural gas that are bleeding cash and subsidizing consumers and industries. The decision was taken by the Economic Co-ordination Committee chaired by new Prime Minister Imran Khan, who has vowed radical economic reforms. The new measures would inject “58 billion rupees to stabilize the two companies”, Sarwar added.

“We are working closely with the private sector which is advising us on making improvement in the business environment” Sindh Chief Minister Syed Murad Ali Shah

QUOTE

Rs78.736b

was earned in after-tax profit by the Oil and Gas Development Company Limited (OGDCL) during the financial year 2017-18 ended on June 30th, 2018. The BoD said that the Company’s net sales revenue was registered as Rs205.335 billion and per-share earnings were Rs18.31 during the financial year 2017-18. During the period under review, OGDCL paid Rs33.890 billion as taxes. On the exploration and development side company recorded significant enhancement in seismic efforts and drilling activities, said a press release.

Rs33.7b

has been released for under its Public Sector Development Programme (PSDP) 2018-19 for various ongoing and new schemes against the total allocations of Rs 1,030 billion. The released funds include Rs 21.8 billion for federal ministries and Rs 11.8 billion for special areas besides other projects, according to the latest data released by the Ministry of Planning, Development and Reforms. Out of these allocations, the government has released Rs 4.73 billion for Pakistan Atomic Energy Commission for which Rs 30.4 billion has been allocated for the year 2018-19, whereas for Maritime Affairs Division, an amount of Rs 414 million has been released out of total allocation of Rs 10.1 billion. Similarly, Rs 201 million has been released for Cabinet Division for which the government has earmarked Rs 1.1 billion, whereas, for Aviation division, an amount of Rs 210 million was released under PSDP 2018-19. Higher Education Commission (HEC) received Rs 4.632 billion out of total allocation of Rs 46.67 billion while Interior Division obtained Rs 2.58 billion out of total allocation of Rs 24.2 billion for the year 2018-19.

150,000

tons decline in sales of high-speed diesel (HSD) during June, July and August 2018. HSD is mostly consumed in tractors, trucks, buses, generators, thermal power stations etc of the country. However, complaints pertaining to the sale of adulterated diesel are on the rise these days from major parts of the country. Transporters are worried as engines of their vehicles are being damaged due to the open sale of sub-standard diesel while the sale of poor quality diesel is causing heavy losses to businesses and the national exchequer as well. Sources in the Oil Companies Advisory Council (OCAC) have disclosed that the sale of diesel (HSD) had registered a huge decrease in the last three months (June, July and August) as a reduction in the sale of HSD was around 150,000 tonnes per month which caused heavy losses to the national exchequer.

6pc

decline was recorded in sales of locally manufactured vehicles sales (including LCVs, Vans, and Jeep) during the first two months (July-August) of current financial year 2018-19. However, the car sales were down by 2.1 percent in July-August to 34,264 units compared to 35,001 units in the same period last year. The car sales of Pak Suzuki Motor Company (PSMC) have declined by 12 percent in the last two months as the company sold only 19,578 units in last two months compared to 22,336 units sold in the same period last year. The sales of Cultus, Mehran, Bolan, and Ravi witness a decline, while Suzuki Swift and WagonR went up during the period. The market experts said that banks are financing for the new cars for drivers of Uber and Careem, therefore, its sales have stabilized for the last few months.

25pc

cut in development expenditure is being contemplated by the newly installed Pakistan Tehreek-e-Insaf (PTI) government.It is aiming to slash federal development programme to around Rs775 billion from Rs1,030 billion set by the previous government in its budget for the financial year 2018-19. This would provide cover to China-Pakistan Economic Corridor and other strategic development projects. And this move would allow the government to save around 25 percent or Rs250-Rs255 billion, a senior official said. During the first two months of current FY19, the Planning Commission has disbursed Rs35 billion for development projects, around 75 percent lower than Rs175 billion in the corresponding period of 2017.

BRIEFING

The countryâ&#x20AC;&#x2122;s crisis was not directly tied to the bankruptcy of Lehman Brothers in the United States, but was indirectly hit by the global fallout of the US crash 14

By Farooq Tirmizi

t was March 16, 2008 and I walked into my office at 9 am just like I had done for the past two months. I was an entry-level research analyst at a small brokerage firm in New York, my first job. My office was in Midtown Manhattan, specifically at 380 Madison Avenue, just two blocks up from the Roosevelt Hotel, owned by Pakistan International Airlines. Across the street from my office was 383 Madison Avenue, a large octagonal building of stone, glass, and steel that was the global headquarters of Bear Stearns. This day, however, was different. For starters, within a matter of min-

utes, all of my colleagues seemed to be congregated around the windows overlooking Madison Avenue. And so I joined them. What I saw was a sight I had never seen before and will never forget: thousands upon thousands of employees of Bear Stearns, the venerated American investment bank and the fifth largest in the world, were pouring out of the building and onto the street, many with boxes that contained what appeared to be the entire contents of their desks. It was starting. The global financial crisis which would go on to transform the world as we knew it was unfolding right before my eyes, though at the time I had no idea of the significance of what I was witnessing. At lunch that day, the high-end restaurants in the neighbourhood that normally catered to the high-flying investment bankers and traders were completely empty. The McDonald’s and

‘WHEN THE NEW GOVERNMENT TOOK OFFICE, IT BEGAN CORRECTING MANY OF THE CATASTROPHIC ERRORS THAT HAD BEEN COMMITTED BY THE MUSHARRAF ADMINISTRATION. HOWEVER, THE SITUATION COULD NOT BE FIXED WITHOUT SIGNIFICANT PAIN INFLICTED NOT JUST UPON THE COUNTRY’S FINANCIAL SYSTEM BUT ALSO THE WIDER ECONOMY’

the low-priced delis, however, were packed with people who just a few days ago would have scoffed at the idea of having to eat there. At the close of that day, we found out that Bear Stearns would be sold to JPMorgan Chase, for just $2 a share. It was a humiliating end to an investment bank that had once proudly proclaimed that it was the only Wall Street firm to have remained profitable throughout the Great Depression of the 1930s. Six months later, the same drama unfolded, this time at Lehman Brothers. This time, of course, the reverberations would be a lot louder. Lehman was much bigger than Bear Stearns, and unlike Bear, Lehman was not bought out but filed for bankruptcy. The fallout was much worse. In November 2008, I moved back to Pakistan (no, I wasn’t fired or laid off) and began working at the asset management subsidiary of Faysal Bank. There, I found that a financial crisis similar to the one that I had experienced in New York was also playing out in Karachi. However, it had very different origins, and would end very differently as well. Unlike the US financial crisis of 2008, which started in the private sector, the Pakistani financial crisis that year started in the public sector, and was motivated largely by the desire of the Musharraf Administration and the then-ruling Pakistan Muslim League Quaid (PML-Q) to win the February 2008 elections. In its bid to win that election, the Musharraf Administration decided to try to hold petrol prices in Pakistan

CRASH OF 2008

artificially low at a time when oil and commodity prices were rising sharply throughout the world. In late 2007 and early 2008, the government ended up spending the country’s foreign exchange reserves in order to do so, leaving the country with both a massive fiscal deficit as well as a current account deficit. By March 2008, when the new government – led by the Pakistan Peoples Party (PPP) – came into office, the fiscal deficit was well on its way to above 7.5% of the total size of the economy and the current account deficit was even higher at 8.5% of gross domestic product (GDP). The impact on the country’s foreign exchange reserves was particularly dire: before the crisis started in late 2007, Pakistan had $16 billion in foreign exchange reserves. A year later, that number was down to less than $5 billion. When the new government took office, it began correcting many of the catastrophic errors that had been committed by the Musharraf Administration. However, the situation could not be fixed without significant pain inflicted not just upon the country’s financial system but also the wider economy. For starters, the rupee had to be allowed to fall from the artificially strong levels it had been kept at by the previous government. That had two effects: it caused a sharp rise in inflation – and therefore interest rates – and it caused many wealthier individuals to begin pulling out money from their rupee accounts, and converting them into dollars, further exacerbating the slide of the rupee. This hit the banks on two fronts. At one level, the rise in inflation and interest rates meant that their loans (the asset side of their balance sheets) started to go bad as more and more borrowers struggled to make the now much higher interest payments on their

‘I THEN NEGOTIATED A VERY GOOD DEAL WITH THE IMF... THEY LENT US FIVE TIMES OUR QUOTA, WHICH AT THAT TIME CAME TO OVER $7.6 BILLION. I ALSO INSISTED WITH THEM THAT THEY GIVE US MOST OF THE MONEY UP FRONT, WHICH THEY AGREED TO DO. THEY GAVE US AROUND 50% OF THE MONEY UP FRONT. THE MINUTE WE GOT $3.5 IN THE TREASURY, SUDDENLY THE PANIC STOPPED’ Shaukat Tarin, Advisor to PM/Finance Minister, Under the PPP dispensation in 2008-10

loans. On the liability side of their balance sheet, the movement of deposits out of rupee accounts meant that there was a crunch of liquidity right when they needed the money the most. And then were the rumours. There were several rumours doing the rounds that – just like in 1998 after the nuclear tests – the government might freeze assets and might even go further and actually seize the contents of bank lockers and vaults. It also did not help that in the middle of all of this came Eid ul Fitr

UNLIKE THE US FINANCIAL CRISIS OF 2008, WHICH STARTED IN THE PRIVATE SECTOR, THE PAKISTANI FINANCIAL CRISIS THAT YEAR STARTED IN THE PUBLIC SECTOR, AND WAS MOTIVATED LARGELY BY THE DESIRE OF THE MUSHARRAF ADMINISTRATION AND THE THEN-RULING PAKISTAN MUSLIM LEAGUE QUAID (PML-Q) TO WIN THE FEBRUARY 2008 ELECTIONS’ 16

(which was October 3 that year), which is when banks traditionally have a hard time because so many people withdraw large sums of money from their accounts to spend on their family and for Eidi. The situation got so bad that the interbank lending market – the market in which all commercial banks in the country lend money to each other to make up for short-term asset-liability mismatches, and one that is the lifeblood of any country’s financial system – seized up. According to sources who worked in the treasury departments of those banks at the time, and wish to remain anonymous, the situation did not just affect the small banks. At one point, around Eid ul Fitr, the market was so frozen that treasurers from Habib Bank and United Bank were unwilling to lend to each other. It was in the midst of all of this – on October 8 2008 – that Shaukat Tarin, a legendary figure in Pakistan’s banking community, was appointed federal finance minister and told to stave off one of the worst financial crises the country had seen up until that point. “I took over in October in the middle of a severe liquidity crisis and I thought that Pakistan would not have enough money to pay off its bonds that were maturing in December 2008 and January 2009,” said Tarin, in an interview with Profit. “We had less than one month’s reserves. The current account deficit was $2.5 billion a month! I knew that in about two months, we could go bankrupt.” The global financial crisis was not directly affecting Pakistan, but it was making solutions much harder to find. “Because Pakistan’s economy –

particularly the private sector and the banks – are not that well-connected with the global economy, the Lehman crisis did not hit us that much,” said Tarin. “But because the global bond markets were frozen, and because our export markets were very weak, we had to rely on extraordinary measures.” The first thing Tarin did was try to stem the domestic panic. In a meeting he chaired at the finance ministry, he declared “over my dead body will anyone consider asset seizures” in Pakistani banks. He then went on television and addressed head on the rumours that were causing a run on the country’s banking system. And then, over the objections of President Asif Ali Zardari and Prime Minister Yousaf Raza Gilani, Tarin headed to Washington to negotiate with the International Monetary Fund (IMF) for a bailout that might help stop the bleeding. “I then negotiated a very good deal with the IMF,” said Tarin. “They lent us five times our quota, which at that time came to over $7.6 billion. I also insisted with them that they give us most of the money up front, which they agreed to do. They gave us around 50% of the money up front. The minute we got $3.5 in the treasury, suddenly the panic stopped.” Of course, this was not the end of the crisis, though the extreme bleeding had been stopped. The next few months were dedicated towards stabilising the banks and the country’s macroeconomic health. On the banking front, part of the problem had been that the banks had been using depositor money to invest in the stock market, which had crashed dramatically over the course of 2008. The benchmark KSE 100 index had peaked on April 18, 2008 at a level 15,676 and then crashed until it hit 4,815 on January 26, 2009, a peak-to-trough decline of 69.3%. On that front, State Bank Governor Salim Raza and his team came

UBL Head Office up with a plan: instead of forcing the banks to recognize their losses all at once, they would be asked to quantify the full scope of the loss and then recognize one quarter of it for every quarter over the course of the calendar year 2009. Not only did that divide up the losses, but it also allowed the banks more time to shore up their reserves, and it allowed the markets to recover, resulting in lower losses than were anticipated in January 2009. With respect to the macroeconomic indicators, it was abundantly clear that Pakistan’s current account deficit needed fixing. “Because of the global financial crisis, we knew we could not rely on exports picking up and we knew we could not count on foreign investment,” said Tarin. “That left only one source of dollars flowing into Pakistan: remittances.” “At the time, most of our remittances came through the hundi/hawala channels, and only about $5 billion came in through formal channels. We created a task force to study that and bring most of it into the formal banking channels. We created the Pakistan Remittance Initiative, which was tremendously successful and this past year, we crossed $20 billion in formal remittances.” The PRI has widely been seen as

‘THE PRI HAS WIDELY BEEN SEEN AS A REMARKABLY SUCCESSFUL INITIATIVE AND PAKISTAN CONSISTENTLY RANKS AMONG THE WORLD BANK’S STUDIES AS THE CHEAPEST COUNTRY TO SEND REMITTANCES TO IN TERMS OF TRANSACTION COSTS’

a remarkably successful initiative and Pakistan consistently ranks among the World Bank’s studies as the cheapest country to send remittances to in terms of transaction costs.

Have we learnt anything?

he banking system in Pakistan today is considerably safer than it was in the swashbuckling days of the Musharraf Administration. Banks have far more restrictions on their ability to invest in stocks, and they are also much more limited in their ability to make riskier consumer loans, which means that there are few borrowers who are likely to be hurt by reckless lending practices on the part of the banks. But in Pakistan, the problem never really started with the banks, and so solving the banking problem will not really stabilize the Pakistani economy. The problem was, and remains, the federal government, and on that front, just about nothing has changed, right down to the insane obsession with the exchange rate, the desire to artificially and recklessly shield urban upper middle class consumers from higher energy prices, and a willingness to let the rich get away with tax evasion. While the government led by the Pakistan Tehrik-e-Insaf (PTI) is attempting to deal with at least some of the wreckage left by its predecessors, it is far from clear if they have the ability to steer the government of Pakistan away from its current status as the single biggest threat to the country’s macroeconomic stability. In Pakistan, it was never the banks that were too big to fail, it was the government. And that remains truer today than ever before.

CRASH OF 2008

By Farooq Tirmizi Do you remember the few days in January 2015, when all of Pakistan seemed to run out of petrol and the entire country seemed to shut down for a while? Do you remember feeling frustrated at how ridiculous a situation that was? In a few years, that will happen with natural gas. Not low pressure, or the few hours that it doesn’t come on in the winters. But just flat out: no natural gas for several days at a stretch in the entire country. Why will that happen? Because this government – like its two predecessors – does not have a clear plan to solve the core problems with Pakistan’s energy crisis. Which is a crying shame, because they, more than any previous government, should be in a good position to solve the problem. In 2013, when Nawaz Sharif became prime minister for the third time, senior executives at energy companies throughout Pakistan got calls from the prime minister-elect to come meet him and discuss how to solve the nation’s crippling energy crisis. No such calls have gone out, certainly not to the same scale, when the Imran Khan Administration came into office. This is not, of course, because the ruling Pakistan Tehreek-e-Insaf (PTI) is any less serious about solving Pakistan’s chronic energy shortage, but because the incoming finance minister, Asad Umar, spent the bulk of his career working as an executive at a hydrocarbon company, and is thus intimately familiar with the country’s energy supply chain. The PTI appears to have largely ceded ground in policymaking on budgetary and fiscal matters to the civil service (more on that in another article in this issue), which is disappointing enough as it is. But it was hoped that having Asad Umar in charge of economic policy might have resulted in bolder initiatives in the energy sector. Unfortunately, at least for now, that does not appear to be on the cards. In this, as in many other areas of policy, it appears that the PTI is once again stopping just short of what is actually needed in terms of policy decisions, which in this case would have involved aggressive price hikes early in their tenure. In order to understand why this would be the case, however, it is important to lay out the context for how Pakistan’s energy sector works, and why this PTI may be inadvertently pushing Pakistan into exacerbating what is already a growing problem: intercorporate circular debt throughout the energy supply chain caused by unpaid bills and stolen electricity and gas.

The interconnected energy grid

nergy, more than most industries, is a highly interconnected sector, and in Pakistan the overwhelming majority of it is owned and operated by the government of Pakistan. As Khurram Hussain has noted in his writings in Dawn, Pakistan has been particularly fortunate in having built dams for hydroelectric power, and for having

COVERY STORY

discovered large reserves of natural gas relatively early in its existence. That investment in hydroelectric power, and combined with the abundance of natural gas, has meant that, for a large part of its energy needs, Pakistan has been able to rely on domestic, state-owned resources that have been relatively affordable. For most of its existence, power outages in Pakistan occurred not because the government needed to ration power, but because of faults in the grid. As things stand today, Pakistan’s fuel mix for electricity generation still largely consists of hydroelectric power and natural gas, with the two accounting for well over half of the country’s primary energy supply. But in terms of importance as a fuel, natural gas is by far the most important. Combining domestic natural gas production with imports of liquefied natural gas (LNG), the fuel accounted for 44.4% of Pakistan’s primary energy supplies in 2016, according to data from the National Electric Power Regulatory Authority (NEPRA). Primary energy supply refers to the fuel source for the country’s entire energy needs, including electricity generation, fuel for transportation, and any other major use of energy. No other fuel source comes even close to being as important to Pakistan, and no other fuel source – barring hydroelectricity – is as dominated by domestic production as natural gas. The nation’s national gas grid, thus, is critical to its energy security. The system consists of 75 natural gas fields spread across all four provinces, which in 2017 generated a total of 3,455 million cubic feet of natural gas per day (mmcfd), according to data from the Oil and Gas Regulatory Authority (OGRA). Another 492 mmcfd was imported in the form of LNG at two terminals located in Karachi and Port Qasim.

‘THIS NUMBER ACTUALLY REPRESENTS A STARK DECLINE FROM THE ROUGHLY 4,200 MMCFD THAT PAKISTAN PRODUCED IN 2014, THE PEAK YEAR OF DOMESTIC NATURAL GAS PRODUCTION. SINCE THEN, MOST OF PAKISTAN’S MAJOR NATURAL GAS FIELDS HAVE BEGUN TO EXPERIENCE A SHARP DECLINE IN CAPACITY, WHICH IN TURN HAS HAD A DRAMATIC IMPACT ON TOTAL DOMESTIC PRODUCTION’ This number actually represents a stark decline from the roughly 4,200 mmcfd that Pakistan produced in 2014, the peak year of domestic natural gas production. Since then, most of Pakistan’s major natural gas fields have begun to experience a sharp decline in capacity, which in turn has had a dramatic impact on total domestic production. As domestic production at existing fields declines, new discoveries are not keeping pace, and even the ones that are discovered to be viable have significantly higher costs of production than the older, larger fields. This is a somewhat natural process: the larger, easier fields get discovered first and have the lowest costs of production. The later fields are smaller, and therefore harder to find, and as a result also require more investment to extract less and less gas.

The budding gas-sector circular debt

his problem first began to arise in the Zardari Administration, when the petroleum engineers at the nation’s state-owned oil and gas companies began to raise the alarm that they were about to hit peak production capacity, following which there would be a precipitous decline. The problem, unfortunately for them, was that they stated that the decline

‘COMBINING DOMESTIC NATURAL GAS PRODUCTION WITH IMPORTS OF LIQUEFIED NATURAL GAS (LNG), THE FUEL ACCOUNTED FOR 44.4% OF PAKISTAN’S PRIMARY ENERGY SUPPLIES IN 2016, ACCORDING TO DATA FROM THE NATIONAL ELECTRIC POWER REGULATORY AUTHORITY (NEPRA)’ 20

would begin in 2014, a full year after the Zardari Administration expected their term to end, meaning that they never bothered to deal with it. The Nawaz Administration felt enough of a compulsion to allow for the construction of new LNG import terminals, but never bothered to fix the core problem of diminishing supplies and rising costs. Indeed both of the previous two administrations continued to allow an increase in the total number of domestic consumer gas connections. Over 300,000 new gas connections were installed over the past five years, according to data from OGRA. Under the government’s contracts with the oil and gas exploration and production companies, the government is bound to pay for the full cost of exploration and production, plus allowing for a profit margin for the companies themselves. However, the government is not legally bound to pass on the full cost of that oil and gas production to consumers, even though it controls the vast majority of the distribution network, and should in theory be financially incentivised to do so. In a bid to keep natural gas prices artificially low, the government continued to force the two major gas distribution companies – Sui Northern Gas Pipelines (SNGP) and Sui Southern Gas Company (SSGC) – to continue to supply gas to all of their consumers (domestic, industrial, power generation, fertilizer manufacturers, and commercial) at more or less the same rates, even though the cost at which they were buying natural gas from the exploration and production companies had skyrocketed. By the time Prime Minister Imran Khan took office, the differential had soared: according to senior officials at the SNGP who briefed the prime minister, the company has a cost basis of

natural gas of Rs629 per million British thermal units (mmBtu), but it is selling it to consumers at an average of Rs399 per mmBtu, which amounts to a negative gross margin of -36.6% or Rs230 per unit. This difference had resulted in the build up of a more quiet version of intercorporate circular debt in the gas sector, similar to the more famous problem in the electricity sector. Left unchecked, this problem could cripple the nation’s energy supplies and would ultimately be resolved only through a massive fiscal shock when the government would inevitably have to use taxpayer money to bail out these companies. What happens next should be obvious: the government should allow the gas companies to raise prices to a level that would pay for their cost of natural gas, plus the cost of maintaining the pipelines and distribution infrastructure. Alas, this is where we run into

the biggest policy choice that every government in Pakistan has refused to make since at least the Musharraf era, and quite possibly, since long before then.

The cost of theft problem

he central problem is what to do with the cost of theft. By now, any rational person needs to accept the following statement as fact: while the vast majority of Pakistanis may not be thieves, an alarmingly large number of our fellow citizens are thieves who have no problem stealing both electricity and natural gas from the national grid, and we as a nation appear to have a very high tolerance for such people. In the realm of natural gas, the terminology for stolen gas is “unaccounted for gas” (UFG). Technically, UFG includes more items than theft, including natural shrinkage of gas as

‘INDEED BOTH OF THE PREVIOUS TWO ADMINISTRATIONS CONTINUED TO ALLOW AN INCREASE IN THE TOTAL NUMBER OF DOMESTIC CONSUMER GAS CONNECTIONS. OVER 300,000 NEW GAS CONNECTIONS WERE INSTALLED OVER THE PAST FIVE YEARS, ACCORDING TO DATA FROM OGRA’

it moves from warmer climates in the southern part of the country where all the gas fields are to colder climates in the northern part of the country where most of the gas is consumed. But most of it is people stealing the gas outright, either by taking gas from pipelines through illegal connections, or having legal connections, but somehow not paying for them. In the year 2017, the most recent year for which complete data is available, the government estimates that UFG amounted to 374 mmcfd, or about 9% of the total amount of gas consumed in the country. To put that in context, that amount of gas is enough to run all of K-Electric’s power plants at full capacity, which could power the entire city of Karachi. And most independent energy analysts believe that the government is underestimating the total amount of the theft. This is the heart of the problem: who should pay for that stolen gas? The ideal answer, of course, is that gas should not be stolen and that the government should crack down on the people who are stealing it. But think about how many people that is. Even at the government’s numbers, the amount of gas stolen is equal to approximately 47% of the total amount of gas consumed by all of the approximately 9.4 million households that have a natural gas connection.

COVERY STORY

In other words, the gas is being stolen by millions of people, and a crackdown is at best a very long-term solution. The other solution, of course, is to simply assume that theft is just a part of the cost of being in the energy business in Pakistan and just build in a certain amount of theft into one’s cost of natural gas. That might be seem to the pragmatic option, but it runs into some very serious challenges, most notable the issue of fairness: why should law-abiding, bill-paying people have to pay for the freeloaders who are literally stealing from them? That is not just a philosophical question. There is a widespread hypothesis – untested – among policymakers, both within the civil service and outside of it, that allowing for an increase in the cost of natural gas (or electricity for that matter) to the cost of people’s gas or electricity bills will prompt more people to switch over from paying their bills to stealing, causing the cost of theft to go higher, and thus forcing the government to raise the cost again, causing yet more people to start stealing, and on and on in a vicious circle that would only make the problem worse than it is now. So what can you do? Well, the government of Pakistan has opted for the easy way out: split the difference, and allow for some stealing to be paid for by bill-paying consumers but not all of it. In the case of natural gas, the amount comes out to almost exactly half: UFG stands at 9% of total gas consumption, but the government restricts its allowance for UFG to 4.5% of total gas sold. This policy is not entirely without merit. The hope is that the companies are not completely left out in the cold in terms of having to face the cost of theft all on their own, but still have some incentive to try to fix the problem over the long run. Unfortunately, this idea only works in theory, not in practice. The two major gas utility companies have an annual revenue shortfall that has now hit Rs152 billion ($1.23 billion). The gas that is stolen still has to be paid for, and the government simply wishes away those financial liabilities. In the absence of government subsidies, they have to be financed by bank borrowing, but there are limits to how much banks can lend before they realise that the problem is never going to get solved and they are

mathematical skills, you can probably see that this measure will not nearly be enough. A 46% increase in overall tariffs for SNGP, for example, means that its average revenue per mmBtu will go from Rs399 per unit to Rs583 per unit. That still leaves a gap of Rs46 per unit that it needs to finance from somewhere. In other words, the government is raising rates substantially across the board, but somehow still not actually solving the problem. It will use its political capital and take abuse from supporters, and get absolutely nothing for it in return. In Urdu, such an act would be called gunah-e-belazzat (sin without pleasure).

Asad Umar, spent the bulk of his career working as an executive at a hydrocarbon company, and is thus intimately familiar with the country’s energy supply chain just throwing good money after bad. Forcing state-owned companies to crack down on theft is just not working.

The government’s half-baked solution

hen a new government is elected, the political capital derived from its electoral victory – however flawed – creates the opportunity for a few months for that government to make bold decisions that may be unpopular but can be sold to the public as necessary, not just because people are willing to give the new government a chance, but also because they can be blamed as necessitated by the previous government’s mistakes. The PTI is still in that phase, but at least for now, appears hell-bent on squandering that opportunity. In a decision that was greeted with some fanfare in the country’s financial press – and certainly among the nation’s financial community – the government decided to increase the cost of natural gas. In a cabinet meeting, the prime minister allowed for an average of a 46% increase in the gas tariffs that the state-owned gas companies can charge consumers. For those of you who have quick

The impending nationwide gas shutdown

o how does this all result in the nationwide shutdown of the natural gas grid that we referred to earlier in this article? Because Pakistan is running out of domestic sources of gas, and has begun importing it. And foreign sellers are far less forgiving of financial mismanagement than the mostly state-owned companies the government has hitherto been dealing with in the natural gas realm until now. Luckily for Pakistan, the decline in domestic production appears to have happened right around the time that global prices for oil and LNG sharply declined, resulting in imported LNG being relatively cheaper than it might have been prior to the August 2014 collapse of global oil prices. But if history is any guide, nobody’s luck lasts forever in the global commodity markets, and Pakistan’s track record is no different. The government went on a massive building spree of oil-fired power plants in the 1900s when oil prices were at record lows, only to be hit with sharp increases in the cost of electricity production when oil prices rose again in the late 2000s and early 2010s. Demand for natural gas is beginning to skyrocket, even as the government shifts more and more electricity production towards coal (that will still not solve the problem, because the real problem in electricity generation is still theft, not the cost of power generation). If the government does not fix the problem of paying for the cost of theft

in the natural gas sector, it will face exactly the same kind of pressures that it did in oil: domestic financing sources for the gas companies tapped out, and banks unable to finance letters of credit for imports, resulting in a complete shutdown of supplies from abroad, upon which the country will rely on more and more over the next decade and beyond. Pakistan currently imports about 10% of its total gas supply, but by the year 2030, that number will reach closer to 83%, which is slightly higher than the percentage of our total consumption of oil that is imported. The markets will both have the same dynamics, and

hence the dysfunctions that we have already seen in the petroleum realm will also likely play out in the natural gas sector. Here is how that nightmare scenario will play out: one fine day, the natural gas companies will be told by their bank that they can no longer lend them any money to pay for the gas they are about to import from Qatar. The government of Pakistan at that point will lean on the government of Qatar to let them have some of the gas for free and some on generous financing terms, but the Qatari government will inform Islamabad that it has already done so over the past several months

‘AS DOMESTIC PRODUCTION AT EXISTING FIELDS DECLINES, NEW DISCOVERIES ARE NOT KEEPING PACE, AND EVEN THE ONES THAT ARE DISCOVERED TO BE VIABLE HAVE SIGNIFICANTLY HIGHER COSTS OF PRODUCTION THAN THE OLDER, LARGER FIELDS. THIS IS A SOMEWHAT NATURAL PROCESS: THE LARGER, EASIER FIELDS GET DISCOVERED FIRST AND HAVE THE LOWEST COSTS OF PRODUCTION. THE LATER FIELDS ARE SMALLER, AND THEREFORE HARDER TO FIND, AND AS A RESULT ALSO REQUIRE MORE INVESTMENT TO EXTRACT LESS AND LESS GAS’

and years and that it has run out of both patience and generosity. Qatar Petroleum will demand up front payment before it will even dispatch the oil from Doha, and at this point, Islamabad will be scrambling to find money to pay for it. Pakistan’s Foreign Service officers around the world will find themselves in the awkward position of having to go into an emergency begging session with their host governments, hoping to scrape the money from somewhere. But there will be none to be had, because by that point, all of the ad hoc measures that the nation’s gas system had been surviving on will have been completely exhausted, and hence there will be no more LNG to pump through the nation’s gas pipelines and Sui will have long since run dry. First it will be the CNG stations that shut down, then the power plants, then the fertiliser plants, and then finally it will be every single household in the country. Forget having gas to heat your home in the winter or warm your water supply, there will be no gas to cook your food. If that sounds like an unlikely nightmare scenario, it should not. It can and will happen if the government does not find a way to deal with this problem. And the longer the government waits, the more expensive the solution gets.

COVERY STORY

Scrambled wires with dozens of illegal electricity connections are a common sight throughout the country

The K-Electric solution

o what exactly can the government do? If it cannot ignore the cost of the theft, and if it cannot make honest bill-paying consumers pay for it, and if even splitting the difference does not work, then what does? Well, we have one success story in Pakistan, but it involves completely changing the incentive structures for the gas companies. That case study is that of K-Electric, the only electricity distribution company in Pakistan that is privatised, and not coincidentally the only utility company in Pakistan that

has successfully managed to crack down on theft. See, the solution is an eventual crack down on theft: dishonest systems can never be sustainable. But in order for the crackdown to happen, the people implementing it need to feel the pinch if they fail to do so. In the case of a private company like K-Electric, the money for that theft has to come from the majority shareholders, who face losses on their investment if they do not stop people from stealing. Who faces the consequences at SNGP if they fail to curb gas theft? Nobody. The company is owned by the government, and its employees and managers know

‘IN OTHER WORDS, THE GOVERNMENT IS RAISING RATES SUBSTANTIALLY ACROSS THE BOARD, BUT SOMEHOW STILL NOT ACTUALLY SOLVING THE PROBLEM. IT WILL USE ITS POLITICAL CAPITAL AND TAKE ABUSE FROM SUPPORTERS, AND GET ABSOLUTELY NOTHING FOR IT IN RETURN. IN URDU, SUCH AN ACT WOULD BE CALLED GUNAH-E-BELAZZAT (SIN WITHOUT PLEASURE)’

that the government will eventually be forced to pay for the problem, so why bother? Before coming into office, the PTI had alluded to moving all state-owned companies into an independent management system that may serve as a prelude to privatising at least some of them, though the party’s leaders have not stated a specific desire to privatise the state-owned natural gas distribution companies. And if they were going to go through the hassle of battling the companies’ unions in their bid to privatise them, the time to announce that decision would have been right around now, and not several months from now, when the sheen from the election victory will have worn off, and the government’s political opponents will have had time to gather strength. Announcing the tariff increase without addressing the remainder of the problem will please absolutely nobody, and will yield no political or policy benefits. The PTI would do well to remember that in politics, fortune favours the bold.

COVERY STORY

From an academic to leading Punjabâ&#x20AC;&#x2122;s digital revolution, PITB Chairman Umar Saif has overseen the largest land record digitisation in Pakistan in an effort to not just end corruption and land grabbing but in a bid to promote land as a liquid asset

By Muhammad Faran Bukhari

mar Saif was only 23 when he completed his PhD from the University of Cambridge. A year later, in 2002, he finished his post-doctorate from Massachusetts Institute of Technology (MIT), in the United States (US), though he stayed put there for four more years before moving back to Pakistan in 2005. Upon his return, he joined his alma mater, Lahore University of Management Sciences (LUMS), to pursue his passion for computer sciences and teaching. During his time as an aspiring academic, Umar was one of the handful of professors who enjoyed the perks of a tenured appointment. After half a dozen years at LUMS, in 2011 Umar was eligible for a yearlong fully paid sabbatical. Having recently won a Google faculty research award, the timing seemed perfect for a break. Excited what the future held for him, he planned to spend the year in the US, working on a project along with some professors from UC Berkeley. Destiny, however, had other plans. At that very time, the MIT Technology Review included him among the top 35 young innovators in the world, making him the first Pakistani to be named on that list. It was sometime in 2011 that having noticed of Umar’s nomination, the then Punjab chief minister Shehbaz Sharif invited Umar to a breakfast meeting over the weekend. Like many of us, he initially dismissed the call as a hoax while it took several more phone calls from the officials at the CM’s office, to ensure his presence at the breakfast table. When Umar showed, the former chief minister put an offer on the table, which only a person of Umar’s calibre would consider to refuse. Fortuitously, Jawaid Ghani, a fellow professor at LUMS who was at that

‘THE ENTIRE WORLD WORKS ON A SELF-FILING SYSTEM FOR TAXES. TECHNOLOGY CAN ENABLE YOU TO ASCERTAIN WHAT TAX YOU NEED TO PAY... WITHOUT INVOLVING A GOVERNMENT AGENT AND IT CAN TAKE THAT ENTIRE CORRUPT INTERFACE OUT OF THE EQUATION. AND THEN THE GOVERNMENT CAN GET THE FIGURES AUDITED BY A THIRD PARTY. IF ADOPTED, THE GOVERNMENT TAX COLLECTION WILL GO THROUGH THE ROOF’ time serving as Punjab Information Technology Board’s (PITB) Chairman, also happened to be present at the breakfast table. Jawaid planned to leave for a year to focus on tableegh (voluntary preaching), and he had suggested Umar’s name to Shehbaz as his replacement during his absence. At first, Umar was reluctant. Accepting the offer to head PITB meant putting all that he had planned on hold. And on top of that, he was susceptible that his fast-paced nature would not fit well inside the slow-moving public sector system that the state had to offer. “When I was offered the position, I was very conflicted. My conscience told me that I had a chance to improve things in the country that I had always felt needed fixing. I felt like a hypocrite, not accepting the offer,” says Umar, during a conversation with Profit. However, after repeated assurances from the other two men at the table and after Shehbaz agreed to help him set up an Information Technology (IT) university, Umar finally accepted to head PITB.

Fast forward to 2018

oday, after almost seven years in office, Umar has survived two possible attempts at his life and has headed a digital revolution in

‘UMAR EXPLAINS THAT DIGITISING LAND RECORDS WILL DO TWO THINGS IN PUNJAB, FIRST IT WILL HELP PINPOINT, IF NOT SOLVE, THE PROBLEM OF LAND GRABBING AND ILLEGAL ENCROACHMENTS, AND SECOND; IT WILL HELP STREAMLINE AND MAKE THE PROCESS OF PROPERTY TAX PAYMENTS TRANSPARENT’

Punjab that is being replicated by other provinces and in some cases even by other countries. Now, our readers might be wondering why Profit, a business magazine, chose to cover an individual heading a public sector organization focusing on public policy reforms. The answer is simple, the projects he has undertaken have been in most cases economically relevant, and their economic impact has been nothing short of substantial. Under his leadership, PITB has grown in size from an organisation employing 100 people in 2011 to a team of around 1,000 people today. The ‘public sector organisation’ has since completed and delivered over 240 IT projects in Punjab alone that include but are not limited to the digitisation of land records, police records and court records, implementation of digital solutions in education and healthcare sectors and encouraging the growth of hundreds of new tech-based companies and startups.

From MIT to ITU

uring his time at MIT, Umar Saif always envisioned building a purely IT-centric university back in Pakistan. It was a near impossible task for a lone ranger and needed the support of various stakeholders, but as luck might have it, being the PITB chairman and working directly under the former chief minister Shehbaz Sharif who also at the time wanted to build a university, helped. Information Technology University (ITU) charter was finally passed in March 2013, and Umar became its founding Vice-Chancellor (VC) at the age of 34, making him the youngest VC at the time. The University, with an

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accomplished faculty of around 100, presently has 1,200 students enrolled in its different programmes. “This year we have had 25,000 applicants for our undergraduate programmes, out of which only 251 were accepted, so that is a 1% acceptance rate. Currently, we are directly competing with NUST (National University of Sciences and Technology) and LUMS,” claims Umar.

Fighting the patwaris

sk anyone in Punjab, and they will tell you that being a patwari is one of the most infamous jobs in these parts. The reason being the sheer extent of corruption these keepers of land ownership records allegedly commit. In fact, the word patwari has become so disreputable that it is used as a taunt for the supporters of a certain political party due to the alleged financial corruption of their leaders. “In a computer system you can only put in 100 per cent of the land. You cannot put 105 per cent because that 5 per cent land does not exist. Before the land records were digitised people had claimed ownership of more land than the land that actually existed. So that had to be settled,” says Umar, putting the patwari problem into perspective. Umar explains that digitising land records will do two things in Punjab, first it will help pinpoint, if not solve, the problem of land grabbing and illegal encroachments, and second; it will help streamline and make the process of property tax payments transparent. Currently, urban land laws in Pakistan are murky, to say the least. “In some cases, claiming ownership of a piece of land is as simple as faking the registry, paying the property tax,

‘MY CONSCIENCE TOLD ME THAT I HAD A CHANCE TO IMPROVE THINGS IN THE COUNTRY THAT I HAD ALWAYS FELT NEEDED FIXING. I FELT LIKE A HYPOCRITE, NOT ACCEPTING THE OFFER’ Umar Saif, Chairman, PITB

and claiming ownership in court on the basis that you have paid the property tax,” claims Umar. “The American economy moves by basically changing half a percent of the mortgage rate, up or down, since land being the basic asset is liquid. You can do business on it, you can borrow against it, you can lease a car, you can mortgage your house and so forth. However, in Pakistan, the basic land asset is illiquid.” According to Umar, Pakistan needs to start treating land as a liquid asset rather than an illiquid one to enhance the liquidity within the economy and create further opportunities. “As long as the government has a monopoly over any kind of a public record, they will be the extortionists. The entire world works on a self-fil-

‘THE ‘PUBLIC SECTOR ORGANISATION’ HAS SINCE COMPLETED AND DELIVERED OVER 240 IT PROJECTS IN PUNJAB ALONE THAT INCLUDE BUT ARE NOT LIMITED TO THE DIGITISATION OF LAND RECORDS, POLICE RECORDS AND COURT RECORDS, IMPLEMENTATION OF DIGITAL SOLUTIONS IN EDUCATION AND HEALTHCARE SECTORS AND ENCOURAGING THE GROWTH OF HUNDREDS OF NEW TECH-BASED COMPANIES AND STARTUPS’ 28

ing system for taxes. Technology can enable you to ascertain what tax you need to pay, it can enable you to pay that electronically without involving a government agent and it can take that entire corrupt interface out of the equation. And then the government can get the figures audited by a third party. If adopted, the government tax collection will go through the roof.” The final idea Umar has proposed regarding land records is to make all public records available to the general public in order to encourage a trend of whistleblowing. For example, if your neighbour owns a 5 kanal house, and pays disproportionately low tax, you can point it out. “The role for me is to come in, digitise the data and make it openly available and transparent for everyone,” he says. The fight against the patwari system has not been without repercussions. In 2017, two weeks after a suicide bomber ‘accidentally’ blew himself up a few feet from PITB’s office in Lahore, Umar’s office at the eleventh floor of the same building was targeted by a sniper bullet. The PITB chairman at that time was in Dubai, and the intelligence agencies termed the bullet that hit a few inches away from Umar’s office chair in Lahore as a warning shot by his enemies.

The tech startup revolution

mar Saif might look like a public policy guy, but he still has his entrepreneurial spirit intact. His earliest entrepreneurial projects date back to his undergraduate days at LUMS where he worked on three startups from inside a small building that he called the ‘Saif Centre of Innovation’. Pursuing his passion for entrepreneurship, Plan 9, situated at the ninth floor of the Arfa Karim Tower in Lahore, two floors below Umar’s office, was set up as one of the first full service incubator in Pakistan, aimed at facilitating young tech-based entrepreneurs in setting up their companies. Till date, more than 160 companies, including the likes of Patari and Mangobazz, with a collective valuation of $70 million have graduated from Plan 9. So successful has the startup incubator model proved to be, that today there are replica incubators all over Pakistan, emulating the Plan 9 model. However, Umar still feels that there are still some questions that the federal government needs to ask itself. “The government needs to figure out if it wants venture capital to come into Pakistan. If the answer is yes then it needs to ask the SECP (Securities and Exchange Commission of Pakistan) to make it easy for venture funds to be established in the country,” he says. “Around the world, 2% of pension funds invest into technology mutual funds. The government needs to talk to funds like EOBI (Employees OldAge Benefits Institution) and other pension funds, to divert a fraction of the money into tech funds.” “They have to also talk to the PSX (Pakistan Stock Exchange) regarding the possibility of having small tech

‘IN COMPUTER SYSTEMS, YOU CAN ONLY PUT IN 100 PERCENT OF THE LAND. YOU CANNOT PUT 105 PERCENT, BECAUSE THAT 5 PERCENT LAND DOES NOT EXIST. BEFORE THE LAND RECORD WAS DIGITISED, PEOPLE HAD CLAIMED OWNERSHIP OF MORE LAND THAN THE LAND THAT ACTUALLY EXISTED. SO THAT HAD TO BE SETTLED’ IPOs (Initial Public Offering). Why cannot Patari go and list itself on the PSX, if Facebook can get listed in the US.”

PITB, PTI and 10 million jobs

uring the 2018 election campaign, Pakistan Tehreek-e-Insaf (PTI) manifesto included the creation of 10 million jobs in the next five years, a promise that seemed well over the top to even the most ardent supporters of the political party. However, PITB might be PTI’s answer to achieving the seemingly unachievable. A large proportion of Pakistan’s IT industry still remains undocumented, an aspect of it being the huge number of freelancers in the country. According to some estimates, Pakistani freelancers collectively earn around $1billion a year, with Pakistan’s freelancing industry being the third largest in the world after the US and the UK. PITB’s e-rozgar centres train people to monetise the different skills that they possess. Umar seems optimistic that these centres can help PTI achieve its goal of providing 10 million jobs for the masses. “We can easily train one million people through our e-rozgar scheme. If the kid makes $30 a day which is our goal, it collectively amounts to $30

‘WE CAN EASILY TRAIN ONE MILLION PEOPLE THROUGH OUR E-ROZGAR SCHEME. IF THE KID MAKES $30 A DAY WHICH IS OUR GOAL, IT COLLECTIVELY AMOUNTS TO $30 MILLION A DAY AND TRANSLATES TO RS100,000 PER KID A MONTH. HOW MANY OTHER GOVERNMENT OR PRIVATE JOBS OFFER RS100,000 A MONTH TO FRESH GRADUATES? OUT OF THOSE 10 MILLION JOBS, 10 PERCENT COULD BE IT-RELATED FREELANCERS’

million dollars a day and translates to Rs100,000 per kid a month. How many other government or private jobs offer Rs100,000 a month to fresh graduates? Out of those 10 million jobs, 10% could be IT related freelancers,” he holds forth. However, he seems unsure about his own place on the table within the

‘ACCORDING TO UMAR, PAKISTAN NEEDS TO START TREATING LAND AS A LIQUID ASSET RATHER THAN AN ILLIQUID ONE TO ENHANCE THE LIQUIDITY WITHIN THE ECONOMY AND CREATE FURTHER OPPORTUNITIES’ new system that has come in place after PTI won the July 25 elections. “It is true that I worked very closely with Shehbaz Sharif. I was part of this team of four or five people that largely planned everything. I was close to him so some people might begrudge that,” he says. “My last substantial job offer, of about $2.5 million a year was made to me five years ago, so in 5 years, my opportunity cost is close to $12.5 million. I could be doing many other things on the side too, like a startup or something else. Now, I have to figure out whether this is a conducive environment for me and more importantly will the new government like me. If it does not work out, I will probably do something else.”

IT INDUSTRY

Asad Umarâ&#x20AC;&#x2122;s lack of preparation on matters of taxation and finance have allowed the civil service to push for a rollback of necessary reforms 30

By Farooq Tirmizi

ever judge a book by its cover, nor a finance minister by their first budget. At least that is what justice would demand. But we cannot help ourselves. Try as we might, we cannot but find ourselves be disappointed in the ‘mini-budget’ put together by the Imran Khan Administration. One might argue, not unreasonably, that we are being unfair towards the Pakistan Tehrik-e-Insaf (PTI) led government in general and Finance Minister Asad Umar in particular. After all, they have not yet had a full two months on the job. There was not nearly enough time to redraft the budget completely. How else could they possibly have done any better? Those are all fair arguments and we will fully acknowledge that at least some of the criticisms of the PTI and Asad Umar have been unfair. But we keep coming back to one point in our heads: had the PTI not been elected, had Asad Umar not become the finance minister, had there been no elected finance minister at all, had the finance ministry civil servants been asked to draft the budget entirely on their own, they would have drafted the exact same budget. The same tired old ideas about how to balance the budget – raise taxes on the already taxed, bring back tariffs to curb imports, and slash development spending – are seen time and again in this mini-budget, which the finance minister announced earlier this month. In the cover story for this week’s edition, we lay out how the government is potentially squandering an opportunity to fix the energy sector’s crises. In this article, we lay out the origins of the fiscal policies that the minister announced in his mini-budget speech to Parliament earlier this month and how they are a reflection of the

‘...HAD THE PTI NOT BEEN ELECTED, HAD ASAD UMAR NOT BECOME THE FINANCE MINISTER, HAD THERE BEEN NO ELECTED FINANCE MINISTER AT ALL, HAD THE FINANCE MINISTRY CIVIL SERVANTS BEEN ASKED TO DRAFT THE BUDGET ENTIRELY ON THEIR OWN, THEY WOULD HAVE DRAFTED THE EXACT SAME BUDGET’ priorities of the civil service, not the PTI.

Raising taxes on the already taxed: the FBR’s favourite trick

he Federal Board of Revenue (FBR) has precisely zero fiscal or tax economists on its staff, which means that any calculations they do on the impact of the government’s tax policies are essentially – and sometimes literally – back-of-the-envelope calculations. The FBR is a congenitally lazy organisation, filled with a staff that has neither the imagination, nor the intellect, nor the inclination to begin conceiving of solutions to Pakistan’s massive tax evasion problem. Of course, since they are the country’s largest tax collection authority, they do face pressure to help the government achieve its fiscal goals. And so they have devised a series of tricks that make it look to the government like they are about to solve the problem, but are really just short-term revenue-generating short-cuts that do nothing to solve the structural issues. See, in order to actually solve the tax collection problem, the FBR would have to analyse the economy, use a myriad of data sources to figure out who is not paying their taxes, and then do the hard work of auditing and prosecuting those who fail to comply with their tax notices. That also has the consequence of potentially damaging

relationships with individuals and businesses that currently bribe senior FBR officials for favours. Few FBR officials would want to disturb that gravy train, and so very few try any substantive reforms at all. What they do instead is figure out how much revenue they are collecting from existing sources and see which ones they have room to tinker with the rates. Their favourites are the withholding taxes, which the government technically counts as income taxes, but are really levied like sales taxes. Playing around with the withholding tax rates on banking transactions and mobile phone service are among their favourites. After the Supreme Court’s intervention earlier this year, changing the rates on mobile services is no longer an option, and so the FBR decided to put their eggs in the basket of charging higher withholding taxes on banking transactions. The rates started off at 0.1% several years ago, and in this year’s mini-budget have risen to 0.6% of the value of transactions above Rs25,000. In its last budget, the Nawaz Administration had tried to reverse decades of the policy of taxing sectors that are already heavily taxed by seeking to reduce income taxes on the salaried class. While the Imran Khan Administration has kept at least some of those reforms, those earning more than Rs200,000 a month will see their taxes go up from where they were in July of this year.

‘THE FBR IS A CONGENITALLY LAZY Tariffs on imports: a sop ORGANISATION, FILLED WITH A STAFF THAT to the customs departHAS NEITHER THE IMAGINATION, NOR THE ment o understand the origins of this policy, one needs to understand INTELLECT, NOR THE INCLINATION TO BEGIN the structure of the tax collectCONCEIVING OF SOLUTIONS TO PAKISTAN’S ing bureaucracy. The FBR is staffed by three separate groups of MASSIVE TAX EVASION PROBLEM’

MINI BUDGET

the Civil Superior Services: the Income Tax group, the Customs group, and the Excise group. Each of those has a tax to its name, though the power of those groups has varied significantly over the years. For most of Pakistan’s existence, the Customs and Excise groups had the most power since they brought in the most revenue. Income Tax was the least powerful among the tax collecting groups. The sales tax was such a small portion of total taxes that it did not even have its own group. That equation, of course, has now completely flipped. The income tax and the sales tax are the two most important taxes for the government, together accounting for upwards of 80% of total government revenues, with excise duties and customs duties accounting for a much smaller share than they once did (each peaked at about 40% of government revenue back in the 1960s). There is still an older generation of FBR officers, however, who are upset about this turn of events, and would like to turn back the clock as much as possible. And since hardly anybody in the civil service is particularly committed to the principles of free trade, introducing trade tariffs in the form of customs duties is a highly popular way of raising revenue. It also has the added ‘benefit’ of supposedly decreasing the trade deficit, though considering the fact that this technique has been tried multiple times over the past decade and a half and the trade deficit has not gone down even once during that period suggests that maybe the stated reason for this policy does not actually work.

Slashing the development budget: an easy life for the Finance Ministry

his one is a little trickier to explain. It is not as though the finance ministry has anything against the development bud-

‘TO ACTUALLY SOLVE THE TAX COLLECTION PROBLEM, THE FBR WOULD HAVE TO ANALYSE THE ECONOMY, USE A MYRIAD OF DATA SOURCES TO FIGURE OUT WHO IS NOT PAYING THEIR TAXES, AND THEN DO THE HARD WORK OF AUDITING AND PROSECUTING THOSE WHO FAIL TO COMPLY WITH THEIR TAX NOTICES. THAT ALSO HAS THE CONSEQUENCE OF POTENTIALLY DAMAGING RELATIONSHIPS… THAT CURRENTLY BRIBE SENIOR FBR OFFICIALS... FEW... WOULD WANT TO DISTURB THAT GRAVY TRAIN, AND SO VERY FEW TRY ANY SUBSTANTIVE REFORMS…’ get. In fact, under certain circumstances, finance ministry officials can actually supplement their income by becoming supervisors of key development projects, particularly if they are funded by Western or Japanese donor agencies. But when it comes to the hierarchy of government expenses, it is abundantly clear that development expenditures – the amount of money the government spends in building new roads, schools, hospitals, and infrastructure – does not actually matter much to the civil servants in charge of spending it. It is astounding how creative the finance ministry staff can be in terms of finding ways to cut the development budget (they can always find ways to cut exactly as much as you need and even more if necessary), but somehow have no ideas on how to reduce the annual bailouts to the badly run state-owned companies. The reason, once one understands how the civil service works, is simple enough: reducing those bailouts will eventually mean either privatisation of state-owned enterprises, or at the very least their removal from the control of the civil service.

‘TAX POLICY IS JUST NOT THE PTI’S STRONG SUIT AND THEY HAVE NEVER EXHIBITED AN ABILITY TO UNDERSTAND OR PRIORITISE FISCAL ECONOMICS. THIS YEAR WAS BAD FOR A GOOD REASON, BUT WE HAVE NO INDICATION THAT NEXT YEAR WILL BE ANY BETTER’

That reduction in power is absolutely unacceptable to the civil service, and so they would rather cut the development budget – and sacrifice the allowances that come with it – rather than do anything about the state-owned companies.

Better luck next year?

n short, this budget was written to please the civil service, not serve the interests of the people of Pakistan. What is astounding is why the minister decided to go along with it, after making so much of a show of wanting to wade deep into understanding the numbers underlying the budgetary process. ll the minister got out of that effort is a more accurate accounting of the government’s revenues and expenses, and those are numbers that the civil service is always willing to give out at the beginning of an administration, even if they sometimes pretend otherwise. Oh well, this was the first year, one might say. Next year will be the real test, and that will be when Asad Umar and the PTI’s policy expertise will truly shine through. Somehow, though, we doubt it. Tax policy is just not the PTI’s strong suit and they have never exhibited an ability to understand or prioritise fiscal economics. This year was bad for a good reason, but we have no indication that next year will be any better. We hope we are proven wrong. The people of Pakistan would be better off for it.

MINI BUDGET

WORLD ECONOMY

By Sheridan Prasso From New Economic Forum

hristopher Fernando knows the price of rapacious development. It has eaten his kitchen. Only the sink remains along what was once an outer wall of Fernando’s seafront home on the west coast of Sri Lanka, about 20 miles north of Colombo. Part of his thatchedroof house where the 55-year-old fisherman has lived for three decades suddenly washed away last year. The dredger he blames, like a mythological sea monster ceaselessly sucking the sea bed, is visible in the distance as he speaks. Waves used to wash sand in, he says, but now they only wash it out, tearing away the shoreline—a charge government officials deny. “From the taking of sand,” Fernando says, “everything is being destroyed.” The sand is being dumped along the coast of Colombo’s business district, where it covers an area the size of 500 American football fields and weighs as much as 70 million Toyota Camrys. It’s the foundation of a development known as Port City Colombo being built by China Communications Construction Co., or CCCC. Plans envision a financial district—pitched as a new hub between Singapore and Dubai—with a marina, a hospital, shopping malls, and 21,000 apartments and homes. The project is part of China’s Belt and Road Initiative, an ambitious plan announced in 2013 by President Xi Jinping to build an estimated $1 trillion of infrastructure to support increased trade and economic ties and further China’s interests around the globe. State-owned CCCC, one of the world’s largest companies with annual revenue greater than Procter & Gamble Co. or FedEx Corp., says its portfolio of 700 projects in more than 100 countries outside China has a value of more than $100 billion. That makes it the largest Belt and Road contractor, according to RWR Advisory Group in Washington, which tracks Chinese investments abroad for government and corporate clients. It is also one of the most vexed. CCCC and its subsidiaries have left a trail of controversy in many of the countries where they operate. The company was blacklisted by the World Bank in 2009 for alleged fraudulent

bidding practices on a highway contract in the Philippines. Malaysia halted two rail projects this year amid corruption suspicions. In Australia, a government investigation published in March said that a CCCC-owned company may have been lax in supervising construction of a children’s hospital, where the water supply was tainted with lead and a subcontractor installed asbestos-filled panels—problems CCCC said weren’t its fault. The Colombo project has drawn protests over environmental issues and is dogged by worries about the types of businesses it will attract, its governance under a legal structure separate from the rest of the country, and the strain that such a huge development will place on surrounding transport, water, and energy infrastructure. The list goes on: allegations of mistreatment of railway workers in Kenya and of corruption in Bangladesh. In Canada, the company was blocked in May from acquiring a construction firm on national security grounds. And there have been calls by some members of the U.S. Congress to sanction CCCC because of its alleged role in helping the Chinese military build bases on reefs along a disputed area of the South China Sea—an issue that scuttled the company’s plans in 2015 to raise $1 billion by spinning off its dredging unit in a public offering on the Hong Kong stock exchange. There’s no shortage of companies, including American ones, that have been accused of bribery and environmental damage when operating abroad. Yet the number and scope of allegations involving CCCC set it apart. “CCCC seems to be constantly pressing the envelope of how countries feel about having a foreign state-owned entity involved in their most strategic assets and critical infrastructure projects,” says Andrew Davenport, RWR Advisory’s chief operating officer. “Recent controversies involving certain of their projects have not helped.” In an interview with Bloomberg Television at CCCC’s Beijing headquarters in August, Chairman Liu Qitao said changes in government in countries where the company has projects often bring forth accusations of corruption. Liu said CCCC complies with local laws and environmental regulations in all countries where it does business. It also monitors adherence to internal guide-

lines, he said. Liu wouldn’t comment on what, if anything, the company is doing in the South China Sea. “We do not allow, nor is there any, corrupt behavior related to any official, because we know that this kind of corrupt behavior is not going to help with the company’s sustainable development,” the 61-year-old chairman said. “And we, as a listed company, are subject to market supervision. If there is corrupt behavior, then the company is finished.” CCCC is a mashup of several engineering, dredging, and construction companies, two of which date back to the Qing dynasty around the beginning of the 20th century. Another got its start as the road building division of the People’s Liberation Army during the civil war that brought the Communist Party to power in 1949. In 2005, the government merged two state-owned entities, China Harbour Engineering Co. and China Road and Bridge Corp., to create CCCC and arranged a listing on the Hong Kong exchange. Today, the company has more than 60 subsidiaries and 120,000 employees, according to its website. Most of its projects are in China, and many investments have nothing to do with Belt and Road. CCCC owns an oil-rig design firm in Texas, and one of its real estate units is co-developer of the Frank Gehry-designed Grand Avenue project in Los Angeles. Despite the company’s global presence, its chairman keeps a low profile and rarely grants interviews to Western media. Trained as a hydraulic engineer at Dalian University of Technology, Liu worked for years at Sinohydro Group, which built the Three Gorges Dam, before becoming president of CCCC in 2010. His official salary was about $120,000 last year, which is in line with those of top executives at other stateowned enterprises. At most such companies, the Communist Party occupies a central place in the leadership structure, and it’s no different at CCCC. Liu is party chief as well as head decision-maker. In one speech published on a government website, he speaks of turning CCCC into a reliable executor of the party’s vision. Dressed for the Bloomberg interview in a charcoal pinstripe suit and red tie, his hair combed back, Liu said the Belt and Road Initiative was “proposed by Mr. Xi Jinping based on the concern

A CCCC dredging vessel at work on Port City Colombo. for the development of mankind, and it invites participation from everyone, not just China but Western companies as well, and aims for shared gains through consultation and cooperation.” By the late 2000s, when China’s economy showed signs of stalling, CCCC began scouting for opportunities in Southeast Asia and Africa. But it ran into a roadblock in the Philippines when a World Bank investigation concluded that a CCCC road building subsidiary was one of seven companies involved in “a collusive scheme designed to establish bid prices at artificial, non-competitive levels” in an auction for a highway contract. The organization blacklisted CCCC in 2009, a ban that lasted eight years. The company said at the time that the allegations had no merit and it had complied with all regulations. The year the World Bank ban went into effect, the same CCCC road building subsidiary allegedly paid $19 million to a son of the president of Equatorial Guinea to win a highway contract, according to a U.S. asset-forfeiture case filed in Los Angeles in 2013. The lawsuit says some of the money, combined

with other ill-gotten gains, was used to purchase Michael Jackson memorabilia, including a signed Thrillerjacket and a white, crystal-covered Bad World Tour glove. The president’s son settled the case, agreeing to hand over $30 million worth of properties (not including the jacket and glove). CCCC declined to comment. The Belt and Road Initiative gave the company a pipeline of new projects, as both Chinese commercial lenders and the government stepped up with financing. Loans from the Export-Import Bank of China and the China Development Bank meant CCCC didn’t have to rely on Western institutions such as the World Bank to fund ports and railroads. Chinese financing also sped up the process of getting complex infrastructure projects off the ground. As the company’s footprint grew, so did the controversy. Investigators in Malaysia are looking into whether CCCC overbilled for a railroad linking Kuala Lumpur with east coast cities, and whether some of that money went to pay debts incurred by government development fund 1Malaysia Develop-

ment Bhd., during the administration of former Prime Minister Najib Razak, who’s facing trial on corruption charges. In Bangladesh, the finance minister told reporters in January that CCCC was blacklisted from future projects after allegedly bribing an official involved in awarding a contract to build a 140-mile highway. Liu said the suspension of rail construction in Malaysia was the result of a change in government this year, that the cost is in line with similar projects, and that he hopes work will resume because it “means a lot for the development of Malaysia.” The allegations of bribery in Bangladesh were a “mistake,” he said. “We are still doing work in Bangladesh. We are not on the blacklist.” Finance ministry officials in Bangladesh didn’t respond to requests for clarification. The lure of Chinese money is hard to resist for poor countries in Asia and Africa. It’s the cheapest and fastest way to turbocharge an economy, says Sumal Perera, founder and chairman of Sri Lankan construction company Access Engineering Plc, which has worked with CCCC on a number of projects,

WORLD ECONOMY

Workers and front loaders at the site of Port City Colombo. including building apartments for Port City engineers and technicians. “To work with the Chinese is to be in the fast lane,” Perera says. “I can’t believe state-owned companies have so much dynamism and initiative.” The hazards of being in the fast lane are obvious in Sri Lanka. In 2010, before there was a Belt and Road Initiative, then-President Mahinda Rajapaksa was seeking to spark development in Hambantota, his rural home district on the island’s south coast, a four-hour drive from Colombo. CCCC subsidiary China Harbour was awarded a contract to build a port in Hambantota, and in 2014 it was granted the Colombo project as well. Now corruption allegations are swirling. In July, Prime Minister Ranil Wickremesinghe said authorities are investigating $8.1 million in fund transfers to members of Rajapaksa’s staff during the six weeks before the January 2015 election, when Rajapaksa was running for a third term. The prime minister said the amount included payments from CCCC routed through an account at Standard Chartered Plc.

Foreign contributions to political campaigns are not prohibited in Sri Lanka, and Rajapaksa, who lost his re-election bid in part because of voters’ opposition to the Chinese projects, has denied any wrongdoing. CCCC dismissed as “speculation” that its money funded the campaign, and the Chinese embassy in Colombo issued a statement saying Chinese projects in Sri Lanka adhere to the principles of “extensive consultation, joint contribution, and shared benefits.” The winner of the 2015 election, Maithripala Sirisena, warned on the campaign trail that Sri Lankans “would become slaves” to the Chinese if the projects went ahead, and he quickly shut them down once he took office. But he restarted both a year later, with even bigger footprints. His administration invited another state-run port operator, China Merchants Port Holdings Co., to bid against CCCC for resuming construction at Hambantota. China Merchants won the contract after wowing the government with a presentation about making the port like one it built in Shenzhen, China,

according to Saliya Wickramasuriya, a senior adviser to both the Hambantota and Colombo projects. As compensation for the switch, he says, CCCC got a tentative commitment for 15,000 acres surrounding the Hambantota port to develop as an industrial zone. Today, Hambantota handles about one ship a day, not enough to make it commercially viable, and wild elephants regularly breach the perimeter fencing. At a nearby airport, which CCCC also helped build during Rajapaksa’s administration, the only commercial flight was canceled in June because of frequent peacock strikes and low demand. The government also renegotiated the Colombo project, seeking to address the issues that opposition politicians had raised. It dropped plans for a Formula One racetrack, gave CCCC a 99-year lease instead of outright land ownership, and drafted more than 70 environmental impact-mitigating requirements. It also increased the land area by 15 percent. The vision for Port City Colombo seems in part an answer to a problem that has long plagued Sri Lanka: Its $90

“We lost our opportunity to Dubai and Singapore, and now we are trying to catch up,” says Champika Ranawaka, who heads Sri Lanka’s Ministry of Megapolis and Western Development, one of two government agencies involved in approving the Colombo project. He says CCCC is putting up all of the $1.4 billion for the initial phase of construction, which the company says is 70 percent funded by loans from Chinese banks at commercial rates. That, plus an additional $800 million that CCCC is spending to build connecting roads, gives it the right to develop most of the land at Port City to recoup its investment, Ranawaka says. “They’re taking a risk, so they have to somehow earn their money. Their success creates a lot of other opportunities for Sri Lanka.” The government intends to ringfence Port City from Sri Lanka’s legal system to facilitate currency movement and create favorable tax and investment incentives. Harsha de Silva, a state minister who once campaigned against the project but is now one of its most vocal supporters, is involved in drafting the separate legal structure. “This must be a top-10 city for doing business in the world,” he says. “Otherwise, what’s the point?” Sri Lanka is currently ranked 111 out of 190 nations on the World Bank’s ease-of-doing-business index. Opponents of Port City see dangers. They say laws encouraging capital flows will make Sri Lanka a financial bottom feeder, a haven for hidden assets such as India’s so-called black money stashed abroad to avoid taxes. They fear casinos will move in and create the only gambling hub in South Asia—something government officials deny but may not be able to prevent. They’re worried about rising pollution levels and how Port City will get enough water and power. And they question whether the project, which has no committed investors, is a pie-in-the-sky vision of a future that won’t materialize. “The whole deal is rotten to the core,” says Feizal Mansoor, a member of the People’s Movement Against the Port City, a group of environmentalists, fishermen, clergy, and other opponents. The sand and quarried rock used for the landfill is 100 years’ worth of construction resources being used up at once, he says, and the Chinese should be paying for it. “They’re going to make a 100 percent profit on their capital investment, and we’re going to make a 1,000 percent loss.”

CCCC Chairman Liu Qitao The biggest cost so far is the environmental damage along a 175mile stretch of coastline north and south of Colombo and the impact on 80,000 households that make a living from the sea. Sri Lanka’s Environmental Foundation warned two years ago that building Port City would have a “severe and highly detrimental” impact on the coastline, causing erosion and affecting marine biodiversity, fishery stocks, and breeding sites. Government officials issued a 421-page environmental impact assessment before the project was restarted, stating that studies “clearly establish” that it won’t cause erosion. The report conceded that dredging would temporarily disrupt some fishing grounds and directed CCCC to pay $3.2 million to fund community projects in the affected areas. But officials say that they’re following mitigation guidelines and that critics don’t have any proof to substantiate their claims. A hunger strike by fishermen in 2016 resulted in an agreement forcing the dredgers farther offshore. But that has barely helped, says Herman Kumara, head of the National Fisheries Solidarity Movement, which represents 17 organizations and unions in Negombo, the center of the fishing industry, north of Colombo. He disputes statistics compiled by Port City officials showing that fishermen’s livelihoods have improved and that fish catches are up. “This is destroying the coast and the coral reefs, and the sea erosion is very serious,” Kumara says. Travel up the coast and you hear fishermen talk about a 20 percent decline in catch and hardships that threaten to wipe them out. “Our future

is now being destroyed,” says Aruna Roshantha Fernando, the president of the All Ceylon Fisher-folk Trade Union and a leader of the hunger strike, who brought an unsuccessful petition to the Supreme Court seeking to stop the Colombo project. “We ask them: If somebody destroys our livelihood, what is your responsibility? They don’t answer.” Mervin Thamel, secretary of the Indiwara Fisheries Cooperative Society just north of Negombo, says that herring, which used to be plentiful and breed where Port City is going up, are nowhere to be found. “We had to sell our gold” to buy fuel to keep the fishing boat operating farther and farther out to find fish, says Thamel, sitting on his front porch a few blocks from the sea. “We’ve protested a lot,” he says, “but we couldn’t stop it.” On Christopher Fernando’s stretch of beach, south of Negombo, his next-door neighbor, W. Mary Johanna, laments the loss of two coconut trees that recently washed out to sea. Since she was born here 52 years ago, she says, she never had a problem with erosion—until the dredgers showed up. Now she’s piling up garbage to stop the waves crashing in on her property, where more than 700 square feet have washed away. “It’s difficult to push against the government; they won’t admit they’re causing this,” she says. “What else can we do apart from die? Soon, I’ll just be washed out with the sea.”

—With Anusha Ondaatjie, Dong Lyu, Arun Devnath, Yudith Ho, John Liu, Iain Marlow, Jinglun Zhang, and Cathy Chan Courtesy: www.bloomberg.com

WORLD ECONOMY

By Muhammad Faran Bukhari

he most noticeable thing about Hassan Tahir is how much he sounds like the CEO of a luxury brand rather than of a lubricant manufacturer and distributor. He thinks about the details of his customers’ experience with his product in a way that most oil company executives simply would not. For him, it is not simply enough that he sells a high-quality, high-margin product. His customer’s experience in buying it must also be a pleasant one, and he goes through the details at considerable length as to how he plans on making that happen. That high-end, luxury mindset is ap-

parent in other ways, most notably in the location of our interview. Hi-Tech Lubricants (HTL), the company Hassan founded and has been running for the past 20 years, is headquartered in one of the poshest neighbourhoods in Lahore, in GOR-I, the enclave of Pakistan’s most powerful serving civil servants. The building is located adjacent to the elitist Punjab Club, an old colonial establishment that still does not allow entry to just any upstart – blackballing him to his grave – and looks down with unalloyed contempt at the likes of Lahore Gymkhana. This is not the kind of place one normally thinks of when one imagines what the headquarters of a lubricant company would look like. Jewelry store, or luxury watches,

maybe. Definitely not lube. Yet perhaps that luxury sensibility is not altogether out of place for Hassan Tahir. Lubricants, after all, a high-margin, low-volume business, much like luxury goods, and quality and branding matter far more than in the fuel oil business. “Ours is not a me-too product,” said Tahir, in an interview with Profit. “It is a totally different product altogether because you have a higher oil drain interval (ODI), where if you are changing oil after 3,000 kilometres with other brands, we recommend 4,000, 6,000, 8,000, and sometimes even 20,000 kilometers. So, your cost per kilometer comes way down even though we are more expensive up front. We give you more protection of your car, we give you fuel saving so that is a very unique proposition.” But alas, growth in the lubricant business for a standalone

time into the wrong market? Hassan Tahir does not think so. “The market is growing, and the opportunity is there,” he said. “The players that can differentiate themselves [in the market] will be profitable. We have a customer base that is using our product and using the HTL service centers. So, we have a unique value proposition to offer.” This is not the first time Tahir has managed the company’s transition, and if his track record is any indication, his competitors would do well to take HTL’s foray into the OMC market seriously.

From trading to manufacturing

operator is proving to be quite difficult for the company, and so it finds itself moving towards the fuel oil business, a transition that is likely to fundamentally transform Hi-Tech Lubricants. It comes at a time, however, when many other companies are already in the midst of their expansion into the oil marketing company (OMC) business. Is Hi-Tech jumping in at the wrong

ahir founded HTL in 1997 as a trading business, buying lubricants from Yu Kong Lubricants (now known as SK Lubricants) based in South Korea. The company started off in the Lahore market, and created a sales team dedicated to educating the Pakistani driver about the benefits of using synthetic lubricants. For the first three years, the company remained largely confined to the Lahore market. In 2000, it expanded to Islamabad and Karachi, and over the next decade or so, the company continued to expand its operational footprint throughout Pakistan. The company created the brand name ZIC, which rapidly became one of the better known brand names in a market otherwise dominated by Shell, and Chevron’s Caltex brand. It was not until 2013, however, that

‘YET PERHAPS THAT LUXURY SENSIBILITY IS NOT ALTOGETHER OUT OF PLACE FOR HASSAN TAHIR. LUBRICANTS, AFTER ALL, A HIGH-MARGIN, LOW-VOLUME BUSINESS, MUCH LIKE LUXURY GOODS, AND QUALITY AND BRANDING MATTER FAR MORE THAN IN THE FUEL OIL BUSINESS’

the company ventured into its own blending operation, which it set up in the Sunder Industrial Estate on the outskirts of Lahore. In order to finance the Rs2.5 billion project, HTL raised equity through its initial public offering (IPO) on the Pakistan Stock Exchange (PSX), which it completed in 2016. “We took the company public in 2016 and the IPO was oversubscribed 3.5 times,” said Tahir. “We raised Rs1.8 billion from the market, primarily because we wanted to expand into the retail segment of the lubricant and fuel market of Pakistan.”

Why expand into retail fuel

“S

o, the whole idea was to increase our footprint in the Pakistani market,” said Tahir. “Our competition did not take us seriously until we set out our own blending plant in Lahore. The next step is getting into the OMC market because it is a very symbiotic market. The two markets facilitate each other, particularly on the institutional side.” “If we talk to the textile companies, or the cement companies, or the big manufacturing giants, what they do is they have contracts with fuel suppliers who club together not just the fuels but also the lubricants to be used by the companies. So if we try to sell your lubricant to, for example, a big independent power producer (IPP), they say that they cannot buy our product because it might cause a disruption in their relationship with the fuel suppliers. So the only way to capture the industrial business is by becoming an OMC ourselves, which is what we are now doing.” Flush with the cash from its public listing, HTL has a somewhat aggressive schedule in terms of its plans to expand into the OMC business. “We are currently on track to open up 100 outlets by 2019, then another 100 outlets by 2020, and we want to get to having 360 outlets within the next five years,” he said. “That is the plan. We are going on track and hopefully, the way we have projected our numbers, we are almost at par on what we want to do.” At that size, HTL would become a medium-sized OMC, surpassing Byco Petroleum and possibly even Hascol in terms of size. But it would also allow HTL to create the kind of national level

ENERGY

footprint that might allow it to gain a firmer foothold in the institutional sales segment of the fuel and lubricant business. It would also significantly bolster the company’s revenues, which may give it the kind of cash flows it would need to keep growing in the market.

The crowded OMC market and HTL’s strategy

he problem with the OMC market is just how crowded it has become over the last year and a half. In the first 70 years of Pakistan’s existence, the government gave out just 20 licences for oil marketing companies. In the year since then, the government has given out 21 such licences. The reason for the sudden influx of licences was the government’s decision to lower the minimum paid up capital requirements to get an OMC licence. In years past, the amount had risen to Rs3 billion. In 2017, however, that number was lowered to Rs100 million, which led a large number of companies to apply for a licence, and many were granted such a licence. After giving out so many licences, however, the government appears to be ready to backtrack, and has raised the minimum paid up capital requirements for an OMC back up to Rs3 billion, and may raise it even further to Rs7 billion, though all companies who have current

‘THE MARKET IS GROWING, AND THE OPPORTUNITY IS THERE... THE PLAYERS THAT CAN DIFFERENTIATE THEMSELVES [IN THE MARKET] WILL BE PROFITABLE. WE HAVE A CUSTOMER BASE THAT IS USING OUR PRODUCT AND USING THE HTL SERVICE CENTERS. SO, WE HAVE A UNIQUE VALUE PROPOSITION TO OFFER’ Hassan Tahir, CEO, ZIC Oil licences, including the new ones, would most likely be grandfathered into the new regulations, so they would only affect any new companies seeking to enter the market. “The reason why the government

wants to raise the amount [of minimum paid up capital] is that it wants only serious players to come in,” said Tahir. “The person who is coming in by showing Rs100 million, he can also come in by showing a bank guarantee. But now government is saying that there should be Rs3 billion of capital in your company, which is much harder to raise. People come and misuse their license. They don’t build proper storage, they don’t create fuel stations, and they make losses for their investors. So, the government wants serious players to come in. I don’t mind. They say that you cannot open a pump unless you have storage. Which is right.” In order to differentiate itself from its competitors, HTL plans to have standardized convenience stores at all

of its retail outlets, which it believes will help drive traffic to its outlets relative to others. “If the mart is placed at the right place, there is a lot of potential,” said Tahir. “The company will control the marts and we will run those marts and make sure that the dealer makes margin on that, rather than charging them a rental on monthly basis. This will allow for standardization. So if you go to a PSO mart, you will see the placement of shelves are pretty different from in Karachi from what it is in Peshawar, or Lahore. There is no standardization. But if you see McDonalds, you will see standardisation across the country. Standardisation is the key.” Another key part of the offering for HTL is to create the expectation of cleanliness at petrol pumps amongst its customers. “Cleanliness is our number one priority for our fuel stations and even for our express centres,” said Tahir. “If you see our express centres, you will see how clean they are. I feel that owner drivers don’t get good clean places to sit and wait, especially female drivers who go to these oil change centres.

They usually just sit in their cars with the air-conditioning on and they don’t get off and go to a place to sit because it is so dirty. So, we have created that environment in our centres. Similarly, we have to create a good environment for our retail outlets.” Yet despite the significant competition that may come from these new entrants, Tahir does not appear to be worried. “A lot of these companies do not care about location or traffic. We rejected as many as 50 locations because either they were bad or would not have enough traffic. If your dealers do not have good traffic, you cannot grow your business. But these new guys: all they want is the Rs400,000 franchise fee cheque from their distributors and they do not care about anything else. That is not how you grow your business.” However, it is not all smooth sailing yet for HTL, whose OMC licence is still pending, in part due to a safety inspection that has yet to be completed. “Once we can show all of our safety procedures, we can get a licence from OGRA [Oil and Gas Regulatory Author-

‘IN ORDER TO DIFFERENTIATE ITSELF FROM ITS COMPETITORS, HTL PLANS TO HAVE STANDARDIZED CONVENIENCE STORES AT ALL OF ITS RETAIL OUTLETS, WHICH IT BELIEVES WILL HELP DRIVE TRAFFIC TO ITS OUTLETS RELATIVE TO OTHERS’

ity]. We need to get up to nine different licences to set up an OMC, including one from the ministry of defence,” said Tahir.

Other ways of growing the business

n addition, HTL is also growing its storage capacity so that it can expand aggressively in the oil marketing company business, without which it would be impossible to compete against the likes of Hascol, which has a robust storage infrastructure. “We have bought six acres of land in Khyber-Pakhtukhwa to build a 2,500 ton storage facility,” said Tahir. “We are also creating storage facilities in areas such as Mehmood Kot, Maachikeh, Shikarpur, where we are entering into partnerships with different companies.” The company is also helping its dealers – the people who actually own and operate its petrol pumps – to finance their working capital. “We are getting financing for our distributors from Meezan Bank and Bank Alfalah. The distributors are having a problem with their cash cycle because we are pushing diesel and motorcycle oil, which have longer credit cycles. In the gasoline segment, you get paid in seven days, 15 days, or a maximum of 21 days. Not so in diesel and motorcycle oil, where 20 to 30 day cash cycles are common.”

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